-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CvFYvXnRFVm6KOQPzqBeodiKu44QPa0gn1MQCpr4w2BATbD/b1DPmZyL7y2Hkc+e 138Lc5U83NRxyAFp3w4njQ== 0000950123-05-000375.txt : 20060310 0000950123-05-000375.hdr.sgml : 20060310 20050114161214 ACCESSION NUMBER: 0000950123-05-000375 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 15 FILED AS OF DATE: 20050114 DATE AS OF CHANGE: 20050204 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHIBRO ANIMAL HEALTH CORP CENTRAL INDEX KEY: 0001069899 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL INORGANIC CHEMICALS [2810] IRS NUMBER: 131840497 FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-122063 FILM NUMBER: 05530884 BUSINESS ADDRESS: STREET 1: 65 CHALLENGER ROAD CITY: RIDGEFIELD PARK STATE: NJ ZIP: 07660 BUSINESS PHONE: 201-329-7300 MAIL ADDRESS: STREET 1: 65 CHALLENGER ROAD CITY: RIDGEFIELD PARK STATE: NJ ZIP: 07660 FORMER COMPANY: FORMER CONFORMED NAME: PHILIPP BROTHERS CHEMICALS INC DATE OF NAME CHANGE: 19980908 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHIBRO ANIMAL HEALTH SA CENTRAL INDEX KEY: 0001280638 IRS NUMBER: 000000000 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-122063-01 FILM NUMBER: 05530879 BUSINESS ADDRESS: STREET 1: ROKIN 55 STREET 2: 1012 KK CITY: AMSTERDAM STATE: X0 ZIP: 00000 BUSINESS PHONE: 201-944-6020 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHIBRO CHEMICALS INC CENTRAL INDEX KEY: 0001069994 IRS NUMBER: 222871784 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-122063-03 FILM NUMBER: 05530881 BUSINESS ADDRESS: STREET 1: ONE PARKER PLZ CITY: FORT LEE STATE: NJ ZIP: 07024 BUSINESS PHONE: 2019446020 MAIL ADDRESS: STREET 1: ONE PARKER PLZ CITY: FORT LEE STATE: NJ ZIP: 07024 FILER: COMPANY DATA: COMPANY CONFORMED NAME: C P CHEMICALS INC CENTRAL INDEX KEY: 0001069900 IRS NUMBER: 221548721 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-122063-04 FILM NUMBER: 05530882 BUSINESS ADDRESS: STREET 1: ONE PARKER PLZ CITY: FORT LEE STATE: NJ ZIP: 07024 BUSINESS PHONE: 2019446020 MAIL ADDRESS: STREET 1: ONE PARKET PLZ CITY: FORT LEE STATE: NJ ZIP: 07024 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHIBROCHEM INC CENTRAL INDEX KEY: 0001069993 IRS NUMBER: 222758614 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-122063-05 FILM NUMBER: 05530883 BUSINESS ADDRESS: STREET 1: ONE PARKER PLZ CITY: FORT LEE STATE: NJ ZIP: 07024 BUSINESS PHONE: 2019446020 MAIL ADDRESS: STREET 1: ONE PARKER PLZ CITY: FORT LEE STATE: NJ ZIP: 07024 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHIBRO ANIMAL HEALTH HOLDINGS INC CENTRAL INDEX KEY: 0001280647 IRS NUMBER: 000000000 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-122063-06 FILM NUMBER: 05530885 BUSINESS ADDRESS: STREET 1: 710 46 EAST CITY: FAIRFIELD STATE: NJ ZIP: 07004 BUSINESS PHONE: 201-944-6020 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHIBRO ANIMAL HEALTH US INC CENTRAL INDEX KEY: 0001280648 IRS NUMBER: 000000000 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-122063-07 FILM NUMBER: 05530886 BUSINESS ADDRESS: STREET 1: 710 46 EAST CITY: FAIRFIELD STATE: NJ ZIP: 07004 BUSINESS PHONE: 201-944-6020 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHILIPP BROTHERS NETHERLANDS III B V CENTRAL INDEX KEY: 0001280631 IRS NUMBER: 000000000 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-122063-10 FILM NUMBER: 05530889 BUSINESS ADDRESS: STREET 1: ROKIN 55 STREET 2: 1012 KK CITY: AMSTERDAM STATE: X0 ZIP: 00000 BUSINESS PHONE: 201-944-6020 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WESTERN MAGNESIUM CORP CENTRAL INDEX KEY: 0001069995 IRS NUMBER: 132849569 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-122063-02 FILM NUMBER: 05530880 BUSINESS ADDRESS: STREET 1: ONE PARKER PLZ CITY: FORT LEE STATE: NJ ZIP: 07024 BUSINESS PHONE: 2019446020 MAIL ADDRESS: STREET 1: ONE PARKER PLZ CITY: FORT LEE STATE: NJ ZIP: 07024 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRINCE AGRIPRODUCTS INC CENTRAL INDEX KEY: 0001069990 IRS NUMBER: 231653576 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-122063-09 FILM NUMBER: 05530888 BUSINESS ADDRESS: STREET 1: ONE PARKER PLZ CITY: FORT LEE STATE: NJ ZIP: 07024 BUSINESS PHONE: 2019446020 MAIL ADDRESS: STREET 1: ONE PARKER PLZ CITY: FORT LEE STATE: NJ ZIP: 07024 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHIBRO TECH INC CENTRAL INDEX KEY: 0001069987 IRS NUMBER: 223060339 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-122063-08 FILM NUMBER: 05530887 BUSINESS ADDRESS: STREET 1: ONE PARKER PLZ CITY: FORT LEE STATE: NJ ZIP: 07024 BUSINESS PHONE: 2019446020 MAIL ADDRESS: STREET 1: ONE PARKER PLZ CITY: FORT LEE STATE: NJ ZIP: 07024 S-4 1 y04700sv4.txt FORM S-4 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 14, 2005 REGISTRATION NO. 333- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 PHIBRO ANIMAL HEALTH CORPORATION PHILIPP BROTHERS NETHERLANDS III B.V. (Exact name of Registrants as specified in their charters) PHIBRO ANIMAL HEALTH CORPORATION NEW YORK 2819 13-1840497 (State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. employer Incorporation or Organization) Classification Code Number) identification number) 65 CHALLENGER ROAD RIDGEFIELD PARK, NEW JERSEY 07660 (201) 329-7300
(Address, including zip code, and telephone number, including area code of registrant's principal executive office) PHILIPP BROTHERS NETHERLANDS III B.V. THE NETHERLANDS 2819 NOT APPLICABLE (State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. employer Incorporation or Organization) Classification Code Number) identification number) ROKIN 55 1012 KK AMSTERDAM THE NETHERLANDS (201) 329-7300
(Address, including zip code, and telephone number, including area code of registrant's principal executive office) SEE TABLE OF ADDITIONAL REGISTRANTS JACK C. BENDHEIM, PRESIDENT AND CHAIRMAN OF THE BOARD PHIBRO ANIMAL HEALTH CORPORATION 65 CHALLENGER ROAD RIDGEFIELD PARK, NEW JERSEY 07660 (201) 329-7300 (Name, address, including zip code, and telephone number, including area code, of agent for service) With a copy to: LAWRENCE M. BELL, ESQ. GOLENBOCK EISEMAN ASSOR BELL & PESKOE LLP 437 MADISON AVENUE NEW YORK, NEW YORK 10022-7302 (212) 907-7300 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this registration statement. If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- AMOUNT PROPOSED PROPOSED MAXIMUM AMOUNT OF TITLE OF EACH CLASS OF TO BE MAXIMUM OFFERING AGGREGATE REGISTRATION SECURITIES TO BE REGISTERED REGISTERED PRICE PER UNIT OFFERING PRICE(2) FEE(3) - --------------------------------------------------------------------------------------------------------------------------------- 13% Senior Secured Units due 2007(1)......... 127,491 $1,000 $127,491,000 $15,006(4) - --------------------------------------------------------------------------------------------------------------------------------- 13% Senior Secured Notes due 2007 of Phibro Animal Health Corporation(3)............... N/A -- -- -- - --------------------------------------------------------------------------------------------------------------------------------- 13% Senior Secured Notes due 2007 of Philipp Brothers Netherlands III B.V.(3) N/A -- -- -- - --------------------------------------------------------------------------------------------------------------------------------- Guarantees(3) N/A -- -- -- - --------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------
(1) Each unit consists of $809.5238 principal amount of 13% senior secured notes due 2007 of Phibro Animal Health Corporation and $190.4762 principal amount of 13% senior secured notes due 2007 of Philipp Brothers Netherlands III B.V. (2) Estimated pursuant to Rule 457(f) under the Securities Act of 1933, as amended, solely for purposes of calculating the registration fee. (3) The domestic companies listed in the Table of Additional Registrants below have guaranteed, jointly and severally, the 13% Senior Secured Notes Due 2007 of Phibro Animal Health Corporation and the 13% Senior Secured Notes Due 2007 of Philipp Brothers Netherlands III B.V. being registered hereby. Phibro Animal Health Corporation and Phibro Animal Health SA have also guaranteed, jointly and severally, the 13% Senior Secured Notes Due 2007 of Philipp Brothers Netherlands III B.V. The Guarantors are registering the Guarantees. Pursuant to Rule 457(n) under the Securities Act of 1933, as amended, no registration fee is required with respect to the Guarantees or the notes. (4) Of the aggregate registration fee of $15,006, $13,303.50 was previously paid in connection with a prior registration statement on Form S-4, SEC File No. 333-112942, with respect to 105,000 units of senior secured notes due 2007 filed on February 18, 2004 and subsequently withdrawn. THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. TABLE OF ADDITIONAL REGISTRANTS
STATE OR OTHER JURISDICTION PRIMARY STANDARD EXACT NAME OF REGISTRANT OF INCORPORATION OR INDUSTRIAL CLASSIFICATION I.R.S. EMPLOYER AS SPECIFIED IN ITS CHARTER ORGANIZATION CODE NUMBER IDENTIFICATION NUMBER - --------------------------- --------------------------- ------------------------- --------------------- Prince Agriproducts, Inc. .......... Delaware 2819 23-1653576 One Prince Plaza Quincy, Illinois 62305 (217) 222-8854 Phibro-Tech, Inc. .................. Delaware 2819 22-3060339 65 Challenger Road Ridgefield Park, New Jersey 07660 (201) 329-7300 Phibro Animal Health U.S., Inc. .... Delaware 2819 22-3743224 65 Challenger Road Ridgefield Park, New Jersey 07660 (201) 329-7300 Phibro Animal Health Holdings, Delaware 2819 22-3743221 Inc. ............................. 65 Challenger Road Ridgefield Park, New Jersey 07660 (201) 329-7300 Phibrochem, Inc. ................... New Jersey 2819 22-2758614 65 Challenger Road Ridgefield Park, New Jersey 07660 (201) 329-7300 C P Chemicals, Inc. ................ New Jersey 2819 22-1548721 65 Challenger Road Ridgefield Park, New Jersey 0766 (201) 329-7300 Phibro Chemicals, Inc. ............. New York 2819 22-2871784 65 Challenger Road Ridgefield Park, New Jersey 07660 (201) 329-7300 Western Magnesium Corp. ............ California 2819 13-2849569 65 Challenger Road Ridgefield Park, New Jersey 07660 (201) 329-7300 Phibro Animal Health SA............. Belgium 2819 Not Applicable Rue de L'Institut, 87A B-1330 Rixensart, Belgium (201) 329-7300
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED , 2005 PROSPECTUS PHIBRO ANIMAL HEALTH CORPORATION PHILIPP BROTHERS NETHERLANDS III B.V. OFFER TO EXCHANGE 127,491 UNITS CONSISTING OF $103,207,000 13% SENIOR SECURED NOTES DUE 2007 OF PHIBRO ANIMAL HEALTH CORPORATION AND $24,284,000 13% SENIOR SECURED NOTES DUE 2007 OF PHILIPP BROTHERS NETHERLANDS III B.V., WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, FOR ALL OUTSTANDING UNITS CONSISTING OF $103,207,000 13% SENIOR SECURED NOTES DUE 2007 OF PHIBRO ANIMAL HEALTH CORPORATION AND $24,284,000 13% SENIOR SECURED NOTES DUE 2007 OF PHILIPP BROTHERS NETHERLANDS III B.V. THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME ON , 2005, UNLESS EXTENDED. --------------------- Terms of the exchange offer: We will exchange all old units that are validly tendered and not withdrawn prior to the expiration of the exchange offer. You may withdraw tenders of old units at any time prior to the expiration of the exchange offer. We believe that the exchange of old units will not be a taxable event for U.S. federal income tax purposes, but you should see "Certain United States Federal Income Tax Considerations" on page 142 for more information. See also "Certain Dutch Tax Consequences." We will not receive any proceeds from the exchange offer. The terms of the new units are substantially identical to the old units, except that the new units are registered under the Securities Act of 1933 and the transfer restrictions and registration rights applicable to the old units do not apply to the new units. --------------------- SEE "RISK FACTORS" BEGINNING ON PAGE 15 FOR A DISCUSSION OF RISKS THAT SHOULD BE CONSIDERED BY HOLDERS PRIOR TO TENDERING THEIR OLD UNITS. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense. The date of this prospectus is , 2005. TABLE OF CONTENTS Prospectus Summary.......................................... 1 Risk Factors................................................ 15 Use of Proceeds............................................. 29 Capitalization.............................................. 30 Selected Consolidated Financial Data........................ 31 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 33 Business.................................................... 55 Conditions in Israel........................................ 73 Management.................................................. 75 Principal Stockholders...................................... 82 Description of Capital Stock................................ 83 Certain Relationships and Related Party Transactions........ 85 Description of Certain Indebtedness......................... 88 The Exchange Offer.......................................... 90 Description of the New Units................................ 99 Description of the New Notes................................ 99 Certain United States Federal Income Tax Consequences....... 154 Certain Dutch Tax Consequences.............................. 158 Plan of Distribution........................................ 161 Legal Matters............................................... 162 Experts..................................................... 162 Where You Can Find More Information......................... 162 Service of Process and Enforcement of Liabilities........... 163 Philipp Brothers Netherlands III B.V........................ 163 Index to Consolidated Financial Statements.................. F-1
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. PHIBRO ANIMAL HEALTH CORPORATION AND PHILIPP BROTHERS NETHERLANDS III B.V. HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. IF ANYONE PROVIDES YOU WITH DIFFERENT OR INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON IT. PHIBRO ANIMAL HEALTH CORPORATION AND PHILIPP BROTHERS NETHERLANDS III B.V. ARE NOT MAKING AN OFFER TO SELL THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED, WHERE THE PERSON MAKING THE OFFER IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON WHO CANNOT LEGALLY BE OFFERED THE SECURITIES. YOU SHOULD ASSUME THAT THE INFORMATION APPEARING IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE ON THE FRONT COVER OF THIS PROSPECTUS OR ANY SUPPLEMENT. Each broker-dealer that receives new units for its own account pursuant to the exchange offer must acknowledge that it will deliver a prospectus in connection with any resale of new units. The letter of transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act of 1933, as amended, which we refer to as the Securities Act. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of new units received in exchange for old units where the old units were acquired by the broker-dealer as a result of market-making activities or other trading activities. Phibro Animal Health Corporation and Philipp Brothers Netherlands III B.V. each has agreed that, for a period of 90 days after the effective date of the registration statement of which this prospectus is a part, it will make this prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." i FOR NEW HAMPSHIRE RESIDENTS Neither the fact that a registration statement or an application for a license has been filed under Chapter 421-B of the New Hampshire Uniform Securities Act of 1933 with the state of New Hampshire nor the fact that a security is effectively registered or a person is licensed in the state of New Hampshire constitutes a finding by the secretary of state that any document filed under RSA 421-B is true, complete and not misleading. Neither any such fact nor the fact that an exemption or exception is available for a security or a transaction means that the secretary of state has passed in any way upon the merits or qualifications of, or recommended or given approval to, any person, security or transaction. It is unlawful to make, or cause to be made, to any prospective purchaser, customer or client any representation inconsistent with the provisions of this paragraph. NETHERLANDS SELLING RESTRICTIONS Neither the new units nor any of the new notes (or any rights representing an interest in the global new unit or any of the global new notes) may be offered, sold, transferred, or delivered as part of their initial distribution or at any time thereafter, directly or indirectly, to any individual or legal entity established, resident or domiciled in The Netherlands. Offers and sales of new units and new notes to any persons or legal entities established, resident or domiciled outside The Netherlands must be made in compliance with any applicable rule in the relevant jurisdictions. BELGIUM SELLING RESTRICTIONS This prospectus and related documents are not intended to constitute a public offering in Belgium. The Belgian Banking and Finance Commission has neither reviewed nor approved these documents or commented on their accuracy or adequacy, or recommended or endorsed the new units and new notes. The new units and new notes may not be offered for sale, sold or marketed in Belgium by means of a public offering under Belgian law. In addition, the new units and new notes may not be offered or sold to any person qualifying as a consumer within the meaning of Article 1.7(o) of the Belgian Law of 14th July 1991 on consumer protection and trade practices, unless such offer or sale is made in compliance with the Belgian Law of 14th July 1991 on consumer protection and trade practices and its implementing legislation. MARKET SHARE, RANKING AND OTHER INDUSTRY DATA The market share, ranking and other industry data contained in this prospectus, including our position and the position of our competitors within these markets, are based either on our management's knowledge of, and experience in, the markets in which we operate, or derived from industry data or third-party sources and, in each case, we believe these estimates are reasonable as of the date of this prospectus or, if an earlier date is specified, as of such earlier date. However, this information may prove to be inaccurate because of the method by which we obtained some of the data for our estimates or because this information is subject to change and cannot always be verified due to limits on the availability and reliability of independent sources, the voluntary nature of the data gathering process and other limitations and uncertainties inherent in any statistical survey of market shares. In addition, purchasing patterns and consumer preferences can and do change. As a result, you should be aware that market share, ranking and other similar data set forth herein, and estimates and beliefs based on such data, may not be reliable. TRADEMARKS The following trademarks and service marks used throughout this prospectus belong to, are licensed to, or are otherwise used by us in our medicated feed additives business: Stafac(R); Eskalin(R); V-Max(R); Terramycin(R); Neo-Terramycin(R); CLTC(R); Mecadox(R); Nicarb(R); Amprol(R); Bloatguard(R); Aviax(R); Coxistac(R); Posistac(R); Banminth(R); Cerditac(R); Cerdimix (R); Rumatel(R). ii FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements within the meaning of the federal securities laws. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements include statements preceded by, followed by or that include the words "may," "could," "would," "should," "believe," "expect," "anticipate," "plan," "estimate," "target," "project," "intend," or similar expressions. These statements include, among others, statements regarding our expected business outlook, anticipated financial and operating results, our business strategy and means to implement the strategy, our objectives, the amount and timing of capital expenditures, the likelihood of our success in expanding our business, financing plans, budgets, working capital needs and sources of liquidity. Forward-looking statements are only predictions and are not guarantees of performance. These statements are based on our management's beliefs and assumptions, which in turn are based on currently available information. Important assumptions relating to the forward-looking statements include, among others, assumptions regarding demand for our products, the expansion of product offerings geographically or through new applications, the timing and cost of planned capital expenditures, competitive conditions and general economic conditions. These assumptions could prove inaccurate. Forward-looking statements also involve risks and uncertainties, which could cause actual results that differ materially from those contained in any forward-looking statement. Many of these factors are beyond our ability to control or predict. Such factors include, but are not limited to, the following: - our substantial leverage and potential inability to service our debt - our dependence on distributions from our subsidiaries - risks associated with our international operations and significant foreign assets - our dependence on our Israeli operations - competition in each of our markets - potential environmental liability - potential legislation affecting the use of medicated feed additives - extensive regulation by numerous government authorities in the United States and other countries - our reliance on the continued operation and sufficiency of our manufacturing facilities - our reliance upon unpatented trade secrets - the risks of legal proceedings and general litigation expenses - potential operating hazards and uninsured risks - the risk of work stoppages - our dependence on key personnel We believe the forward-looking statements in this prospectus are reasonable; however, you should not place undue reliance on any forward-looking statements, which are based on current expectations. You should read this prospectus completely and with the understanding that future results may be materially different from what we expect. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update publicly any of them in light of new information or future events. iii PROSPECTUS SUMMARY The following summary highlights information that we believe is especially important concerning our business and this exchange offer. The following summary is qualified in its entirety by the more detailed information and the financial statements and notes thereto appearing elsewhere in this prospectus. You should carefully read this entire prospectus and should consider, among other things, the matters set forth under "Risk Factors" before deciding to participate in the exchange offer. Unless otherwise indicated or the context requires otherwise, references in this prospectus to (1) "PAH," "our company," "we," "our," "us" and similar expressions refer to Phibro Animal Health Corporation, a New York corporation, and its consolidated subsidiaries, (2) "PB Netherlands" refers to Philipp Brothers Netherlands III B.V., a company organized under the laws of the Netherlands, and its consolidated subsidiaries, (3) the "US issuer" refers to Phibro Animal Health Corporation and not its subsidiaries, and (4) the "Dutch issuer" refers to Philipp Brothers Netherlands III B.V. and not its subsidiaries. We formerly conducted business under the name, "Philipp Brothers Chemicals, Inc." As used herein, references to any "fiscal" year of our company refer to our fiscal year ended or ending on the June 30 of such year. THE EXCHANGE OFFER On October 21, 2003, the US issuer and Dutch issuer issued and sold 105,000 units, consisting of $85.0 million principal amount of 13% Senior Secured Notes due 2007 of the US issuer and $20.0 million principal amount of 13% Senior Secured Notes due 2007 of the Dutch issuer, and on December 21, 2004 the US issuer and Dutch issuer issued and sold, under the same indenture as such 105,000 units, 22,491 additional units, consisting of $18.207 million principal amount of 13% Senior Secured Notes due 2007 of the US issuer and $4.284 million principal amount of 13% Senior Secured Notes due 2007 of the Dutch issuer. The units and notes issued and sold on October 21, 2003 and on December 21, 2004 are collectively referred to as the old units and the old notes. The units and notes issued and sold on December 21, 2004 are referred to separately as the additional old units and additional old notes. In connection with each of those sales, we entered into a registration rights agreement, the terms of each of which are substantially similar, with the initial purchaser of the old units in which we agreed to deliver this prospectus to you and to complete an exchange offer for the old units. As contemplated by the registration rights agreements, we are offering to exchange an aggregate of 127,491 new units, consisting of $103.207 million principal amount of new 13% Senior Secured Notes due 2007 of the US issuer and $24.284 million principal amount of new 13% Senior Secured Notes due 2007 of the Dutch issuer, referred to collectively as the new units and the new notes, the issuance of which new units have been registered under the Securities Act, for a like aggregate principal amount of our old units. We urge you to read the discussions in this Prospectus Summary under the headings "Summary of Exchange Offer" and "The New Units" and in this Prospectus under the headings "The Exchange Offer" and "The New Units" for further information regarding the exchange offer and the new units. THE COMPANY OVERVIEW We are a leading diversified global manufacturer and marketer of a broad range of animal health and nutrition products, specifically medicated feed additives (MFAs) and nutritional feed additives (NFAs), which we sell throughout the world predominantly to the poultry, swine and cattle markets. MFAs are used preventively and therapeutically in animal feed to produce healthy livestock. We believe we are the third largest manufacturer and marketer of MFAs in the world, and we believe that certain of our MFA products have leading positions in the marketplace. We are also a specialty chemicals manufacturer and marketer, serving primarily the United States pressure-treated wood and chemical industries. We have several proprietary products, and many of our products provide critical performance attributes to our customers' products, while representing a relatively small percentage of total end-product cost. We operate in over 16 countries around the world and sell our animal health and nutrition products and specialty chemicals products into over 40 countries. Approximately 76% of our fiscal 2004 net sales were from our Animal Health and Nutrition business, and approximately 24% of our fiscal 2004 net sales were from our Specialty Chemicals business. 1 Our Animal Health and Nutrition segment manufactures and markets more than 500 formulations and concentrations of medicated and nutritional feed additives, including antibiotics, antibacterials, anticoccidials, anthelmintics, trace minerals, vitamins, vitamin premixes and other animal health and nutrition products, to the livestock and pet food industries. Our MFA products are internationally recognized for quality and efficacy in the prevention and treatment of diseases in livestock, such as coccidiosis in poultry, dysentery in swine and acidosis in cattle. We market our Animal Health and Nutrition products under approximately 450 governmental product registrations, approving our MFA products with respect to animal drug safety and effectiveness. Our Specialty Chemicals business manufactures and markets a number of specialty chemicals for use in the pressure-treated wood, chemical catalyst, semiconductor, automotive, aerospace and agricultural industries. We anticipate that our proprietary manufacturing process to produce a copper-based solution for one of the leading new products for manufacturing pressure-treated wood will represent our largest growth opportunity in our Specialty Chemicals business. Over 39% of our fiscal 2004 net sales in our Specialty Chemicals business was derived from copper-based compounds, solutions or mixes. We have in recent years focused our business on animal health and nutrition products. As a result of the rapid decline of the printed circuit board industry in the United States, we have substantially exited that business, including our etchant recycling operations, and re-directed our productive capacity in niche markets. We have also sold other non-strategic businesses, such as our Agtrol copper fungicide business and our subsidiaries, Mineral Resource Technologies, Inc. ("MRT") and The Prince Manufacturing Company ("PMC"). In addition, we closed our operations in Odda, Norway ("Odda") and Bordeaux, France ("La Cornubia"). BUSINESS STRENGTHS Top Three MFA Provider in the World. We believe we are the world's third largest manufacturer and marketer of medicated feed additives in the poultry and swine markets. We manufacture and market over 200 MFA formulations and concentrations. We believe our MFAs rank first in sales in Brazil, and third in the United States. Our Animal Health and Nutrition business serves our customers in over 40 countries from 21 facilities. Many of our MFA products have been marketed for over 20 years. Significant Barriers to Entry. Medicated feed additives cannot be manufactured or marketed without governmental product registrations that are specific to each country -- the Food and Drug Administration ("FDA") for example, in the United States, Health Canada in Canada, and EFSA/EMEA authorities in Europe. Before a product registration is granted, the applicant must show the regulatory authority that the product and its proposed use are both effective and safe for the specified species and application. Obtaining an MFA product registration is comparable in cost and difficulty with obtaining approval for drugs used to treat humans. In addition to approval of formulation and labeling, regulatory authorities typically require approval and periodic inspection of the manufacturing facilities. Because of the costs and difficulties associated with obtaining MFA product registrations, there have been few new medicated feed additives developed and marketed over the last decade. The only two new MFA compounds approved for use in the last 10 years were semduramicin, one of our products, and ractopamine. Because of the inherent difficulties and high costs of obtaining major product registrations and their absolute necessity to operate in this business, our existing broad portfolio of product registrations provides us strength in the marketplace. Strong Brand Name Recognition of Our Medicated Feed Additives. We enjoy strong brand name recognition with our medicated feed additives for the prevention and control of diseases in poultry, swine and cattle. In particular, virginiamycin, an antibiotic marketed under the Stafac(R), Eskalin(R) and V-Max(R) brand names, is a popular and efficacious choice of medicated feed additive in the poultry, swine and cattle industry. Semduramicin, sold under the brand name Aviax(R), and salinomycin, sold under the brand name Coxistac(R), are also leading poultry anticoccidials. In fiscal 2004, branded MFAs accounted for approximately 50% of our total Animal Health and Nutrition sales. Established Global Network and Customer Base. From our 23 facilities in 16 countries, we manufacture and market our products, which are sold through multiple distribution channels to over 2,800 customers in a wide variety of end use markets. We sell our products through an established global sales, marketing and 2 distribution network to customers in over 40 countries. In fiscal 2004, no single customer accounted for more than 5% of total revenues and our top 10 customers accounted for less than 22% of total revenues. Extensive Technical Support for Customers. We employ over 60 chemists, technicians, PhDs and veterinarians (DVMs) at our various facilities involved in providing technical services to customers. Our technical service group and sales personnel are able to work directly with commercial feed manufacturers and integrated poultry, swine and cattle producers to promote animal health. We are able to offer our customers products targeted to local markets, allowing us to serve those local markets more effectively. Our MFA field personnel are skilled in the area of product differentiation and have extensive applications knowledge so as to be able to work closely with customers in determining optimum benefits from usage of our products. As agricultural food production will continue to intensify and will adopt evolving technologies, our MFA personnel are constantly working with customers to better understand their needs in order to best utilize the products existing within our MFA portfolio. This commercial knowledge also plays a pivotal role within the R&D function to ensure that research results are applicable to customer needs and concerns. Manufacturing Expertise. Our manufacturing expertise and know-how in antibiotic manufacturing process and organic synthesis has given us unique positions in the marketplace. We believe that we are the only manufacturer of virginiamycin and semduramicin in the world. Our blending, compounding and formulation expertise is recognized by our customers in the animal health and nutrition market. In addition, in our Specialty Chemicals business, based on our more than 50 years of expertise in the metal chemical area, we have become a leading supplier of the new copper-containing compound to the pressure-treated wood industry. We also believe we hold leading positions in agricultural and other industrial applications for copper-containing compounds. Proven Management Team. We have assembled a strong and experienced management team at both the corporate and operating levels. Our top operating managers have an average of over 30 years of experience in the animal health and nutrition and specialty chemicals industries. With our expanded management team, we have added significant operational and international experience to our businesses. Our founding family owns 100% of our common stock. BUSINESS STRATEGY Expand Applications for Animal Health and Nutrition Product Offerings to Our Primary Markets. We seek to increase our product lines through expanding the scope of our animal health and nutrition product registrations, through both extending the use claims and formulations and the geographic areas of such registrations. We are actively working with the FDA and other regulators to obtain additional registrations and cross-clearances so that our MFA products can continue to be used in situations where another MFA is also in use. In the United States, we obtained from the FDA a zero-day withdrawal registration for the use of our oxytetracycline product in cattle and recently obtained a cross clearance for Mecadox(R) and Terramycin(R) in swine. We have obtained approval for Aviax(R) in the EU, and are pursuing a modification of our Aviax(R) registration in the United States allowing for site change of the active ingredient. We believe that our receipt of FDA approval of Aviax(R), together with our EU approval of Aviax(R) and our other registration efforts, has the potential to increase our sales over the next two to three years. By leveraging our global reach and our position as the only leading animal health company dedicated to MFAs and NFAs, we are natural partners for small players in the industry, who approach us to help them license or distribute new products they have developed, because we do not compete with their other products. Expand Our Customer Base. We intend to expand and strengthen our customer base by (i) focusing on relationships with key accounts, (ii) continuing to incent our sales force to concentrate on fast-growing, high-margin areas within existing product groups, and (iii) pursuing growth opportunities for our existing products in new markets. As certain of our MFA products are used in rotation by our customers, we seek to supply all or substantially all of the various MFA products which our customers may want to use. Our MFA business has historically been strongest in the poultry market, and we are seeking to develop it further in the swine and cattle markets. We expect to continue to enhance our sales force in the swine market, and believe that there are further growth opportunities from doing so. In addition, we believe the under-penetrated Chinese and 3 Latin American markets offer growth opportunities. In China, we are seeking to partner with local distributors, to leverage our existing local sales force. RECENT DEVELOPMENTS The Offering. On December 21, 2004, we completed a private placement (the "2004 Offering") under Rule 144A and Regulation S of the Securities Act, pursuant to which the US issuer and the Dutch issuer issued and sold $22.491 million of additional old units, from which we received gross proceeds of approximately $23.4 million. We used the proceeds from the 2004 Offering to refinance indebtedness outstanding under our domestic senior credit facility. Such additional old units were issued under the same indenture as the 105,000 old units issued on October 21, 2003. See "Description of Certain Indebtedness -- Domestic Senior Credit Facility" for more information. Consent Solicitation. In connection with the completion of the 2004 Offering, we solicited consents with regard to our outstanding old notes to amendments to the indenture governing such old notes to permit the sale of substantially all of the facilities owned by Phibro Animal Health SA (formerly Phibro Animal Health (Belgium) SPRL) ("PAH Belgium"), a wholly owned subsidiary of the Dutch issuer, in Rixensart, Belgium (the "Belgium Plant"), to reduce excess manufacturing capacity and to reduce operating expenses and, in furtherance thereof, to permit the maximum amount of indebtedness under our domestic senior credit facility permitted under the indenture governing the notes to be increased from $15.0 million to $37.5 and to permit the related transactions described herein. The requisite consents were obtained and the indenture was amended pursuant to the Second Supplemental Indenture, dated as of December 8, 2004. The amendments became effective on December 21, 2004 in connection with the 2004 Offering. Sale of Belgium Plant. On December 16, 2004, we entered into an agreement to sell the Belgium Plant to Glaxosmithkline Biologicals S.A. ("GSK") and to transfer to GSK a majority of the employees of PAH Belgium. GSK was a previous owner of the Rixensart plant, and sold it to Pfizer SA in 1995, which sold it to PAH Belgium in 2000. Such sale, when completed, would include the following elements: (i) the transfer of substantially all of the land and buildings and certain equipment of PAH Belgium at the Belgium Plant, as well as the industrial activities and intellectual property relating to certain solvent technology of Phibro Belgium, for a purchase price of EUR 6.2 million, payable at closing; (ii) the transfer to GSK of a majority of the employees of PAH Belgium and the corresponding responsibility for statutory severance obligations; (iii) GSK agreeing to be responsible for costs of cleaning-up, by demolition or otherwise, certain buildings not to be used by it, but for PAH Belgium to reimburse GSK up to a maximum of EUR 0.7 million for such clean-up costs; (iv) in recognition of the benefits to us from the proposed transaction, PAH Belgium agreeing to pay to GSK EUR 1.5 million within six months from the closing date, EUR 1.5 million within eighteen months from the closing date, EUR 1.5 million within thirty months from the closing date, and EUR 0.5 million within forty-two months from the closing date; (v) PAH Belgium retaining certain excess land (valued at approximately EUR 0.4 million) and being able to sell such land for its own account; (vi) PAH Belgium being responsible for certain plant closure costs and legally required severance indemnities in connection with workforce reductions, estimated in total to be EUR 7.7 million of which an amount estimated to be approximately EUR 4.1 million would be payable at or around the closing and an aggregate amount so estimated to be approximately EUR 3.6 million would be payable over periods up to thirteen years; and (vii) PAH Belgium retaining certain equipment at the Belgium Plant, and being able to sell such equipment for the account of PAH Belgium or transfer such equipment, together with other assets and rights related to the production of virginiamycin, to our subsidiary in Brazil that owns the facility in Guarulhos or in connection with alternative production arrangements. The foregoing transactions and agreements are subject to a closing that is expected to occur no earlier than July 1, 2005 nor later than June 30, 2006. The carrying value of the Belgium Plant and related assets at September 30, 2004 is EUR 13.9 million. The Company is in the process of evaluating the accounting for this transaction and will record an impairment loss, if required, in the second quarter ended December 31, 2004. In addition, the Company will expense severance, plant closure and other related costs in the period in which such liabilities are incurred in 4 accordance with Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". As of the date of this filing, estimates of such costs are in process of being determined. The Dutch notes and related guaranties are secured by a mortgage on the Belgium Plant which is to be released in connection with the closing of the sale of the Belgium Plant to GSK. Refinancing of Domestic Senior Credit Facility with Proceeds of the Additional Units. To provide the necessary funds to build inventory of virginiamycin until the Brazil plant or alternative supplier is able to produce production quantities of virginiamycin and to finance the purchase of capital equipment to fit out the Brazilian plant with equipment to produce virginiamycin, other than equipment transferred from the Belgium Plant, the maximum amount of indebtedness under our domestic senior credit facility permitted under the indenture governing the old notes was increased from $15.0 million to $37.5 million, pursuant to the Second Supplemental Indenture, and we increased our borrowing to $22.5 million. The proceeds of the 2004 Offering were used to refinance $22.5 million of borrowing under the domestic senior credit facility. The issuance of the additional old units had the effect of reducing the maximum amount of indebtedness under our domestic senior credit facility permitted under the indenture governing the notes by the principal amount of the additional old units issued. Borrowings under the domestic senior credit facility continue to be subject to a borrowing base formula based on percentages of eligible domestic receivables and domestic inventory. PHILIPP BROTHERS NETHERLANDS III B.V. Philipp Brothers Netherlands III B.V., the Dutch issuer, is an indirect wholly-owned subsidiary of the US issuer and is incorporated under the laws of the Netherlands as a private company with limited liability. The Dutch issuer is a holding company formed to finance the operations of PAH Belgium, which owns and operates our Rixensart, Belgium plant. Such plant uses fermentation processes to produce the active ingredients semduramicin and virginiamycin and conducts all of our fermentation development activities. For the fiscal year ended June 30, 2004, the Dutch issuer and its consolidated subsidiaries, including PAH Belgium, had revenue of $34.7 million and operating income of $6.7 million. As of September 30, 2004, the Dutch issuer and its consolidated subsidiaries, including PAH Belgium, had cash and cash equivalents of $0.2 million, net trade accounts receivable of $2.0 million, inventory of $29.1 million, net property, plant and equipment of $17.3 million, total assets of $51.1 million, total accounts payable and other current liabilities of $17.2 million, total debt of $31.7 million and total liabilities of $49.8 million. --------------------- We are a New York corporation and our principal executive offices are located at 65 Challenger Road, Ridgefield Park, New Jersey 07660 and our phone number is (201) 329-7300. 5 SUMMARY OF THE EXCHANGE OFFER On October 21, 2003, we completed a private offering of 105,000 old units consisting of: - $85.0 million principal amount of 13% Senior Secured Notes due 2007 of the US issuer, referred to as old US notes; and - $20.0 million principal amount of 13% Senior Secured Notes due 2007 of the Dutch issuer, referred to as old Dutch notes. On December 21, 2004, we completed a private offering of 22,491 additional old units consisting of: - $18.207 million principal amount of 13% Senior Secured Notes due 2007 of the US issuer, also referred to as old US notes; and - $4.284 million principal amount of 13% Senior Secured Notes due 2007 of the Dutch issuer, also referred to as old Dutch notes. In connection with each of those sales, we entered into a registration rights agreement, the terms of each of which are substantially similar, with the initial purchaser of the old units in which we agreed to deliver this prospectus to you and to complete an exchange offer for the old units. NEW UNITS OFFERED............. 127,491 new units consisting of: $103.207 million principal amount of 13% Senior Secured Notes due 2007 of the US issuer, referred to as the new US notes; and $24.284 million principal amount of 13% Senior Secured Notes due 2007 of the Dutch issuer, referred to as the new Dutch notes. The issuance of the new units has been registered under the Securities Act. The terms of the new units and old units are identical in all material respects, except for transfer restrictions, registration rights relating to the old units and certain provisions relating to increased interest rates in connection with the old units under circumstances relating to the timing of the exchange offer. You are urged to read the discussions under the heading "The New Units" in this summary for further information regarding the new units. THE EXCHANGE OFFER............ We are offering the new units to you in exchange for a like number of old units. The old units may be exchanged only in integral multiples of $1,000. We intend by the issuance of the new units to satisfy our obligations contained in the registration rights agreement. After the exchange offer is complete, you will no longer be entitled to any exchange or registration with respect to your old units. In this prospectus, the term "exchange offer" means this offer to exchange new units for old units in accordance with the terms set forth in this prospectus and the accompanying letter of transmittal. CONSEQUENCES OF FAILURE TO EXCHANGE UNITS................ If you do not exchange your old units for new units, subject to some limited exceptions, you will no longer be able to require us to register the old units under the Securities Act. In addition, you will not be able to offer or sell the old units unless: - they are registered under the Securities Act and applicable state securities laws (and we will have no obligation to register them, except for some limited exceptions), or 6 - you offer or sell them under an exemption from the requirements of, or in a transaction not subject to, the Securities Act and applicable state securities laws. We do not currently intend to register the old units under the Securities Act. Under some circumstances, however, holders of the old units, including holders who are not permitted to participate in the exchange offer or who may not freely resell new units received in the exchange offer, may require us to file, and to cause to become effective, a shelf registration statement covering resales of new units by these holders. For more information regarding the consequences of not tendering your old units, see "The Exchange Offer -- Consequences of Failure to Exchange Units." EXPIRATION DATE; WITHDRAWAL OF TENDER..................... The exchange offer will expire at 5:00 p.m., New York City time, on , 2005, or such later date and time to which it may be extended by us. The tender of old units pursuant to the exchange offer may be withdrawn at any time prior to the expiration date of the exchange offer. Any old units not accepted for exchange for any reason will be returned without expense to the tendering holder thereof promptly after the expiration or termination of the exchange offer. CONDITIONS TO THE EXCHANGE OFFER......................... Our obligation to accept for exchange, or to issue new units in exchange for, any old units is subject to customary conditions relating to compliance with any applicable law or any applicable interpretation by the staff of the Securities and Exchange Commission, the receipt of any applicable governmental approvals and the absence of any actions or proceedings of any governmental agency or court which could materially impair PAH's or PB Netherlands' ability to consummate the exchange offer. See "The Exchange Offer -- Conditions to the Exchange Offer." PROCEDURE FOR TENDERING OLD UNITS......................... If you wish to accept the exchange offer and tender your old units, you must either: complete, sign and date the letter of transmittal, or a facsimile of the letter of transmittal, in accordance with its instructions and the instructions in this prospectus, and mail or otherwise deliver such letter of transmittal, or the facsimile, together with the old units and any other required documentation, to the exchange agent at the address set forth herein; or if old units are tendered pursuant to book-entry procedures, the tendering holder must deliver a completed and duly executed letter of transmittal or arrange with The Depository Trust Company, or DTC, to cause an agent's message to be transmitted through DTC's Automated Tender Offer Program System with the required information (including a book-entry confirmation) to the exchange agent. See "The Exchange Offer -- Procedures for Tendering Old Units." BROKER-DEALERS................ Each broker-dealer that receives new units for its own account in exchange for old units, where such old units were acquired by such broker-dealer as a result of market-making activities or other 7 trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such new units. See "Plan of Distribution." USE OF PROCEEDS............... We will not receive any proceeds from the exchange offer. See "Use of Proceeds." EXCHANGE AGENT................ HSBC Bank USA, National Association is serving as the exchange agent in connection with the exchange offer. The address, telephone number and facsimile number of the exchange agent are provided in the section "The Exchange Offer," as well as in the letter of transmittal. FEDERAL INCOME TAX CONSEQUENCES.................. We believe that the exchange of old units for new units pursuant to the exchange offer will not be a taxable event for United States federal income tax purposes. You are referred to the discussion of the tax consequences of the exchange offer under "Certain United States Federal Income Tax Consequences" and "Certain Dutch Tax Consequences." You should consult your tax advisor about the tax consequences as they apply to your individual circumstances. CONSEQUENCES OF EXCHANGING OLD UNITS PURSUANT TO THE EXCHANGE OFFER Based on certain interpretive letters issued by the Staff of the Securities and Exchange Commission to third parties in unrelated transactions, we are of the view that holders of old units (other than any holder who is an "affiliate" of PAH or PB Netherlands within the meaning of Rule 405 under the Securities Act) who exchange their old units for new units pursuant to the exchange offer generally may offer the new units for resale, resell such new units and otherwise transfer the new units without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that: - the new units are acquired in the ordinary course of the holders' business; - the holders have no arrangement or understanding with any person to participate in a distribution of the new units; and - neither the holder nor any other person is engaging in or intends to engage in a distribution of the new units. Each broker-dealer that receives new units for its own account in exchange for old units must acknowledge that it will deliver a prospectus in connection with any resale of the new units. See "Plan of Distribution." In addition, to comply with the securities laws of applicable jurisdictions, the new units may not be offered or sold unless they have been registered or qualified for sale in the applicable jurisdiction or in compliance with an available exemption from registration or qualification. PAH and PB Netherlands have agreed, under the registration rights agreement and subject to limitations specified in the registration rights agreement, to register or qualify the new units for offer or sale under the securities or blue sky laws of the applicable jurisdictions as any holder of the units reasonably requests in writing. If a holder of old units does not exchange the old units for new units according to the terms of the exchange offer, the old units will continue to be subject to the restrictions on transfer contained in the indenture governing the units and in the legend printed on the old units. In general, the old units may not be offered or sold, unless registered under the Securities Act, except under an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. Holders of old units do not have any appraisal or dissenters' rights in connection with the exchange offer. See "The Exchange Offer -- Resales of New Units." The old units are currently eligible for trading in the Private Offerings, Resales and Trading through Automated Linkages (PORTAL) market. Following commencement of the exchange offer but prior to its completion, the old units may continue to be traded in the PORTAL market. Following completion of the exchange offer, however, the new units will not be eligible for trading in the PORTAL market. 8 THE NEW UNITS The terms of the new units and the old units are identical in all material respects, except for transfer restrictions, registration rights relating to the old units and certain provisions relating to increased interest rates in connection with the old units under circumstances relating to the timing of the exchange offer, which rights will terminate upon completion of the exchange offer. The new units will evidence the same debt as the old units and will be governed by the same indenture. This summary is not intended to be complete. For a more complete description of the terms of the new units and new notes, see "Description of the New Units" and "Description of the New Notes," respectively, in this prospectus. ISSUERS....................... Phibro Animal Health Corporation, the US issuer, and Philipp Brothers Netherlands III B.V., the Dutch issuer. SECURITIES OFFERED............ 127,491 new units consisting of $103.207 million principal amount of 13% senior secured notes due 2007 of Phibro Animal Health Corporation, the new US notes, and $24.284 million principal amount of 13% senior secured notes due 2007 of Philipp Brothers Netherlands III B.V., the new Dutch notes. The new US notes and new Dutch notes are collectively referred to as the new notes. MATURITY...................... December 1, 2007. INTEREST RATE AND PAYMENT DATES......................... Each issuer will pay interest on its new notes at a rate equal to 13% per year. Interest on the new notes will be payable semi-annually in cash in arrears on June 1 and December 1 of each year, beginning on June 1, 2005. USE OF PROCEEDS............... The new units issued in connection with the exchange offer are only being issued in exchange for your old units. We will not receive any cash proceeds from the issuance of the new units pursuant to the exchange offer. All old units accepted by us in this exchange offer will be cancelled. SEPARATION EVENTS............. The new notes of each issuer will not trade separately unless an event of default on the new notes has occurred, a tax redemption of the new Dutch notes related to certain changes affecting withholding taxes has occurred or a change in control of the Dutch issuer has occurred. GUARANTEES.................... All of the US issuer's existing and future domestic restricted subsidiaries will guarantee the new notes of each issuer on a senior secured basis. The new Dutch notes will also be guaranteed by the US issuer and by the Dutch issuer's current and future restricted subsidiaries, including PAH Belgium. The guarantees of the new US notes by its domestic restricted subsidiaries and the guarantees of the new Dutch notes by the US issuer, its domestic restricted subsidiaries and each of the restricted subsidiaries of the Dutch issuer will be senior secured obligations of the US guarantors and such restricted subsidiaries and will rank equal in right of payment with all of their respective existing and future senior indebtedness. SECURITY INTEREST............. The new US notes and related guarantees will be secured by substantially all of the US issuer's assets and the assets of the US issuer's domestic restricted subsidiaries, other than real property and interests therein. In addition, the new US notes and related guarantees will be secured by 65% of the voting stock and 100% of 9 the non-voting stock of foreign subsidiaries owned by the US issuer's domestic restricted subsidiaries or the US issuer. Pursuant to the terms of an intercreditor agreement, as amended in connection with the 2004 Offering, the security interest securing the new US notes and the related guarantees made by the US issuer's domestic restricted subsidiaries will be subordinated to a lien securing the US issuer's domestic senior credit facility. Such security interest will also be subordinated to certain other secured indebtedness permitted to be incurred by the US issuer under the indenture and will be structurally subordinated to all liabilities of the US issuer's foreign subsidiaries and unrestricted subsidiaries. The new Dutch notes and related guarantees will be secured by a pledge of all of the accounts receivable, a security interest or floating charge on the inventory to the extent permitted by applicable law, a mortgage on substantially all of the real property of the Dutch issuer and each of its restricted subsidiaries, a pledge of 100% of the stock of each direct subsidiary of the Dutch issuer and its restricted subsidiaries, a pledge of the intercompany loans made by the Dutch issuer to its restricted subsidiaries and substantially all of the assets of the US guarantors, other than real property and interests therein. RANKING....................... The new notes of each issuer will be senior secured obligations of that issuer and will rank equal in right of payment with any of the other senior indebtedness of that issuer, including in the case of the US issuer, indebtedness under the US issuer's domestic senior credit facility. OPTIONAL MAKE-WHOLE REDEMPTION.................... The issuers may, at their option, redeem some or all of their new notes at any time prior to June 1, 2005 by paying the greater of (i) 100% of the aggregate principal amount of their notes and (ii) the sum of the present values of 114% of the aggregate principal amount of their notes plus scheduled interest payments on the new notes through and including June 1, 2005, discounted to the redemption date on a semi-annual basis at the adjusted treasury rate plus 50 basis points, together with, in each case, accrued and unpaid interest to the redemption date. The foregoing optional redemption of the notes shall include both new US notes and new Dutch notes on a pro rata basis based upon the aggregate principal amount of notes outstanding at the time of redemption, unless a change of control of the Dutch issuer has occurred. OPTIONAL REDEMPTION........... On or after June 1, 2005, the issuers may redeem all or a portion of the new notes at their option at the redemption prices (expressed as a percentage of the principal amount), plus accrued and unpaid interest, if redeemed during the six-month period commencing on the dates indicated below:
PERIOD PERCENTAGE ------ ---------- June 1, 2005................................... 114.0% December 1, 2005............................... 109.0% June 1, 2006................................... 105.0% December 1, 2006, and thereafter............... 101.0%
10 Prior to June 1, 2005, the issuers may redeem on one or more occasions up to 35% of the aggregate principal amount of the new notes at a redemption price equal to 113% plus accrued and unpaid interest with the net proceeds of any public equity offering. The foregoing optional redemption of the new notes shall include both new US notes and new Dutch notes on a pro rata basis based upon the aggregate principal amount of the notes outstanding at the time of redemption, unless a change of control of the Dutch issuer has occurred. The Dutch issuer may redeem the new Dutch notes in whole, and not in part, at 100% of their principal amount plus accrued and unpaid interest in the event of certain changes affecting withholding taxes described below in "Description of the New Notes." CHANGE OF CONTROL OFFER....... If the US issuer experiences a change of control, each holder of new units will have the right to sell the issuers all or a portion of the new notes held by it at 101% of the aggregate principal amount of such new notes, plus accrued and unpaid interest, if any, and additional interest, if any, to the date of purchase. If the Dutch issuer experiences a change of control, it may, at its option at any time, redeem its new notes in whole, and not in part, at the optional redemption prices otherwise applicable on the redemption date. If the Dutch issuer has not delivered a notice of redemption to the holders within 30 days following a change of control, it shall be required to commence an offer to purchase its new notes on the same terms and conditions that apply to it in the event of a change in control of the US issuer; provided, that at any time prior to the consummation of the offer to purchase its new notes, the Dutch issuer may deliver an optional redemption notice to redeem all of its notes in lieu of completing the offer to purchase. ASSET SALE OFFERS............. If either issuer or any of its restricted subsidiaries sells assets and does not reinvest the proceeds from the sale of its assets in its respective business, the issuers may have to offer to use the proceeds to repurchase new notes at 100% of their aggregate principal amount plus accrued and unpaid interest to the date of purchase. Any such repurchase of the new notes shall include both new US notes and new Dutch notes on a pro rata basis based upon the aggregate principal amount of the notes outstanding at the time of such repurchase, unless a change of control of the Dutch issuer has occurred. EXCESS CASH FLOW OFFERS....... If we have excess cash flow, the issuers may have to offer to use 50% of the excess cash flow to repurchase a portion of the new notes at 102.5% of their aggregate principal amount, plus accrued and unpaid interest. Any such repurchase of the new notes shall include both new US notes and new Dutch notes on a pro rata basis based upon the aggregate principal amount of the notes outstanding at the time of such repurchase, unless a change of control of the Dutch issuer has occurred. RESTRICTIVE COVENANTS......... The indenture governing the new notes will contain covenants that, among other things, limit our ability to: - incur additional indebtedness or issue disqualified capital stock; - make investments; - pay dividends or make other restricted payments; 11 - issue capital stock of certain subsidiaries; - enter into transactions with affiliates; - create or incur liens; - transfer or sell assets; - incur dividend or other payment restrictions affecting certain subsidiaries; and - consummate a merger, consolidation or sale of all or substantially all of our assets. These covenants are subject to a number of important exceptions described below in "Description of the New Notes -- Certain\ Covenants." BOARD REPRESENTATION.......... A Noteholder Representative has been designated to serve on the board of directors of the Company. See "Description of the New Notes -- Certain Covenants -- Noteholder Representative." REGISTRATION.................. We filed a registration statement with the SEC on Form S-4 with respect to an exchange offer for the 105,000 old units issued in October 2003, but due to pending confidential acquisition negotiations, such registration statement did not become effective, and the Company caused a notice of withdrawal to be submitted to the SEC on November 15, 2004. As a result, a Registration Default exists with respect to the old notes issued in October 2003, and such notes have borne additional interest. However, the consummation of the exchange offer of new units for old units is expected to cure such Registration Default. In such event, from and after such date, such old notes will bear interest at the rate set forth on the cover page of this prospectus and cease to accrue such additional interest. See "The Exchange Offer -- Registration Rights and Additional Interest on Certain Old Units." RISK FACTORS An investment in the new units and the new notes involves risks. You should carefully consider the information in this prospectus. In particular, you should evaluate the specific risk factors set forth under the caption "Risk Factors", as well as all other information set forth in this prospectus. 12 SUMMARY HISTORICAL AND UNAUDITED CONSOLIDATED FINANCIAL DATA The summary historical and unaudited consolidated financial data set forth below reflect continuing operations. Our Odda, Carbide, MRT and La Cornubia businesses have been classified as discontinued operations and are not included below. Odda operations were terminated in February 2003. Carbide was sold in April 2003. MRT was sold in August 2003. La Cornubia operations were terminated in June 2004. The summary consolidated financial data included in this prospectus have been prepared by, and are the responsibility of, our management. PricewaterhouseCoopers LLP, an independent registered public accounting firm, has neither examined nor reviewed the accompanying summary consolidated financial data and, accordingly, PricewaterhouseCoopers LLP does not express an opinion or any other form of assurance with respect thereto. The PricewaterhouseCoopers LLP report included in this prospectus relates only to our historical financial statements for the fiscal years ended June 30, 2004, 2003 and 2002. It does not extend to any other financial data and should not be read to do so. The following summary consolidated financial data set forth below should be read in conjunction with, and are qualified in their entirety by reference to, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and the notes thereto appearing elsewhere in this prospectus.
3 MONTHS ENDED FISCAL YEAR ENDED JUNE 30, SEPTEMBER 30, ------------------------------------ ----------------- 2002 2003 2004 2003 2004 -------- -------- -------------- ------- ------- (UNAUDITED) (IN THOUSANDS) RESULTS OF OPERATIONS: Net sales...................... $328,676 $341,746 $358,274 $84,950 $88,275 Gross profit................... 81,265 90,546 90,403 21,160 22,622 Selling, general and administrative expenses...... 70,636 65,050 71,389 15,785 16,594 Operating income............... 10,629 25,496 19,014 5,375 6,028
AS OF SEPTEMBER 30, AS OF JUNE 30, AS OF SEPTEMBER 30, 2004 -------------- ------------------------- ------------------------ 2004 2003 2004 AS ADJUSTED -------------- ----------- ----------- ------------------------ (UNAUDITED) (UNAUDITED) (UNAUDITED) (IN THOUSANDS) BALANCE SHEET DATA:* Cash and cash equivalents..... $ 5,568 $ 26,917 $ 5,778 $ 15,626 Fixed assets.................. 58,786 62,795 59,818 59,818 Total assets.................. 241,369 276,216 243,551 255,674 Total debt.................... 170,365 164,182 170,213 181,436 Series B and C redeemable preferred stock............. 24,678 69,868 25,359 25,359 Total stockholders' deficit... (63,833) (84,784) (61,574) (61,574)
- --------------- * Adjusted balance sheet data give effect to the 2004 Offering and the application of the proceeds as provided in "Recent Developments -- The Offering." 13 RATIO OF EARNINGS TO FIXED CHARGES The following table sets forth our historical consolidated ratio of earnings to fixed charges for the periods indicated.
3 MONTHS ENDED FISCAL YEAR ENDED JUNE 30, SEPTEMBER 30, -------------------------------- ------------- 2000 2001 2002 2003 2004 2003 2004 ---- ---- ---- ---- ---- ----- ----- Ratio of earnings to fixed charges(a).... 1.1 (b) (b) 1.4 2.2 1.5 1.1
- --------------- (a) For purposes of computing the consolidated ratio of earnings to fixed charges, earnings represent earnings (loss) from continuing operations before income taxes, loss on equity investments and fixed charges. Fixed charges include interest expense (whether expensed or capitalized) and a portion of rentals determined to be representative of the interest component of such rental expense. Management believes that one-third is representative of the interest component of such rental expense. (b) The amounts by which earnings were inadequate to cover fixed charges were $9,563 and $10,384 for the fiscal years ended June 30, 2001 and 2002 respectively. The following table sets forth our consolidated ratio of earnings to fixed charges for the periods indicated, adjusted to give effect to the 2004 Offering and application of the proceeds as provided in "Recent Developments -- The Offering.".
FISCAL YEAR 3 MONTHS ENDED ENDED JUNE 30, 2004 SEPTEMBER 30, 2004 ------------- ------------------ Ratio of earnings to fixed charges(a)................... 1.9 1.0
- --------------- (a) For purposes of computing the consolidated ratio of earnings to fixed charges, earnings represent earnings (loss) from continuing operations before income taxes, loss on equity investments and fixed charges. Fixed charges include interest expense (whether expensed or capitalized) and a portion of rentals determined to be representative of the interest component of such rental expense. Management believes that one-third is representative of the interest component of such rental expense. 14 RISK FACTORS An investment in the new units involves a significant degree of risk, including the risks described below. You should carefully consider the following risk factors and the other information in this prospectus before deciding to exchange old units for new units. The risks described below are not the only ones facing us. This prospectus contains forward-looking statements that involve risks and uncertainties, including, in particular, the statements about our plans, strategies and prospects under the headings "Prospectus Summary," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Business." Although we believe that our plans, intentions and expenditures reflected in or suggested by such forward-looking statements are reasonable, we can give no assurance that such plans, intentions or expectations will be achieved. Important factors that could cause actual results to differ materially from the forward-looking statements we make in this prospectus are set forth below and elsewhere in this prospectus. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the following cautionary statements. RISK FACTORS RELATED TO THE EXCHANGE OFFER IF YOU FAIL TO EXCHANGE YOUR OLD UNITS FOR NEW UNITS, YOUR OLD UNITS WILL CONTINUE TO BE SUBJECT TO RESTRICTIONS ON TRANSFER. The old units were not registered under the Securities Act or under the securities laws of any state and may not be resold, offered for resale or otherwise transferred unless they are subsequently registered or resold under an exemption from the registration requirements of the Securities Act and applicable state securities laws. If you do not exchange your old units for new units under the exchange offer, you will not be able to resell, offer to resell or otherwise transfer the old units unless they are registered under the Securities Act or unless you resell them, offer to resell or otherwise transfer them under an exemption from the registration requirements of, or in a transaction not subject to, the Securities Act. In addition, we will no longer be under an obligation to register the old units under the Securities Act except in the limited circumstances provided under the registration rights agreement. In addition, if you want to exchange your old units in the exchange offer for the purpose of participating in a distribution of the new units, you may be deemed to have received restricted securities, and, if so, will be required to comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. IF AN ACTIVE TRADING MARKET FOR THE NEW UNITS DOES NOT DEVELOP, THE LIQUIDITY AND VALUE OF THE NEW UNITS COULD BE HARMED. While the old units are currently eligible for trading on the PORTAL market, even if the registration statement becomes effective, which will generally allow resale of the new units, there is no established trading market for the new units. Neither issuer intends to list the new units on any U.S. national securities exchange or automated quotation system. We cannot assure you that an active trading market will develop for the new units. If no active trading market develops, you may not be able to resell your new units at their fair market value or at all. Future trading prices of the new units will depend on many factors, including, among other things, prevailing interest rates, our operating results, our ability to complete the exchange offer and the market for similar securities. The initial purchaser has advised us that it currently intends to make a market in the new units, but it is not obligated to do so and may discontinue any market making in the new units at any time. THE ISSUANCE OF THE NEW UNITS MAY ADVERSELY AFFECT THE MARKET FOR THE OLD UNITS. To the extent that the old units are tendered for exchange and accepted in the exchange offer, the trading market for the untendered and tendered but unaccepted old units could be adversely affected. YOU MUST COMPLY WITH THE EXCHANGE OFFER PROCEDURES IN ORDER TO RECEIVE THE NEW UNITS. The new units will be issued in exchange for the old units only after timely receipt by the exchange agent of the old units or a book-entry confirmation or a confirmation of blocking instructions related thereto, a 15 properly completed and executed letter of transmittal, or an agent's message and all other required documentation. If you want to tender your old units in exchange for new units, you should allow sufficient time to ensure timely delivery. None of PAH, PB Netherlands nor the exchange agent are under any duty to give you notification of defects or irregularities with respect to tenders of old units for exchange. Old units that are not tendered or are tendered but not accepted will, following the exchange offer, continue to be subject to the existing transfer restrictions. In addition, if you tender the old units in the exchange offer to participate in a distribution of the new units, you will be required to comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. For additional information, please refer to the sections entitled "The Exchange Offer" and "Plan of Distribution" later in this prospectus. RISK FACTORS RELATING TO THE NEW UNITS AND THE NEW NOTES OUR SUBSTANTIAL LEVEL OF INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION AND PREVENT US FROM FULFILLING OUR OBLIGATIONS UNDER THE NEW UNITS AND THE NEW NOTES. We have a substantial amount of debt. As of September 30, 2004, we had approximately $170.2 million of total indebtedness outstanding and our ratio of earnings to fixed charges was 1.1x. We had the ability to borrow, as of September 30, 2004, an additional $6.2 million under the revolving portion of our domestic senior credit facility, subject to the restrictions in the indenture and in our domestic senior credit facility. As of such date, after giving effect to the 2004 Offering and application of proceeds, we had $181.4 million of total indebtedness outstanding and our ratio of earnings to fixed charges was 1.0x. We had the ability to borrow an additional $17.5 million under the revolving portion of our domestic senior credit facility, subject to such aforementioned restrictions. Additionally, subject to restrictions in the indenture and our domestic senior credit facility, we may incur additional indebtedness. Our high level of indebtedness could have important consequences to you, including the following: - it may make it difficult for us to satisfy our obligations under the notes and our other indebtedness and contractual and commercial commitments; - we must use a substantial portion of our cash flow from operations to pay interest on the notes and our other indebtedness, which will reduce the funds available to us for other purposes; - all of the indebtedness outstanding under our domestic senior credit facility will have a prior ranking claim on our assets and will mature prior to the notes; - our domestic senior credit facility has a variable rate of interest, which exposes us to the risk of increased interest rates; - our ability to obtain additional debt financing in the future for working capital, capital expenditures, acquisitions or general corporate purposes may be limited; - our high level of indebtedness could limit our flexibility in reacting to changes in the industry and make us more vulnerable to adverse changes in our business or economic conditions in general; - our high level of indebtedness could place us at a competitive disadvantage to those of our competitors who operate on a less leveraged basis; and - if we fail to comply with the covenants in the indenture relating to the notes, our domestic senior credit facility or in the instruments governing our other indebtedness (including the indenture for our outstanding senior subordinated notes due 2008), such failure could have a material adverse effect on our business and our ability to repay the notes. Our ability to make payments with respect to the notes and to satisfy our other debt obligations will depend on our future operating performance and our ability to refinance our indebtedness, which will be affected by prevailing economic conditions and financial, business and other factors, certain of which are beyond our control. 16 WE MAY NOT BE ABLE TO GENERATE SUFFICIENT CASH FLOW TO MEET OUR DEBT SERVICE AND OTHER OBLIGATIONS DUE TO EVENTS BEYOND OUR CONTROL. Upon the issuance of the old notes, our interest expense increased compared to prior years. Our ability to generate cash flows from operations and to make scheduled payments on our indebtedness, including equipment and other leases, will depend on our future financial performance. Our future performance will be affected by a range of economic, competitive and business factors that we cannot control, such as general economic and financial conditions in our industry or the economy at large. A significant reduction in operating cash flows resulting from changes in economic conditions, increased competition, or other events beyond our control could increase the need for additional or alternative sources of liquidity and could have a material adverse effect on our business, financial condition, results of operations, prospects and our ability to service our debt and other obligations. If we are unable to service our indebtedness, we will be forced to adopt an alternative strategy that may include actions such as reducing or delaying acquisitions and capital expenditures, selling assets, restructuring or refinancing our indebtedness, or seeking additional equity capital. We cannot assure you that any of these alternative strategies could be effected on satisfactory terms, if at all, or that they would yield sufficient funds to make required payments on the notes and our other indebtedness. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." We urge you to consider the information under "Capitalization," "Prospectus Summary -- Summary Historical and Unaudited Consolidated Financial Data," "Description of the Notes," and "Description of Certain Indebtedness" for more information on these matters. WE WILL DEPEND ON DISTRIBUTIONS FROM OUR SUBSIDIARIES TO MEET OUR OBLIGATIONS UNDER THE NEW NOTES. Substantially all of our operating income comes from our subsidiaries. Therefore, we will depend on dividends and other distributions from our restricted subsidiaries to generate the funds necessary to meet our obligations, including the payment of principal and interest on the notes. The ability of our subsidiaries to pay such dividends will be subject to, among other things, the terms of any debt instruments of our subsidiaries then in effect and applicable law. In addition, in the case of our foreign subsidiaries, dividends and interest may be subject to foreign withholding taxes, which would reduce the amount of funds we receive from such foreign subsidiaries. Distributions from our foreign subsidiaries may also be subject to fluctuations in currency exchange rates, which could reduce the amount of funds we receive from such foreign subsidiaries. THE DUTCH ISSUER IS A FINANCE SUBSIDIARY WITH LIMITED ASSETS. The capital stock of PAH Belgium, the intercompany loan to PAH Belgium that was previously funded with proceeds of the Dutch notes issued in October 2003 and the new intercompany loan to PAH Belgium, are and will be the only significant assets of the Dutch issuer. Therefore the Dutch issuer will be entirely dependent on payments on the intercompany loans to PAH Belgium to make payments on the Dutch notes. In return, PAH Belgium will depend on the income it receives from its business operations to service its indebtedness in respect of the intercompany loans granted to it by the Dutch issuer. Your right to receive payments on the Dutch notes could be adversely affected if PAH Belgium is declared bankrupt, liquidates or reorganizes. The dependence of the Dutch issuer on payments from the US issuer and its domestic guarantors is likely to increase after the sale of the Belgium Plant and the sale of the virginiamycin inventory to be built up prior to a supply from a new source. THE COLLATERAL SECURING THE NEW NOTES MAY BE INSUFFICIENT OR UNAVAILABLE IN THE EVENT OF A DEFAULT. No appraisal of the value of the collateral has been made in connection with this offering and the value of the collateral in the event of liquidation will depend on market and economic conditions, the availability of buyers and other factors. Consequently, we cannot assure you that liquidating the collateral securing the notes would produce proceeds in an amount sufficient to pay any amounts due under the notes after also satisfying the obligations to pay any other senior secured creditors. Nor can we assure you that the fair market value of the collateral securing the notes would be sufficient to pay any amounts due under the notes following their acceleration. 17 The notes and guarantees related thereto will be effectively subordinated, to the extent of the value of assets securing the notes and such guarantees, to indebtedness that may be incurred under our domestic senior credit facility and our performance bonds. In the event of a default under the notes, the proceeds from the sale of the collateral may not be sufficient to satisfy in full our obligations under our domestic senior credit facility, our performance bonds and the notes. The amount to be received upon such a sale would depend upon numerous factors, including the timing and manner of the sale. The book value of the collateral will be less than the principal amount of the notes offered hereby. By its nature, the collateral will be illiquid and may have no readily ascertainable market value. Accordingly, there can be no assurance that the collateral can be sold in a short period of time or that the proceeds obtained therefrom will be sufficient to pay all amounts owing to the lenders under our domestic senior credit facility and the holders of the notes. In addition, our failure or inability to pay rent under real property leases could cause the loss of certain collateral. To the extent that third parties (including the lenders under our domestic senior credit facility) enjoy permitted liens, such third parties may have rights and remedies with respect to the property subject to such liens that, if exercised, could adversely affect the value of the collateral. Additionally, the terms of the indenture allow us to issue additional notes provided that we meet a specified coverage ratio. The indenture does not require that we maintain the current level of collateral or maintain a specific ratio of indebtedness to asset values. Any additional notes issued pursuant to the indenture will rank pari passu to the notes issued in the exchange offer and be entitled to the same rights and priority with respect to the collateral. Thus, the issuance of additional notes pursuant to the indenture may have the effect of significantly diluting your ability to recover payment in full from the then existing pool of collateral. See "Description of the New Notes -- Security." THE LIEN-RANKING PROVISIONS SET FORTH IN THE INDENTURE GOVERNING THE NOTES LIMIT THE RIGHTS OF THE HOLDERS OF THE NEW NOTES WITH RESPECT TO THE COLLATERAL SECURING THE NEW NOTES AND THE GUARANTEES RELATED THERETO. The rights of the holders of the notes with respect to the collateral of the US issuer and its domestic restricted subsidiaries that secure the notes are substantially limited pursuant to the terms of the lien-ranking provisions set forth in the intercreditor agreement relating to the indenture governing the notes. Under those lien-ranking provisions, at any time that obligations that have the benefit of liens that are senior to the liens securing the notes and such guarantees pursuant to the terms thereof are outstanding, any actions that may be taken in respect of that collateral, including the ability to cause the commencement of enforcement proceedings against that collateral and to control the conduct of such proceedings, and releases of that collateral from the lien of the collateral documents of the US issuer and its domestic restricted subsidiaries, will be at the direction of the holders of the obligations secured by such senior liens, and the collateral agent, on behalf of itself, the trustee and the holders of the notes, will not have the ability to control or direct such actions, even if the rights of the holders of the notes are adversely affected. Additional releases of that collateral from the liens securing the notes are permitted under some circumstances. THE ABILITY OF THE COLLATERAL AGENT TO FORECLOSE ON THE COLLATERAL MAY BE LIMITED PURSUANT TO BANKRUPTCY LAWS. The right of the collateral agent, as a secured party under the collateral documents for the benefit of itself, the trustee and the holders of the US notes, to foreclose upon and sell the collateral upon the occurrence of a payment default is likely to be significantly impaired by applicable bankruptcy laws, including the automatic stay provision contained in Section 362 of the Bankruptcy Code. Under applicable federal bankruptcy laws, a secured creditor is prohibited from repossessing its security from a debtor in a bankruptcy case, or from disposing of security repossessed from such a debtor, without bankruptcy court approval. Moreover, applicable federal bankruptcy laws generally permit the debtor to continue to retain and use collateral even though the debtor is in default under the applicable debt instruments. In view of the broad discretionary powers of a bankruptcy court, we cannot predict whether payments under the US notes would be made following commencement of, and during the pendency of, a bankruptcy case, whether or when the collateral agent could foreclose upon or sell the collateral or whether or to what extent holders of notes would be compensated for any delay in payment or loss of value of the collateral. Furthermore, if a bankruptcy court determines that the value of the collateral is not sufficient to repay all amounts due on the notes, holders of US notes would hold 18 "under-secured claims." Applicable federal bankruptcy laws do not permit the payment or accrual of interest, costs and attorney's fees for "under-secured claims" during a debtor's bankruptcy case. There are two primary insolvency regimes under Dutch law: the first, moratorium of payment (surseance van betaling) is intended to facilitate the reorganization of a debtor's debts and enable the debtor to continue as a going concern. The second, bankruptcy (faillissement), is designed to liquidate and distribute the assets of a debtor to its creditors. Under Netherlands law the holders of the Dutch notes can in the event of bankruptcy or moratorium of payment exercise the rights afforded to pledgees as if there were no bankruptcy or moratorium of payment. However, bankruptcy or moratorium of payment involving the Dutch issuer would affect the position of the holders of the Dutch notes as pledgees in some respects, the most important of which are: (i) the right of pledge will not extend to accounts receivable that arise under an agreement creating continuing obligations of the Dutch issuer and become due and payable on or after the date on which the Dutch issuer is declared bankrupt or granted a moratorium of payments, (ii) the right of pledge will not extend to inventory that is acquired by the Dutch issuer on or after the date on which the Dutch issuer is declared bankrupt or granted a moratorium of payments, (iii) payments received by the Dutch issuer from the debtors of pledged accounts receivable after bankruptcy or moratorium of payments involving the Dutch issuer having been declared, will be part of the bankrupt estate, although the holders of the Dutch notes have the right to receive such amounts by preference after deduction of certain costs, (iv) a mandatory "cooling-off" period of up to two months may apply in case of bankruptcy or moratorium of payments involving the Dutch issuer, which, if applicable, would delay the exercise of the rights of pledge on the shares of PAH Belgium and the accounts receivable and (v) the holders of the Dutch notes may be obliged to enforce their rights of pledge within a reasonable period as determined by the judge-commissioner (rechter-commissaris) appointed by the court in case of bankruptcy of the Dutch issuer. THE INDENTURE GOVERNING THE NEW NOTES AND THE INSTRUMENTS GOVERNING OUR OTHER INDEBTEDNESS IMPOSE SIGNIFICANT OPERATING AND FINANCIAL RESTRICTIONS ON US THAT MAY PREVENT US FROM PURSUING CERTAIN BUSINESS OPPORTUNITIES AND RESTRICT OUR ABILITY TO OPERATE OUR BUSINESS. The indenture governing the notes and our domestic senior credit facility contain covenants that restrict our ability to take various actions, such as: - incur additional indebtedness or issue disqualified capital stock; - make investments - pay dividends or make other restricted payments; - issue capital stock of certain subsidiaries; - enter into transactions with affiliates; - create or incur liens; - transfer or sell assets; - incur dividend or other payment restrictions affecting certain subsidiaries; and - consummate a merger, consolidation or sale of all or substantially all of our assets. Our ability to comply with these covenants can be affected by events beyond our control and we cannot assure you that we will satisfy those requirements. A breach of any of these provisions could result in a default under these instruments, which could allow all amounts outstanding thereunder to be declared immediately due and payable. We cannot assure you that our assets would be sufficient to repay such amounts (including amounts due under the notes) in full. We may also be prevented from taking advantage of business opportunities that arise if we fail to meet certain financial ratios or because of the limitations imposed on us by the restrictive covenants under these instruments. We urge you to read the information under "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources," "Description of Certain Indebtedness" and "Description of the New Notes -- Certain Covenants" for a more detailed discussion of the substantive requirements of these covenants. 19 WE MAY BE UNABLE TO PURCHASE THE NEW NOTES UPON A CHANGE OF CONTROL. Upon the occurrence of a change of control, we will be required to offer to purchase all outstanding notes at a price equal to 101% of the principal amount of the notes, together with accrued and unpaid interest, if any, and additional interest or liquidated damages, if any, to the date of repurchase. However, it is possible that we will not have sufficient funds at the time of the change of control to make the required repurchase of the notes or that restrictions in our domestic senior credit facility will not allow such repurchases. If we are required to repurchase the notes, we would probably require third party financing. We cannot be sure that we would be able to obtain third party financing on acceptable terms, or at all. Our failure to purchase the notes would be a default under the indenture, which would result in a default under our domestic senior credit facility. See "Description of the New Notes -- Change of Control" and "Description of Certain Indebtedness -- Domestic Senior Credit Facility." One of the circumstances under which a change of control may occur is upon the sale or disposition of all or substantially all of our capital stock or assets. However, the phrase "all or substantially all" will likely be interpreted under applicable state law and will be dependent upon particular facts and circumstances. As a result, there may be a degree of uncertainty in ascertaining whether a sale or disposition of "all or substantially all" of our capital stock or assets has occurred, in which case, the ability of a holder of the notes to obtain the benefit of an offer to repurchase all of a portion of the notes held by such holder may be impaired. A COURT COULD CANCEL THE GUARANTEES AND SECURITY INTERESTS UNDER FRAUDULENT CONVEYANCE LAWS OR CERTAIN OTHER CIRCUMSTANCES. All of our present and future domestic restricted subsidiaries will guarantee the notes and provide assets as security for such guarantees. If, however, such a subsidiary becomes a debtor in a case under the Bankruptcy Code or encounters other financial difficulty, under federal or state fraudulent conveyance laws, renewable transactions or preferential payments, a court in the relevant jurisdiction might avoid or cancel its guarantee and/or the liens created by the security interest. The court might do so if it found that, when the subsidiary entered into its guarantee and security arrangement or, in some states, when payments become due thereunder, it received less than reasonably equivalent value or fair consideration for such guarantee and/or security arrangement and either was or was rendered insolvent, was left with inadequate capital to conduct its business, or believed or should have believed that it would incur debts beyond its ability to pay. The court might also avoid such guarantee and/or security arrangement, without regard to the above factors, if it found that the subsidiary entered into its guarantee and/or security arrangement with actual or deemed intent to hinder, delay, or defraud its creditors. A court could find that a subsidiary did not receive reasonably equivalent value or fair consideration for its guarantee and/or security arrangement unless it benefited directly or indirectly from the issuance of the notes. If a court avoided such guarantee and/or security arrangement, you would no longer have a claim against such subsidiary. In addition, the court might direct you to repay any amounts already received from such subsidiary. If the court were to avoid any guarantee and/or security arrangement, we cannot assure you that funds would be available to pay the notes from another subsidiary or from any other source. In addition to the grounds set out above and other grounds for invalidating guarantees and security in insolvency, PAH Belgium's guarantee of the Dutch notes and/or the security interests securing such guarantee could be invalidated by a Belgian court if it is held to be ultra vires or contrary to PAH Belgium's corporate interest. This could be the case if the court were to find that PAH Belgium did not receive a benefit proportionate to the risk it incurred under the guarantee, or if such risk is disproportionate to PAH Belgium's financial means. The indenture will state that the liability of each subsidiary on its guarantee and security arrangement is limited to the maximum amount that the subsidiary can incur without risk that the guarantee or security arrangement will be subject to avoidance as a fraudulent conveyance. This limitation may not protect the guarantees and/or security arrangements from a fraudulent conveyance attack or, if it does, that the guarantees and/or security arrangements will be in amounts sufficient, if necessary, to pay obligations under the notes when due. 20 THE NEW NOTES WILL BE EFFECTIVELY SUBORDINATED TO ALL EXISTING AND FUTURE LIABILITIES, INCLUDING ALL INDEBTEDNESS, OF OUR FOREIGN AND UNRESTRICTED SUBSIDIARIES. Our operations are predominantly conducted through subsidiaries. Although our domestic restricted subsidiaries have guaranteed the notes and entered into security arrangements with respect to certain of their assets to secure repayment of the notes, our foreign and unrestricted subsidiaries (other than the Dutch issuer and its restricted subsidiaries with respect to the Dutch notes and the related guarantees) have not guaranteed, granted liens or otherwise become obligated with respect to the notes. Claims of creditors of such subsidiaries, including trade creditors, will generally have priority as to the assets of such subsidiaries over the claims of us and the holders of our indebtedness, including the notes. The notes will therefore be effectively subordinated to all existing and future liabilities, including indebtedness, of our foreign subsidiaries (other than the Dutch issuer and its restricted subsidiaries with respect to the Dutch notes and the related guarantees). As of September 30, 2004, our foreign subsidiaries had indebtedness for borrowed money and had other liabilities of approximately $28 million reflected on our consolidated balance sheet. For fiscal 2004, our foreign subsidiaries contributed approximately 29% of our consolidated net sales. In addition, distributions and intercompany transfers to us from our subsidiaries will depend on: - their earnings; - covenants contained in our and their debt agreements, including our domestic senior credit facility and the notes; - covenants contained in other agreements to which we or our subsidiaries are or may become subject; - business and tax considerations; and - applicable law, including laws regarding the payment of dividends and distributions. We cannot assure you that the operating results of our subsidiaries at any given time will be sufficient to make distributions or other payments to us or that any distributions and/or payments will be adequate to pay any amounts due under the notes or our other indebtedness. THERE IS NO ESTABLISHED TRADING MARKET FOR THE NEW UNITS, AND YOU MAY NOT BE ABLE TO SELL THEM QUICKLY OR AT THE PRICE YOU PAID. The units are a new issue of securities and there is no established trading market for the units. Although, upon being declared effective, the registration statement will generally allow resales of the exchange units, the exchange units will constitute a new issue of securities with no established trading market. We do not intend to apply for the units or any exchange units to be listed on any security exchange or to arrange for quotation on any automated dealer quotation systems. The initial purchaser has advised us that it intends to make a market in the units and the exchange units, but it is not obligated to do so and may discontinue any market making in the units or exchange units at any time, in its sole discretion. You may not be able to sell your units or exchange units at a particular time or at favorable prices. As a result, we cannot assure you as to the liquidity of any trading market for the units or the exchange units or, in the case of any holders or the units that do not exchange them, the trading market for the units following the offer to exchange the units for exchange units. As a result, you may be required to bear the financial risk of your investment in the units indefinitely. Future trading prices of the units and exchange units may be volatile and will depend on many factors, including: - our operating performance and financial condition; - our ability to complete the offer to exchange the units for the exchange units; - the interest of securities dealers in making a market for them; and - the market for similar securities. 21 AS A RESULT OF THE DUTCH NOTES BEING ISSUED IN U.S. DOLLARS, WE MAY BE SUBJECT TO ADDITIONAL CURRENCY RISKS. The Dutch notes will be issued and paid for, and the interest paid on these notes will be paid in, U.S. dollars. The Dutch issuer will lend the proceeds of the Dutch notes to PAH Belgium, and will pay interest and principal on the Dutch notes primarily from interest and principal repayments on such loan to PAH Belgium or through dividends from PAH Belgium. PAH Belgium, however, receives its revenues primarily in Euros. As a result, in the event that the U.S. dollar appreciates against the Euro, PAH Belgium may have difficulty in generating the U.S. dollars necessary to repay the U.S. dollar loan from its parent, the Dutch issuer. From time to time, if we determine it is appropriate and advisable to do so, we may seek to lessen the effect of exchange rate fluctuations through the use of derivative financial instruments. We cannot assure you, however, that we will be successful in these efforts. BELGIAN LAW MAY LIMIT THE GUARANTEE AND THE RELATED SECURITY OF PAH BELGIUM WITH RESPECT TO THE DUTCH NOTES. Under Belgian law, the following factors may limit the proceeds which could ultimately be obtained in respect of the security provided by PAH Belgium: - The floating charge over the assets of PAH Belgium is restricted by statute to 50% of all of the inventory (work-in-progress and finished goods) of PAH Belgium. The remaining one-half of the inventory would thus fall outside the scope of the charge, and would be available for payment to unsecured creditors. - Enforcement of the floating charge may trigger the bankruptcy of PAH Belgium, as it could significantly impair the use of the business assets for the ongoing conduct of PAH Belgium's business. - Enforcement of the share pledge over the shares of PAH Belgium, the floating charge and the real property mortgage of PAH Belgium is subject to mandatory court intervention and approval. In insolvency, the insolvency official (under supervision of the court) will handle the sale. At certain stages of the process, PAH Belgium itself or other creditors could intervene. This could lead to significant delays in enforcement, which in turn could adversely affect the value of the assets, the timing of realization and therefore the amount of proceeds ultimately obtained for the benefit of the noteholders. - In any Belgian insolvency proceedings involving PAH Belgium, stays on enforcement of security are likely to be imposed. These stays could be significant, which could adversely affect the ultimate value of the collateral. In addition, under Belgian bankruptcy law, the trustee in bankruptcy may seek to set aside certain pre-bankruptcy transactions, including transactions at an undervalue, new security for pre-existing debts, and transactions entered into with the knowledge that the bankrupt debtor was in a state of insolvency. RISK FACTORS RELATING TO OUR BUSINESS WE HAVE SIGNIFICANT ASSETS LOCATED OUTSIDE THE UNITED STATES AND A SIGNIFICANT PORTION OF OUR SALES AND EARNINGS ARE ATTRIBUTABLE TO OPERATIONS CONDUCTED ABROAD. During fiscal 2004, we operated manufacturing and other facilities in over 16 countries and sold our products in over 40 countries. At September 30, 2004, approximately 55% of our assets were located outside the United States, representing manufacturing facilities in Belgium, Brazil, Israel and the United Kingdom, and, for fiscal 2004, approximately 28% of our net sales consisted of sales made by us outside the United States. Changes in the relative values of currencies take place from time to time and could in the future adversely affect our results of operations as well as our ability to meet interest and principal obligations on the notes. To the extent that the U.S. dollar weakens or strengthens versus the applicable foreign currency, our results are favorably or unfavorably affected. We may from time to time manage this exposure by entering into foreign currency forward exchange contracts. Such contracts generally are entered into with respect to anticipated revenues denominated in foreign currencies for which timing of the receipt of payment can be 22 reasonably estimated. No assurances can be given that such hedging activities will not result in losses which will have an adverse effect on our financial condition or results of operations. In addition, there are times when we do not hedge against foreign currency fluctuations and are therefore subject to the risks associated with fluctuations in currency exchange rates. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 17 to our Consolidated Financial Statements included elsewhere herein. In addition, international manufacturing, sales and raw materials sourcing are subject to other inherent risks, including possible nationalization or expropriation, labor unrest, political instability, price and exchange controls, limitation on foreign participation in local enterprises, health-care regulation, export duties and quotas, domestic and international customs and tariffs, unexpected changes in regulatory environments, difficulty in obtaining distribution and support, and potentially adverse tax consequences. Although such risks have not had a material adverse effect on us in the past, there can be no assurance that these factors will not have a material adverse impact on our ability to increase or maintain our international sales or on our results of operations in the future. WE HAVE ASSETS LOCATED IN ISRAEL AND A PORTION OF OURS SALES AND EARNINGS ARE ATTRIBUTABLE TO OPERATIONS CONDUCTED IN ISRAEL. Israeli operations are conducted through Koffolk (1949) Ltd., a wholly owned subsidiary, and accounted for approximately 14% of our consolidated assets as of September 30, 2004 and approximately 12% of our fiscal 2004 consolidated net sales. We maintain two manufacturing facilities in Israel, one located near Tel Aviv in Petach Tikva, which manufacturers and markets nutritional feed additives for the livestock feed industry, and the second located south of Beersheba in Ramat Hovav, which synthesizes anticoccidials (nicarbazin and amprolium) and vitamins, the bulk of which are exported from Israel to the major world markets. Accordingly, Koffolk is dependent on foreign markets and its ability to reach those markets. Consequently, we are affected by social, political and economic conditions affecting Israel, and any major hostilities involving Israel as well as the Middle East or curtailment of trade between Israel and its current trading partners, either as a result of hostilities or otherwise, could have a material adverse effect on us. See "Conditions in Israel." WE FACE COMPETITION IN EACH OF OUR MARKETS FROM A NUMBER OF LARGE AND SMALL COMPANIES, SOME OF WHICH HAVE GREATER FINANCIAL, RESEARCH AND DEVELOPMENT, PRODUCTION AND OTHER RESOURCES THAN WE HAVE. Many of our products, including our Animal Health and Nutrition and Specialty Chemicals products, face competition from products which may be used as an alternative or substitute therefore. In addition, we compete with several large companies in the animal health and nutrition and specialty chemicals businesses. To the extent these companies, or new entrants into the market, offer comparable animal health and nutrition or specialty chemical products at lower prices, our business could be adversely affected. Our competitive position is based principally on our product registrations, customer service and support, breadth of product line, product quality, manufacturing technology, facility location, and the selling prices of our products. Our competitors can be expected to continue to improve the design and performance of their products and to introduce new products with competitive price and performance characteristics. There can be no assurance that we will have sufficient resources to maintain our current competitive position or market share. We typically do not enter into long-term agreements with our customers. See "Business -- Competition" and "Business -- Sales, Marketing and Distribution." OUR OPERATIONS, PROPERTIES AND SUBSIDIARIES ARE SUBJECT TO A WIDE VARIETY OF COMPLEX AND STRINGENT FEDERAL, STATE, LOCAL AND FOREIGN ENVIRONMENTAL LAWS AND REGULATIONS, INCLUDING THOSE GOVERNING THE USE, STORAGE, HANDLING, GENERATION, TREATMENT, EMISSION, RELEASE, DISCHARGE AND DISPOSAL OF CERTAIN MATERIALS AND WASTES, THE REMEDIATION OF CONTAMINATED SOIL AND GROUNDWATER, THE MANUFACTURE, SALE AND USE OF PESTICIDES AND THE HEALTH AND SAFETY OF EMPLOYEES (COLLECTIVELY, "ENVIRONMENTAL LAWS"). Pursuant to these Environmental Laws, certain of our subsidiaries are required to obtain and retain numerous governmental permits and approvals, including RCRA Part B permits, to conduct various aspects of 23 their operations, any of which may be subject to revocation, modification or denial under certain circumstances. U.S. manufacturers of specialty chemicals, including certain of our subsidiaries, have expended, and may be required to expend in the future, substantial funds for compliance with such Environmental Laws. As recyclers of hazardous metal-containing chemical waste, certain of our subsidiaries have been, and are likely to be, the focus of extensive compliance reviews by federal, state and local environmental regulatory authorities. In the past, certain of our subsidiaries have paid certain fines and agreed to certain consent orders. While procedures have been implemented at each facility which are intended to achieve compliance in all material respects with Environmental Laws, there can be no assurance that our operations or activities or those of certain of our subsidiaries will not result in civil or criminal enforcement actions or private actions, resulting in mandatory clean-up requirements, revocation of required permits or licenses or significant fines, penalties or damages which could have a material adverse effect on us. In addition, we cannot predict the extent to which any further legislation or regulation may affect the market for our services or our cost of doing business. For instance, if governmental enforcement efforts should lessen, the market for the recycling services by certain of our subsidiaries could decline. Alternatively, changes in Environmental Laws (some of which are set forth below) might increase the cost of such services by imposing additional requirements. States that have received authorization to administer their own hazardous waste management programs may also amend their applicable Environmental Laws, and may impose requirements which are stricter than those imposed by the U.S. Environmental Protection Agency ("EPA"). No assurance can be provided that such changes will not adversely affect the ability of our subsidiaries to provide services at a competitive price and thereby reduce the market for their services. As such, the nature of our current and former operations and those of our subsidiaries exposes us and our subsidiaries to the risk of claims with respect to such matters and there can be no assurance that material costs and liabilities will not be incurred in connection with such claims. Based upon our experience to date, we believe that the future cost of compliance with existing Environmental Laws, and liability for known environmental claims pursuant to such Environmental Laws, will not have a material adverse effect on us. However, future events, such as new information, changes in existing Environmental Laws or their interpretation, and more vigorous enforcement policies of regulatory agencies, may give rise to additional expenditures or liabilities that could be material. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business -- Environmental Matters," "Business -- Legal Proceedings," and our Consolidated Financial Statements included herein. THE USE OF ANTIBIOTICS IN MEDICATED FEED ADDITIVES IS A SUBJECT OF LEGISLATIVE AND REGULATORY INTEREST. The issue of potential for increased bacterial resistance to certain antibiotics used in certain food-producing animals is the subject of discussions on a worldwide basis and, in certain instances, has led to government restrictions on the use of antibiotic MFAs in these food-producing animals. The sale of medicated feed additives containing antibiotics is a material portion of our business. Legislative bills are introduced in the U.S. Congress from time to time, some of which, if adopted, could have an adverse effect on our business. However, in the past, such bills that could have had a material adverse effect, have not had sufficient support to become law. The animal pharmaceutical industry is actively engaged in the legislative process. One of these initiatives is a proposed bill (S.1460) referred to the Committee on Health, Education, Labor, and Pensions of the Senate, called the Preservation of Antibiotics for Medical Treatment Act of 2003, sponsored by Senator Edward Kennedy. Should legislative, regulatory or other developments, including increased influence of consumer groups and other special interest lobbyists on the legislative and/or regulatory process, result in further restrictions on the sale of such products, it could have a material adverse impact on our financial position, results of operations and cash flows. On November 23, 2004, the FDA's Center for Veterinary Medicine released a draft for comment of its long awaited risk assessment of streptogramin resistance for treatment of certain infections in humans attributable to the use of streptogramins in animals (the "virginiamycin risk assessment"). The risk assessment was initiated over three years ago after the 1999 approval of Synercid for treating E. faecium infection in humans, which approval led to increased attention to the use of streptogramins in animals. Synercid and virginiamycin are both members of the streptogramin class of antimicrobial drugs. The draft risk 24 assessment specifically addresses the risk of humans failing Synercid therapy for E. faecium infections due to the acquisition of resistance as a result of the ingestion of resistant strains of E. faecium present in food. The draft risk assessment found that it is difficult to assess the extent of transfer of streptogramin resistance from virginiamycin-exposed E. faecium infection to E. faecium infection found in human infections based on the available data, and that there are certain differences in the characteristics of E. faecium isolated from animal and human sources. The risk assessment concluded that these two findings, along with the current incomplete knowledge of the genetic basis of streptogramin resistance, prevents the risk assessment from making firm conclusions as to whether, and, if so, how much, the use of virginiamycin in food animals contributes to the occurrence of virginiamycin-resistant infections in humans via a foodborne pathway. In August 2002, Japan's Ministry of Agriculture, Forests and Fisheries (MAFF) launched a review of 29 U.S., European, and Japanese animal feed additives to determine whether the preventive use of certain medicated animal feed additives should be restricted because of the potential transfer of antimicrobial resistance to similar drugs used in treating humans. In January 2003, MAFF announced that it would conduct a transparent science-based risk assessment of certain feed additives, consistent with the World Trade Organization's ("WTO") Agreement on the Application of Sanitary and Phyto-Sanitary Measures (SPS Agreement), and thus was no longer considering an immediate ban on such products. The SPS Agreement requires the 165 countries that are WTO Members to base food safety and animal health measures on scientific principles and evidence. Accordingly, such a risk assessment involves a detailed study of potential risks and appropriate methods of managing such risks, and must be based on valid scientific principles and evidence. The Australian Pesticides and Veterinary Medicines Authority (APPVMA) is conducting a review of virginiamycin, which is likely to result in additional restrictions on the labeling of virginiamycin. In February 2003, the Sixtieth Joint FAO/WHO Expert Committee on Food Additives (JECFA) was held in Geneva, Switzerland to evaluate certain residues of veterinary drugs in food. Based on an earlier opinion from the thirty-sixth JECFA meeting in 1990, the Committee determined that an "acceptable daily intake" (ADI) of carbadox and another animal drug, flumequine, could not be established, because of the lack of an internationally agreed methodology for evaluating the scientific risks posed by such products. Accordingly, the JECFA recommended that the international Maximum Residue Levels (MRLs) for such products be withdrawn. The JECFA consists of experts from various countries acting in their individual capacities. Its recommendations are not binding on the full Codex Alimentarius Commission ("Codex"), which is the recognized international standard-setting body for animal drugs. The Codex and its member countries are responsible for any final decision regarding the MRL, and must review JECFA's recommendations before any decision could be made. At present, the MRL for carbadox, which was established by JECFA in 1990, remains the international standard. Nevertheless, foreign governments could decide to restrict the uses of carbadox in the interim, as has occurred in the European Union. Japan has banned the use of carbadox in Japan, while allowing the import of pork from swine fed a carbadox containing MFA so long as no residues are detectable in the imported pork. Codex Committee on Residues of Veterinary Drugs in Food (CCRVDF) has recently endorsed the JECFA recommendation to withdraw the Codex MRL for carbadox. In 1998, the FDA conducted an evaluation of carbadox and found that it was safe based on the U.S. "sensitivity of the method" policy. Accordingly, the FDA continues to permit the approved use of carbadox in the United States. In the European Union, the Commission withdrew marketing authorization of a number of anticoccidials, including nicarbazin, as the Commission did not consider the submissions to be in full compliance with its new regulations. We have since completed the necessary data and resubmitted our nicarbazin dossier. Feasibility and timetable for new registration will depend on the nature of demands and remarks from the Commission. There can be no assurance that the United States, Japan or other countries may not decide to ban or curtail the uses of certain medicated feed additives. Such a ban, depending upon the product involved and its 25 importance to our MFA business, in one or more countries could have a material adverse effect on our business. THE TESTING, MANUFACTURING, AND MARKETING OF CERTAIN OF OUR PRODUCTS ARE SUBJECT TO EXTENSIVE REGULATION BY NUMEROUS GOVERNMENT AUTHORITIES IN THE UNITED STATES AND OTHER COUNTRIES, INCLUDING, BUT NOT LIMITED TO, THE UNITED STATES FOOD AND DRUG ADMINISTRATION (FDA). Among other requirements, FDA approval of our MFA and NFA products, including a review of the manufacturing processes and facilities used to produce such products, is required before such products may be marketed in the United States. Similarly, marketing approval by a foreign governmental authority is typically required before such MFA and NFA products may be marketed in a particular foreign country. In order to obtain FDA approval of a new animal health and nutrition product, we must, among other things, demonstrate to the satisfaction of the FDA that the product is safe and effective for its intended uses and that we are capable of manufacturing the product with procedures that conform to the FDA's current good manufacturing practice ("cGMP") regulations, which must be followed at all times. The process of seeking FDA approvals can be costly, time consuming, and subject to unanticipated and significant delays. There can be no assurance that such approvals will be granted to us on a timely basis, or at all. Any delay in obtaining or any failure to obtain such approvals would adversely affect our ability to introduce and market MFA and NFA products and to generate product revenue. See "Business -- Government Regulation." FIFRA, a health and safety statute, requires that all pesticides sold or distributed in the U.S. must first be registered with the EPA. In order to obtain a registration, an applicant typically must demonstrate through test data that its product will not cause unreasonable adverse effects on the environment. Depending on the specific requirements at issue, these tests can be very expensive, running to millions of dollars. However, if the product in question is generic in nature (i.e., chemically identical or substantially similar to a previously-registered product), the applicant has the option of citing and relying on the test data supporting the original registrant's product, in lieu of submitting data. Should the generic applicant choose the citation option, it must offer to pay compensation to the original submitter and must agree to enter into binding arbitration with the original submitter if the parties are unable to agree on the terms and amount of compensation. We have elected the citation option in the past and may use the citation option in the future should we conclude that it is economically desirable to do so. While there are cost savings associated with the opportunity to avoid one's own testing and demonstration to the EPA of test data, there is, in each instance, a risk that the level of compensation ultimately required to be paid by us to the original registrant will be substantial. There is also the risk that a third party will elect the citation option with respect to one of our products, and that the level of compensation ultimately required to be paid to us as the original registrant will not be substantial. MR. JACK BENDHEIM OWNS A SUBSTANTIAL AMOUNT OF OUTSTANDING SHARES OF OUR VOTING CAPITAL STOCK. Pursuant to corporate law and certain shareholder agreements, Mr. Bendheim controls the election of all but four of seven of the directors of the Company and Marvin Sussman, Mr. Bendheim's brother-in-law, controls the election of one of the directors of the Company. Mr. Bendheim's capital stock in the Company and board seats give him substantial influence on the outcome of corporate transactions or other matters submitted to the board of directors or stockholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets, and also the power to prevent or cause a change in control. Mr. Bendheim is also the Chairman of the Board and President. The interests of Mr. Bendheim could conflict with your interests. For example, if we encounter financial difficulties or are unable to pay our debts as they mature, the interests of Mr. Bendheim as a significant holder of our equity might conflict with your interests as a holder of the notes. Mr. Bendheim also may have an interest in pursuing acquisitions, divestitures, financings or other transactions that, in his judgment, could enhance his equity investment, even though such transactions might involve risks to you, as holders of the notes. See "Management -- Directors and Executive Officers" and "Principal Stockholders." 26 THE PRINCIPAL RAW MATERIALS USED BY US IN THE MANUFACTURE OF OUR PRODUCTS CAN BE SUBJECT TO CYCLICAL PRICE FLUCTUATIONS. No single raw material accounted for more than 5% of our fiscal 2004 cost of goods sold. While the selling prices of our products tend to increase or decrease over time with the cost of raw materials, such changes may not occur simultaneously or to the same degree. There can be no assurance that we will be able to pass any increases in raw material costs through to our customers in the form of price increases. Significant increases in the price of raw materials, if not offset by product price increases, would have an adverse impact upon our profitability. OUR REVENUES ARE DEPENDENT ON THE CONTINUED OPERATION OF OUR VARIOUS MANUFACTURING FACILITIES AND INTELLECTUAL PROPERTY. Although presently all our operating plants are considered to be in good condition, the operation of animal health and nutrition and specialty chemical manufacturing plants involves many risks, including the breakdown, failure or substandard performance of equipment, power outages, the improper installation or operation of equipment, natural disasters and the need to comply with environmental and other directives of governmental agencies. Certain of our product lines are manufactured at a single facility and production would not be transferable to another site. The occurrence of material operational problems, including but not limited to the above events, may adversely affect our profitability during the period of such operational difficulties. Our competitive position is also dependent upon unpatented trade secrets, which generally are difficult to protect. There can be no assurance that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets, that such trade secrets will not be disclosed or that we can effectively protect our rights to unpatented trade secrets. WE HAVE BEEN AND MAY CONTINUE TO BE SUBJECT TO CLAIMS OF INJURY FROM DIRECT EXPOSURE TO CERTAIN OF OUR SUBSIDIARIES' PRODUCTS, WHICH CONSTITUTE OR CONTAIN HAZARDOUS MATERIALS AND FROM INDIRECT EXPOSURE WHEN SUCH MATERIALS ARE INCORPORATED INTO OTHER COMPANIES' PRODUCTS. Because certain of our subsidiaries' products constitute or contain hazardous materials, and because the production of certain chemicals involves the use, handling, processing, storage and transportation of hazardous materials, we and our subsidiaries have been subject to claims of injury from direct exposure to such materials and from indirect exposure when such materials are incorporated into other companies' products. There can be no assurance that as a result of past or future operations, there will not be additional claims of injury by employees or members of the public due to exposure, or alleged exposure, to such materials. In most cases, such claims are covered by insurance and, where applicable, worker's compensation insurance, subject to policy limits and exclusions. Furthermore, we and our subsidiaries are parties to a number of claims and lawsuits arising out of the normal course of business including product liabilities and governmental regulation. Certain of these actions seek damages in various amounts. In most cases, such claims are covered by insurance. We also have exposure to present and future claims with respect to workplace exposure, workers' compensation and other matters. There can be no assurance as to the actual amount of these liabilities or the timing thereof. WE ARE SUBJECT TO RISKS THAT MAY NOT BE COVERED BY OUR INSURANCE POLICIES. In addition to pollution and other environmental risks, we are subject to risks inherent in the animal health and nutrition and specialty chemicals industries, such as explosions, fires and spills or releases. Any significant interruption of operations at our principal facilities could have a material adverse effect on us. We maintain general liability insurance and property and business interruption insurance with coverage limits that we believe are adequate. Because of the nature of industry hazards, it is possible that liabilities for pollution and other damages arising from a major occurrence may not be covered by our insurance policies or could exceed insurance coverages or policy limits or that such insurance may not be available at reasonable rates in the future. Any such liabilities, which could arise due to injury or loss of life, severe damage to and destruction of property and equipment, pollution or other environmental damage or suspension of operations, could have a 27 material adverse effect on us. See "-- Our operations, properties and subsidiaries are subject to a wide variety of complex and stringent federal, state, local and foreign environmental laws and regulations, including those governing the use, storage, handling, generation, treatment, emission, release, discharge and disposal of certain materials and wastes, the remediation of contaminated soil and groundwater, the manufacture, sale and use of pesticides and the health and safety of employees (collectively, 'Environmental Laws')." CERTAIN OF OUR EMPLOYEES ARE COVERED BY COLLECTIVE BARGAINING AGREEMENTS. As of September 30, 2004, approximately 16 of our domestic employees were covered by a collective bargaining agreement which expires in 2006. Most of our employees in Israel are covered by collective bargaining agreements. We believe that we have satisfactory relations with our unions and, therefore, anticipate reaching new agreements on satisfactory terms as the existing agreements expire or shortly thereafter. There can be no assurance, however, that new agreements will be reached without a work stoppage or strike or will be reached on terms satisfactory to us. A prolonged work stoppage or strike at any of our manufacturing facilities could have a material adverse effect on our results of operations. WE ARE DEPENDENT ON KEY PERSONNEL. Our operations are dependent on the continued efforts of our senior executive officers, Jack Bendheim, Gerald Carlson and Richard Johnson. The loss of the services of any of Messrs. Bendheim, Carlson or Johnson could have a material adverse effect on us. We do not carry key-man life insurance other than to fund stock repurchase or compensation obligations and other than pursuant to our arrangements with the Palladium Investors. See "Management -- Directors and Executive Officers." 28 USE OF PROCEEDS We will not receive any proceeds from this exchange offer. In consideration for issuing the new units, we will receive in exchange a like amount of the old units. The old units surrendered in exchange for the new units will be retired and cancelled and cannot be reissued. Accordingly, issuance of the new notes will not result in any increase in our indebtedness. We have agreed to bear the expenses of this exchange offer. No underwriter is being used in connection with the exchange offer. The net proceeds from the sale of the old units issued in October 2003 were approximately $97.3 million, after deducting fees and expenses from the offering. See "Description of Certain Indebtedness" for more information. These net proceeds were used to repay approximately $34.9 million of indebtedness outstanding under our previous credit facility, purchase $52.0 million of our senior subordinated notes at a price of 60% plus accrued and unpaid interest through the purchase date and pay certain of our obligations to Pfizer Inc. The proceeds of the 2004 Offering were used to refinance $22.5 million of indebtedness outstanding under our domestic senior credit facility. 29 CAPITALIZATION The following table sets forth our capitalization at September 30, 2004, and as adjusted to give effect to the 2004 Offering and the application of the proceeds therefrom as described under "Prospectus Summary -- The Company -- Recent Developments -- The Offering." This presentation should be read in conjunction with our historical financial statements and the related notes thereto included elsewhere in this prospectus.
AT SEPTEMBER 30, 2004 ------------------------- ACTUAL AS ADJUSTED(2) -------- -------------- (IN THOUSANDS) Cash and cash equivalents................................... $ 5,778 $ 15,626 ======== ======== Debt: Domestic senior credit facility(1)........................ 11,268 $ -- Foreign bank loans........................................ 5,912 5,912 Senior secured notes due 2007............................. 105,000 127,491 Senior subordinated notes due 2008........................ 48,029 48,029 Other..................................................... 4 4 -------- -------- Total debt........................................... 170,213 181,436 Series C redeemable preferred stock......................... 25,359 25,359 Shareholders' deficit....................................... (61,574) (61,574) -------- -------- Total capitalization................................... $133,998 $145,221 ======== ========
- --------------- (1) Borrowings under our domestic senior credit facility were approximately $22.5 million at the closing of the 2004 Offering. See "Prospectus Summary -- The Company -- Recent Developments -- Refinancing of Domestic Senior Credit Facility with Proceeds of Additional Units." (2) Adjusted financial data give effect to the outstanding senior secured notes, including the 2004 Offering, and the application of the proceeds as provided in the "Prospectus Summary -- The Company -- Recent Developments -- The Offering." 30 SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data as of and for fiscal years ended June 30, 2000, 2001, 2002, 2003 and 2004 have been derived from our audited annual consolidated financial statements. The following selected consolidated financial data as of and for the three months ended September 30, 2004 and 2003 have been derived from our unaudited interim consolidated financial statements. The selected consolidated financial data reflect our Odda, Carbide, MRT and La Cornubia businesses as discontinued operations for all periods presented. You should read the information set forth below in conjunction with our "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes included elsewhere in this prospectus.
3 MONTHS ENDED FISCAL YEARS ENDED JUNE 30, SEPTEMBER 30, ---------------------------------------------------- ------------------- 2000 2001 2002 2003 2004 2003 2004 -------- -------- -------- -------- -------- -------- -------- (2)(3) (7) (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT RATIOS) RESULTS OF OPERATIONS: Net sales.............................. $261,769 $302,328 $328,676 $341,746 $358,274 $ 84,950 $ 88,275 Cost of goods sold..................... 201,320 234,784 247,411 251,200 267,871 63,790 65,653 -------- -------- -------- -------- -------- -------- -------- Gross profit........................... 60,449 67,544 81,265 90,546 90,403 21,160 22,622 Selling, general and administrative expenses(5).......................... 47,528 61,624 70,636 65,050 66,128 15,785 16,594 Curtailment of operations at manufacturing facility............... (1,481) Costs of non-completed transaction..... 5,261 -------- -------- -------- -------- -------- -------- -------- Operating income....................... 14,402 5,920 10,629 25,496 19,014 5,375 6,028 Interest expense....................... 14,520 17,919 18,070 16,281 18,618 3,933 5,246 Interest (income)...................... (600) (566) (346) (85) (130) (242) (25) Other expense (income), net............ (506) 327 3,354 1,666 (89) (585) 25 (Gain) from property damage claim...... (946) (Gain) from sale of assets............. (1,790) (5) (127) (692) (1) Net (gain) on extinguishment of debt(6).............................. (23,226) -------- -------- -------- -------- -------- -------- -------- Income (loss) from continuing operations before income taxes....... 1,934 (9,970) (10,444) 7,761 24,533 2,269 783 Provision (benefit) for income taxes(4)............................. 1,143 (24) 14,767 10,060 7,969 783 924 -------- -------- -------- -------- -------- -------- -------- Income (loss) from continuing operations........................... 791 (9,946) (25,211) (2,299) 16,564 1,486 (141) Income (loss) from discontinued operations(1)........................ 9,262 (4,949) (26,559) (14,577) (1,625) (462) Income (loss) on disposal of discontinued operations(1)........... (683) (2,089) 231 -------- -------- -------- -------- -------- -------- -------- Net income (loss)...................... 10,053 (14,895) (51,770) (17,559) 12,850 1,255 (141) Change in derivative instruments....... 1,062 (981) (72) 317 75 Change in foreign currency translation adjustment........................... 55 (5,146) (6,125) 7,377 (776) (859) 3,007 -------- -------- -------- -------- -------- -------- -------- Comprehensive income (loss)............ $ 10,108 $(20,041) $(56,833) $(11,163) $ 12,002 $ 713 $ 2,941 ======== ======== ======== ======== ======== ======== ======== Net income (loss)...................... $ 10,053 $(14,895) $(51,770) $(17,559) $ 12,850 $ 1,255 $ (141) Excess of the reduction of redeemable preferred stock over total assets divested and costs and liabilities incurred on the Prince Transaction... -- -- -- -- 20,138 -- -- Dividends and equity value accreted on series B and C redeemable preferred stock................................ -- (8,172) (7,623) (12,278) (11,463) (987) (682) -------- -------- -------- -------- -------- -------- -------- Net income (loss) available to common shareholders......................... $ 10,053 $(23,067) $(59,393) $(29,837) $ 21,525 $ 268 $ (823) ======== ======== ======== ======== ======== ======== ========
31
3 MONTHS ENDED FISCAL YEARS ENDED JUNE 30, SEPTEMBER 30, ---------------------------------------------------- ------------------- 2000 2001 2002 2003 2004 2003 2004 -------- -------- -------- -------- -------- -------- -------- (2)(3) (7) (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT RATIOS) OTHER FINANCIAL DATA: Depreciation and amortization.......... $ 7,931 $ 10,063 $ 12,355 $ 12,524 $ 13,183 $ 3,168 $ 3,355 Capital expenditures................... 11,033 6,437 8,518 8,636 6,244 852 1,748 Ratio of earnings to fixed charges(8)........................... 1.1 -- -- 1.4 2.2 1.6 1.1 (Deficiency) in earnings necessary to cover fixed charges(9)............... -- (9,156) (10,061) -- -- -- -- BALANCE SHEET DATA: Cash and cash equivalents.............. $ 2,403 $ 14,845 $ 6,419 $ 11,179 $ 5,568 $ 26,917 $ 5,778 Total assets........................... 258,450 330,019 296,444 274,347 241,369 276,216 243,551 Long-term debt......................... 139,685 139,455 136,641 102,263 158,018 102,756 157,992 Series B and C redeemable preferred stock................................ -- 48,980 56,602 68,881 24,678 69,868 25,359 Total stockholders' equity (deficit)... 31,618 3,405 (61,189) (84,510) (63,833) (84,784) (61,574)
- --------------- (1) The Company's Odda Smelteverk (Norway) ("Odda"), Carbide Industries (U.K.) ("Carbide"), Mineral Resource Technologies, Inc. ("MRT"), and La Cornubia S.A. (France) ("La Cornubia") businesses have been classified as discontinued operations as discussed in the notes to consolidated financial statements contained in this prospectus. The Company's selected consolidated financial data have been reclassified to report separately the operating results, financial position and cash flows of the discontinued operations. (2) On November 30, 2000, the Company purchased the Medicated Feed Additives ("MFA") business of Pfizer, Inc. The operating results, financial position and cash flows of this business are included in the Company's selected consolidated financial data from the date of acquisition. The acquisition was financed through the issuance of a note payable to Pfizer, Inc. and the issuance of the Series B and C redeemable preferred stock. (3) During May and June 2001, the Company sold its Agtrol crop protection business to Nufarm, Inc. The sale included inventory and intangible assets, but did not include manufacturing facilities. The results of operations, financial position and cash flows of the Agtrol business are included in the Company's selected consolidated financial data through the dates of divestiture. (4) The Company's fiscal 2002 provision for income taxes includes a charge of $12,200 for an increased valuation allowance for deferred tax assets recorded in previous years and a charge of $13,600 for a full valuation allowance for deferred tax assets relating to fiscal 2002 operating losses. The Company' fiscal 2003 provision for income taxes includes a charge of $5,600 for increased valuation allowances for deferred tax assets in foreign jurisdictions. (5) The Company's selling, general and administrative expenses include litigation income of $742 in fiscal 2002 and $3,040 in fiscal 2003 relating to a class action suit brought against various vitamin manufacturers. (6) The Company recorded a net gain on extinguishment of debt relating to its refinancing activities in fiscal 2004 as discussed in the notes to consolidated financial statements contained in this prospectus. (7) Effective December 26, 2003, the Company completed the divestiture of substantially all of the business and assets of its subsidiary, The Prince Manufacturing Company ("PMC") as discussed in the notes to consolidated financial statements contained in this prospectus. The results of operations, financial position and cash flows of PMC are included in the Company's selected consolidated financial data through the date of divestiture. (8) For purposes of computing the consolidated ratio of earnings to fixed charges, earnings represents earnings from continuing operations before income taxes and fixed charges. Fixed charges include interest expense and a portion of rentals determined to be representative of the interest component of such rental expense. Management believes that one-third is representative of the interest component of such rental expense. (9) For periods in which earnings before fixed charges were insufficient to cover fixed charges, the dollar amount of coverage deficiency, instead of the ratio, is disclosed. 32 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This information should be read in conjunction with the consolidated financial statements and related notes contained in this prospectus. The Company's Odda, Carbide, MRT and La Cornubia businesses have been classified as discontinued operations. This discussion presents information only for continuing operations, unless otherwise indicated. The Company presents its annual consolidated financial statements on the basis of its fiscal year ending June 30. GENERAL The Company is a leading diversified global manufacturer and marketer of a broad range of animal health and nutrition products, specifically medicated feed additives (MFAs) and nutritional feed additives (NFAs), which are sold throughout the world predominantly to the poultry, swine and cattle markets. MFAs are used preventatively and therapeutically in animal feeds to produce healthy livestock. The Company believes it is the third largest manufacturer and marketer of MFAs in the world, and that certain of its MFA products have leading positions in the marketplace. The Company is also a specialty chemicals manufacturer and marketer, serving primarily the United States pressure-treated wood and chemical industries. The Company has several proprietary products, and many of the Company's products provide critical performance attributes to customers' products, while representing a relatively small percentage of total end-product cost. In August 2003, the Company completed the sale of MRT for net proceeds after transaction costs of approximately $13.8 million. In December 2003, the Company completed the divestiture of substantially all of the assets of The Prince Manufacturing Company (see discussion below under "Prince Transactions"). On June 30, 2004, one of the Company's French subsidiaries, La Cornubia SA ("La Cornubia"), filed for bankruptcy under the insolvency laws of France. The Company believes that, as a result of the bankruptcy filing by La Cornubia, it is possible that LC Holding S.A. ("LC Holding"), La Cornubia's parent, a holding company with no assets except for its investment in La Cornubia, may also file for bankruptcy in France. The Company does not believe that La Cornubia's bankruptcy filing, nor the possible bankruptcy filing by LC Holding, will have a material adverse effect on its financial condition or results of operations. During 2004, the Company incurred $5.3 million of costs in connection with a potential acquisition transaction that was not completed. The Company has charged the costs to expense in its 2004 results. The costs primarily consisted of professional fees for services in connection with the transaction. The Company's ability to fund its operating plan depends upon the continued availability of borrowing under its domestic senior credit facility. The Company believes that it will be able to comply with the terms of its covenants under its domestic senior credit facility based on its forecasted operating plan. In the event of adverse operating results and/or violation of covenants under this facility, there can be no assurance that the Company would be able to obtain waivers or amendments on favorable terms, if at all. The Company's fiscal 2005 operating plan projects adequate liquidity throughout the year, with periods of reduced availability around the dates of the semi-annual interest payments due December 1, 2004 and June 1, 2005 related to its senior secured and senior subordinated notes. The Company is pursuing additional cost reduction activities, working capital improvement plans, and sales of non-strategic assets to ensure additional liquidity. The Company also has availability under foreign credit lines that likely would be available. The Company also has undertaken a strategic review of its manufacturing capabilities, and is currently increasing inventory levels of certain products to enhance future supply flexibility and reduce cost. The Company intends to sell its manufacturing facility in Rixensart, Belgium and will continue to increase inventory levels of virginiamycin to ensure an adequate supply until a new production source is operational (see discussion below under "Sale of Belgium Plant and Related Consent Solicitation." There can be no assurance the Company will be successful in any of the above-noted actions. 33 THE OFFERING On December 21, 2004, we completed a private placement (the "2004 Offering") under Rule 144A and Regulation S of the Securities Act, pursuant to which the US issuer and the Dutch issuer issued and sold $22.491 million of additional old units, from which we received net proceeds of $21.1 million. We used the proceeds from the 2004 Offering to refinance $22.5 million of indebtedness outstanding under our domestic senior credit facility. See "Description of Certain Indebtedness -- Domestic Senior Credit Facility" for more information. SALE OF BELGIUM PLANT AND RELATED CONSENT SOLICITATION Consent Solicitation. In connection with the completion of the 2004 Offering, we solicited consents with regard to our outstanding senior secured notes to amendments to the indenture governing such notes to permit the sale of substantially all of the facilities owned by Phibro Animal Health SA (formerly Phibro Animal Health (Belgium) SPRL) ("PAH Belgium"), a wholly owned subsidiary of the Dutch issuer, in Rixensart, Belgium (the "Belgium Plant"), to reduce excess manufacturing capacity and to reduce operating expenses and, in furtherance thereof, to permit the maximum amount of indebtedness under our domestic senior credit facility permitted under the indenture governing the notes to be increased from $15.0 million to $37.5 and to permit the related transactions described herein. The requisite consents were obtained and the indenture was amended pursuant to the Second Supplemental Indenture dated as of December 8, 2004. The amendments became effective on December 21, 2004 in connection with the 2004 Offering. Sale of Belgium Plant. On December 16, 2004 we entered into an agreement to sell the Belgium Plant to Glaxosmithkline Biologicals S.A. ("GSK") and to transfer to GSK a majority of the employees of PAH Belgium. GSK was a previous owner of the Rixensart plant, and sold it to Pfizer SA in 1995, which sold it to PAH Belgium in 2000. Such sale, when completed, would include the following elements: (i) the transfer of substantially all of the land and buildings and certain equipment of PAH Belgium at the Belgium Plant, as well as the industrial activities and intellectual property relating to certain solvent technology of Phibro Belgium, for a purchase price of EUR 6.2 million, payable at closing; (ii) the transfer to GSK of a majority of the employees of PAH Belgium and the corresponding responsibility for statutory severance obligations; (iii) GSK agreeing to be responsible for costs of cleaning-up, by demolition or otherwise, certain buildings not to be used by it, but for PAH Belgium to reimburse GSK up to a maximum of EUR 0.7 million for such clean-up costs; (iv) in recognition of the benefits to us from the proposed transaction, PAH Belgium agreeing to pay to GSK EUR 1.5 million within six months from the closing date, EUR 1.5 million within eighteen months from the closing date, EUR 1.5 million within thirty months from the closing date, and EUR 0.5 million within forty-two months from the closing date; (v) PAH Belgium retaining certain excess land (valued at approximately EUR 0.4 million) and being able to sell such land for its own account; (vi) PAH Belgium being responsible for certain plant closure costs and legally required severance indemnities in connection with workforce reductions, estimated in total to be EUR 7.7 million of which an amount estimated to be approximately EUR 4.1 million would be payable at or around the closing and an aggregate amount so estimated to be approximately EUR 3.6 million would be payable over periods up to thirteen years; and (vii) PAH Belgium retaining certain equipment at the Belgium Plant, and being able to sell such equipment for the account of PAH Belgium or transfer such equipment, together with other assets and rights related to the production of virginiamycin, to our subsidiary in Brazil that owns the facility in Guarulhos or in connection with alternative production arrangements. The foregoing transactions and agreements are subject to a closing that is expected to occur no earlier than July 1, 2005 nor later than June 30, 2006. The carrying value of the Belgium Plant and related assets at September 30, 2004 is EUR 13.9 million. The Company is in the process of evaluating the accounting for this transaction and will record an impairment loss, if required, in the second quarter ended December 31, 2004. In addition, the Company will expense severance, plant closure and other related costs in the period in which such liabilities are incurred in accordance with Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". As of the date of this filing, estimates of such costs are in process of being determined. 34 The Dutch notes and related guaranties are secured by a mortgage on the Belgium Plant which will be released in connection with the closing of the sale of the Belgium Plant to GSK. Refinancing of Domestic Senior Credit Facility with Proceeds of the Additional Units. To provide the necessary funds to build inventory of virginiamycin until the Brazil plant or alternative supplier is able to produce production quantities of virginiamycin and to finance the purchase of capital equipment to fit out the Brazilian plant with equipment to produce virginiamycin, other than equipment transferred from the Belgium Plant, the maximum amount of indebtedness under our domestic senior credit facility permitted under the indenture governing the notes was increased from $15.0 million to $37.5 million, pursuant to the Second Supplemental Indenture, and we increased our borrowing to $22.5 million. The proceeds of the 2004 Offering were used to refinance $22.5 million under the domestic senior credit facility. The issuance of the additional units had the effect of reducing the maximum amount of indebtedness under our domestic senior credit facility permitted under the indenture governing the notes by the principal amount of the additional units issued. Borrowings under the domestic senior credit facility continue to be subject to a borrowing base formula based on percentages of eligible domestic receivables and domestic inventory. REFINANCING On October 21, 2003, the Company issued 105,000 units consisting of $85.0 million of its 13% Senior Secured Notes due 2007 (the "US Senior Secured Notes") and $20.0 million 13% of Senior Secured Notes due 2007 of Philipp Brothers Netherlands III B.V. (the "Dutch Senior Secured Notes" and, together with the US Senior Secured Notes, the "Senior Secured Notes"), an indirect wholly-owned subsidiary of the Company (the "Dutch issuer"). The Company used the proceeds from the issuance to: (i) repurchase $52.0 million of its 9 7/8% Senior Subordinated Notes due 2008 at a price equal to 60% of the principal amount thereof, plus accrued and unpaid interest; (ii) repay $34.9 million under our then outstanding domestic senior credit facility; (iii) satisfy, for a payment of approximately $29.3 million certain of its outstanding obligations to Pfizer Inc., including: (a) $20.1 million aggregate principal amount of its promissory note plus accrued and unpaid interest, (b) $9.7 million of accounts payable, (c) $9.0 million of accrued expenses, and (d) future contingent purchase price obligations under its agreements with Pfizer Inc. by which the Company acquired Pfizer's medicated feed additive business; and (iv) pay fees and expenses relating to the above transactions. A net gain on extinguishment of debt is included in the Company's condensed consolidated statement of operations, calculated as follows (amounts in thousands): NET GAIN ON REPURCHASE OF 9 7/8% SENIOR SUBORDINATED NOTES DUE 2008: Principal amount of repurchased notes..................... $ 51,971 Repurchased at 60% of principal amount.................... (31,183) Transaction costs......................................... (4,107) -------- NET GAIN ON REPURCHASE OF NOTES............................. 16,681 -------- LOSS ON REPAYMENT OF DOMESTIC SENIOR CREDIT FACILITY........ (1,018) -------- NET GAIN ON PAYMENT OF PFIZER OBLIGATIONS: Obligations paid: -- promissory note........................................ 20,075 -- accrued interest on promissory note.................... 1,015 -- accounts payable and accrued expenses.................. 18,788 -------- Total obligations paid.................................... 39,878 Cash payment to Pfizer.................................... (29,315) Transaction costs......................................... (3,000) -------- NET GAIN ON PAYMENT OF PFIZER OBLIGATIONS................... 7,563 -------- NET GAIN ON EXTINGUISHMENT OF DEBT.......................... $ 23,226 ========
The Company filed a registration statement with the SEC on Form S-4 with respect to an exchange offer for the Senior Secured Notes, but due to pending confidential acquisition negotiations, such registration statement did not become effective and the Company caused a notice of withdrawal to be submitted to the SEC on November 15, 2004. 35 On December 21, 2004, the US issuer and Dutch issuer issued and sold 22,491 additional units, consisting of an additional $18.207 principal amount of US Senior Secured Notes and $4.284 million principal amount of Dutch Senior Secured Notes. The US Senior Secured Notes and the Dutch Senior Secured Notes are senior secured obligations of each of the Company (the "US Issuer") and the Dutch issuer, respectively. The US Senior Secured Notes and the Dutch Senior Secured Notes are guaranteed on a senior secured basis by all the US Issuer's domestic restricted subsidiaries, and the Dutch Senior Secured Notes are guaranteed on a senior secured basis by the US Issuer and by the restricted subsidiaries of the Dutch issuer, presently consisting of Phibro Animal Health SA. The US Senior Secured Notes and related guarantees are collateralized by substantially all of the US Issuer's assets and the assets of its domestic restricted subsidiaries, other than real property and interests therein, including a pledge of all the capital stock of such domestic restricted subsidiaries. The Dutch Senior Secured Notes and related guarantees are collateralized by a pledge of all the accounts receivable, a security interest or floating charge on the inventory to the extent permitted by applicable law, and a mortgage on substantially all of the real property of the Dutch issuer and each of its restricted subsidiaries, a pledge of 100% of the capital stock of each subsidiary of the Dutch issuer, a pledge of the intercompany loans made by the Dutch issuer to its restricted subsidiaries and substantially all of the assets of the U.S. guarantors, other than real property and interests therein. The indenture governing the Senior Secured Notes provides for optional make-whole redemptions at any time prior to June 1, 2005, optional redemption on or after June 1, 2005, and requires the Company to make certain offers to purchase Senior Secured Notes upon a change of control, upon certain asset sales and from fifty percent (50%) of excess cash flow (as such terms are defined in the indenture). Also, on October 21, 2003, the Company entered into a new replacement domestic senior credit facility with Wells Fargo Foothill, Inc., providing for a working capital facility plus a letter of credit facility. The aggregate amount of borrowings under such working capital and letter of credit facilities initially could not exceed $25.0 million including aggregate borrowings under the working capital facility up to $15.0 million. On April 29, 2004, the Company amended the domestic senior credit facility to increase the aggregate amount of borrowings available under such working capital and letter of credit facilities from $25.0 million to $27.5 million and to increase the amount of aggregate borrowings available under the working capital facility from $15.0 million to $17.5 million. As of September 24, 2004, the Company amended the domestic senior credit facility to: (i) increase the aggregate amount of borrowings available under such working capital and letter of credit facilities from $27.5 million to $32.5 million; the amount of aggregate borrowings available under the working capital facility remained unchanged at $17.5 million; (ii) amend the EBITDA definition to exclude charges and expenses related to unsuccessful acquisitions and related financings in an aggregate amount not to exceed $5.3 million for the period beginning January 1, 2004 and ending June 30, 2004; (iii) amend the definition of Additional Indebtedness to exclude advances under the working capital facility; (iv) amend the definition of Permitted Investments to allow other investments made during the period from January 1, 2004 through June 30, 2004 in an aggregate amount not to exceed $336,000; and (v) establish covenant EBITDA levels for the periods ending after June 30, 2004. The amendment was effective June 30, 2004 for items (i), (ii) and (iii); effective January 1, 2004 for item (iv); and effective September 24, 2004 for all other items. Concurrent with the completion of the 2004 Offering, on December 21, 2004, we amended the domestic senior credit facility to (i) amend the EBITDA definition to exclude charges and expenses related to the sale of the Belgium Plant in an aggregate amount not to exceed $26.8 million for purposes of calculating a certain financial covenant, (ii) amend the Indenture Reserve definition to include scheduled payments of interest due on the additional notes, (iii) amend the maximum aggregate amount of borrowings available under the working capital facility to permit a temporary increase to $22.5 million and for its reduction to $17.5 million on such borrowings being refinanced by the proceeds of the 2004 Offering, (iv) amend the Permitted Investments definition to include investments in connection with the sale of the Belgium Plant and transfer of certain equipment, together with other assets and rights related to the production of virginiamycin, to our subsidiary in Brazil or in connection with alternative production arrangements, and (v) provide for the issuance of the additional notes and the sale of the Belgium Plant and related transactions. 36 Borrowings under the domestic senior credit facility are subject to a borrowing base formula based on percentages of eligible domestic receivables and domestic inventory. Under the domestic senior credit facility, the Company may choose between two interest rate options: (i) the applicable base rate as defined plus 0.50% and (ii) the LIBOR rate as defined plus 2.75%. Indebtedness under the domestic senior credit facility is secured by a first priority lien on substantially all of the Company's assets and assets of substantially all of the Company's domestic subsidiaries. The Company is required to pay an unused line fee of 0.375% on the unused portion of the domestic senior credit facility, a monthly servicing fee and standard letter of credit fees to issuing banks. Borrowings under the domestic senior credit facility are available until, and are repayable no later than, October 31, 2007, although borrowings must be repaid by June 30, 2007 if the maturity of the Senior Secured Notes has not been extended, as required by the domestic senior credit facility, by that date. Pursuant to the terms of an intercreditor agreement, as amended in connection with the 2004 Offering, the security interest securing the Senior Secured Notes and the guarantees made by the Company's domestic restricted subsidiaries is subordinated to a lien securing the domestic senior credit facility. PRINCE TRANSACTIONS Effective December 26, 2003 (the "Closing Date"), the Company completed the divestiture of substantially all of the business and assets of The Prince Manufacturing Company ("PMC") to a company ("Buyer") formed by Palladium Equity Partners II, LP and certain of its affiliates (the "Palladium Investors"), and the related reduction of the Company's preferred stock held by the Palladium Investors (collectively the "Prince Transactions"). Pursuant to definitive purchase and other agreements executed on and effective as of the Closing Date, the Prince Transactions included the following elements: (i) the transfer of substantially all of the business and assets of PMC to Buyer; (ii) the reduction of the value of the Company's Preferred Stock owned by the Palladium Investors from $72.2 million to $16.5 million (accreted through the Closing Date) by means of the redemption of all of its shares of Series B Preferred Stock and a portion of its Series C Preferred Stock; (iii) the termination of $2.2 million in annual management advisory fees payable by the Company to Palladium; (iv) a cash payment of $10.0 million to the Palladium Investors in respect of the portion of the Company's Preferred Stock not exchanged in consideration of the business and assets of PMC; (v) the agreement of the Buyer to pay the Company for advisory fees for the next three years of $1.0 million, $0.5 million, and $0.2 million, respectively (which were pre-paid at closing by the Buyer and satisfied for $1.3 million, the net present value of such payments); and (vi) the Buyer agreed to supply manganous oxide and red iron oxide products and to provide certain mineral blending services to the Company's Prince Agriproducts subsidiary ("Prince Agri"). Prince Agri agreed to continue to provide the Buyer with certain laboratory, MIS and telephone services, all on terms substantially consistent with the historic relationship between Prince Agri and PMC, and to lease to Buyer office space used by PMC in Quincy, Illinois. The Company has an agreement to receive certain treasury services from Palladium for $0.1 million per year. Pursuant to definitive agreements, the Company made customary representations, warranties and environmental and other indemnities, agreed to a post-closing working capital adjustment, paid $4.0 million in full satisfaction of all intercompany debt owed to PMC, paid a closing fee to Palladium of $0.5 million, made certain capital expenditure adjustments included as part of the intercompany settlement amount, and agreed to pay for certain out-of-pocket transaction expenses. PMC retained $0.4 million of its accounts receivable. The Company established a $1.0 million letter of credit escrow for two years to secure its working capital adjustment and certain indemnification obligations. The Company agreed to indemnify the Palladium Investors for a portion, at the rate of $0.65 for every dollar, of the amount they receive in respect of the disposition of Buyer for less than $21.0 million up to a maximum payment by the Company of $4.0 million (the "Backstop Indemnification Amount"). The Backstop Indemnification Amount would be payable on the earlier to occur of July 1, 2008 or six months after the redemption date of all of the Company's Senior Secured Notes due 2007 if such a disposition closes prior to such redemption and six months after the closing of any such disposition if the disposition closes after any such redemption. The Company's obligations with respect to the Backstop Indemnification Amount will cease if the Palladium Investors do not close the disposition of Buyer by January 1, 2009. The definition of "Equity Value" in the Company's Certificate of Incorporation was 37 amended to reduce the multiple of trailing EBITDA payable in connection with any future redemption of Series C Preferred to 6.0 from 7.5. The amount of consideration paid and payable in connection with the Prince Transactions and all matters in connection therewith were determined pursuant to arm's length negotiations. The excess of the reduction in redeemable preferred stock over total assets divested and costs and liabilities incurred on the Prince Transactions was recorded as a decrease to accumulated deficit on the Company's condensed consolidated balance sheet at December 31, 2003, and was calculated as follows (amounts in thousands): 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. 38 The Company's operations, properties and subsidiaries are subject to a wide variety of complex and stringent federal, state, local and foreign environmental laws and regulations, including those governing the use, storage, handling, generation, treatment, emission, release, discharge and disposal of certain materials and wastes, the remediation of contaminated soil and groundwater, the manufacture, sale and use of pesticides and the health and safety of employees. As such, the nature of the Company's current and former operations and those of its subsidiaries exposes the Company and its subsidiaries to the risk of claims with respect to such matters. SUMMARY CONSOLIDATED RESULTS OF CONTINUING OPERATIONS
THREE MONTHS ENDED YEAR ENDED JUNE 30, SEPTEMBER 30, ------------------------------ ------------------- 2004 2003 2002 2004 2003 -------- -------- -------- -------- -------- Net Sales......................... $358,274 $341,746 $328,676 $88,275 $84,950 Gross Margin...................... 90,403 90,546 81,265 22,622 21,160 Selling, general and administrative expenses......... 66,128 65,050 70,636 16,594 15,785 Costs of non-completed transaction..................... 5,261 -- -- -- -- Operating income.................. 19,014 25,496 10,629 6,028 5,375 Interest expense, net............. 18,488 16,196 17,724 5,221 3,691 Other expense (income), net....... (781) 1,539 3,349 24 (585) Net (gain) on extinguishment of debt............................ (23,226) -- -- -- -- Provision for income taxes........ 7,969 10,060 14,767 924 783 Income (loss) from continuing operations...................... $ 16,564 $ (2,299) $(25,211) $ (141) $ 1,486
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 Net Sales of $88.3 million increased $3.3 million, or 4%. Animal Health and Nutrition sales of $65.8 million grew $6.0 million, or 10%, due to volume increases offset in part by lower average selling prices. Specialty Chemical Group (comprised of the Industrial Chemicals, Distribution and All Other segments) sales of $22.5 million decreased $2.6 million. Excluding PMC, Specialty Chemical group sales increased by $3.1 million due to volume increases in Industrial Chemicals and All Other segments. The Specialty Chemical Group included PMC sales of $5.7 million for the 2003 quarter. Gross Profit of $22.6 million increased $1.5 million to 25.6% of net sales, compared with 24.9% in 2003. Animal Health and Nutrition gross profit increased due to higher sales unit volumes and lower unit costs offset in part by lower average selling prices. The Specialty Chemical Group also contributed to the improvement due to expanded sales of the Company's new copper-based wood treatment products. The Specialty Chemical Group included PMC gross profit of $1.9 million for the 2003 quarter. Selling, General and Administrative Expenses of $16.6 million increased $0.8 million. Expenses in the operating segments, excluding PMC, increased over the prior year due to severance accruals, higher research and development costs associated with registration trials, unfavorable foreign exchange rates and overall higher operating costs. Corporate expenses increased due to higher depreciation and amortization charges, compensation and severance costs offset partially by income of $0.2 million from the PMC advisory fee and the elimination of the Palladium management fee of $0.6 million in 2003. PMC expenses were $0.7 million for the 2003 quarter. Operating Income of $6.0 million increased $0.7 million to 6.8% of sales. Operating income, excluding PMC, improved in both the Animal Health and Nutrition and Specialty Chemical Group with increased gross profit offset in part by higher selling, general and administrative expenses. PMC contributed $1.2 million for the 2003 quarter offset in part by the elimination of the Palladium management fee. 39 Interest Expense, Net of $5.2 million increased $1.5 million from the 2003 quarter, primarily due to higher average interest rates and also higher borrowing levels associated with the issuance of the Company's Senior Secured Notes. Other (Income) Expense, Net principally reflects foreign currency transaction net (gains) losses related to short-term inter-company balances and foreign currency translation (gains) losses. Income Taxes of $0.9 million were recorded on consolidated pre-tax income of $0.8 million. The tax rate reflects income tax provisions in profitable foreign jurisdictions and for state income taxes. A provision for U.S. federal income taxes has not been recorded due to the utilization of net operating loss carryforwards. The Company has recorded valuation allowances related to substantially all deferred tax assets. The Company will continue to evaluate the likelihood of recoverability of these deferred tax assets based upon actual and expected operating performance. COMPARISON OF YEARS ENDED JUNE 30, 2004 AND 2003 Net Sales of $358.3 million increased $16.5 million, or 5%. Animal Health and Nutrition sales of $265.4 million grew $14.7 million, or 6%, due to volume increases. Specialty Chemical Group sales (comprised of the Industrial Chemicals, Distribution and All Other segments) of $92.9 million increased $1.8 million, or 2%, primarily due to volume increases in all segments, offset by a decrease in PMC sales. The Specialty Chemical Group included PMC sales of $11.1 million and $22.3 million for 2004 and 2003, respectively. Gross Profit of $90.4 million decreased $0.1 million to 25.2% of net sales, compared with 26.5% in 2003. Animal Health and Nutrition gross profit decreased due to lower average selling prices and unfavorable currency related to the effect of the Euro on Belgium manufacturing costs. Improvements in the Specialty Chemical Group partially offset the Animal Health and Nutrition decline. The Specialty Chemical Group included PMC gross profit of $3.6 million and $6.2 million, respectively, for the fiscal 2004 and 2003 periods. Gross profit increased $2.0 million in the fourth quarter of 2004 due to an agreement related to the production and sale of amprolium, an anticoccidial MFA. The Company acquired the rights to sell amprolium in most international markets. In payment for the acquired rights, the Company relinquished its claims against the seller for certain purchase order commitments, and will make $2.1 million of cash payments to the seller over the next five years. The present value of these payments is $1.9 million and was recorded as a liability. The $2.4 million value of the purchase order commitments was recorded as a reduction in cost of goods sold and inventory, and an intangible asset of $4.3 million was recorded representing the fair value of the acquired rights and is included on the Company's balance sheet at June 30, 2004. The Company will amortize this intangible over a 10 year period. No amortization was recorded in 2004. Amortization expense for each of the next five years from 2005 to 2009 is expected to be $0.4 million per year. Selling, General and Administrative Expenses of $66.1 million increased $1.1 million. Expenses in the operating segments, excluding PMC, approximated the prior year primarily due to lower environmental and severance accruals offset in part by unfavorable foreign exchange rates. Corporate expenses in the current fiscal year reflect the elimination of the Palladium annual management fee of $2.25 million as of December 31, 2003 and income of $0.5 million from the PMC Advisory fee. Corporate expenses increased in fiscal 2004 due to higher depreciation and amortization charges and insurance costs offset by lower benefit charges. Corporate expenses in fiscal 2003 included vitamin settlement income of $3.0 million. PMC expenses were $1.3 million and $2.6 million for 2004 and 2003, respectively. Costs of non-completed transaction. During 2004, the Company incurred $5.3 million of costs in connection with a potential acquisition transaction that was not completed. The Company has charged the costs to expense in its 2004 results. The costs primarily consisted of professional fees for services in connection with the transaction. Net gain on extinguishment of debt. The Company recorded a net gain on the extinguishment of debt of $23.2 million due to the repurchase of senior subordinated notes ($16.7 million), and the repayment of Pfizer 40 obligations ($7.6 million) offset in part by a loss on repayment of the domestic senior credit facility ($1.0 million). Operating Income of $19.0 million decreased $6.5 million to 5.3% of sales. The decrease was primarily due to the non-completed transaction costs described above. In addition, gross profit declined in the Animal Health and Nutrition segment but was offset in part by improved operating performance of the Specialty Chemical Group. PMC contributed $2.3 million and $3.6 million for 2004 and 2003, respectively. Interest Expense, Net of $18.5 million increased $2.3 million from the prior year, primarily due to higher borrowing levels and also higher average interest rates associated with the issuance of the Company's Senior Secured Notes. Other (Income) Expense, Net of ($0.8) million improved in comparison with $1.5 million of expense last year. During 2004, the Company's Phibro-Tech subsidiary received $1.0 million in exchange for the sale of certain assets related to the manufacture and sale of ferric chloride from its plant in Joliet, Illinois and recognized a net gain of $0.7 million. The balance of other (income) expense principally reflects foreign currency transaction net (gains) losses related to short-term inter-company balances and foreign currency translation (gains) losses. Income Taxes of $8.0 million were 32% of consolidated pre-tax income of $24.5 million. The tax rate reflects income tax provisions in profitable foreign jurisdictions and for state income taxes. A provision for U.S. federal income taxes has not been recorded due to the utilization of net operating loss carryforwards. The Company has recorded valuation allowances related to substantially all deferred tax assets. The Company will continue to evaluate the likelihood of recoverability of these deferred tax assets based upon actual and expected operating performance. COMPARISON OF YEARS ENDED JUNE 30, 2003 AND 2002 Net Sales of $341.7 million increased $13.1 million, or 4%. Animal Health and Nutrition sales of $250.7 million grew $11.1 million, or 5%, due to volume increases. Specialty Chemical Group sales of $91.0 million increased $2.0 million, or 2%, primarily due to volume increases in the Distribution and All Other businesses. Gross Profit of $90.5 million improved $9.3 million to 26.5% of net sales, compared with 24.7% in 2002. Animal Health and Nutrition gross profit improvements were responsible for the overall increase. Purchase accounting adjustments related to the MFA acquisition resulted in a $3.3 million increase to cost of goods sold in 2002. Excluding the purchase accounting adjustment, the gross profit ratio would have been 25.7% in 2002. Selling, General and Administrative Expenses of $65.1 million decreased $5.6 million, or 8%. Expenses declined $6.5 million in the Specialty Chemicals Group due to downsizing and restructuring of the Industrial Chemicals segment, reflecting the decline in the printed circuit board market. Industrial Chemicals included expense for additional environmental reserves and write-offs of unamortized permit fees at closed facilities of $1.0 million and $1.6 million for 2003 and 2002, respectively. Animal Health and Nutrition expenses decreased by approximately $0.4 million. Corporate expenses increased $1.3 million, primarily due to increased staff levels. Corporate expenses included a vitamin settlement income of $3.0 million and $0.7 million in 2003 and 2002, respectively, from the settlement of class action litigation against European vitamin manufacturers. Debt restructuring costs of $0.8 million, severance of $0.4 million, and expense related to a divested business of $0.2 million were also recorded in 2003. Included in 2002 was $0.4 million non-cash income to reflect the decrease in value of redeemable common stock; no amount was recorded in 2003. Operating Income of $25.5 million increased $14.9 million to 7.5% of sales. The improvement was due to sales growth, gross margin improvements in Animal Health and Nutrition, and operating expense reductions. Interest Expense, Net of $16.2 million decreased $1.5 million, compared with $17.7 million in 2002, primarily due to lower average interest rates and reduced average borrowing levels. 41 Other Expense, Net of $1.5 million in fiscal 2003 improved in comparison with $3.4 million in the prior year. The expense principally reflects foreign currency transaction and translation net losses related to short-term inter-company balances. Income Taxes of $10.1 million were primarily due to a $5.6 million increase in valuation allowances for deferred tax assets in foreign jurisdictions where future profitability is not currently considered more likely than not, and income tax provisions in profitable foreign jurisdictions. The Company has recorded valuation allowances related to substantially all deferred tax assets. The Company will continue to evaluate the likelihood of recoverability of these deferred tax assets based upon actual and expected operating performance. Operating Segments The Animal Health and Nutrition segment manufactures and markets MFAs and NFAs to the poultry, swine and cattle markets, and includes the operations of the Phibro Animal Health business unit, Prince AgriProducts, Koffolk (1949) Ltd. and Planalquimica. The Industrial Chemicals segment manufacturers and markets specialty chemicals for use in the pressure treated wood, brick, glass, and chemical industries, and includes Phibro-Tech and PMC. The Distribution segment markets a variety of specialty chemicals, and includes PhibroChem and Ferro operations. The All Other segment includes contract manufacturing of crop protection chemicals, Wychem and all other operations. Due to the divestiture of PMC in December 2003, PMC's results are shown separately for comparability.
THREE MONTHS ENDED YEAR ENDED JUNE 30, SEPT. 30, ------------------------------ ------------------- 2004 2003 2002 2004 2003 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) NET SALES: Animal Health & Nutrition....... $265,421 $250,706 $239,602 $65,806 $59,841 Industrial Chemicals -- ex PMC.......................... 31,135 26,465 29,403 8,393 6,299 Industrial Chemicals -- PMC..... 11,118 22,332 21,451 -- 5,683 Distribution.................... 30,861 30,072 27,852 7,661 7,939 All other....................... 19,739 12,171 10,368 6,415 5,188 -------- -------- -------- ------- ------- $358,274 $341,746 $328,676 $88,275 $84,950 ======== ======== ======== ======= ======= OPERATING INCOME: Animal Health & Nutrition....... $ 33,307 $ 38,472 $ 28,298 $ 7,815 $ 6,900 Industrial Chemicals -- ex PMC.......................... 621 (5,434) (10,964) 773 (391) Industrial Chemicals -- PMC..... 2,278 3,579 3,640 -- 1,213 Distribution.................... 2,900 3,207 2,345 864 841 All other....................... 2,301 620 1,164 705 669 Corporate expenses and adjustments.................. (22,393) (14,948) (13,854) (4,129) (3,857) -------- -------- -------- ------- ------- $ 19,014 $ 25,496 $ 10,629 $ 6,028 $ 5,375 ======== ======== ======== ======= =======
OPERATING SEGMENTS COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 Animal Health and Nutrition Net Sales of $65.8 million increased $6.0 million, or 10%. MFA net sales increased by $2.4 million. Revenues were higher primarily for antibacterials and antibiotics but were offset in part by lower sales of anticoccidials. The increase in MFA revenues was due to higher unit volumes and favorable currency effect on international sales offset in part by lower average selling prices. NFA net sales increased by $3.6 million principally due to volume increases in trace mineral premixes and other feed ingredients. 42 Operating Income of $7.8 million increased $0.9 million, or 13%. Operating income improved due to higher sales unit volumes and lower unit costs offset in part by lower average selling prices and increased selling, general and administrative expenses. Specialty Chemicals Industrial Chemicals net sales of $8.4 million, excluding PMC, increased $2.1 million, or 33%. Sales of copper-related products to the wood treatment markets increased due to the introduction of new copper based wood treatment products. PMC, divested in December 2003, generated revenues of $5.7 million for the 2003 quarter. Operating income, excluding PMC, of $0.8 million improved by $1.2 million from the 2003 quarter. This improvement was due to new product introductions and savings from previously implemented headcount reductions and facility restructurings in Phibro-Tech operations. PMC provided operating income of $1.2 million for the 2003 quarter. Distribution net sales of $7.7 million decreased $0.3 million, or 4%. Lower sales volumes in Europe were offset in part by higher domestic unit volumes and slightly higher average selling prices. Distribution operating income of $0.9 million approximated the prior period. As a percentage of sales, operating income was 11% in both 2004 and 2003 quarters. All Other net sales of $6.4 million increased $1.2 million, or 24%. Revenues for contract manufacturing increased $0.7 million due to increased volumes and average selling prices. Revenues from specialized lab projects and formulations increased $0.5 million over the prior period. Operating income of $0.7 million improved slightly from the prior period due to higher margins on specialized lab projects and formulations. OPERATING SEGMENTS COMPARISON OF YEARS ENDED JUNE 30, 2004 AND 2003 Animal Health and Nutrition Net Sales of $265.4 million increased $14.7 million, or 6%. Medicated Feed Additives net sales decreased by $7.8 million. Revenues were lower primarily for anticoccidials but were offset in part by higher sales of other medicated feed additives. Sales of anticoccidial products were $7.1 million lower due to contract negotiations with a major customer that were completed in the fourth quarter of 2004. The decrease in MFA revenues also was due to lower average selling prices offset in part by favorable currency effect on international sales. Nutritional Feed Additives net sales increased by $22.5 million, principally due to volume increases in core inorganic minerals, trace mineral premixes and other ingredients. Operating Income of $33.3 million decreased $5.2 million, or 13%. Operating income declined due to product mix, higher cost of goods reflecting the stronger Euro's effect on Belgian manufacturing cost and unfavorable currency effects on international selling, general and administrative expense. Lower average selling prices also contributed to the decrease. Operating income increased $2.0 million in the fourth quarter of 2004 due to an agreement related to the production and sale of amprolium, an anticoccidial MFA. Specialty Chemicals Industrial Chemicals net sales of $31.1 million, excluding PMC, increased $4.7 million, or 18%. Sales of copper related products to the wood treatment markets increased due to the introduction of new copper based wood treatment chemicals which offset the divestiture of the Company's Eastern United States etchant business in mid 2003. The Company continues its existing etchant business at one remaining facility. PMC, divested in December 2003, generated revenues of $11.1 million and $22.3 million for 2004 and 2003, respectively. Operating income of $0.6 million improved by $6.1 million from the prior year. This improvement was due to new product introductions and savings from headcount reductions and facility restructurings in Phibro-Tech operations. PMC provided operating income of $2.3 million and $3.6 million for 2004 and 2003, respectively. Distribution net sales of $30.9 million increased $0.8 million, or 3%. Higher sales volumes in Europe were offset in part by lower domestic unit volumes and lower average selling prices. Distribution operating income 43 of $2.9 million decreased $0.3 million from the prior year. As a percentage of sales, operating income was 9% and 11% in 2004 and 2003, respectively. All Other net sales of $19.7 million increased $7.6 million, or 62%. Revenues for contract manufacturing increased $7.6 million due to increased volumes and average selling prices. Specialized lab projects and formulations approximated the prior year. Operating income of $2.3 million improved by $1.7 million from the prior year due to higher revenues and increased margins on contract manufacturing. OPERATING SEGMENTS COMPARISON OF YEARS ENDED JUNE 30, 2003 AND 2002 Animal Health and Nutrition Net Sales of $250.7 million increased $11.1 million, or 5%. Medicated Feed Additives net sales increased by $6.7 million. Revenues were higher for antibacterials, antibiotics and anticoccidials but were offset in part by lower sales of anthelmintics and other medicated feed additives. The increased revenues were due to volume increases offset in part by lower average selling prices, including the effect of currency devaluations in Latin America. Nutritional Feed Additives net sales increased by $4.4 million, principally due to volume increases in core inorganic minerals, trace mineral premixes and other ingredients. Operating Income of $38.5 million increased $10.2 million, or 36%. Purchase accounting adjustments relating to inventory in the MFA acquisition resulted in a $3.3 million increase to 2002 cost of goods sold. The operating income ratio increased to 15% in 2003 from 13% in 2002 (excluding the purchase accounting adjustments). The improvement in operating income resulted from increased sales of higher margin products and close control of operating expenses. Specialty Chemicals Industrial Chemicals net sales of $26.5 million, excluding PMC, decreased $2.9 million, or 10%. Industrial Chemicals net sales decreased due to the divestiture of the Company's Eastern United States etchant business in mid-fiscal 2003 and reduced sales of etchants to the printed circuit board market. PMC, divested in December 2003, generated revenues of $22.3 million and $21.5 million for fiscal periods 2003 and 2002, respectively. Industrial Chemicals operating loss of $5.4 million improved by $5.5 million from the year earlier loss. The improvement principally was due to the partial disposal during 2003 of the ammoniacal etchant business and savings from headcount reductions and facility restructurings. The gain on the transaction was not material. PMC provided operating income of $3.6 million in each of the 2003 and 2002 fiscal periods. Distribution net sales of $30.1 million increased $2.2 million, or 8%. Higher sales volumes in Europe and improved product mix in domestic operations accounted for the increase. Distribution operating income of $3.2 million increased $0.9 million, or 37%. As a percentage of sales, operating income increased to 11% in 2003 from 8% in 2002. The improvement in operating income margins resulted principally from increased sales of higher margin products. All Other net sales of $12.2 million increased $1.8 million, or 17%. Revenues for contract manufacturing increased $2.4 million due to increased volumes. Revenues from specialized lab projects and formulations declined $0.6 million. Operating income of $0.6 million decreased primarily due to specialized lab projects and formulations. DISCONTINUED OPERATIONS In August 2003, the Company divested Mineral Resource Technologies, Inc and shutdown its operations at La Cornubia. These businesses have been classified as discontinued operations. The Company's consoli- 44 dated financial statements have been reclassified to report separately the operating results and cash flows of the discontinued operations.
THREE MONTHS ENDED SEPTEMBER 30, 2003 ----------------------------- MRT LA CORNUBIA TOTAL ------ ----------- ------ Net Sales............................................... $3,327 $2,220 $5,577 ====== ====== ====== Operating Loss.......................................... $ (124) $ (372) $ (496) Interest Expense, net................................... -- 16 16 Other Expense (Income), net............................. -- (50) (50) Provision (benefit) for income tax...................... -- -- -- ------ ------ ------ Net Income (Loss) from discontinued operations.......... $ (124) $ (338) $ (462) ====== ====== ====== Depreciation & Amortization............................. $ -- $ 100 $ 100 ====== ====== ======
Mineral Resource Technologies, Inc. ("MRT"). In August 2003, the Company divested MRT for net proceeds, after transaction costs, of approximately $13.8 million. MRT was included in the Company's All Other segment. La Cornubia. On June 30, 2004, one of the Company's French subsidiaries, La Cornubia SA ("La Cornubia"), filed for bankruptcy under the insolvency laws of France. The Company believes that, as a result of the bankruptcy filing by La Cornubia, it is possible that LC Holding S.A. ("LC Holding"), La Cornubia's parent, a holding company with no assets except for its investment in La Cornubia, may also file for bankruptcy in France. The Company does not believe that La Cornubia's bankruptcy filing, nor the possible bankruptcy filing by LC Holding, will have a material adverse effect on its financial condition or results of operations. During fiscal 2004, the Company shutdown its operations at La Cornubia. During fiscal 2003, the Company shutdown or divested Odda Smelteverk (Norway), Carbide Industries (U.K.), and Mineral Resource Technologies, Inc. These businesses have been classified as discontinued operations. The Company's consolidated financial statements have been reclassified to report separately the operating results, financial position, and cash flows of the discontinued operations. Prior year financial statements have been reclassified to conform to the 2004 presentation.
YEAR ENDED JUNE 30, 2004 --------------------------------------------- LA CORNUBIA ODDA/CARBIDE MRT TOTAL ----------- ------------ ------ ------- Net Sales................................. $13,918 $ -- $3,327 $17,245 ======= ===== ====== ======= Operating Loss............................ $(1,491) $ -- $ (124) $(1,615) Interest Expense, net..................... 94 94 Other Expense (Income), net............... (102) -- -- (102) Provision (benefit) for income tax........ 18 -- -- 18 ------- ----- ------ ------- Net Income (Loss) from discontinued operations.............................. $(1,501) $ -- $ (124) $(1,625) ======= ===== ====== ======= Depreciation & Amortization............... $ 400 $ -- $ -- $ 400 ======= ===== ====== =======
45
YEAR ENDED JUNE 30, 2003 ----------------------------------------------- LA CORNUBIA ODDA/CARBIDE MRT TOTAL ----------- ------------ ------- -------- Net Sales............................... $13,479 $ 11,217 $18,671 $ 43,367 ======= ======== ======= ======== Operating Loss.......................... $ (359) $(13,462) $(3,454) $(17,275) Interest Expense, net................... 60 60 Other Expense (Income), net............. (389) (2,327) -- (2,716) Provision (benefit) for income tax...... 16 58 -- (42) ------- -------- ------- -------- Net Income (Loss) from discontinued operations............................ $ (46) $(11,077) $(3,454) $(14,577) ======= ======== ======= ======== Depreciation & Amortization............. $ 359 $ 894 $ 1,309 $ 2,562 ======= ======== ======= ========
YEAR ENDED JUNE 30, 2002 ----------------------------------------------- LA CORNUBIA ODDA/CARBIDE MRT TOTAL ----------- ------------ ------- -------- Net Sales............................... $11,873 $ 31,219 $17,045 $ 60,137 ======= ======== ======= ======== Operating Loss.......................... $ (912) $(27,709) $(2,930) $(31,551) Interest Expense, net................... 78 78 Other Expense (Income), net............. (263) (3,699) (3,962) Provision (benefit) for income tax...... 62 (1,170) -- (1,108) ------- -------- ------- -------- Net Income (Loss) from discounted operations............................ $ (789) $(22,840) $(2,930) $(26,559) ======= ======== ======= ======== Depreciation & Amortization............. $ 325 $ 17,676 $ 1,192 $ 19,193 ======= ======== ======= ========
Odda and Carbide. During fiscal 2003, the Company determined that it would permanently shutdown and no longer fund the operations of Odda. On February 28, 2003, Odda filed for bankruptcy in Norway. The bankruptcy is proceeding in accordance with Norwegian law. The Company removed all assets, liabilities (except as noted below), and cumulative translation adjustments related to Odda from the Company's consolidated balance sheet as of June 30, 2003, and recorded the net result as a loss on disposal of discontinued operations. The Company has been advised that, as a result of the bankruptcy, the creditors of Odda have recourse only to the assets of Odda, except in the case of certain debt guaranteed by the Company. During fiscal 2004, the Company paid the remaining guaranteed debt of $5.7 million. The Company has been advised by Norwegian counsel that it has obtained the benefit of the banks' position as a secured creditor upon payment pursuant to the guarantees. During fiscal 2003, the Company sold Carbide, previously a distributor for one of Odda's product lines. Proceeds from the divestiture were not material. Odda was included in the Company's Industrial Chemicals segment and Carbide was included in the Company's Distribution segment. The Company recorded a $0.7 million loss on disposal of Odda and Carbide during fiscal 2003. The loss primarily related to the write-off of Odda's remaining net assets, including the related cumulative currency translation adjustment. LIQUIDITY AND CAPITAL RESOURCES Net Cash Provided by Operating Activities. Cash provided by operations for the three months ended September 30, 2004 and 2003 was $2.4 million and $1.3 million, respectively. Cash provided was due to income from continuing operations offset in part by working capital requirements. The Company is currently increasing inventory levels of certain products to enhance future supply flexibility and reduce cost as part of a strategic review of its manufacturing capabilities. Cash provided by operations for fiscal 2004 and 2003 was $2.9 million and $34.7 million, respectively. Cash provided in fiscal 2004 was due to income from continuing operations offset in part by working capital requirements. In addition, payment of the Pfizer obligations (shown in financing activities) eliminated additional working capital requirements that otherwise would have 46 been necessary. Cash provided in fiscal 2003 was due to improved income from continuing operations and aggressive working capital management. The Company incurred $5.3 million of costs for a non-completed acquisition transaction and paid approximately $1.4 million of these charges in fiscal 2004. Net Cash Provided (Used) by Investing Activities. Net cash provided (used) by investing activities for the three months ended September 30, 2004 and 2003 was ($1.7) million and $13.2 million, respectively. Capital expenditures of $1.7 million and $0.9 million for the three months ended September 30, in 2004 and 2003, respectively, were for new product capacity, for maintaining the Company's existing asset base and for environmental, health and safety projects. Discontinued operations, primarily from the sale of MRT, provided funds of $14.0 million in the three months ended September 30, 2003. Net cash provided (used) by investing activities for fiscal 2004 and 2003 was $9.1 million and ($4.0) million, respectively. Discontinued operations, primarily from the sale of MRT, provided funds of $14.9 million in fiscal 2004. Discontinued operations provided $1.4 million in fiscal 2003. Capital expenditures of $6.2 million and $8.6 million for fiscal 2004 and 2003, respectively, were for new product capacity, for maintaining the Company's existing asset base and for environmental, health and safety projects. Proceeds from sales of fixed assets and other investing activities accounted for the remainder of cash provided by investing activities in fiscal 2004. Net Cash Provided (Used) by Financing Activities. Net cash provided (used) by financing activities for the three months ended September 30, 2004 and 2003 was ($0.4) million and $1.1 million, respectively. Short-term debt increased due to a $0.3 million increase in the domestic senior credit facility. Proceeds from long-term debt and payments of long-term debt, net used $0.4 million of funds and primarily reflect the borrowing activity of Koffolk Israel. Net cash (used) by financing activities for fiscal 2004 and 2003 was ($17.8) million and ($26.4) million, respectively. Short-term debt decreased due to the reduction of the domestic senior credit facility of $21.2 million, debt payments related to Odda of $5.7 million and by other increases of $0.1 million in fiscal 2004. Proceeds from long-term debt reflect the issuance of $105.0 million Senior Secured Notes and an increase of $4.6 million in foreign bank loans in fiscal 2004. Payments of long-term debt primarily reflect the retirement of Senior Subordinated Notes in fiscal 2004. Payments of the Pfizer obligations, the Prince transactions and costs related to the refinancing account for the remainder of funds used by financing activities in fiscal 2004. Working Capital and Capital Expenditures. Working capital as of September 30, 2004 was $57.7 million compared to $54.4 million at fiscal year end June 30, 2004, an increase of $3.0 million. The Company is currently increasing inventory levels of certain products to enhance future supply flexibility and reduce cost as part of a strategic review of its manufacturing capabilities. The fiscal 2005 increase in working capital primarily was due to higher inventory levels. The Company anticipates spending approximately $8.0 million for capital expenditures in fiscal 2005, primarily to cover the Company's asset replacement needs, to improve processes, and for environmental and regulatory compliance, subject to the availability of funds. Liquidity. At September 30, 2004, the amount of credit extended under the Company's domestic senior credit facility totaled $11.3 million under the working capital facility and $8.7 million under the letter of credit facility, and the Company had $6.2 million available under the working capital facility. In addition, certain of the Company's foreign subsidiaries also had availability totaling $5.1 million under their respective loan agreements. As of September 24, 2004, the Company amended its domestic senior credit facility to: (i) increase the aggregate amount of borrowings available under such working capital and letter of credit facilities to $32.5 million; the amount of aggregate borrowings available under the working capital facility remained unchanged at $17.5 million; (ii) amend the EBITDA definition to exclude charges and expenses related to unsuccessful acquisitions and related financings in an aggregate amount not to exceed $5.3 million for the period beginning January 1, 2004 and ending June 30, 2004; (iii) amend the definition of Additional Indebtedness to exclude advances under the working capital facility; (iv) amend the definition of Permitted Investments to allow other investments made during the period from January 1, 2004 through June 30, 2004 in an aggregate amount not to exceed $336,000; and (v) establish covenant EBITDA levels for the periods ending after June 30, 2004. The amendment was effective June 30, 2004 for items (i), (ii) and (iii); effective January 1, 2004 for item (iv); and effective September 24, 2004 for item (v). 47 The domestic senior credit facility contains a lock-box requirement and a material adverse change clause should an event of default (as defined in the agreement) occur. Accordingly, the amounts outstanding have been classified as short-term and are included in loans payable to banks in the condensed consolidated balance sheet. The Company's ability to fund its operating plan depends upon the continued availability of borrowing under its domestic senior credit facility. The Company believes that it will be able to comply with the terms of its covenants under the domestic senior credit facility based on its forecasted operating plan. In the event of adverse operating results and/or violation of covenants under this facility, there can be no assurance that the Company would be able to obtain waivers or amendments on favorable terms, if at all. The Company's fiscal 2005 operating plan projects adequate liquidity throughout the year, with periods of reduced availability around the dates of the semi-annual interest payments due December 1, 2004 and June 1, 2005 related to its senior secured and senior subordinated notes. The Company is pursuing additional cost reduction activities, working capital improvement plans, and sales of non-strategic assets to ensure additional liquidity. The Company also has availability under foreign credit lines that likely would be available. The Company also has undertaken a strategic review of its manufacturing capabilities, and is currently increasing inventory levels of certain products to enhance future flexibility and reduce cost. There can be no assurance the Company will be successful in any of the above-noted actions. The Company's contractual obligations (in millions) at September 30, 2004 mature as follows:
YEARS ------------------------------------------------------ WITHIN 1 OVER 1 TO 3 OVER 3 TO 5 OVER 5 TOTAL -------- ----------- ----------- ------ ------ Loans payable to banks................ $11.3 $ -- $ -- $ -- $ 11.3 Long-term debt (including current portion)............................ 1.0 4.1 153.9 -- 159.0 Interest payments..................... 19.3 38.4 12.7 -- 70.4 Lease commitments..................... 1.4 2.6 2.0 2.2 8.2 Acquisition of rights................. 0.6 0.8 0.4 -- 1.8 ----- ----- ------ ---- ------ Total contractual obligations....... $33.6 $45.9 $169.0 $2.2 $250.7 ===== ===== ====== ==== ======
The Company's contractual obligations (in millions) at September 30, 2004, as adjusted to give effect to the additional notes issued in December 2004, mature as follows:
YEARS ------------------------------------------------------ WITHIN 1 OVER 1 TO 3 OVER 3 TO 5 OVER 5 TOTAL -------- ----------- ----------- ------ ------ Loans payable to banks................ $ -- $ -- $ -- $ -- $ -- Long-term debt (including current portion)............................ 1.0 4.1 176.3 -- 181.4 Interest payments..................... 22.2 44.2 13.2 -- 79.6 Lease commitments..................... 1.4 2.6 2.0 2.2 8.2 Acquisition of rights................. 0.6 0.8 0.4 -- 1.8 ----- ----- ------ ---- ------ Total contractual obligations....... $25.2 $51.7 $191.9 $2.2 $271.0 ===== ===== ====== ==== ======
SUPPLEMENTAL INFORMATION (UNAUDITED) The Company shutdown Odda and divested Carbide during fiscal 2003, sold MRT in August 2003, and shutdown La Cornubia in June 2004. These businesses have been classified as discontinued operations. The Company's consolidated financial statements have been reclassified to report separately the operating results, financial position, and cash flows of the discontinued operations. In addition, the Company completed the Prince Transactions in December 2003, including the divestiture of PMC and the termination of management fees to the Palladium Investors. 48 To facilitate quarterly comparisons, the following unaudited statements present the quarterly operating results of continuing operations, for the years ended June 30, 2004, 2003 and 2002. Amounts are in thousands.
QUARTERS ENDED YEAR ----------------------------------------- ENDED SEP. 30, DEC. 31, MAR. 31, JUN. 30, JUN. 30, 2003 2003 2004 2004 2004 -------- -------- -------- -------- -------- NET SALES: Animal Health & Nutrition..................... $59,841 $ 68,687 $64,819 $72,074 $265,421 Industrial Chemicals -- ex PMC................ 6,299 6,244 10,000 8,592 31,135 Industrial Chemicals -- PMC................... 5,683 5,435 -- -- 11,118 Distribution.................................. 7,939 7,656 7,916 7,350 30,861 All Other..................................... 5,188 4,518 4,302 5,731 19,739 ------- -------- ------- ------- -------- Total net sales............................ 84,950 92,540 87,037 93,747 358,274 Cost of goods sold.............................. 63,790 69,991 63,843 70,247 267,871 ------- -------- ------- ------- -------- Gross profit............................... 21,160 22,549 23,194 23,500 90,403 Selling, general and administrative expenses.... 15,785 16,824 16,165 17,354 66,128 Costs of non-completed transaction.............. -- -- -- 5,261 5,261 ------- -------- ------- ------- -------- OPERATING INCOME (LOSS): Animal Health & Nutrition..................... 6,900 7,655 8,370 10,382 33,307 Industrial Chemicals -- ex PMC................ (391) (287) 1,136 163 621 Industrial Chemicals -- PMC................... 1,213 1,065 -- -- 2,278 Distribution.................................. 841 692 789 578 2,900 All Other..................................... 669 657 557 418 2,301 Corporate Expenses............................ (3,377) (4,132) (4,116) (9,729) (21,354) Eliminations.................................. 82 638 293 (927) 86 Palladium management fee...................... (562) (563) -- -- (1,125) ------- -------- ------- ------- -------- Total operating income (loss).............. 5,375 5,725 7,029 885 19,014 OTHER: Interest expense.............................. 3,933 4,549 4,918 5,218 18,618 Interest (income)............................. (242) 168 (43) (13) (130) Other expense, net............................ (585) 127 (131) (192) (781) Net (gain) on extinguishment of debt.......... -- (23,226) -- -- (23,226) ------- -------- ------- ------- -------- Income (loss) from continuing operations before income taxes...................... 2,269 24,107 2,285 (4,128) 24,533 Provision for income taxes...................... 783 2,880 2,209 2,097 7,969 ------- -------- ------- ------- -------- Income/(loss) from continuing operations... 1,486 21,227 76 (6,225) 16,564 DISCONTINUED OPERATIONS: Income (loss) from operations................. (462) 59 (471) (751) (1,625) Gain (loss) on disposal....................... 231 -- -- (2,320) (2,089) ------- -------- ------- ------- -------- Net income/(loss).......................... $ 1,255 $ 21,286 $ (395) $(9,296) $ 12,850 ======= ======== ======= ======= ======== DEPRECIATION AND AMORTIZATION FROM CONTINUING OPERATIONS: Animal Health & Nutrition..................... $ 2,029 $ 2,059 $ 2,086 $ 2,089 $ 8,263 Industrial Chemicals -- ex PMC................ 406 395 403 432 1,636 Industrial Chemicals -- PMC................... 243 244 -- -- 487 Distribution.................................. 3 4 3 1 11 All Other..................................... 115 98 105 101 419 Corporate Expenses............................ 372 576 660 759 2,367 ------- -------- ------- ------- -------- Total depreciation and amortization........ $ 3,168 $ 3,376 $ 3,257 $ 3,382 $ 13,183 ======= ======== ======= ======= ========
49
QUARTERS ENDED YEAR ----------------------------------------- ENDED SEP. 30, DEC. 31, MAR. 31, JUN. 30, JUN. 30, 2002 2002 2003 2003 2003 -------- -------- -------- -------- -------- NET SALES: Animal Health & Nutrition................ $59,976 $ 66,650 $62,675 $61,405 $250,706 Industrial Chemicals -- ex PMC........... 8,138 5,946 6,449 5,932 26,465 Industrial Chemicals -- PMC.............. 5,756 5,285 5,743 5,548 22,332 Distribution............................. 8,096 7,197 7,612 7,167 30,072 All Other................................ 1,711 2,190 3,793 4,477 12,171 ------- -------- ------- ------- -------- Total net sales....................... 83,667 87,268 86,272 84,529 341,746 Cost of goods sold......................... 61,638 63,366 63,306 62,890 251,200 ------- -------- ------- ------- -------- Gross profit.......................... 22,039 23,902 22,966 21,639 90,546 Selling, general and administrative expenses................................. 15,544 15,874 17,496 16,136 65,050 OPERATING INCOME (LOSS): Animal Health & Nutrition................ 9,420 11,593 8,902 8,557 38,472 Industrial Chemicals -- ex PMC........... (1,035) (1,815) (1,555) (1,029) (5,434) Industrial Chemicals -- PMC.............. 1,127 901 839 712 3,579 Distribution............................. 750 802 900 755 3,207 All Other................................ 13 245 356 6 620 Corporate Expenses....................... (3,051) (3,440) (3,324) (2,905) (12,720) Eliminations............................. (167) 305 (86) (30) 22 Palladium management fee................. (562) (563) (562) (563) (2,250) ------- -------- ------- ------- -------- Total operating income (loss)......... 6,495 8,028 5,470 5,503 25,496 OTHER: Interest expense......................... 4,489 3,641 3,958 4,193 16,281 Interest (income)........................ (126) 31 (39) 49 (85) Other expense, net....................... 1,155 235 201 (52) 1,539 ------- -------- ------- ------- -------- Income (loss) from continuing operations before income taxes...... 977 4,121 1,350 1,313 7,761 Provision for income taxes................. 432 1,409 599 7,620 10,060 ------- -------- ------- ------- -------- Income/(loss) from continuing operations.......................... 545 2,712 751 (6,307) (2,299) DISCONTINUED OPERATIONS: Income (loss) from operations............ (702) (10,547) (1,681) (1,647) (14,577) Gain (loss) on disposal.................. -- -- (1,342) 659 (683) ------- -------- ------- ------- -------- Net income/(loss)..................... $ (157) $ (7,835) $(2,272) $(7,295) $(17,559) ======= ======== ======= ======= ======== DEPRECIATION AND AMORTIZATION FROM CONTINUING OPERATIONS: Animal Health & Nutrition................ $ 1,892 $ 1,920 $ 1,890 $ 1,988 $ 7,690 Industrial Chemicals -- ex PMC........... 587 699 498 164 1,948 Industrial Chemicals -- PMC.............. 232 239 240 245 956 Distribution............................. 3 3 2 4 12 All Other................................ 87 90 94 93 364 Corporate Expenses....................... 355 395 405 399 1,554 ------- -------- ------- ------- -------- Total depreciation and amortization... $ 3,156 $ 3,346 $ 3,129 $ 2,893 $ 12,524 ======= ======== ======= ======= ========
50
QUARTERS ENDED YEAR ----------------------------------------- ENDED SEP. 30, DEC. 31, MAR. 31, JUN. 30, JUN. 30, 2001 2001 2002 2002 2002 -------- -------- -------- -------- -------- NET SALES: Animal Health & Nutrition................ $57,943 $63,156 $59,378 $ 59,125 $239,602 Industrial Chemicals -- ex PMC........... 6,591 6,253 7,258 9,301 29,403 Industrial Chemicals -- PMC.............. 5,062 5,218 5,418 5,753 21,451 Distribution............................. 7,590 6,640 6,753 6,869 27,852 All Other................................ 2,377 2,448 2,595 2,948 10,368 ------- ------- ------- -------- -------- Total net sales....................... 79,563 83,715 81,402 83,996 328,676 Cost of goods sold......................... 59,592 60,128 60,885 66,806 247,411 ------- ------- ------- -------- -------- Gross profit.......................... 19,971 23,587 20,517 17,190 81,265 Selling, general and administrative expenses................................. 16,431 17,614 17,577 19,014 70,636 OPERATING INCOME (LOSS): Animal Health & Nutrition................ 7,365 10,259 6,246 4,428 28,298 Industrial Chemicals -- ex PMC........... (2,759) (2,160) (1,175) (4,870) (10,964) Industrial Chemicals -- PMC.............. 821 588 1,058 1,173 3,640 Distribution............................. 612 544 496 693 2,345 All Other................................ 214 367 108 475 1,164 Corporate Expenses....................... (2,204) (2,708) (2,733) (3,746) (11,391) Eliminations............................. 53 (354) (498) 586 (213) Palladium management fee................. (562) (563) (562) (563) (2,250) ------- ------- ------- -------- -------- Total operating income (loss)......... 3,540 5,973 2,940 (1,824) 10,629 OTHER: Interest expense......................... 4,596 4,660 4,590 4,224 18,070 Interest (income)........................ (65) (231) (6) (44) (346) Other expense, net....................... 1,263 753 368 965 3,349 ------- ------- ------- -------- -------- Income (loss) from continuing operations before income taxes...... (2,254) 791 (2,012) (6,969) (10,444) Provision for income taxes................. (197) 1,203 1,264 12,497 14,767 ------- ------- ------- -------- -------- Income/(loss) from continuing operations.......................... (2,057) (412) (3,276) (19,466) (25,211) DISCONTINUED OPERATIONS: Income (loss) from operations............ (308) (1,287) (5,796) (19,168) (26,559) Gain (loss) on disposal.................. -- -- -- -- -- ------- ------- ------- -------- -------- Net income/(loss)..................... $(2,365) $(1,699) $(9,072) $(38,634) $(51,770) ======= ======= ======= ======== ======== DEPRECIATION AND AMORTIZATION FROM CONTINUING OPERATIONS: Animal Health & Nutrition................ $ 1,810 $ 1,589 $ 1,996 $ 2,043 $ 7,438 Industrial Chemicals -- ex PMC........... 633 579 609 748 2,569 Industrial Chemicals -- PMC.............. 242 240 242 242 966 Distribution............................. 7 (1) 3 3 12 All Other................................ 81 78 80 82 321 Corporate Expenses....................... 264 268 263 254 1,049 ------- ------- ------- -------- -------- Total depreciation and amortization... $ 3,037 $ 2,753 $ 3,193 $ 3,372 $ 12,355 ======= ======= ======= ======== ========
51 CRITICAL ACCOUNTING POLICIES Critical accounting policies are those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. The Company's significant accounting policies are described in Note 2 to the Consolidated Financial Statements. Not all of these significant accounting policies require management to make difficult, subjective or complex judgments or estimates. However, management of the Company is required to make certain estimates and assumptions during the preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. These estimates and assumptions impact the reported amount of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the period they are determined to be necessary. Actual results could differ from those estimates. Following are some of the Company's critical accounting policies impacted by judgments, assumptions and estimates. REVENUE RECOGNITION Revenues are recognized when title to products and risk of loss are transferred to customers. Additional conditions for recognition of revenue are that collection of sales proceeds is reasonably assured and the Company has no further performance obligations. Net sales are comprised of total sales billed, less reductions for returned goods, trade discounts and customer allowances. LITIGATION The Company is subject to legal proceedings and claims arising out of the normal course of business. The Company routinely assesses the likelihood of any adverse judgments or outcomes to these matters as well as ranges of probable losses. A determination of the amount of the reserves required for these contingencies is based on an analysis of the various issues, historical experience, other third party judgments and outside specialists, where required. The required reserves may change in the future due to new developments in each matter. For further discussion, see Note 15 to the Consolidated Financial Statements. ENVIRONMENTAL MATTERS The Company determines the costs of environmental remediation of its facilities and formerly owned properties on the basis of current law and existing technologies. Uncertainties exist in these evaluations primarily due to unknown conditions, changing governmental regulations and legal standards regarding liability, and evolving technologies. The liabilities are adjusted periodically as remediation efforts progress or as additional information becomes available. The Company has recorded liabilities of $2.9 million at September 30, 2004 for such activities. LONG LIVED ASSETS Long-lived assets, including plant and equipment, and other intangible assets are reviewed for impairment when events or circumstances indicate that a diminution in value may have occurred, based on a comparison of undiscounted future cash flows to the carrying amount of the long-lived asset. If the carrying amount exceeds undiscounted future cash flows, an impairment charge is recorded based on the difference between the carrying amount of the asset and its fair value. The assessment of potential impairment for a particular asset or set of assets requires certain judgments and estimates by the Company, including the determination of an event indicating impairment; the future cash flows to be generated by the asset, including the estimated life of the asset and likelihood of alternative courses of action; the risk associated with those cash flows; and the Company's cost of capital or discount rate to be utilized. 52 USEFUL LIVES OF LONG-LIVED ASSETS Useful lives of long-lived assets, including plant and equipment and other intangible assets are based on management's estimates of the periods that the assets will be productively utilized in the revenue-generation process. Factors that affect the determination of lives include prior experience with similar assets and product life expectations and management's estimate of the period that the assets will generate revenue. INVENTORIES Inventories are valued at the lower of cost or market. Cost is determined on a first-in, first-out (FIFO) and average methods for most inventories. The determination of market value to compare to cost involves assessment of numerous factors, including costs to dispose of inventory and estimated selling prices. Reserves are recorded for inventory determined to be damaged, obsolete, or otherwise unsaleable. INCOME TAXES Deferred tax assets and liabilities are determined using enacted tax rates for the effects of net operating losses and temporary differences between the book and tax bases of assets and liabilities. The Company records a valuation allowance on deferred tax assets when appropriate to reflect the expected future tax benefits to be realized. In determining the appropriate valuation allowance, certain judgments are made relating to recoverability of deferred tax assets, use of tax loss carryforwards, level of expected future taxable income and available tax planning strategies. These judgments are routinely reviewed by management. For further discussion, see Note 14 to the Consolidated Financial Statements. NEW ACCOUNTING PRONOUNCEMENTS There were no new accounting policies issued during the quarter ended September 30, 2004 which would result in a material impact on the Company's financial statements. EFFECT OF INFLATION; FOREIGN CURRENCY EXCHANGE RATES Inflation generally affects the Company by increasing the cost of labor, equipment and raw materials. The Company does not believe that inflation has had any material effect on the Company's business over the last two years. The Company's substantial foreign operations expose it to risk of exchange rate fluctuations. Financial position and results of operations of the Company's international subsidiaries generally are measured using local currencies as the functional currency. Assets and liabilities of these operations are translated at the exchange rates in effect at each fiscal year end. The translation adjustments related to assets and liabilities that arise from the use of differing exchange rates from period to period are included in accumulated other comprehensive loss in shareholders' equity. Income statement accounts are translated at the average rates of exchange prevailing during the year. A business unit of Koffolk and all of Planalquimica operate primarily in U.S. dollars. The U.S. dollar is designated as the functional currency for these businesses and translation gains and losses are included in determining net income or loss. Foreign currency transaction gains and losses primarily arise from short-term intercompany balances. Net foreign currency transaction and translation (gains) losses were ($116), $789 and $3,385 for fiscal 2004, 2003 and 2002, respectively, and were included in other expense, net in the consolidated statements of operations. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK In the normal course of operations, the Company is exposed to market risks arising from adverse changes in interest rates, foreign currency exchange rates, inflation and commodity prices. As a result, future earnings, cash flows and fair values of assets and liabilities are subject to uncertainty. The Company uses, from time to time, foreign currency forward contracts as a means of hedging exposure to foreign currency risks. The Company also utilizes, on a limited basis, certain commodity derivatives, primarily on copper used in its 53 manufacturing processes, to hedge the cost of its anticipated purchase requirements. The Company does not utilize derivative instruments for trading purposes. The Company does not hedge its exposure to market risks in a manner that completely eliminates the effects of changing market conditions on earnings, cash flows and fair values. The Company monitors the financial stability and credit standing of its major counterparties. INTEREST RATE RISK The Company uses sensitivity analysis to assess the market risk of its debt-related financial instruments and derivatives. Market risk is defined for these purposes as the potential change in the fair value resulting from an adverse movement in interest rates. The Company's debt portfolio is comprised of fixed rate and variable rate debt of approximately $170.2 million as of September 30, 2004. Approximately 10% of the debt is variable and would be interest rate sensitive. For further details, see Note 9, to the Consolidated Financial Statements of the Company appearing elsewhere herein. For the purposes of the sensitivity analysis, an immediate 10% change in interest rates would not have a material impact on the Company's cash flows and earnings over a one year period. As of June 30, 2004, the fair value of the Company's senior secured and subordinated notes are estimated based on quoted market rates at $158 million and the related carrying amount is $153 million. FOREIGN CURRENCY EXCHANGE RATE RISK A significant portion of the financial results of the Company is derived from activities conducted outside the U.S. and denominated in currencies other than the U.S. dollar. Because the financial results of the Company are reported in U.S. dollars, they are affected by changes in the value of the various foreign currencies in relation to the U.S. dollar. Exchange rate risks are reduced, however, by the diversity of the Company's foreign operations and the fact that international activities are not concentrated in any single non-U.S. currency. Short-term exposures to changing foreign currency exchange rates are primarily due to operating cash flows denominated in foreign currencies. From time to time, the Company may cover known and anticipated operating exposures by using purchased foreign currency exchange option and forward contracts. The primary currencies for which the Company has foreign currency exchange rate exposure are the Euro, the Brazilian Real, and Japanese yen. The Company uses sensitivity analysis to assess the market risk associated with its foreign currency transactions. Market risk is defined for these purposes as the potential change in fair value resulting from an adverse movement in foreign currency exchange rates. The fair value associated with the foreign currency contracts has been estimated by valuing the net position of the contracts using the applicable spot rates and forward rates as of the reporting date. Based on the limited amount of foreign currency contracts at September 30, 2004, the Company does not believe that an instantaneous 10% adverse movement in foreign currency rates from their levels at September 30, 2004, with all other variables held constant, would have a material effect on the Company's results of operations, financial position or cash flows. COMMODITY PRICE RISK The Company purchases certain raw materials, such as copper, under short-term supply contracts. The purchase prices thereunder are generally determined based on prevailing market conditions. The Company uses commodity derivative instruments to modify some of the commodity price risks. Assuming a 10% change in the underlying commodity price, the potential change in the fair value of commodity derivative contracts held at September 30, 2004 would not be material when compared to the Company's operating results and financial position. The foregoing market risk discussion and the estimated amounts presented are Forward-Looking Statements that assume certain market conditions. Actual results in the future may differ materially from these projected results due to developments in relevant financial markets and commodity markets. The methods used above to assess risk should not be considered projections of expected future events or results. 54 BUSINESS OVERVIEW We are a leading diversified global manufacturer and marketer of a broad range of animal health and nutrition products, specifically medicated feed additives (MFAs) and nutritional feed additives (NFAs), which we sell throughout the world predominantly to the poultry, swine and cattle markets. MFAs are used preventively and therapeutically in animal feed to produce healthy livestock. We believe we are the third largest manufacturer and marketer of MFAs in the world, and we believe that certain of our MFA products have leading positions in the marketplace. We are also a specialty chemicals manufacturer and marketer, serving primarily the United States pressure-treated wood and chemical industries. We have several proprietary products, and many of our products provide critical performance attributes to our customers' products, while representing a relatively small percentage of total end-product cost. We operate in over 16 countries around the world and sell our animal health and nutrition products and specialty chemicals products into over 40 countries. Approximately 76% of our fiscal 2004 net sales were from our Animal Health and Nutrition business, and approximately 24% of our fiscal 2004 net sales were from our Specialty Chemicals business. Our Animal Health and Nutrition segment manufactures and markets more than 500 formulations and concentrations of medicated and nutritional feed additives, including antibiotics, antibacterials, anticoccidials, anthelmintics, trace minerals, vitamins, vitamin premixes and other animal health and nutrition products, to the livestock and pet food industries. Our MFA products are internationally recognized for quality and efficacy in the prevention and treatment of diseases in livestock, such as coccidiosis in poultry, dysentery in swine and acidosis in cattle. We market our Animal Health and Nutrition products under approximately 450 governmental product registrations, approving our MFA products with respect to animal drug safety and effectiveness. Our Specialty Chemicals business manufactures and markets a number of specialty chemicals for use in the pressure-treated wood, chemical catalyst, semiconductor, automotive, aerospace and agricultural industries. We anticipate that our proprietary manufacturing process to produce a copper-based solution for one of the leading new products for manufacturing pressure-treated wood will represent our largest growth opportunity in our Specialty Chemicals business. Over 39% of our fiscal 2004 net sales in our Specialty Chemicals business was derived from copper-based compounds, solutions or mixes. We have in recent years focused our business on animal health and nutrition products. As a result of the rapid decline of the printed circuit board industry in the United States, we have substantially exited that business, including our etchant recycling operations, and re-directed our productive capacity in niche markets. We have also sold other non-strategic businesses, such as our Agtrol copper fungicide business and our subsidiaries, Mineral Resource Technologies, Inc. ("MRT") and The Prince Manufacturing Company ("PMC"). In addition, we closed our operations in Odda, Norway ("Odda") and Bordeaux, France ("La Cornubia"). In August 2003, the Company completed the sale of MRT for net proceeds after transaction costs of approximately $13.8 million. MRT managed and sold coal combustion by-products, including fly ash. Effective December 26, 2003, the Company completed the divestiture of substantially all of the business and assets of PMC to a company formed by Palladium Equity Partners II, LP and certain of its affiliates (the "Palladium Investors"), and the related reduction of the Company's preferred stock held by the Palladium Investors. PMC manufactured and marketed various mineral oxides, including iron compounds and manganese compounds (see Note 4 to Consolidated Financial Statements) (the "Prince Transactions"). Unless otherwise indicated, the information in this prospectus does not include PMC. On June 30, 2004, one of the Company's French subsidiaries, La Cornubia SA, filed for bankruptcy under the insolvency laws of France. The Company believes that as a result of the bankruptcy filing by La Cornubia, it is possible that LC Holding S.A. ("LC Holding"), La Cornubia's parent, a holding company with no assets except for its investment in La Cornubia, may also file for bankruptcy in France. 55 On December 16, 2004, the Company entered into an agreement to sell the Belgium Plant to Glaxosmithkline Biologicals S.A. ("GSK") and to transfer to GSK a majority of the employees of PAH Belgium. GSK was a previous owner of the Rixensart plant, and sold it to Pfizer SA in 1995, which sold it to PAH Belgium in 2000. Such sale, when completed, would include the following elements: (i) the transfer of substantially all of the land and buildings and certain equipment of PAH Belgium at the Belgium Plant, as well as the industrial activities and intellectual property relating to certain solvent technology of Phibro Belgium, for a purchase price of EUR 6.2 million, payable at closing; (ii) the transfer to GSK of a majority of the employees of PAH Belgium and the corresponding responsibility for statutory severance obligations; (iii) GSK agreeing to be responsible for costs of cleaning-up, by demolition or otherwise, certain buildings not to be used by it, but for PAH Belgium to reimburse GSK up to a maximum of EUR 0.7 million for such clean-up costs; (iv) in recognition of the benefits to us from the proposed transaction, PAH Belgium agreeing to pay to GSK EUR 1.5 million within six months from the closing date, EUR 1.5 million within eighteen months from the closing date, EUR 1.5 million within thirty months from the closing date, and EUR 0.5 million within forty-two months from the closing date; (v) PAH Belgium retaining certain excess land (valued at approximately EUR 0.4 million) and being able to sell such land for its own account; (vi) PAH Belgium being responsible for certain plant closure costs and legally required severance indemnities in connection with workforce reductions, estimated in total to be EUR 7.7 million of which an amount estimated to be approximately EUR 4.1 million would be payable at or around the closing and an aggregate amount so estimated to be approximately EUR 3.6 million would be payable over periods up to thirteen years; and (vii) PAH Belgium retaining certain equipment at the Belgium Plant, and being able to sell such equipment for the account of PAH Belgium or transfer such equipment, together with other assets and rights related to the production of virginiamycin, to our subsidiary in Brazil that owns the facility in Guarulhos or in connection with alternative production arrangements. The foregoing transactions and agreements are subject to a closing that is expected to occur no earlier than July 1, 2005 nor later than June 30, 2006. On December 21, 2004, we completed a private placement of $22.491 million of additional old units to refinance borrowings under our domestic senior credit facility incurred to fund alternative virginiamycin production arrangements and the increase of virginiamycin inventory pending supply under such alternative production arrangements. BUSINESS STRENGTHS Top Three MFA Provider in the World. We believe we are the world's third largest manufacturer and marketer of medicated feed additives in the poultry and swine markets. We manufacture and market over 200 MFA formulations and concentrations. We believe our MFAs rank first in sales in Brazil, and third in the United States. Our Animal Health and Nutrition business serves our customers in over 40 countries from 21 facilities. Many of our MFA products have been marketed for over 20 years. Significant Barriers to Entry. Medicated feed additives cannot be manufactured or marketed without governmental product registrations that are specific to each country -- the Food and Drug Administration ("FDA") for example, in the United States, Health Canada in Canada, and EFSA/EMEA authorities in Europe. Before a product registration is granted, the applicant must show the regulatory authority that the product and its proposed use are both effective and safe for the specified species and application. Obtaining an MFA product registration is comparable in cost and difficulty with obtaining approval for drugs used to treat humans. In addition to approval of formulation and labeling, regulatory authorities typically require approval and periodic inspection of the manufacturing facilities. Because of the costs and difficulties associated with obtaining MFA product registrations, there have been few new medicated feed additives developed and marketed over the last decade. The only two new MFA compounds approved for use in the last 10 years were semduramicin, one of our products, and ractopamine. Because of the inherent difficulties and high costs of obtaining major product registrations and their absolute necessity to operate in this business, our existing broad portfolio of product registrations provides us strength in the marketplace. Strong Brand Name Recognition of Our Medicated Feed Additives. We enjoy strong brand name recognition with our medicated feed additives for the prevention and control of diseases in poultry, swine and cattle. In particular, virginiamycin, an antibiotic marketed under the Stafac(R), Eskalin(R) and V-Max(R) brand 56 names, is a popular and efficacious choice of medicated feed additive in the poultry, swine and cattle industry. Semduramicin, sold under the brand name Aviax(R), and salinomycin, sold under the brand name Coxistac(R), are also leading poultry anticoccidials. In fiscal 2004, branded MFAs accounted for approximately 50% of our total Animal Health and Nutrition sales. Established Global Network and Customer Base. From our 23 facilities in 16 countries, we manufacture and market our products, which are sold through multiple distribution channels to over 2,800 customers in a wide variety of end use markets. We sell our products through an established global sales, marketing and distribution network to customers in over 40 countries. In fiscal 2004, no single customer accounted for more than 5% of total revenues and our top 10 customers accounted for less than 22% of total revenues. Extensive Technical Support for Customers. We employ over 60 chemists, technicians, PhDs and veterinarians (DVMs) at our various facilities involved in providing technical services to customers. Our technical service group and sales personnel are able to work directly with commercial feed manufacturers and integrated poultry, swine and cattle producers to promote animal health. We are able to offer our customers products targeted to local markets, allowing us to serve those local markets more effectively. Our MFA field personnel are skilled in the area of product differentiation and have extensive applications knowledge so as to be able to work closely with customers in determining optimum benefits from usage of our products. As agricultural food production will continue to intensify and will adopt evolving technologies, our MFA personnel are constantly working with customers to better understand their needs in order to best utilize the products existing within our MFA portfolio. This commercial knowledge also plays a pivotal role within the R&D function to ensure that research results are applicable to customer needs and concerns. Manufacturing Expertise. Our manufacturing expertise and know-how in antibiotic manufacturing process and organic synthesis has given us unique positions in the marketplace. We believe that we are the only manufacturer of virginiamycin and semduramicin in the world. Our blending, compounding and formulation expertise is recognized by our customers in the animal health and nutrition market. In addition, in our Specialty Chemicals business, based on our more than 50 years of expertise in the metal chemical area, we have become a leading supplier of the new copper-containing compound to the pressure-treated wood industry. We also believe we hold leading positions in agricultural and other industrial applications for copper-containing compounds. Proven Management Team. We have assembled a strong and experienced management team at both the corporate and operating levels. Our top operating managers have an average of over 30 years of experience in the animal health and nutrition and specialty chemicals industries. With our expanded management team, we have added significant operational and international experience to our businesses. Our founding family owns 100% of our common stock. BUSINESS STRATEGY Expand Applications for Animal Health and Nutrition Product Offerings to Our Primary Markets. We seek to increase our product lines through expanding the scope of our animal health and nutrition product registrations, through both extending the use claims and formulations and the geographic areas of such registrations. We are actively working with the FDA and other regulators to obtain additional registrations and cross-clearances so that our MFA products can continue to be used in situations where another MFA is also in use. In the United States, we obtained from the FDA a zero-day withdrawal registration for the use of our oxytetracycline product in cattle and recently obtained a cross clearance for Mecadox(R) and Terramycin(R) in swine. We have obtained approval for Aviax(R) in the EU, and are pursuing a modification of our Aviax(R) registration in the United States allowing for site change of the active ingredient. We believe that our receipt of FDA approval of Aviax(R), together with our EU approval of Aviax(R) and our other registration efforts, has the potential to increase our sales over the next two to three years. By leveraging our global reach and our position as the only leading animal health company dedicated to MFAs and NFAs, we are natural partners for small players in the industry, who approach us to help them license or distribute new products they have developed, because we do not compete with their other products. 57 Expand Our Customer Base. We intend to expand and strengthen our customer base by (i) focusing on relationships with key accounts, (ii) continuing to incentive our sales force to concentrate on fast-growing, high-margin areas within existing product groups, and (iii) incent growth opportunities for our existing products in new markets. As certain of our MFA products are used in rotation by our customers, we seek to supply all or substantially all of the various MFA products which our customers may want to use. Our MFA business has historically been strongest in the poultry market, and we are seeking to develop it further in the swine and cattle markets. We expect to continue to enhance our sales force in the swine market, and believe that there are further growth opportunities from doing so. In addition, we believe the under-penetrated Chinese and Latin American markets offer growth opportunities. In China, we are seeking to partner with local distributors, to leverage our existing local sales force. OUR ANIMAL HEALTH AND NUTRITION BUSINESS -- MEDICATED FEED ADDITIVES We manufacture and market a broad range of medicated feed additive products to the global livestock industry, either directly to large integrated producers or through a network of independent distributors. Feed additives provide both therapeutic benefits and increased conversion efficiency -- key drivers of profitability for livestock producers. Our MFA products can be grouped into five principal categories: antibiotics, antibacterials, anticoccidials, anthelmintics and other medicated feed additives. In fiscal 2004, antibiotics and antibacterials generated sales for us of approximately $79 million, anticoccidials generated sales for us of approximately $44 million, and anthelmintics and other medicated feed additives generated sales for us of approximately $9 million. Our core MFA products are listed in the table below:
BRAND ACTIVE/ANTIGEN MARKET ENTRY COMMENT ----- -------------- ------------ ------- Terramycin(R)/Neo- oxytetracycline, 1951 Antibiotic with multiple applications Terramycin(R)/Neo- neomycin/OTC for a wide number of species TM(R) CLTC(R) chlortetracycline 1954 Antibiotic with multiple applications for a wide number of species Nicarb(R) nicarbazin 1955 Anticoccidial for poultry Amprol(R) amprolium 1960 Anticoccidial for poultry and cattle Bloatguard(R) poloxalene 1966 Anti-bloat treatment for cattle Banminth(R) pyrantel tartrate 1969 Anthelmintic for livestock Mecadox(R) carbadox 1971 Antibacterial used in swine feeds to control salmonellosis and dysentery Stafac(R)/Eskalin(R)/V- virginiamycin 1972 Antibiotic used to prevent and control Max(R) diseases in poultry, swine and cattle Coxistac(R)/Posistac(R) salinomycin 1979 Anticoccidial for poultry; disease preventative in swine Rumatel(R) morantel tartrate 1981 Anthelmintic for livestock Cerditac(R)/Cerdimix(R) oxibendazole 1982 Anthelmintic for livestock Aviax(R) semduramicin 1995 Anticoccidial for poultry
ANTIBIOTICS Antibiotics are natural products produced by fermentation and are used to treat or to prevent diseases, thereby promoting more efficient growth. Several factors contribute to limit the efficiency, the weight gain and feed conversions of livestock production, including poor nutrition, environmental and management problems, heat stress and subclinical disease. 58 Virginiamycin. Virginiamycin is an antibiotic marketed under our brand names Stafac(R) for treating swine, cattle, broilers and turkeys, Eskalin(R) for dairy cows and V-Max(R) for feed lot cattle. We formulate virginiamycin to improve health in poultry, swine and cattle and prevent necrotic enteritis in poultry, dysentery in swine and liver abscesses in cattle. The product is sold to large poultry and swine producers and feed companies in North America, Latin America and Asia. First discovered in Belgium in 1954, virginiamycin is an antibiotic produced from the streptomyces virginiae fungus. Virginiamycin has been successful due to a number of strong product features. For example, no withdrawal period is required since it is virtually unabsorbed from the digestive tract. It is excreted in very low concentrations and rapidly degraded. It alleviates some of the production limiting effects of certain diseases of livestock and poultry. To date, no generic competition has been introduced due to our proprietary virginiamycin manufacturing technology. Terramycin and Neo-Terramycin. Terramycin(R) and Neo-Terramycin(R), which are derived from the active ingredient oxytetracycline, are effective against a range of diseases including: - fowl cholera in chickens, - airsacculitis in turkeys, - pneumonia and enteritis in swine, and - pneumonia, enteritis and liver abscesses in cattle. We sell Terramycin(R) and Neo-Terramycin(R) feed additive products in various concentrations. Terramycin(R) is approved for use for poultry, swine, cattle and sheep. Neo-Terramycin(R) combines the active ingredients oxytetracycline and neomycin to prevent and treat a wide range of diseases caused by Gram-positive and Gram-negative organisms, including bacterial enteritis in chickens and turkeys, baby pig diarrhea in swine and calf diarrhea. These terramycin products are sold mostly in the United States to livestock producers, feed companies and distributors. Limited quantities are sold in selected countries in Latin America and Asia. ANTIBACTERIALS Antibacterials are produced through chemistry and are used to treat and prevent diseases. Carbadox. We market carbadox under the brand name Mecadox(R). Carbadox is an antibacterial compound recommended for use in swine feeds to promote and to control swine salmonellosis and swine dysentery. In swine production, the primary objective of producers is the rapid and efficient development of swine at minimal cost. Since 1970, Mecadox(R) has been a leader in reducing livestock production costs through meaningful performance enhancement. Mecadox(R) is a leading product for starter/grower swine in the United States. In addition to its antimicrobial properties, it also improves nitrogen retention and increases the efficiency of amino acid metabolism, two critical factors in the development of young swine. Mecadox(R) is chemically unrelated to any other antibacterial that is used in animals or humans. Mecadox(R) is sold primarily in North America to feed companies and large integrated swine producers. ANTICOCCIDIALS Anticoccidials are produced through fermentation and chemistry, and are primarily used to prevent and control the disease coccidiosis in poultry and in cattle. Coccidiosis is a disease of the digestive tract that is of great concern to animal producers. Caused by the protozoan parasite Eimeria spp., coccidiosis is one of the most destructive diseases facing the world's poultry producers. Common effects of this disease (such as weight loss, wet droppings, poor feed utilization and higher mortality rates) rapidly affect an entire flock of poultry, resulting in annual losses of hundreds of millions of dollars for the poultry industry. Modern, large scale poultry production is based on intensive animal management practices. This type of animal production requires routine preventive medications in order to prevent health problems. Coccidiosis is one of the critical disease challenges which poultry producers face globally. We sell our anticoccidials globally, 59 primarily to integrated poultry producers and feed companies in North America, the Middle East, Latin America and Asia, and to international animal health companies. Nicarbazin and Amprolium. We produce nicarbazin and amprolium for distribution to the world-wide poultry industry through major multinational life science and veterinary companies. Nicarbazin is a broad-spectrum anticoccidial which works by interfering with mitochondrial metabolism. It is classified as an oxidative phosphorylation uncoupler and is used for coccidiosis prevention in broiler chickens. We believe that we are the largest volume world-wide producer of amprolium, and the largest volume world-wide producer of nicarbazin. We are also the sole Latin American producer of nicarbazin. Nicarbazin and amprolium, along with salinomycin and semduramicin, are among the most effective medications for the prevention of coccidiosis in chickens when used in rotation with other anticoccidials. In the United States, we market nicarbazin under the trademark Nicarb(R). Other Anticoccidials. From a class of compounds known as ionophores, we developed Aviax(R) and Coxistac(R) to combat coccidiosis. These two products have demonstrated increased feed efficiency and the ability to suppress coccidial lesions, with minimal side-effects. Through a third product, Posistac(R), we have extended the application of the active ingredient in Coxistac(R) to swine. Aviax(R) contains the ionophore semduramicin which provides protection for poultry against all major coccidial parasites. The product can be incorporated into virtually any type of feed, and provided to broilers of any production stage. We have received regulatory approval to sell Aviax(R) in the EU and have applied in the United States for the sale of Aviax(R) in mycelial dosage form. This dosage form is significantly more cost-effective and may improve profitability. Coxistac(R) contains the ionophore salinomycin. The product acts early in the coccidial life cycle by killing sporozoites, trophozoites and early developing schizonts before poultry can be severely damaged. Coxistac(R) has proven to be effective and safe with minimal resistance development evident in commercial studies. The recommended dosage provides a high level of protection against coccidiosis even through temporary periods of low feed intake caused by disease or adverse climatic conditions. No withdrawal period is required for poultry before slaughter. Coxistac(R) is a leading anticoccidial in Asia, Latin America, the Middle East and Canada. Posistac(R) contains salinomycin which acts as a productivity enhancer for grower/finisher swine. The compound increases the utilization and digestion of feed ingredients by mature swine thereby allowing swine to reach market weight earlier and at less cost than swine fed conventional feed additives. Posistac(R) can be used up to the slaughter phase without the need for withdrawal. ANTHELMINTICS Anthelmintics protect against internal parasites. Our anthelmintic products are marketed under the Rumatel(R) and Banminth(R) brand names. Rumatel(R). Rumatel(R) is a potent broad-spectrum anthelmintic that effectively eliminates the major internal nematode parasites in cattle. Unlike other single-dose dewormers, Rumatel(R) may be administered to lactating dairy cattle with no milk withdrawal. Dairy cattle may be treated with Rumatel(R) at any time during their production cycle, whether dry, pregnant or lactating. Banminth(R). Banminth(R) is an anthelmintic compound, a member of the class of synthetic compounds called tetra-hydropyrimidines. Banminth(R) has a mode of action that works effectively in protecting swine against the two major internal parasites, large roundworms (Ascaris suum) and nodular worms (Oesophagostomum spp.). Banminth(R) kills adult parasites and prevents roundworm larval migration, preventing damage to the liver and lungs of swine. When used continuously in feeds, Banminth(R) prevents re-infection of swine raised on dirt. 60 OTHER MEDICATED FEED ADDITIVES Our other medicated feed additives include a range of products sold under the Bloat Guard(R) brand name. Bloat Guard(R) controls legume or wheat pasture bloat in cattle. The products control bloat for at least 12 hours after a single dose with no adverse effect on reproduction, rumen function or milk production. We manufacture bulk active ingredients for our MFA products primarily in four modern facilities located in: - Guarulhos, Brazil (salinomycin and semduramicin), - Rixensart, Belgium (virginiamycin and semduramicin), which facility is to be sold (see "Prospectus Summary -- The Company -- Recent Developments -- Sale of Belgium Plant"), - Ramat Hovav, Israel (nicarbazin and amprolium), and - Braganca Paulista, Brazil (nicarbazin). Active ingredients are further processed in our facilities and in contract premix facilities located in each major region of the world. We have established sales and technical offices for our MFA products in 14 countries including: the United States, Canada, Mexico, Venezuela, Brazil, Argentina, Costa Rica, Australia, China, Thailand, Malaysia, South Africa, Belgium and Israel. The business is not dependent on any one customer. The use of MFAs is controlled by regulatory authorities that are specific to each country (e.g., the Food and Drug Administration ("FDA") in the United States, Health Canada in Canada, EFSA/EMEA authorities in Europe, etc.), responsible for the safety and wholesomeness of the human food supply, including feed additives for animals from which human foods are derived. Each product is registered separately in each country where it is sold. The appropriate registration files pertaining to such regulations and approvals are continuously monitored, maintained and updated by us. In certain countries where we are working with a third party distributor, local regulatory requirements may require registration in the name of such distributor. ANIMAL HEALTH AND NUTRITION -- NUTRITIONAL FEED ADDITIVES We manufacture and market trace minerals, trace mineral premixes, vitamins and other nutritional ingredients to the livestock feed and pet food industries, predominantly in the United States and Israel. These products generally fortify, enhance or make more nutritious or palatable the livestock feeds and pet foods with which they are mixed. The majority of the other ingredients that we sell are nutrients that are used as supplements for animal feed. We serve customers in major feed segments, including swine, dairy, poultry and beef. We customize trace mineral premixes at our blending facilities in Marion, Iowa, Bremen, Indiana and Petach Tikva, Israel, and market a diverse line of other trace minerals and macro-minerals. Our major customers for these products are medium-to-large feed companies, co-ops, blenders, integrated poultry operations and pet food companies. We sell other ingredients, such as buffers, yeast, palatants, vitamin K and amino acids, including lysine, tryptophan and threonine. We also market copper sulfate as an animal feed supplement. OUR SPECIALTY CHEMICALS BUSINESS We manufacture and market a number of specialty chemicals for use in the wood treatment, chemical catalyst, semiconductor, automotive, aerospace and agricultural industries. Our manufacturing customers incorporate our specialty chemicals products into their finished products in various industrial markets. We seek to take advantage of opportunistic niche markets where we believe that our expertise and capabilities can be leveraged. COPPER WOOD TREATMENT PRODUCTS For many years, we were a major supplier of an important ingredient (copper oxide) used in the manufacture of CCA (chromated-copper-arsenic) wood treating solutions for the pressure-treated wood 61 industry. Pursuant to a United States Environmental Protection Agency ("EPA") ruling, since December 31, 2003, all pressure-treated wood for the residential and recreational markets can no longer be treated using the standard chromated-copper-arsenic (CCA) solution. A leading replacement solution for CCA pressure-treated wood is a copper carbonate compound. We currently estimate that the total potential size of this copper solution to the pressure-treated wood market is approximately $120 million annually. We have already signed a multi-year, take-or-pay contract with a major chemicals supplier to the pressure-treated wood industry to provide it with this new product, which we estimate will increase our sales by approximately $30 million over the life of the contract, based on existing forecasts. A patent with respect to the manufacturing process of our solution, and the claims in our patent application was granted and issued on November 11, 2003. We believe that our manufacturing process allows us to operate in this market with a lower cost of capital and higher factory through-put than our competition. To take advantage of this potential new market, we have constructed and are operating commercial production facilities in Sumter, South Carolina and in Joliet, Illinois. In addition, we have filed a provisional patent for a new, large molecule pressure-treated wood copper compound product. We believe that this new product may be the next generation in copper-based wood treatment products, with the potential to substantially increase the duration of protection for treated wood. OTHER COPPER PRODUCTS We manufacture on a contract basis copper compounds for use primarily in agricultural fungicides from our Sumter, South Carolina facility. This contract was part of the sale by us of our Agtrol business to Nufarm, Inc. in the fourth quarter of fiscal 2001. Utilizing our over fifty-year history in producing copper chemicals, we supply various metal-based chemicals to the catalyst and electronics industries. We also manufacture copper compounds for a broad variety of industrial customers. OTHER SPECIALTY CHEMICALS PRODUCTS We market and distribute fine and specialty chemicals to manufacturers of health and personal care products and chemical coating products to customers in the automotive, metal finishing and chemical intermediate markets. Among our products for such applications are sodium fluoride and stannous fluoride, DL Panthenol and selenium disulfide. Sodium fluoride is the active anti-cavity ingredient in fluoride toothpaste, powders and mouthwashes. Selenium disulfide is used as a dandricide in shampoo and hair care preparations. SALES, MARKETING AND DISTRIBUTION We have approximately 2,800 customers. Sales to our top ten customers represented approximately 22% of our fiscal 2004 net sales and no single customer represented more than 5% of our fiscal 2004 net sales. Our world-wide sales and marketing network consists of approximately 118 employees, 5 independent agents and 125 distributors who specialize in particular markets. Our products are often critical to the performance of our customers' products, while representing a relatively small percentage of the total end-product cost. We believe the three key factors to marketing our products successfully are high quality products, a highly trained and technical sales force, and customer service. Most of our plants have chemists and technicians on staff involved in product development, quality assurance, quality control and also providing technical services to customers. Technical assurance is an important aspect of our overall sales effort. We field Animal Health and Nutrition technical service people throughout the world, with capabilities to interface with all key customers on a marketing, sales training and technical (product) basis, and who work directly with commercial feed manufacturers and integrated poultry, swine and cattle producers to promote animal health. Our MFA and NFA field personnel are skilled in the area of product differentiation and have extensive application knowledge so as to work closely with customers in determining optimum benefits from product usage. As agricultural food production will continue to intensify 62 and will adopt evolving technologies, our MFA and NFA personnel are constantly working with customers to better understand their needs in order to best utilize the products existing within our portfolio. This commercial knowledge also plays a pivotal role within the research and development function to ensure that research results are applicable to customer needs and concerns. PRODUCT REGISTRATIONS, PATENTS AND TRADEMARKS We own certain product registrations, patents, tradenames and trademarks, and use know-how, trade secrets, formulae and manufacturing techniques which assist in maintaining the competitive positions of certain of our products. Product registrations are required to manufacture and sell medicated feed additives. Formulae and know-how are of particular importance in the manufacture of a number of the products sold in our specialty chemicals business. We believe that no single patent or trademark is of material importance to our business and, accordingly, that the expiration or termination thereof would not materially affect our business. See "Government Regulation." PROPERTIES In December 2004, we relocated our principal executive offices and sales offices to 34,000 square feet of leased space in Ridgefield Park, New Jersey. We operate company-owned manufacturing facilities and utilize third party toll manufacturers. The chart below sets forth the locations and sizes of the principal manufacturing and other facilities operated by us and uses of such facilities, all of which are owned, except as noted.
APPROXIMATE LOCATION SQUARE FOOTAGE USES - -------- -------------- ---- ANIMAL HEALTH AND NUTRITION Bangkok, Thailand(a).................. 500 Sales Braganca Paulista, Brazil............. 35,000 Sales, Manufacturing and Administrative Bremen, Indiana....................... 50,000 Sales, Premixing and Warehouse Buenos Aires, Argentina(a)............ 900 Sales and Administrative San Jose, Costa Rica.................. 800 Sales and Administrative Guarulhos, Brazil(b).................. 1,234,000 Sales, Premixing, Manufacturing and Administrative Hong Kong, China(a)................... 750 Sales and Administrative Kuala Lumpur, Malaysia(a)............. 7,300 Sales, Premixing and Warehouse Ladora, Iowa.......................... 9,500 Warehouse Lee's Summit, Missouri(a)............. 1,500 Sales Marion, Iowa.......................... 32,500 Premixing and Warehouse Petach Tikva, Israel.................. 60,000 Sales, Premixing, Warehouse and Administrative Pretoria, South Africa(a)............. 3,200 Sales and Administrative Quincy, Illinois(c)................... 50,000 Sales, Warehouse, Research and Administrative Rixensart, Belgium(d)................. 865,000 Sales, Manufacturing, Research and Administrative Ramat Hovav, Israel................... 140,000 Manufacturing and Research Regina, Canada(a)..................... 1,000 Sales and Administrative Queretaro, Mexico(a).................. 3,500 Sales and Administrative Sydney, Australia(a).................. 3,500 Sales and Administrative Valencia, Venezuela(a)................ 1,100 Sales and Administrative SPECIALTY CHEMICALS Garland, Texas........................ 20,000 Manufacturing Joliet, Illinois...................... 34,500 Manufacturing Reading, United Kingdom(a)............ 3,100 Sales and Administrative Santa Fe Springs, California(e)....... 90,000 Manufacturing Stradishall, United Kingdom........... 20,000 Sales, Manufacturing and Administrative Sumter, South Carolina................ 123,000 Manufacturing and Research
63 - --------------- (a) This facility is leased. Our leases expire through 2027. For information concerning our rental obligations, see Note 15 to our Consolidated Financial Statements included herein. (b) Our Guarulhos, Brazil plant utilizes fermentation processes to produce the active ingredients semduramicin-mycelial and salinomycin. The plant also produces Aviax(R), Terramycin(R), Stafac(R) and Coxistac(R) Granular formulations. The plant is cGMP compliant and is FDA approved. (c) Comprises three facilities, including a warehouse, laboratory and office. (d) Our Rixensart, Belgium plant utilizes fermentation processes to produce the active ingredients semduramicin-crystalline and virginiamycin. The plant also produces Stafac(R) formulations and is responsible for all of our fermentation development activities. The plant has been approved by the FDA and is cGMP compliant. We have entered into an agreement to sell the Rixensart facility (see "Prospectus Summary -- The Company -- Recent Developments -- Sale of Belgium Plant"). (e) We lease the land under this facility from a partnership owned by Jack Bendheim, Marvin Sussman and James Herlands. See "Certain Relationships and Related Party Transactions." Our subsidiary, CP Chemicals, Inc., leases portions of a previously owned inactive, former manufacturing facility in Sewaren, New Jersey, and another of our subsidiaries owns inactive, former manufacturing facilities in Powder Springs, Georgia, Union, Illinois, Union City, California and Wilmington, Illinois. We believe that our existing and planned facilities are and will be adequate for the conduct of our business as currently conducted and as currently contemplated to be conducted. We and our subsidiaries are subject to extensive regulation by numerous governmental authorities, including the FDA and corresponding state and foreign agencies, and to various domestic and foreign safety standards. Our manufacturing facilities in Ramat Hovav, Israel, Rixensart, Belgium (to be sold; see "Prospectus Summary -- The Company -- Recent Developments -- Sale of Belgium Plant"), and Guarulhos, Brazil manufacture products that conform to the FDA's cGMP regulations. Three domestic facilities involved with recycling have final RCRA Part B hazardous waste storage and treatment permits. Our regulatory compliance programs include plans to achieve compliance with international quality standards known as ISO 9000 standards, which became mandatory in Europe in 1999 and environmental standards known as ISO 14000. The FDA is in the process of adopting the ISO 9000 standards as regulatory standards for the United States, and it is anticipated that these standards will be phased in for U.S. manufacturers over a period of time. Our plant in Petach Tikva, Israel has achieved ISO 9000 certification. We do not believe that adoption of the ISO 9000 standards by the FDA will have a material effect on our financial condition, results of operations or cash flows. RAW MATERIALS The raw materials used in our business include certain active drug ingredients, a wide variety of chemicals, mineral ores and copper metal that are purchased from manufacturers and suppliers in the United States, Europe and Asia. In fiscal 2004, no single raw material accounted for more than 5% of our cost of goods sold. Total raw materials cost was approximately $133 million or 38% of net sales in fiscal 2004. We believe that for most of our raw materials, alternate sources of supply are available to us at competitive prices. RESEARCH AND DEVELOPMENT Research, development and technical service efforts are conducted at our various facilities. We operate research and development facilities in Rixensart, Belgium (which is to be sold; see "Prospectus Summary -- The Company -- Recent Developments -- Sale of Belgium Plant"), Sumter, South Carolina, Ramat Hovav, Israel and Stradishall, England. These facilities provide research and development services relating to fermentation development in the areas of micro-biological strain improvement as well as: process scale-up; wood treatment products; and organic chemical intermediates. Technology is an important component of our competitive position, providing us unique and low cost positions enabling us to produce high quality products. Patents protect some of our technology, but a great 64 deal of our competitive advantage revolves around know-how built up over many years of commercial operation. CUSTOMERS We do not consider our business to be dependent on a single customer or a few customers, and the loss of any of our customers would not have a material adverse effect on our results. No single customer accounted for more than 5% of our fiscal 2004 net sales. We typically do not enter into long-term contracts with our customers. COMPETITION We are engaged in highly competitive industries and, with respect to all of our major products, we face competition from a substantial number of global and regional competitors. Some of our competitors have greater financial, research and development, production and other resources than we do. Our competitive position is based principally on customer service and support, product quality, manufacturing technology, facility location and price. We have competitors in every market in which we participate. Many of our products face competition from products that may be used as an alternative or substitute. EMPLOYEES As of June 30, 2004, we had 1,051 employees worldwide. Of these, 210 employees were in management and administration, 118 were in sales and marketing, 132 were chemists, technicians or quality control personnel, and 591 were in production. Certain employees are covered by individual employment agreements. Our Israeli operations continue to operate under the terms of Israel's national collective bargaining agreement, portions of which expired in 1994. We consider our relations with both our union and non-union employees to be good. ENVIRONMENTAL MATTERS We and our subsidiaries are subject to a wide variety of complex and stringent federal, state, local and foreign environmental laws and regulations, including those governing the use, storage, handling, generation, treatment, emission, release, discharge and disposal of certain materials and wastes, the manufacture, sale and use of pesticides and the health and safety of employees. Pursuant to environmental laws, our subsidiaries are required to obtain and retain numerous governmental permits and approvals to conduct various aspects of their operations, any of which may be subject to revocation, modification or denial under certain circumstances. Under certain circumstances, we or any of our subsidiaries might be required to curtail operations until a particular problem is remedied. Known costs and expenses under environmental laws incidental to ongoing operations are generally included within operating budgets. Potential costs and expenses may also be incurred in connection with the repair or upgrade of facilities to meet existing or new requirements under environmental laws or to investigate or remediate potential or actual contamination and from time to time we establish reserves for such contemplated investigation and remediation costs. In many instances, the ultimate costs under environmental laws and the time period during which such costs are likely to be incurred are difficult to predict. Our subsidiaries have, from time to time, implemented procedures at their facilities designed to respond to obligations to comply with environmental laws. We believe that our operations are currently in material compliance with such environmental laws, although at various sites our subsidiaries are engaged in continuing investigation, remediation and/or monitoring efforts to address contamination associated with their historic operations. As many environmental laws impose a strict liability standard, however, we can provide no assurance that future environmental liability will not arise. In addition, we cannot predict the extent to which any future environmental laws may affect any market for our products or services or our costs of doing business. Alternatively, changes in environmental laws might increase the cost of our products and services by imposing additional requirements on us. States that have received authorization to administer their own hazardous waste management programs may also amend their 65 applicable statutes or regulations, and may impose requirements which are stricter than those imposed by the EPA. We can provide no assurance that such changes will not adversely affect our ability to provide products and services at competitive prices and thereby reduce the market for our products and services. The nature of our and our subsidiaries' current and former operations exposes us and our subsidiaries to the risk of claims with respect to environmental matters and we can provide no assurance that we will not incur material costs and liabilities in connection with such claims. Based upon our experience to date, we believe that the future cost of compliance with existing environmental laws, and liability for known environmental claims pursuant to such environmental laws, will not have a material adverse effect on us. Based upon information available, we estimate the cost of further investigation and remediation of identified soil and groundwater problems at operating sites, closed sites and third-party sites, (including the litigation referred to under "Legal Proceedings") to be approximately $2.9 million, which is included in current and long-term liabilities in our June 30, 2004 consolidated balance sheet. However, future events, such as new information, changes in existing environmental laws or their interpretation, and more vigorous enforcement policies of regulatory agencies, may give rise to additional expenditures or liabilities that could be material. For all purposes of the discussion under this caption, under "Legal Proceedings" and elsewhere in this prospectus, it should be noted that we take and have taken the position that neither Phibro Animal Health Corporation, nor any of our subsidiaries is liable for environmental or other claims made against one or more of our other subsidiaries or for which any of such other subsidiaries may ultimately be responsible. FEDERAL REGULATION The following summarizes the principal federal environmental laws affecting our business: Resource Conservation and Recovery Act of 1976, as amended ("RCRA"). Congress enacted RCRA to regulate, among other things, the generation, transportation, treatment, storage and disposal of solid and hazardous wastes. RCRA required the EPA to promulgate regulations governing the management of hazardous wastes, and to allow individual states to administer and enforce their own hazardous waste management programs as long as such programs were equivalent to and no less stringent than the federal program. Such facilities are also subject to closure and post-closure requirements. The EPA's regulations, and most state regulations in authorized states, establish categories of regulated entities and set standards and procedures those entities must follow in their handling of hazardous wastes. The three general categories of waste handlers governed by the regulations are hazardous waste generators, hazardous waste transporters, and owners and operators of hazardous waste treatment, storage and/or disposal facilities. Generators are required, among other things, to obtain identification numbers and to arrange for the proper treatment and/or disposal of their wastes by licensed or permitted operators and all three categories of waste handlers are required to utilize a document tracking system to maintain records of their activities. Transporters must obtain permits, transport hazardous waste only to properly permitted treatment, storage or disposal facilities, and maintain required records of their activities. Treatment, storage and disposal facilities are subject to extensive regulations concerning their location, design and construction, as well as the operating methods, techniques and practices they may use. Such facilities are also required to demonstrate their financial responsibility with respect to compliance with RCRA, including closure and post-closure requirements. The Federal Water Pollution Control Act, as amended (the "Clean Water Act"). The Clean Water Act prohibits the discharge of pollutants to the waters of the United States without governmental authorization. Like RCRA, the Clean Water Act provides that states with programs approved by the EPA may administer and enforce their own water pollution control programs. Pursuant to the mandate of the Clean Water Act, the EPA has promulgated "pre-treatment" regulations, which establish standards and limitations for the introduction of pollutants into publicly-owned treatment works. Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended ("CERCLA" or "Superfund"). Under CERCLA and similar state laws, we and our subsidiaries may have strict and, under certain circumstances, joint and several liability for the investigation and remediation of environmental pollution and natural resource damages associated with real property currently and formerly- 66 owned or operated by us or a subsidiary and at third-party sites at which our subsidiaries disposed of or treated, or arranged for the disposal of or treatment of, hazardous substances. Federal Insecticide, Fungicide and Rodenticide Act, as amended ("FIFRA"). FIFRA governs the manufacture, sale and use of pesticides, including the copper-based fungicides sold by us. FIFRA requires such products and the facilities at which they are formulated to be registered with the EPA before they may be sold. If the product in question is generic in nature (i.e., chemically identical or substantially similar to a previously registered product), the new applicant for registration is entitled to cite and rely on the test data supporting the original registrant's product in lieu of submitting data of its own. Should the generic applicant choose this citation option, it must offer monetary compensation to the original registrant and must agree to binding arbitration if the parties are unable to agree on the terms and amount of compensation. We have elected this citation option in the past and may use the citation option in the future should we conclude it is, in some instances, economically desirable to do so. While there are cost savings associated with the opportunity to avoid one's own testing and demonstration to the EPA of test data, there is, in each instance, a risk that the level of compensation ultimately required to be paid to the original registrant will be substantial. Under FIFRA, the EPA also has the right to "call in" additional data from existing registrants of a pesticide, should the EPA determine, for example, that the data already in the file need to be updated or that a specific issue or concern needs to be addressed. The existing registrants have the option of submitting data separately or by joint agreement. Alternatively, if one registrant agrees to generate and submit the data, the other(s) may meet their obligations under the statute by making a statutory offer to jointly develop or share in the costs of developing the data. In that event, the offering party must, again, agree to binding arbitration to resolve any dispute as to the terms of the data development arrangement. The Clean Air Act. The Federal Clean Air Act of 1970 ("Clean Air Act") and amendments to the Clean Air Act, and corresponding state laws regulate the emissions of materials into the air. Such laws affect the coal industry both directly and indirectly and, therefore, the operations of MRT, which was divested in August 2003. Phibro-Tech is also impacted by the Clean Air Act and has various air quality permits, including a Title V operating air permit at its Sumter, South Carolina facility. STATE AND LOCAL REGULATION In addition to those federal programs described above, a number of states and some local governments have also enacted laws and regulations similar to the federal laws described above governing hazardous waste generation, handling and disposal, emissions to the water and air and the design, operation and maintenance of recycling facilities. FOREIGN REGULATION Our foreign subsidiaries are subject to a variety of foreign environmental laws relating to pollution and protection of the environment, including the generation, handling, storage, management, transportation, treatment and disposal of solid and hazardous materials and wastes, the manufacture and processing of pesticides and animal feed additives, emissions to the air, discharges to land, surface water and subsurface water, human exposure to hazardous and toxic materials and the remediation of environmental pollution relating to their past and present properties and operations. REGULATION OF RECYCLING ACTIVITIES We have substantially reduced our recycling activities at our Joliet, Illinois; Garland, Texas; Sumter, South Carolina; and Sewaren, New Jersey sites. Our recycling activities may be broken down into the following segments for purposes of regulation under RCRA or equivalent state programs: (i) transport of wastes to our facilities; (ii) storage of wastes prior to processing; (iii) treatment and/or recycling of wastes; (iv) corrective action at our RCRA facilities; and (v) management of wastes and residues from the recycling process. Although all aspects of the treatment and recycling of waste at our recycling facilities are not currently the subject of federal RCRA regulation, our subsidiaries decided to permit our recycling facilities as RCRA regulated facilities. Final RCRA "Part B" permits to operate as hazardous waste treatment and 67 storage facilities have been issued at our facilities in Santa Fe Springs, California; Garland, Texas; Joliet, Illinois; Sumter, South Carolina; and Sewaren, New Jersey (expired August 2003, see "Particular Facilities -- Sewaren, NJ" below). Part B renewal applications have been submitted for the Santa Fe Springs, Garland and Joliet sites. The applications are being reviewed. In connection with RCRA Part B permits for the waste storage and treatment units of various facilities, our subsidiaries have been required to perform extensive site investigations at such facilities to identify possible contamination and to provide regulatory authorities with plans and schedules for remediation. Soil and groundwater contamination has been identified at several plant sites and has required and will continue to require corrective action and monitoring over future years. In order to maintain compliance with RCRA Part B permits, which are subject to suspension, revocation, modification or denial under certain circumstances, we have been, and in the future may be, required to undertake additional capital improvements or corrective action. Our subsidiaries involved in recycling activities are required by the RCRA and their Part B permits to develop and incorporate in their Part B permits estimates of the cost of closure and post-closure monitoring for their operating facilities. In general, in order to close a facility which has been the subject of a RCRA Part B permit, a RCRA Part B closure permit is required which approves the investigation, remediation and monitoring closure plan, and requires post-closure monitoring and maintenance for up to 30 years. Accordingly, we incur additional costs in connection with any such closure. These cost estimates are updated annually for inflation, developments in available technology and corrective actions already undertaken. We have, in most instances, chosen to provide the regulatory guarantees required in connection with these matters by means of our coverage under an environmental impairment liability insurance policy. We can provide no assurance that such policy will continue to be available in the future at economically acceptable rates, in which event other methods of financial assurance will be necessary. In addition to certain operating facilities, we or our subsidiaries have been and will be required to investigate and remediate certain environmental contamination at shutdown plant sites. We or our subsidiaries are also required to monitor such sites and continue to develop controls to manage these sites within the requirements of RCRA corrective action programs. WASTE BYPRODUCTS In connection with our subsidiaries' production of finished chemical products, limited quantities of waste by-products are generated. Depending on the composition of the by-product, our subsidiaries either sell it, send it to smelters for metal recovery or send it for treatment or disposal to regulated facilities. PARTICULAR FACILITIES The following is a description of certain environmental matters relating to certain facilities of certain of our subsidiaries. References to "we" or "us" throughout this section is intended to refer only to the applicable subsidiary unless the context otherwise requires. These matters should be read in conjunction with the description of Legal Proceedings below, certain of which involve such facilities, and Note 15 to our Consolidated Financial Statements. In 1984, Congress enacted certain amendments to RCRA under which facilities with RCRA permits were required to have RCRA facility assessments ("RFA") by the EPA or the authorized state agency. Following an RFA, a RCRA facility investigation, a corrective measures study, and corrective measure implementation must, if warranted, be developed and implemented. As indicated below, certain of our subsidiaries are in the process of developing or completing various actions associated with these regulatory phases at certain of their facilities. Sumter, SC. In 2003, the South Carolina Department of Health and Environmental Control ("DHEC") ordered Phibro-Tech, Inc., a subsidiary ("Phibro-Tech"), to prepare a RCRA Facility Investigation ("RFI") and to prepare and propose Corrective Action Plans. Phibro-Tech has done so, and such proposed investigatory activities and Corrective Action Plans are being reviewed by the State. Additional 68 Corrective Action is also being undertaken by Phibro-Tech pursuant to prior agreements with DHEC to remedy certain deficiencies in the plant's hazardous waste closure, storage and management system. Santa Fe Springs, CA. Phibro-Tech submitted an application for renewal of the Part B Permit for the Santa Fe Springs, California facility. Such application is presently under review by the State of California and may require certain corrective actions including, but not limited to, a pump and treat system utilizing existing water treatment facilities. Phibro-Tech has submitted a report to the State recommending that soil be remediated instead of groundwater. This recommendation is also under review by the State. Joliet, IL. Phibro-Tech has submitted an application for renewal of the Part B Permit for the Joliet, Illinois facility. In connection with this application, Phibro-Tech completed an initial investigation and determined that certain minor corrective action was required. Phase I and Phase II corrective action work has been completed. The application for renewal is presently pending and is expected to be issued in the first quarter of 2005. Garland, TX. The renewal application for the Part B Permit at the Garland, Texas facility has been granted effective September 12, 2003. As part of an earlier site investigation, certain corrective action was required including upgrading of pollution control equipment and additional site characterization. Both of these are presently underway. Powder Springs, GA. Phibro-Tech's facility in Powder Springs, Georgia has been operationally closed since 1985. Phibro-Tech retains environmental compliance responsibility for this facility and has effected a RCRA closure of the regulated portion of the facility, a surface impoundment. Post-closure monitoring and corrective action are required pursuant to a state-issued permit. As required by the permit, corrective action for groundwater has begun, and Phibro-Tech has submitted and received approval from the state for a remedial investigation plan. Sewaren, NJ. Operations at the Sewaren facility were curtailed on or about September 30, 1999. In June, 2000, CP Chemicals, Inc., a subsidiary ("CP"), transferred title to the Sewaren property to Woodbridge Township while, at the same time, entering into a 10-year lease with the Township providing for lease payments aggregating $2 million, and covering certain areas of the property, including those areas of the property relating to the existing hazardous waste storage, treatment and transfer permit, loading docks and pads, and a building, as well as access, parking, scale use and office space. The property is the subject of an Administrative Consent Order executed in March 1991 between the New Jersey Department of Environmental Protection (or "DEP") and CP. CP has ongoing obligations under that Administrative Consent Order. CP is required to complete the implementation of the Remedial Action Work Plan approved by the Department of Environmental Protection and the United States Environmental Protection Agency. Remediation of soils at the Sewaren facility is complete, with the exception of long term maintenance, and groundwater remediation is underway. Although some of the obligations of the Administrative Consent Order, specifically with respect to groundwater, have been assumed by the Township under the Lease, CP remains responsible to the Department of Environmental Protection and the United States Environmental Protection Agency. CP is currently engaged in discussions with the Department of Environmental Protection, the United States Environmental Protection Agency and the Township concerning the ongoing groundwater remediation. CP has posted financial assurance, based on the estimated costs of implementation, under the Administrative Consent Order. The property is also regulated under the Corrective Action Program administered by the United States Environmental Protection Agency pursuant to the Resource Conservation and Recovery Act. The property has been designated as a RCRA facility for which achieving the Environmental Indicators is a priority. Currently, CP is interfacing with the Department of Environmental Protection and the Environmental Protection Agency to coordinate its efforts under this program and the Administrative Consent Order discussed above. Much of the effort required by CP in this program is already being conducted as part of the requirements of the Administrative Consent Order discussed above. The hazardous waste facility permit issued to CP for this facility expired in August 2003. CP has completed the implementation of its approved closure plan and is awaiting DEP approval. Based on a formula 69 established by the Department of Environmental Protection, those closure costs were estimated at $292,823 and submitted to the Department in April 2003. CP has also advised the New Jersey Division of Law of its intent to withdraw from the licensing program governing facilities. Union City, CA. Closure of the Union City, California facility has been completed. Union, IL. The facility in Union, Illinois, has been closed since 1986. A revised remedial action plan ("RAP") has been submitted to the Illinois Environmental Protection Agency (the "IEPA"). Negotiations between the IEPA and Phibro-Tech have resulted in an agreed closure plan consistent with the proposed RAP. The agreed closure plan is expected to resolve Phibro-Tech's appeal of the IEPA's initial closure requirements. That appeal is currently pending before the Illinois Pollution Control Board but is expected to be voluntarily dismissed upon receipt of IEPA's written approval of the negotiated closure plan. Ramat Hovav, Israel. Koffolk (1949) Ltd's ("Koffolk Israel") Ramat Hovav plant produces a wide range of organic chemical intermediates for the animal health, chemical, pharmaceutical and veterinary industries. Israeli legislation enacted in 1997 amended certain environmental laws by authorizing the relevant administrative and regulatory agencies to impose certain sanctions, including issuing an order against any person that violates such environmental laws to remove the environmental hazard. In addition, this legislation imposes criminal liability on the officers and directors of a corporation that violates such environmental laws, and increases the monetary sanctions that such officers, directors and corporations may be ordered to pay as a result of such violations. The Ramat Hovav plant operates under the regulation of the Ministry of Environment of the State of Israel. The sewage system of the plant is connected to the Ramat Hovav Local Industrial Council's central installation, where Koffolk Israel's sewage is treated together with sewage of other local plants. Owners of the plants in the area, including Koffolk Israel, have been required by the Israeli Ministry of Environment to build facilities for pre-treatment of their sewage. GOVERNMENT REGULATION Most of our Animal Health and Nutrition Group products require licensing by a governmental agency before marketing. In the United States, governmental oversight of animal nutrition and health products is shared primarily by the United States Department of Agriculture ("USDA") and the Food and Drug Administration. A third agency, the Environmental Protection Agency, has jurisdiction over certain products applied topically to animals or to premises to control external parasites. The issue of the potential for increased bacterial resistance to certain antibiotics used in certain food producing animals is the subject of discussions on a worldwide basis and, in certain instances, has led to government restrictions on the use of antibiotics in these food producing animals. The sale of feed additives containing antibiotics is a material portion of our business. Should regulatory or other developments result in restrictions on the sale of such products, it could have a material adverse impact on our financial position, results of operations and cash flows. The FDA is responsible for the safety and wholesomeness of the human food supply. It regulates foods intended for human consumption and, through The Center for Veterinary Medicine, regulates the manufacture and distribution of animal drugs, including feed additives and drugs that will be given to animals from which human foods are derived, as well as feed additives and drugs for pet (or companion) animals. To protect the food and drug supply for animals, the FDA develops technical standards for animal drug safety and effectiveness and evaluates data bases necessary to support approvals of veterinary drugs. The USDA monitors the food supply for animal drug residues. FDA approval is based on satisfactory demonstration of safety and efficacy. Efficacy requirements are based on the desired label claim and encompass all species for which label indication is desired. Safety requirements include target animal safety and, in the case of food animals, drug residues and the safety of those residues must be considered. In addition to the safety and efficacy requirements for animal drugs used in food producing animals, the environmental impact must be determined. Depending on the compound, the environmental studies may be quite extensive and expensive. In many instances the regulatory hurdles for a drug which will be used in food producing animals are at least as stringent if not more so than those required 70 for a drug used in humans. For FDA approval of a new animal drug it is estimated the cost is $100 million to $150 million and time for approval could be 8 to 10 years. The Office of New Animal Drug Evaluation ("NADE") is responsible for reviewing information submitted by drug sponsors who wish to obtain approval to manufacture and sell animal drugs. A new animal drug is deemed unsafe unless there is an approved New Animal Drug Application ("NADA"). Virtually all animal drugs are "new animal drugs" within the meaning of the term in the Federal Food, Drug, and Cosmetic Act. Although the procedures for licensing products by the FDA are formalized, the acceptance standards of performance for any product are agreed upon between the manufacturer and the NADE. A NADA in animal health is analogous to a New Drug Application ("NDA") in human pharmaceuticals. Both are administered by the FDA. The drug development process for human therapeutics can be more involved than that for animal drugs. However, for food-producing animals, food safety residue levels are an issue, making the approval process longer than for animal drugs for non-food producing animals, such as pets. The FDA may deny a NADA if applicable regulatory criteria are not satisfied, require additional testing or information, or require postmarketing testing and surveillance to monitor the safety or efficacy of a product. There can be no assurances that FDA approval of any NADA will be granted on a timely basis or at all. Moreover, if regulatory approval of a product is granted, such approval may entail limitations on the indicated uses for which it may be marketed. Finally, product approvals may be withdrawn if compliance with regulatory standards is not maintained or if problems occur following initial marketing. Among the conditions for NADA approval is the requirement that the prospective manufacturer's quality control and manufacturing procedures conform to Current Good Manufacturing Practice ("cGMP"). The plant must be inspected biannually by the FDA for determination of compliance with cGMP after an initial preapproval inspection. After FDA approval, any manufacturing changes that may have an impact on the safety and/or efficacy must be approved by the FDA prior to implementation. In complying with standards set forth in these regulations, manufacturers must continue to expend time, monies and effort in the area of production and quality control to ensure compliance. For clinical investigation and marketing outside the United States, we are also subject to foreign regulatory requirements governing investigation, clinical trials and marketing approval for animal drugs. The foreign regulatory approval process includes all of the risks associated with FDA approval set forth above. Currently, in the EU, feed additives which are successfully sponsored by a manufacturer are assigned to an Annex. Initially, they are assigned to Annex II. During this period, member states may approve the feed additive for local use. After five years or earlier, the product passes to Annex I if no adverse reactions or trends develop over the probationary period. The EU is in the process of centralizing the regulatory process for animal drugs for member states. In 1997, the EU drafted new regulations requiring the re-registration of feed additives, including coccidiostats. Part of these regulations include a provision for manufacturers to submit quality data for their own formulation, in effect adopting a Product License procedure similar to that of the FDA. The provision is known as Brand Specific Approval ("BSA"), and provides manufacturers with the opportunity to register their own unique brands, instead of simply the generic compound. The BSA process is being implemented over time. The new system is more like the U.S. system, where regulatory approval is for the formulated product or "brand." A number of manufacturers, including us, have submitted dossiers in order to re-register various anticoccidials for the purpose of obtaining regulatory approval from the European Commission. As a result of its review of said dossiers, the Commission withdrew marketing authorization of a number of anticoccidials, including nicarbazin, as the Commission did not consider the submissions to be in full compliance with its new regulations. We have subsequently resubmitted our nicarbazin dossier. Feasibility and timetable for new registration will depend on the nature of demands and remarks from the Commission. Notwithstanding the Commission's actions with respect to our nicarbazin dossier, we are able to sell, and do sell, nicarbazin as an active ingredient for another MFA marketer's product which has obtained a BSA and is sold in the EU. 71 LEGAL PROCEEDINGS Reference is made to the discussion above under "Environmental Matters" for information as to various environmental investigation and remediation obligations of our subsidiaries associated principally with their recycling and production facilities and to certain legal proceedings associated with such facilities. In addition to such matters, we or certain of our subsidiaries are subject to certain litigation described below. On or about April 17, 1997, CP and we were served with a complaint filed by Chevron U.S.A. Inc. ("Chevron") in the United States District Court for the District of New Jersey, alleging that the operations of CP at its Sewaren plant affected adjoining property owned by Chevron and alleging that we, as the parent of CP, are also responsible to Chevron. In July 2002, a phased settlement agreement was reached and a Consent Order entered by the Court. That settlement is in the process of being implemented. Our portion of the settlement for past costs and expenses through the entry of the Consent Order was $495,000 and is included in selling, general and administrative expenses in the June 30, 2002 statement of operations and comprehensive income. Such amount was paid in July 2002. The Consent Order then provides for a period of due diligence investigation of the property owned by Chevron. The investigation has been conducted and the results are under review. The investigation costs are being split with one other defendant, Vulcan Materials Company. Upon completion of the review of the results of the investigation, a decision will be made whether to opt out of the settlement or proceed. If no party opts out of the settlement, Phibro Animal Health Corporation and CP will take title to the adjoining Chevron property, probably through the use of a three-member New Jersey limited liability company. In preparation to move forward, a limited liability company has been formed, with Vulcan Materials Company as the third member. We also have commenced negotiations with Chevron regarding its allocation of responsibility and associated costs under the Consent Order. While the costs cannot be estimated with any degree of certainty at this time, we believe that insurance recoveries will be available to offset some of those costs. Our Phibro-Tech subsidiary was named in 1993 as a potentially responsible party ("PRP") in connection with an action commenced under CERCLA by the EPA, involving a former third-party fertilizer manufacturing site in Jericho, South Carolina. An agreement has been reached under which we have agreed to contribute up to $900,000 of which $634,596 has been paid as of June 30, 2004. Some recovery from insurance and other sources is expected. We have also accrued our best estimate of any future costs. Phibro-Tech, Inc. has resolved certain alleged technical permit violations with the California Department of Toxic Substance Control ("DTSC") and has reached an agreement to pay $425,000 over six (6) years as a result. The annual payments required under this agreement are not expected to have any material adverse impact on us. Phibro-Tech, Inc. and DTSC are currently negotiating the settlement of certain alleged technical permit violations from 2003. Phibro-Tech, Inc. believes most if not all of the alleged violations will be withdrawn. In the event penalties are assessed, they are not expected to exceed $50,000. In February 2000, the EPA notified numerous parties of potential liability for waste disposed of at a licensed Casmalia, California disposal site, including a business, assets of which were originally acquired by a subsidiary of ours in 1984. A settlement has been reached in this matter and we have paid $171,103 in full settlement. On or about April 5, 2002, the Company was served, as a potentially responsible party, with an information request from the EPA relating to a third-party superfund site in Rhode Island. The Company is investigating the matter, which relates to events in the 1950's and 1960's, but management does not believe that the Company has any liability in this matter. On or about August 13, 2004 the Company was served with a Request for Information pursuant to Section 104 of CERCLA and Section 3007 of RCRA relating to possible discharges into Turkey Creek in Sumter, South Carolina. The Company is preparing its response to the Request for Information and believes 72 that, because its Sumter, South Carolina facility is distant from Turkey Creek and does not discharge into Turkey Creek, there is a low probability of liability associated with this matter. We and our subsidiaries are party to a number of claims and lawsuits arising out of the normal course of business including product liabilities and governmental regulation. Certain of these actions seek damages in various amounts. In most cases, such claims are covered by insurance. We believe that none of the claims or pending lawsuits, either individually or in the aggregate, will have a material adverse effect on our financial position or results of operations. CONDITIONS IN ISRAEL The following information discusses certain conditions in Israel that could affect our Israeli subsidiary, Koffolk Israel. Israeli operations (excluding Koffolk Israel's non-Israeli subsidiaries) accounted for approximately 14% of our consolidated assets as of September 30, 2004 and approximately 12% of our consolidated net sales for fiscal 2004. We are, therefore, directly affected by the political, military and economic conditions in Israel. POLITICAL AND MILITARY CONDITIONS Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors and a state of hostility, varying from time to time in intensity and degree, has led to security and economic problems for Israel. Although Israel has entered into various agreements with certain Arab countries and the Palestinian Authority, since October 2000 there has been a significant increase in violence and terrorist activity in Israel. In April 2002, and from time to time thereafter, Israel undertook military operations in several Palestinian cities and towns. We cannot predict whether the current violence and unrest will continue and to what extent it will have an adverse impact on Israel's economic development or on Koffolk Israel's or our results of operations. We also cannot predict whether or not any further hostilities will erupt in Israel and the Middle East and to what extent such hostilities, if they do occur, will have an adverse impact on Israel's economic development or on Koffolk Israel's or our results of operations. Certain countries, companies and organizations continue to participate in a boycott of Israeli firms and other companies doing business in Israel or with Israel companies. We do not believe that the boycott has had a material adverse effect on us, but we can not provide assurance that restrictive laws, policies or practices directed toward Israel or Israeli businesses will not have an adverse impact on our operations or expansion of the our business. Generally, male adult citizens who are permanent residents of Israel under the age of 40 are, unless exempt, obligated to perform certain military duty annually. Additionally, all such residents are subject to being called to active duty at any time under emergency circumstances. Some of the employees of Koffolk Israel currently are obligated to perform annual reserve duty. While Koffolk Israel has operated effectively under these and similar requirements in the past, we cannot assess the full impact of such requirements on Koffolk Israel and us in the future, particularly if emergency circumstances occur and employees of Koffolk Israel are called to active duty. ECONOMIC CONDITIONS Israel is currently experiencing the longest recession since the establishment of Israel in 1948. Factors affecting Israel's economy include the Intifada, which began in September 2000, the slowdown in world trade and the global slump in the high-tech industry. In addition, Israel's economy has been subject to numerous destabilizing factors, including a period of rampant inflation in the early to mid-1980's, low foreign exchange reserves, fluctuations in world commodity prices, military conflicts and security incidents. Further disruptions to the Israeli economy as a result of these or other factors could have a material adverse affect on Koffolk Israel's and our results of operations. 73 Koffolk Israel receives a portion of its revenues in U.S. dollars while its expenses are principally payable in New Israeli Shekels. Dramatic changes in the currency rates could have an adverse effect on Koffolk Israel's results of operations. INVESTMENT INCENTIVES Certain of our Israeli production facilities have been granted Approved Enterprise status pursuant to the Law for the Encouragement of Capital Investments, 1959, and consequently may enjoy certain tax benefits and investment grants. Taxable income of Koffolk Israel derived from these production facilities is subject to a lower rate of company tax than the normal rate applicable in Israel. Dividends distributed by Koffolk Israel out of the same income are subject to lower rates of withholding tax than the rate normally applicable to dividends distributed by an Israeli company to a non-resident corporate shareholder. The grant available to newly Approved Enterprises was decreased throughout recent years. Certain of our Israeli production facilities further enjoyed accelerated depreciation under regulation extended from time to time and other deductions. We cannot provide assurance that we will, in the future, be eligible for or receive such or similar grants. 74 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS Set forth below is certain information with respect to our directors and executive officers.
NAME AGE POSITION - ---- --- -------- Jack C. Bendheim.......................... 58 Chairman of the Board of Directors and President Gerald K. Carlson......................... 61 Chief Executive Officer Marvin S. Sussman......................... 57 Vice Chairman of the Board of Directors and President, Prince Agri James O. Herlands......................... 62 Director and Executive Vice President Richard G. Johnson........................ 55 Chief Financial Officer Daniel M. Bendheim........................ 33 President, Specialty Chemicals Group* Steven L. Cohen........................... 60 Vice President, General Counsel and Assistant Secretary Keith Collins............................. 50 President, Phibro Animal Health Division** Daniel A. Welch........................... 54 Senior Vice President, Human Resources Sam Gejdenson............................. 56 Director, Noteholder Representative Peter A. Joseph........................... 52 Director Mary Lou Malanoski........................ 48 Director Marcos Rodriguez.......................... 43 Director
- --------------- * William A. Mathison, the former President, Specialty Chemicals Group, retired in August 2004. ** David G. McBeath, the former President, Animal Health Group, returned, as planned, to his private consulting business in December 2004. Jack C. Bendheim Chairman of the Board of Directors and President. Mr. Bendheim has been President since 1988. He was Chief Operating Officer from 1988 to 1998, and was Chief Executive Officer from 1998 to May 2002. He has been a director since 1984. Mr. Bendheim joined us in 1969 and served as Executive Vice President and Treasurer from 1983 to 1988 and as Vice President and Treasurer from 1975 to 1983. Mr. Bendheim is also a director of The Berkshire Bank in New York, New York, and Empire Resources, Inc., a metals trading company in Fort Lee, New Jersey. Gerald K. Carlson Chief Executive Officer. Mr. Carlson joined us in May 2002 and has served as our Chief Executive Officer since then. Prior to joining us, Mr. Carlson served as the Commissioner of Trade and Development for the State of Minnesota from January 1999 to March 2001. Mr. Carlson served as Senior Vice President -- Corporate Planning and Development from June 1996 to his retirement in October 1998 from Ecolab, Inc. During his thirty-two year career at Ecolab, Mr. Carlson also served as Senior Vice President of International as well as Senior Vice President and General Manager -- Institutional North America. Marvin S. Sussman Vice Chairman of the Board of Directors and President of our Prince Agri subsidiary. He has been a director since 1988 and was Chief Operating Officer from 1998 to 2002. Mr. Sussman joined us in 1971. Since then, he has served in various executive positions with us. Mr. Sussman was President of our Prince Group from 1988 to 2002. Mr. Sussman is the brother-in-law of Jack Bendheim. James O. Herlands Director; Executive Vice President. Mr. Herlands joined us in 1964. Since then, he has served in various capacities in sales/marketing and purchasing. He has been a director since 1988 and served as President of our CP/PhibroChem division since 1992. In addition, Mr. Herlands has served as our Executive Vice President since 1988. Mr. Herlands is the first cousin of Jack Bendheim. Richard G. Johnson Chief Financial Officer. Mr. Johnson joined us in September 2002 and has served as our Chief Financial Officer since then. Prior to joining us, Mr. Johnson served as Director of Financial 75 Management for Laserdyne Prima, Inc. from 2001 to 2002 and as Vice President -- Planning and Control, Latin America for Ecolab, Inc. from 1992 to 1999. In addition, Mr. Johnson served in various senior financial positions at Ecolab over a fifteen year period. Daniel M. Bendheim President, Specialty Chemicals Group. Mr. Bendheim joined the Company in 1998. In 2001 he was appointed Vice President of Business Development, and was appointed to his current position of President, Specialty Chemicals Group in September, 2004. Prior to joining the Company Mr. Bendheim worked as an analyst at SouthCoast Capital. Mr. Bendheim received a JD from Harvard Law School in 1996 and a BA from Yeshiva University in 1993. Mr. Bendheim is a son of Jack Bendheim. Steven L. Cohen Vice President and General Counsel. Mr. Cohen joined us in October 2000 and has served as our Vice President -- Regulatory and General Counsel since then. Prior to joining us, Mr. Cohen was, from 1997 to 2000, General Counsel of Troy Corporation, a multi-national chemical company. From 1994 to 1997, Mr. Cohen was in the private practice of law. Keith R. Collins President, Phibro Animal Health Division. Mr Collins joined us in August 2004. Prior to joining us, Mr. Collins was, from 2000 to 2004, Director, Global Strategic Marketing for Cattle and Swine with Merial Ltd., the world's largest animal health company. From 1995 to 2000, he was Director of European Operations with Hoechst Roussel Vet and Intervet based in Germany and Holland respectively. Mr Collins is a Fellow of the New Zealand Institute of Management. Daniel A. Welch Senior Vice President Human Resources. Mr. Welch joined us on August 9, 2004. Prior to joining us, he was Director of Human Resources of Pfizer Inc. since 2001. From 1998 to 2001, Mr. Welch was the President of Value Growth Dynamics, LLC, a consulting firm focused on strategic change. Sam Gejdenson Director. From 1981 to 2000, Congressman Sam Gejdenson served eastern Connecticut in the U.S. House of Representatives. Mr. Gejdenson was the senior Democrat on the House International Relations Committee. He received an A.S. degree from Mitchell College in New London, Connecticut in 1968 and a B.A. from the University of Connecticut in Storrs, Connecticut in 1970. In 1974, he was elected to the Connecticut House of Representatives, serving two terms before accepting a post in the administration of Connecticut Governor Ella T. Grasso. Mr. Gejdenson is now involved in international trade in his own company Sam Gejdenson International. Peter A. Joseph Director. Mr. Joseph has served as one of our Directors since February 2001. From 1998 to present, he has been a member of Palladium Equity Partners, LLC. From 1986 to 1997, Mr. Joseph was a general partner of Joseph Littlejohn & Levy, a buyout firm. Mary Lou Malanoski Director. Ms. Malanoski currently serves as a Managing Director at Morgan Joseph & Co. Inc. From 1994 until June 2001, Ms. Malanoski served as Managing Director and Chief Financial Officer of New Street Advisors LP, a private equity firm that she co-founded. Ms. Malanoski began her career at Drexel Burnham Lambert in 1980 in the Corporate Finance Department. She subsequently served in various positions, finally serving as Managing Director in the Mergers and Acquisitions Department and Chair of the Corporate Finance Underwriting Commitment Committee. Following Drexel's bankruptcy filing in 1990, Ms. Malanoski was responsible for formulating the firm's plan of reorganization, which was successfully consummated in 1992. She remained at the reorganized firm, which was renamed New Street Capital Corp., as a Managing Director responsible for many of the firm's merchant banking investments. Following New Street Capital's sale in 1994, Ms. Malanoski co-founded New Street Advisors. She is a Trustee of Rosemont College, from which she received a B.A. degree in Mathematics, and she also received an MBA from the Johnson School of Cornell University. Marcos A. Rodriguez Director. Mr. Rodriguez founded Palladium Equity Partners in 1997 and serves as Managing Member. Prior to forming Palladium, Mr. Rodriguez was a partner of Joseph Littlejohn & Levy (JLL), a buyout firm which he joined in 1989. He was responsible for spearheading a number of JLL's major investments. Before launching his private equity career 14 years ago, Mr. Rodriguez worked in operations for General Electric Company in the U.S., Mexico and France and graduated from GE's Manufacturing Management Program. Mr. Rodriguez serves on the Board of Directors of portfolio companies Haden International, The Hilsinger Company and Wise Foods. In addition, Mr. Rodriguez serves as 76 Chairman of the Development Committee and Treasurer of the Board of Directors of The Robert Toigo Foundation, a not-for-profit organization that supports the advancement of exceptional minority business degree students and alumni within the finance industry through scholarships, mentoring, internships and job placement. He is also a member of the New America Alliance. Mr. Rodriguez earned a B.S. in Mechanical Engineering from Columbia University, an M.B.A from the Wharton School and an M.A. in International Studies from the Lauder Institute of the University of Pennsylvania. BOARD COMPOSITION Our entire Board of Directors consists of 7 members, all of whom are currently designated and serving as directors. Our board of directors is elected annually, and our directors hold office until the next annual meeting of shareholders or until their successors are elected and qualified. Each officer serves at the discretion of the Board of Directors. COMPENSATION OF DIRECTORS Except for the payment of $50,000 annually to Mr. Sam Gejdenson, the director designated by the holders of the Senior Secured Notes, our directors do not receive any cash compensation for service on our Board of Directors. Directors may be reimbursed for certain expenses in connection with attendance at board meetings, however. We have entered into certain transactions with certain of the directors. See "Certain Relationships and Related Party Transactions." CODE OF ETHICS Our Board of Directors has not adopted a code of ethics applicable to our principal executive, financial or accounting officers. The Board of Directors believes that our current internal control procedures and business practices are adequate to promote honest and ethical conduct and to deter wrongdoing by these executives. COMMITTEES OF THE BOARD OF DIRECTORS We are not a "listed issuer" as defined under Section 10A-3 of the Exchange Act and are therefore not required to have an audit committee comprised of independent directors. We currently do not have an audit committee and our Board of Directors has determined that we do not have an audit committee financial expert. The Board of Directors believes that each of its members has the requisite financial background, experience, and knowledge to fulfill the duties and obligations that an audit committee would have, and therefore does not believe that it is necessary at this time to search for a person who would qualify as an audit committee financial expert. Our Board of Directors has not created any committees other than the compensation committee. The duties of the Compensation Committee are to recommend to the Board of Directors a compensation program, including incentives, for the Chief Executive Officer and other senior officers of the Company, for approval by the full Board of Directors. The current members of the Compensation Committee are Mr. Jack C. Bendheim, Mr. Joseph and Mr. Gejdenson. 77 EXECUTIVE COMPENSATION The following table sets forth the cash compensation paid by us and our subsidiaries for services during fiscal 2004, 2003, and 2002 to each of our five most highly compensated executive officers:
ANNUAL COMPENSATION ------------------------------------ OTHER ANNUAL ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION COMPENSATION(1) - --------------------------- ---- ---------- -------- ------------ --------------- Jack C. Bendheim................... 2004 $1,650,000 $ -- $ -- $ 2,050 Chairman of the Board; President 2003 1,650,000 -- 150,000(2) 6,500 2002 1,500,000 265,000 -- 6,000 Gerald K. Carlson(3)............... 2004 500,000 575,000 24,000 1,458 Chief Executive Officer 2003 500,000 -- 24,000 -- 2002 49,350 -- -- -- Marvin S. Sussman(4)............... 2004 1,000,000 101,372 -- 24,581(6) Vice Chairman of the Board; 2003 1,000,000 -- -- 24,500(6) President of Prince Agri 2002 1,000,000 -- -- 6,000 James O. Herlands.................. 2004 400,000 95,519 -- 6,581 Executive Vice President 2003 400,000 150,000 -- 6,500 2002 400,000 150,000 -- 6,000 Richard G. Johnson(5).............. 2004 268,750 200,000 13,500 6,703 Chief Financial Officer 2003 192,308 -- 39,000 --
- --------------- (1) Represents contributions by us under our 401(k) Retirement and Savings Plan. See "Compensation Pursuant to Plans." (2) In fiscal 2003, Mr. Bendheim was paid $150,000 for temporary deferral of fiscal 2002 compensation. (3) 2002 salary is for a partial year commencing May 2002. In fiscal 2004 and 2003, Mr. Carlson received $24,000 for relocation and housing assistance. (4) Pursuant to a Stockholders Agreement between us and Mr. Sussman, we are required to purchase, at book value, all shares of our Class B Common Stock owned by Mr. Sussman in the event of his retirement, death, disability or the termination of his employment by us. Should Mr. Sussman elect to sell his shares, we have a right of first offer and an option to purchase the shares. See "Certain Relationships and Related Party Transactions." As a result, each year, we are required to record as compensation expense (income) in our results of operations the change in our book value attributable to Mr. Sussman's shares. For 2004, 2003 and 2002, the expense (income) attributable to Mr. Sussman's shares was $0, $0 and ($378,000), respectively. No distributions have been made to Mr. Sussman under this agreement. (5) Salary is since date of employment for 2003. In fiscal 2004 and 2003, Mr. Johnson received $13,500 and $39,000, respectively, for relocation and housing assistance. (6) Of such amount, $18,000 represents the cost of the term portion of a life insurance policy purchased by the Company in the face amount of $10 million on the life of Mr. Sussman, with a required premium of $252,000 per year. The policy commenced in April 2002. In fiscal 2004, no options were granted to the named executive officers and no options were held or exercised by any of the named executive officers. EMPLOYMENT AND SEVERANCE AGREEMENTS We entered into an employment agreement with Gerald K. Carlson in May 2002, whereby Mr. Carlson will serve as our Chief Executive Officer. The agreement provides for a base salary of $500,000 during the first year of its term. Mr. Carlson is eligible to receive an annual bonus of up to 150% of his base salary based on our achievement of certain specified EBITDA growth targets. If Mr. Carlson is terminated without Cause (as defined) or he voluntarily terminates the agreement with Good Reason (as defined), he is entitled to receive the accrued portion of the target annual bonus, as well as an amount ranging from two to eight months of base 78 salary depending on when such termination occurs. If, within six months after a Change of Control (as defined), Mr. Carlson is terminated without cause or he voluntarily terminates the agreement with Good Reason, he will be entitled to receive a lump sum payment equal to the amount of annual target bonus accrued to the date of termination, plus 100% of base salary and 50% of annual target bonus. We are obligated under the agreement to provide separate indemnification insurance to Mr. Carlson in the amount of the current coverage provided to our current board of directors. We entered into an employment agreement with Marvin S. Sussman in December 1987. The term of employment is from year-to-year, unless terminated by us at any time or by his death or permanent disability. In December 2004, David McBeath resigned as President, Animal Health Group. We entered into a consulting agreement with Mr. McBeath in November 2004, pursuant to which Mr. McBeath agreed to provide to us consulting services through December 2005. The consulting agreement provides that Mr. McBeath shall work ten days per month at a rate of GBP1,000 per day from January through June 2005 and five days per month at a rate of GBP1,100 per day through December 2005. In 1995, James O. Herlands purchased stock in Phibro-Tech. In connection therewith, we entered into a severance agreement with him. The agreement provides that, upon his Actual or Constructive Termination or a Change in Control Event (as such terms are defined), he is entitled to receive a cash Severance Amount (as defined therein), based upon a multiple of Phibro-Tech's pre-tax earnings (as defined therein). In addition, if an Extraordinary Event (as defined) occurs within 12 months after the occurrence of an Actual or Constructive Termination, the executive is entitled to receive an additional Catch-up Payment (as defined). At June 30, 2004, no severance payments would have been due to Mr. Herlands if he were terminated. See "Certain Relationships and Related Party Transactions." COMPENSATION PURSUANT TO PLANS 401(k) Plan. We maintain for the benefit of our employees a 401(k) Retirement and Savings Plan (the "Plan"), which is a defined contribution, profit sharing plan qualified under Section 401(k) of the Internal Revenue Code of 1986, as amended (the "Code"). Our employees are eligible for participation in the Plan once they have attained age 21 and completed a year of service (in which the employee completed 1,000 hours of service). Up to $200,000 (indexed for inflation) of an employee's base salary may be taken into account for Plan purposes. Under the Plan, employees may make pre-tax contributions of up to 60.0% of such employee's base salary, and we will make non-matching contributions equal to 1% of an employee's base salary and matching contribution equal to 50.0% of an employee's pre-tax contribution up to 3.0% of such employee's base salary and 25.0% of such employee's pre-tax contribution from 3.0% to 6.0% of base salary. Participants are vested in employer contributions in 20% increments beginning after completion of the second year of service and become fully vested after five years of service. Distributions are generally payable in a lump sum after termination of employment, retirement, death, disability, plan termination, attainment of age 59 1/2, disposition of substantially all of our assets or upon financial hardship. The Plan also provides for Plan loans to participants. The accounts of Messrs. Bendheim, Carlson, Sussman, Herlands, and Johnson were credited with employer contributions of $2,050, $1,458, $6,581, $6,581, and $6,703, respectively, for fiscal 2004. Retirement Plan. We have adopted The Retirement Plan of Phibro Animal Health Corporation and Subsidiaries and Affiliates, which is a defined benefit pension plan (the "Retirement Plan"). Our employees are eligible for participation in the Retirement Plan once they have attained age 21 and completed a year of service (which is a Plan Year in which the employee completes 1,000 hours of service). The Retirement Plan provides benefits equal to the sum of (a) 1.0% of an employee's "average salary" plus 0.5% of the employee's "average salary" in excess of the average of the employee's social security taxable wage base, times years of service after July 1, 1989, plus (b) the employee's frozen accrued benefit, if any, as of June 30, 1989 calculated under the Retirement Plan formula in effect at that time. For purposes of calculating the portion of the benefit based on "average salary" in excess of the average wage base, years of service shall not exceed 35. "Average salary" for these purposes means the employee's salary over the consecutive five year period in the last ten years preceding retirement or other termination of employment which produces the highest average; 79 or, if an employee has fewer than five years of service, all such years of service. An employee becomes vested in his plan benefit once he completes five years of service with us. In general, benefits are payable after retirement or disability in the form of a 50%, 75% or 100% joint or survivor annuity, life annuity or life annuity with a five or ten year term. In some cases benefits may also be payable under the Retirement Plan in the event of an employee's death. The following table shows estimated annual benefits payable upon retirement in specified compensation and years of service classifications, assuming a life annuity with a ten year term.
YEARS OF SERVICE ----------------------------------------------- AVERAGE COMPENSATION 15 20 25 30 35 - -------------------- ------- ------- ------- ------- ------- $25,000.............................. $ 3,750 $ 5,000 $ 6,250 $ 7,500 $ 8,750 $50,000.............................. $ 7,500 $10,000 $12,500 $15,000 $17,500 $75,000.............................. $11,420 $15,000 $18,750 $22,500 $26,250 $100,000............................. $17,040 $22,000 $26,980 $31,990 $37,280 $150,000............................. $28,290 $37,000 $45,730 $54,490 $63,530 $200,000............................. $39,540 $52,000 $64,480 $76,990 $89,780
As of June 30, 2004, Messrs. Bendheim, Carlson, Sussman, Herlands, and Johnson had 35, 2, 33, 40 and 2 estimated credited years of service, respectively, under the Retirement Plan. The compensation covered by the Retirement Plan for each of these officers as of June 30, 2004 is $205,000. Such individuals, at normal retirement age 65, will have 43, 6, 41, 43 and 12 credited years of service, respectively. The annual expected benefit after normal retirement at age 65 for each of these individuals, based on the compensation taken into account as of June 30, 2004, is $118,200, $16,580, $134,110, $129,240, and $32,000, respectively. Most of our foreign subsidiaries have retirement plans covering substantially all employees. Contributions to these plans are generally deposited under fiduciary-type arrangements. Benefits under these plans are primarily based on levels of compensation. Funding policies are based on applicable legal requirements and local practices. Deferred Compensation Plan. In 1994, we adopted a non-qualified Deferred Compensation Plan and Trust, as an incentive for certain executives. The plan provides for (i) a Retirement Income Benefit (as defined), (ii) a Survivor's Income Benefit (as defined), and (iii) Deferred Compensation Benefit (as defined). Three employees currently participate in this plan. A trust has been established to provide the benefits described above. The following table shows the estimated benefits from this plan as of June 30, 2004.
ANNUAL SURVIVOR'S DEFERRED RETIREMENT INCOME COMPENSATION INCOME BENEFIT BENEFIT BENEFIT -------------- ---------- ------------ Jack C. Bendheim............................... $35,309 $1,500,000 $386,368 Marvin S. Sussman.............................. $35,309 $1,000,000 $128,451 James O. Herlands.............................. $35,085 $ 400,000 $347,104
We determine the Retirement Income Benefit based upon the employee's salary, years of service and age at retirement. At present, it is contemplated that a benefit of 1% of each participant's eligible compensation will be accrued each year. The benefit is payable upon retirement (after age 65 with at least 10 years of service) in monthly installments over a 15 year period to the participant or his named beneficiary. The Survivor's Income Benefit for the current participants is one times annualized compensation at the time of death, capped at $1,500,000, payable in 24 equal monthly installments. The Deferred Compensation Benefit is substantially funded by compensation deferred by the participants. Such benefit is based upon a participant making an election to defer no less than $3,000 and no more than $20,000 of his compensation in excess of $150,000, payable in a lump sum or in monthly installments for up to 15 years. We make a matching contribution of $3,000. Participants have no claim against us other than as unsecured creditors. We intend to fund the payments using the cash value or the death benefit from the life insurance policies insuring each Executive's life. 80 Executive Income Program. On March 1, 1990, we entered into an Executive Income Program to provide a pre-retirement death benefit and a retirement benefit to certain of our executives. The Program consists of a Split-Dollar Agreement and a Deferred Compensation Agreement with Jack Bendheim, Marvin S. Sussman and James O. Herlands (the "Executives"). The Split Dollar Agreement provides for us to own a whole life insurance policy in the amount of $1,000,000 (plus additions) on the life of each Executive. Each policy also contains additional paid-up insurance and extended term insurance. On the death of the Executive prior to his 60th birthday or his actual retirement date, whichever is later: (i) the first $1,000,000 of the death benefit is payable to the Executive's spouse, or issue; (ii) the excess is payable to us up to the aggregate amount of premiums paid by us; and (iii) any balance is payable to the Executive's spouse or issue. The Split-Dollar Agreement terminates and no benefit is payable if the Executive dies after his retirement. The Deferred Compensation Agreement provides that upon the Executive's retirement, at or after attaining age 65, we will make retirement payments to the Executive during his life for 10 years or until he or his beneficiaries have received a total of 120 monthly payments. Participants have no claim against us other than as unsecured creditors. We intend to fund the payments using the cash value or the death benefit from the life insurance policies insuring each Executive's life. The retirement benefits are as follows: Jack Bendheim $30,000; Marvin S. Sussman $30,000; and James O. Herlands $20,000. 1993 Split Dollar Agreement. On August 12, 1993, we entered into a Split Dollar Agreement with David Butler and Gail Bendheim, as trustees under an Indenture of Trust dated August 12, 1993 (the "Trust"). This Agreement provides for the Trust to purchase and own life insurance policies on the life of Jack C. Bendheim in the aggregate face amount of $5,000,000 (plus additions). The premiums for such insurance are paid in part by the Trust (to the extent of the lesser of the P.S. 58 rates, or the insurers' current published premium rate for annually renewable term insurance for standard risks) and in part by us (we pay the balance of the premiums not paid by the Trust). Upon the death of Jack C. Bendheim or upon the cancellation of the policies or the termination of the Agreement, we have the right to be repaid the total amount we advanced toward payment of premiums. To secure our right to be repaid, the Trust has assigned each policy to us as collateral. After repayment of the amount due to us, the remaining cash surrender value or the remaining death benefit is payable to the Trust, the beneficiaries of which are the wife and issue of Jack C. Bendheim. MEETINGS OF DIRECTORS During fiscal 2004, the Board of Directors took certain actions by both written consent and at regular meetings. Directors are elected annually and serve until the next annual meeting of Shareholders or until their successors are elected and qualified. REPORT OF THE COMPENSATION COMMITTEE The compensation committee was established during fiscal 2004. The responsibility of the compensation committee is to recommend to the Board of Directors a compensation program, including incentives, for the Chief Executive Officer and other senior officers, for approval by the full Board of Directors. The compensation committee will prepare recommendations to the Board of Directors for the 2005 fiscal year. Executive compensation for the 2004 fiscal year was determined by the Board as a whole. During fiscal 2004 the directors participated in deliberations regarding compensation of our officers. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Jack Bendheim, Marvin S. Sussman and James O. Herlands are members of our Board of Directors and are executive officers. Jack Bendheim, Peter Joseph and Sam Gejdenson are members of the compensation committee. None of our executive officers serve as a member of the Board of Directors of any other non-Company entity which has one or more members serving as a member of our Board of Directors, except that Jack Bendheim and Peter Joseph serve as directors of Penick Holding Company. Messrs. Bendheim, Sussman, Herlands, Joseph and Rodriguez have participated in certain transactions with us and our subsidiaries and affiliates. See "Certain Relationships and Related Transaction." 81 PRINCIPAL STOCKHOLDERS The table sets forth certain information as of September 30, 2004 regarding beneficial ownership of our capital stock by each of our directors and named executive officers, each beneficial owner of 5% or more of the outstanding shares of capital stock and all directors and officers as a group.
NUMBER OF COMMON SHARES (PERCENTAGE OF CLASS) ----------------------------------------- NAME CLASS A VOTING(1) CLASS B NON-VOTING(2) - ---- ----------------- --------------------- Jack Bendheim(3)(4).............................. 12,600(100)% 10,699.65(90)% Marvin S. Sussman................................ -- 1,188.85(10)% All other officers and directors(5).............. -- -- All officers and directors as a group............ 12,600(100)% 11,888.50(100)%
- --------------- (1) The entire voting power is exercised by the holders of Class A Common Stock, except that the holders of Class A Common Stock currently are entitled to elect all but four of the directors. The holders of Class B Common Stock are entitled to elect one and the holders of Series C Preferred Stock are entitled to elect two directors but do not vote on any other matters. In addition, the holders of the units of senior secured notes have the right to designate one member of the Board of Directors. (2) Class B Common shareholders will receive the entire equity upon our liquidation, after payment of preferences to holders of all classes of preferred stock and Class A Common Stock. (3) Jack Bendheim also owns 5,207 (100%) shares of Series A Preferred Stock. (4) Includes 6,308.527 shares of Class B Common Stock owned by trusts for the benefit of Jack Bendheim, his spouse, his children and their spouses and his grandchildren. (5) Peter A. Joseph and Marcos Rodriguez have been designated as directors of the Company by Palladium Equity Partners II, LP ("Palladium") which beneficially owns 10,591 shares of our Series C Preferred Stock. Palladium has the right to designate two directors to the Board of Directors. See "Certain Relationships and Related Party Transactions." 82 DESCRIPTION OF CAPITAL STOCK Our authorized capital stock consists of 30,300 shares of Common Stock, allocated as follows: 16,200 shares of Class A Common Stock, par value $0.10 per share, and 14,100 shares of Class B Common Stock, par value $0.10 per share, and 155,750 shares of Preferred Stock, par value $100 per share, of which the following series have been established: 5,207 shares of Series A Preferred Stock and 20,000 shares of Series C Redeemable Participating Preferred Stock ("Series C Preferred Stock"). At the date of this prospectus, there are issued and outstanding 12,600 shares of Class A Common Stock, 11,888.50 shares of Class B Common Stock, 5,207 shares of Series A Preferred Stock and 10,591 shares of Series C Preferred Stock. The following description of the terms of all classes and series of our common and preferred stock is not complete and is subject to and qualified in its entirety by reference to our amended certificate of incorporation (the "Certificate of Incorporation"). The entire voting power is vested in the holders of Class A Common Stock, except that the holders of shares of Class A Common Stock are entitled to elect all but four of the directors. The holders of Class B Common Stock are entitled to elect one director and holders of the Series C Preferred Stock are entitled by contract to elect two directors and are not entitled to vote on any other corporate action except as required by applicable law. In addition, under the indenture one member of the Board of Directors is designated on behalf of the holders of the units of senior secured notes. Holders of units are not entitled to vote on any other corporate action. The holders of shares of Class A Common Stock are entitled to one vote per share upon all matters submitted for a vote of the shareholders. The Certificate of Incorporation does not provide for cumulative voting. The holders of Common Stock are entitled to preemptive rights. No dividends may be paid to holders of Common Stock until all dividends have been paid to holders of Preferred Stock. The holders of Series C Preferred Stock are entitled to cumulative cash dividends, payable semi-annually, at 15% per annum of the liquidation value. The liquidation value of the Series C Preferred Stock is an amount equal to $1,000 per share plus all accrued and unpaid dividends (the "Liquidation Value"), plus a percentage of our equity value, as defined in the Certificate of Incorporation. The equity value is calculated as a multiple of the earnings before interest, tax, depreciation and amortization of our business, and with deductions for, among other things, outstanding indebtedness ("Equity Value"). In connection with the PMC transaction, the definition of Equity Value in the Company's Certificate of Incorporation was amended to reduce the multiple of trailing EBITDA payable in connection with any future redemption of Series C Preferred to 6.0 from 7.5. In connection with the 2004 Offering, we agreed with the holders of the Series C Preferred Stock that, for purposes of calculating the Equity Value, the total net debt of Phibro Animal Health Corporation would not exceed $170 million. Directors elected by the holders of Class A Common Stock have the exclusive right and power to cause us to declare and pay other dividends. Non-cumulative dividends are payable on the outstanding Series A Preferred Stock and Common Stock, in the following order only when and as declared by the Board: each share of Series A Preferred Stock -- $1.00 per year; each share of Class A Common Stock -- $0.0055 per year; and each share of Class B Common Stock, as determined by the Board. Beginning November 30, 2003, and on each anniversary thereafter, we may redeem, for cash only, in whole the Series C Preferred Stock, at the Liquidation Value plus the Equity Value payment. At any time after the redemption of the Senior Subordinated Notes due 2008, Palladium has the right to require us to redeem, for cash, the Series C Preferred Stock at the Liquidation Value plus the Equity Value payment. In connection with the Palladium repurchase and divestiture of PMC, all of the shares of Series B Preferred Stock were repurchased and all of the shares of Series C Preferred Stock other than shares having a value as of December 26, 2003, the date of repurchase, of $16.5 million were repurchased. See "Certain Relationships and Related Party Transactions." The shares of Series A Preferred Stock are redeemable at our option, in whole or part, at any time or from time to time, for a redemption price equal to the par value thereof plus any declared but unpaid dividends. 83 In the event of any complete liquidation, dissolution or winding up of the business, or sale of all of our assets, after redemption of the Series C Preferred Stock, each share of Series A Preferred Stock is entitled to a distribution equal to the par value thereof and any declared but unpaid dividends. Thereafter, our remaining assets shall be distributed, first to the holders of Class A Common Stock in an amount equal to $0.10 per share, and then to the holders of Class B Common Stock. In the event that no shares of Class B Common Stock are then outstanding, all remaining assets will be paid to the holders of Class A Common Stock. The Board of Directors is authorized to issue shares of Preferred Stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any series or the designation of such series, without further vote or action by the stockholders. The issuance of Preferred Stock may have the effect of delaying, deferring or preventing a change in control of us without further action by the stockholders. The issuance of Preferred Stock with voting and conversion rights may adversely affect the voting power of the holders of Common Stock, including the loss of voting control to others. At present, we have no plans to issue any shares of Preferred Stock. The authorized share capital of the Dutch issuer is Euro 90,000, divided into 900 ordinary shares with a nominal value of Euro 100 each, of which 180 fully paid shares have been issued. 84 CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS Our Phibro-Tech subsidiary leases the property underlying its Santa Fe Springs, California facility from First Dice Road Company, a California limited partnership ("First Dice"), in which Jack Bendheim, our President and principal stockholder, Marvin S. Sussman and James O. Herlands, directors, own 39.0%, 40.0% and 20.0% limited partnership interests, respectively. The general partner, having a 1% interest in the partnership, is Western Magnesium Corp., a wholly-owned subsidiary of ours, of which Jack Bendheim is the president. The lease expires on June 30, 2008. The annual rent is $250,000. Phibro-Tech is also required to pay all real property taxes, personal property taxes and liability and property insurance premiums. In June 2001, Jack Bendheim entered into a secured $1.4 million revolving credit arrangement with First Union National Bank, which replaced a prior loan from Fleet Bank. Mr. Bendheim reloans borrowings under the First Union credit line to First Dice on the same terms as his borrowing from First Union. We believe that the terms of such lease and loan are on terms no less favorable to Phibro-Tech than those that reasonably could be obtained at such time in a comparable arm's-length transaction from an unrelated third-party. Pursuant to a Shareholders Agreement dated December 29, 1987 between Marvin S. Sussman and us, we are required to purchase, at book value, all shares of our Class B Common Stock owned by Mr. Sussman, in the event of his retirement, death, permanent disability or the termination of his employment by us. Should Mr. Sussman elect to sell his shares, we have a right of first offer and an option to purchase the shares. A Shareholders Agreement initially entered into by Phibro-Tech and three executives of Phibro-Tech, including James O. Herlands (the "Executives") provides, among other things, for restrictions on their shares as to voting, dividends, liquidation and transfer rights. The Shareholders Agreement also provides that upon the death of an Executive or termination of an Executive's employment, Phibro-Tech must purchase the Executive's shares at their fair market value, as determined by a qualified appraiser. In the event of a Change of Control (as defined), the Executive has the option to sell his shares to Phibro-Tech at such value. The Shareholders Agreement provides, that, upon the consent of Phibro-Tech, the Executives and us, the Executives' shares of Phibro-Tech Common Stock may be exchanged for a number of shares of our Common Stock, which may be non-voting Common Stock, having an equivalent value, and upon any such exchange such shares of our Common Stock will become subject to the Shareholders Agreement. We and Phibro-Tech also entered into Severance Agreements with the Executives which provide, among other things, for certain severance payments. See "Management -- Executive Compensation -- Employment and Severance Agreements." We advanced $200,000 to Marvin Sussman and his wife in 1987, pursuant to a secured promissory note that is payable on demand and bears interest at the annual rate of 9%. Certain relatives of Jack Bendheim, other than Mr. Sussman and Mr. Herlands named above, provide services to us, in one case through a consulting firm controlled by a relative, and in other cases as employees, and received directly or through such consulting firm annual aggregate payments of approximately $650,000 for the fiscal year ended June 30, 2004. On January 5, 2000, the United States Bankruptcy Court for the Eastern District of New York confirmed a Plan of Reorganization for Penick Corporation and Penick Pharmaceutical, Inc. (collectively, "Penick") which prior to such confirmation were debtors in proceedings in such Court for reorganization under Chapter 11 of the Bankruptcy Code, and awarded Penick to Penick Holding Company ("PHC"). PHC is a corporation formed to effect such acquisition by the Company, PBCI LLC, a limited liability company controlled by Mr. Jack Bendheim, and several other investors, including Peter A. Joseph, a director of the Company. Pursuant to a Shareholders' Agreement among the shareholders of PHC, Messrs. Bendheim and Joseph have been designated as two of three directors of PHC, and Mr. Katzenstein, our Secretary, has been designated as Secretary and Treasurer of PHC. The Company has invested approximately $2,300,000 for shares of Series A Preferred Stock of PHC bearing an 8.5 percent annual cumulative dividend, and PBCI LLC invested approximately $500,000 for approximately 15 percent of the Common Stock of PHC. Mr. Joseph owns or controls approximately 12 percent of the Common Stock of PHC. 85 In connection with the sale of our Series B and Series C Preferred Stock to the Palladium Investors, we and Jack Bendheim entered into a Stockholders Agreement (the "Palladium Stockholders Agreement") dated November 30, 2000 with the Palladium Investors. The Palladium Stockholders Agreement provides for our Board to include two directors to be designated by the Palladium Investors. Peter A. Joseph and Marcos Rodriguez are currently the two designees of the Palladium Investors serving as directors. If and for so long as we fail to redeem any share of Series B or Series C Preferred Stock requested for redemption by a Palladium Investor after the earliest to occur of June 1, 2008 (the maturity date of our 9 7/8% Senior Subordinated Notes due 2008), the redemption of such Notes in full prior thereto or a change in control of us, then (x) the Palladium Investors may take control of our Board of Directors, and (y) Jack C. Bendheim has agreed to cause all equity securities owned by him to be voted in the manner directed by the Palladium Investors; provided, that, we must pay Jack Bendheim and Marvin Sussman, whether or not employed by us, an amount not less than their respective annual base salaries in effect immediately prior to such assumption of control, until the earlier to occur of the expiration of control by the Palladium Investors and the fifth anniversary of their assumption of control. The Palladium Stockholders Agreement contains covenants which restrict, without the consent of at least one director designated by the Palladium Investors (or, if no such director is then serving on the Board, at least one Palladium Investor), among other things, certain (a) issuances of any equity securities, unless the purchaser agrees to be bound by the Palladium Stockholders Agreement, (b) sales of assets in excess of $10 million, (c) purchases of businesses and other investments in excess of $10 million, (d) the incurrence of indebtedness for borrowed money, including guarantees, in excess of $12.5 million, (e) redemptions, acquisitions or other purchases of equity securities, (f) transactions with officers, directors, stockholders or employees or any family member or affiliate thereof in excess of $500,000, (g) compensation and benefits of certain officers, and (h) transactions involving a change of control. The Palladium Stockholders Agreement also provides that we shall furnish the Palladium Investors certain financial reporting and environmental information each year and grant to the Palladium Investors registration rights comparable to any such rights granted to any third party, and requires us to maintain certain key man life insurance on Jack C. Bendheim for the benefit of the Palladium Investors. The Palladium Stockholders Agreement provides certain limitations on the ability of Jack C. Bendheim to transfer voting shares, and certain limitations on the ability of the Palladium Investors to transfer their shares, including a right of first refusal in favor of us and Mr. Bendheim. Pursuant to the Management and Advisory Services Agreement dated November 30, 2000 between us and the Palladium Investors, we agreed to pay, on a quarterly basis, the Palladium Investors an annual management advisory fee of $2.25 million until such time as all shares of Series B and Series C Preferred Stock are redeemed. Pursuant to the sale of PMC described below, our obligations for this fee have been terminated. Our policy with respect to the sale, lease or purchase of assets or property of any related party is that such transaction should be on terms that are no less favorable to us or our subsidiary, as the case may be, than those that could reasonably be obtainable at such time in a comparable arm's length transaction from an unrelated third party. The indenture and the domestic senior credit facility both include a similar restriction on us and our domestic subsidiaries with respect to the sale, purchase, exchange or lease of assets, property or services, subject to certain limitations as to the applicability thereof. Effective December 26, 2003 (the "Closing Date"), the Company completed the divestiture of substantially all of the business and assets of The Prince Manufacturing Company ("PMC") to a company ("Buyer") formed by Palladium Equity Partners II, LP and certain of its affiliates (the "Palladium Investors"), and the related reduction of the Company's preferred stock held by the Palladium Investors (collectively the "Prince Transactions"). Pursuant to definitive purchase and other agreements executed on and effective as of the Closing Date, the Prince Transactions included the following elements: (i) the transfer of substantially all of the business and assets of PMC to Buyer; (ii) the reduction of the value of the Company's Preferred Stock owned by the Palladium Investors from $72.2 million to $16.5 million (accreted through the Closing Date) by means of the redemption of all of its shares of Series B Preferred Stock and a portion of its Series C Preferred Stock; 86 (iii) the termination of $2.2 million in annual management advisory fees payable by the Company to Palladium; (iv) a cash payment of $10.0 million to the Palladium Investors in respect of the portion of the Company's Preferred Stock not exchanged in consideration of the business and assets of PMC; (v) the agreement of the Buyer to pay the Company for advisory fees for the next three years of $1.0 million, $0.5 million, and $0.2 million, respectively (which were pre-paid at closing by the Buyer and satisfied for $1.3 million, the net present value of such payments); and (vi) the Buyer agreed to supply manganous oxide and red iron oxide products and to provide certain mineral blending services to the Company's Prince Agriproducts subsidiary ("Prince Agri"). Prince Agri agreed to continue to provide the Buyer with certain laboratory, MIS and telephone services, all on terms substantially consistent with the historic relationship between Prince Agri and PMC, and to lease to Buyer office space used by PMC in Quincy, Illinois. The Company has an agreement to receive certain treasury services from Palladium for $0.1 million per year. Pursuant to definitive agreements, the Company made customary representations, warranties and environmental and other indemnities, agreed to a post-closing working capital adjustment, paid $4.0 million in full satisfaction of all intercompany debt owed to PMC, paid a closing fee to Palladium of $0.5 million, made certain capital expenditure adjustments included as part of the intercompany settlement amount, and agreed to pay for certain out-of-pocket transaction expenses. PMC retained $0.4 million of its accounts receivable. The Company established a $1.0 million letter of credit escrow for two years to secure its working capital adjustment and certain indemnification obligations. The Company agreed to indemnify the Palladium Investors for a portion, at the rate of $0.65 for every dollar, of the amount they receive in respect of the disposition of Buyer for less than $21.0 million up to a maximum payment by the Company of $4.0 million (the "Backstop Indemnification Amount"). The Backstop Indemnification Amount would be payable on the earlier to occur of July 1, 2008 or six months after the redemption date of all of the Company's Senior Secured Notes due 2007 if such a disposition closes prior to such redemption and six months after the closing of any such disposition if the disposition closes after any such redemption. The Company's obligations with respect to the Backstop Indemnification Amount will cease if the Palladium Investors do not close the disposition of Buyer by January 1, 2009. The definition of "Equity Value" in the Company's Certificate of Incorporation was amended to reduce the multiple of trailing EBITDA payable in connection with any future redemption of Series C Preferred to 6.0 from 7.5. The amount of consideration paid and payable in connection with the Prince Transactions and all matters in connection therewith were determined pursuant to arm's length negotiations. In connection with the 2004 Offering, we agreed with the holders of the Series C Preferred Stock that, for purposes of calculating the Equity Value, which is calculated as part of the calculation of the Liquidation Value of the Series C Preferred Stock, the total net debt of Phibro Animal Health Corporation would not exceed $170 million. See "Description of Capital Stock." 87 DESCRIPTION OF CERTAIN INDEBTEDNESS The following is a summary of certain of our indebtedness. To the extent such summary contains descriptions of the credit agreements and other loan documents, such descriptions do not purport to be complete and are qualified in their entirety by reference to such documents, which are available at or through the SEC or upon request from us. DOMESTIC SENIOR CREDIT FACILITY Substantially simultaneously with the completion of the offering of the old units, on October 21, 2003, we entered into a new replacement domestic senior credit facility with Wells Fargo Foothill, Inc., providing for a working capital facility plus a letter of credit facility. The aggregate amount of borrowings under such working capital and letter of credit facilities originally were not permitted to exceed $25.0 million, including aggregate borrowings under the working capital facility of up to $15.0 million. On April 29, 2004, we amended the domestic senior credit facility to increase the aggregate amount of borrowings available under such working capital and letter of credit facilities from $25.0 million to $27.5 million and to increase the amount of aggregate borrowings available under the working capital facility from $15.0 million to $17.5 million. As of September 24, 2004, we amended the domestic senior credit facility to: (i) increase the aggregate amount of borrowings available under such working capital and letter of credit facilities from $27.5 million to $32.5 million; the amount of aggregate borrowings available under the working capital facility remained unchanged at $17.5 million; (ii) amend the EBITDA definition to exclude charges and expenses related to unsuccessful acquisitions and related financings in an aggregate amount not to exceed $5.3 million for the period beginning January 1, 2004 and ending June 30, 2004; (iii) amend the definition of Additional Indebtedness to exclude advances under the working capital facility; (iv) amend the definition of Permitted Investments to allow other investments made during the period from January 1, 2004 through June 30, 2004 in an aggregate amount not to exceed $336,000; and (v) establish covenant EBITDA levels for the periods after June 30, 2004. The amendment was effective June 30, 2004 for items (i), (ii) and (iii); effective January 1, 2004 for item (iv); and effective September 24, 2004 for all other items. Concurrent with the completion of the 2004 Offering, on December 21, 2004, we amended the domestic senior credit facility to (i) amend the EBITDA definition to exclude charges and expenses related to the sale of the Belgium Plant in an aggregate amount not to exceed $26.8 million for purposes of calculating a certain financial covenant, (ii) amend the Indenture Reserve definition to include scheduled payments of interest due on the additional notes, (iii) amend the maximum aggregate amount of borrowings available under the working capital facility to permit a temporary increase to $22.5 million and for its reduction to $17.5 million on such borrowings being refinanced by the proceeds of the additional old notes issues in the 2004 Offering, (iv) amend the Permitted Investments definition to include investments in connection with the sale of the Belgium Plant and transfer of certain equipment, together with other assets and rights related to the production of virginiamycin, to our subsidiary in Brazil or in connection with alternative production arrangements, and (v) provide for the issuance of the additional notes and the sale of the Belgium Plant and related transactions. Borrowings under the domestic senior credit facility are subject to a borrowing base formula based on percentages of eligible domestic receivables and domestic inventory. Under the domestic senior credit facility, we may choose between two interest rate options: (i) the applicable base rate as defined plus 0.50% and (ii) the LIBOR rate as defined plus 2.75%. Indebtedness under the domestic senior credit facility is secured by a first priority lien on substantially all of our assets and assets of substantially all of our domestic subsidiaries. We are required to pay an unused line fee of 0.375% on the unused portion of the domestic senior credit facility, a monthly servicing fee and standard letter of credit fees to issuing banks. Borrowings under the domestic senior credit facility are available until, and are repayable no later than, October 31, 2007, although borrowings must be repaid by June 30, 2007 if the maturity of the Senior Secured Notes has not been extended, as required by the domestic senior credit facility, by that date. Pursuant to the terms of an intercreditor agreement, as amended in connection with the 2004 Offering, the security interest securing the Senior Secured Notes and the guarantees made by our domestic restricted subsidiaries is subordinated to a lien securing the domestic senior credit facility. 88 The domestic senior credit facility also contains various covenants which restrict us and our subsidiaries with respect to, among other things, incurring indebtedness, entering into merger or consolidation transactions, disposing of assets (other than in the ordinary course of business), acquiring assets (with permitted exceptions), making certain restricted payments, making optional redemptions of, or excess cash flow offers for the notes, repaying our Senior Subordinated Notes not purchased by us with the proceeds of the offering of old notes, creating any liens on our assets, making investments, creating guarantee obligations and entering into sale and leaseback transactions and transactions with affiliates. In the event our total availability under our domestic senior credit facility falls below specified levels, the facility will require that we comply with various financial covenants, including meeting a minimum EBITDA requirement and limitations on capital expenditures. The domestic senior credit facility agreement provides for certain events of default, including default upon the nonpayment of principal, interest, fees or other amounts, a cross default with respect to other obligations of ours and our subsidiaries, failure to comply with certain covenants, conditions or provisions under the domestic senior credit facility, the existence of certain unstayed or undischarged judgments, the invalidity or unenforceability of the relevant security documents, the making of materially false or misleading representations or warranties, commencement of reorganization, bankruptcy, insolvency or similar proceedings and the occurrence of certain ERISA events. Upon the occurrence of an event of default under the domestic senior credit facility, the lenders may declare all obligations thereunder to be immediately due and payable. We may from time to time, prior to the maturity date of the notes, refinance, replace, restructure, substitute for, amend or supplement the domestic senior credit facility. The actual terms of any new or modified credit facility which replaces the domestic senior credit facility could differ substantially from the facility summarized above. OTHER INDEBTEDNESS AND CREDIT FACILITIES In June 1998, we issued $100 million aggregate principal amount of 9 7/8% Senior Subordinated Notes due 2008. Proceeds of the offering of the old units issued on October 21, 2003 were used to complete the repurchase of $51,971,000 of our 9 7/8% Senior Subordinated Notes at a price equal to 60% of the principal amount thereof plus accrued and unpaid interest. The Senior Subordinated Notes are general unsecured obligations and are subordinated in right of payment to all existing and future senior debt (as defined in the indenture), and rank pari passu in right of payment with all other existing and future senior subordinated indebtedness. The Senior Subordinated Notes are unconditionally guaranteed on a senior subordinated basis by our domestic subsidiaries. The restrictive covenants in the indenture for the Senior Subordinated Notes were amended in certain respects. Certain of our foreign subsidiaries have existing local credit arrangements which will continue in effect after the offering. Our subsidiary in Israel, Koffolk Israel, has a $10.5 million working capital facility with Israeli banks for loans in various currencies, including dollars, euros and shekels. Borrowings under such facility bear interest at the LIBOR rate as defined plus 2.25%. Such facility matures every twelve months, subject to renewal, and is secured by a general floating lien over the accounts receivables and inventories of Koffolk Israel and its Israeli subsidiaries. 89 THE EXCHANGE OFFER Simultaneously with the sale of the old units in October 2003 and December 2004, the US issuer, the Dutch issuer and the guarantors entered into substantially similar registration rights agreements with Jefferies & Company, Inc., the initial purchaser of the old units. We are conducting the exchange offer to satisfy our obligations under the registration rights agreements. The form and terms of the new units are identical in all material respects to the form and terms of the old units, except that the new units will be registered under the Securities Act; will not bear restrictive legends restricting their transfer under the Securities Act; will not be entitled to the registration rights that apply to the old units; and will not contain provisions relating to increased interest rates in connection with the old units under circumstances related to the timing of the exchange offer. The new units will evidence the same debt as the old units. The new units will be issued under and entitled to the benefits of the same indenture that authorized the issuance of the old units. Consequently, both the old units and the new units will be treated as a single series of debt securities under the indenture. For a description of the indenture, see "Description of the New Notes." The exchange offer is not extended to, nor will we accept tenders for exchange from, old unit holders in any jurisdiction where the exchange offer does not comply with the securities or blue sky laws of that jurisdiction. TERMS OF THE EXCHANGE OFFER We are offering to exchange an aggregate number of up to 127,491 units, each unit consisting of: - $809.5238 principal amount of 13% Senior Secured Notes due 2007 of the US issuer; and - $190.4762 principal amount of 13% Senior Secured Notes due 2007 of the Dutch issuer. Holders may only exchange old units for new units. The old units must be tendered properly in accordance with the conditions set forth in this prospectus and the accompanying letter of transmittal on or prior to the expiration date and not withdrawn as permitted below. The exchange offer is not conditioned upon holders tendering a minimum number of old units. As of the date of this prospectus, all of the old units are outstanding. Only whole units will be accepted in the exchange offer; no fractions of old units will be accepted. Holders of the old units do not have any appraisal or dissenters' rights in connection with the exchange offer. If you do not tender your old units or if you tender old units that we do not accept, your old units will remain outstanding and continue to accrue interest and you will be entitled to the rights and benefits holders have under the indenture relating to the old units and the new units. Existing transfer restrictions would continue to apply to such old units. See "Risk Factors -- If you fail to exchange your old units for new units, your old units will continue to be subject to restrictions on transfer" for more information regarding old units outstanding after the exchange offer. None of the US issuer, the Dutch issuer or the guarantors, or our respective boards of directors or management, recommends that you tender or not tender old units in the exchange offer or has authorized anyone to make any recommendation. You must decide whether to tender in the exchange offer and, if you decide to tender, the aggregate number of old units to tender. The expiration date is 5:00 p.m., New York City time, on , 2005, or such later date and time to which the exchange offer is extended. We have the right, in accordance with applicable law, at any time: - to delay the acceptance of the old units; - to terminate the exchange offer and not accept any old units for exchange if we determine that any of the conditions to the exchange offer have not occurred or have not been satisfied; 90 - to extend the expiration date of the exchange offer and retain all old units tendered in the exchange offer other than those units properly withdrawn; and - to waive any condition or amend the terms of the exchange offer in any manner. If we materially amend the exchange offer, we will as promptly as practicable distribute a prospectus supplement to the holders of the old units disclosing the change and extend the exchange offer for a period of five to ten business days, depending upon the significance of the amendment and the manner of disclosure to the registered holders, if the exchange offer would otherwise expire during the five to ten business day period. If we exercise any of the rights listed above, we will as promptly as practicable give oral notice, promptly confirmed in writing, to the exchange agent and will make a public announcement of such action. In the case of an extension, an announcement will be made no later than 9:00 a.m., New York City time on the next business day after the previously scheduled expiration date. Without limiting the manner in which we may choose to make public announcements of any delay in acceptance, extension, termination or amendment of the exchange offer, we will have no obligation to publish, advertise, or otherwise communicate any public announcement, other than by making a timely release to a financial news service. During an extension, all old units previously tendered will remain subject to the exchange offer and may be accepted for exchange by us. Any old units not accepted for exchange for any reason will be returned without cost to the holder that tendered them promptly after the expiration or termination of the exchange offer. We will accept all old units validly tendered and not withdrawn. Promptly after the expiration date, we will issue new units registered under the Securities Act and deliver them to the exchange agent. The exchange agent might not deliver the new units to all tendering holders at the same time. The timing of delivery depends upon when the exchange agent receives and, after the expiration date, processes the required documents. We will be deemed to have exchanged old units validly tendered and not withdrawn when we give oral notice, promptly confirmed in writing, to the exchange agent of our acceptance of the tendered old units. The exchange agent is our agent for receiving tenders of old units, letters of transmittal and related documents. In tendering old units, you must warrant in the letter of transmittal or in an agent's message (described below) that: - you have full power and authority to tender, exchange, sell, assign and transfer old units; - we will acquire good, marketable and unencumbered title to the tendered old units, free and clear of all liens, restrictions, charges and other encumbrances; and - the old units tendered for exchange are not subject to any adverse claims or proxies. You also must warrant and agree that you will, upon request, execute and deliver any additional documents requested by us or the exchange agent to complete the exchange, sale, assignment and transfer of the old units. PROCEDURES FOR TENDERING OLD UNITS VALID TENDER We have forwarded to you, along with this prospectus, a letter of transmittal relating to this exchange offer. The letter of transmittal is to be completed by a holder of old units either if (1) a tender of old units is to be made by delivering physical certificates for such old units to the exchange agent, (2) a tender of old units is to be made by book-entry transfer to the account of the exchange agent for the exchange offer at DTC, or by confirmation of blocking instructions in accordance with the standard operating procedures of Euroclear or Clearstream, as the case may be, pursuant to the procedures set forth below or (3) a tender of old units is to be made according to the guaranteed delivery procedures set forth below. 91 Only a holder of record of old units may tender old units in the exchange offer. To tender in the exchange offer, a holder must comply with the procedures of DTC, Euroclear or Clearstream, as applicable, and either: - complete, sign and date the letter of transmittal, or a facsimile of the letter of transmittal; have the signature on the letter of transmittal guaranteed if the letter of transmittal so requires; and deliver the letter of transmittal or facsimile to the exchange agent prior to the expiration date; or - in lieu of delivering a letter of transmittal, instruct DTC, Euroclear or Clearstream, as the case may be, to transmit on behalf of the holder a computer-generated message to the exchange agent in which the holder of the old units acknowledges and agrees to be bound by the terms of, and to make all of the representations contained in, the letter of transmittal, which agent's message (as defined below) shall be received by the exchange agent prior to 5:00 p.m., New York City time, on the expiration date. In addition, either: - the exchange agent must receive old units along with the letter of transmittal; or - the exchange agent must receive, before expiration of the exchange offer, timely confirmation of book-entry transfer of such old units into the exchange agent's account at DTC, according to the procedure for book-entry transfer described below; or - the exchange agent must receive, before the expiration date, timely confirmation from Euroclear or Clearstream, as the case may be, that the securities account to which the old units are credited has been blocked from and including the day on which the confirmation is delivered to the exchange agent and that no transfers will be effected in relation to such old units at any time after such date. To be tendered effectively, the exchange agent must receive any physical delivery of the letter of transmittal and other required documents at the address set forth below under the caption "-- Exchange Agent" before expiration of the exchange offer. To receive confirmation of valid tender of old units, a holder should contact the exchange agent at the telephone number listed under the caption "-- Exchange Agent." The tender by a holder that is not withdrawn before expiration of the exchange offer will constitute a binding agreement between that holder and us in accordance with the terms and subject to the conditions set forth in this prospectus and in the letter of transmittal. Only a registered holder of old units may tender the old units in the exchange offer. If you tender fewer than all of your old units, you should fill in the amount of units tendered in the appropriate box on the letter of transmittal. The amount of old units delivered to the exchange agent will be deemed to have been tendered unless otherwise indicated. The method of delivery of the certificates for the old units, the letter of transmittal and all other required documents is at the election and sole risk of the holders. If delivery is by mail, we recommend registered mail with return receipt requested, properly insured, or overnight delivery service. In all cases, you should allow sufficient time to assure timely delivery. No letters of transmittal or old units should be sent directly to PAH or PB Netherlands. Delivery is complete when the exchange agent actually receives the items to be delivered. Delivery of documents to DTC in accordance with their respective procedures does not constitute delivery to the exchange agent. If you beneficially own old units and those units are registered in the name of a broker, dealer, commercial bank, trust company or other nominee or custodian and you wish to tender your old units in the exchange offer, you should contact the registered holder as soon as possible and instruct it to tender the old units on your behalf and comply with the instructions set forth in this prospectus and the letter of transmittal. If the applicable letter of transmittal is signed by the record holder(s) of the old units tendered, the signature must correspond with the name(s) written on the face of the old unit without alteration, enlargement or any change whatsoever. If the applicable letter of transmittal is signed by a participant in DTC, Euroclear or Clearstream, as applicable, the signature must correspond with the name as it appears on the security position listing as the holder of the old units. If any letter of transmittal, endorsement, bond power, power of attorney, or any other document required by the letter of transmittal is signed by a trustee, executor, administrator, guardian, attorney-in-fact, officer of 92 a corporation or other person acting in a fiduciary or representative capacity, that person must indicate such capacity when signing. In addition, unless waived by us, the person must submit proper evidence satisfactory to us, in our sole discretion, of his or her authority to so act. Holders should receive copies of the letter of transmittal with the prospectus. A holder may obtain additional copies of the letter of transmittal for the old units from the exchange agent at its offices listed under the caption "-- Exchange Agent." SIGNATURE GUARANTEES Signatures on a letter of transmittal or a notice of withdrawal, as the case may be, must be guaranteed by an eligible institution unless the old units surrendered for exchange are tendered: - by a registered holder of old units who has not completed the box entitled "Special Issuance Instructions" or "Special Delivery Instructions" on the letter of transmittal; or - for the account of an eligible institution. An "eligible institution" is a firm or other entity which is identified as an "Eligible Guarantor Institution" in Rule 17Ad-15 under the Exchange Act, including: - a bank; - a broker, dealer, municipal securities broker or dealer or government securities broker or dealer; - a credit union; - a national securities exchange, registered securities association or clearing agency; or - a savings association. If old units are registered in the name of a person other than the signer of the letter of transmittal, the old units surrendered for exchange must be endorsed or accompanied by a written instrument or instruments of transfer or exchange, in satisfactory form as determined by us in our sole discretion, duly executed by the registered holder with the holder's signature guaranteed by an eligible institution. DTC BOOK-ENTRY TRANSFERS For tenders by book-entry transfer of old units cleared through DTC, the exchange agent will make a request to establish an account at DTC for purposes of the exchange offer. Any financial institution that is a DTC participant may make book-entry delivery of old units by causing DTC to transfer the old units into the exchange agent's account at DTC in accordance with DTC's procedures for transfer. The exchange agent and DTC have confirmed that any financial institution that is a participant in DTC may use the Automated Tender Offer Program, or ATOP, procedures to tender old units. Accordingly, any participant in DTC may make book-entry delivery of old units by causing DTC to transfer those old units into the exchange agent's account in accordance with its ATOP procedures for transfer. Notwithstanding the ability of holders of old units to effect delivery of old units through book-entry transfer at DTC, the letter of transmittal or a facsimile thereof, or an agent's message in lieu of the letter of transmittal, with any required signature guarantees and any other required documents must be transmitted to and received by the exchange agent prior to the expiration date at the address given below under "-- Exchange Agent." In this context, the term "agent's message" means a message, transmitted by DTC and received by the exchange agent and forming part of a book-entry confirmation, which states that DTC has received an express acknowledgment from a participant tendering old units that are the subject of the book-entry confirmation that the participant has received and agrees to be bound by the terms of the letter of transmittal, and that we may enforce that agreement against the participant. 93 EUROCLEAR AND CLEARSTREAM PROCEDURES FOR BLOCKING INSTRUCTIONS The registered holder of the old units on the records of Euroclear or Clearstream must instruct Euroclear or Clearstream to block the securities in the account in Euroclear or Clearstream to which such old units are credited. In order for the exchange offer to be accepted, the exchange agent must have received, prior to the expiration date, a confirmation from Euroclear or Clearstream that the securities account of old units tendered has been blocked from and including the day on which the confirmation is delivered to the exchange agent and that no transfers will be effected in relation to the old units at any time after such date. Old units should be blocked in accordance with the procedures of Euroclear or Clearstream, as the case may be. The exchange of the old units so tendered will be made only after a timely receipt by the exchange agent of an agent's message and any other documents required by the letter of transmittal. The term "agent's message" means a message, transmitted by Euroclear or Clearstream and received by the exchange agent that states that Euroclear or Clearstream has received an express acknowledgment from a participant tendering old units that the participant has received and agrees to be bound by the terms of the letter of transmittal, and that we may enforce that agreement against the participant. GUARANTEED DELIVERY PROCEDURES If a registered holder of the old units desires to tender the old units and the old units are not immediately available, or time will not permit the holder's old units or other required documents to reach the exchange agent before the expiration date of the exchange offer, or the procedure for book-entry transfer or a confirmation of blocking instructions cannot be completed on a timely basis, a tender may nonetheless be effected if: - the tender is made through a firm which is a member of a registered national securities exchange or a member of the National Association of Securities Dealers, Inc. or a commercial bank or trust company having an office or correspondent in the United States; - prior to the expiration date of the exchange offer, the exchange agent received from the firm which is a member of a registered national securities exchange or a member of the National Association of Securities Dealers, Inc. or commercial bank or trust company having an office or correspondent in the United States a properly completed and duly executed Letter of Transmittal (or a facsimile of the Letter of Transmittal) and Notice of Guaranteed Delivery, substantially in the form provided by us (by facsimile transmission, mail or hand delivery), setting forth the name and address of the holder of old units and the amount of old units tendered, stating that the tender is being made and guaranteeing that within five New York Stock Exchange trading days after the date of execution of the Notice of Guaranteed Delivery, the certificates for all physically tendered old units, in proper form for transfer, or a confirmation of a book-entry transfer or a confirmation of blocking instructions, as the case may be, and any other documents required by the Letter of Transmittal will be deposited by the firm which is a member of a registered national securities exchange or a member of the National Association of Securities Dealers, Inc. or commercial bank or trust company having an office or correspondent in the United States with the exchange agent; and - the certificates for all physically tendered old units, in proper form for transfer, or a confirmation of a book-entry transfer or a confirmation of blocking instructions, as the case may be, and all other documents required by the Letter of Transmittal are received by the exchange agent within five New York Stock Exchange trading days after the date of execution of the Notice of Guaranteed Delivery. DETERMINATION OF VALIDITY We, in our sole discretion, will resolve all questions regarding the form of documents, validity, eligibility, including time of receipt, and acceptance for exchange and withdrawal of any tendered old units. Our determination of these questions as well as our interpretation of the terms and conditions of the exchange offer, including the letter of transmittal, will be final and binding on all parties. A tender of old units is invalid until all defects and irregularities have been cured or waived. Holders must cure any defects and irregularities in connection with tenders of old units for exchange within such reasonable period of time as we will 94 determine, unless we waive the defects or irregularities. Neither we, any of our affiliates or assigns, the exchange agent nor any other person is under any obligation to give notice of any defects or irregularities in tenders nor will we or they be liable for failing to give any such notice. We reserve the absolute right, in our sole and absolute discretion: - to reject any tenders determined to be in improper form or unlawful; - to waive any of the conditions of the exchange offer; and - to waive any condition or irregularity in the tender of old units by any holder. Any waiver to the exchange offer will apply to all old units tendered. WITHDRAWAL RIGHTS You can withdraw tenders of old units at any time prior to 5:00 p.m., New York City time, on the expiration date. For a withdrawal to be effective, you must deliver a written notice of withdrawal to the exchange agent. The notice of withdrawal must: - specify the name of the person tendering the old units to be withdrawn; - identify the old units to be withdrawn, including the total principal amount of old units to be withdrawn; and - where certificates for old units are transmitted, the name of the registered holder of the old units if different from the person withdrawing the old units. If you delivered or otherwise identified old units to the exchange agent, you must submit the serial numbers of the old units to be withdrawn and the signature on the notice of withdrawal must be guaranteed by an eligible institution, except in the case of old units tendered for the account of an eligible institution. If you tendered old units as a book-entry transfer or through the blocking procedures described above, the notice of withdrawal must specify the name and number of the account at DTC, Euroclear or Clearstream, as applicable, to be credited with the withdrawn old units and you must deliver the notice of withdrawal to the exchange agent and otherwise comply with the procedures of the facility. You may not rescind withdrawals of tender; however, properly withdrawn old units may again be tendered by following one of the procedures described under "-- Procedures for Tendering Old Units" above at any time prior to 5:00 p.m., New York City time, on the expiration date. We will determine all questions regarding the form of withdrawal, validity, eligibility, including time of receipt, and acceptance of withdrawal notices. Our determination of these questions as well as our interpretation of the terms and conditions of the exchange offer (including the letter of transmittal) will be final and binding on all parties. Neither we, any of our affiliates or assigns, the exchange agent nor any other person is under any obligation to give notice of any irregularities in any notice of withdrawal, nor will we be liable for failing to give any such notice. Withdrawn old units will be returned to the holder after withdrawal. In the case of old units tendered by book-entry transfer through DTC, the old units withdrawn or not exchanged will be credited to an account maintained with DTC. The old units will be returned or credited to the account maintained with DTC promptly after withdrawal, rejection of tender or termination of the exchange offer. In the case of old units tendered in accordance with the blocking procedures of Euroclear or Clearstream, as the case may be, the old units will be returned to their holder by cancellation of the blocking instruction in accordance with the standard operating procedures of Euroclear or Clearstream, as applicable. Any old units which have been tendered for exchange but which are not exchanged for any reason will be returned to the holder thereof without cost to the holder. 95 CONDITIONS TO THE EXCHANGE OFFER Notwithstanding any other provision of the exchange offer, we are not required to accept for exchange, or to issue new units in exchange for, any old units, and we may terminate or amend the exchange offer, if at any time prior to 5:00 p.m., New York City time, on the expiration date, we determine that: - the new units to be received will not be tradable by the holder, without restriction under the Securities Act and the Exchange Act and without material restrictions under the blue sky or securities laws of substantially all of the states of the United States; - we have not received all applicable governmental approvals; - the exchange offer, or the making of any exchange by a holder of old units, would violate applicable law or any applicable interpretation or policy of the staff of the SEC; or - any action or proceeding has been instituted or threatened in any court or by or before any governmental agency with respect to the exchange offer that would reasonably be expected to impair our ability to proceed with the exchange offer. The foregoing conditions are for our sole benefit, and we may assert them regardless of the circumstances giving rise to any such condition, or we may waive the conditions, completely or partially, whenever or as many times as we choose, in our reasonable discretion. The foregoing rights are not deemed waived because we fail to exercise them, but continue in effect, and we may still assert them whenever or as many times as we choose. However, any such waiver, other than a waiver involving governmental approval, must be satisfied or waived before the expiration of the offer. If we determine that a waiver of conditions materially changes the exchange offer, the prospectus will be amended or supplemented, and the exchange offer extended, if appropriate, as described under "-- Terms of the Exchange Offer." In addition, at a time when any stop order is threatened or in effect with respect to the registration statement of which this prospectus constitutes a part or with respect to the qualification of the indenture under the Trust Indenture Act of 1939, as amended, we will not accept for exchange any old units tendered, and no new units will be issued in exchange for any such old units. If we terminate or suspend the exchange offer based on a determination that the exchange offer violates applicable law or SEC policy, the registration rights agreement requires that we, as soon as practicable after such determination, use all commercially reasonable efforts to cause a shelf registration statement covering the resale of the old units to be filed and declared effective by the SEC. See "-- Registration Rights and Additional Interest on the Old Units." EXCHANGE AGENT We appointed HSBC Bank USA, National Association as exchange agent for the exchange offer. You should direct questions and requests for assistance, requests for additional copies of this prospectus, the Letter of Transmittal or the Notice of Guaranteed Delivery to the exchange agent at the address and phone number as follows: HSBC Bank USA, National Association One Hanson Place, Lower Level Brooklyn, NY 10018 Attention: Paulette Shaw -- Issuer Services By facsimile (for eligible institutions only): (718) 488-4488 Confirm facsimile by telephone ONLY: (718) 488-4475 If you deliver letters of transmittal and any other required documents to an address or facsimile number other than those listed above, your tender is invalid. 96 FEES AND EXPENSES The registration rights agreement provides that we will bear all expenses in connection with the performance of our obligations relating to the registration of the new units and the conduct of the exchange offer. These expenses include registration and filing fees, accounting and legal fees and printing costs, among others. We will pay the exchange agent reasonable and customary fees for its services and reasonable out-of-pocket expenses. We will also reimburse brokerage houses and other custodians, nominees and fiduciaries for customary mailing and handling expenses incurred by them in forwarding this prospectus and related documents to their clients that are holders of old units and for handling or tendering for such clients. We have not retained any dealer-manager in connection with the exchange offer and will not pay any fee or commission to any broker, dealer, nominee or other person, other than the exchange agent, for soliciting tenders of old units pursuant to the exchange offer. TRANSFER TAXES Holders who tender their old units for exchange will not be obligated to pay any transfer taxes in connection with the exchange. If, however, new units issued in the exchange offer are to be delivered to, or are to be issued in the name of, any person other than the holder of the old units tendered, or if a transfer tax is imposed for any reason other than the exchange of old units in connection with the exchange offer, then the holder must pay any such transfer taxes, whether imposed on the registered holder or on any other person. If satisfactory evidence of payment of, or exemption from, such taxes is not submitted with the letter of transmittal, the amount of such transfer taxes will be billed directly to the tendering holder. ACCOUNTING TREATMENT The new units will be recorded at the same carrying value as the old units. Accordingly, PAH will not recognize any gain or loss for accounting purposes. PAH intends to amortize the expenses of the exchange offer and issuance of the old units over the term of the new units. REGISTRATION RIGHTS AND ADDITIONAL INTEREST ON CERTAIN OLD UNITS In the event that applicable interpretations of the Staff do not permit the issuers and the guarantors to effect the exchange offer or if for any other reason the exchange offer is not consummated by the 210th day following the Issue Date, or if the initial purchaser so requests with respect to the units not eligible to be exchanged for exchange units in the exchange offer or if any holder of units is prohibited by law or Commission policy from participating in the exchange offer or does not receive freely tradeable exchange units in the exchange offer, the issuers and the guarantors will, at their expense, (a) promptly file the Shelf Registration Statement permitting resales from time to time of the units, (b) use our best efforts to cause the Shelf Registration Statement to become effective and (c) use our best efforts to keep the Shelf Registration Statement current and effective until two years from the Issue Date or such shorter period that will terminate when all the units covered by the Shelf Registration Statement have been sold pursuant thereto. The issuers and the guarantors, at their expense, will provide to each holder of the units copies of the prospectus, which is a part of the Shelf Registration Statement, notify each such holder when the Shelf Registration Statement has become effective and take certain other actions as are required to permit unrestricted resales of the units from time to time. A holder of units who sells such units pursuant to the Shelf Registration Statement generally will be required to be named as a selling securityholder in the related prospectus and to deliver a prospectus to purchasers, will be subject to certain of the civil liability provisions under the Securities Act in connection with such sales and will be bound by the provisions of the Registration Rights Agreement which are applicable to such holder (including certain indemnification obligations). In the event that: (i) the Exchange Offer Registration Statement is not filed with the Commission on or prior to the 120th day after the Issue Date or declared effective on or prior to the 180th day after the Issue Date, 97 (ii) the Exchange Offer is not consummated on or prior to the 30th day following the effectiveness of the Exchange Offer Registration Statement, (iii) the Shelf Registration Statement is not filed or declared effective within the required time periods or (iv) the Exchange Offer Registration Statement or the Shelf Registration Statement is declared effective but thereafter ceases to be effective (except as specifically permitted therein) for a period of 15 consecutive days without being succeeded immediately by an additional Exchange Offer Registration Statement or Shelf Registration Statement, as the case may be, filed and declared effective (each such event, a "Registration Default"), then, the interest rate borne by the notes shall be increased by 0.25% per annum for the 90-day period following such Registration Default. Such interest rate will increase by an additional 0.25% per annum at the beginning of each subsequent 90-day period following such Registration Default, up to a maximum aggregate increase of 1.0% per annum. From and after the date that all Registration Defaults have been cured, the notes will bear interest at the rate set forth on the cover page of this prospectus. Following the cure of all Registration Defaults, the accrual of such increased interest rate will cease. We filed a registration statement with the SEC on Form S-4 with respect to an exchange offer for the 105,000 old units issued in October 2003, but due to pending confidential acquisition negotiations, such registration statement did not become effective and the Company caused a notice of withdrawal to be submitted to the SEC on November 15, 2004. As a result, a Registration Default exists with respect to the old notes issued in October 2003 and such notes have borne additional interest. However, the consummation of the exchange offer of new units for old units is expected to cure such Registration Default. In such event, from and after such date, such old notes will bear interest at the rate set forth on the cover page of this prospectus and cease to accrue such additional interest. RESALES OF NEW UNITS Based on existing SEC interpretations issued to third parties in unrelated transactions, we believe that the new units will be freely transferable by holders other than affiliates of us after the registered exchange offer without further registration under the Securities Act if the holder of the new units is acquiring the new units in the ordinary course of its business, has no arrangement or understanding with any person to participate in the distribution of the new units and is not an affiliate of us, as such terms are interpreted by the SEC; provided that broker-dealers receiving new units in the exchange offer will have a prospectus delivery requirement with respect to resales of such new units. While the SEC has not taken a position with respect to this particular transaction, under existing SEC interpretations relating to transactions structured substantially like the exchange offer, participating broker-dealers may fulfill their prospectus delivery requirements with respect to the new units (other than a resale of an unsold allotment of the units) with the prospectus contained in the exchange offer registration statement. We will not seek our own interpretive letter. As a result, we cannot assure you that the staff will take the same position on this exchange offer as it did in interpretive letters to other parties in similar transactions. By tendering old units, the holder, other than participating broker-dealers, as defined below, of those old units will represent to us that, among other things: - the new units acquired in the exchange offer are being obtained in the ordinary course of business of the person receiving the new units, whether or not that person is the holder; - neither the holder nor any other person receiving the new units is engaged in, intends to engage in or has an arrangement or understanding with any person to participate in a "distribution" (as defined under the Securities Act) of the new units; and - neither the holder nor any other person receiving the new units is an "affiliate" (as defined under the Securities Act) of us. 98 If any holder or any such other person is an "affiliate" of us or is engaged in, intends to engage in or has an arrangement or understanding with any person to participate in a "distribution" of the new units, such holder or other person: - may not rely on the applicable interpretations of the staff of the SEC referred to above; and - must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. Each broker-dealer that receives new units for its own account in exchange for old units must represent that the old units to be exchanged for the new units were acquired by it as a result of market-making activities or other trading activities and acknowledge that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any offer to resell, resale or other retransfer of the new units. Any such broker-dealer is referred to as a participating broker-dealer. However, by so acknowledging and by delivering a prospectus, the participating broker-dealer will not be deemed to admit that it is an "underwriter" (as defined under the Securities Act). If a broker-dealer acquired old units as a result of market-making or other trading activities, it may use this prospectus, as amended or supplemented, in connection with offers to resell, resales or retransfers of new units received in exchange for the old units pursuant to the exchange offer. We have agreed that, for a period of 90 days after the effective date of the registration statement of which this prospectus is a part, we will make this prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution" for a discussion of the exchange and resale obligations of broker-dealers in connection with the exchange offer. DESCRIPTION OF THE NEW UNITS We are offering 127,491 new units (the "New Units"), consisting of $103.207 million 13% senior secured notes due 2007 (the "U.S. Notes") of Phibro Animal Health Corporation (the "U.S. Issuer") and $24.284 million 13% senior secured notes due 2007 (the "Dutch Notes" and, together with the U.S. Notes, the "New Notes") of Philipp Brothers Netherlands III B.V. (the "Dutch Issuer" and, together with the U.S. Issuer, the "Issuers"). The New Notes of each Issuer that comprise the New Units will not trade separately unless (i) an event of default under the indenture has occurred, (ii) a tax redemption of the New Notes issued by Dutch Issuer related to certain changes affecting withholding taxes has occurred or (iii) there has been a change of control of the Dutch Issuer. See "Description of the New Notes" for further information concerning the New Notes. DESCRIPTION OF THE NEW NOTES You can find the definitions of certain terms used in this description under the subheading "Certain Definitions." For purposes of this description: - the words "we", "our" and "us" refer only to the Issuers and not to any of their respective subsidiaries; - the word "Company" refers only to Phibro Animal Health Corporation and not to any of its subsidiaries; On October 21, 2003, we issued 105,000 Units, consisting of $85.0 million aggregate principal amount of U.S. Notes and $20.0 million aggregate principal amount of Dutch Notes and on December 21, 2004 we issued 22,491 additional Units, consisting of $18.207 million aggregate principal amount of U.S. Notes and $4.284 million aggregate principal amount of Dutch Notes (the "Outstanding Notes") under an indenture (the "Indenture"), dated as of October 21, 2003, as amended and supplemented, among us, the Guarantors and HSBC Bank USA, National Association, as trustee (the "Trustee") and collateral agent (the "Collateral Agent"). As used in this "Description of the New Notes," except as the context otherwise requires, the term "Notes" means all U.S. Notes issued by the U.S. Issuer and all Dutch Notes issued by the Dutch Issuer pursuant to the Indenture (including the notes offered hereby, the Outstanding Notes and any additional notes that we may issue from time to time under the Indenture). The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (the "Trust 99 Indenture Act"). The Collateral Agreements referred to herein under the subcaption "Security" contain the terms of the security interests that secure the Notes. The following description is a summary of the material provisions of the Indenture and the Collateral Agreements. It does not restate those agreements in their entirety. We urge you to read the Indenture and the Collateral Agreements because they, and not this description, define your rights. Copies of the Indenture and the Collateral Agreements are available from the Company. The terms of the new notes are the same as the terms of the old notes, except that: - the new notes will be registered under the Securities Act of 1933, as amended; - the new notes will not bear restrictive legends restricting their transfer under the Securities Act; - the holder of the new notes are not entitled to certain rights under the registration rights agreement; and - the new notes will not contain provisions relating to increased interest rates in connection with the old notes under circumstances related to the timing of the exchange offer. BRIEF DESCRIPTION OF THE NOTES AND THE GUARANTEES The Notes Generally. The U.S. Notes will be the several obligations of the U.S. Issuer and the Dutch Notes will be the several obligations of the Dutch Issuer, and statements herein to the effect of "we will pay all principal, interest and premiums and Additional Interest, if any, on the Notes" or of similar import should be interpreted as the several payment by the U.S. Issuer of all principal, interest and premiums and Additional Interest, if any, on the U.S. Notes and the Dutch Issuer of all principal, interest and premiums and Additional Interest, if any, on the Dutch Notes. The Notes of each Issuer will not trade separately unless (i) an Event of Default has occurred, (ii) a redemption of the Dutch Notes as described under "-- Taxation; Redemption For Taxation Reasons" has occurred (a "Tax Redemption") or (iii) a Change of Control of the Dutch Issuer has occurred (each, a "Separation Event"). The U.S. Notes. The U.S. Notes: - will be the general obligations of the U.S. Issuer; - will rank equally in right of payment with all other senior obligations of the U.S. Issuer; - will rank senior in right of payment to all Indebtedness of the U.S. Issuer which by its terms is subordinated to the U.S. Notes; - will be secured by security interests in substantially all assets of the U.S. Issuer and the current and future Domestic Restricted Subsidiaries of the U.S. Issuer (other than real property and interests therein), subject to Permitted Liens; - will be structurally subordinated to all liabilities of the Foreign Subsidiaries and Unrestricted Subsidiaries of the U.S. Issuer; and - will be guaranteed, jointly and severally, on a senior secured basis by each of the current and future Domestic Restricted Subsidiaries of the U.S. Issuer. Pursuant to the terms of the Intercreditor Agreement, the security interest on the assets of the U.S. Issuer and its current and future Domestic Restricted Subsidiaries that secure the Notes, the Domestic Guarantees and the Company Guarantee will be subordinated to a Lien securing the Credit Agreement. The Dutch Notes. The Dutch Notes: - will be the general obligations of the Dutch Issuer; - will rank equally in right of payment with all other senior obligations of the Dutch Issuer; 100 - will rank senior in right of payment to all Indebtedness of the Dutch Issuer which by its terms is subordinated to the Dutch Notes; - will be secured by - a pledge of all of the accounts receivable, a security interest or floating charge on the inventory to the extent permitted by applicable law and a mortgage on substantially all real property of the Dutch Issuer and its current and future Restricted Subsidiaries, - a pledge of 100% of the Capital Stock of each direct Subsidiary of the Dutch Issuer and each Restricted Subsidiary of the Dutch Issuer, and - a pledge of the intercompany loans made by the Dutch Issuer to its Restricted Subsidiaries, in each case, subject to Permitted Liens; - will be structurally subordinated to all liabilities of the Foreign Subsidiaries of the U.S. Issuer (other than the Dutch Issuer and its Restricted Subsidiaries) and Unrestricted Subsidiaries of the U.S. Issuer; and - will be guaranteed, jointly and severally, on a senior secured basis by the U.S. Issuer and each of the current and future Domestic Restricted Subsidiaries of the U.S. Issuer and by each of the current and future Restricted Subsidiaries of the Dutch Issuer. The Guarantees. Each Guarantee of each Guarantor: - will be the general obligation of such Guarantor; - will rank equally in right of payment with all other senior obligations of such Guarantor; and - will rank senior in right of payment to all Indebtedness of such Guarantor which by its terms is subordinated to the Guarantees; provided, that: - the Guarantee of each Foreign Guarantor shall only be in respect of the Dutch Notes and the other Obligations of the Dutch Issuer and not in respect of the U.S. Notes or any other Obligation of the U.S. Issuer; and - the Guarantee of each Guarantor will be secured, - in the case where such Guarantor is a Domestic Guarantor, by security interests in substantially all assets of such Guarantor (other than real property and interests therein), and - in the case where such Guarantor is a Foreign Guarantor, by security interests in all of the accounts receivable, a security interest or floating charge on the inventory to the extent permitted by applicable law and a mortgage on substantially all real property of such Guarantor and a pledge of 100% of the Capital Stock of each direct Subsidiary of such Guarantor. The U.S. Issuer will also guarantee the payment of the Dutch Notes and the other Obligations of the Dutch Issuer under the Indenture. Such guarantee of the U.S. Issuer will have the same characteristics that are described above with respect to the Guarantee of each Domestic Guarantor in respect of the Obligations of the Dutch Issuer that are guaranteed thereunder. METHODS OF RECEIVING PAYMENTS ON THE NOTES If a Holder has given wire transfer instructions to us, we will pay all principal, interest and premium and Additional Interest, if any, on that Holder's Notes in accordance with those instructions. All other payments on the Notes will be made at the office or agency of the paying agent and registrar unless we elect to make interest payments by check mailed to the Holders at their addresses set forth in the register of Holders. 101 PAYING AGENT AND REGISTRAR FOR THE NOTES The Trustee will initially act as paying agent and registrar. We may change the paying agent or registrar without prior notice to the Holders of the Notes, and we or any of our Subsidiaries may act as paying agent or registrar. TRANSFER AND EXCHANGE A Holder may transfer or exchange the Units and Notes in accordance with the Indenture. The registrar and the trustee may require a Holder, among other things, to furnish appropriate endorsements and transfer documents in connection with a transfer of the Units or Notes. No service charge will be made for any transfer, exchange or redemption of the Units or Notes. However, Holders will be required to pay all taxes due on transfer. We are not required to transfer or exchange any Unit or Note selected for redemption. Also, we are not required to transfer or exchange any Unit or Note for a period of 15 days before a selection of the Units or Notes to be redeemed. PRINCIPAL, MATURITY AND INTEREST The Indenture does not limit the maximum principal amount of Units and Notes that we may issue thereunder. We will issue 127,491 Units in this offering which will be comprised of U.S. Notes in an aggregate principal amount of $103.207 million and Dutch Notes in an aggregate principal amount of $24.284 million. We may issue additional notes ("Additional Notes") in additional units ("Additional Units") from time to time, subject to the limitations set forth under "-- Certain Covenants -- Limitation on Incurrence of Indebtedness." The Notes and any Additional Notes will be substantially identical other than the issuance dates and the dates from which interest will accrue. We will issue the Units in denominations of $1,000 and in integral multiples of $1,000. The Notes will mature on December 1, 2007. Interest on the Notes will accrue at the rate of 13% per annum and will be payable semi-annually in arrears on June 1 and December 1 in each year, commencing on June 1, 2005, to Holders of record on the immediately preceding May 15 and November 15, respectively. Interest on the Notes will accrue from the date it was most recently paid or, if no interest has been paid, from October 21, 2003 in the case of the old notes issued in October 2003 and from December 21, 2004 in the case of the old notes issued in the 2004 Offering. We will pay interest on overdue principal at 1% per annum in excess of the above rate and we will pay interest on overdue installments of interest at such higher rate to the extent lawful. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. Any Notes that remain outstanding after the completion of the Exchange Offer, together with the Exchange Notes issued in connection with the Exchange Offer, will be treated as a single class of securities under the Indenture. Because, however, any Additional Notes may not be fungible with the Notes for federal income tax purposes, they may have a different CUSIP number or numbers, be represented by a different Global Note or Notes, and otherwise be treated as a separate class or classes of Notes for other purposes. SECURITY Pursuant to the terms of the Domestic Collateral Agreements, the Outstanding Notes and the related Company Guarantee and Domestic Guarantees of the current and future Domestic Guarantors are, and the Notes offered hereby and the related Company Guarantee and Domestic Guarantees of the current and future Domestic Guarantors will be, secured by substantially all of the assets of the U.S. Issuer and such Domestic Guarantors (other than real property and interests therein), including a pledge of the Capital Stock owned directly by the U.S. Issuer and such Domestic Guarantors. However, no such pledge will include more than 65% of the Voting Stock of our Foreign Subsidiaries directly owned by the U.S. Issuer or any such Domestic Guarantor. In addition to the arrangements described in the immediately preceding sentence, the outstanding Dutch Notes and the related Foreign Guarantees of the Foreign Guarantors are, and the Dutch Notes offered hereby and the related Foreign Guarantees of the Foreign Guarantors will be, secured, pursuant to the Foreign 102 Collateral Agreements, by a pledge of all of the accounts receivable, a security interest or floating charge on the inventory to the extent permitted by applicable law and a mortgage on substantially all real property of the Dutch Issuer and the Foreign Guarantors, a pledge of 100% of the Capital Stock of each direct Subsidiary of the Dutch Issuer and each Foreign Guarantor and a pledge of the intercompany loans made by the Dutch Issuer to its Restricted Subsidiaries. The Domestic Collateral that secures the Outstanding Notes and the related Company Guarantee and Domestic Guarantees that will secure the Notes offered hereby and the related Company Guarantee and Domestic Guarantees currently serves as collateral to secure the obligations under the Credit Agreement. The U.S. Issuer, the Domestic Guarantors and the Collateral Agent, on behalf of itself, the Trustee and the Holders, and the Administrative Agent, on behalf of the Lenders, entered into the Intercreditor Agreement on the Issue Date of the Units issued in October 2003, and amended the Intercreditor Agreement in connection with the issuance of the Units issued in December 2004. The Intercreditor Agreement, as amended, provides, among other things, that (1) Liens in the Domestic Collateral securing the Notes are junior to the security interests in favor of the Administrative Agent under the Credit Agreement, and consequently, the Lenders will be entitled to receive proceeds from the foreclosure of any Domestic Collateral prior to the Holders, (2) during any insolvency proceedings, the Administrative Agent and the Collateral Agent will coordinate their efforts to give effect to the relative priority of their security interests in such assets and (3) the Administrative Agent will, following the occurrence and during the continuance of an Event of Default or an event of default under the Credit Agreement, have the sole and exclusive right to make all decisions with respect to the foreclosure of any such Domestic Collateral, including the timing and method of any disposition thereof. The Intercreditor Agreement also provides that the Collateral Agent and the Administrative Agent will provide notices to each other with respect to the occurrence of events of default and the acceleration of the Notes or the Indebtedness outstanding under the Credit Agreement, as the case may be. Subject to the restrictions on incurring Indebtedness in the Indenture, we and our Restricted Subsidiaries will also have the right to grant Liens securing Capital Lease Obligations and Purchase Money Obligations constituting Permitted Indebtedness and to acquire any such assets subject to such Liens. Upon the occurrence of an Event of Default, the proceeds from the sale of Collateral securing the Notes will likely be insufficient to satisfy our obligations under the Notes. No appraisals of any of the Collateral have been prepared in connection with the Offering. Moreover, the amount to be received upon such a sale would be dependent upon numerous factors, including the condition, age and useful life of the Collateral at the time of such sale, as well as the timing and manner of such sale. By its nature, all or some of the Collateral will be illiquid and may have no readily ascertainable market value. Accordingly, there can be no assurance that the Collateral, if saleable, can be sold in a short period of time. To the extent third parties hold Permitted Liens, such third parties may have rights and remedies with respect to the property subject to such Liens that, if exercised, could adversely affect the value of the Collateral. Given the intangible nature of certain of the Collateral, any such sale of such Collateral separately from the Company as a whole may not be feasible. Additionally, the inclusion of the fixtures of the U.S. Issuer of the current and future Domestic Guarantors in the Collateral securing the Notes will be limited by the extent to which (a) such fixtures are deemed not to be personal property, and (b) any applicable state laws would, for purposes of perfecting security interests with respect thereto, require that the Collateral Agent effectuate certain filings in applicable real estate land records. Our ability to grant a security interest in certain Collateral may be limited by legal or other logistical considerations. The ability of the Holders to realize upon the Collateral may be subject to certain bankruptcy law limitations in the event of a bankruptcy. See "-- Certain Bankruptcy and Other Limitations." The U.S. Issuer is permitted to form new Domestic Restricted Subsidiaries and to transfer all or a portion of the Collateral to one or more of its Domestic Restricted Subsidiaries. Each such new Domestic Restricted Subsidiary will be required to execute a Guarantee in respect of our obligations under the Notes and the Indenture and a security agreement granting to the Collateral Agent a security interest in substantially all of the assets of such Domestic Restricted Subsidiary (other than real property and interests therein) on the same 103 basis and subject to the same limitations as the currently existing Domestic Restricted Subsidiaries of the U.S. Issuer as described above. In addition, the Dutch Issuer is permitted to form new Restricted Subsidiaries and to transfer all or a portion of the Foreign Collateral to the U.S. Issuer or one or more of the Guarantors. Each such newly formed Restricted Subsidiary will be required to execute a Foreign Guarantee in respect of the obligations of the Dutch Issuer under the Dutch Notes and the Indenture and Foreign Collateral Agreements granting to the Collateral Agent a pledge of all the accounts receivable, a security interest or floating charge on the inventory to the extent permitted by applicable law and a mortgage on substantially all real property of such Restricted Subsidiary, as well as 100% of the Capital Stock of each Subsidiary of each Restricted Subsidiary, on the same basis and subject to the same limitations as our currently existing Restricted Subsidiaries of the Dutch Issuer as described above. So long as no Event of Default shall have occurred and be continuing, and subject to certain terms and conditions in the Indenture, the Domestic Collateral Agreements and the Intercreditor Agreement, we and our Domestic Restricted Subsidiaries will be entitled to receive all cash dividends, interest and other payments made upon or with respect to the Capital Stock of any of our Subsidiaries and until delivery of a written notice from the Collateral Agent, to exercise any voting, consensual rights and other rights pertaining to such pledged Capital Stock. Upon the occurrence and during the continuance of an Event of Default, subject to the terms of the Intercreditor Agreement as it relates to any Collateral constituting Domestic Collateral, upon notice from the Collateral Agent: (a) all of our rights to exercise such voting, consensual rights, or other rights shall cease following the delivery of such written notice and all such rights shall become vested in the Collateral Agent, which, to the extent permitted by law, shall have the sole right to exercise such voting, consensual rights or other rights; (b) all of our rights to receive all cash dividends, interest and other payments made upon or with respect to the Collateral shall cease, and such cash dividends, interest and other payments shall be paid to the Collateral Agent; and (c) the Collateral Agent may sell the Collateral or any part thereof in accordance with, and subject to the terms of, the Collateral Agreements. All funds distributed under the Collateral Agreements and received by the Collateral Agent for the ratable benefit of the Holders shall be distributed by the Collateral Agent in accordance with the provisions of the Indenture. The collateral release provisions of the Indenture permit the release of Collateral without substitution of collateral having at least equal value under certain circumstances, including asset sales made in compliance with the Indenture. CERTAIN BANKRUPTCY AND OTHER LIMITATIONS The right of the Collateral Agent to repossess and dispose of or otherwise exercise remedies relating to the Collateral upon the occurrence and during the continuance of an Event of Default is likely to be significantly impaired by applicable bankruptcy law if a bankruptcy proceeding were to be commenced by or against the Company or any of its Domestic Restricted Subsidiaries prior to the Collateral Agent having repossessed and disposed of the Collateral or otherwise completed the exercise of its remedies with respect to the Collateral. Under the Bankruptcy Code, a secured creditor such as the Collateral Agent is prohibited from repossessing its security from a debtor in a bankruptcy case, or from disposing of security repossessed from such debtor, without bankruptcy court approval. Moreover, the Bankruptcy Code permits the debtor to continue to retain and to use collateral even though the debtor is in default under the applicable debt instruments; provided that, under the Bankruptcy Code, the secured creditor is given "adequate protection." The meaning of the term "adequate protection" may vary according to circumstances, but it is intended in general to protect the value of the secured creditor's interest in the collateral securing the obligations owed to it and may include cash payments or the granting of additional security, if and at such times as the bankruptcy 104 court in its discretion determines, for any diminution in the value of such collateral as a result of the stay of repossession or disposition or any use of the collateral by the debtor during the pendency of the bankruptcy case. In view of the lack of a precise definition of the term "adequate protection" and the broad discretionary powers of a bankruptcy court, it is impossible to predict how long payments under the Notes could be delayed following commencement of a bankruptcy case, whether or when the Collateral Agent could repossess or dispose of the Domestic Collateral or whether or to what extent Holders would be compensated for any delay in payment or loss of value of the Domestic Collateral through the requirement of "adequate protection." There are two primary insolvency regimes under Dutch law: the first, moratorium of payment (surseance van betaling) is intended to facilitate the reorganization of a debtor's debts and enable the debtor to continue as a going concern. The second, bankruptcy (faillissement), is designed to liquidate and distribute the assets of a debtor to its creditors. Under Netherlands law the Holders of the Dutch Notes can in the event of bankruptcy or moratorium of payment exercise the rights afforded to pledgees as if there were no bankruptcy or moratorium of payment. However, bankruptcy or moratorium of payment involving the Dutch Issuer would affect the position of the Holders of the Dutch Notes as pledgees in some respects, the most important of which are: (i) the right of pledge will not extend to accounts receivable that arise under an agreement creating continuing obligations of the Dutch Issuer and become due and payable on or after the date on which the Dutch Issuer is declared bankrupt or granted a moratorium of payments, (ii) the right of pledge will not extend to inventory that is acquired by the Dutch Issuer on or after the date on which the Dutch Issuer is declared bankrupt or granted a moratorium of payments, (iii) payments received by the Dutch Issuer from the debtors of pledged accounts receivable after bankruptcy or moratorium of payments involving the Dutch Issuer having been declared, will be part of the bankrupt estate, although the Holders of the Dutch Notes have the right to receive such amounts by preference after deduction of certain costs, (iv) a mandatory "cooling-off" period of up to two months may apply in case of bankruptcy or moratorium of payments involving the Dutch Issuer, which, if applicable, would delay the exercise of the rights of pledge on the shares of Phibro Belgium and the accounts receivable and (v) the Holders of the Dutch Notes may be obliged to enforce their rights of pledge within a reasonable period as determined by the judge-commissioner (rechter-commissaris) appointed by the court in case of bankruptcy of the Dutch Issuer. Under Belgian insolvency law, the right of the Collateral Agent to seize or to enforce against the Foreign Collateral provided by Phibro Belgium would be severely restricted or prohibited altogether if Phibro Belgium were subject to insolvency proceedings at the time of seizure or enforcement. In bankruptcy, secured creditors may not proceed against assets from the declaration of bankruptcy at least until the end of the proceeding for verification of claims. Even thereafter, the trustee in bankruptcy may petition the court to disallow enforcement for up to one year. In judicial composition (reorganization), secured creditors cannot take enforcement or attachment measures during the provisional composition (up to nine months) and may be barred for a further 18 months pursuant to the definitive plan of composition, if interest is paid. Moreover, the Collateral Agent's ability to foreclose on the Collateral may be subject to lack of perfection, the consent of third parties, prior liens and practical problems associated with the realization of the Collateral Agent's Lien on the Collateral. In addition, because a portion of the Collateral consists of pledges of a portion of the Capital Stock of certain of the Foreign Subsidiaries of the Company, the validity of those pledges under applicable foreign law, and the ability of the Collateral Agent to realize upon that Collateral under applicable foreign law, may be limited by such law, which limitations may or may not affect such Liens. THE GUARANTEES The Guarantors will fully and unconditionally guarantee on a senior secured basis (each a "Guarantee" and, collectively, the "Guarantees"), jointly and severally, to each Holder, the Collateral Agent and the Trustee, the full and prompt performance of the Issuers' Obligations under the Indenture and the Notes; provided, that the Guarantee of each Foreign Guarantor shall only be in respect of the Dutch Notes and the other Obligations of the Dutch Issuer and not in respect of the U.S. Notes or any other Obligation of the U.S. Issuer. Pursuant to the Company Guarantee, the U.S. Issuer will also fully and unconditionally guarantee 105 on a senior secured basis to each Holder, the Collateral Agent and the Trustee, the full and prompt performance of the Dutch Issuer's Obligations under the Indenture and the Dutch Notes. The Company Guarantee and the Domestic Guarantees will be the joint and several Obligation of the U.S. Issuer and the Domestic Guarantors. The Obligations of each Guarantor will be limited as necessary to prevent its Guarantee from constituting a fraudulent conveyance or fraudulent transfer under applicable law. Each Domestic Guarantor may consolidate with or merge into or sell its assets to the Company or any other Domestic Guarantor without limitation. Each Foreign Guarantor may consolidate with or merge into or sell its assets to the Dutch Issuer or any other Guarantor without limitation. See "-- Merger, Consolidation and Sale of Assets" and "-- Certain Covenants -- Limitation on Asset Sales." A Guarantor will be released from its Guarantee without any action required on the part of the Trustee or any Holder: (1) if (a) all of the Capital Stock issued by such Guarantor or all or substantially all of the assets of such Guarantor is sold or otherwise disposed of (including by way of merger or consolidation) to a Person other than us or any of our Domestic Restricted Subsidiaries or (b) such Guarantor ceases to be a Restricted Subsidiary, and we otherwise comply, in each case, to the extent applicable, with the provisions of the covenant described below under the caption "-- Certain Covenants -- Limitation on Asset Sales" that are required to be satisfied thereunder either prior to or concurrent with the consummation of the applicable transaction; (2) if we designate such Guarantor as an Unrestricted Subsidiary in accordance with the covenant described below under the caption "-- Certain Covenants -- Limitation on Restricted Payments"; or (3) upon satisfaction and discharge of the Indenture or payment in full of the principal of, premium, if any, accrued and unpaid interest and Additional Interest, if any, on the Notes and all other Obligations that are then due and payable. The U.S. Issuer will be released from the Company Guarantee upon satisfaction of the condition described in clause (3) above to the extent the Obligations described therein relate to the Dutch Notes and all other Obligations of the Dutch Issuer. At our request and expense, the Trustee will execute and deliver any instrument evidencing such release. A Guarantor and the U.S. Issuer may also be released from its obligations under its Guarantee or the Company Guarantee, as applicable, in connection with a permitted amendment. See "-- Amendment, Supplement and Waiver." REDEMPTION Mandatory Redemption; Offers to Purchase; Open Market Purchases. The Notes are not subject to any mandatory sinking fund redemption prior to maturity. However, under certain circumstances, we may be required to offer to purchase the Notes as described under the captions "-- Change of Control" and "-- Certain Covenants -- Limitation on Asset Sales." We may at any time and from time to time purchase Units or Notes (in the event that a Separation Event has occurred) in the open market or otherwise. OPTIONAL REDEMPTIONS Optional Redemption Prior to June 1, 2005. At any time prior to June 1, 2005, the Issuers may, at their option, on one or more occasions redeem all or part of their Notes at a redemption price equal to the greater of (1) 100% of the aggregate principal amount of the Notes being redeemed and (2) the sum of the present values of 114% of the aggregate principal amount of the Notes being redeemed and scheduled payments of interest on such Notes to and including June 1, 2005 discounted to the date of redemption on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus 50 basis points, together with, in each case, accrued and unpaid interest, if any, to the date of redemption. The foregoing optional redemption of the Notes prior to June 1, 2005 shall include both U.S. Notes and Dutch Notes on a pro rata basis based on the aggregate principal amount of the Notes outstanding at the time of redemption, unless a Change in Control of the Dutch Issuer has occurred. 106 "Treasury Rate" means, with respect to any redemption date, the rate per annum equal to the semi-annual equivalent yield to maturity of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such redemption period. "Comparable Treasury Issue" means the United States Treasury security selected by a Reference Treasury Dealer appointed by the Company as having a maturity comparable to the remaining term of the Notes (as if the final maturity of the Notes was June 1, 2005) that would be utilized at the time of selection and in accordance with customary financial practice in pricing new issues of corporate debt securities of comparable maturity to the remaining term of the Notes (as if the final maturity of the Notes was June 1, 2005). "Comparable Treasury Price" means, with respect to any redemption date, (1) the average of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) on the third business day preceding such redemption date, as set forth in the daily statistical release (or any successor release) published by the Federal Reserve Bank of New York and designated "Composite 3:30 p.m. Quotations for U.S. Government Securities" or (2) if such release (or any successor release) is not published or does not contain such prices on such business day, (A) the average of the Reference Treasury Dealer Quotations (as defined below) for such redemption date, after excluding the highest and lowest such Reference Treasury Dealer Quotation or (B) if the Company obtains fewer than three such Reference Treasury Dealer Quotations, the average of all such Reference Treasury Dealer Quotations. "Reference Treasury Dealer Quotation" means, with respect to each Reference Treasury Dealer and any redemption date, the average, as determined by the Company, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Company by such Reference Treasury Dealer at 5:00 p.m. on the third business day preceding such redemption date. "Reference Treasury Dealer" means any primary U.S. government securities dealer in the City of New York selected by the Company. Optional Redemption on or After June 1, 2005. The Notes are redeemable at our option, in whole or in part, at any time on or after June 1, 2005 at the redemption prices (expressed as percentages of the principal amount of the Notes) set forth below plus in each case accrued and unpaid interest and Additional Interest, if any, to the date of redemption, if redeemed during the six-month period beginning on the dates indicated below:
PERIOD PERCENTAGE - ------ ---------- June 1, 2005................................................ 114.0% December 1, 2005............................................ 109.0% June 1, 2006................................................ 105.0% December 1, 2006, and thereafter............................ 101.0%
In addition, at any time prior to June 1, 2005, we may, at our option, redeem up to 35% of the sum of (i) the initial aggregate principal amount of the Notes issued in the Offering and (ii) the respective initial aggregate principal amount of the Notes issued under the Indenture after the Issue Date, on one or more occasions with the net proceeds of one or more Public Equity Offerings at 113% of the principal amount thereof, plus accrued and unpaid interest and Additional Interest, if any, to the date of redemption; provided, that immediately after giving effect to such redemption, at least 65% of the sum of (i) $105.0 million (the initial aggregate principal amount of the Notes issued in the Offering) and (ii) the respective initial aggregate principal amount of the Notes issued under the Indenture after the Issue Date remain outstanding (other than any Notes owned by the Company or any of its Affiliates). In order to effect the foregoing redemption with the proceeds of any Public Equity Offering, we will make such redemption not more than 90 days after the consummation of any such Public Equity Offering. 107 "Public Equity Offering" means an underwritten public offering of Capital Stock (other than Disqualified Stock) of the Company pursuant to an effective registration statement filed under the Securities Act. The foregoing optional redemption of the Notes on or after June 1, 2005 shall include both U.S. Notes and Dutch Notes on a pro rata basis based on the aggregate principal amount of the Notes outstanding at the time of redemption, unless a Change of Control of the Dutch Issuer has occurred. Selection and Notice. If less than all of the Notes are to be redeemed at any time, selection of the Notes to be redeemed will be made by the Trustee in compliance with the requirements of the principal national securities exchange, if any, on which the Notes are listed or, if the Notes are not listed on a securities exchange, on a pro rata basis or by lot or any other method as the Trustee shall deem fair and appropriate; provided, that Notes redeemed in part shall only be redeemed in integral multiples of $1,000; provided further, that any such redemption pursuant to the provisions relating to a Public Equity Offering shall be made on a pro rata basis or on as nearly a pro rata basis as practicable (subject to the procedures of The Depository Trust Company or any other depositary), unless such method is otherwise prohibited. Notices of any optional or mandatory redemption shall be mailed by first class mail at least 30 but not more than 60 days before the redemption date to each Holder to be redeemed at such Holder's registered address. If any Note is to be redeemed in part only, the notice of redemption that relates to such Note shall state the portion of the principal amount thereof to be redeemed, and the Trustee shall authenticate and mail to the Holder of the original Note a Note in principal amount equal to the unredeemed portion of the original Note promptly after the original Note has been canceled. On and after the redemption date, interest and Additional Interest, if applicable, will cease to accrue on Notes or portions thereof called for redemption. TAXATION; REDEMPTION FOR TAXATION REASONS All payments by the Dutch Issuer and any Guarantor (and the U.S. Issuer with respect to the Company Guarantee) in respect of the Dutch Notes shall be made without withholding or deduction for or on account of any present or future taxes, duties, assessments or other governmental charges of whatsoever nature, including penalties, interest and any other liabilities related thereto ("Taxes"), imposed or levied by or on behalf of The Netherlands, or any other jurisdiction in which any Guarantor (or the U.S. Issuer with respect to the Company Guarantee) in respect of the Dutch Notes is organized or resident for tax purposes of any such jurisdiction, as the case may be, or, in each case, any other relevant jurisdiction or any political subdivision or authority of or in any such jurisdiction having power to tax (for purposes of this "-- Taxation; Redemption For Taxation Reasons," the "Relevant Jurisdiction"), unless the Dutch Issuer or any such Guarantor (or the U.S. Issuer with respect to the Company Guarantee) is compelled by law to deduct or withhold such taxes, duties, assessments or other governmental charges. In such event, the Dutch Issuer or such Guarantor (or the U.S. Issuer with respect to the Company Guarantee) shall pay such additional amounts ("Additional Amounts") as may be necessary to ensure that the net amounts received by the holders of the Dutch Notes after such withholding or deduction shall equal the amounts of such payments that would have been receivable in respect of the Dutch Notes in the absence of such withholding or deduction, except that no such Additional Amounts shall be payable in respect of any Dutch Note (i) presented for payment of principal more than 60 days after the later of (x) the date on which such payment first became due and (y) if the full amount payable has not been received in New York City by the Trustee on or prior to such due date, the date on which, the full amount having been so received, notice to that effect shall have been given to the holders by the Trustee, except to the extent that the holders would have been entitled to such Additional Amounts on presenting such Dutch Note for payment on the last day of the applicable 60 day period, (ii) if any tax, assessment or other governmental charge is imposed or withheld by reason of the failure to comply by the holder or, if different, the beneficial owner of the interest payable on the Dutch Note with a timely request of the Dutch Issuer addressed to such holder or beneficial owner to complete and return an official document concerning the nationality, residence, identity or connection with the Netherlands or any Relevant Jurisdiction of such holder or beneficial owner which is required or imposed by a statute, treaty, regulation or administrative practice of the Netherlands or any Relevant Jurisdiction as a precondition to exemption from all or part of such tax, assessment or governmental charge and provided that the request to so comply is made in writing and delivered to such holder or beneficial owner, as applicable, not later than 60 days prior to the 108 date by which the delivery of such official document is required, (iii) held by or on behalf of a holder who is liable for Taxes giving rise to such Additional Amounts in respect of such Dutch Note by reason of having some connection with the Netherlands or any Relevant Jurisdiction other than the mere purchase, holding or disposition of any Dutch Note, or the receipt of principal or interest in respect thereof, including, without limitation, such holder being or having been a citizen or resident thereof or being or having been present or engaged in a trade or business therein or having had a permanent establishment therein, (iv) where such withholding or deduction is imposed on a payment to an individual who is resident for tax purposes in a jurisdiction which is a member state of the European Union (whether such payment is made through a paying agent or otherwise) and is required to be made pursuant to European Union Directive 2003/48/EC of 3 June 2003 on the taxation of savings or any law implementing or complying with, or introduced in order to conform to such Directive and (v) any combination of clause (i), (ii), (iii) or (iv) above; nor shall Additional Amounts be paid with respect to any payment of the principal of, or any interest on, any Dutch Note to any holder who is a fiduciary or partnership or other than the sole beneficial owner of such payment to the extent that a beneficiary or settlor or beneficial owner would not have been entitled to any Additional Amounts had such beneficiary or settlor or beneficial owner been the holder. The Dutch Issuer or such Guarantor (or the U.S. Issuer with respect to the Company Guarantee) will also (a) make such withholding or deduction compelled by applicable law and (b) remit the full amount deducted or withheld to the relevant authority in accordance with applicable law. The Dutch Issuer or such Guarantor (or the U.S. Issuer with respect to the Company Guarantee) will furnish copies of such receipts evidencing the payment of any Taxes so deducted or withheld in such form as provided in the normal course by the taxing authority imposing such Taxes and as is reasonably available to the Dutch Issuer or such Guarantor (or the U.S. Issuer with respect to the Company Guarantee) to the Trustee within 60 days after the date of receipt of such evidence. The Trustee will make such evidence available to the holders of Dutch Notes upon request. All references herein and in the Indenture or the Dutch Notes to the principal of or interest or other payments on, or in respect of, a Dutch Note shall be deemed to include, without duplication, any Additional Amounts payable in connection therewith. The Dutch Issuer will pay any present or future stamp, court or documentary taxes or any other excise or property taxes, charges or similar levies that arise in any jurisdiction from the execution, delivery or registration of the Dutch Notes or any other document or instrument referred to in the Indenture or Dutch Notes. Dutch Notes may be redeemed, at the option of the Dutch Issuer, as a whole, but not in part (limited to Dutch Notes with respect to which an Additional Amount (as described above) is or may be required), at any time, upon giving notice to holders not less than 30 days nor more than 60 days prior to the date fixed for redemption (which notice shall be irrevocable), at a redemption price equal to 100% of the principal amount thereof, together with interest accrued to the date fixed for redemption and any Additional Amounts payable with respect thereto, if the Dutch Issuer determines and certifies to the Trustee immediately prior to the giving of such notice that (i) the Dutch Issuer or any Guarantor (or the U.S. Issuer with respect to the Company Guarantee) in respect of the Dutch Notes has or will become obligated to pay Additional Amounts in respect of such Dutch Notes as a result of any change in or amendment to the laws (or any regulations or rulings promulgated thereunder) of the Netherlands or any Relevant Jurisdiction or any political subdivision or taxing authority thereof or therein affecting taxation, or any change in the official position regarding the application or interpretation of such laws, regulations or rulings (including a holding by a court of competent jurisdiction) which change or amendment becomes effective on or after the date of issuance of such Dutch Notes and (ii) such obligation cannot be avoided by the Dutch Issuer or such Guarantor (or the U.S. Issuer with respect to the Company Guarantee) taking reasonable measures available to it, provided, that no such notice of redemption shall be given earlier than 60 days prior to the earliest date on which the Dutch Issuer or such Guarantor (or the U.S. Issuer with respect to the Company Guarantee) would be obligated to pay such Additional Amounts if a payment in respect of such Dutch Notes was then due. Prior to the giving of any notice of redemption described in this paragraph, the Dutch Issuer shall deliver to the Trustee (a) a certificate signed by two directors of the Dutch Issuer stating that the obligation to pay Additional Amounts cannot be avoided by the Dutch Issuer or such Guarantor (or the U.S. Issuer with respect to the Company Guarantee) 109 taking reasonable measures available to them and (b) a written opinion of independent legal counsel to the Dutch Issuer to the effect that the Dutch Issuer or such Guarantor (or the U.S. Issuer with respect to the Company Guarantee) has become obligated to pay Additional Amounts as a result of such a change or amendment described above and that the Dutch Issuer or such Guarantor (or the U.S. Issuer with respect to the Company Guarantee) cannot avoid payment of such Additional Amounts by taking reasonable measures available to them. CHANGE OF CONTROL In the event of a Change of Control of the U.S. Issuer, each Holder will have the right, unless we have given a notice of redemption, subject to the terms and conditions of the Indenture, to require us to offer to purchase all or any portion (equal to $1,000 or an integral multiple thereof) of such Holder's Notes at a purchase price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest and Additional Interest, if any, to the date of purchase, in accordance with the terms set forth below. Any such repurchase of the Notes will include both U.S. Notes and Dutch Notes on a pro rata basis based on the aggregate principal amount of the Notes outstanding at the time of redemption, unless a Change of Control of the Dutch Issuer has occurred. In the event of a Change of Control of the Dutch Issuer, the Dutch Issuer may, at its option at any time, redeem the Dutch Notes in whole, and not in part, at the optional redemption price specified in "-- Redemption -- Optional Redemption" with respect to the date such redemption is to be effected (such right, a "Change of Control Redemption of Dutch Notes Right", and such redemption, a "Change of Control Redemption of Dutch Notes"). If the Dutch Issuer has not delivered a notice of redemption within 30 days following a Change of Control of the Dutch Issuer, each Holder of a Dutch Note shall have the right to require that the Dutch Issuer repurchase all or a portion of such Holder's Dutch Notes at a purchase price in cash equal to 101% of the principal amount thereof plus accrued and unpaid interest and Additional Amounts, if any, to the date of repurchase (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date), in accordance with the next paragraph; provided that at any time prior to the consummation of the offer to purchase required by the Dutch Issuer in accordance with the next paragraph, the Dutch Issuer may deliver an optional redemption notice to redeem all of the Dutch Notes in lieu of completing such offer to purchase. We currently have no outstanding securities or liabilities that are pari passu with the Notes and also contain mandatory Change of Control repayment provisions; however, the Credit Agreement may contain an event of default based upon a change of control and upon the occurrence of such event of default the obligations thereunder may be accelerated by the requisite holders thereof. In addition, other debt instruments of the Company may in the future contain a "change of control" provision that is similar to the provision in the Indenture relating to a Change of Control, and the occurrence of such a "change of control" could constitute a default under such debt instruments. If a Change of Control were to occur, there can be no assurance that we (or the Dutch Issuer, if it were to exercise its Change of Control Redemption of Dutch Notes Right) would have sufficient assets to satisfy our obligations under other agreements relating to indebtedness (including the Credit Agreement) and to purchase all of (i) the Notes that might be delivered by Holders seeking to accept a Change of Control Offer (as defined below) or (ii) if a Change of Control of the Dutch Issuer were to occur and the Dutch Issuer were to exercise its Change of Control Redemption of Dutch Notes Right, all of the Dutch Notes. In the event we are required to purchase outstanding Notes pursuant to a Change of Control Offer or the Dutch Issuer is required to purchase the Dutch Notes in connection with a Change of Control Redemption of Dutch Notes, we expect that we would seek third party financing to the extent we do not have available funds to meet our purchase obligations. However, there can be no assurance that we would be able to obtain such financing and the terms of the Credit Agreement and/or the Indenture may restrict the our ability to obtain such financing. See "Risk Factors -- We may not be able to satisfy our obligations to Holders upon a change of control." The Indenture provides the Holders protection in the event of a highly leveraged transaction to the extent that our ability to effect a highly leveraged transaction, in connection with any Change of Control or otherwise, 110 is subject to the provisions of the Indenture described below under the caption "-- Certain Covenants," including without limitation the provisions described thereunder under the headings "Limitation on Incurrence of Indebtedness." The covenant described below under the heading "Limitation on Incurrence of Indebtedness" does not specifically limit the leverage of any particular transaction, but requires that we have a ratio of consolidated cash flow to interest expense above a specified level in order to incur Indebtedness, subject to certain enumerated exceptions. In general, the Change of Control provisions would not be triggered if either Issuer was to recapitalize or to enter into transactions with management or its affiliates unless at least one of the events relating to such Issuer and specified in the definition of the term "Change of Control" were also to occur. See "-- Certain Definitions." Without the consent of each Holder affected, no amendment of the Indenture or waiver of any Default or Event of Default thereunder, will, following the occurrence of a Change of Control, amend, change or modify our obligation to make and consummate a Change of Control Offer as a result of such a Change of Control a Change of Control Redemption of Dutch Notes as a result of such a Change of Control and the exercise by the Dutch Issuer of the Change of Control Redemption of Dutch Notes Right or modify the provisions or definitions with respect thereto in a manner adverse to the Holders with respect to such Change of Control. See "-- Amendment, Supplement and Waiver." On or before the 30th day following the occurrence of any Change of Control, we will, and within 30 days following any Change of Control of the Dutch Issuer, the Dutch Issuer will, mail an offer (each, a "Change of Control Offer") to each Holder at such Holder's registered address a notice by first-class mail stating: (i) that a Change of Control has occurred and that such Holder has the right to require us or the Dutch Issuer, as the case may be, to purchase all or a portion (equal to $1,000 or an integral multiple thereof) of such Holder's Notes or Dutch Notes, as the case may be, at a purchase price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest and Additional Interest, if any, to the date of purchase (the "Change of Control Purchase Date"), which shall be a business day, specified in such notice, that is not earlier than 30 days or later than 60 days from the date such notice is mailed, (ii) the amount of accrued and unpaid interest and Additional Interest, if any, as of the Change of Control Purchase Date, (iii) that any Note not tendered will continue to accrue interest and Additional Interest, if applicable, (iv) that, unless we or the Dutch Issuer, as the case may be, default in the payment of the purchase price for the Notes payable pursuant to the Change of Control Offer, any Notes accepted for payment pursuant to the Change of Control Offer shall cease to accrue interest and Additional Interest, if applicable, on the Change of Control Purchase Date, (v) the procedures, consistent with the Indenture, to be followed by a Holder in order to accept a Change of Control Offer or to withdraw such acceptance, and (vi) such other information as may be required by the Indenture and applicable laws and regulations. We or the Dutch Issuer, as the case may be, will not be required to make a Change of Control Offer upon a Change of Control if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements set forth in the Indenture applicable to a Change of Control Offer made by us or the Dutch Issuer, as the case may be, and purchases all Notes validly tendered and not withdrawn under such Change of Control Offer. On the Change of Control Purchase Date, we or the Dutch Issuer, as the case may be, will (i) accept for payment all Notes or portions thereof tendered pursuant to the Change of Control Offer, (ii) deposit with the Paying Agent the aggregate purchase price of all Notes or portions thereof accepted for payment, and (iii) deliver or cause to be delivered to the Trustee all Notes tendered pursuant to the Change of Control Offer. The Paying Agent shall promptly mail to each Holder whose Notes or portions thereof were accepted for payment an amount equal to the purchase price for such Notes or portion thereof plus accrued and unpaid interest and Additional Interest, if any, thereon, and the Trustee shall promptly authenticate and mail to each Holder whose Notes or portions thereof were accepted for payment in part a Note equal in principal amount to any unpurchased portion of the Notes, and any Note not accepted for payment in whole or in part shall be promptly returned to the Holder of such Note. On and after a Change of Control Purchase Date, interest and Additional Interest, if applicable, will cease to accrue on the Notes or portions thereof accepted for payment, 111 unless we or the Dutch Issuer, as the case may be, defaults in the payment of the purchase price therefor. We will publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Purchase Date. As used in the definition of Change of Control, the phrase "all or substantially all" of the Capital Stock or assets of the Company and its Restricted Subsidiaries will likely be interpreted under applicable state law and will be dependent upon particular facts and circumstances. As a result, there may be a degree of uncertainty in ascertaining whether a sale or disposition of "all or substantially all" of the Capital Stock or assets of the Company and its Restricted Subsidiaries has occurred, in which case a Holder's ability to obtain the benefit of a Change or Control Offer may be impaired. We will comply with the applicable tender offer rules, including the requirements of Section 14(e) and Rule 14e-1 under the Exchange Act, and all other applicable securities laws and regulations in connection with any Change of Control Offer and will be deemed not to be in violation of any of the covenants under the Indenture to the extent such compliance is in conflict with such covenants. EXCESS CASH FLOW OFFER Within 120 days after the end of each fiscal year of the Company (beginning with the fiscal year ending June 30, 2005), we may, if excess cash flow for such fiscal year was at least $250,000, be required to make an offer (an "Excess Cash Flow Offer") to all Holders to purchase the maximum principal amount of Notes that may be purchased with 50% of Excess Cash Flow for such fiscal year (the "Excess Cash Flow Offer Amount"), at a purchase price in cash equal to 102.5% of the principal amount of the Notes to be purchased, plus accrued and unpaid interest and Additional Interest, if any, to the date of such purchase. The Indenture will provide for each Excess Cash Flow Offer to remain open for a period of 30 days, unless a longer period is required by law. If the Excess Cash Flow Offer Amount exceeds the aggregate amount of Notes tendered pursuant to any Excess Cash Flow Offer, we shall make an offer at the end of such period to all holders of Existing Notes, to purchase the maximum principal amount of Existing Notes that may be purchased with such excess, at a purchase price in cash equal to 100% of the principal amount of the Existing Notes to be purchased, plus accrued and unpaid interest thereon to the date of such purchase. If any excess remains following such offer in respect of the Existing Notes, we may, subject to the other provisions of the Indenture, use any such remaining excess for general corporate purposes. Upon receiving notice of the Excess Cash Flow Offer, Holders may elect to tender their Notes, in whole or in part, in integral multiples of $1,000 principal amount in exchange for cash. Any such repurchase of the Notes shall include both U.S. Notes and Dutch Notes on a pro rata basis based upon the aggregate principal amount of the Notes outstanding at the time of such repurchase, unless a change of control of the Dutch Issuer has occurred. Any Excess Cash Flow Offer Amount may be reduced by prior open market purchases of Units or Notes during such fiscal year. Within 30 days prior to the required purchase date, we will mail an offer to each Holder, with a copy to the Trustee, which offer will govern the terms of the Excess Cash Flow Offer. Such offer will state, among other things the purchase date and price. We will comply with the applicable tender offer rules, including the requirements of Section 14(e) and Rule 14e-1 under the Exchange Act, and all other applicable securities laws and regulations in connection with any Excess Cash Flow Offer and will be deemed not to be in violation of any of the covenants under the Indenture to the extent such compliance is in conflict with such covenants. However, each Excess Cash Flow Offer is likely to be subject to limitations in the Credit Agreement. CERTAIN COVENANTS Limitation on Incurrence of Indebtedness. The Indenture provides that the Company will not, and will not permit any Restricted Subsidiary to, create, incur, assume or directly or indirectly guarantee or in any other manner become directly or indirectly liable for ("incur") any Indebtedness (including Acquired Debt), except that the Company and any Domestic Guarantor may incur Indebtedness (including Acquired Debt) if, immediately after giving pro forma effect to, such incurrence of Indebtedness, the Consolidated Cash Flow Coverage Ratio of the Company for the most recently ended four fiscal quarters would be at least 2.25 to 1.0 if 112 incurred during the period from the Issue Date through the second anniversary thereof, and 2.50 to 1.0 if incurred thereafter. The foregoing limitations do not apply to the incurrence of any of the following (collectively, "Permitted Indebtedness"), each of which shall be given independent effect: (i) Indebtedness of the Company and its Restricted Subsidiaries arising under the Credit Agreement, in an aggregate principal amount not to exceed at any time outstanding an amount equal to (w) $37.5 million, less (x) during the 30 day period preceding the date on which a scheduled payment of interest is due on the Notes, the aggregate amount of such interest, less (y) during the 30 day period preceding the date on which a scheduled payment of interest is due on the Existing Notes, the aggregate amount of such interest, less (z) the aggregate principal amount of Notes issued pursuant to clause (xx) below; (ii) Indebtedness of the Issuers and the Guarantors represented by the Notes issued on the Issue Date in the Offering, Exchange Notes issued in exchange for such Notes or in exchange for Notes issued in compliance with the first paragraph of this covenant and the related Guarantees and the Company Guarantee; (iii) Indebtedness of the Company or any Restricted Subsidiary in existence, and Indebtedness pursuant to any commitment in effect under any credit agreement or facility, in each case, on the Issue Date ("Existing Indebtedness"); (iv) Indebtedness of a Domestic Restricted Subsidiary of the Company to the Company or to a Restricted Subsidiary of the Company for so long as such Indebtedness is held by the Company or a Restricted Subsidiary of the Company or the holder of a Permitted Lien thereon of the type described in clause (i), (vii) or (xv) of the definition thereof, in each case, subject to no Lien held by a Person other than the Company or a Restricted Subsidiary of the Company or the holder of a Permitted Lien of the type described in clause (i), (vii) or (xv) of the definition thereof; provided that (a) any such Indebtedness is subordinated, pursuant to a written agreement by the holder thereof, to such Subsidiary's Obligations under the Indenture and its Guarantee and (b) if as of any date any Person other than the Company or a Restricted Subsidiary of the Company or the holder of a Permitted Lien thereon of the type described in clause (i), (vii) or (xv) of the definition thereof owns or holds any such Indebtedness or holds a Lien in respect of such Indebtedness, such date shall be deemed the incurrence of Indebtedness not constituting Permitted Indebtedness under this clause (iv) by the issuer of such Indebtedness; (v) Indebtedness of a Foreign Restricted Subsidiary of the Company to the Company or to a Restricted Subsidiary of the Company for so long as such Indebtedness is permitted to be made as a Permitted Investment under clause (i)(B), (ix) or (x) of the definition thereof and is held by the Company or a Restricted Subsidiary of the Company, as the case may be, or the holder of a Permitted Lien thereon of the type described in clause (i), (vii) or (xv) of the definition thereof, in each case, subject to no Lien held by a Person other than the Company or a Restricted Subsidiary of the Company, as the case may be, or the holder of a Permitted Lien of the type described in clause (i), (vii) or (xv) of the definition thereof; provided that (a) if such Indebtedness was made as a Permitted Investment under clause (i)(B) of the definition thereof to the Dutch Issuer or any Foreign Guarantor, such Indebtedness shall be subordinated, pursuant to a written agreement by the holder thereof, to the Dutch Issuer's or such Foreign Guarantor's, as the case may be, Obligations under the Indenture and the Dutch Notes or its Foreign Guarantee, as applicable, and (b) if as of any date any Person other than the Company or a Restricted Subsidiary of the Company, as the case may be, or the holder of a Permitted Lien thereon of the type described in clause (i), (vii) or (xv) of the definition thereof owns or holds any such Indebtedness or holds a Lien in respect of such Indebtedness, such date shall be deemed the incurrence of Indebtedness not constituting Permitted Indebtedness under this clause (v) by the issuer of such Indebtedness; 113 (vi) (A) Indebtedness of a Foreign Restricted Subsidiary of the Company to a Foreign Restricted Subsidiary of the Company that is not the Dutch Issuer or a Restricted Subsidiary thereof for so long as such Indebtedness is held by such Foreign Restricted Subsidiary of the Company or the holder of a Permitted Lien thereon of the type described in clause (xv) of the definition thereof, in each case, subject to no Lien held by a Person other than the Company or such Foreign Restricted Subsidiary of the Company or the holder of a Permitted Lien of the type described in clause (xv) of the definition thereof (provided that if as of any date any Person other than such Foreign Restricted Subsidiary of the Company or the holder of a Permitted Lien thereon of the type described in clause (xv) of the definition thereof owns or holds any such Indebtedness or holds a Lien in respect of such Indebtedness, such date shall be deemed the incurrence of Indebtedness not constituting Permitted Indebtedness under this clause (vi) (A) by the issuer of such Indebtedness); and (B) Indebtedness of the Dutch Issuer or any Restricted Subsidiary thereof to a Restricted Subsidiary of the Dutch Issuer or the Dutch Issuer for so long as such Indebtedness is held by a Restricted Subsidiary of the Dutch Issuer or the Dutch Issuer or the holder of a Permitted Lien thereon of the type described in clause (vii) or (xv) of the definition thereof, in each case, subject to no Lien held by a Person other than a Restricted Subsidiary of the Dutch Issuer or the Dutch Issuer or the holder of a Permitted Lien of the type described in clause (vii) or (xv) of the definition thereof (provided that (1) any such Indebtedness is subordinated, pursuant to a written agreement by the holder thereof, to the Dutch Issuer's or such Restricted Subsidiary's, as the case may be, Obligations under the Indenture and the Dutch Notes or its Guarantee, as applicable, and (2) if as of any date any Person other a Restricted Subsidiary of the Dutch Issuer or the Dutch Issuer or the holder of a Permitted Lien thereon of the type described in clause (vii) or (xv) of the definition thereof owns or holds any such Indebtedness or holds a Lien in respect of such Indebtedness, such date shall be deemed the incurrence of Indebtedness not constituting Permitted Indebtedness under this clause (vi)(B) by the issuer of such Indebtedness); (vii) Indebtedness of the Company to a Restricted Subsidiary of the Company for so long as such Indebtedness is held by a Restricted Subsidiary of the Company, in each case, subject to no Lien other than a Permitted Lien of the type described in clause (i), (vii) or (xv) of the definition thereof; provided that (a) any such Indebtedness is subordinated, pursuant to a written agreement by the holder thereof, to the Company's Obligations under the Indenture and the Notes and (b) if as of any date any Person other than a Restricted Subsidiary of the Company or the holder of a Permitted Lien of the type described in clause (i), (vii) or (xv) of the definition thereof, owns or holds any such Indebtedness or any Person holds a Lien in respect of such Indebtedness, such date shall be deemed the incurrence of Indebtedness not constituting Permitted Indebtedness under this clause (vii) by the Company; (viii) Indebtedness of the Company or any Restricted Subsidiary arising with respect to (A) Interest Rate Agreement Obligations incurred for the purpose of fixing or hedging interest rate risk or currency risk with respect to any fixed or floating rate Indebtedness that is permitted by the terms of the Indenture to be outstanding to the extent that the notional amount of any such Interest Rate Agreement Obligations do not exceed at the time of the incurrence thereof, the principal amount of Indebtedness to which such Interest Rate Agreement Obligations relate and (B) Currency Agreement Obligations incurred for the purpose of fixing or hedging currency risk with respect to any receivable or liability the payment of which is determined by reference to a foreign currency (provided that in the case of Currency Agreement Obligations which relate to Indebtedness, such Currency Agreement Obligations do not increase the Indebtedness of the Company and its Restricted Subsidiaries outstanding other than as a result of fluctuations in foreign currency exchange rates or by reason of fees, indemnities and compensation payable thereunder); (ix) Indebtedness represented by performance, completion, guarantee, surety and similar bonds and assurances provided by or for the Company or any Restricted Subsidiary in the ordinary course of business; (x) any Indebtedness incurred in connection with or given in exchange for the renewal, extension, substitution, refunding, defeasance, refinancing or replacement, in whole or in part (a "refinancing"), of any Indebtedness incurred as permitted under the first paragraph of this covenant or any Indebtedness 114 described in any of clauses (ii) or (iii) above, and this clause (x) ("Refinancing Indebtedness"); provided, however, that (a) the principal amount of such Refinancing Indebtedness shall not exceed the principal amount (or accreted amount, if less, or in the case of a revolving credit facility the maximum amount of the facility, if more) of the Indebtedness so refinanced (plus accrued interest on the Indebtedness being refinanced plus the premiums, if any, on the Indebtedness being refinanced and reasonable expenses to be paid in connection therewith, which, with respect to such premiums, shall not exceed the stated amount of any premium or other payment required to be paid in connection with such a refinancing pursuant to the terms of the Indebtedness being refinanced); (b) if the Weighted Average Life to Maturity of the Indebtedness being refinanced is equal to or greater than the Weighted Average Life to Maturity of the Notes, the Refinancing Indebtedness shall have a Weighted Average Life to Maturity equal to or greater than the Weighted Average Life to Maturity of the Indebtedness being refinanced; (c) the final maturity of such Refinancing Indebtedness shall not be earlier than the final maturity of the Indebtedness being Refinanced; (d) with respect to Refinancing Indebtedness refinancing Subordinated Indebtedness, shall be subordinated to the Notes at least to the same extent and in the same manner as the Indebtedness being refinanced; and (e) the obligor on such Refinancing Indebtedness shall be the obligor on the Indebtedness being refinanced; (xi) Indebtedness of the Company or any Restricted Subsidiary (a) representing Capital Lease Obligations and any amendments, modifications, renewals, refundings, replacements or refinancings thereof and/or (b) in respect of Purchase Money Obligations for property acquired, constructed or improved in the ordinary course of business and any refinancings thereof, which taken together in the aggregate principal amount do not exceed $5.0 million at any one time outstanding; (xii) (A) commodity agreements entered into in the ordinary course of business to protect against fluctuations in the prices of raw materials and not for speculative purposes and (B) foreign currency forward exchange contracts entered into in the ordinary course of business to protect against fluctuations in the relative values of currencies that could adversely affect our results of operations and not for speculative purposes; (xiii) Indebtedness incurred by the Company or any Restricted Subsidiary constituting reimbursement obligations with respect to letters of credit issued in the ordinary course of business (A) in respect of (1) workers' compensation claims or self-insurance or (2) other Indebtedness with respect to reimbursement type obligations regarding workers' compensation claims or self-insurance or (B) for regulatory or insurance purposes; (xiv) Indebtedness incurred in respect of letters of credit issued for the account of the Company or any Restricted Subsidiary in an aggregate stated amount not to exceed $5.0 million (or the foreign currency equivalent thereof being determined as of the later of the date of the issuance thereof or any date on which the stated amount of such letter of credit is increased); (xv) Indebtedness of Foreign Restricted Subsidiaries of the Company, in an aggregate principal amount at any time outstanding not to exceed $2.5 million, incurred to finance losses or costs relating to catastrophic occurrences or expenses occurring outside of the ordinary course of business; provided, that, in the case of losses or costs relating to catastrophic occurrences, the amount of any such losses or costs shall be deemed to be reduced by all insurance and condemnation proceeds on the thirtieth day following the receipt thereof by the Company or any of its Restricted Subsidiaries in connection with such catastrophic occurrence(s); (xvi) Any guaranty by the Company and its Restricted Subsidiaries of each other's Indebtedness; provided that such other Indebtedness is permitted to be incurred under the Indenture; (xvii) Indebtedness of the Company or any Restricted Subsidiary in addition to that described in clauses (i) through (xvi) above and clause (xviii) below, and any amendments, modifications, renewals, refundings, replacements or refinancings of such Indebtedness, so long as the aggregate principal amount of all such Indebtedness incurred pursuant to this clause (xvii) does not exceed $2.5 million at any one time outstanding; 115 (xviii) Indebtedness arising from agreements of the Company or a Restricted Subsidiary providing for the guarantee, indemnification, adjustment of purchase price or similar obligations, in each case, incurred in connection with the disposition of any business, assets or Subsidiary, other than guarantees of Indebtedness incurred by any Person acquiring all or any portion of such business, assets or Subsidiary for the purpose of financing such acquisition; provided that the maximum aggregate liability in respect of such Indebtedness shall at no time exceed the gross proceeds or value of the consideration actually received by the Company and its Restricted Subsidiaries in connection with such transaction; (xix) Indebtedness of the Company and its Restricted Subsidiaries arising under the Belgium Purchase Agreement; and (xx) Indebtedness of the Issuers and the Guarantors represented by the Additional Notes issued after the Issue Date in an aggregate principal amount not to exceed $22.5 million, the proceeds of which are used to refinance or replace Indebtedness incurred pursuant to clause (i) above, Exchange Notes issued in exchange for such Additional Notes and the related Guarantees and the Company Guarantee. For purposes of determining any particular amount of Indebtedness under this covenant, any guaranty, Liens or obligations with respect to letters of credit supporting Indebtedness otherwise included in the determination of such particular amount shall not be included, except in the case of any such letter of credit to the extent the stated amount thereof exceeds the principal amount of such other Indebtedness so supported. Indebtedness of any Person which is outstanding at the time such Person becomes a Restricted Subsidiary or is merged with or into or consolidated with the Company or a Restricted Subsidiary shall be deemed to have been incurred at the time such Person becomes a Restricted Subsidiary or is merged with or into or consolidated with the Company or a Restricted Subsidiary, and Indebtedness which is assumed at the time of the acquisition of any asset shall be deemed to have been incurred at the time of such acquisition. Limitation on Restricted Payments. The Indenture provides that the Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, make any Restricted Payment, unless at the time of and immediately after giving effect to the proposed Restricted Payment (with the value of any such Restricted Payment, if other than cash, to be determined reasonably and in good faith by the Board of Directors of the Company): (i) no Default or Event of Default shall have occurred and be continuing or would occur as a consequence thereof; (ii) the Company could incur at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) pursuant to the covenant described under "-- Certain Covenants -- Limitation on Incurrence of Indebtedness;" and (iii) the aggregate amount of all Restricted Payments made by the Company and its Restricted Subsidiaries after the Issue Date shall not exceed the sum of: (a) an amount equal to 50% of the Company's aggregate cumulative Consolidated Net Income accrued on a cumulative basis during the period (treated as one accounting period) beginning on the first day of the first calendar month after the Issue Date and ending on the date of such proposed Restricted Payment (or, if such aggregate cumulative Consolidated Net Income for such period shall be a deficit, minus 100% of such deficit); plus (b) the aggregate amount of all net cash proceeds received since the Issue Date by the Company from the issuance and sale (other than to a Restricted Subsidiary) of, or equity contribution with respect to, Capital Stock (other than Disqualified Stock) and the principal amount of Indebtedness of the Company or any Restricted Subsidiary issued or incurred on or after the Issue Date that has been converted into or exchanged for Capital Stock (other than Disqualified Stock), in any such case and solely for purposes of avoiding duplication, to the extent that such proceeds are not theretofore used (x) to redeem, repurchase, retire or otherwise acquire Capital Stock or any Indebtedness of the Company or any Restricted Subsidiary pursuant to clause (ii) of the next 116 paragraph or (y) to make any Restricted Investment pursuant to clause (iv) of the next paragraph; plus (c) the amount of the net reduction in Investments in Unrestricted Subsidiaries resulting from (x) the payment of dividends or the repayment in cash of the principal of loans or the cash return on any Investment, in each case to the extent received by the Company or any Restricted Subsidiary from Unrestricted Subsidiaries, (y) the release or extinguishment of any guaranty of Indebtedness of any Unrestricted Subsidiary, and (z) the redesignation of Unrestricted Subsidiaries as Restricted Subsidiaries (valued as provided in the definition of the term "Investment"), such aggregate amount of the net reduction in Investments not to exceed in the case of any Unrestricted Subsidiary the amount of Restricted Investments previously made by the Company or any Restricted Subsidiary in such Unrestricted Subsidiary, which amount was included in the calculation of the amount of Restricted Payments; plus (d) to the extent that any Restricted Investment that was made after the Issue Date is sold for cash or the proceeds of such sale are converted into cash or otherwise liquidated or repaid for cash, the amount of cash proceeds received with respect to such Restricted Investment, net of taxes and the cost of disposition, not to exceed the amount of Restricted Investments made after the Issue Date. The foregoing provisions do not prohibit, so long as no Default or Event of Default is continuing or would occur as a consequence thereof, the following actions (collectively, "Permitted Payments"): (i) the payment of any dividend within 60 days after the date of declaration thereof, if at such declaration date such payment would have been permitted under the Indenture (which payment shall be deemed to have been paid on such date of declaration for purposes of clause (iii) of the preceding paragraph); (ii) the redemption, repurchase, retirement or other acquisition of any Capital Stock or any Indebtedness of the Company or any Restricted Subsidiary in exchange for, or out of the proceeds of, the substantially concurrent sale (other than to a Restricted Subsidiary) of, or equity contribution with respect to, Capital Stock of the Company (other than any Disqualified Stock); (iii) any purchase or defeasance of Subordinated Indebtedness to the extent required upon a Change of Control by the Indenture or other agreement or instrument pursuant to which such Subordinated Indebtedness was issued or any refinancing of Subordinated Indebtedness permitted by the Indenture or other agreement or instrument pursuant to which such Subordinated Indebtedness was issued, but only if the Company has complied with its obligations under the provisions described under "-- Change of Control;" (iv) any Restricted Investment to the extent the sole consideration for which consists of, or is made with the proceeds of the substantially concurrent sale (other than to a Restricted Subsidiary) of, or equity contribution with respect to, Capital Stock of the Company (other than any Disqualified Stock); (v) the repurchase of Capital Stock of the Company (including options, warrants or other rights to acquire such Capital Stock) from departing or deceased directors, officers and employees of the Company and its Subsidiaries pursuant to the terms of an employee benefit plan or employee agreement in an aggregate amount that shall not exceed $500,000 since the Issue Date plus the aggregate cash proceeds from any payments on insurance policies in which the Company or any of its Subsidiaries is the beneficiary with respect to any directors, officers or employees of the Company and its Subsidiaries which proceeds are used to purchase the Capital Stock of the Company or any Restricted Subsidiary of the Company held by any of such directors, officers or employees; and the repurchase of Capital Stock of the Company or a Restricted Subsidiary by the Company or such Restricted Subsidiary pursuant to the terms of any of the Shareholders Agreements; (vi) loans or advances to employees of the Company or any of its Subsidiaries which loans or advances exist on the Issue Date, and other loans or advances to employees of the Company or any 117 Subsidiary to pay reasonable relocation expenses or otherwise entered into in the ordinary course of business not to exceed $500,000 in the aggregate principal amount at any one time outstanding; (vii) Restricted Payments in an amount such that the sum of the aggregate amount of Restricted Payments made pursuant to this clause (vii) after the Issue Date does not exceed $2.5 million at any one time outstanding; and (viii) payments pursuant to any of the Transactions or made in a manner consistent with the information under the caption "Use of Proceeds" (other than general corporate purposes) in the Offering Circular pursuant to which the Notes are offered and sold. For purposes of clause (iii) of the first paragraph of this covenant, the Permitted Payments referred to in clauses (i) and (v) above shall be included in the aggregate amount of Restricted Payments made since the Issue Date, and any other Permitted Payments described above shall be excluded. Limitation on Asset Sales. The Indenture provides that the Company will not, and will not permit any Restricted Subsidiary to, make any Asset Sale unless: (i) the Company or such Restricted Subsidiary, as the case may be, receives consideration at the time of such Asset Sale at least equal to the Fair Market Value (as evidenced by a resolution of the Board of Directors set forth in an Officers' Certificate delivered to the Trustee) of the assets or other property sold or disposed of in the Asset Sale; and (ii) at least 75% of such consideration consists of either cash or Cash Equivalents (other than in the case of an Asset Sale consummated prior to the 180th day following the Issue Date of all or substantially all of the Capital Stock or assets of Wychem Limited, an English company indirectly wholly-owned by the Company). For purposes of this covenant, "cash" shall include (x) the amount of any Indebtedness (other than any Indebtedness that is by its terms subordinated to the Notes and/or the Guarantees and/or the Company Guarantee), accounts payable and accrued expenses of the Company or such Restricted Subsidiary that is assumed by the transferee of any such assets or other property in such Asset Sale (and excluding any liabilities that are incurred in connection with or in anticipation of such Asset Sale), but only to the extent that such assumption of Indebtedness is effected on a basis such that there is no further recourse to the Company or any of the Restricted Subsidiaries with respect to such liabilities (other than customary indemnifications to the transferee and its Affiliates) and (y) any notes, obligations or securities received by the Company or such Restricted Subsidiary from such transferee that are due and payable within 60 days by the Company or such Restricted Subsidiary into cash (to the extent of the cash received). Within 270 days after receipt of Net Proceeds from any Asset Sale, the Company may elect to apply the Net Proceeds from such Asset Sale: (a)(i) to repay Indebtedness under the Credit Agreement and permanently reduce the commitments thereunder (provided, however, that no such Net Proceeds shall be used to repay such Indebtedness to the extent such Net Proceeds arose from an Asset Sale of any Foreign Collateral), (ii) in the case where the property or asset that was the subject of such Asset Sale does not constitute Collateral, to repay Indebtedness secured by a Lien of the type described in clause (i), (iii), (vi), (viii), (xiv) or (xv) of the definition of the term "Permitted Lien" (provided, however, that no such Net Proceeds shall be used to repay Indebtedness of any Foreign Restricted Subsidiary except to the extent that such Net Proceeds arose from an Asset Sale of the assets of a Foreign Restricted Subsidiary), (iii) in the case where the property or asset that was the subject of such Asset Sale is the property or asset of a Foreign Restricted Subsidiary that does not constitute Foreign Collateral, to repay Indebtedness of any Foreign Restricted Subsidiary or (iv) a combination of the foregoing clauses (i), (ii) and (iii); and/or (b) make an investment in, or acquire assets and properties that will be used in, the business of the Company or a Restricted Subsidiary, existing on the Issue Date or in a Related Business; provided, however, that no such investments in or acquisitions of assets or properties that are to be used in the business of any Foreign Restricted Subsidiary or any Related Business thereof may be made using any 118 such Net Proceeds except to the extent that such Net Proceeds arose from an Asset Sale of the assets of a Foreign Restricted Subsidiary. Pending the final application of any such Net Proceeds, the Company or any Restricted Subsidiary may temporarily reduce Indebtedness of the Company under the Credit Agreement or temporarily invest such Net Proceeds in cash or Cash Equivalents. Any Net Proceeds from an Asset Sale not applied or invested as provided in the first sentence of this paragraph within 270 days of such Asset Sale will be deemed to constitute "Excess Proceeds." Each date that the aggregate amount of Excess Proceeds in respect of which an Asset Sale Offer (as defined below) has not been made exceeds $5.0 million shall be deemed an "Asset Sale Offer Trigger Date." As soon as practicable, but in no event later than 20 business days after each Asset Sale Offer Trigger Date, the Company shall commence an offer (an "Asset Sale Offer") to purchase the maximum principal amount of Notes that may be purchased out of the Excess Proceeds. Any Notes to be purchased pursuant to an Asset Sale Offer shall be purchased pro rata based on the aggregate principal amount of Notes outstanding, and all Notes shall be purchased at an offer price in cash in an amount equal to 100% of the principal amount thereof, plus accrued and unpaid interest and Additional Interest, if any, to the date of purchase. To the extent that any Excess Proceeds remain after completion of an Asset Sale Offer, the Company may use the remaining amount for general corporate purposes otherwise permitted by the Indenture. Upon the consummation of any Asset Sale Offer, the amount of Excess Proceeds shall be deemed to be reset to zero. Notice of an Asset Sale Offer shall be mailed by the Company not later than the 20th business day after the related Asset Sale Offer Trigger Date to each Holder at such Holder's registered address, stating: (i) that an Asset Sale Offer Trigger Date has occurred and that the Company is offering to purchase the maximum principal amount of Notes that may be purchased out of the Excess Proceeds (to the extent provided in the immediately preceding paragraph), at an offer price in cash in an amount equal to 100% of the principal amount thereof, plus accrued and unpaid interest and Additional Interest, if any, to the date of the purchase (the "Asset Sale Offer Purchase Date"), which shall be a business day, specified in such notice, that is not earlier than 30 days or later than 60 days from the date such notice is mailed; (ii) the amount of accrued and unpaid interest and Additional Interest, if any, as of the Asset Sale Offer Purchase Date; (iii) that any Note not tendered will continue to accrue interest and Additional Interest, if applicable; (iv) that, unless the Company defaults in the payment of the purchase price for the Notes payable pursuant to the Asset Sale Offer, any Notes accepted for payment pursuant to the Asset Sale Offer shall cease to accrue interest and Additional Interest, if applicable, after the Asset Sale Offer Purchase Date; (v) the procedures, consistent with the Indenture, to be followed by a Holder in order to accept an Asset Sale Offer or to withdraw such acceptance; and (vi) such other information as may be required by the Indenture and applicable laws and regulations. On the Asset Sale Offer Purchase Date, the Company will (i) accept for payment the maximum principal amount of Notes or portions thereof tendered pursuant to the Asset Sale Offer that can be purchased out of Excess Proceeds from such Asset Sale that are to be applied to an Asset Sale Offer, (ii) deposit with the Paying Agent the aggregate purchase price of all Notes or portions thereof accepted for payment, and (iii) deliver or cause to be delivered to the Trustee all Notes tendered pursuant to the Asset Sale Offer. If less than all Notes tendered pursuant to the Asset Sale Offer are accepted for payment by the Company for any reason consistent with the Indenture, selection of the Notes to be purchased by the Company shall be in compliance with the requirements of the principal national securities exchange, if any, on which the Notes are listed or, if the Notes are not so listed, on a pro rata basis or by lot; provided, however, 119 that Notes accepted for payment in part shall only be purchased in integral multiples of $1,000. The Paying Agent shall promptly mail to each Holder or portions thereof accepted for payment an amount equal to the purchase price for such Notes plus accrued and unpaid interest and Additional Interest, if any, thereon, and the Trustee shall promptly authenticate and mail to such Holder accepted for payment in part a Note equal in principal amount to any unpurchased portion of the Notes, and any Note not accepted for payment in whole or in part shall be promptly returned to the Holder of such Note. On and after an Asset Sale Offer Purchase Date, interest and Additional Interest, if applicable, will cease to accrue on the Notes or portions thereof accepted for payment, unless the Company defaults in the payment of the purchase price therefor. The Company will publicly announce the results of the Asset Sale Offer on or as soon as practicable after the Asset Sale Offer Purchase Date. Any repurchase of Notes pursuant to an Asset Sale Offer shall include both U.S. Notes and Dutch Notes on a pro rata basis based upon the aggregate principal amount of the Notes outstanding at the time of such repurchase, unless a Change of Control of the Dutch Issuer has occurred. The foregoing provisions will not apply to a transaction consummated in compliance with the provisions of the Indenture described under "-- Merger, Consolidation and Sale of Assets" below. The Company will comply with the applicable tender offer rules, including the requirements of Section 14(e) and Rule 14e-1 under the Exchange Act, and all other applicable securities laws and regulations in connection with any Asset Sale Offer and will be deemed not to be in violation of any of the covenants under the Indenture to the extent such compliance is in conflict with such covenants. Limitation on Liens. The Indenture provides that the Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, create, incur, assume or suffer to exist any Lien on any asset now owned or hereafter acquired, or any income or profits therefrom, or assign or convey any right to receive income therefrom, in each case, other than Permitted Liens. Limitation on Dividends and Other Payment Restrictions Affecting Restricted Subsidiaries. The Indenture provides that the Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, create or otherwise cause to become effective any consensual encumbrance or consensual restriction on the ability of any Restricted Subsidiary to (i) pay dividends or make any other distributions to the Company or any other Restricted Subsidiary on its Capital Stock or with respect to any other interest or participation in, or measured by, its profits, or pay any Indebtedness owed to the Company or any other Restricted Subsidiary, (ii) make loans or advances to, or issue any guaranty for the benefit of, the Company or any other Restricted Subsidiary or (iii) transfer any of its properties or assets to the Company or any other Restricted Subsidiary, except for such encumbrances or restrictions existing under or by reason of (a) the Credit Agreement as in effect on the Issue Date, and any amendments, modifications, renewals, refundings, replacements or refinancings thereof; provided that such amendments, modifications, renewals, refundings, replacements or refinancings are no more restrictive in the aggregate with respect to such dividend and other payment restrictions than those contained in the Credit Agreement (or, if more restrictive, than those contained in the Indenture) immediately prior to any such amendment, restatement, renewal, replacement or refinancing; (b) applicable law; (c) any instrument governing Indebtedness or Capital Stock of an Acquired Person acquired by the Company or any of its Restricted Subsidiaries as in effect at the time of such acquisition (except to the extent such Indebtedness was incurred in connection with or in contemplation of such acquisition); provided, however, that no such encumbrance or restriction is applicable to any Person, or the properties or assets of any Person, other than the Acquired Person; (d) customary non-assignment, subletting or net worth provisions in leases or other agreements entered into the ordinary course of business; (e) Purchase Money Obligations for property acquired in the ordinary course of business that impose restrictions only on the property so acquired; 120 (f) an agreement for the sale or disposition of assets or the Capital Stock of a Restricted Subsidiary; provided, however, that such restriction or encumbrance is only applicable to such Restricted Subsidiary or assets, as applicable, and such sale or disposition otherwise is permitted by the provisions described under "-- Certain Covenants -- Limitation on Asset Sales;" provided further, however, that such restriction or encumbrance shall be effective only for a period from the execution and delivery of such agreement through a termination date not later than 270 days after such execution and delivery (other than any such restriction or encumbrance contained in the Belgium Purchase Agreement); (g) Refinancing Indebtedness permitted under the Indenture; provided, however, that the restrictions contained in the agreements governing such Refinancing Indebtedness are no more restrictive in the aggregate than those contained in the agreements governing the Indebtedness being refinanced immediately prior to such refinancing; (h) the Indenture, the Notes, the Guarantees, the Company Guarantee and the Collateral Agreements; and (i) encumbrances and restrictions imposed by amendments, restatements, renewals, replacements or refinancings of the contracts, instruments or obligations referred to in clauses (a) through (h) above; provided that such encumbrances and restrictions are, in the good faith judgment of the Company's Board of Directors, no more restrictive, in any material respect, than those contained in such contracts, instruments or obligations immediately prior to such amendment, restatement, renewal, replacement or refinancing. Limitation on Transactions with Affiliates. The Indenture provides that the Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, enter into or suffer to exist any transaction or series of related transactions (including, without limitation, the sale, purchase, exchange or lease of assets, property or services) with any Affiliate of the Company unless (1) such transaction or series of transactions is on terms that are no less favorable to the Company or such Restricted Subsidiary, as the case may be, than those that could reasonably be obtainable at such time in a comparable transaction in arm's-length dealings with an unrelated third party, and (2) the Company delivers to the Trustee (a) with respect to any transaction or series of transactions involving aggregate payments in excess of $250,000, an Officer's Certificate certifying that such transaction or series of related transactions has been approved by a majority of the members of the Board of Directors of the Company, and (b) with respect to any transaction or series of transactions involving aggregate payments in excess of $5.0 million, an opinion as to the fairness of the transaction to the Company from a financial point of view issued by an accounting, appraisal or investment banking firm of national standing. Notwithstanding the foregoing, this covenant does not apply to: (i) employment agreements or compensation or employee benefit arrangements with any officer, director or employee of the Company or any of its Restricted Subsidiaries entered into in the ordinary course of business (including customary benefits thereunder and including reimbursement or advancement of out-of-pocket expenses, and director's and officer's liability insurance); (ii) any transaction entered into by or among the Company or one of its Restricted Subsidiaries with one or more Restricted Subsidiaries of the Company; (iii) any transaction permitted by the second paragraph under "-- Certain Covenants -- Limitation on Restricted Payments," (iv) transactions permitted by, and complying with, the provisions described under "-- Merger, Consolidation and Sale of Assets"; (v) any Transaction or any transaction described under the caption "Use of Proceeds" in the Offering Circular pursuant to which the Notes are offered and sold; and (vi) agreements to make the payments described in clause (y)(2) of the second sentence of the definition of the term "Investment." 121 The Indenture provides that as of the Issue Date, the cash salary and bonus in the aggregate payable to Jack Bendheim in respect of each fiscal year beginning on or after July 1, 2003 (i) for which Cash Flow of the prior fiscal year is less than $25.0 million shall be capped at $750,000, (ii) for which Cash Flow of the prior fiscal year is greater than or equal to $25.0 million but less than $36.0 million, shall not exceed the sum of (A) $750,000 plus (B)(I) $900,000 times (II) a ratio, the numerator of which is Cash Flow with respect to such prior fiscal year less $25.0 million and the denominator of which is $11.0 million and (iii) for which Cash Flow of the prior fiscal year is greater than or equal to $36.0 million, shall be determined by the Compensation Committee of the Board of Directors and shall not exceed $2.0 million. Limitation on Issuances and Sales of Capital Stock of Subsidiaries. The Company will not permit or cause any of its Restricted Subsidiaries to issue or sell any Capital Stock except: (1) to the Company or a Wholly-Owned Restricted Subsidiary of the Company and so long as concurrently with the issuance thereof all steps necessary for the Collateral Agent to have a perfected security interest therein, subject to the Permitted Liens, shall have been taken; (2) issuances of director's qualifying shares or sales to foreign nationals of shares of Capital Stock of Foreign Restricted Subsidiaries to the extent required by applicable law; (3) if, immediately after giving effect to such issuance or sale, such Restricted Subsidiary would no longer constitute a Restricted Subsidiary and any Investment in such Person remaining after giving effect to such issuance or sale would have been permitted to be made under the "Limitation on Restricted Payments" covenant if made on the date of such issuance or sale; or (4) sales of (i) all of the Capital Stock of a Restricted Subsidiary of the Company or (ii) Common Stock of a Foreign Subsidiary, in each case in compliance with the provisions of the "Limitation on Asset Sales" covenant. Limitation on Designation of Unrestricted Subsidiaries. The Indenture provides that the Company will not designate any Subsidiary of the Company (other than a newly created Subsidiary in which no Investment has previously been made) as an "Unrestricted Subsidiary" under the Indenture (a "Designation") unless: (a) no Default shall have occurred and be continuing at the time of or after giving effect to such Designation; (b) immediately after giving effect to such Designation, the Company would be able to incur $1.00 of additional Indebtedness (other than Permitted Indebtedness) under the covenant described under "-- Certain Covenants -- Limitation on Incurrence of Indebtedness;" and (c) the Company would not be prohibited under the Indenture from making an Investment at the time of Designation in an amount (the "Designation Amount") equal to the greater of (x) the book value of such Restricted Subsidiary on such date and (y) the Fair Market Value of such Restricted Subsidiary on such date. In the event of any such Designation, the Company shall be deemed to have made an Investment constituting a Restricted Payment pursuant to the covenant described under "-- Certain Covenants -- Limitation on Restricted Payments" for all purposes of the Indenture in an amount equal to the Designation Amount. The Indenture further provides that the Company will not designate an Unrestricted Subsidiary as a Restricted Subsidiary (a "Redesignation"), unless: (a) no Default shall have occurred and be continuing at the time of and after giving effect to such Redesignation; and (b) all Liens and Indebtedness of such Unrestricted Subsidiary outstanding immediately following such Redesignation shall be deemed to have been incurred at such time and shall have been permitted to be incurred for all purposes of the Indenture. 122 The Indenture, which as previously stated was entered into on the Issue Date in connection with the issuance of the Outstanding Notes, contains a requirement that PMC, MRT Holdings, LLC and Prince MFG, LLC would be deemed to be redesignated as a Restricted Subsidiaries on January 1, 2004 if the PMC Sale Transactions were not consummated on or prior to such date. No such redesignation occurred as we consummated the PMC Sale Transactions on December 26, 2003. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Prince Transactions." An Unrestricted Subsidiary shall be deemed to be redesignated as a Restricted Subsidiary at any time if (a) the Company or any other Restricted Subsidiary (i) provides credit support for, or a guarantee of, any Indebtedness of such Unrestricted Subsidiary (including any undertaking, agreement or instrument evidencing such Indebtedness) or (ii) is directly or indirectly liable for any Indebtedness of such Unrestricted Subsidiary or (b) a default with respect to any Indebtedness of such Unrestricted Subsidiary (including any right which the holders thereof may have to take enforcement action against it) would permit (upon notice, lapse of time or both) any holder of any other Indebtedness of the Company or any Restricted Subsidiary to declare a default on such other Indebtedness or cause the payment thereof to be accelerated or payable prior to its final scheduled maturity, except in the case of clause (a) to the extent permitted under the covenant described above under the caption "-- Certain Covenants -- Limitation on Restricted Payments." If any Unrestricted Subsidiary is (or is deemed to have been) redesignated as a Restricted Subsidiary, each Subsidiary of the Company that owns all or any portion of the Capital Stock of such Unrestricted Subsidiary shall be deemed to have been redesignated as a Restricted Subsidiary as well. MRT Holdings, LLC and Prince MFG, LLC and its direct wholly-owned subsidiary, PMC, were the only Unrestricted Subsidiaries as of the Issue Date. All Designations and Redesignations must be evidenced by Board Resolutions delivered to the Trustee certifying compliance with the foregoing provisions. Subsidiaries that are not designated by the Board of Directors as Restricted or Unrestricted Subsidiaries will be deemed to be Restricted Subsidiaries. The Designation of a Restricted Subsidiary as an Unrestricted Subsidiary shall be deemed a Designation of all of the Subsidiaries of such Unrestricted Subsidiary as Unrestricted Subsidiaries. Noteholder Representative. The Indenture provides that from and after the Issue Date until the date on which all principal and interest (including any Additional Interest) on all of the outstanding Units (and the underlying Notes) have been paid in full as provided in the Indenture, the Company will take such action as shall be necessary in accordance with applicable law and its certificate of incorporation and by-laws so that the Board of Directors of the Company may include one Noteholder Representative. The Noteholder Representative shall be designated mutually by Jefferies & Company, Inc. ("Jefferies") and the Company. If Jefferies and the Company cannot agree on a mutually acceptable candidate within 60 days after the Issue Date (or the date of any subsequent vacancy), each of Jefferies and the Company shall nominate a candidate meeting the criteria below and the Company shall mail a ballot to the Holders within 90 days of the Issue Date (or the date of any subsequent vacancy). The ballot may include biographical and other information with respect to each candidate under Regulation 14A of the Securities Exchange Act of 1934, as amended. The Noteholder Representative will be selected by Holders of a majority in aggregate principal amount of the Notes who complete and submit to the Company a ballot. The initial Noteholder Representative designated by the holders of the Notes in accordance with this covenant was Mr. Sam Gejdenson. See "Management -- Directors and Executive Officers." Each candidate submitted by Jefferies and the Company for election as the Noteholder Representative shall be a person who is not an executive officer or director of (i) a significant supplier of the Company or any Subsidiary or Affiliate thereof or (ii) any competitor of the Company or any Subsidiary or Affiliate thereof, unless otherwise agreed by the Company. If a Noteholder Representative resigns, dies or becomes incapacitated, or such position is otherwise vacant, no action requiring the affirmative vote of the Noteholder Representative shall be taken until the earlier of (i) the expiration of 45 days after the mailing of such ballot and (ii) the designation of a successor 123 Noteholder Representative by the Holders and approval of such action by the successor Noteholder Representative. The Noteholder Representative shall be a member of the Compensation Committee and, except as provided above, all decisions of the Compensation Committee shall require the consent of the Noteholder Representative. Business Activities. The Indenture provides that the Company will not, and will not permit any of its Restricted Subsidiaries to, engage in any business other than such business as conducted by it on the Issue Date and any Related Business. The Indenture also provides that for so long as any of MRT Holdings, LLC, Prince MFG, LLC or PMC shall be an Unrestricted Subsidiary of the Company or the PMC Sale Transactions shall not have been consummated, no such entity shall engage in any activities other than those currently conducted by such entity or those necessary or incidental to consummating the PMC Sale Transactions; provided, however, that notwithstanding the foregoing, no such entity shall incur any Indebtedness, make any Investments, or pay the obligations of any other person or entity, in an aggregate amount exceeding $25,000 or dispose of any of its assets other than in the ordinary course of business, if such entity is an Unrestricted Subsidiary of the Company other than as necessary or incidental to consummate the PMC Sale Transactions. Impairment of Security Interest. No Issuer nor any Guarantor may take or knowingly omit to take any action which would materially impair the Liens in favor of the Collateral Agent, on behalf of itself, the Trustee and the Holders, with respect to any material portion of the Collateral securing the Notes or any Guarantee either the U.S. Notes, the Domestic Guarantees and the Company Guarantee or the Dutch Notes and the Foreign Guarantees. No Issuer nor any Guarantor may grant to any Person (other than the Collateral Agent), or permit any Person (other than the Collateral Agent) to retain any interest whatsoever in the Collateral other than Permitted Liens or as otherwise permitted by the Indenture. No Issuer nor any Guarantor may enter into any agreement that requires the proceeds received from any sale of Collateral to be applied to repay, redeem, defease or otherwise acquire or retire any Indebtedness of any Person, other than as permitted by the Indenture, the Notes and the Collateral Agreements, subject to the terms of the Intercreditor Agreement (as it relates to the Domestic Collateral). Each Issuer and each Guarantor will, at its sole cost and expense, execute and deliver all such agreements and instruments as the Collateral Agent or the Trustee shall reasonably request to more fully or accurately describe the property intended to be Collateral or the obligations intended to be secured by the Collateral Agreements. Each Issuer and each Guarantor will, at its sole cost and expense, file any such notice filings or other agreements or instruments as may be required under applicable law to perfect the Liens created by the Collateral Agreements, subject to Permitted Liens. Landlord, Bailee and Consignee Waivers. Each of the Company, the Dutch Issuer, each Domestic Restricted Subsidiary of the Company and each Restricted Subsidiary of the Dutch Issuer that is a lessee of, or becomes a lessee of, real property (whether used for manufacturing purposes or otherwise) on or in which it will maintain, store, hold or locate all or any of its assets having an aggregate fair market value of at least $50,000, is, and will be, required to use commercially reasonable best efforts (which shall not require the expenditure of cash or the making of any material concessions under any relevant lease that was in effect on the Issue Date or if such (i) Domestic Restricted Subsidiary of the Company was not a Domestic Restricted Subsidiary of the Company on the Issue Date, the date such Domestic Restricted Subsidiary became a Domestic Restricted Subsidiary of the Company or (ii) Restricted Subsidiary of the Dutch Issuer was not a Restricted Subsidiary of the Dutch Issuer on the Issue Date, the date such Restricted Subsidiary became a Restricted Subsidiary of the Dutch Issuer) to deliver to the Collateral Agent a landlord waiver, substantially in the form of the exhibit form thereof to be attached to the Indenture, executed by the lessor of such real property; provided that in the case where such lease is a lease in existence on the Issue Date or the lessee thereof that is a (A) Domestic Restricted Subsidiary of the Company was not a Domestic Restricted Subsidiary of the Company on the Issue Date or (B) Restricted Subsidiary of the Dutch Issuer was not a Restricted Subsidiary of the Dutch Issuer on the Issue Date, the Company or its Domestic Restricted Subsidiary or the Dutch Issuer or its Restricted Subsidiary that is the lessee thereunder shall have 60 days from the Issue Date (or from the date the lessee thereof becomes a Domestic Restricted Subsidiary of the Company or a Restricted Subsidiary of the Dutch Issuer) to satisfy such requirement and shall be relieved of 124 such obligation with respect to any landlord waiver to the extent such lessor has refused to deliver such a waiver following such Person's use of such commercially reasonable efforts. Each of the Company, each of its Domestic Restricted Subsidiaries, the Dutch Issuer and each of its Restricted Subsidiaries that provides any of its assets having an aggregate fair market value of at least $50,000 to a bailee or consignee agrees to be bound by the terms of the immediately preceding sentence, mutatis mutandis; provided that (i) the terms "landlord", "lessee" and "lease" shall be replaced, respectively, with the terms "bailee" or "consignee", as applicable, "bailor" or "consignor", as applicable, and the "applicable agreement" and (ii) the condition that the lessee maintain, store, hold or locate all or any of its assets having an aggregate fair market value of at least $50,000 shall instead be replaced with the condition that the fair market value of the assets subject to the applicable bailment or consignment have a fair market value of at least $50,000. Real Estate Mortgages and Recordings. With respect to any real property (individually and collectively, the "Premises") that (a) is owned as of the Issue Date by the Dutch Issuer or any of its Restricted subsidiaries or (b)(i) is acquired by Dutch Issuer or any of its Restricted Subsidiaries after the Issue Date and (ii) has a purchase price or a Fair Market Value, of at least $250,000 (other than properties purchased subject to Acquired Indebtedness or Purchase Money Indebtedness), the Dutch Issuer or such Restricted Subsidiary, as the case may be, shall, at its sole cost and expense: (A) take all such actions as the Collateral Agent deems necessary or desirable to cause the Collateral Agent to have a valid first priority perfected Lien in such Premises free and clear of all defects and encumbrances (other than Permitted Liens), including, without limitation, (1) duly executing and delivering a Foreign Collateral Agreement, (2) recording, registering or filing such Foreign Collateral Agreement with the necessary offices or authorities to result in such Lien being a valid, perfected first priority Lien against the such Premises under the laws of the jurisdiction in which such Premises is located and (3) paying all recordation taxes, fees and expenses required in connection with such recordation, registration or filing; and (B) deliver to the Collateral Agent, with respect to such Premises, a copy of such Foreign Collateral Agreement and evidence of such recordation, registration or filing, as the case may be, local counsel opinions and such other documents, instruments, certificates and agreements as the Collateral Agent and its counsel shall, consistent with the laws of the jurisdiction in which such Premises is located, reasonably request or as may be required under the Indenture; provided that the Dutch Issuer or such Restricted Subsidiary, as the case may be, shall have a period of 90 days from (x) the date of the Issue Date to satisfy the foregoing requirements with respect to any such Premises that is owned by the Dutch Issuer or such Restricted Subsidiary, as the case may be, as of the Issue Date and (y) the date such interest was acquired by the Dutch Issuer or such Restricted Subsidiary, as the case may be, to satisfy the foregoing requirements with respect to any such Premises that was acquired after the Issue Date. Future Guarantors. The Indenture provides that the Company and each Domestic Guarantor shall cause each Domestic Restricted Subsidiary of the Company which, after the date of the Indenture (if not then a Guarantor), becomes a Domestic Restricted Subsidiary (including, without limitation, as the result of the redesignation of an Unrestricted Subsidiary that is a Domestic Subsidiary as a Restricted Subsidiary) to: (1) execute and deliver to the Trustee a supplemental indenture pursuant to which such Domestic Restricted Subsidiary shall unconditionally guarantee on a senior secured basis all of the Company's obligations under the U.S. Notes and the Indenture on the terms set forth in the Indenture; (2) (a) execute and deliver to the Collateral Agent and the Trustee such amendments or supplements to the Domestic Collateral Agreements as may be necessary or as the Collateral Agent deems reasonably desirable in order to grant to Collateral Agent, for the benefit of itself, the Holders and the Trustee, a perfected security interest in the Capital Stock of such new Domestic Restricted Subsidiary and the debt securities of such new Domestic Restricted Subsidiary, subject to Permitted Liens, which are owned by the Company or any Domestic Restricted Subsidiary and required to be pledged pursuant to the Domestic Collateral Agreements, and (b) deliver to Collateral Agent the 125 certificates representing such Capital Stock and debt securities, together with (i) in the case of such Capital Stock, undated stock powers or instruments of transfer, as applicable, endorsed in blank, and (ii) in the case of such debt securities, endorsed in blank, in each case executed and delivered by a Officer of the Company or such Domestic Restricted Subsidiary, as the case may be; (3) cause such new Domestic Restricted Subsidiary to take such actions as may be necessary or as necessary or as the Collateral Agent deems reasonably desirable to grant to the Collateral Agent for the benefit of itself, the Holders and the Trustee a perfected security interest in substantially all of the assets of such new Domestic Restricted Subsidiary (excluding real property and interests therein), subject to Permitted Liens, including the filing of Uniform Commercial Code financing statements in such jurisdictions as may be required by the Domestic Collateral Agreements or by law or as may be reasonably requested by the Collateral Agent; (4) take such further action and execute and deliver such other documents specified in the Indenture or otherwise reasonably requested by the Trustee or the Collateral Agent to effectuate the foregoing; and (5) deliver to the Trustee an opinion of counsel relating to the foregoing actions and the perfection of such security interests so granted, in each case, to the extent required under the Trust Indenture Act. The Indenture also provides that the Dutch Issuer and each Restricted Subsidiary of the Dutch Issuer shall cause each Restricted Subsidiary of the Dutch Issuer which, after the date of the Indenture (if not then a Foreign Guarantor), becomes a Restricted Subsidiary of the Dutch Issuer (including, without limitation, as the result of the redesignation of an Unrestricted Subsidiary that is a Subsidiary of the Dutch Issuer as a Restricted Subsidiary thereof) to take the actions and make the deliveries specified in the immediately preceding paragraph, mutatis mutandis; provided that (i) the terms "Domestic Restricted Subsidiary", "Company's" and "U.S. Notes" as used in the immediately preceding paragraph shall be deemed to refer to the terms "Restricted Subsidiary", "Dutch Issuer's" and "Dutch Notes", respectively, and (ii) clauses (2) and (3) thereof shall be deemed to read in their respective entireties as follows: "(2) execute and deliver to the Collateral Agent and the Trustee such Foreign Collateral Agreements or amendments or supplements thereto and take all such other actions including, without limitation, recording, registering or filing such amendments, supplements or any other documents or instruments and paying all such taxes, fees and expenses required in connection with such recordation, registration or filing, in each case, as may be necessary or as the Collateral Agent deems reasonably desirable in order to grant to the Collateral Agent, for the benefit of itself, the Holders and the Trustee, a Lien in 100% of the Capital Stock of such new Restricted Subsidiary, which is owned by the Dutch Issuer or any Restricted Subsidiary of the Dutch Issuer, and provide the Collateral Agent with a valid first priority perfected Lien (subject to Permitted Liens) in all such Capital Stock for the benefit of itself, the Holders and the Trustee; (3) cause such new Restricted Subsidiary of the Dutch Issuer to (x) execute and deliver to the Collateral Agent and the Trustee such Foreign Collateral Agreements or amendments or supplements thereto and take all such other actions including, without limitation, recording, registering or filing such amendments, supplements or any other documents or instruments and paying all such taxes, fees and expenses required in connection with such recordation, registration or filing, in each case, as may be necessary or as the Collateral Agent deems reasonably desirable in order to grant to the Collateral Agent, for the benefit of itself, the Holders and the Trustee, a Lien in all of the accounts receivable, inventory (to the extent permitted by applicable law) and Capital Stock of each direct Subsidiary of such new Restricted Subsidiary that is then owned or thereafter acquired by such new Restricted Subsidiary, and provide the Collateral Agent with a valid first priority perfected Lien (subject to Permitted Liens) in all such accounts receivable, inventory (to the extent permitted by applicable law) and Capital Stock for the benefit of itself, the Holders and the Trustee and (y) to the extent such new Restricted Subsidiary of the Dutch Issuer owns any real property on the date it became a new Restricted Subsidiary of the Dutch Issuer, comply with the requirements of the covenant "-- Certain Covenants -- Real Estate Mortgages 126 and Recordings" as if such new Restricted Subsidiary of the Dutch Issuer had acquired such real property on such date;". Provision of Financial Statements and Information. Whether or not either Issuer is then subject to Section 13(a) or 15(d) of the Exchange Act, the Indenture provides that the Company will file with the Commission following the effectiveness of the Exchange Offer Registration Statement, so long as any Notes are outstanding, the annual reports, quarterly reports and other periodic reports which the Company would have been required to file with the Commission pursuant to such Section 13(a) or 15(d) if the Company were so subject, and such documents shall be filed with the Commission on or prior to the respective dates (the "Required Filing Dates") by which the Company would have been required so to file such documents if the Company were so subject; provided the Commission will accept such filings. The Company will also in any event (i) within 15 days of each Required Filing Date following the effectiveness of the Exchange Offer Registration Statement, file with the Trustee, and supply the Trustee with copies for delivery to the Holders and prospective purchasers of the Notes, the annual reports, quarterly reports and other periodic reports which the Company would have been required to file with the Commission pursuant to Section 13(a) or 15(d) of the Exchange Act if the Company were subject to such Sections and (ii) if the Commission will not accept the filing of such documents promptly upon written request and payment of the reasonable cost of duplication and delivery, supply copies of such documents to any prospective Holder of the Notes. Prior to the effectiveness of the Exchange Offer Registration Statement, the Company will provide upon request from Holders or prospective Holders of Notes the information required by Rule 144A(d)(4) under the Securities Act. Payments for Consent. Neither Issuer will, nor will either Issuer permit any of its Subsidiaries to, directly or indirectly, pay or cause to be paid any consideration to or for the benefit of any Holder for or as an inducement to any consent, waiver or amendment of any of the terms or provisions of the Indenture, the Notes, the Registration Rights Agreement, the Collateral Agreements or the Intercreditor Agreement unless such consideration is offered to be paid or is paid to all Holders that consent, waive or agree to amend in the time frame set forth in the solicitation documents relating to such consent, waiver or agreement. Additional Covenants. The Indenture also contains covenants with respect to the following matters: (i) payment of principal, premium, interest and Additional Interest; (ii) maintenance of an office or agency in The City of New York; (iii) maintenance of corporate existence; (iv) payment of taxes and other claims; (v) maintenance of properties; and (vi) maintenance of insurance. MERGER, CONSOLIDATION AND SALE OF ASSETS The Indenture provides that the Company shall not, in any single transaction or series of related transactions, consolidate or merge with or into (whether or not the Company is the Surviving Person), or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its properties or assets (determined on a consolidated basis for the Company and its Restricted Subsidiaries) in one or more related transactions to, another Person, and the Company will not permit any Restricted Subsidiary to enter into any such transaction or series of related transactions if such transaction or series of related transactions, in the aggregate, would result in a sale, assignment, transfer, lease, conveyance or other disposition of all or substantially all of the properties and assets of the Company and the Restricted Subsidiaries, taken as a whole, to another Person, unless: (i) the Surviving Person is a corporation organized or existing under the laws of the United States, any State thereof or the District of Columbia; (ii) the Surviving Person (if other than the Company) assumes (a) all the obligations of the Company under the U.S. Notes (and the Guarantees of the Company's Domestic Restricted Subsidiaries shall be confirmed as applying to such Surviving Person's obligations), the Indenture, the Company Guarantee and, if then in effect, the Registration Rights Agreement pursuant to a supplemental indenture or other written agreement, as the case may be, in a form reasonably satisfactory to the Trustee and (b) by amendment, supplement or other instrument (in form and substance satisfactory to the Trustee and the Collateral Agent), executed and delivered to the Trustee, all Obligations of the Company under the Collateral Agreements and the Intercreditor Agreement, and in connection therewith shall cause such 127 instruments to be filed and recorded in such jurisdictions and take such other actions as may be required by applicable law to perfect or continue the perfection of the Lien created under the Collateral Agreements on the Collateral owned by or transferred to the surviving entity; (iii) immediately both before and after giving effect to such transaction, no Default or Event of Default shall have occurred and be continuing; (iv) after giving pro forma effect to such transaction, the Surviving Person (x) would have a Consolidated Net Worth equal to or greater than the Consolidated Net Worth of the Company immediately preceding such transaction and (y) would be permitted to incur at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) pursuant to the covenant described under "-- Certain Covenants -- Limitation on Incurrence of Indebtedness;" and (v) the Company or the Surviving Person shall have delivered to the Trustee an officers' certificate and an opinion of counsel, each stating that such consolidation, merger, sale, assignment, transfer, lease, conveyance or other disposition and, if a supplemental indenture or any amendment or supplement to the Collateral Agreements is required in connection with such transaction, such supplemental indenture or such amendment or supplement comply with the applicable provisions of the Indenture and that all conditions precedent in the Indenture relating to such transaction have been satisfied to the extent such conditions are required to be satisfied thereunder either prior to or concurrent with the consummation of the applicable transaction. Notwithstanding clauses (iii) and (iv) above, any Restricted Subsidiary (other than the Dutch Issuer) may consolidate with, merge into or transfer all or part of its properties and assets to the Company. In the event of any transaction (other than a lease) described in and complying with the conditions listed in the immediately preceding paragraph in which the Company is not the Surviving Person, such Surviving Person shall succeed to, and be substituted for, and may exercise every right and power of, the Company, and the Company shall be discharged from its obligations under, the Indenture, the U.S. Notes, the Domestic Collateral Agreements and the Registration Rights Agreement. Each Domestic Guarantor (other than any Domestic Guarantor whose Domestic Guarantee is to be released in accordance with the terms of the Domestic Guarantee and the Indenture in connection with any transaction complying with the provisions of "-- Certain Covenants -- Limitation on Asset Sales") will not, and the Company will not cause or permit any Domestic Guarantor to, consolidate with or merge with or into any Person other than the Company or any other Domestic Guarantor unless: (1) the entity formed by or surviving any such consolidation or merger (if other than the Domestic Guarantor) or to which such sale, lease, conveyance or other disposition shall have been made is a corporation organized and existing under the laws of the United States or any State thereof or the District of Columbia; (2) such entity assumes (a) by supplemental indenture (in form and substance satisfactory to the Trustee), executed and delivered to the Trustee, all of the obligations of the Domestic Guarantor under the Domestic Guarantee and, to the extent applicable, the Intercreditor Agreement and (b) by amendment, supplement or other instrument (in form and substance satisfactory to the Trustee and the Collateral Agent) executed and delivered to the Trustee and the Collateral Agent, all obligations of the Domestic Guarantor under the Domestic Collateral Agreements and, to the extent applicable, the Intercreditor Agreement and in connection therewith shall cause such instruments to be filed and recorded in such jurisdictions and take such other actions as may be required by applicable law to perfect or continue the perfection of the Lien created under the Domestic Collateral Agreements on the Collateral owned by or transferred to the surviving entity; (3) immediately both before and after giving effect to such transaction, no Default or Event of Default shall have occurred and be continuing; 128 (4) immediately after giving effect to such transaction and the use of any net proceeds therefrom on a pro forma basis, the Company could satisfy the provisions of clause (iv) of the first paragraph of this covenant; and (5) the Company shall have delivered to the Trustee an officers' certificate and an opinion of counsel, each stating that such consolidation, merger, sale, assignment, transfer, lease, conveyance or other disposition and, if a supplemental indenture or any amendment or supplement to the Domestic Collateral Agreements is required in connection with such transaction, such supplemental indenture or such amendment or supplement comply with the applicable provisions of the Indenture and that all conditions precedent in the Indenture relating to such transaction have been satisfied. Notwithstanding clauses (3) and (4) above, any Restricted Subsidiary (other than the Dutch Issuer) may consolidate with, merge into or transfer all or part of its properties and assets to the Company or any Domestic Guarantor. Any merger or consolidation of (i) a Domestic Guarantor with and into the Company (with the Company being the surviving entity) or another Domestic Guarantor or (ii) a Domestic Guarantor or the Company with an Affiliate organized solely for the purpose of reincorporating such Domestic Guarantor or the Company in another jurisdiction in the United States or any State thereof or the District of Columbia or changing the legal form of such Domestic Guarantor or the Company need only comply with in the case of a merger or consolidation involving (x) the Company as described in clause (ii) above, clauses (ii) and (v) of the first paragraph of this covenant and (y) in the case of a Domestic Guarantor as described in (1) clause (i) above, clause (5) of the immediately preceding paragraph and (2) clause (ii) above, clauses (2) and (5) of the immediately preceding paragraph. The Indenture will contain similar restrictions on mergers, consolidations and sales of assets by the Dutch Issuer and the Foreign Guarantors as those contained in the paragraphs set forth above in this covenant, mutatis mutandis; provided that (i) the terms "Company", "Restricted Subsidiary", "Restricted Subsidiaries", "the United States, any State thereof or the District of Columbia", "U.S. Notes", "Domestic Guarantee", "Domestic Guarantor", and "Domestic Collateral Agreements" as used in the preceding paragraphs of this covenant, other than clause (iv) of the first paragraph hereof and clause (4) of the third paragraph hereof shall remain unchanged, shall be deemed to refer to the terms "Dutch Issuer", "Restricted Subsidiary of the Dutch Issuer", "Restricted Subsidiaries of the Dutch Issuer", "the jurisdiction of organization of the Dutch Issuer or Foreign Guarantor that is the subject of such transaction", "Dutch Notes", "Foreign Guarantee", "Foreign Guarantor", and "Foreign Collateral Agreements", respectively; (ii) the words "of the Company's Domestic Restricted Subsidiaries" contained in clause (ii)(a) of the first paragraph of this covenant shall be deemed to have been replaced with the words "of the Guarantors and the Company Guarantee"; (iii) clause (ii) of the first paragraph of this covenant shall also be deemed to be revised to delete the words "and the Intercreditor Agreement" and the words ", the Company Guarantee" therefrom; (iv) the last sentence of the first paragraph of this covenant shall be deemed to read in its entirety as follows "Notwithstanding clauses (iii) and (iv) above, any Restricted Subsidiary of the Dutch Issuer may consolidate with, merge into or transfer all or part of its properties and assets to the Dutch Issuer."; (v) clause (2) of the third paragraph of this covenant shall also be deemed to be revised to delete the words "and, to the extent applicable, the Intercreditor Agreement"; (vi) the last sentence of the third paragraph of this covenant shall be deemed to read in its entirety as follows "Notwithstanding clauses (3) and (4) above, any Restricted Subsidiary of the Dutch Issuer may consolidate with, merge into or transfer all or part of its properties and assets to the Dutch Issuer, the U.S. Issuer or any other Guarantor; and 129 (vii) at the end of such covenant, the following provision would be inserted as an additional provision thereof: "Notwithstanding the foregoing, the Dutch Issuer may permit, and there may be effected, the Belgium Plant Sale and Virginiamycin Production Transactions." POSSESSION, USE AND RELEASE OF COLLATERAL Unless an Event of Default shall have occurred and be continuing, each Issuer and each Guarantor has the right to remain in possession and retain exclusive control of its Collateral securing the Notes (other than as set forth in the Collateral Agreements), to freely operate the Collateral and to collect, invest and dispose of any income therefrom; provided that until delivery of a written notice from the Collateral Agent to the Company or the applicable Domestic Guarantor, when any Event of Default shall have occurred and be continuing, to refrain from exercising any voting, consensual rights and other rights pertaining to Collateral consisting of Capital Stock pledged by it to the Collateral Agent for the benefit of itself, the Trustee and the Holders, the Company or such Domestic Guarantor, as the case may be, shall be entitled to exercise all such voting, consensual rights and other rights pertaining to such Collateral. Release of Collateral. Upon compliance by the applicable Issuer or Guarantor with the conditions set forth below under the caption "-- Asset Sale Release," "-- Non-Asset Sale Release" or "-- Release of Inventory and Accounts Receivable Collateral" in respect of any release of items of its Collateral described thereunder (and in the case of any such items of Collateral subject to the conditions set forth below under the caption "-- Asset Sale Release," upon delivery by the Company to the Collateral Agent and the Trustee of an opinion of counsel to the effect that such conditions have been met), (a)(i) in the case of any such items of Collateral subject to the conditions set forth below under the caption "-- Asset Sale Release," the Collateral Agent will terminate and release its Lien granted under the Collateral Agreements on such items of Collateral and (ii) in the case of any such items of Collateral subject to the conditions set forth below under the caption "-- Non-Asset Sale Release" or "-- Release of Inventory and Accounts Receivable Collateral", the Lien granted under the Collateral Agreements on such items of Collateral shall terminate and be released automatically and without any action by or on behalf of the Collateral Agent, and (b) in each such case, the Collateral Agent shall, at the sole cost and expense of such applicable Issuer or Guarantor, execute and deliver to such applicable Issuer or Guarantor such documents, without any representation, warranty or recourse of any kind whatsoever, as or such applicable Issuer or Guarantor shall reasonably request to evidence such termination and release. Asset Sale Release. Each Issuer and Guarantor have the right to obtain a release of items of Collateral (the "Released Interests") subject to an Asset Sale permitted hereunder upon compliance with the condition that the Company deliver to the Collateral Agent the following: (1) A notice from the Company requesting the release of Released Interests: (i) describing the proposed Released Interests; and (ii) specifying the Fair Market Value of such Released Interests on a date within 60 days of such notice (the "Valuation Date"); and (2) An Officers' Certificate of the Company certifying that: (i) such Asset Sale complies with the terms and conditions of the Indenture with respect to such Asset Sale to the extent such terms and conditions are required to be satisfied thereunder either prior to or concurrent with the consummation of such Asset Sale; (ii) there is no Default or Event of Default in effect or continuing on the date thereof or the date of such Asset Sale; (iii) the release of the Collateral will not result in a Default or Event of Default under the Indenture; (iv) the purchase price received is at least equal to the Fair Market Value of the Released Interests; (v) the release of such Released Interests would not be expected to interfere in any material respect with the Collateral Agent's ability to realize the value of the remaining Collateral and will not impair in any material respect the maintenance and operation of the remaining Collateral; and (vi) all conditions precedent in the Indenture relating to the release in question have been or will be complied with. 130 Non-Asset Sale Releases. The Liens granted in favor of the Collateral Agent for the benefit of itself, the Trustee and the Holders on Collateral (including Collateral consisting of the Capital Stock of any Restricted Subsidiary and any equipment that is obsolete or no longer useful in the business of the applicable Issuer or Guarantor) and proceeds thereof that is sold, conveyed or otherwise disposed of by the applicable Issuer or Guarantor (including by way of a sale-and-leaseback) in the ordinary course of business, whether in a single transaction or a series of related transactions, to any Person (other than to the Company or any Guarantor) for Net Proceeds of $250,000 or less shall be subject to termination and release upon the consummation of any such sale, conveyance or disposition. Release of Inventory and Accounts Receivable Collateral. Notwithstanding any provision to the contrary in the Indenture, Collateral comprised of accounts receivable, inventory or (prior to an Event of Default) the proceeds of the foregoing shall be subject to termination and release upon sales of such inventory and collection of the proceeds of such receivables in the ordinary course of business. EVENTS OF DEFAULT The Indenture provides that each of the following constitutes an event of default (each, an "Event of Default"): (i) a default for 30 days in the payment when due of premium, if any, or interest or Additional Interest, if any, on or with respect to any Note; (ii) a default in the payment when due of principal on any Note, whether upon maturity, acceleration, optional or mandatory redemption, required repurchase or otherwise; (iii) failure to perform or comply with any covenant, agreement or warranty in the Indenture (other than the defaults specified in clauses (i) and (ii) above) or any Collateral Agreement which failure continues for 30 days after written notice thereof has been given to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in aggregate principal amount of the then outstanding Notes; (iv) the occurrence of one or more defaults under any agreements, indentures or instruments under which the Company or any Restricted Subsidiary then has outstanding Indebtedness in excess of $5.0 million in the aggregate and, if not already matured at its final maturity in accordance with its terms, such Indebtedness shall have been accelerated and such acceleration is not rescinded, annulled or cured within 10 days thereafter; (v) one or more judgments, orders or decrees for the payment of money in excess of $5.0 million, either individually or in the aggregate, shall be entered against the Company or any Restricted Subsidiary or any of their respective properties and which judgments, orders or decrees are not paid, discharged, bonded or stayed or stayed pending appeal for a period of 60 days after their entry; (vi) certain events of bankruptcy, insolvency or reorganization of either Issuer or any Significant Subsidiary; (vii) any Guarantee of a Significant Subsidiary or the Company Guarantee ceases to be in full force and effect (other than as expressly provided for under the Indenture) or is declared null and void, or any Guarantor which is a Significant Subsidiary or the U.S. Issuer denies that it has any further liability under its Guarantee or the Company Guarantee, as applicable, or gives notice to such effect (other than by reason of the termination of the Indenture or the release of such Guarantor or the U.S. Issuer from its Guarantee or the Company Guarantee, as applicable, in accordance with the Indenture); or (viii) any Collateral Agreement at any time for any reason shall cease to be in full force and effect, or either Issuer or any Guarantor which is a Significant Subsidiary denies that it has any further liability under any Collateral Agreement, or gives notice to such effect (other than by reason of the termination of the Indenture or the release of such Guarantor from any Collateral Agreement in accordance with the Indenture), or any Collateral Agreement at any time for any reason shall cease to be effective in all material respects to grant the Collateral Agent the Liens purported to be created thereby on a material 131 portion of the Collateral thereunder, subject to Permitted Liens and no other Liens except as permitted by the Indenture or the Collateral Agreements, in each case for 30 days after the Company receives written notice thereof specifying such occurrence from the Trustee, the Collateral Agent or the Holders of at least 25% of the outstanding principal amount at maturity of the Notes. If any Event of Default (other than as specified in clause (vi) of the preceding paragraph with respect to either Issuer) occurs and is continuing, the Trustee or the Holders of at least 25% in aggregate principal amount of the then outstanding Notes may, and the Trustee at the request of such Holders shall, declare all the Notes to be due and payable immediately by notice in writing to the Issuers, and to the Issuers and the Trustee if by the Holders, specifying the respective Event of Default and that such notice is a "notice of acceleration," and the Notes shall become immediately due and payable. Notwithstanding the foregoing, in the case of an Event of Default arising from the events specified in clause (vi) of the preceding paragraph with respect to either Issuer, the principal of, premium, if any, and any accrued interest and Additional Interest, if any, on all outstanding Notes of both Issuers shall ipso facto become immediately due and payable without further action or notice. Holders may not enforce the Indenture or the Notes except as provided in the Indenture and under the Trust Indenture Act. The Holders of a majority in aggregate principal amount of the Notes then outstanding by notice to the Trustee may on behalf of all of the Holders waive any existing Default or Event of Default and its consequences under the Indenture except (i) a continuing Default or Event of Default in the payment of the principal of, or premium, if any, or interest or Additional Interest, if any, on, the Notes (which may only be waived with the consent of each affected Holder), or (ii) in respect of a covenant or provision which under the Indenture cannot be modified or amended without the consent of each Holder. Subject to certain limitations, the Holders of a majority in principal amount of the then outstanding Notes may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from the Holders notice of any continuing Default or Event of Default (except a Default or Event of Default relating to the payment of principal, premium, interest or Additional Interest) if it determines that withholding notice is in their interest. The Issuers are required to deliver to the Trustee annually a statement regarding compliance with the Indenture, and the Company is required, upon becoming aware of any Default or Event of Default, to deliver to the Trustee a statement specifying such Default or Event of Default. NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS The Indenture provides that no recourse for the payment of the principal of, premium, if any, interest on or Additional Interest, if any, with respect to any of the Notes or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of either Issuer in the Indenture, or in any of the Notes or because of the creation of any Indebtedness represented thereby, shall be had against any officer, employee, incorporator, direct or indirect controlling person, shareholder, member, partner or Affiliate of such Issuer or of any successor Person thereof. Each Holder, by accepting the Notes, and the Collateral Agent and the Trustee, waive and release all such liability. DEFEASANCE The Issuers may, at their option and at any time, elect to have the obligations of the Issuers discharged with respect to the outstanding Notes ("defeasance"). Such defeasance means that the Issuers shall be deemed to have paid and discharged the entire Indebtedness represented by the outstanding Notes and to have satisfied all other obligations under the Notes and the Indenture except for: (i) the rights of the Holders to receive, solely from the trust fund described below, payments in respect of the principal of, premium, if any, and interest and Additional Interest, if any, on such Notes when such payments are due; (ii) the Issuers' obligations with respect to the Notes concerning issuing temporary Notes, registration of Notes, mutilated, destroyed, lost or stolen Notes, and the maintenance of an office or agency for payment; 132 (iii) the rights, powers, trusts, duties and immunities of the Trustee under the Indenture; and (iv) the defeasance provisions of the Indenture. In addition, the Issuers may, at their option and at any time, elect to have the obligations of the Issuers released with respect to certain covenants that are described in the Indenture ("covenant defeasance") and any omission to comply with such obligations shall not constitute a Default or an Event of Default with respect to the Notes. In the event that a covenant defeasance occurs, certain events (not including non-payment, bankruptcy and insolvency events) described under "-- Events of Default" will no longer constitute Events of Default with respect to the Notes. In order to exercise either defeasance or covenant defeasance: (i) the Issuers shall irrevocably deposit with the Trustee, as trust funds in trust, for the benefit of the Holders, cash in United States dollars, U.S. Government Obligations (as defined in the Indenture), or a combination thereof, in such amounts as will be sufficient, in the report of a nationally recognized firm of independent public accountants or a nationally recognized investment banking firm, to pay and discharge the principal of, premium, if any, and interest and Additional Interest, if any, on the outstanding Notes to redemption or maturity; (ii) the Issuers shall have delivered to the Trustee an opinion of counsel in the United States to the effect that the Holders will not recognize income, gain or loss for Federal income tax purposes as a result of such defeasance or covenant defeasance, as the case may be, and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such defeasance or covenant defeasance, as the case may be, had not occurred (in the case of defeasance, such opinion must refer to and be based upon a ruling of the Internal Revenue Service or a change in applicable Federal income tax laws); (iii) no Default or Event of Default shall have occurred and be continuing on the date of such deposit or insofar as clause (vi) under the first paragraph under "-- Events of Default" is concerned, at any time during the period ending on the 91st day after the date of deposit; (iv) such defeasance or covenant defeasance shall not result in a breach or violation of, or constitute a Default under the Indenture or a default under any other agreement or instrument to which either Issuer is a party or by which it is bound; (v) the Issuers shall have delivered to the Trustee opinions of counsel to the effect that (A) the trust funds will not be subject to any rights of holders of Indebtedness (other than the Holders) and (B) after the 91st day following the deposit, the trust funds will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally; and (vi) the Issuers shall have delivered to the Trustee Officers' Certificate and opinions of counsel, each stating that all conditions precedent under the Indenture to either defeasance or covenant defeasance, as the case may be, have been complied with and that no violations under agreements governing any other outstanding Indebtedness would result therefrom. SATISFACTION AND DISCHARGE The Indenture will be discharged and will cease to be of further effect (except as to surviving rights of registration of transfer or exchange of the Notes, as expressly provided for in the Indenture) as to all outstanding Notes when: (i) either (a) all Notes theretofore authenticated and delivered (except lost, stolen or destroyed Notes which have been replaced or paid and Notes for whose payment money has theretofore been deposited in trust and thereafter repaid to the Issuers) have been delivered to the Trustee for cancellation or (b) all Notes not theretofore delivered to the Trustee for cancellation have become due and payable and the Issuers have irrevocably deposited or caused to be deposited with the Trustee an amount in United States dollars sufficient to pay and discharge the entire indebtedness on the Notes not theretofore 133 delivered to the Trustee for cancellation, for the principal of, premium, if any, interest and Additional Interest, if any, to the date of deposit; (ii) the Issuers have paid or caused to be paid all other sums payable under the Indenture by the Company; and (iii) the Issuers have delivered to the Trustee Officers' Certificate and opinions of counsel each stating that all conditions precedent under the Indenture relating to the satisfaction and discharge of the Indenture have been complied with. RELEASE OF GUARANTEE So long as no Event of Default shall have occurred and be continuing, upon (i)(A) the sale or disposition (whether by merger, stock purchase, asset or sale or otherwise) of a Guarantor (or all or substantially all of the assets of any such Guarantor or all of the Capital Stock of any such Guarantor) to an entity which is not a Subsidiary of the Company or (B) such Guarantor ceases to be a Restricted Subsidiary, and our compliance, in each case, to the extent applicable, with the provisions of the covenant described above under the caption "-- Certain Covenants -- Limitation on Asset Sales" that are required to be satisfied thereunder either prior to or concurrent with the consummation of the applicable transaction; (ii) the designation by the Company of such Guarantor as an Unrestricted Subsidiary in accordance with the "-- Certain Covenants -- Limitation on Restricted Payments" covenant described above; (iii) upon satisfaction and discharge of the Indenture or payment in full of the principal of, premium, if any, accrued and unpaid interest and Additional Interest, if any, on the Notes and all other Obligations that are then due and payable, such Guarantor or the U.S. Issuer with respect to the Company Guarantee shall be deemed released from all its obligations under its Guarantee of the Notes and the Indenture or the Company Guarantee, as applicable, or (iv) in the case of any Foreign Guarantor or the U.S. Issuer with respect to the Company Guarantee, upon payment in full of the principal of, premium, if any, accrued and unpaid interest and Additional Interest, if any, on the Dutch Notes and all other Obligations of the Dutch Issuer that are then due and payable, such Foreign Guarantor or the U.S. Issuer, as the case may be, shall be deemed released from all its Obligations under its Foreign Guarantee of the Dutch Notes and the Indenture or the Company Guarantee, as applicable. Upon the release of any Guarantor or the U.S. Issuer, as the case may be, from its Guarantee or the Company Guarantee, as applicable, pursuant to the provisions of the Indenture, each other Guarantor not so released shall remain liable for the full amount of principal of, premium, if any, and interest and Additional Interest, if any, on, the Notes as and to the extent provided in the Indenture. Upon delivery by the Company to the Collateral Agent and the Trustee of an opinion of counsel to the effect that the conditions described in the immediately preceding paragraph have been met, the Collateral Agent shall, at the sole cost and expense of the Company, execute and deliver to the Company such documents, without any representation, warranty or recourse of any kind whatsoever, as the Company shall reasonably request to evidence such release. AMENDMENT, SUPPLEMENT AND WAIVER Except as provided in the next two paragraphs, the Indenture, the Notes, the Collateral Agreements, the Guarantees, the U.S. Guarantee or the Registration Rights Agreement may be amended or supplemented with the written consent of the Holders of at least a majority in aggregate principal amount of the then outstanding Notes (including consents obtained in connection with a tender offer or exchange offer for the Notes), and any existing Default or Event of Default or compliance with any provision of the Indenture or the Notes may be waived with the consent of the Holders of a majority in aggregate principal amount of the then outstanding Notes (including consents obtained in connection with a tender offer or exchange offer for Notes). Without the consent of each affected Holder, an amendment or waiver shall not: (i) reduce the principal amount of the Notes whose Holders must consent to an amendment, supplement or waiver; 134 (ii) reduce the principal of or change the fixed maturity of any Note, or alter or waive the provisions with respect to the redemption of the Notes in a manner adverse to the Holders other than with respect to a Change of Control Offer or an Asset Sale Offer; (iii) reduce the rate of or change the time for payment of interest or Additional Interest on any Notes; (iv) waive a Default or Event of Default in the payment of principal of, premium, if any, or interest or Additional Interest, if any, on the Notes (except that the Holders of at least a majority in aggregate principal amount of the then outstanding Notes may (a) rescind an acceleration of the Notes that resulted from a non-payment default, and (b) waive the payment default that resulted from such acceleration) (v) make any Note payable in money other than that stated in the Notes; (vi) make any change in the provisions of the Indenture relating to the right of the Holders to waive past Defaults or the rights of the Holders to receive payments of principal of, or premium, if any, or interest or Additional Interest, if any, on, the Notes; (vii) following the occurrence of a Change of Control, amend, change or modify either Issuer's obligation to make and consummate a Change of Control Offer by reason of such a Change of Control or modify any of the provisions or definitions with respect thereto in a manner adverse to the Holders with respect to such Change of Control, or following the exercise by the Dutch Issuer of the Change of Control Redemption of Dutch Notes Right or Tax Redemption, amend, change or modify the Dutch Issuer's obligation to make and consummate a Change of Control Redemption of Dutch Notes or Tax Redemption with respect to such exercise or modify any of the provisions or definitions with respect thereto in a manner adverse to the Holders with respect to such Change of Control Redemption of Dutch Notes Right, Change of Control Redemption of Dutch Notes or Tax Redemption, or following the occurrence of an Asset Sale or any fiscal year of the Company ending on or after June 30, 2004, for which Excess Cash Flow was in an amount at least equal to $250,000, amend, change or modify the Issuers' obligations to make and consummate an Asset Sale Offer with respect to such Asset Sale or an Excess Flow Offer with respect to such fiscal year, as the case may be, or modify any of the provisions or definitions with respect thereto in a manner adverse to the Holders with respect to such Asset Sale Offer or Excess Cash Flow Offer, as the case may be; (viii) release any Guarantor that is a Significant Subsidiary or the U.S. Issuer with respect to the Company Guarantee from any of its obligations under its Guarantee or the Indenture or the Company Guarantee, as applicable, other than in accordance with the terms of the Indenture; or (ix) release all or substantially all of the Collateral. Notwithstanding the foregoing, without the consent of any Holder, the Issuers and the Trustee may amend or supplement the Indenture or the Notes: (i) to cure any ambiguity, defect or inconsistency; (ii) to provide for uncertificated Notes in addition to or in place of certificated Notes; (iii) to provide for the assumption of either Issuer's Obligations to Holders in the event of any Disposition involving such Issuer in which such Issuer is not the Surviving Person; (iv) to make any change that would provide any additional rights or benefits to the Holders or that does not adversely affect the rights of any such Holder; (v) to release any Guarantor from its Guarantee and the Indenture or the U.S. Issuer with respect to the Company Guarantee from the Company Guarantee that is permitted to be released under the Indenture in accordance with the terms thereof; or (vi) to comply with the requirements of the Commission in order to effect or maintain the qualification of the Indenture under the Trust Indenture Act. 135 TRANSFER AND EXCHANGE The registered Holder of a Note will be treated as the owner of such Note for all purposes. A Holder may transfer or exchange Notes in accordance with the Indenture. The Registrar and the Trustee may require a Holder among other things, to furnish appropriate endorsements and transfer documents and the applicable Issuer may require a Holder to pay any taxes and fees required by law or permitted by the Indenture. Neither either Issuer nor the Registrar shall be required to issue, register the transfer of or exchange any Note (i) during a period beginning at the opening of business on the day that the Trustee receives notice of any redemption from such Issuer and ending at the close of business on the day the notice of redemption is sent to the Holders, (ii) selected for redemption, in whole or in part, except the unredeemed portion of any Note being redeemed in part may be transferred or exchanged, and (iii) during a Change of Control Offer, Change of Control Redemption of Dutch Notes, Tax Redemption or an Asset Sale Offer if such Note is tendered pursuant to such Change of Control Offer, Change of Control Redemption of Dutch Notes, Tax Redemption or Asset Sale Offer and not withdrawn. THE TRUSTEE HSBC Bank USA, National Association is the Trustee under the Indenture and has been appointed by the Issuers as Registrar and Paying Agent with regard to the Notes. The Indenture (including the provisions of the Trust Indenture Act incorporated by reference therein) contains limitations on the rights of the Trustee thereunder, should it become a creditor of either Issuer, to obtain payment of claims in certain cases or to realize on certain property received by it in respect of any such claims, as security or otherwise. The Trustee is permitted to engage in other transactions; provided, however, if it acquires any conflicting interest (as defined in the Trust Indenture Act) it must eliminate such conflict or resign. GOVERNING LAW The Indenture is, and the Notes, the Guarantees, the Company Guarantee and the U.S. Security Agreement will be, governed by the laws of the State of New York, without regard to the principles of conflicts of law. ENFORCEABILITY OF JUDGMENTS Since the operating assets of the Dutch Issuer and the Foreign Guarantors are outside the United States, any judgment obtained in the United States against either the Dutch Issuer or any Foreign Guarantor, including judgments with respect to the payment of principal, premium, if any, interest, Additional Amounts, if any, Additional Interest, if any, redemption price and any purchase price with respect to the Dutch Notes, or any guarantee in respect thereof, may not be collectible within the United States. A judgment obtained in the courts of another EU Member State would be enforced by Dutch courts without re-examination of the merits of the case subject to and in accordance with the EU Regulation on jurisdiction and Recognition and Enforcement of Judgements in Civil and Commercial Matters, as amended. In the absence of an applicable treaty between the United States and The Netherlands, a judgment rendered by a court in the United States (the "Foreign Court") will not be enforced by Dutch courts. In order to obtain a judgment which is enforceable in The Netherlands, the claim must be relitigated before a competent Dutch court. If and to the extent that the Dutch court finds that the jurisdiction of the Foreign Court has been based on grounds which are internationally acceptable and that proper legal procedures have been observed, the Dutch court would, in principle, give binding effect to the final judgment of the Foreign Court unless such judgment contravenes principles of Dutch public policy. A final and conclusive judgment rendered in a court in another EU Member State would be recognized and enforced by the Belgian courts without re-examination of the merits, subject to the conditions set out in EU legislation (the EU Regulation on Jurisdiction and Enforcement of Judgments in Civil and Commercial Matters (44/2001) of 22 December 2001). A final and conclusive judgment rendered in a court of a non-EU 136 Member State would be recognized and enforced by the Belgian courts, provided that the procedure set out in Article 570 of the Belgian Judicial Code is followed. The foreign judgment would only be recognized and enforced in Belgium after review of the merits by a court of first instance, and if the court is satisfied that certain conditions have been fulfilled. CERTAIN DEFINITIONS Set forth below are certain defined terms used in the Indenture. Reference is made to the Indenture for the definition of all other terms used in the Indenture. "Acquired Debt" means, with respect to any specified Person, Indebtedness of any other Person (the "Acquired Person") existing at the time the Acquired Person merges with or into, or becomes a Restricted Subsidiary of, such specified Person, including Indebtedness incurred in connection with, or in contemplation of, the Acquired Person merging with or into, or becoming a Restricted Subsidiary of, such specified Person; provided, however, that Indebtedness of such Acquired Person which is redeemed, defeased, retired or otherwise repaid at the time of or immediately upon consummation of the transactions by which such Acquired Person merges with or into or becomes a Restricted Subsidiary of such specified Person shall not be Acquired Debt. "Additional Interest" has the meaning set forth in the Registration Rights Agreement. "Administrative Agent" has the meaning set forth in the definition of the term "Credit Agreement." "Affiliate" means, with respect to any specified Person, any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with") of any Person means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by agreement or otherwise. "Asset Sale" means (i) any sale, lease, conveyance or other disposition by the Company or any Restricted Subsidiary of any assets (including by way of a sale-and-leaseback) other than in the ordinary course of business or (ii) the issuance or sale of Capital Stock of any Restricted Subsidiary, in the case of each of (i) and (ii), whether in a single transaction or a series of related transactions, to any Person (other than (A) (1) in the case of the Company or any Domestic Restricted Subsidiary to the Company or any Guarantor and (2) in the case of any Foreign Restricted Subsidiary to the Company or any Wholly Owned Restricted Subsidiary, (B) directors' qualifying shares and (C) sales or grants of licenses to use the patents, trade secrets, know-how and other intellectual property of the Company or any of its Restricted Subsidiaries to the extent that such license does not prohibit the Company and its Restricted Subsidiaries from using the intellectual property so licensed or require the Company or any of its Restricted Subsidiaries to pay any fees for such use) for Net Proceeds in excess of $250,000. "Belgium Equipment" means all equipment located at the Belgium Plant. "Belgium Plant" means the plant owned by Phibro Belgium in Rixensart, Belgium. "Belgium Plant Sale and Virginiamycin Production Transactions" means the following transactions and payments, including payments required pursuant to the documents to evidence such transactions, each of which is subject to entering into definitive documentation containing customary representations, warranties, covenants and indemnities for a transaction of that type, and changes in the definitive economic terms which are not, individually or in the aggregate, material to the Company: (i) the transfer of substantially all of the land and buildings and certain equipment of Phibro Belgium at the Belgium Plant, as well as the industrial activities and intellectual property relating to certain solvent technology of Phibro Belgium, for a purchase price of EUR 6.2 million, payable at closing; (ii) the transfer to GSK of a majority of the employees of Phibro Belgium and the corresponding responsibility for statutory severance obligations; (iii) GSK agreeing to be responsible for costs of cleaning-up, by demolition or otherwise, certain buildings not to be used by it, but for Phibro Belgium to reimburse GSK up to a maximum of EUR 0.7 million for such clean-up costs; (iv) in 137 recognition of the benefits to the Company from the proposed transaction, Phibro Belgium agreeing to pay to GSK EUR 1.5 million within six months from the closing date, EUR 1.5 million within eighteen months from the closing date, EUR 1.5 million within thirty months from the closing date, and EUR 0.5 million within forty-two months from the closing date; (v) Phibro Belgium retaining certain excess land (valued at approximately EUR 0.4 million) and being able to sell such land for its own account; (vi) Phibro Belgium being responsible for certain plant closure costs and legally required severance indemnities in connection with workforce reductions, estimated in total to be EUR 7.7 million, of which an amount estimated to be approximately EUR 4.1 million would be payable at or around the closing and an aggregate amount so estimated to be approximately EUR 3.6 million would be payable over periods up to thirteen years; and (vii) Phibro Belgium retaining any or all equipment at the Belgium Plant, and being able to sell such equipment for the account of Phibro Belgium or transfer such equipment, together with other assets and rights related to the production of virginiamycin, to the Company's Restricted Subsidiary in Brazil that owns the facility in Guarulhos or in connection with alternative production arrangements. "Belgium Purchase Agreement" means a Purchase Agreement between Phibro Belgium and GSK relating to the Belgium Plant Sale and Virginiamycin Production Transactions, and any related or ancillary agreements or instruments entered into by Phibro Belgium, GSK, their respective Affiliates and/or other persons in connection with the Belgium Plant Sale and Virginiamycin Production Transactions, in each case, as such agreements may be amended, modified or supplemented (so long as such amendments, modifications or supplements are not, individually or in the aggregate, materially adverse to the Company or the Holders). "Capital Lease Obligation" of any Person means, at the time any determination thereof is to be made, the amount of the liability in respect of a capital lease for property leased by such Person that would at such time be required to be capitalized on the balance sheet of such Person in accordance with GAAP. "Capital Stock" of any Person means any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated) corporate stock or other equity participations, including partnership interests, whether general or limited, of such Person, including any Preferred Stock. "Cash Equivalents" means: (i) marketable direct obligations issued by, or unconditionally guaranteed by, the United States Government or issued by any agency or instrumentality thereof and backed by the full faith and credit of the United States, in each case maturing within one year from the date of acquisition thereof; (ii) marketable direct obligations issued by any state of the United States of America or any political subdivision of any such state or any public instrumentality thereof maturing within one year from the date of acquisition thereof and, at the time of acquisition, having one of the two highest ratings obtainable from either Standard & Poor's Rating Services or Moody's Investors Service, Inc.; (iii) commercial paper maturing no more than one year from the date of creation thereof and, at the time of acquisition, having a rating of at least A-1 from Standard & Poor's Rating Services or at least P-1 from Moody's Investors Service, Inc.; (iv) certificates of deposit, time deposits or bankers' acceptances (or, with respect to foreign banks, similar instruments) maturing within one year from the date of acquisition thereof issued by any bank organized under the laws of the United States of America or any state thereof or the District of Columbia or any member of the European Union or any U.S. branch of a foreign bank or (with respect to any Restricted Subsidiary) any foreign country in which such Restricted Subsidiary is located, having at the date of acquisition thereof combined capital and surplus of not less than $250.0 million and a Thompson or Keefe Bank Watch Rating of "B" or better (including bank accounts in such banks); (v) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clause (i) above entered into with any bank meeting the qualifications specified in clause (iv) above; 138 (vi) in the case of any Foreign Restricted Subsidiary, Investments: (a) in direct obligations of the sovereign nation (or any agency or instrumentality thereof) in which such Foreign Restricted Subsidiary is organized or is conducting business or in obligations fully and unconditionally guaranteed by such sovereign nation (or any agency or instrumentality thereof), (b) of the type and maturity described in clauses (i) through (v) above of foreign obligors, which Investments or obligors (or the parents of such obligors) have ratings described in such clauses or equivalent ratings from comparable foreign rating agencies or (c) of the type and maturity described in clauses (i) through (v) above of foreign obligors (or the parents of such obligors), which Investments or obligors (or the parents of such obligors), are not rated as provided in such clauses or in clause (vi)(b) but which are, in the reasonable judgment of the Company, comparable in investment quality to such Investments and obligors (or the parents of such obligors); and (vii) investments in money market funds which invest substantially all their assets in securities of the types described in clauses (i) through (vi) above. "Cash Flow" means, with respect to any period, Consolidated Net Income for such period, plus, to the extent deducted in computing such Consolidated Net Income: (i) extraordinary net losses, plus (ii) provision for taxes based on income or profits and any provision for taxes utilized in computing the extraordinary net losses under clause (i) hereof, plus (iii) Consolidated Interest Expense, plus (iv) depreciation, amortization and all other non-cash charges (including amortization of goodwill and other intangibles but excluding any items that will require cash payments in the future for which an accrual or reserve is made), plus (v) any non-recurring fees, charges or other expenses made or incurred by the Company in connection with the Transactions. "Change of Control" means: (a) with respect to the Company, the occurrence of any of the following events after the Issue Date: (i) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act) (other than one or more Permitted Holders) is or becomes (including by merger, consolidation or otherwise) the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a Person shall be deemed to have beneficial ownership of all shares that such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of 50% or more of the voting power of the total outstanding Voting Stock of the Company; (ii) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors of the Company (together with any new directors whose election to such Board of Directors, or whose nomination for election by the stockholders of the Company, was approved by a vote of 66 2/3% of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of such Board of Directors of the Company then in office; (iii) the approval by the holders of Capital Stock of the Company of any plan or proposal for the liquidation or dissolution of the Company as a whole and not any Restricted Subsidiary or Guarantor (whether or not otherwise in compliance with the terms of the Indenture); or (iv) the sale or other disposition (other than by way of merger or consolidation) of all or substantially all of the Capital Stock or assets of the Company and its Restricted Subsidiaries taken as a whole to any Person or group (as defined in Rule 13d-5 of the Exchange Act) (other than to one or more of the Permitted Holders) as an entirety or substantially as an entirety in one transaction or a series of related transactions, unless the "beneficial owners" of the Voting Stock of such Person immediately prior to such transaction own, directly or indirectly, more than 50% of the total voting power of such Person immediately after such transaction; and 139 (b) with respect to the Dutch Issuer, the failure of the Company to own, directly or indirectly, 100% of the issued and outstanding Capital Stock of the Dutch Issuer (other than directors' qualifying shares). "Collateral" means, collectively, the Domestic Collateral and the Foreign Collateral. "Collateral Agent" means HSBC Bank USA, National Association, as collateral agent, and any successor thereto in accordance with the terms of the Indenture. "Collateral Agreements" means, collectively, the Domestic Collateral Agreements and the Foreign Collateral Agreements. "Common Stock" of any Person means any and all shares, interests or other participations in, and other equivalents (however designated and whether voting or non-voting) of such Person's common stock, whether outstanding on the Issue Date or issued after the Issue Date, and includes, without limitation, all series and classes of such common stock. "Company Guarantee" means a guarantee by the U.S. Issuer in respect of the Dutch Notes and all other Obligations of the Dutch Issuer under the Indenture. "Consolidated Cash Flow Coverage Ratio" means, for any period, the ratio of (i) the aggregate amount of Cash Flow for such period, to (ii) Consolidated Interest Expense for such period, determined on a pro forma basis after giving pro forma effect to (a) the incurrence of the Indebtedness giving rise to the calculation of the Consolidated Cash Flow Coverage Ratio and (if applicable) the application of the net proceeds therefrom, including to refinance other Indebtedness, as if such Indebtedness was incurred, and the application of such proceeds occurred, at the beginning of such period; (b) the incurrence, repayment or retirement of any other Indebtedness by the Company and its Restricted Subsidiaries since the first day of such period as if such Indebtedness was incurred, repaid or retired at the beginning of such period (except that, in making such computation, the amount of Indebtedness under any revolving credit facility shall be computed based upon the average balance of such Indebtedness at the end of each month during such period); (c) in the case of Acquired Debt, the related acquisition as if such acquisition had occurred at the beginning of such period; and (d) any acquisition or disposition by the Company and its Restricted Subsidiaries of any company or any business or any assets out of the ordinary course of business, or any related repayment of Indebtedness, in each case since the first day of such period, assuming such acquisition or disposition had been consummated on the first day of such period. "Consolidated Interest Expense" means, with respect to any period, the sum of (i) the interest expense of the Company and its Restricted Subsidiaries for such period, including, without limitation, (a) amortization of debt discount, (b) the net payments, if any, under interest rate contracts (including amortization of discounts), (c) the interest portion of any deferred payment obligation and (d) accrued interest, plus (ii) the interest component of the Capital Lease Obligations paid, accrued and/or scheduled to be paid or accrued by the Company and its Restricted Subsidiaries during such period, and all capitalized interest of the Company and its Restricted Subsidiaries, plus (iii) all dividends paid during such period by the Company and its Restricted Subsidiaries with respect to any Disqualified Stock (other than by any Restricted Subsidiary to the Company or any other Restricted Subsidiary and other than any dividend paid in Capital Stock (other than Disqualified Stock)), in each case, as determined on a consolidated basis in accordance with GAAP consistently applied. "Consolidated Net Income" means, with respect to any period, the net income (or loss) of the Company and its Restricted Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP consistently applied, adjusted to the extent included in calculating such net income (or loss), by excluding, without duplication: (i) all extraordinary gains (less all fees and expenses relating thereto); (ii) the portion of net income (or loss) of the Company and its Restricted Subsidiaries allocable to interests in unconsolidated Persons or Unrestricted Subsidiaries, except to the extent of the amount of dividends or distributions actually paid to the Company or its Restricted Subsidiaries by such other Person during such period; 140 (iii) for purposes of the covenant entitled "-- Certain Covenants -- Limitation on Restricted Payments," net income (or loss) of any Person combined with the Company or any of its Restricted Subsidiaries on a "pooling-of-interests" basis attributable to any period prior to the date of combination; (iv) net gains and losses (less all fees and expenses relating thereto) in respect of disposition of assets (including, without limitation, pursuant to sale and leaseback transactions) other than in the ordinary course of business; (v) the net income of any Restricted Subsidiary to the extent that the declaration of dividends or similar distributions by that Restricted Subsidiary of that income to the Company is not at the time permitted, directly or indirectly, by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Restricted Subsidiary or its stockholders; (vi) the cumulative non-cash effect of any change in accounting principles; provided that any net gain referred to in clause (iv) above that relates to a Restricted Investment and which is received in or converted into cash by the Company or a Restricted Subsidiary during such period shall be included in the consolidated net income of the Company; and (vii) the amount of accretions on preferred stock not paid in cash and dividends paid in kind on preferred stock reducing Consolidated Net Income in accordance with FASB 150. "Consolidated Net Worth" means, with respect to any Person at any date, the sum of (i) the consolidated stockholders' equity of such Person less the amount of such stockholders' equity attributable to Disqualified Stock of such Person and its Restricted Subsidiaries, as determined on a consolidated basis in accordance with GAAP consistently applied and (ii) the amount of any Preferred Stock of such Person not included in the stockholders' equity of such Person in accordance with GAAP, which Preferred Stock does not constitute Disqualified Stock. "Copyright Security Agreement" means a Copyright Security Agreement made by any of the Company or any Domestic Guarantor in favor of the Collateral Agent, as amended or supplemented from time to time in accordance with its terms. "Credit Agreement" means the Loan and Security Agreement, dated as of the Issue Date, among the Company, each of its Subsidiaries parties thereto, lenders parties thereto as such (together with their successors and assigns, the "Lenders") and Wells Fargo Foothill, Inc., as administrative agent (in such capacity, together with its successors and assigns, the "Administrative Agent"), or any other agreement providing for revolving credit loans, term loans, receivables financing or letters of credit, as the same may be further amended, modified, renewed, refunded, replaced or refinanced from time to time (including extending the maturity of, increasing the amount of available borrowings under, extending the purpose to include acquisition, working capital and other facilities of, changing the conditions and basis of borrowing of, combining the seniority of, changing the covenants and other provisions of, and adding Subsidiaries of the Company as additional borrowers or guarantors, or otherwise restructuring all or any portion of the Indebtedness under such agreement or any successor or replacement and whether with the same or any other agent, lender or group of lenders), including (i) any related notes, letters of credit, guarantees, collateral documents, instruments and agreements executed in connection therewith, and in each case as amended, modified, renewed, refunded, replaced or refinanced from time to time, and (ii) any notes, guarantees, collateral documents, instruments and agreements executed in connection with any such amendment, modification, renewal, refunding, replacement or refinancing. "Currency Agreement Obligations" means the obligations of any person under a foreign exchange contract, currency swap agreement or other similar agreement or arrangement to protect such person against fluctuations in currency values. "Default" means any event that is, or after the giving of notice or passage of time or both would be, an Event of Default. 141 "Disposition" means, with respect to any Person, any merger, consolidation or other business combination involving such Person (whether or not such Person is the Surviving Person) or the sale, assignment, transfer, lease, conveyance or other disposition of all or substantially all of such Person's assets. "Disqualified Stock" means (i) any Preferred Stock of any Restricted Subsidiary (other than Preferred Stock owned by the Company or any Wholly Owned Restricted Subsidiary) and (ii) that portion of any Capital Stock that, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable at the option of the holder thereof (other than upon a Change of Control of the Company in circumstances where the Holders would have similar rights), in whole or in part on or prior to the stated maturity of the Notes. "Dollars" and "$" means lawful money of the United States of America. "Domestic Collateral" shall mean Collateral as defined in the Domestic Collateral Agreements. "Domestic Collateral Agreements" means, collectively, the U.S. Security Agreement, the U.S. Pledge Agreement, each Patent Security Agreement, each Copyright Security Agreement and each Trademark Security Agreement, in each case, as the same may be amended, supplemented or modified from time to time in accordance with its terms. "Domestic Guarantee" means a guarantee by a Domestic Restricted Subsidiary of the U.S. Issuer in respect of the U.S. Notes and all other Obligations of the U.S. Issuer under the Indenture and the Dutch Notes and all other Obligations of the Dutch Issuer under the Indenture. "Domestic Guarantor" means each Domestic Restricted Subsidiary of the U.S. Issuer that is designated as such on the signature pages of the Indenture and each other Domestic Restricted Subsidiary of the U.S. Issuer that has issued a Domestic Guarantee. "Domestic Restricted Subsidiary" means any Restricted Subsidiary of the Company that is not a Foreign Restricted Subsidiary. "Domestic Subsidiary" means any Subsidiary of the Company that is not a Foreign Subsidiary. "Excess Cash Flow" means, for any period, Cash Flow for such period minus the sum of (i) the lesser of (x) all Capital Expenditures made during such period by the Company and its Restricted Subsidiaries and (y) $8.5 million; (ii) the sum of (x) the cash portion of the Consolidated Interest Expense (net of interest income) for such period and (y) the cash portion of any related financing fees for such period; (iii) the aggregate amount (without duplication) of all federal, state and foreign income taxes and franchise taxes actually paid in cash by the Company and its Restricted Subsidiaries during such period. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission promulgated thereunder. "Existing Notes" shall mean the Company's outstanding 9.875% senior subordinated notes due 2008 as the same may be amended, modified, renewed, refunded or refinanced from time to time. "Fair Market Value" means, with respect to any asset or property, the sale value that would be obtained in an arm's-length transaction between an informed and willing seller under no compulsion to sell and an informed and willing buyer under no compulsion to buy. "Foreign Collateral" shall mean the assets or property subject to any Lien under a Foreign Collateral Agreement. "Foreign Collateral Agreements" means, collectively, any and all agreements purporting to grant a Lien on assets and properties of the Dutch Issuers and the Foreign Guarantors to secure their respective Obligations under the Dutch Notes, the Indenture and the Foreign Guarantees, which agreements shall be in form and substance reasonably satisfactory to the Collateral Agent, in each case as amended or supplemented from time to time in accordance with its terms. 142 "Foreign Guarantee" means a guarantee by Restricted Subsidiary of the Dutch Issuer in respect of the Dutch Notes and all other Obligations of the Dutch Issuer under the Indenture. "Foreign Guarantor" means each Restricted Subsidiary of the Dutch Issuer that is designated as such on the signature pages of the Indenture and each other Restricted Subsidiary of the Dutch Issuer that has issued a Foreign Guarantee. "Foreign Restricted Subsidiary" means a Restricted Subsidiary of the Company that is a Foreign Subsidiary. "Foreign Subsidiary" means a Subsidiary of the Company (1) which is organized under the laws of any jurisdiction outside of the United States of America, (2) which conducts the major portion of its business outside of the United States of America and (3) all or substantially all of the property and assets of which are located outside of the United States of America. "GAAP" means generally accepted accounting principles in the United States set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession in the United States of America, which are applicable as of the Issue Date and consistently applied. "GSK" means Glaxosmithkline Biologicals SA and/or Affiliates thereof. "Guarantees" means, collectively, the Domestic Guarantees and the Foreign Guarantees. "Guarantors" means, collectively, the Domestic Guarantors and the Foreign Guarantors; provided that any Person constituting a Guarantor as described above shall cease to constitute a Guarantor when its respective Guarantee is released in accordance with the terms of the Indenture. "guaranty" means a guarantee (other than by endorsement of negotiable instruments for collection or deposit in the ordinary course of business), direct or indirect, in any manner (including, without limitation, letters of credit and reimbursement agreements in respect thereof), of all or any part of any Indebtedness. "Holder" means the Person in whose name a Unit or, if a Separation Event has occurred, a Note, is registered on the Registrar's books. "Indebtedness" means, with respect to any Person, without duplication, and whether or not contingent: (i) all indebtedness of such Person for borrowed money or which is evidenced by a note, bond, debenture or similar instrument; (ii) all obligations of such Person to pay the deferred or unpaid purchase price of property, which purchase price is due more than six months after the date of placing such property in service or taking delivery and title thereto; (iii) all Capital Lease Obligations of such Person; (iv) all obligations of such Person in respect of letters of credit or bankers' acceptances issued or created for the account of such Person; (v) to the extent not otherwise included in this definition, all net obligations of such Person under Interest Rate Agreement Obligations or Currency Agreement Obligations of such Person; (vi) all liabilities of others of the kind described in the preceding clause (i), (ii) or (iii) secured by any Lien on any property owned by such Person; provided, however, if the obligations secured by a Lien (other than a Permitted Lien not securing any liability that would itself constitute Indebtedness) on any assets or property have not been assumed by such Person in full or are not such Person's legal liability in full, the amount of such Indebtedness for purposes of this definition shall be limited to the lesser of the amount of Indebtedness secured by such Lien and the Fair Market Value of the property subject to such Lien; 143 (vii) all Disqualified Stock issued by such Person and all Preferred Stock issued by a Subsidiary of such Person (other than Preferred Stock of a Restricted Subsidiary owned by the Company or a Wholly Owned Restricted Subsidiary); and (viii) to the extent not otherwise included, any guaranty by such Person of any other Person's indebtedness or other obligations described in clauses (i) through (vii) above. "Indebtedness" of the Company and the Restricted Subsidiaries shall not include current trade payables incurred in the ordinary course of business, and non-interest bearing installment obligations and accrued liabilities incurred in the ordinary course of business. The principal amount outstanding of any Indebtedness issued with original issue discount is the accreted value of such Indebtedness. Notwithstanding the foregoing, Indebtedness shall not include Indebtedness arising from the honoring by a bank or other financial institution of a check, draft or similar instrument inadvertently drawn against insufficient funds in the ordinary course of business; provided that such Indebtedness is extinguished within 3 business days of the incurrence thereof. In addition, Indebtedness shall not include a government grant and any guaranty of the Company or a Restricted Subsidiary required by such grant which obligates the Company or a Restricted Subsidiary to repay such grant at the discretion of such government or upon the failure of the conditions of such grant specified therein to be fulfilled, but which is forgiven solely by reason of the passage of time or the fulfillment of such grant conditions (other than repayment); provided that if the conditions for forgiveness of such government grant lapse for whatever reason and the Company or a Restricted Subsidiary becomes obligated to repay such grant, the grant shall be deemed Indebtedness which is incurred at the time such obligation to repay is triggered. "Indenture Documents" means, collectively, the Indenture, the Notes, the Guarantees, the Company Guarantee and the Collateral Agreements. "Intercreditor Agreement" means the Intercreditor Agreement, dated as of the Issue Date, among the Administrative Agent, the Collateral Agent, the Company and the Domestic Guarantors, as the same may be amended, supplemented or modified from time to time. "Interest Rate Agreement Obligations" means, with respect to any Person, the obligations of such Person under (i) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements, and (ii) other agreements or arrangements designed to protect such Person against fluctuations in interest rates. "Investment" means, with respect to any Person, any direct or indirect loan or other extension of credit (including, without limitation, any guaranty) or capital contribution to (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others), or any purchase or acquisition by such Person of any Capital Stock, bonds, notes, debentures or other securities or evidences of Indebtedness issued by, any other Person. "Investment" shall exclude (x) extensions of trade credit by the Company and its Restricted Subsidiaries on commercially reasonable terms in accordance with normal trade practices of the Company or such Restricted Subsidiary, as the case may be, and (y) payments made by the Company and its Restricted Subsidiaries in respect of liabilities of the type described in clauses (ii)(b) and (e) of the definition of the term "Net Proceeds" in connection with (1) any Asset Sales by the Company or any of its Restricted Subsidiaries (provided, however, that the aggregate amount of such payments relating to any such Asset Sale shall at no time exceed the gross proceeds actually received by the Company or such Restricted Subsidiary in connection with such Asset Sale) and (2) the disposition of all or substantially all of the Capital Stock or assets of MRT and PMC. For the purposes of the "Limitation on Restricted Payments" covenant, (i) "Investment" shall include and be valued at the Fair Market Value of the net assets of any Restricted Subsidiary (to the extent of the Company's equity interest in such Restricted Subsidiary) at the time that such Restricted Subsidiary is designated an Unrestricted Subsidiary and shall exclude the Fair Market Value of the net assets of any Unrestricted Subsidiary at the time that such Unrestricted Subsidiary is designated a Restricted Subsidiary and (ii) the amount of any Investment shall be the original cost of such Investment plus the cost of all additional Investments by the Company or any of its Restricted Subsidiaries, without any adjustments for increases or decreases in value, or write-ups, write-downs or write-offs with respect to such Investment, reduced by the payment of dividends or distributions in connection with such Investment or any other amounts received in respect of such Investment; provided, 144 however, that no such payment of dividends or distributions or receipt of any such other amounts shall reduce the amount of any Investment if such payment of dividends or distributions or receipt of any such amounts would be included in Consolidated Net Income. If the Company or any Restricted Subsidiary of the Company sells or otherwise disposes of any Common Stock of any direct or indirect Restricted Subsidiary of the Company such that, after giving effect to any such sale or disposition, the Company no longer owns, directly or indirectly, greater than 50% of the outstanding Common Stock of such Restricted Subsidiary, the Company and/or such Restricted Subsidiary shall be deemed to have made an Investment on the date of any such sale or disposition equal to the Fair Market Value of the Common Stock of such Restricted Subsidiary not sold or disposed of. "Issue Date" means October 21, 2003, the date of the original issuance of the Units and the underlying Notes. "Lenders" has the meaning set forth in the definition of the term "Credit Agreement." "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or similar encumbrance of any kind in respect of such asset, whether or not filed, recorded or otherwise perfected under applicable law (including any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to give a security interest in any asset). "MRT" means Mineral Resource Technologies, Inc., a Delaware corporation. "Net Proceeds" means, with respect to any Asset Sale by any Person, the aggregate cash or Cash Equivalent proceeds received by such Person and/or its Affiliates in respect of such Asset Sale, which amount is equal to the excess, if any, of (i) the cash or Cash Equivalents received by such Person and/or its Affiliates (including any cash payments received by way of deferred payment pursuant to, or monetization of, a note or installment receivable or otherwise, but only as and when received) in connection with such Asset Sale, over (ii) the sum of (a) the amount of any Indebtedness that is secured by such asset and which is required to be (and is in fact) repaid by such Person in connection with such Asset Sale, plus (b) all fees, commissions and other expenses incurred by such Person in connection with such Asset Sale, plus (c) provision for taxes, including income taxes, directly attributable to the Asset Sale or to prepayments or repayments of Indebtedness with the proceeds of such Asset Sale, plus (d) if such Person is a Restricted Subsidiary, any dividends or distributions payable to holders of minority interests in such Restricted Subsidiary from the proceeds of such Asset Sale, plus (e) appropriate amounts to be provided or established by the Company or any Restricted Subsidiary as a reserve against any liabilities associated with such Asset Sale, including, without limitation, pension and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale; provided that upon the release of any such reserves, such amounts shall constitute "Net Proceeds" hereunder. "Obligations" means any principal, premium, interest (including Additional Interest), Additional Amounts, penalties, fees, indemnifications, reimbursement obligations, damages and other liabilities and obligations payable under the Indenture, any Note or any other Indenture Document. "Officers' Certificate" means a certificate signed on behalf of a Person by two Officers of such Person, one of whom must be the principal executive officer, the principal financial officer or the principal accounting officer of such Person, that meets the requirements set forth in the Indenture. "Patent Security Agreement" means a Patent Security Agreement made by any of the Company or any Domestic Guarantor in favor of the Collateral Agent, as amended or supplemented from time to time in accordance with its terms. "Permitted Holders" means (i) Jack Bendheim; (ii) each of his spouse, siblings, ancestors, descendants (whether by blood, marriage or adoption, and including stepchildren) and the spouses, siblings, ancestors and descendants thereof (whether by blood, marriage or adoption, and including stepchildren) of such natural persons, the beneficiaries, estates and legal representatives of any of the foregoing, the trustee of any bona fide trust of which any of the foregoing, individually or in the aggregate, are the majority in interest beneficiaries or grantors, and any corporation, partnership, limited liability company or other Person in which any of the 145 foregoing, individually or in the aggregate, own or control a majority in interest; and (iii) all Affiliates controlled by the individual named in clause (i) above. "Permitted Investments" means: (i) Investments by the Company or any Restricted Subsidiary of the Company (A) in any Person that is or will become immediately after such Investment a Domestic Guarantor or that will merge or consolidate into the Company or a Domestic Guarantor or (B) in either Issuer or any Guarantor, to the extent 100% of the net proceeds thereof are used substantially contemporaneously with the receipt of such proceeds to make any redemption, repurchase or other retirement for value or payment on or in respect of the Dutch Notes or its Guarantee or the Company Guarantee, as applicable, in respect thereof, as applicable; (ii) any investment in cash or Cash Equivalents; (iii) Investments in the Company by any Restricted Subsidiary of the Company; provided that any Indebtedness evidencing such Investment held by a Restricted Subsidiary shall satisfy the requirements of clause (vii) of the definition of the term "Permitted Indebtedness"; (iv) Investments in accounts and notes receivable acquired in the ordinary course of business; (v) any notes, obligations or other securities received in connection with an Asset Sale that complies with the covenant described under "Limitations on Asset Sales" or any other disposition not constituting an Asset Sale; (vi) Interest Rate Agreement Obligations and Currency Agreement Obligations permitted pursuant to the second paragraph of the covenant described under "Limitation on Incurrence of Indebtedness" above; (vii) investments in or acquisitions of Capital Stock or similar interests in Persons (other than Affiliates of the Company) received in the bankruptcy or reorganization of or by such Person or any exchange of such investment with the issuer thereof or taken in settlement of or other resolution of claims or disputes; (viii) Investments by any Foreign Subsidiary of the Company that (A) is not the Dutch Issuer or a Restricted Subsidiary of the Dutch Issuer, in any other Foreign Subsidiary of the Company and (B) is the Dutch Issuer or a Foreign Guarantor, in either Issuer or any Guarantor; (ix) Investments in any Foreign Subsidiary of the Company by the Company or any Restricted Subsidiary of the Company to the extent the aggregate amount of such Investments at any one time outstanding does not exceed $5.0 million; (x) other Investments made after the Issue Date in an aggregate amount at any one time outstanding not to exceed $2.5 million; and (xi) Investments in Restricted Subsidiaries of the Company in connection with the production of virginiamycin in an amount not to exceed the Fair Market Value of the Belgium Equipment plus $15.0 million. "Permitted Liens" means: (i) Liens securing Indebtedness under the Credit Agreement to the extent such Indebtedness is permitted under clause (i), (xiii), (xiv) or (xvii) of the definition of the term "Permitted Indebtedness"; (ii) Liens securing Acquired Debt incurred in accordance with the terms of the Indenture; provided, however, that (A) such Liens secured such Acquired Debt at the time of and prior to the incurrence of such Acquired Debt by the Company or a Restricted Subsidiary of the Company and were not granted in connection with, or in anticipation of, the incurrence of such Acquired Debt by the Company or a Restricted Subsidiary of the Company and (B) such Liens do not extend to or cover any property or assets of the Company or of any of its Restricted Subsidiaries other than the property or assets 146 that secured the Acquired Debt prior to the time such Indebtedness became Acquired Debt of the Company or a Restricted Subsidiary of the Company (and property or assets acquired in replacement of any such property or assets after such time to the extent acquired using the proceeds of any such replaced property or assets) and are not materially more favorable to the lienholders than those securing the Acquired Debt prior to the incurrence of such Acquired Debt by the Company or a Restricted Subsidiary of the Company; (iii) Liens on property acquired by the Company or a Restricted Subsidiary; provided, however, that such Liens were in existence prior to the contemplation of such acquisition and do not extend to any other property of the Company or such Restricted Subsidiary; (iv) Liens in respect of Interest Rate Agreement Obligations and Currency Agreement Obligations permitted under the Indenture; (v) Liens in favor of the Company or any Restricted Subsidiary so long as such Liens are subordinated to the Liens described in clause (vii) below; (vi) Liens existing or created on the Issue Date; (vii) Liens securing the Notes, the Guarantees or the Company Guarantee; (viii) Liens securing Capital Lease Obligations and Purchase Money Obligations permitted pursuant to clause (xi) of the definition of "Permitted Indebtedness"; provided, however, that (A) in the case of any Capital Lease Obligations, such Liens do not extend to any property or assets which is not leased property subject to such Capitalized Lease Obligations (whether or not such property or assets were the initial leased property thereunder) and (B) in the case of any Purchase Money Obligations, (1) the Indebtedness shall not exceed the cost of the real property acquired, together with the cost of the installation and construction thereof and improvements thereto, and shall not be secured by any property or assets of the Company or any Restricted Subsidiary of the Company other than such property and improvements thereto so acquired, installed or constructed (and property or assets acquired in replacement of any such property or assets after such date of acquisition, installation or construction to the extent acquired using the proceeds of any such replaced property or assets) and (2) the Lien securing such Indebtedness shall be created within 30 days of such acquisition, installation or construction or, in the case of a refinancing of any such Purchase Money Obligations, within 30 days of such refinancing; (ix) leases or subleases granted to others that do not materially interfere with the ordinary course of business of the Company and its Restricted Subsidiaries; (x) Liens arising from filing Uniform Commercial Code financing statements regarding operating leases; (xi) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods; (xii) Liens to secure obligations arising from statutory, regulatory, contractual or warranty requirements of the Company or any of its Restricted Subsidiaries, including the performance of statutory obligations, surety or appeal bonds or performance bonds, or landlords', carriers', warehousemen's, mechanics', suppliers', materialmen's or other like Liens, in any case incurred in the ordinary course of business and rights to offset and set-off; (xiii) Liens for taxes, assessments or governmental charges or claims that are not yet delinquent or that are being contested in good faith by appropriate proceedings promptly instituted and diligently concluded; provided that any reserve or other appropriate provision as shall be required in conformity with GAAP shall have been made therefor; (xiv) Liens securing Indebtedness incurred to amend, modify, renew, refund, replace or refinance Indebtedness that has been secured by a Lien permitted under the Indenture; provided that (a) any such Lien not extend to or cover any assets or property not securing the Indebtedness so refinanced; (b) any such Lien is no less favorable to the Holders and are not more favorable to the lienholders with respect to 147 such Lien than the Lien in respect of the Indebtedness being amended, modified, renewed refunded, replaced or refinanced and (c) the Refinancing Indebtedness secured by such Lien shall have been permitted to be incurred under the Indenture; (xv) Liens securing Indebtedness of Foreign Restricted Subsidiaries to the extent such Indebtedness is permitted under clauses (x), (xv) and (xvii) of the definition of the term "Permitted Indebtedness;" provided, however, that no asset of the Company or any Domestic Restricted Subsidiary shall be subject to any such Lien; (xvi) judgment Liens not giving rise to an Event of Default so long as such Lien is adequately bonded and any appropriate legal proceedings which may have been duly initiated for the review of such judgment shall not have been finally terminated or the period within which such proceedings may be initiated shall not have expired; (xvii) easements, rights-of-way, zoning restrictions, title irregularities and other similar charges or encumbrances in respect of real property not interfering in any material respect with the ordinary conduct of the business of the Company or any if its Restricted Subsidiaries; (xviii) Liens upon specific items of inventory or other goods and proceeds of any Person securing such Person's obligation in respect of bankers' acceptances issued or created for the account of such Person (to the extent the Indebtedness evidenced thereby was permitted to be incurred under the terms of the Indenture) to facilitate the purchase, shipment or storage of such inventory or other goods; and (xix) Liens arising in connection with the placement by either Issuer or any Restricted Subsidiary of the Company, as the case may be, of a reasonable amount of cash (as determined in good faith by such Person's board of director) in escrow against any obligations permitted pursuant to clause (xviii) of "Certain Covenants -- Limitation on Incurrence of Indebtedness." "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, limited liability company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Phibro Belgium" means Phibro Animal Health SA (formerly Phibro Animal Health (Belgium) SPRL). "PMC Sale Transactions" means the following transactions and payments, including payments required pursuant to the documents evidencing such transactions: (i) the transfer of ownership to the Palladium Investors of The Prince Manufacturing Company ("PMC") which would be valued at approximately $21 million; (ii) the reduction of the preferred stock of the Palladium Investors to $15.2 million (as of September 30, 2003); (iii) the termination of any obligation of the Company or any Restricted Subsidiary of the Company in respect of the $2.25 million annual management advisory fee (subject to reinstatement if these transactions are not consummated on or before December 31, 2003); (iv) a separate cash payment to the Palladium Investors of $10 million from the recent sale of MRT; (v) payments by PMC to the Company for central support services for the three years ending June 30, 2006 of $1 million, $0.5 million and $0.2 million, respectively; (vi) supply arrangements between the Company and PMC with respect to manganous oxide and red iron oxide; (vii) customary representations, warranties and indemnities by the Company, and provisions for closing working capital balance adjustments, settlement of intercompany accounts owed to PMC, a closing fee payable to Palladium and the agreement of the Company to pay or reimburse the Palladium Investors for their reasonable out-of-pocket expenses; and (viii) the establishment by the Company of a $1 million escrow or other credit support for two years to secure its net working capital and foregoing indemnification obligations, and indemnification of the Palladium Investors, payable after the maturity of the Notes, for a portion, at the rate of $0.65 for every dollar, of the amount they receive in respect of the disposition of PMC less than $21 million, up to a maximum payment by the Company of $4 million. "Preferred Stock" as applied to the Capital Stock of any Person, means Capital Stock of any class or classes (however designated) which is preferred as to the payment of dividends or distributions, or as to the 148 distribution of assets upon any voluntary or involuntary liquidation or dissolution of such Person, over Capital Stock of any other class of such Person. "Purchase Money Obligation" means any Indebtedness (as amended, modified, renewed, refunded, replaced or refinanced) secured by a Lien on assets related to the business of the Company or the Restricted Subsidiaries, and any additions and accessions thereto, which are purchased, constructed or improved by the Company or any Restricted Subsidiary at any time after the Issue Date; provided, however, that (i) any security agreement or conditional sales or other title retention contract pursuant to which the Lien on such assets is created (collectively, a "Security Agreement") shall be entered into within 90 days after the purchase or substantial completion of the construction or improvement of such assets and shall at all times be confined solely to the assets so purchased, constructed or improved, any additions and accessions thereto and any proceeds therefrom, (ii) at no time shall the aggregate principal amount of the outstanding Indebtedness secured thereby be increased, except in connection with the purchase of additions and accessions thereto and except in respect of fees and other obligations in respect of such Indebtedness and (iii)(A) the aggregate outstanding principal amount of Indebtedness secured thereby (determined on a per asset basis in the case of any additions and accessions) shall not at the time such Security Agreement is entered into exceed 100% of the purchase price or cost of construction or improvement to the Company or any Restricted Subsidiary of the assets subject thereto or (B) the Indebtedness secured thereby shall be with recourse solely to the assets so purchased, constructed or improved, any additions and accessions thereto and any proceeds therefrom. "Related Business" means any business that is reasonably related to or complementary to the businesses conducted by the Company, or the Restricted Subsidiaries, on the Issue Date. "Restricted Investment" means an Investment other than a Permitted Investment. "Restricted Payment" means (i) any dividend or other distribution declared or paid on any Capital Stock of the Company (other than (A) dividends or distributions payable solely in Capital Stock (other than Disqualified Stock) of the Company or (B) dividends or distributions payable to the Company or any Restricted Subsidiary); (ii) any payment to purchase, redeem or otherwise acquire or retire for value any Capital Stock of the Company; (iii) any payment to purchase, redeem, defease or otherwise acquire or retire for value, prior to any scheduled maturity, repayment or sinking fund payment, any Subordinated Indebtedness other than a purchase, redemption, defeasance or other acquisition or retirement for value that is paid for with the proceeds of Refinancing Indebtedness that is permitted under the covenant described under "-- Certain Covenants -- Limitation on Incurrence of Indebtedness;" or (iv) any Restricted Investment. A Permitted Investment is not a Restricted Payment. "Restricted Subsidiary" means each direct or indirect Subsidiary of the Company other than an Unrestricted Subsidiary. "Shareholders Agreements" means (i) the Shareholders Agreement dated December 29, 1987 by and between Marvin S. Sussman and the Company; (ii) the Shareholders Agreement dated February 21, 1995 among Phibro-Tech, Inc., I. David Paley, Nathan Z. Bistricer and James O. Herlands; (iii) the Severance Agreement between Phibro-Tech, Inc. and James O. Herlands, dated February 21, 1995 and (iv) the Stockholders Agreement, dated as of November 30, 2000, among, inter alia, the Company, Jack C. Bendheim and the Palladium Investors; each as amended and in effect on the Issue Date, and as thereafter amended, except for any amendment subsequent to the Issue Date which causes the terms of such agreement to be less favorable to the Company or Phibro-Tech, as the case may be. "Significant Subsidiary" means any Subsidiary that would be a "significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X promulgated pursuant to the Securities Act, as such Regulation S-X is in effect on the Issue Date. "Subordinated Indebtedness" means Indebtedness of the Company or a Guarantor which (A) if incurred by the Company, is subordinated in right of payment to the Notes, or (B) if incurred by a Guarantor, is subordinated in right of payment to the Guarantee of such Guarantor. 149 "Subsidiary" of a Person means (i) any corporation more than 50% of the outstanding voting power of the Voting Stock of which is owned or controlled, directly or indirectly, by such Person or by one or more other Subsidiaries of such Person, or by such Person and one or more other Subsidiaries thereof, or (ii) any limited partnership of which such Person or any Subsidiary of such Person is a general partner, or (iii) any other Person (other than a corporation or limited partnership) in which such Person or one or more other Subsidiaries of such Person, or such Person and one or more other Subsidiaries thereof, directly or indirectly, has more than 50% of the outstanding partnership or similar interests or has the power, by contract or otherwise, to direct or cause the direction of the policies, management and affairs thereof. "Surviving Person" means, with respect to any Person involved in or that makes any Disposition, the Person formed by or surviving such Disposition or the Person to which such Disposition is made. "Trademark Security Agreement" means a Trademark Security Agreement made by any of the Company or any Domestic Guarantor in favor of the Collateral Agent, as amended or supplemented from time to time in accordance with its terms. "Transactions" means, collectively, the Offering, the PMC Sale Transactions and the solicitation of consents with respect to the Company's Existing Notes to amendments to the indenture governing the Existing Notes, the Belgium Plant Sale and Virginiamycin Production Transactions and the offering of the Notes described in clause (xx) of the second paragraph under "-- Certain Covenants -- Limitation on Incurrence of Indebtedness" to refinance a portion of the Credit Agreement and the solicitation of consents with respect to the Notes to amendments to the indenture to permit the foregoing. "U.S. Pledge Agreement" means the Pledge Agreement, dated as of the Issue Date, made by the Company and the Domestic Guarantors parties thereto in favor of the Collateral Agent, as amended or supplemented from time to time in accordance with its terms. "U.S. Security Agreement" means the Security Agreement, dated as of the Issue Date, made by the Company and the Domestic Guarantors in favor of the Collateral Agent, as amended or supplemented from time to time in accordance with its terms. "Unrestricted Subsidiary" means any Subsidiary of the Company designated as such pursuant to and in compliance with the covenant described under "-- Limitation on Designation of Unrestricted Subsidiaries" and not redesignated a Restricted Subsidiary in compliance with such covenant. "Voting Stock" of a Person means Capital Stock of such Person of the class or classes pursuant to which the holders thereof have the general voting power under ordinary circumstances to elect at least a majority of the board of directors, managers or trustees of such Person (irrespective of whether or not at the time stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency). "Weighted Average Life to Maturity" means, when applied to any Indebtedness at any date, the number of years obtained by dividing (i) the sum of the products obtained by multiplying (a) the amount of each then remaining installment, sinking fund, serial maturity or other required scheduled payment of principal, including payment at final maturity, in respect thereof, with (b) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment, by (ii) the then outstanding aggregate principal amount of such Indebtedness. "Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary with respect to which all of the outstanding voting securities (other than directors' qualifying shares or nominee shares held by a third party to comply with local law) of which are owned, directly or indirectly, by the Company or a Surviving Person of any Disposition involving the Company, as the case may be. 150 BOOK-ENTRY; DELIVERY AND FORM The certificates representing each Unit will be issued in fully registered form without interest coupons. Units sold in reliance on Rule 144A will initially be represented by permanent global units (each a "Restricted Global Unit") consisting of U.S. Notes and Dutch Notes in fully registered form without interest coupons (each a "Restricted Global Note") and will be deposited with the Trustee as a custodian for The Depository Trust Company ("DTC") and registered in the name of a nominee of such depositary. Units sold in offshore transactions in reliance on Regulation S under the Securities Act will initially be represented by global units (a "Regulation S Global Unit") consisting of U.S. Notes and Dutch Notes in fully registered form without interest coupons (each a "Regulation S Global Note") and will be deposited with the Trustee as custodian for DTC, as depositary, and registered in the name of a nominee of such depositary for the account of the operator of the Euroclear System or Clearstream Banking. Prior to the expiration of the "distribution compliance period" (as defined in Regulation S), a beneficial interest in the Regulation S Global Unit may be transferred to a Person who takes delivery in the form of an interest in the Restricted Global Unit only upon receipt by the Trustee of a written certification from the transferor to the effect that such transfer is being made to a Person whom the transferor reasonably believes is a QIB in a transaction meeting the requirements of Rule 144A. Beneficial interests in a Restricted Global Unit may be transferred to a Person who takes delivery in the form of an interest in a Regulation S Global Unit whether before, on or after such a time, only upon receipt by the Trustee of a written certification to the effect that such transfer is being made in accordance with Regulation S. Any beneficial interest in a Regulation S Global Unit or a Restricted Global Unit (each a "Global Unit") that is transferred to a Person who takes delivery in the form of an interest in a Restricted Global Unit or a Regulation S Global Unit, respectively, will, upon transfer, cease to be an interest in the type of Global Unit previously held and become an interest in the other type of Global Unit and, accordingly, will thereafter be subject to all transfer restrictions, if any, and other procedures applicable to beneficial interests in such other type of Global Unit for as long as it remains an interest. The Global Units and Global Notes (and any Units or Notes issued in exchange therefore) will be subject to certain restrictions on transfer set forth therein and in the indenture and will bear the legend regarding such restrictions set forth under the heading "Notice to Investors" herein. Subject to such restrictions, QIBs or non-U.S. purchasers may elect to take physical delivery of their certificates (each a "Certified Security") instead of holding their interests through the Global Units and Global Notes (and which are then ineligible to trade through DTC) (collectively referred to herein as the "Non-Global Purchasers"). Upon the transfer to a QIB of any Certificated Security initially issued to a Non-Global Purchaser, such Certified Security will, unless the transferee requests otherwise or the Global Units have previously been exchanged in whole for Certificated Securities, be exchanged for an interest in the Global Units. For a description of the restrictions on transfer of Certificated Securities and any interest in the Global Units, see "Notice to Investors." Book-entry interests for Restricted Global Units and Permanent Regulation S Global Units will be shown on, and transfers thereof will be effected only through, records maintained by Euroclear or Clearstream and their participants. The laws of some jurisdictions, including some states of the United States, may require that certain purchasers of securities take physical delivery of those securities in definitive form. THE GLOBAL UNITS We expect that pursuant to procedures established by DTC (i) upon the issuance of the Global Units, DTC or its custodian will credit, on its internal system, the principal amount at maturity of the individual beneficial interests represented by the underlying Global Notes to the respective accounts of Persons who have accounts with such depositary and (ii) ownership of beneficial interests in the Global Units will be shown on, and the transfer of such ownership will be effected only through, records maintained by DTC or its nominee (with respect to interests of participants) and the records of participants (with respect to interests of Persons other than participants). Such accounts initially will be designated by or on behalf of the initial purchasers and 151 ownership of beneficial interests in the Global Units will be limited to Persons who have accounts with DTC ("participants") or Persons who hold interests through participants. Holders may hold their interests in the Global Units directly through DTC if they are participants in such system, or indirectly through organizations that are participants in such system. So long as DTC, Euroclear, Clearstream, or any of their respective nominees, is the registered owner or holder of the Units, DTC, Euroclear, Clearstream or such nominee, as the case may be, will be considered the sole owner or holder of the Notes represented by such Global Units for all purposes under the indenture. No beneficial owner of an interest in the Global Units will be able to transfer that interest except in accordance with DTC's, Euroclear's or Clearstream's, as applicable, procedures, in addition to those provided for under the indenture with respect to the Units. Payments of the principal of, and premium (if any) and interest (including Additional Interest) on, the Global Notes will be made to DTC, Euroclear, Clearstream or their respective nominees, as the case may be, as the registered owner thereof. None of us, the Trustee or any paying agent will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests in the Global Units or for maintaining, supervising or reviewing any records relating to such beneficial ownership interest. We expect that DTC, Euroclear, Clearstream or their respective nominees, upon receipt of any payment of principal, premium, if any, interest (including Additional Interest) on the Global Notes, will credit participants' accounts with payments in amounts proportionate to their respective beneficial interests in the principal amount of the Global Notes as shown on the records of DTC, Euroclear, Clearstream or their respective nominees. We also expect that payments by participants to owners of beneficial interests in the Global Units held through such participants will be governed by standing instructions and customary practice, as is now the case with securities held for the accounts of customers registered in the names of nominees for such customers. Such payments will be the responsibility of such participants. Transfers between participants in DTC will be effected in the ordinary way through DTC's same-day funds system in accordance with DTC rules and will be settled in same day funds. If a Holder requires physical delivery of a Certificated Security for any reason, including to sell Units to Persons in states which require physical delivery of the Units, or to pledge such securities, such Holder must transfer its interest in a Global Unit, in accordance with the normal procedures of DTC and with the procedures set forth in the indenture. Participants in Euroclear and/or Clearstream must rely upon the procedures of Euroclear and Clearstream in order to transfer their interests in the Global Units, and indirect participants must rely on the procedures of the participants through which they own book-entry interests to transfer their interests or to exercise any rights of holders under the indenture. DTC, Euroclear and Clearstream have advised us that they will take any action permitted to be taken by a Holder of Units and Notes (including the presentation of Units and Notes for exchange as described below) only at the direction of one or more participants to whose account the DTC, Euroclear or Clearstream interests in the Global Units are credited and only in respect of such portion of the aggregate principal amount of Notes as to which such participant or participants has or have given such direction. However, if there is an event of default under the indenture, DTC, Euroclear and Clearstream will exchange the Global Units and Global Notes for Certificated Securities, which they will distribute to their participants and which will be legended as set forth under the heading "Notice to Investors." DTC has advised us as follows: DTC is a limited purpose trust company organized under the laws of the State of New York, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the Uniform Commercial Code and a "Clearing Agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC was created to hold securities for its participants and facilitate the clearance and settlement of securities transactions between participants through electronic book-entry changes in accounts of its participants, thereby eliminating the need for physical movement of certificates. Participants include securities brokers and dealers, banks, trust companies and clearing corporations and 152 certain other organizations. Indirect access to the DTC system is available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a participant, either directly or indirectly. Although DTC has agreed to the foregoing procedures in order to facilitate transfers of interests in the Global Units among participants of DTC, it is under no obligation to perform such procedures, and such procedures may be discontinued at any time. Neither the Trustee nor we will have any responsibility for the performance by DTC or its participants or indirect participants of their respective obligations under the rules and procedures governing their operations. We understand as follows with respect to Euroclear and Clearstream: Euroclear and Clearstream hold securities for participating organizations and facilitate the clearance and settlement of securities transactions between their respective participants through electronic book-entry changes in accounts of such participants. Euroclear and Clearstream provide to their participants, among other things, services for safekeeping, administration, clearance and settlement of internationally traded securities and securities lending and borrowing. Euroclear and Clearstream interface with domestic securities markets. Euroclear and Clearstream participants are financial institutions such as underwriters, securities brokers and dealers, banks, trust companies and certain other organizations. Indirect access to Euroclear or Clearstream is also available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodian relationship with Euroclear or Clearstream participants, either directly or indirectly. CERTIFICATED SECURITIES Certificated Securities shall be issued in exchange for beneficial interests in the Global Units and underlying Global Notes (i) for Global Units or Global Notes held by DTC, if requested by a Holder of such interests or (ii) if DTC, Euroclear or Clearstream is at any time unwilling or unable to continue as a depositary for the Global Notes and a successor depositary is not appointed by us within 90 days. 153 CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES The following is a summary of certain material U.S. federal income tax consequences of the exchange, ownership and disposition of Notes and Units to holders of old units that acquired old units at the initial offering price thereof pursuant to the initial offering thereof. Unless the context otherwise requires, any reference in this summary to Units refers to both old units and Exchange Units and any reference to Notes refers to both old notes and Exchange Notes. Unless otherwise stated under the heading "Non-U.S. holders" below, this summary deals only with Units (and the notes comprising the components thereof) held as capital assets within the meaning of Section 1221 of the Code (as defined below) by U.S. holders (as defined below). It does not deal with special classes of holders such as banks, thrifts and other financial institutions, real estate investment trusts, regulated investment companies, insurance companies, dealers or traders in securities or currency or tax-exempt investors. This summary also does not address the tax consequences to U.S. holders that have a functional currency other than the U.S. Dollar, U.S. expatriates, partnerships or other entities treated as partnerships that hold Units, persons that hold Units as part of a straddle, hedging, constructive sale or conversion transaction, or shareholders, partners or beneficiaries of a holder of Units. It also does not include any description of any tax consequences under the tax laws of any state or local government or of any foreign jurisdiction that may be applicable to the Units (and the notes comprising the components thereof) (a description of certain Dutch tax consequences follows this summary). This summary is based on the Internal Revenue Code of 1986, as amended, which we refer to in this prospectus as the Code, Treasury regulations under the Code, which we refer to in this prospectus as the Treasury Regulations, and administrative and judicial interpretations thereof, as of the date of this prospectus, all of which are subject to change, possibly on a retroactive basis. IF YOU ARE CONSIDERING EXCHANGING UNITS, YOU SHOULD CONSULT YOUR OWN TAX ADVISOR TO DETERMINE THE FEDERAL, STATE, LOCAL AND FOREIGN INCOME TAX CONSEQUENCES OF THE EXCHANGE, OWNERSHIP AND DISPOSITION OF THE OLD NOTES AND THE APPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS TO YOUR SITUATION. As used in this section, the term "U.S. holder" means any beneficial owner of old units (and the old notes comprising the components thereof) that is, for United States federal income tax purposes, - a citizen or resident of the United States, - a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States or of any state thereof or the District of Columbia, - an estate the income of which is subject to United States federal income taxation regardless of its source, or - a trust if (1) a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States persons have the authority to control all substantial decisions of the trust or (2) the trust has in effect a valid election to be treated as a domestic trust for United States federal income tax purposes. As used in this discussion, the term Non-U.S. holder means a beneficial owner of old units (and the old notes comprising the components thereof) that is not a U.S. holder and is not an entity organized in or under the laws of the United States, any state thereof or the District of Columbia. TAX CONSEQUENCES OF THE EXCHANGE OFFER The exchange of old units and underlying old notes for publicly registered Units ("Exchange Units") and underlying publicly registered notes ("Exchange Notes") having substantially identical terms, under current law, will not be treated as an "exchange" or other taxable event for federal income tax purposes. Accordingly, - holders will not recognize taxable gain or loss upon the receipt of Exchange Units (and underlying Exchange Notes) in exchange for old units (and underlying old notes) in the Exchange Offer, 154 - the holding period for an Exchange Unit (or underlying Exchange Note) received in the exchange offer will include the holding period of the old unit (or underlying old note) surrendered in exchange therefor, and - the adjusted tax basis of an Exchange Unit (or underlying Exchange Note) immediately after the exchange will be the same as the adjusted tax basis of the old unit (or underlying old note) surrendered in exchange therefor. TAX CONSEQUENCES OF OWNERSHIP AND DISPOSITION OF NOTES AND UNITS U.S. HOLDERS Allocation of Issue Price. The issue price of a Unit for U.S. federal income tax purposes will be the first price at which a substantial amount of the Units are sold to the public. Under Treasury Regulations, we are required to allocate the issue price of a Unit between the Notes comprising the components of the Unit based on the relative fair market values of each. The portion of the issue price of a Unit allocated to each Note will constitute the issue price of such Note. Such allocation is binding on a U.S. holder unless the holder discloses on a statement attached to its U.S. federal income tax return that it is using a different allocation. There can be no assurance, however, that the IRS will respect our determination of the relative fair market values of the Notes. If our determination were successfully challenged by the IRS, the amount, timing, and character of income on a Note could be different from that resulting under the allocation determined by us. Interest Income. Stated interest on a Note comprising a portion of a Unit will be includible in a U.S. holder's gross income as ordinary interest income at the time it is accrued or received in accordance with the U.S. holder's method of accounting for United States federal income tax purposes. Premium. The Notes issued pursuant to the 2004 Offering are treated as issued at a premium. The amount of premium on any such Note will be the difference between the portion of the U.S. holder's cost of the related Unit that is allocable to the Note and the principal amount of the Note. A U.S. holder may elect to amortize such premium (as an offset to interest income), using a constant-yield method over the term of the Note. Such election, once made, generally applies to all taxable debt instruments held or subsequently acquired by the U.S. holder during or after the first taxable year to which the election applies and may not be revoked without the consent of the IRS. Sale, Exchange or Retirement of Notes or Units. Upon sale, exchange, or retirement of a Note, a U.S. holder generally will recognize gain or loss equal to the difference between the U.S. holder's adjusted tax basis in the Note and the amount realized on the sale, exchange, or retirement (less any accrued but previously unpaid interest, which would be treated as a payment of previously accrued interest on the Notes). A U.S. holder's adjusted tax basis in a Note will generally equal the cost of the related Unit allocable to such note as described above in "-- U.S. Holders -- Allocation of Issue Price" reduced by the amount of premium previously amortized on the Note. If a U.S. holder does not elect to amortize premium on a Note, then the holder's tax basis will include amounts representing the premium. Thus, if such U.S. holder holds the Note to maturity, the holder would generally be required to treat the premium as a loss when the Note matures. The amount realized on disposition of a Unit will be treated as an amount realized on disposition of each Note comprising the components thereof, such amount to be allocated between the Notes on the basis of the relative fair market values of each. Assuming the Unit and related Note was held as a capital asset, gain or loss so recognized will be capital gain or loss and will be long-term capital gain or loss if, at the time of the sale, exchange, or retirement, the Unit and related note was held for more than one year. Under current law, net capital gains of non-corporate taxpayers, under certain circumstances, are taxed at lower rates than items of ordinary income. The deduction of capital losses is subject to certain limitations applicable to both corporations and individuals. NON-U.S. HOLDERS Interest Income. Generally, interest income on a U.S. Note (including original issue discount) of a Non-U.S. holder that is not effectively connected with a United States trade or business will be subject to a 155 withholding tax at a 30% rate or, if applicable, a lower tax rate specified by a treaty. However, interest income (including original issue discount) earned on a U.S. Note by a Non-U.S. holder may qualify for the "portfolio interest" exemption and therefore not be subject to United States federal income tax or withholding tax, if such interest income is not effectively connected with a United States trade or business of the Non-U.S. holder and if: - the Non-U.S. holder does not actually or constructively own 10% or more of the total combined voting power of all classes of the Company's stock entitled to vote, - the Non-U.S. holder is not a controlled foreign corporation that is related to the Company through stock ownership, - the Non-U.S. holder certifies to the Company or the Company's agent, under penalties of perjury, that it is not a U.S. holder and provides its name and address or otherwise satisfies applicable identification requirements, and - neither the Company nor its paying agent knows or has reason to know that the conditions of the exemption are, in fact, not satisfied. In the case of U.S. Notes held by foreign partnerships, the certification described above generally must be provided by the partners, rather than by the partnerships, and the partnership must provide certain information, including a U.S. taxpayer identification number. A look through rule applies in the case of tiered partnerships. Subject to the discussion below, a Non-U.S. holder generally will not be subject to U.S. federal income or withholding tax on interest income on a Dutch Note. A Non-U.S. holder generally will be taxed in the same manner as a U.S. holder with respect to interest income on U.S. Notes or Dutch Notes that is effectively connected with a United States trade or business of the Non-U.S. holder unless an applicable treaty provides otherwise. In the case of a Non-U.S. holder that is eligible for benefits of an income tax treaty with the United States, such Non-U.S. holder generally will be taxed on its effectively connected interest income in the same manner as a U.S. holder only if such income is attributable to a permanent establishment maintained by the Non-U.S. holder in the United States. Such effectively connected interest received or accrued by a corporate Non-U.S. holder may also, under certain circumstances, be subject to an additional "branch profits" tax at a 30% rate or, if applicable, a lower tax rate specified by a treaty. Even though such effectively connected interest is subject to U.S. income tax and may be subject to the branch profits tax, it is not subject to U.S. withholding tax if the holder delivers a properly executed IRS Form W-8ECI (or a suitable substitute form) to us or our paying agent and neither we nor our paying agent knows or has reason to know that the information on the form is incorrect. Sale, Exchange, or Retirement of Note or Units. A Non-U.S. holder generally will not be subject to United States federal income tax or withholding tax on any gain realized on the sale, exchange, or retirement of U.S. Notes or Dutch Notes or Units unless: - the gain is effectively connected with a United States trade or business of the Non-U.S. holder (and, if a treaty applies, the gain is generally attributable to a United States permanent establishment maintained by that Non-U.S. holder), or - in the case of a Non-U.S. holder who is an individual, such holder is present in the United States for a period or periods aggregating 183 days or more during the taxable year of the disposition, and either such holder has a "tax home" in the United States or the disposition is attributable to an office or other fixed place of business maintained by such holder in the United States. 156 INFORMATION REPORTING AND BACKUP WITHHOLDING TAX In general, information reporting on IRS Form 1099 will apply to payments to a U.S. Holder of principal, premium (if any) and interest on the Notes comprising the Units and the proceeds of the sale of the Units. Backup withholding tax may apply to such payments to a non-corporate U.S. holder if: - the U.S. holder fails to furnish or certify its correct taxpayer identification number to us or our paying agent in the manner required, - we are notified by the IRS that the U.S. holder has failed to report payments of interest or dividends properly, or - under certain circumstances the U.S. holder fails to certify that it has not been notified by the IRS that it is subject to backup withholding for failure to report interest or dividend payments. Information reporting on IRS Form 1099 and backup withholding tax generally will not apply to payments of interest on Notes to a Non-U.S. holder if the certification or identification requirements described in "-- Non-U.S. holders -- Interest Income" above are satisfied by the holder, unless the payor knows or has reason to know that the holder is not entitled to an exemption from information reporting or backup withholding tax. However, we may report payments of interest on the U.S. Notes to a Non-U.S. holder on IRS Form 1042-S regardless of whether a Non-U.S. holder provides the certification or identification requirements described above. Information reporting requirements and backup withholding tax will not apply to any payment of the proceeds of the sale of Notes or Units effected outside the United States by a foreign office of a "broker" (as defined in applicable Treasury Regulations), unless the broker is a United States person or has certain other connections to the United States. Payment of the proceeds of any such sale effected outside the United States by a foreign office of a broker with such connections to the United States described in the preceding sentence will not be subject to backup withholding tax, but will be subject to information reporting requirements, unless the broker has documentary evidence in its records that the beneficial owner is a Non-U.S. holder and certain other conditions are met, or the beneficial owner otherwise establishes an exemption. Payment of the proceeds of any such sale to or through the United States office of a broker is subject to information reporting and backup withholding requirements unless the beneficial owner of the Notes provides the certification described in "-- Non-U.S. holders -- Interest Income" or otherwise establishes an exemption. Any amounts withheld under the backup withholding rules will be allowed as a credit against that holder's United States federal income tax liability and may entitle the holder to a refund, provided that the required information is furnished to the IRS. The current rate for backup withholding tax is 28%. The foregoing summary of certain United States federal income tax consequences of the exchange, ownership and disposition of Units and Notes is intended for general information. You are urged to consult with your own tax advisor as the U.S. federal income tax consequences of an investment in the Units as well as the consequences under state, local and foreign income tax law. Non-U.S. holders are urged to consult their own tax advisors as to the effect of income tax treaties and reporting requirements with regard to the Units. 157 CERTAIN DUTCH TAX CONSEQUENCES GENERAL The following summary describes the principal Dutch tax consequences of the acquisition, holding, redemption and disposal of Dutch notes. This summary does not purport to be a comprehensive description of all Dutch tax considerations that may be relevant to a decision to acquire, to hold, and to dispose of the Dutch notes. Each prospective noteholder should consult a professional adviser with respect to the tax consequences of an investment in the Dutch notes. The discussion of certain Dutch taxes set forth below is included for general information purposes only. This summary is based on the Dutch tax legislation, published case law, treaties, rules, regulations and similar documentation, in force as of the date of this prospectus, without prejudice to any amendments introduced at a later date and implemented with retroactive effect. This summary does not address the Dutch tax consequences of a holder of Dutch notes who holds a substantial interest (aanmerkelijk belang) in the Dutch issuer, within the meaning of Section 4.3 of the Income Tax Act 2001. Generally speaking, a noteholder holds a substantial interest in the Dutch issuer, if such noteholder, alone or together with his or her partner (statutory defined term) or certain other related persons, directly or indirectly, holds (i) an interest of 5 percent or more of the total issued capital of the Dutch issuer or of 5 percent or more of the issued capital of a certain class of shares of the Dutch issuer, (ii) rights to acquire, directly or indirectly, such interest or (iii) certain profit sharing rights in the Dutch issuer. WITHHOLDING TAX No Dutch withholding tax is due upon payments on the Dutch notes. CORPORATE INCOME TAX AND INDIVIDUAL INCOME TAX Residents of the Netherlands. If the holder of Dutch notes is subject to Dutch corporate income tax and the Dutch notes are attributable to its (deemed) business assets, income derived from the Dutch notes and gains realized upon the redemption and disposal of the Dutch notes are generally taxable in the Netherlands. If the holder of Dutch notes is an individual, resident or deemed to be resident of the Netherlands for Dutch tax purposes (including the individual holder of Dutch notes who has opted to be taxed as a resident of the Netherlands), the income derived from the Dutch notes and the gains realized upon the redemption and disposal of the Dutch notes are taxable at the progressive rates of the Income Tax Act 2001, if: (i) the holder of Dutch notes has an enterprise or an interest in an enterprise, to which enterprise the Dutch notes are attributable; or (ii) such income or gains qualify as "income from miscellaneous activities" (resultaat uit overige werkzaamheden) within the meaning of Section 3.4 of the Income Tax Act 2001, which include activities with respect to the Dutch notes that exceed "regular, active portfolio management" (normaal, actief vermogensbeheer). If neither condition (i) nor condition (ii) applies to the individual holder of Dutch notes, the actual income derived from the Dutch notes and the actual gains realized with respect to the Dutch notes will not be taxable. Instead, such holder of Dutch notes will be taxed at a flat rate of 30% on deemed income from "savings and investments" (sparen en beleggen) within the meaning of Section 5.1 of the Income Tax Act 2001. This deemed income amounts to 4% of the average of the individual's "yield basis" (rendementsgrondslag) within the meaning of article 5.3 of the Income Tax Act 2001 at the beginning of the calendar year and the individual's yield basis at the end of the calendar year, insofar the average exceeds a certain threshold. The fair market value of the Dutch notes will be included in the individual's yield basis. Non-residents of the Netherlands. A holder of Dutch notes that is not a resident nor deemed to be a resident of the Netherlands for Dutch tax purposes (nor, if he or she is an individual, has opted to be taxed as 158 a resident of the Netherlands) is not taxable in respect of income derived from the Dutch notes and gains realized upon the redemption and disposal of the Dutch notes, unless: (i) the holder of Dutch notes has an enterprise or an interest in an enterprise, that is, in whole or in part, carried on through a permanent establishment or a permanent representative in the Netherlands to which Dutch permanent establishment or permanent representative the Dutch notes are attributable, or (ii) the holder of Dutch notes is an individual and such income or gains qualify as "income from miscellaneous activities" (resultaat uit overige werkzaamheden) in the Netherlands within the meaning of Section 3.4 of the Income Tax Act 2001, which include activities in the Netherlands with respect to the Dutch notes that exceed "regular, active portfolio management" (normaal, actief vermogensbeheer). GIFT AND INHERITANCE TAXES Residents of the Netherlands. Generally, gift and inheritance taxes will be due in the Netherlands in respect of the acquisition of the Dutch notes by way of a gift by, or on the death of, a holder of Dutch notes who is a resident or deemed to be a resident of the Netherlands for the purposes of Dutch gift and inheritance tax at the time of the gift or his or her death. An individual of Dutch nationality is deemed to be a resident of the Netherlands for the purposes of the Dutch gift and inheritance tax, if he or she has been resident in the Netherlands during the ten years preceding the gift or his or her death. An individual of any other nationality is deemed to be a resident of the Netherlands for the purposes of the Dutch gift and inheritance tax only if he or she has been residing in the Netherlands at any time during the twelve months preceding the time of the gift. Non-residents of the Netherlands. No gift or inheritance taxes will arise in the Netherlands in respect of the acquisition of the Dutch notes by way of gift by, or as a result of the death of, a holder of Dutch notes who is neither a resident nor deemed to be a resident of the Netherlands for the purposes of the Dutch gift and inheritance tax, unless: (i) such holder of Dutch notes at the time of the gift has or at the time of his or her death had an enterprise or an interest in an enterprise that is or was, in whole or in part, carried on through a permanent establishment or a permanent representative in the Netherlands and to which Dutch permanent establishment or permanent representative the Dutch notes are or were attributable; or (ii) in the case of a gift of the Dutch notes by an individual who at the date of the gift was neither a resident nor deemed to be a resident of the Netherlands, such individual dies within 180 days after the date of the gift, while at the time of his or her death, being a resident or deemed to be a resident of the Netherlands. Treaties. Treaties may limit the Dutch sovereignty to levy gift and inheritance tax. OTHER TAXES AND DUTIES No Dutch VAT, capital duty, registration tax, customs duty, transfer tax, stamp duty or any other similar documentary tax or duty, will be due in the Netherlands by a holder of Dutch notes in respect of or in connection with the subscription, issue, placement, allotment or delivery of the Dutch notes. EU SAVINGS DIRECTIVE On June 3, 2003, the European Council of Economics and Finance Ministers adopted a Directive on the taxation of savings income. Under the Directive Member States will (if equivalent measures have been introduced by certain non-EU countries) be required, from July 1, 2005, to provide to the tax authorities of another Member State details of payments of interest (or similar income) paid by a person within its jurisdiction to an individual resident in that other Member State. However, for a transitional period, Belgium, Luxembourg and Austria will instead be required (unless during that period they elect otherwise) to operate a withholding system in relation to such payments (the ending of such transitional period being dependent upon the conclusion of certain other agreements relating to information exchange with certain other countries). 159 DUTCH TAX ASPECTS IN RELATION TO THE EXCHANGE Considering the fact that, except for the removal of the legend relating to the SEC registration, the terms and conditions of the old notes are identical to the terms and conditions of the new notes, it is reasonable to take the view that the Exchange should not constitute a taxable event for Dutch tax purposes. Since there is no authority or guidance with respect to this issue, it is, however, possible that the Dutch tax authorities will assert that the Exchange does constitute a taxable event. In the situation that the Dutch tax authorities take the view that the Exchange constitutes a taxable event, a gain (if any) realized as a result of the Exchange by a Dutch resident corporate noteholder will, in principle, be taxable. If certain conditions are met, the gain can be deferred under the "like-kind-exchange" case law (ruilarresten). If any gain would be realized as a result of the Exchange by a Dutch resident individual noteholder, such gain would not be taxable when the notes are held as a passive investment and as such are part of the "yield basis" (rendementsgrondslag) within the meaning of article 5.3 of the Income Tax Act 2001. Such Dutch resident individual holder will be taxed on deemed income from "savings and investments" (sparen en beleggen) within the meaning of Section 5.1 of the Income Tax Act 2001. A possible gain realized by a Dutch resident individual holder would only be taxable if: (i) the noteholder has an enterprise or an interest in an enterprise, to which enterprise the Notes are attributable, with an exception for a possible deferral for gains realized upon the Exchange under the "like-kind-exchange" case law (ruilarresten); or (ii) such gain qualifies as "income from miscellaneous activities" (resultaat uit overige werkzaamheden) within the meaning of Section 3.4 of the Dutch Income Tax Act 2001, which include the performance of activities with respect to the Notes that exceed "regular, active portfolio management" (normaal, actief vermogensbeheer). If a non-resident noteholder would realize a gain as a result of the Exchange, such gain would only be taxable if: (i) the noteholder has an enterprise or an interest in an enterprise, that is, in whole or in part, carried on through a permanent establishment or a permanent representative in the Netherlands to which enterprise Dutch permanent establishment or permanent representative the Notes are attributable, with an exception for a possible deferral for gains realized upon the Exchange under the "like-kind-exchange" case law (ruilarresten); or (ii) the noteholder is an individual and such gain qualifies as "income from miscellaneous activities" (resultaat uit overige werkzaamheden) in the Netherlands within the meaning of Section 3.4 of the Dutch Income Tax Act 2001, which include the performance of activities in the Netherlands with respect to the Notes that exceed "regular, active portfolio management" (normaal, actief vermogensbeheer). 160 PLAN OF DISTRIBUTION The exchange offer is not being made to, nor will we accept surrenders of old units for exchange from, holders of old units in any jurisdiction in which the exchange offer or the acceptance thereof would not be in compliance with the securities or blue sky laws of such jurisdiction. This communication is directed solely at persons who are outside the Netherlands and Belgium. (all such persons together are referred to as "relevant persons"). This communication must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this communication relates is available only to relevant persons and will be engaged in only with relevant persons. The distribution of this prospectus and the offer and sale of the new units may be restricted by law in certain jurisdictions. Persons who come into possession of this prospectus or any of the new units must inform themselves about and observe any such restrictions. You must comply with all applicable laws and regulations in force in any jurisdiction in which you purchase, offer or sell the new units or possess or distribute this prospectus and, in connection with any purchase, offer or sale by you of the new units, must obtain any consent, approval or permission required under the laws and regulations in force in any jurisdiction to which you are subject or in which you make such purchase, offer or sale. Under existing SEC interpretations, the new units will be freely transferable by holders other than our affiliates after the exchange offer without further registration under the Securities Act if the holder of the new units represents that it is acquiring the new units in the ordinary course of its business, that it has no arrangement or understanding with any person to participate in the distribution of the new units and that it is not an affiliate of ours, as such terms are interpreted by the SEC; provided that broker-dealers receiving new units in the exchange offer will have a prospectus delivery requirement with respect to resales of such new units. While the SEC has not taken a position with respect to this particular transaction, under existing SEC interpretations relating to transactions structured substantially like this exchange offer, participating broker-dealers may fulfill their prospectus delivery requirements with respect to new units (other than a resale of an unsold allotment of the new units) with the prospectus contained in the exchange offer registration statement. Each broker-dealer that receives new units for its own account pursuant to the exchange offer must acknowledge that it will deliver a prospectus in connection with any resale of such new units. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of new units received in exchange for old units where such old units were acquired as a result of market-making activities or other trading activities. We have agreed that, for a period of 90 days after the date of this prospectus, we will make this prospectus, as amended or supplemented, available to any broker-dealer for use in connection with any such resale. In addition, until , 2005 (90 days after the date of this prospectus), all dealers effecting transactions in the new units may be required to deliver a prospectus. A broker-dealer intending to use this prospectus in the resale of new units must so notify us on or prior to the expiration date. This notice may be given in the space provided in the letter of transmittal or may be delivered to the exchange agent. We may, in certain cases, issue a notice suspending use of this exchange offer registration statement. If we do so, the period during which the registration statement must remain effective will be extended for a number of days equal to the number of days the registration statement was in suspense. We will not receive any proceeds from any sale of new units by brokers-dealers. New units received by broker-dealers for their own account pursuant to the exchange offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the new units or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer and/or the purchasers of any such new units. Any broker-dealer that resells the new units that were received by it for its own account pursuant to the exchange offer and any broker or dealer that participates in a distribution of such new units may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit of any such resale of new units and any commissions or 161 concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The letter of transmittal states that by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. For a period of 90 days after the date of this prospectus, we will promptly send additional copies of this prospectus and any amendment or supplement to this prospectus to any broker-dealer that requests such documents in the letter of transmittal. We have agreed to pay all expenses incident to the exchange offer (including the expenses of one counsel for the holder of the old units) other than commissions or concessions of any brokers or dealers and will indemnify the holders of the old units (including any broker-dealers) against certain liabilities, including liabilities under the Securities Act. LEGAL MATTERS Certain legal matters with respect to the new units and the guarantees offered hereby will be passed upon for the Company by Golenbock Eiseman Assor Bell & Peskoe LLP, New York, New York. Certain legal matters with respect to Philipp Brothers Netherlands III B.V. and Phibro Animal Health SA will be passed upon for the Company by Allen & Overy LLP. EXPERTS The consolidated financial statements of Phibro Animal Health Corporation as of June 30, 2004 and 2003 and for each of the three years in the period ended June 30, 2004, the consolidated financial statements of Philipp Brothers Netherlands I B.V. as of June 30, 2004 and 2003 and for each of the three years in the period ended June 30, 2004 and the financial statements of Phibro Animal Health SA (Belgium) as of June 30, 2004 and 2003 and for each of the three years in the period ended June 30, 2004 included in this prospectus, have all been so included in reliance on the report of PricewaterhouseCoopers LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting. WHERE YOU CAN FIND MORE INFORMATION We are not subject to the reporting requirements of the Securities Exchange Act of 1934, but have voluntarily filed certain periodic reports and other information with the SEC. Upon effectiveness of the registration statement, we will become subject to the informational requirements of the Securities and Exchange Act of 1934, and, in accordance therewith, will file reports and other information with the SEC. Those reports and other information so filed with the SEC may be inspected and copied at the public reference facilities maintained by the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of those materials can be obtained from the Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. You may call the SEC at 1-800-SEC-0330 to obtain information on the operation of the public reference room. The SEC also maintains a site on the World Wide Web at http://www.sec.gov, which contains reports and other information regarding registrants that file electronically with the SEC. We have filed with the SEC a registration statement on Form S-4 under the Securities Act of 1933, covering the new units to be issued in the exchange offer (Registration No. 333- ). This prospectus, which is a part of the registration statement, does not contain all of the information included in the registration statement. Any statement made in this prospectus concerning the contents of any contract, agreement or other document is not necessarily complete. For further information regarding us and the new units to be issued in the exchange offer, please reference the registration statement, including its exhibits. If we have filed any 162 contract, agreement or other document as an exhibit to the registration statement, you should read the exhibit for a more complete understanding of the documents or matter involved. Copies of the registration statement, including all related exhibits and schedules, may be inspected without charge at the public reference facilities maintained by the SEC, or obtained at prescribed rates from the Public Reference Section of the SEC. In addition, you may request a copy of any of these filings, at no cost, by writing our Chief Financial Officer at our principal executive offices, which are located at 65 Challenger Road, Ridgefield Park, NJ 07660 telephone number (201) 329-7300. SERVICE OF PROCESS AND ENFORCEMENT OF LIABILITIES Philipp Brothers Netherlands III B.V. ("PB Netherlands") is a company incorporated under the laws of the Netherlands. Certain of its directors and executive officers are resident outside of the United States and many of its assets are located outside of the United States. Although PB Netherlands has agreed, in accordance with the terms of the indenture, to accept service of process in the United States by agents designated for such purpose, it may not be possible for holders of new notes (a) to effect service of process upon certain of its directors or officers or (b) to enforce judgements of courts of the United States predicated upon the civil liability of such persons under the United States securities law against any such persons in the courts of a foreign jurisdiction. PHILIPP BROTHERS NETHERLANDS III B.V. Philipp Brothers Netherlands III B.V., the Dutch issuer, is an indirect wholly-owned subsidiary of the US issuer and is incorporated under the laws of the Netherlands as a private company with limited liability. The Dutch issuer is a holding company formed to finance the operations of Phibro Animal Health SA, a Belgian company, which owns and operates our Rixensart, Belgium plant. Such plant uses fermentation processes to produce the active ingredients semduramycin and virginiamycin and conducts all of our fermentation development activities. On December 16, 2004, we entered into an agreement to sell the Rixensart, Belgium plant to Glaxosmithkline Biologicals S.A. (see "Prospectus Summary -- The Company -- Recent Developments -- Sale of Belgium Plant"). The managing directors of Philipp Brothers Netherlands III B.V. are Mr. Jack Bendheim and Mr. Joseph Katzenstein (each a managing director, class B) and Mr. Robbert Elshout and Ms. Liselotte Heine (each a managing director, class A). Mr. Bendheim has served as a managing director B of Philipp Brothers Netherlands III B.V., since June 2004. See also "Management" for additional information regarding Mr. Bendheim. Mr. Joseph Katzenstein, age 62, has served as a managing director B of Philipp Brothers Netherlands III B.V. since June 2004. Mr. Katzenstein, has also served as the secretary of Phibro Animal Health Corporation since 1982 and the treasurer of Phibro Animal Health Corporation from 1982 through 2002. Mr. Katzenstein served as corporate controller of Phibro Animal Health Corporation from 1965 to 1985. Mr. Elshout and Ms. Heine have been managing directors A of Philipp Brothers Netherlands III B.V. since June 2004. 163 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- AUDITED CONSOLIDATED FINANCIAL STATEMENTS: Report of Independent Registered Public Accounting Firm..... F-2 Consolidated Balance Sheets as of June 30, 2004 and 2003.... F-3 Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended June 30, 2004, 2003 and 2002...................................................... F-4 Consolidated Statements of Changes in Stockholders' Deficit for the years ended June 30, 2004, 2003 and 2002.......... F-5 Consolidated Statements of Cash Flows for the years ended June 30, 2004, 2003 and 2002.............................. F-6 Notes to Consolidated Financial Statements.................. F-7 UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS: Condensed Consolidated Balance Sheets as of September 30, 2004 and June 30, 2004.................................... F-45 Condensed Consolidated Statements of Operations and Comprehensive Income for the three months ended September 30, 2004 and 2003......................................... F-46 Condensed Consolidated Statements of Changes in Stockholders' Deficit for the three months ended September 30, 2004.................................................. F-47 Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2004 and 2003............ F-48 Notes to Unaudited Condensed Consolidated Financial Statements................................................ F-49
OTHER FINANCIAL STATEMENTS OF CERTAIN PHIBRO ANIMAL HEALTH CORPORATION SUBSIDIARIES The following financial statements for certain of Phibro Animal Health Corporation's indirectly wholly owned subsidiaries are included pursuant to Regulation S-X Rule 3-16 of the Exchange Act, "Financial Statements of Affiliates Whose Securities Collateralize an Issue Registered or Being Registered." See Note 9 to the Phibro Animal Health Corporation consolidated financial statements. PHILIPP BROTHERS NETHERLANDS I B.V Report of Independent Registered Public Accounting Firm..... F-66 Consolidated Balance Sheets as of June 30, 2004 and 2003.... F-67 Consolidated Statements of Operations and Comprehensive Loss for the years ended June 30, 2004, 2003 and 2002.......... F-68 Consolidated Statements of Changes in Stockholders' Deficit for the years ended June 30, 2004, 2003 and 2002.......... F-69 Consolidated Statements of Cash Flows for the years ended June 30, 2004, 2003 and 2002.............................. F-70 Notes to Consolidated Financial Statements.................. F-71 PHIBRO ANIMAL HEALTH SA Report of Independent Registered Public Accounting Firm..... F-82 Balance Sheets as of June 30, 2004 and 2003................. F-83 Statements of Operations and Comprehensive Income (Loss) for the years ended June 30, 2004, 2003 and 2002.............. F-84 Statements of Changes in Stockholders' Equity for the years ended June 30, 2004, 2003 and 2002........................ F-85 Statements of Cash Flows for the years ended June 30, 2004, 2003 and 2002............................................. F-86 Notes to Financial Statements............................... F-87
F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors of Phibro Animal Health Corporation: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and comprehensive income (loss), changes in stockholders' deficit and cash flows present fairly, in all material respects, the financial position of Phibro Animal Health Corporation and its subsidiaries at June 30, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2004, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Florham Park, New Jersey September 27, 2004 F-2 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, ------------------- 2004 2003 -------- -------- (IN THOUSANDS) ASSETS Current Assets: Cash and cash equivalents................................. $ 5,568 $ 11,179 Trade receivables, less allowance for doubtful accounts of $1,358 and $1,437 at June 30, 2004 and 2003, respectively........................................... 57,658 52,714 Other receivables......................................... 2,766 3,503 Inventories............................................... 79,910 87,849 Prepaid expenses and other current assets................. 8,688 9,868 Current assets from discontinued operations............... -- 9,276 -------- -------- Total current assets................................. 154,590 174,389 Property, plant and equipment, net.......................... 58,786 63,905 Intangibles................................................. 11,695 8,669 Other assets................................................ 16,298 14,059 Other assets from discontinued operations................... -- 13,325 -------- -------- $241,369 $274,347 ======== ======== LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Cash overdraft............................................ $ 891 $ 1,686 Loans payable to banks.................................... 10,996 37,878 Current portion of long-term debt......................... 1,351 24,124 Accounts payable.......................................... 46,972 55,355 Accrued expenses and other current liabilities............ 40,010 40,699 Current liabilities from discontinued operations.......... -- 5,557 -------- -------- Total current liabilities............................ 100,220 165,299 Long-term debt.............................................. 158,018 102,263 Other liabilities........................................... 22,286 21,241 Other liabilities from discontinued operations.............. -- 1,173 -------- -------- Total liabilities.................................... 280,524 289,976 -------- -------- Commitments and contingencies Redeemable securities: Series B and C preferred stock............................ 24,678 68,881 -------- -------- Stockholders' deficit: Preferred stock -- $100 par value, 150,543 shares authorized, none issued at June 30, 2004 and 2003; Series A preferred stock -- $100 par value, 6% non- cumulative, 5,207 shares authorized, issued and outstanding at June 30, 2004 and 2003.................. 521 521 Common stock -- $0.10 par value, 30,300 authorized and 24,488 shares issued and outstanding at June 30, 2004 and 2003............................................... 2 2 Paid-in capital........................................... 860 860 Accumulated deficit....................................... (57,964) (79,489) Accumulated other comprehensive income (loss): Gain on derivative instruments......................... 9 81 Cumulative currency translation adjustment............. (7,261) (6,485) -------- -------- Total stockholders' deficit.......................... (63,833) (84,510) -------- -------- $241,369 $274,347 ======== ========
The accompanying notes are an integral part of the Consolidated Financial Statements. F-3 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED JUNE 30, ------------------------------ 2004 2003 2002 -------- -------- -------- (IN THOUSANDS) Net sales................................................... $358,274 $341,746 $328,676 Cost of goods sold.......................................... 267,871 251,200 247,411 -------- -------- -------- Gross profit.............................................. 90,403 90,546 81,265 Selling, general and administrative expenses (includes litigation income of $3,040 in 2003 and $742 in 2002)..... 66,128 65,050 70,636 Costs of non-completed transaction.......................... 5,261 -- -- -------- -------- -------- Operating income.......................................... 19,014 25,496 10,629 Other: Interest expense.......................................... 18,618 16,281 18,070 Interest (income)......................................... (130) (85) (346) Other (income) expense, net............................... (781) 1,539 3,349 Net (gain) on extinguishment of debt...................... (23,226) -- -- -------- -------- -------- Income from continuing operations before income taxes..... 24,533 7,761 (10,444) Provision for income taxes.................................. 7,969 10,060 14,767 -------- -------- -------- Income (loss) from continuing operations.................. 16,564 (2,299) (25,211) Discontinued operations: (Loss) from discontinued operations (net of income taxes)................................................. (1,625) (14,577) (26,559) (Loss) on disposal of discontinued operations (net of income taxes).......................................... (2,089) (683) -- -------- -------- -------- Net income (loss)......................................... 12,850 (17,559) (51,770) Other comprehensive income (loss): Change in derivative instruments, net of tax.............. (72) (981) 1,062 Change in currency translation adjustment................. (776) 7,377 (6,125) -------- -------- -------- Comprehensive income...................................... $ 12,002 $(11,163) $(56,833) ======== ======== ======== Net income (loss)......................................... 12,850 (17,559) (51,770) Excess of the reduction of redeemable preferred stock over total assets divested and costs and liabilities incurred on the Prince Transactions................................ 20,138 -- -- Dividends and equity value accreted on Series B and C redeemable preferred stock................................ (11,463) (12,278) (7,623) -------- -------- -------- Net income (loss) available to common shareholders........ $ 21,525 $(29,837) $(59,393) ======== ======== ========
The accompanying notes are an integral part of the Consolidated Financial Statements. F-4 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED JUNE 30, 2004, 2003 AND 2002 --------------------------------------------------------------------------------- ACCUMULATED RETAINED OTHER PREFERRED COMMON STOCK EARNINGS COMPREHENSIVE STOCK ----------------- PAID-IN (ACCUMULATED (LOSS) SERIES A CLASS A CLASS B CAPITAL DEFICIT) INCOME TOTAL --------- ------- ------- ------- ------------ ------------- -------- (IN THOUSANDS) Balance, June 30, 2001...... $521 $1 $1 $ 878 $ 9,741 $ (7,737) $ 3,405 Dividends on Series B and C redeemable preferred stock.................. (7,623) (7,623) Change in derivative instruments, net of tax.................... 1,062 1,062 Foreign currency translation adjustment............. (6,125) (6,125) Receivable from principal shareholder............ (138) (138) Net (loss)................ (51,770) (51,770) ---- -- -- ----- -------- -------- -------- Balance, June 30, 2002...... $521 $1 $1 $ 740 $(49,652) $(12,800) $(61,189) ==== == == ===== ======== ======== ======== Dividends on Series B and C redeemable preferred stock.................. (8,808) (8,808) Equity value accreted on Series B and C redeemable preferred stock.................. (3,470) (3,470) Change in derivative instruments, net of tax.................... (981) (981) Foreign currency translation adjustment............. 7,377 7,377 Payable to principal shareholder............ 120 120 Net (loss)................ (17,559) (17,559) ---- -- -- ----- -------- -------- -------- Balance, June 30, 2003...... $521 $1 $1 $ 860 $(79,489) $ (6,404) $(84,510) ==== == == ===== ======== ======== ======== Excess of the reduction in redeemable preferred stock over total assets divested and costs and liabilities incurred on the Prince Transactions........... 20,138 20,138 Dividends on Series B and C redeemable preferred stock.................. (6,042) (6,042) Equity value accreted on Series B and C redeemable preferred stock.................. (5,421) (5,421) Change in derivative instruments, net of tax.................... (72) (72) Foreign currency translation adjustment............. (776) (776) Net (loss)................ 12,850 12,850 ---- -- -- ----- -------- -------- -------- Balance, June 30, 2004...... $521 $1 $1 $ 860 $(57,964) $ (7,252) $(63,833) ==== == == ===== ======== ======== ========
The accompanying notes are an integral part of the Consolidated Financial Statements. F-5 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, ------------------------------ 2004 2003 2002 -------- -------- -------- (IN THOUSANDS) OPERATING ACTIVITIES: Net income (loss)......................................... $ 12,850 $(17,559) $(51,770) Adjustment for discontinued operations.................... 3,714 15,260 26,559 -------- -------- -------- Income (loss) from continuing operations.................. 16,564 (2,299) (25,211) Adjustments to reconcile income (loss) from continuing operations to net cash provided (used) by operating activities: Depreciation and amortization........................... 13,183 12,524 12,355 Deferred income taxes................................... 326 6,460 11,238 Net gain from sales of assets........................... (692) (127) (5) Net gain on extinguishment of debt...................... (23,226) -- -- Change in redemption amount of redeemable common stock................................................. -- -- (378) Effects of changes in foreign currency.................. (548) 390 2,120 Other................................................... 1,114 387 2,416 Changes in operating assets and liabilities: Accounts receivable................................... (7,222) 3,810 6,046 Inventories........................................... 3,660 (1,598) (13,991) Prepaid expenses and other current assets............. (314) (3,122) (2,819) Other assets.......................................... (3,079) (2,632) 2,667 Accounts payable...................................... (5,650) 20,503 (6,606) Accrued expenses and other liabilities................ 6,965 (355) 8,511 Accrued costs of non-completed transaction............ 3,970 -- -- Cash provided (used) by discontinued operations........... (2,189) 716 (1,088) -------- -------- -------- Net cash provided (used) by operating activities...... 2,862 34,657 (4,745) -------- -------- -------- INVESTING ACTIVITIES: Capital expenditures...................................... (6,244) (8,636) (8,518) Acquisition of a business, net of cash acquired........... -- -- (7,182) Proceeds from property damage claim....................... -- -- 411 Proceeds from sale of assets.............................. 1,094 2,565 19 Other investing........................................... (655) 737 580 Discontinued operations................................... 14,875 1,363 (2,671) -------- -------- -------- Net cash provided (used) by investing activities...... 9,070 (3,971) (17,361) -------- -------- -------- FINANCING ACTIVITIES: Net increase (decrease) in cash overdraft................. (795) (6,081) 3,438 Net increase (decrease) in short-term debt................ (26,954) (6,660) 14,237 Proceeds from long-term debt.............................. 109,661 2,000 2,322 Payments of long-term debt................................ (35,453) (16,014) (4,730) Payment of Pfizer obligations............................. (28,300) -- -- Payments relating to the Prince Transactions and related costs................................................... (21,393) -- -- Debt refinancing costs.................................... (15,548) -- -- Discontinued operations................................... 1,005 377 (1,590) -------- -------- -------- Net cash provided (used) by financing activities...... (17,777) (26,378) 13,677 -------- -------- -------- Effect of exchange rate changes on cash..................... 234 452 3 -------- -------- -------- Net increase (decrease) in cash and cash equivalents........................................ (5,611) 4,760 (8,426) Cash and cash equivalents at beginning of period............ 11,179 6,419 14,845 -------- -------- -------- Cash and cash equivalents at end of period.................. $ 5,568 $ 11,179 $ 6,419 ======== ======== ======== Supplemental Cash Flow Information: Interest paid............................................. $ 17,578 $ 16,104 $ 17,003 Income taxes paid......................................... 4,755 3,046 2,629
The accompanying notes are an integral part of the Consolidated Financial Statements. F-6 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS) 1. DESCRIPTION OF BUSINESS Phibro Animal Health Corporation (the "Company" or "PAHC") is a leading diversified global manufacturer and marketer of a broad range of animal health and nutrition products, specifically medicated feed additives ("MFA") and nutritional feed additives ("NFA"), which the Company sells throughout the world predominately to the poultry, swine and cattle markets. The Company is also a specialty chemicals manufacturer and marketer, serving numerous markets. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION: The consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements. The Company consolidates the financial statements of Koffolk (1949) Ltd. (Israel) ("Koffolk") and Planalquimica Industrial Ltda. (Brazil) ("Planalquimica") on the basis of their March 31 fiscal year-ends to facilitate the timely inclusion of such entities in the Company's consolidated financial reporting. The Company's Odda Smelteverk (Norway) ("Odda"), Carbide Industries (U.K.) ("Carbide"), Mineral Resource Technologies, Inc. ("MRT"), and La Cornubia S.A. (France) ("La Cornubia") businesses have been classified as discontinued operations as discussed in Note 5. The Company's consolidated financial statements have been reclassified to report separately the operating results, financial position and cash flows of the discontinued operations. These footnotes present information only for continuing operations, unless otherwise indicated. The Company presents its consolidated financial statements on the basis of its fiscal year ending June 30. All references to years 2004, 2003, and 2002 in these financial statements refer to the fiscal year ended June 30 of that year. RISKS, UNCERTAINTIES AND LIQUIDITY: The Company's ability to fund its operating plan relies upon the continued availability of borrowing under the domestic senior credit facility. The Company believes that it will be able to comply with the terms of its covenants under the amended domestic senior credit facility based on its forecasted operating plan. In the event of adverse operating results and/or violation of covenants under this facility, there can be no assurance that the Company would be able to obtain waivers or amendments on favorable terms, if at all. The Company's 2005 operating plan projects adequate liquidity throughout the year, with periods of reduced availability around the dates of the semi-annual interest payments due December 1, 2004 and June 1, 2005. The Company is pursuing additional cost reduction activities, working capital improvement plans, and sales of non-strategic assets to ensure additional liquidity. The Company also has availability under foreign credit lines that would be available as needed. The Company has also undertaken a strategic review of its manufacturing capabilities, and is currently increasing inventory levels of certain products to enhance future flexibility and reduce costs. There can be no assurance the Company will be successful in any of the above-noted actions. The use of antibiotics in medicated feed additives is a subject of legislative and regulatory interest. The issue of potential for increased bacterial resistance to certain antibiotics used in certain food-producing animals is the subject of discussions on a worldwide basis and, in certain instances, has led to government restrictions on the use of antibiotics in food-producing animals. The sale of feed additives containing antibiotics is a material portion of the Company's business. Should regulatory or other developments result in F-7 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) further restrictions on the sale of such products, it could have a material adverse impact on the Company's financial position, results of operations and cash flows. The testing, manufacturing, and marketing of certain products are subject to extensive regulation by numerous government authorities in the United States and other countries. The Company has significant assets located outside of the United States, and a significant portion of the Company's sales and earnings are attributable to operations conducted abroad. The Company has assets located in Israel and a portion of its sales and earnings are attributable to operations conducted in Israel. The Company is affected by social, political and economic conditions affecting Israel, and any major hostilities involving Israel as well as the Middle East or curtailment of trade between Israel and its current trading partners, either as a result of hostilities or otherwise, could have a material adverse effect on the Company. The Company's operations, properties and subsidiaries are subject to a wide variety of complex and stringent federal, state, local and foreign environmental laws and regulations, including those governing the use, storage, handling, generation, treatment, emission, release, discharge and disposal of certain materials and wastes, the remediation of contaminated soil and groundwater, the manufacture, sale and use of pesticides and the health and safety of employees. As such, the nature of the Company's current and former operations and those of its subsidiaries exposes the Company and its subsidiaries to the risk of claims with respect to such matters. USE OF ESTIMATES: Preparation of the Company's financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. Actual results could differ from these estimates. Significant estimates include reserves for bad debts, inventory obsolescence, environmental matters, depreciation and amortization periods of long-lived assets, recoverability of long-lived assets, realizability of deferred tax assets and actuarial assumptions related to the Company's pension plans. REVENUE RECOGNITION: Revenue is recognized upon transfer of title and when risk of loss passes to the customer, generally at the time of shipment. Net sales reflect total sales billed, less reductions for goods returned, trade discounts and customer allowances. CASH AND CASH EQUIVALENTS: Cash equivalents include highly liquid investments with maturities of three months or less when purchased. ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS: Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company's best estimate of the probable credit losses in its existing accounts receivable. The allowance is based on historical write-off experience and is reviewed periodically. Past due balances are reviewed individually for collectibility. Account balances are charged against the allowance when F-8 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the Company feels that it is probable that the receivable will not be recovered. Receivables consist of the following:
AS OF ----------------------------- JUNE 30, 2004 JUNE 30, 2003 ------------- ------------- Trade receivables........................................... $57,658 $52,714 Employee receivables........................................ 256 267 Other receivables........................................... 2,510 3,236 ------- ------- Total receivables........................................... $60,424 $56,217 ======= =======
The allowance for doubtful accounts was:
2004 2003 2002 ------ ------ ------- Balance at beginning of period............................ $1,437 $1,461 $ 1,760 Provision for bad debts................................... 565 347 979 Bad debt write-offs....................................... (644) (371) (1,278) ------ ------ ------- Balance at end of period.................................. $1,358 $1,437 $ 1,461 ====== ====== =======
INVENTORIES: Inventories are valued at the lower of cost or market. Cost is determined principally under the first-in, first-out (FIFO) and average methods; cost for certain inventories is determined under the last-in, first-out (LIFO) method. Inventories valued at LIFO amounted to $0 and $3,805 at June 30, 2004 and 2003, respectively. Obsolete and unsaleable inventories are reflected at estimated net realizable value. Inventory costs include materials, direct labor and manufacturing overhead. Inventories are comprised of:
AS OF ----------------------------- JUNE 30, 2004 JUNE 30, 2003 ------------- ------------- Raw materials............................................... $16,313 $21,668 Work-in-process............................................. 1,764 1,565 Finished goods.............................................. 61,833 65,248 Excess of FIFO cost over LIFO cost.......................... -- (632) ------- ------- Total inventory............................................. $79,910 $87,849 ======= =======
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated at cost. The Company capitalizes interest expense as part of the cost of construction of facilities and equipment. Interest expense capitalized was $0, $0 and $106 in 2004, 2003 and 2002, respectively. Depreciation is charged to results of operations using the straight-line method based upon the assets' estimated useful lives ranging from 8 to 20 years for buildings and improvements and 3 to 10 years for machinery and equipment. The Company capitalizes costs that extend the useful life or productive capacity of an asset. Repair and maintenance costs are expensed as incurred. In the case of disposals, the assets and related accumulated depreciation are removed from the accounts, and the net amounts, less proceeds from disposal, are included in the statements of operations and comprehensive income (loss). F-9 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DEFERRED FINANCING COSTS: Deferred financing costs related to the senior secured notes and senior subordinated notes are amortized over the respective lives of the notes. Deferred financing costs related to the domestic senior credit facility are amortized over the life of the agreement. INTANGIBLES: Product intangibles cost arising from the MFA acquisition was $10,673 and $10,449 at June 30, 2004 and 2003, respectively, and accumulated amortization of $3,230 and $1,780 at June 30, 2004 and 2003, respectively. Amortization expense was $1,229, $964 and $816 for 2004, 2003 and 2002, respectively. Amortization expense from the MFA acquisition for each of the next five years from 2005 to 2009 is expected to be $1,145 per year. In May 2004 the Company acquired the rights to sell amprolium, an anticoccidial MFA, in most international markets. In payment for the acquired rights, the Company relinquished its claims against the seller for certain purchase order commitments, and will make $2,100 of cash payments to the seller over the next five years. The present value of these payments is $1,898 and was recorded as a liability. The $2,354 value of the purchase order commitments was recorded as a reduction in cost of goods sold and inventory, and an intangible asset of $4,252 was recorded representing the fair value of the acquired rights and is included on the Company's balance sheet at June 30, 2004. The Company will amortize this intangible over a ten year period. No amortization was recorded in 2004. Amortization expense for each of the next five years from 2005 to 2009 is expected to be $425 per year. FOREIGN CURRENCY TRANSLATION: Financial position and results of operations of the Company's international subsidiaries generally are measured using local currencies as the functional currency. Assets and liabilities of these operations are translated at the exchange rates in effect at each fiscal year end. The translation adjustments related to assets and liabilities that arise from the use of differing exchange rates from period to period are included in accumulated other comprehensive loss in stockholders' deficit. Income statement accounts are translated at the average rates of exchange prevailing during the year. A business unit of Koffolk and all of Planalquimica operate primarily in U.S. dollars. The U.S. dollar is designated as the functional currency for these businesses and translation gains and losses are included in determining net income or loss. Foreign currency transaction gains and losses primarily arise from short-term intercompany balances. Net foreign currency transaction and translation (gains) losses were $(116), $789 and $3,385 for 2004, 2003 and 2002, respectively, and were included in other expense, net in the consolidated statements of operations and comprehensive income (loss). DERIVATIVE FINANCIAL INSTRUMENTS: The Company records all derivative financial instruments on the consolidated balance sheet at fair value. Changes in the fair value of derivatives are recorded in results of operations or accumulated other comprehensive income (loss), depending on whether a derivative is designated and effective as part of a hedge transaction and, if it is, the type of hedge transaction. Gains and losses on derivative instruments reported in accumulated other comprehensive income (loss) are included in operations in the periods in which operations are affected by the hedged item. F-10 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) RECOVERABILITY OF LONG-LIVED ASSETS: The Company evaluates the recoverability of long-lived assets, including intangible assets, when events or circumstances indicate that a diminution in value may have occurred, using financial indicators such as historical and future ability to generate cash flows from operations. The Company's policy is to record an impairment loss in the period it is determined the carrying amount of the asset may not be recoverable. This determination is based on an evaluation of such factors as the occurrence of a significant event, a significant change in the environment in which the business operates, or if the expected future net cash flows (undiscounted and without interest or income taxes) are less than the carrying amount of the assets. ENVIRONMENTAL LIABILITIES: Expenditures for ongoing compliance with environmental regulations that relate to current operations are expensed or capitalized as appropriate. The Company capitalizes expenditures made to improve the condition of property, compared with the condition of that property when constructed or acquired. The Company also capitalizes expenditures that prevent future environmental contamination. Other expenditures are expensed as incurred. The Company records the expense and related liability in the period an environmental assessment indicates remedial efforts are probable and the costs can be reasonably estimated. Estimates of the liability are based upon currently available facts, existing technology, and presently enacted laws and regulations taking into consideration the likely effects of inflation and other societal and economic factors. All available evidence is considered, including prior experience in remediation of contaminated sites, other companies' experience, and data released by the U.S. Environmental Protection Agency or other organizations. When such costs will be incurred over a long-term period and can be reliably estimated as to timing, the liabilities are included in the consolidated balance sheet at their discounted amounts. INCOME TAXES: Income tax expense includes U.S. federal, state, and foreign income taxes. The tax effect of certain temporary differences between amounts recognized for financial reporting purposes and amounts recognized for tax purposes are reported as deferred income taxes. Deferred tax balances are adjusted to reflect tax rates, based on current tax laws, which will be in effect in the years in which the temporary differences are expected to reverse. Valuation allowances are established as necessary to reduce deferred tax assets to amounts more likely than not to be realized. RESEARCH AND DEVELOPMENT EXPENDITURES: Research and development expenditures are expensed as incurred, recorded in selling, general and administrative expenses and were $5,076, $4,634 and $4,251 for 2004, 2003 and 2002, respectively. NEW ACCOUNTING PRONOUNCEMENTS: The Company adopted the following new and revised accounting pronouncements in fiscal 2004: Statement of Financial Accounting Standards No. 149, "Amendment of SFAS No. 133 on Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS No. 149 amends and clarifies accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. The adoption of SFAS No. 149 did not result in a material impact on the Company's financial statements. Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS No. 150"). SFAS No. 150 requires that an issuer classify a financial instrument, that is within its scope, as a liability (or an asset in some circumstances). SFAS No. 150 also revises the definition of liabilities to encompass certain obligations that can, or must, be F-11 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) settled by issuing equity shares, depending on the nature of the relationship established between the holder and the issuer. The adoption of SFAS No. 150 did not result in a material impact on the Company's financial statements. Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits, an amendment to FASB Statements No. 87, 88, and 106 (revised 2003)" ("SFAS No. 132"). This revision to SFAS No. 132 relates to employers' disclosures about pension plans and other postretirement benefit plans. SFAS No. 132 now requires additional disclosures to describe the types of plan assets, investment strategy, measurement date(s), plan obligations, cash flows, and components of net periodic benefit cost recognized during interim periods of defined pension plans and other defined postretirement plans. The additional disclosures required by this revision to SFAS No. 132 have been provided in the notes to consolidated financial statements. FASB Interpretation No. 46, "Consolidation of Variable Interest Entities (revised December 2003)" ("FIN No. 46"). This revision to FIN No. 46 clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements", to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. The adoption of FIN No. 46 did not result in a material impact on the Company's financial statements. 3. REFINANCING On October 21, 2003, the Company issued 105,000 units consisting of $85,000 of 13% Senior Secured Notes due 2007 (the "US Senior Secured Notes") and $20,000 13% Senior Secured Notes due 2007 of Philipp Brothers Netherlands III B.V. (the "Dutch Senior Secured Notes" and, together with the US Senior Secured Notes, the "Senior Secured Notes"), an indirect wholly-owned subsidiary of the Company (the "Dutch issuer"). The Company used the proceeds from the issuance to: (i) repurchase $51,971 of its 9 7/8% Senior Subordinated Notes due 2008 at a price equal to 60% of the principal amount thereof, plus accrued and unpaid interest; (ii) repay its domestic senior credit facility of $34,888 outstanding at the repayment date; (iii) satisfy, for a payment of approximately $29,315, certain of its outstanding obligations to Pfizer Inc., including: (a) $20,075 aggregate principal amount of its promissory note plus accrued and unpaid interest, (b) $9,748 of accounts payable, (c) $9,040 of accrued expenses, and (d) future contingent purchase price obligations under its agreements with Pfizer Inc. by which the Company acquired Pfizer's medicated feed additive business; and (iv) pay fees and expenses relating to the above transactions. A net gain on extinguishment of debt is included in the Company's condensed consolidated statement of operations, calculated as follows: 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) --------
F-12 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 Secured Notes and the Dutch Senior Secured Notes are senior secured obligations of each of the Company (the "US Issuer") and the Dutch issuer, respectively. The US Senior Secured Notes and the Dutch Senior Secured Notes are guaranteed on a senior secured basis by all the US Issuer's domestic restricted subsidiaries, and the Dutch Senior Secured Notes are guaranteed on a senior secured basis by the US Issuer and by the restricted subsidiaries of the Dutch issuer, presently consisting of Phibro Animal Health SA. The US Senior Secured Notes and related guarantees are collateralized by substantially all of the US Issuer's assets and the assets of its domestic restricted subsidiaries, other than real property and interests therein, including a pledge of all the capital stock of such domestic restricted subsidiaries. The Dutch Senior Secured Notes and related guarantees are collateralized by a pledge of all the accounts receivable, a security interest or floating charge on the inventory to the extent permitted by applicable law, and a mortgage on substantially all of the real property of the Dutch issuer and each of its restricted subsidiaries, a pledge of 100% of the capital stock of each subsidiary of the Dutch issuer, a pledge of the intercompany loans made by the Dutch issuer to its restricted subsidiaries and substantially all of the assets of the U.S. guarantors, other than real property and interests therein. The indenture governing the Senior Secured Notes provides for optional make-whole redemptions at any time prior to June 1, 2005, optional redemption on or after June 1, 2005, and requires the Company to make certain offers to purchase Senior Secured Notes upon a change of control, upon certain asset sales and from fifty percent (50%) of excess cash flow (as such terms are defined in the indenture). Also, on October 21, 2003, the Company entered into a new replacement domestic senior credit facility ("domestic senior facility") with Wells Fargo Foothill, Inc., providing for a working capital facility plus a letter of credit facility. The aggregate amount of borrowings under such working capital and letter of credit facilities initially could not exceed $25,000, including aggregate borrowings under the working capital facility up to $15,000. On April 29, 2004, the Company amended the domestic senior facility to increase the aggregate amount of borrowings available under such working capital and letter of credit facilities from $25,000 to $27,500 and to increase the amount of aggregate borrowings available under the working capital facility from $15,000 to $17,500. As of September 24, 2004, the Company amended the domestic senior credit facility to: (i) increase the aggregate amount of borrowings available under such working capital and letter of credit facilities from $27,500 to $32,500; the amount of aggregate borrowings available under the working capital facility remained unchanged at $17,500; (ii) amend the EBITDA definition to exclude charges and expenses related to unsuccessful acquisitions and related financings in an aggregate amount not to exceed $5,300 for the period beginning January 1, 2004 and ending June 30, 2004; (iii) amend the definition of Additional Indebtedness to exclude advances under the working capital facility; (iv) amend the definition of Permitted Investments to allow other investments made during the period from January 1, 2004 through June 30, 2004 in an aggregate amount not to exceed $336; and (v) establish covenant EBITDA levels for the periods ending F-13 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) after June 30, 2004. The amendment was effective June 30, 2004 for items (i), (ii) and (iii); effective January 1, 2004 for item (iv); and effective September 24, 2004 for all other items. Borrowings under the domestic senior credit facility are subject to a borrowing base formula based on percentages of eligible domestic receivables and domestic inventory. Under the domestic senior credit facility, the Company may choose between two interest rate options: (i) the applicable base rate as defined plus 0.50% and (ii) the LIBOR rate as defined plus 2.75%. Indebtedness under the domestic senior credit facility is secured by a first priority lien on substantially all of the Company's assets and assets of substantially all of the Company's domestic subsidiaries. The Company is required to pay an unused line fee of 0.375% on the unused portion of the domestic senior credit facility, a monthly servicing fee and standard letter of credit fees to issuing banks. Borrowings under the domestic senior credit facility are available until, and are repayable no later than, October 31, 2007, although borrowings must be repaid by June 30, 2007 if the maturity of the Senior Secured Notes has not been extended, as required by the domestic senior credit facility, by that date. Pursuant to the terms of an intercreditor agreement, the security interest securing the Senior Secured Notes and the guarantees made by the Company's domestic restricted subsidiaries are subordinated to a lien securing the domestic senior credit facility. 4. PRINCE TRANSACTIONS Effective December 26, 2003 (the "Closing Date"), the Company completed the divestiture of substantially all of the business and assets of The Prince Manufacturing Company ("PMC") to a company ("Buyer") formed by Palladium Equity Partners II, LP and certain of its affiliates (the "Palladium Investors"), and the related reduction of the Company's preferred stock held by the Palladium Investors (collectively the "Prince Transactions"). Pursuant to definitive purchase and other agreements executed on and effective as of the Closing Date, the Prince Transactions included the following elements: (i) the transfer of substantially all of the business and assets of PMC to Buyer; (ii) the reduction of the value of the Company's Preferred Stock owned by the Palladium Investors from $72,184 to $16,517 (accreted through the Closing Date) by means of the redemption of all of its shares of Series B Preferred Stock and a portion of its Series C Preferred Stock; (iii) the termination of $2,250 in annual management advisory fees payable by the Company to Palladium; (iv) a cash payment of $10,000 to the Palladium Investors in respect of the portion of the Company's Preferred Stock not exchanged in consideration of the business and assets of PMC; (v) the agreement of the Buyer to pay the Company for advisory fees for the next three years of $1,000, $500, and $200, respectively (which were pre-paid at closing by the Buyer and satisfied for $1,300, the net present value of such payments); and (vi) the Buyer agreed to supply manganous oxide and red iron oxide products and to provide certain mineral blending services to the Company's Prince Agriproducts subsidiary ("Prince Agri"). Prince Agri agreed to continue to provide the Buyer with certain laboratory, MIS and telephone services, all on terms substantially consistent with the historic relationship between Prince Agri and PMC, and to lease to Buyer office space used by PMC in Quincy, Illinois. The Company has an agreement to receive certain treasury services from Palladium for $100 per year. Pursuant to definitive agreements, the Company made customary representations, warranties and environmental and other indemnities, agreed to a post-closing working capital adjustment, paid $3,958 in full satisfaction of all intercompany debt owed to PMC, paid a closing fee to Palladium of $500, made certain capital expenditure adjustments included as part of the intercompany settlement amount, and agreed to pay for certain out-of-pocket transaction expenses. PMC retained $414 of its accounts receivable. The Company established a $1,000 letter of credit escrow for two years to secure its working capital adjustment and certain indemnification obligations. The Company agreed to indemnify the Palladium Investors for a portion, at the rate of $0.65 for every dollar, of the amount they receive in respect of the disposition of Buyer for less than $21,000, up to a maximum payment by the Company of $4,000 (the "Backstop Indemnification Amount"). The Backstop Indemnification Amount would be payable on the F-14 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) earlier to occur of July 1, 2008 or six months after the redemption date of all of the Company's Senior Secured Notes due 2007 if such a disposition closes prior to such redemption and six months after the closing of any such disposition if the disposition closes after any such redemption. The Company's obligations with respect to the Backstop Indemnification Amount will cease if the Palladium Investors do not close the disposition of Buyer by January 1, 2009. The definition of "Equity Value" in the Company's Certificate of Incorporation was amended to reduce the multiple of trailing EBITDA payable in connection with any future redemption of Series C Preferred to 6.0 from 7.5 The excess of the reduction in redeemable preferred stock over total assets divested and costs and liabilities incurred on the Prince Transactions was recorded as a decrease to accumulated deficit on the Company's consolidated balance sheet at December 31, 2003, and was calculated as follows: SERIES B & C REDEEMABLE PREFERRED STOCK: Accreted value pre-transaction.............................. $72,184 Accreted value post-transaction............................. 16,517 ------- REDUCTION IN REDEEMABLE PREFERRED STOCK..................... 55,667 ------- ASSETS DIVESTED AND COSTS INCURRED: PMC net assets divested..................................... 7,430 Cash paid to Palladium Investors for: -- reduction of redeemable preferred stock................ 10,000 -- settlement of PMC intercompany debt.................... 3,958 -- working capital adjustment............................. 1,331 -- closing fee............................................ 500 Transaction costs........................................... 8,310 Contingent Backstop Indemnification Amount accrued.......... 4,000 ------- TOTAL ASSETS DIVESTED AND COSTS AND LIABILITIES INCURRED.... 35,529 ------- EXCESS AMOUNT RECORDED AS A DECREASE TO ACCUMULATED DEFICIT................................................... $20,138 =======
PMC is included in the Company's Industrial Chemicals segment. The results of operations of PMC were:
FOR THE YEARS ENDED JUNE 30, ------------------------------ 2004 2003 2002 -------- -------- -------- Net sales............................................... $11,118 $22,332 $21,451 Operating income........................................ 2,278 3,579 3,640 Depreciation and amortization........................... 487 956 966
The divestiture of PMC has not been reflected as a discontinued operation due to the existence of the Backstop Indemnification and continuing supply and service agreements. F-15 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. DISCONTINUED OPERATIONS The Company shutdown Odda and divested Carbide during 2003, and sold MRT and shutdown La Cornubia during 2004. These businesses have been classified as discontinued operations. ODDA AND CARBIDE Operating results and loss on disposal of Odda and Carbide were:
FOR THE YEARS ENDED JUNE 30, ------------------- 2003 2002 -------- -------- OPERATING RESULTS: Net sales................................................... $ 11,217 $ 31,219 Cost of goods sold.......................................... 13,723 46,116 Selling, general and administrative expenses................ 3,175 12,812 Asset writedowns............................................ 7,781 -- Other income................................................ 2,327 3,699 -------- -------- (Loss) before income taxes.................................. (11,135) (24,010) (Benefit) for income taxes.................................. (58) (1,170) -------- -------- (Loss) from operations...................................... $(11,077) $(22,840) ======== ======== Depreciation and amortization............................... $ 894 $ 17,676 ======== ======== LOSS ON DISPOSAL: Assets...................................................... $ (3,359) Liabilities................................................. 6,432 Unsecured debt.............................................. 2,488 Currency translation adjustment............................. (6,244) -------- (Loss) on disposal.......................................... $ (683) ========
MINERAL RESOURCE TECHNOLOGIES, INC. The Company sold MRT on August 28, 2003. Net proceeds, after transaction costs, were approximately $13,836. Operating results, gain on sale and balance sheet items of MRT were:
FOR THE YEARS ENDED JUNE 30, ----------------------------- 2004 2003 2002 -------- -------- ------- OPERATING RESULTS: Net sales.............................................. $ 3,327 $18,671 $17,045 Cost of goods sold..................................... 3,135 19,943 17,676 Selling, general and administrative expenses........... 316 2,182 2,299 -------- ------- ------- (Loss) before income taxes............................. (124) (3,454) (2,930) Provision for income taxes............................. -- -- -- -------- ------- ------- (Loss) from operations................................. $ (124) $(3,454) $(2,930) ======== ======= ======= Depreciation and amortization.......................... $ -- $ 1,309 $ 1,192 ======== ======= =======
F-16 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED JUNE 30, 2003 -------------- GAIN ON SALE: Current assets.............................................. $ (5,813) Property, plant & equipment -- net and other assets......... (10,703) Liabilities................................................. 2,911 Net proceeds of sale........................................ 13,836 -------- Gain on sale................................................ $ 231 ========
AS OF JUNE 30, 2003 -------- BALANCE SHEET: Trade receivables........................................... $ 2,633 Other receivables........................................... 304 Inventories................................................. 1,643 Prepaid expenses and other current assets................... 362 ------- Current assets from discontinued operations................. $ 4,942 ======= Property, plant and equipment, net.......................... $ 9,999 Intangibles................................................. 196 Other assets................................................ 455 ------- Other assets from discontinued operations................... $10,650 ======= Accounts payable............................................ $ 1,466 Accrued expenses and other current liabilities.............. 585 ------- Current liabilities from discontinued operations............ $ 2,051 ======= Other liabilities........................................... $ 198 ------- Other liabilities from discontinued operations.............. $ 198 =======
LA CORNUBIA, S.A. During June 2004 the Company determined that it would no longer fund the operations of La Cornubia. On June 30, 2004, La Cornubia filed for bankruptcy in France. The bankruptcy is proceeding in accordance with French law. The Company has been advised that, as a result of the bankruptcy, the creditors of La Cornubia have recourse only to the assets of La Cornubia. The Company removed all assets, liabilities, and cumulative translation adjustments related to La Cornubia from the Company's consolidated balance sheet as of June 30, 2004, and recorded a loss on disposal of discontinued operations. The Company obtained the consent of a majority of the holders of its senior secured notes due 2007 and its senior subordinated notes due 2008 to amend the indentures governing these notes in such a manner that the bankruptcy of La Cornubia would not create an event of default thereunder. The Company also obtained a waiver under its domestic senior credit facility so that the bankruptcy of La Cornubia would not constitute an event of default under the terms of the domestic senior credit facility. F-17 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Operating results, loss on disposal and balance sheet items of La Cornubia were:
FOR THE YEARS ENDED JUNE 30, ------------------------------ 2004 2003 2002 -------- -------- -------- OPERATING RESULTS: Net sales............................................... $13,918 $13,479 $11,873 Cost of goods sold...................................... 13,723 12,528 11,144 Selling, general and administrative expenses............ 1,686 1,310 1,641 Other income............................................ 102 389 263 Interest (expense) -- net............................... (94) (60) (78) ------- ------- ------- (Loss) before income taxes.............................. (1,483) (30) (727) Provision for income taxes.............................. 18 16 62 ------- ------- ------- (Loss) from operations.................................. $(1,501) $ (46) $ (789) ======= ======= ======= Depreciation and amortization........................... $ 400 $ 359 $ 325 ======= ======= ======= LOSS ON DISPOSAL: Current Assets.......................................... $(5,085) Property, plant & equipment -- net and other assets..... (2,557) Liabilities............................................. 3,614 Unsecured debt.......................................... 2,167 Currency translation adjustment......................... (459) ------- (Loss) on disposal...................................... $(2,320) =======
AS OF JUNE 30, 2003 -------- BALANCE SHEET: Trade receivables....................................... $ 2,957 Other receivables....................................... 139 Inventories............................................. 918 Prepaid expenses and other current assets............... 348 ------- Current assets from discontinued operations............. $ 4,362 ======= Property, plant and equipment, net...................... $ 2,535 Other assets............................................ 140 ------- Other assets from discontinued operations............... $ 2,675 ======= Accounts payable........................................ $ 1,560 Accrued expenses and other current liabilities.......... 910 Unsecured debt.......................................... 1,036 ------- Current liabilities from discontinued operations........ $ 3,506 ======= Other liabilities....................................... $ 975 ------- Other liabilities from discontinued operations.......... $ 975 =======
F-18 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment was:
AS OF JUNE 30, ------------------- 2004 2003 -------- -------- Land........................................................ $ 5,657 $ 5,816 Buildings and improvements.................................. 27,925 29,841 Machinery and equipment..................................... 105,308 106,026 -------- -------- 138,890 141,683 Less: accumulated depreciation.............................. 80,104 77,778 -------- -------- $ 58,786 $ 63,905 ======== ========
Certain of the buildings of Koffolk are on land leased for a nominal amount from the Israel Land Authority. The lease expires on July 9, 2027. Depreciation expense was $9,122, $9,202 and $10,235 for 2004, 2003 and 2002, respectively. 7. RELATED PARTY TRANSACTIONS The Company owns approximately $2,300 par value of preferred stock of a pharmaceutical company. The principal common stockholder of the Company owns approximately 15% voting common stock interest in the pharmaceutical company, acquired for approximately $500. The preferred stock investment, included in other assets, has a net carrying value of $1,610 at June 30, 2004. A subsidiary of the Company leases the property underlying its Santa Fe Springs, California plant from a limited partnership controlled by common shareholders of the Company. The lease requires annual base rent of $250 and terminates on December 31, 2008. The Company is responsible under the lease agreement to pay all real property taxes. In accordance with the terms of the Prince Transactions (Note 4) the Buyer paid the Company advisory fees of $500 for the year ended June 30, 2004. The Buyer also supplied manganous oxide and red iron oxide products, and provided certain mineral blending services to the Company's Prince Agriproducts subsidiary ("Prince Agri") for which Prince Agri paid $2,149 during the year ended June 30, 2004. Prince Agri provided the Buyer with certain laboratory, MIS and telephone services, and leased to Buyer office space in Quincy, Illinois for which the buyer paid Prince Agri $421 during the year ended June 30, 2004. The Company also has an agreement to receive certain treasury services from the Palladium Investors for $100 per year. Prior to the Prince Transactions an annual management advisory fee of $2,250 was payable to the Palladium Investors. Payments were due quarterly in advance and were charged to selling, general and administrative expenses. The management fee was $1,125, $2,250 and $2,250 for 2004, 2003 and 2002, respectively. F-19 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities were:
AS OF JUNE 30, ----------------- 2004 2003 ------- ------- Employee related expenses................................... $11,444 $10,003 Payments due to Pfizer...................................... -- 9,040 Interest and tax accruals................................... 4,836 9,249 Other accrued liabilities................................... 23,730 12,407 ------- ------- $40,010 $40,699 ======= =======
9. DEBT LOANS PAYABLE TO BANKS At June 30, 2004, loans payable to banks included $10,996 under the domestic senior credit facility with Wells Fargo Foothill, Inc. The weighted average interest rate under the domestic senior credit facility from its inception at October 21, 2003 through June 30, 2004 was 8.0%. At June 30, 2004, the Company had $6,504 of borrowings available under the borrowing base formula in effect for the domestic senior credit facility that is provided under the domestic senior credit facility. On October 21, 2003, the Company entered into a new domestic senior credit facility with Wells Fargo Foothill, Inc., providing for a working capital facility plus a letter of credit facility. The aggregate amount of borrowings under such working capital and letter of credit facilities may not exceed $25,000, including aggregate borrowings under the working capital facility of up to $15,000. On April 29, 2004, the Company amended the domestic senior credit facility to increase the aggregate amount of borrowings available under such working capital and letter of credit facilities from $25,000 to $27,500 and to increase the amount of aggregate borrowings available under the working capital facility from $15,000 to $17,500. As of September 24, 2004, the Company amended the domestic senior credit facility to: (i) increase the aggregate amount of borrowings available under such working capital and letter of credit facilities from $27,500 to $32,500; the amount of aggregate borrowings available under the working capital facility remained unchanged at $17,500; (ii) amend the EBITDA definition to exclude charges and expenses related to unsuccessful acquisitions and related financings in an aggregate amount not to exceed $5,300 for the period beginning January 1, 2004 and ending June 30, 2004; (iii) amend the definition of Additional Indebtedness to exclude advances under the working capital facility; (iv) amend the definition of Permitted Investments to allow other investments made during the period from January 1, 2004 through June 30, 2004 in an aggregate amount not to exceed $336; and (v) establish covenant EBITDA levels for the periods after June 30, 2004. The amendment was effective June 30, 2004 for items (i), (ii) and (iii); effective January 1, 2004 for item (iv); and effective September 24, 2004 for all other items. Borrowings under the domestic senior credit facility are subject to a borrowing base formula based on percentages of eligible domestic receivables and domestic inventory. Under the domestic senior credit facility, the Company may choose between two interest rate options: (i) the applicable base rate as defined plus 0.50% and (ii) the LIBOR rate as defined plus 2.75%. Indebtedness under the domestic senior credit facility is secured by a first priority lien on substantially all of the Company's assets and assets of substantially all of the Company's domestic subsidiaries. The Company is required to pay an unused line fee of 0.375% on the unused portion of the domestic senior credit facility, a monthly servicing fee and standard letter of credit fees to issuing banks. Borrowings under the domestic senior credit facility are available until, and are repayable no later than, October 31, 2007, although borrowings must be repaid by June 30, 2007 if the maturity of the Senior Secured Notes has not been extended, as required by the domestic senior credit facility, by that date. F-20 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) As of June 30, 2004, the Company was in compliance with the financial covenants of the amended domestic senior credit facility. The domestic senior credit facility requires, among other things, the maintenance of certain levels of trailing consolidated and domestic EBITDA (earnings before interest, taxes, depreciation and amortization) calculated on a monthly basis, and an acceleration clause should an event of default (as defined in the agreement) occur. In addition, there are certain restrictions on additional borrowings, additional liens on the Company's assets, guarantees, dividend payments, redemption or purchase of the Company's stock, sale of subsidiaries' stock, disposition of assets, investments, and mergers and acquisitions. The domestic senior credit facility contains a lock-box requirement and a material adverse change clause should an event of default (as defined in the agreement) occur. Accordingly, the amounts outstanding have been classified as short-term and are included in loans payable to banks in the consolidated balance sheet. LONG-TERM DEBT
AS OF JUNE 30, ------------------- 2004 2003 -------- -------- Senior secured notes due December 1, 2007................... $105,000 $ -- Senior subordinated notes due June 1, 2008.................. 48,029 100,000 Foreign bank loans.......................................... 6,237 3,906 Pfizer promissory note...................................... -- 20,075 Bank capital expenditure facility........................... -- 1,496 Capitalized lease obligations and other..................... 103 910 -------- -------- 159,369 126,387 Less: current maturities.................................... 1,351 24,124 -------- -------- $158,018 $102,263 ======== ========
Senior Secured Notes due 2007 In October 2003 the Company issued 105,000 units, consisting of $85,000 of 13% Senior Secured Notes due 2007 (the "US Senior Secured Notes") and $20,000 of 13% Senior Secured Notes due 2007 of Philipp Brothers Netherlands III B.V. (the "Dutch Senior Secured Notes" and, together with the US Senior Secured Notes, the "Senior Secured Notes"), an indirect wholly-owned subsidiary of the Company (the "Dutch issuer"). The US Senior Secured Notes and the Dutch Senior Secured Notes are senior secured obligations of each of the Company (the "US issuer") and the Dutch issuer, respectively. The US Senior Secured Notes and the Dutch Senior Secured Notes are guaranteed on a senior secured basis by all the US Issuer's domestic restricted subsidiaries, and the Dutch Senior Secured Notes are guaranteed on a senior secured basis by the US Issuer and by the restricted subsidiaries of the Dutch issuer, presently consisting of Phibro Animal Health SA. The US Senior Secured Notes and related guarantees are collateralized by substantially all of the US Issuer's assets and the assets of its domestic restricted subsidiaries, other than real property and interests therein, including a pledge of all the capital stock of such domestic restricted subsidiaries. The Dutch Senior Secured Notes and related guarantees are collateralized by a pledge of all the accounts receivable, a security interest or floating charge on the inventory to the extent permitted by applicable law, and a mortgage on substantially all of the real property of the Dutch issuer and each of its restricted subsidiaries, a pledge of 100% of the capital stock of each subsidiary of the Dutch issuer, a pledge of the intercompany loans made by the Dutch issuer to its restricted subsidiaries and substantially all of the assets of the U.S. guarantors, other than real property and interests therein. The indenture governing the Senior Secured Notes provides for optional F-21 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) make-whole redemptions at any time prior to June 1, 2005, optional redemption on or after June 1, 2005, and requires the Company to make certain offers to purchase Senior Secured Notes upon a change of control, upon certain asset sales and from fifty percent (50%) of excess cash flow (as such terms are defined in the indenture). The indenture contains certain covenants with respect to the Company and the guarantors, which restrict, among other things, (a) the incurrence of additional indebtedness, (b) the payment of dividends and other restricted payments, (c) the creation of certain liens, (d) the sale of assets, (e) certain payment restrictions affecting subsidiaries, and (f) transactions with affiliates. The indenture restricts the Company's ability to consolidate, or merge with or into, or to transfer all or substantially all of its assets to, another person. Senior Subordinated Notes due 2008 The Company issued $100,000 aggregate principal amount of 9 7/8% Senior Subordinated Notes due 2008 ("Senior Subordinated Notes") of which $51,971 principal amount was repurchased with proceeds of the Senior Secured Notes. The Senior Subordinated Notes are general unsecured obligations of the Company and are subordinated in right of payment to all existing and future senior debt (as defined in the indenture agreement of the Company) and rank pari passu in right of payment with all other existing and future senior subordinated indebtedness of the Company. The Senior Subordinated Notes are unconditionally guaranteed on a senior subordinated basis by the domestic restricted subsidiaries of the Company. Additional future domestic subsidiaries may become guarantors under certain circumstances. The indenture contains certain covenants with respect to the Company and the Guarantors, which restrict, among other things, (a) the incurrence of additional indebtedness, (b) the payment of dividends and other restricted payments, (c) the creation of certain liens, (d) the sale of assets, (e) certain payment restrictions affecting subsidiaries, and (f) transactions with affiliates. The indenture restricts the Company's ability to consolidate, or merge with or into, or to transfer all or substantially all of its assets to, another person. Foreign Bank Loans The bank loans of the Company's Koffolk Ltd. (Israel) subsidiary are collateralized by its receivables and inventory, accrue interest at LIBOR plus 1.25%, and are repayable in equal quarterly payments through 2005. The LIBOR rate was 1.15% at June 30, 2004. The Company's foreign subsidiaries have aggregate credit lines of $11,044. At June 30, 2004, the Company had $4,807 of borrowings available under these credit lines. Aggregate Maturities of Long-Term Debt The aggregate maturities of long-term debt as of June 30, 2004 were:
YEAR ENDED JUNE 30, - ------------------- 2005........................................................ $ 1,351 2006........................................................ 4,127 2007........................................................ -- 2008........................................................ 153,891 2009........................................................ -- -------- Total..................................................... $159,369 ========
F-22 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 10. REDEEMABLE COMMON STOCK OF SUBSIDIARY A key executive of the Company has a 2.1% ownership interest in the common stock of a subsidiary. The subsidiary's shares are redeemable at fair market value, based on independent appraisal, upon the death, disability or termination of the key executive. The Company and its subsidiary have entered into a severance agreement with the executive for payments based on a multiple of pre-tax earnings (as defined). The payments are subject to certain restrictions pursuant to terms of the domestic senior credit facility. At June 30, 2004 no severance payments would have been due upon termination. 11. REDEEMABLE PREFERRED STOCK Effective December 26, 2003 (the "Closing Date"), the Company entered into the Prince Transactions with the Palladium Investors (Note 4). Pursuant to definitive purchase and other agreements executed on and effective as of the Closing Date, the Prince Transactions included the following elements which relate to the Company's Redeemable Preferred Stock: the reduction of the value of the Company's Preferred Stock owned by the Palladium Investors from $72,184 (25,000 Series B shares and 20,000 Series C shares) to $16,517 (accreted through the Closing Date) (10,591 Series C shares) by means of the redemption of all of its shares of Series B Preferred Stock and a portion of its Series C Preferred Stock; the termination of $2,250 in annual management advisory fees payable by the Company to Palladium; a cash payment of $10,000 to the Palladium Investors in respect of the portion of the Company's Preferred Stock not exchanged in consideration of the business and assets of PMC; and the agreement of the Palladium Investors to pay the Company for advisory fees for the next three years of $1,000, $500, and $200, respectively (which were pre-paid at closing by the Palladium Investors and satisfied for $1,300, the net present value of such payments). The Company has an agreement to receive certain treasury services from the Palladium Investors for $100 per year. The redeemable preferred stock is entitled to cumulative cash dividends, payable semi-annually, at 15% per annum of the liquidation value. The redeemable Preferred C stock is entitled to the Liquidation Value plus a percentage of the equity value of the Company, as defined in the amended Certificate of Incorporation. The equity value is calculated as a multiple of earnings before interest, taxes, depreciation and amortization ("EBITDA") of the Company's business ("Equity Value"). On the third closing anniversary and on each closing anniversary thereafter, the Company may redeem, for cash only, in whole the Preferred C, at the Liquidation Value plus the Equity Value payment. At any time after the redemption of the Company's Senior Subordinated Notes (due June 2008), Palladium Investors shall have the right to require the Company to redeem, for cash, the Preferred C at the Liquidation Value plus the Equity Value payment. Dividends of $6,042, $8,808 and $7,623 for the years ended June 30, 2004, 2003 and 2002, respectively, were accrued on the preferred shares and charged to retained earnings. Equity Value of $5,421, $3,470 and $0 for the years ended June 30, 2004, 2003 and 2002, respectively, was accrued and charged to retained earnings. F-23 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Redeemable preferred stock is comprised of:
AS OF ----------------------------- JUNE 30, 2004 JUNE 30, 2003 ------------- ------------- Series B Value at issuance......................................... $ -- $25,000 Accrued dividends......................................... -- 11,339 Series C Value at issuance......................................... 10,591 20,000 Accrued dividends......................................... 7,200 9,072 Accreted equity value..................................... 6,887 3,470 ------- ------- Total redeemable preferred stock............................ $24,678 $68,881 ======= =======
The agreement with the Palladium Investors contains covenants which restrict, without the consent of at least one director designated by the Palladium Investors (or if no such director is then serving on the Board, at least one of the Palladium Investors), certain (a) issuances of equity securities, (b) sales of assets in excess of $10,000, (c) purchases of business and other investments in excess of $10,000, (d) incurrence of indebtedness for borrowed money in excess of $12,500, (e) redemptions, acquisitions or other purchases of equity securities, (f) transactions with officers, directors, stockholders or employees or any family member or affiliate thereof in excess of $500, (g) compensation and benefits of certain officers, and (h) transactions involving a change of control. 12. COMMON STOCK AND PAID-IN CAPITAL COMMON STOCK: Common stock at June 30, 2004 and 2003 was:
AUTHORIZED ISSUED AMOUNT SHARES SHARES AT PAR ---------- ------ ------ Class A common stock..................................... 16,200 12,600 $.10 Class B common stock..................................... 14,100 11,888 $.10 ------ ------ 30,300 24,488
The entire voting power is vested in the holders of Class A common stock, except the holders of Class A common stock are entitled to elect all but four of the directors. The holders of Class B common stock are entitled to elect one director, and the purchasers of the Preferred B and Preferred C are entitled by contract to elect two directors. No dividends may be paid to common stockholders until all dividends have been paid to preferred stockholders. Thereafter, holders of Class A common stock shall receive dividends, when and as declared by the directors, at the rate of 5.5% of the par value of such stock (non-cumulative). After all declared dividends have been paid to Class A common stockholders, dividends may be declared and paid to the holders of Class B common stock. In the event of any complete liquidation, dissolution, winding-up of the business, or sale of all the assets of the Company, and after the redemption of the preferred stock, the Class A common stockholders are entitled to a distribution equal to the par value of the stock plus declared and unpaid dividends. Thereafter, the remaining assets of the Company shall be distributed to the holders of Class B common stock. F-24 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) REDEEMABLE COMMON STOCK: Pursuant to terms of an agreement with a minority shareholder, who is also an officer of the Company, the Company is required to purchase at book value, the Class B shares of such shareholder upon his retirement, death, disability, or the termination of his employment. Should such shareholder elect to sell his shares, the Company has a right of first offer and an option to purchase the shares. The Company records a liability for the redemption amount as calculated at each balance sheet date. No liability was recorded as of June 30, 2004 and 2003. Income of $378 was recorded during 2002 to adjust the shares to redeemable value. 13. EMPLOYEE BENEFIT PLANS The Company and its domestic subsidiaries maintain noncontributory defined benefit pension plans for all eligible domestic nonunion employees who meet certain requirements of age, length of service and hours worked per year. The Company's Belgium subsidiary maintains a defined contribution and defined benefit plan for eligible employees. The benefits provided by the plans are based upon years of service and the employees' average compensation, as defined. The measurement date for the domestic and international pension plans was June 30, 2004 and 2003, respectively. Reconciliations of changes in benefit obligations, plan assets, and funded status of the plans were:
DOMESTIC INTERNATIONAL ----------------- --------------- 2004 2003 2004 2003 ------- ------- ------ ------ CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year.......... $15,846 $11,821 $6,595 $4,251 Service cost..................................... 1,260 1,056 467 310 Employee contributions........................... -- -- 27 100 Interest cost.................................... 891 784 374 259 Benefits paid.................................... (595) (243) (3) (29) Actuarial (gain) or loss......................... (251) (663) (475) 879 Curtailment...................................... (922) -- -- -- Change in Discount Rate.......................... (786) 3,091 -- -- Exchange rate impact............................. -- -- 338 825 ------- ------- ------ ------ Benefit obligation at end of year................ $15,443 $15,846 $7,323 $6,595 ======= ======= ====== ======
At June 30, 2004 and 2003, the accumulated benefit obligation was $13,075 and $12,458, respectively, for domestic pension plans and $4,383 and $4,248, respectively, for international pension plans. CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year......................................... $10,387 $ 9,717 $ 4,566 $ 2,882 Actual return on plan assets................... 1,068 537 435 204 Employer contributions......................... 935 376 558 841 Employee contributions......................... -- -- 27 100 Benefits paid.................................. (595) (243) (3) (29) Exchange rate impact........................... -- -- 245 568 ------- ------- ------- ------- Fair value of plan assets at end of year....... $11,795 $10,387 $ 5,828 $ 4,566 ======= ======= ======= =======
F-25 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) FUNDED STATUS Funded status of the plan...................... $(3,648) $(5,459) $(1,495) $(2,029) Unrecognized net actuarial (gain) or loss...... 152 2,358 368 961 Unrecognized prior service cost................ (338) (553) -- -- Unrecognized transition obligation/(asset)..... (8) (12) -- -- ------- ------- ------- ------- (Accrued) pension cost......................... $(3,842) $(3,666) $(1,127) $(1,068) ======= ======= ======= =======
The Company expects to contribute $990 and $602 to its Domestic and International plans, respectively, during fiscal 2005. The Company's policy is to fund the pension plans in amounts which comply with contribution limits imposed by law. Components of net periodic pension expense were:
2004 2003 2002 ------ ------ ----- DOMESTIC PENSION EXPENSE Service cost -- benefits earned during the year............. $1,260 $1,056 $ 879 Interest cost on benefit obligation......................... 891 784 714 Expected return on plan assets.............................. (846) (756) (709) Amortization of initial unrecognized net transition (asset)................................................... (3) (3) (3) Amortization of prior service costs......................... (153) (162) (165) Amortization of net actuarial loss (gain)................... 25 (57) (31) Curtailment benefit......................................... (64) -- -- ------ ------ ----- Net periodic pension cost -- domestic....................... $1,110 $ 862 $ 685 ====== ====== ===== INTERNATIONAL PENSION EXPENSE Service cost -- benefits earned during the year............. $ 467 $ 310 $ 217 Interest cost on benefit obligation......................... 374 259 164 Expected return on plan assets.............................. (300) (203) (123) Amortization of net actuarial loss.......................... 22 -- -- ------ ------ ----- Net periodic pension cost -- international.................. $ 563 $ 366 $ 258 ====== ====== =====
Significant actuarial assumptions for the plans were:
2004 2003 2002 -------- -------- -------- DOMESTIC ACTUARIAL ASSUMPTIONS Discount rate for service and interest................ 5.8% 7.1% 7.5% Expected rate of return on plan assets................ 7.5% 7.5% 7.5% Rate of compensation increase......................... 3.0%-4.5% 3.0%-4.5% 3.0%-4.5% Discount rate for year-end benefit obligation......... 6.1% 5.8% 7.1% INTERNATIONAL ACTUARIAL ASSUMPTIONS Discount rate for service and interest................ 5.5% 5.8% 5.8% Expected rate of return on plan assets................ 6.0% 6.0% 6.0% Rate of compensation increase......................... 3.0% 3.0% 3.0% Discount rate for year-end benefit obligation......... 5.5% 5.5% 5.8%
F-26 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Estimated future benefit payments, including benefits attributable to future service, are as follows:
DOMESTIC INTERNATIONAL -------- ------------- 2005........................................................ $ 295 $ 37 2006........................................................ 301 38 2007........................................................ 311 40 2008........................................................ 451 41 2009........................................................ 508 42 2010-2014................................................... 4,500 1,817
The Company's domestic plan target allocations for fiscal 2005 and the weighted asset allocation of plan assets as of June 30, 2004 and 2003 are as follows:
2005 2004 2003 ------- ---- ---- DOMESTIC PLAN ASSET ALLOCATIONS Debt Securities............................................. 45%-55% 50% 59% Equity Securities........................................... 15%-25% 19% 9% Other....................................................... 25%-35% 31% 32%
The expected long-term rate of return for the plan's total assets is based on the expected return of each of the above categories, weighted based on the median of the target allocation of each class. Equity securities are expected to return 8% to 10% over the long-term, while debt securities are expected to return 4% to 6%. Based on historical experience, the Committee expects that the Plan's asset managers will provide a modest (1/2% to 1% per annum) premium to their respective market benchmark indices. The investment policy and strategy is to earn a long-term investment return sufficient to meet the obligations of the Plan, while assuming a moderate amount of risk in order to maximize investment return. In order to achieve this goal, assets are invested in a diversified portfolio consisting of equity securities, debt securities, limited partnerships and other investments in a manner consistent with ERISA's fiduciary requirements. The Company's international plan target allocations for fiscal 2005 and the weighted asset allocation of plan assets as of June 30, 2004 and 2003 are as follows:
2005 2004 2003 ---- ---- ---- INTERNATIONAL PLAN ASSET ALLOCATIONS Debt Securities............................................. 59% 62% 79% Equity Securities........................................... 25% 21% 20% Other....................................................... 16% 17% 1%
The expected long-term rate of return for the plan's total assets is based on the expected return of each of the above categories, weighted based on the target allocation for each class. Equity securities are expected to return 7.5% over the long-term, while debt securities are expected to return 5.5%. The Company assumed the liability for the International pension plan during 2002 as part of the MFA acquisition. In addition to Belgium, most of the Company's foreign subsidiaries have retirement plans covering substantially all employees. Contributions to these plans are generally deposited under fiduciary-type arrangements. Benefits under these plans primarily are based on compensation levels. Funding policies are based on legal requirements and local practices. Expense under these plans was $585, $522 and $534 for 2004, 2003 and 2002, respectively. F-27 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company and its domestic subsidiaries provide a 401(k) savings plan, under which an employee may make a pre-tax contribution of up to 60% of base compensation. The Company makes a non-matching contribution equal to 1% of the employee's base compensation and a matching contribution equal to 50% of the employee's contribution up to the first 3% of base compensation and 25% of the employee's contribution from 3% to 6% of base compensation. All employee contributions are subject to the maximum amounts permitted for federal income tax purposes. Employees vest in the Company's matching contributions over 5 years. The Company's contribution was $502, $528 and $539 in 2004, 2003 and 2002, respectively. The Company has a deferred compensation and supplemental retirement plan for certain senior executives. The benefits provided by the plan are based upon years of service and the executives' average compensation, subject to certain limits. The plan also provides for death benefits before retirement. Expense under this plan was $259, $249, and $204 in 2004, 2003 and 2002, respectively. The aggregate liability under this plan amounted to $2,018 and $1,678 at June 30, 2004 and 2003, respectively. To assist in funding the benefits of the plan, the Company invested in corporate-owned life insurance policies, through a trust, which at June 30, 2004 and 2003 had cash surrender values of $1,481 and $1,299, respectively, and are included in other assets. The Company has an executive income program to provide a pre-retirement death benefit and a supplemental retirement benefit for certain senior executives. The aggregate liability under this plan amounted to $416 and $385 at June 30, 2004 and 2003, respectively. To assist in funding the benefits of the plan, the Company invested in split-dollar life insurance policies, which at June 30, 2004 and 2003 had cash surrender values to the Company of $1,529 and $1,392, respectively, and are included in other assets. 14. INCOME TAXES Income (loss) from continuing operations before income taxes was:
2004 2003 2002 ------- ------ -------- Domestic................................................ $27,587 $3,855 $ (5,507) Foreign................................................. (3,054) 3,906 (4,937) ------- ------ -------- Income (loss) from continuing operations before income taxes................................................. $24,533 $7,761 $(10,444) ======= ====== ========
Components of the provision for income taxes were:
2004 2003 2002 ------- ------- ------- Current tax provision (benefit): Federal............................................... $ 563 $ -- $ -- State and local....................................... 1,333 516 (256) Foreign............................................... 5,747 3,084 3,785 ------- ------- ------- Total current tax provision........................... 7,643 3,600 3,529 ------- ------- ------- Deferred tax provision (benefit): Federal............................................... 10,150 1,705 (1,225) State and local....................................... (1,396) (345) (590) Foreign............................................... (1,671) 850 (1,673) Change in valuation allowance -- domestic............. (8,754) (1,360) 14,726 -- foreign............ 1,997 5,610 -- ------- ------- ------- Total deferred tax provision.......................... 326 6,460 11,238 ------- ------- ------- Provision for income taxes.............................. $ 7,969 $10,060 $14,767 ======= ======= =======
F-28 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Reconciliations of the Federal statutory rate to the Company's effective tax rate are:
2004 2003 2002 ----- ----- ----- Federal income tax rate..................................... 35.0% 35.0% (35.0)% State and local taxes, net of federal income tax effect..... 3.5 1.4 (4.9) Foreign tax rate differences and taxes in certain profitable foreign jurisdictions..................................... 22.9 33.2 50.8 Change in valuation allowance............................... (41.4) 55.0 131.8 Gain not taxable for book purposes.......................... 10.4 -- -- Expenses with no tax benefit................................ 1.7 4.4 1.0 Other....................................................... 0.3 0.6 (2.3) ----- ----- ----- Effective tax rate.......................................... 32.4% 129.6% 141.4% ===== ===== =====
Most of the investments in fixed assets of the Company's Israeli subsidiary have been granted "approved enterprise" status under Israeli law. The subsidiary is also a "foreign investors' company" as defined by Israeli law. This status entitles the subsidiary to reduced tax rates. The entitlement of the reduced tax rates is conditional upon the subsidiary fulfilling the conditions stipulated by Israeli law, regulations published there-under and the instruments of approval for the specific investments in approved enterprises. In the event of failure to comply with these conditions, the benefits may be canceled and the subsidiary may be required to refund the amount of the benefits, in whole or in part, with the addition of interest. The periods of benefits expire in various years through 2010. Provision has not been made for United States or additional foreign taxes on undistributed earnings of foreign subsidiaries of approximately $39,200, whose earnings have been or are intended to be reinvested. It is not practicable at this time to determine the amount of income tax liability that would result should such earnings be repatriated. The tax effects of significant temporary differences that comprise deferred tax assets and liabilities at June 30, 2004 and 2003 were:
AS OF JUNE 30, ------------------- 2004 2003 -------- -------- Deferred tax assets: Employee benefits......................................... $ 3,274 $ 3,194 Property, plant and equipment............................. 475 686 Insurance................................................. 350 341 Receivables allowances.................................... 724 770 Inventory................................................. 3,441 4,588 Environmental remediation................................. 1,322 1,232 Alternative minimum tax................................... 701 163 Net operating loss carry forwards -- domestic............. 11,645 20,186 -- foreign............. 10,432 1,290 Other..................................................... 1,333 2,059 -------- -------- 33,697 34,509 Valuation allowance....................................... (30,045) (32,954) -------- -------- 3,652 1,555 -------- --------
F-29 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AS OF JUNE 30, ------------------- 2004 2003 -------- -------- Deferred tax liabilities Property, plant and equipment............................. (2,727) (2,354) Other..................................................... (2,649) -- -------- -------- (5,376) (2,354) -------- -------- Net deferred tax liability.................................. $ (1,724) $ (799) ======== ========
Deferred taxes are included in the following line items in the consolidated balance sheets:
2004 2003 ------- ------- Prepaid expenses and other current assets................... $ 502 $ 543 Accrued expenses and other current liabilities.............. (138) (111) Other assets................................................ 669 624 Other liabilities........................................... (2,757) (1,855) ------- ------- $(1,724) $ (799) ======= =======
The Company has incurred domestic and foreign losses in recent years and has reassessed the likelihood of recovering net deferred tax assets, resulting in the recording of valuation allowances due to the uncertainty of future profitability. The Company recorded income tax expense and increased the valuation allowances by $5,610 and $11,594 during the fourth quarters of 2003 and 2002, respectively. The Company will continue to evaluate the likelihood of recoverability of these deferred tax assets based upon actual and expected operating performance. The valuation allowance for deferred tax assets was:
2004 2003 2002 ------- ------- ------- Balance at beginning of period.......................... $32,954 $18,495 $ 1,434 Change in valuation allowance........................... (6,757) 4,250 14,726 Other adjustments....................................... 3,848 10,209 2,335 ------- ------- ------- Balance at end of period................................ $30,045 $32,954 $18,495 ======= ======= =======
The other adjustments in the valuation allowance consist primarily of changes in the valuation allowance attributable to discontinued operations. The Company has domestic federal net operating loss carry forwards of approximately $25,000 that expire in 2019 through 2024, state net operating loss carry forwards of approximately $55,000 that expire over various periods beginning in 2005 and foreign net operating loss carry forwards of approximately $30,000 that expire over various periods beginning in 2010. F-30 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 15. COMMITMENTS AND CONTINGENCIES LEASES: The Company leases office, warehouse and manufacturing equipment and facilities for minimum annual rentals (plus certain cost escalations) as follows:
NON-CANCELABLE ------------------- CAPITAL OPERATING YEAR ENDED JUNE 30 LEASES LEASES - ------------------ ------- --------- 2005........................................................ $103 $1,524 2006........................................................ 2 778 2007........................................................ -- 568 2008........................................................ -- 456 2009........................................................ -- 167 Thereafter.................................................. -- 72 ---- ------ Total minimum lease payments................................ $105 $3,565 ====== Amounts representing interest............................... 2 ---- Present value of minimum lease payments..................... $103 ====
Equipment under capitalized leases included in the consolidated balance sheet at June 30, 2004 was $1,027, net of accumulated depreciation of $440. Operating lease commitments include $1,125 with a related party controlled by shareholders of the Company, as described in Related Party Transactions. Rent expense under operating leases for 2004, 2003 and 2002 was $2,441, $2,221 and $2,015, respectively. LITIGATION: On or about April 17, 1997, CP Chemicals, Inc. (a subsidiary, "CP") and the Company were served with a complaint filed by Chevron U.S.A. Inc. ("Chevron") in the United States District Court for the District of New Jersey, alleging that the operations of CP at its Sewaren plant affected adjoining property owned by Chevron and alleging that the Company, as the parent of CP, is also responsible to Chevron. In July 2002, a phased settlement agreement was reached and a Consent Order entered by the Court. That settlement is in the process of being implemented. The Company's and CP's portion of the settlement for past costs and expenses through the entry of the Consent Order was $495 and was included in selling, general and administrative expenses in fiscal 2002 and was paid in fiscal 2003. The Consent Order then provides for a period of due diligence investigation of the property owned by Chevron. The investigation has been conducted and the results are under review. The investigation costs are being split with one other defendant, Vulcan Materials Company. Upon completion of the review of the results of the investigation, a decision will be made whether to opt out of the settlement or proceed. If no party opts out of the settlement, the Company and CP will take title to the adjoining Chevron property, probably through the use of a three-member New Jersey limited liability company. In preparation to move forward, a limited liability company has been formed, with Vulcan Materials Company as the third member. The Company also has commenced negotiations with Chevron regarding its allocation of responsibility and associated costs under the Consent Order. While the costs cannot be estimated with any degree of certainty at this time, the Company believes that insurance recoveries will be available to offset some of those costs. The Company's Phibro-Tech subsidiary was named in 1993 as a potentially responsible party ("PRP") in connection with an action commenced under the Federal Comprehensive Environmental Response, Compen- F-31 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) sation, and Liability Act ("CERCLA") by the United States Environmental Protection Agency ("the EPA"), involving a former third-party fertilizer manufacturing site in Jericho, South Carolina. An agreement has been reached under which such subsidiary agreed to contribute up to $900 of which $635 has been paid as of June 30, 2004. Some recovery from insurance and other sources is expected but has not been recorded. The Company also has accrued its best estimate of any future costs. Phibro-Tech, Inc. has resolved certain alleged technical permit violations with the California Department of Toxic Substances Control and has reached an agreement to pay $425 over a six year period ending October 2008. In February 2000, the EPA notified numerous parties of potential liability for waste disposal at a licensed Casmalia, California disposal site, including a business, assets of which were originally acquired by a subsidiary in 1984. A settlement has been reached in this matter and the Company has paid $171 in full settlement. On or about April 5, 2002, the Company was served, as a potentially responsible party, with an information request from the EPA relating to a third-party superfund site in Rhode Island. The Company is investigating the matter, which relates to events in the 1950's and 1960's, but management does not believe that the Company has any liability in this matter. On or about August 13, 2004 the Company was served with a Request for Information pursuant to Section 104 of CERCLA and Section 3007 of RCRA relating to possible discharges into Turkey Creek in Sumter, South Carolina. The Company is preparing its response to the Request for Information and believes that, because its Sumter, South Carolina facility is distant from Turkey Creek and does not discharge into Turkey Creek, there is a low probability of liability associated with this matter. The Company and its subsidiaries are party to a number of claims and lawsuits arising out of the normal course of business including product liabilities and governmental regulation. Certain of these actions seek damages in various amounts. In most cases, such claims are covered by insurance. The Company believes that none of the claims or pending lawsuits, either individually or in the aggregate, will have a material adverse effect on its financial position. ENVIRONMENTAL REMEDIATION: The Company's operations, properties and subsidiaries are subject to a wide variety of complex and stringent federal, state, local and foreign environmental laws and regulations, including those governing the use, storage, handling, generation, treatment, emission, release, discharge and disposal of certain materials and wastes, the remediation of contaminated soil and groundwater, the manufacture, sale and use of pesticides and the health and safety of employees. As such, the nature of the Company's current and former operations and those of its subsidiaries exposes the Company and its subsidiaries to the risk of claims with respect to such matters. Under certain circumstances, the Company or any of its subsidiaries might be required to curtail operations until a particular problem is remedied. Known costs and expenses under environmental laws incidental to ongoing operations are generally included within operating results. Potential costs and expenses may also be incurred in connection with the repair or upgrade of facilities to meet existing or new requirements under environmental laws or to investigate or remediate potential or actual contamination and from time to time the Company establishes reserves for such contemplated investigation and remediation costs. In many instances, the ultimate costs under environmental laws and the time period during which such costs are likely to be incurred are difficult to predict. The Company's subsidiaries have, from time to time, implemented procedures at their facilities designed to respond to obligations to comply with environmental laws. The Company believes that its operations are currently in material compliance with such environmental laws, although at various sites its subsidiaries are F-32 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) engaged in continuing investigation, remediation and/or monitoring efforts to address contamination associated with their historic operations. The nature of the Company's and its subsidiaries' current and former operations exposes the Company and its subsidiaries to the risk of claims with respect to environmental matters and the Company cannot assure it will not incur material costs and liabilities in connection with such claims. Based upon its experience to date, the Company believes that the future cost of compliance with existing environmental laws, and liability for known environmental claims pursuant to such environmental laws, will not have a material adverse effect on the Company's financial position. Based upon information available, the Company estimates the cost of litigation proceedings described above and the cost of further investigation and remediation of identified soil and groundwater problems at operating sites, closed sites and third-party sites, and closure costs for closed sites to be approximately $2,933, which is included in current and long-term liabilities in the June 30, 2004 consolidated balance sheet (approximately $2,652 at June 30, 2003). Environmental provisions were $1,511, $1,610 and $2,148 for 2004, 2003 and 2002, respectively, and were included in selling, general and administrative expenses in the consolidated statements of operations. 16. GUARANTEES As part of the Prince Transactions (Note 4), as is normal for such transactions, the Company has agreed to indemnify the Palladium Investors for losses arising out of breach of representations, warranties and covenants. The Company's maximum liability under such indemnifications is limited to $15,000. The Company agreed to indemnify the Palladium Investors for a portion, at the rate of $0.65 for every dollar, of the amount they receive in respect of the disposition of Buyer for less than $21,000, up to a maximum payment by the Company of $4,000 (the "Backstop Indemnification Amount"). The Backstop Indemnification Amount would be payable on the earlier to occur of July 1, 2008 or six months after the redemption date of all of the Company's Senior Secured Notes due 2007 if such a disposition closes prior to such redemption and six months after the closing of any such disposition if the disposition closes after any such redemption. The Company's obligations with respect to the Backstop Indemnification Amount will cease if the Palladium Investors do not close the disposition of Buyer by January 1, 2009. The maximum potential Backstop Indemnification Amount is included in other liabilities on the Company's consolidated balance sheet at June 30, 2004. The Company established a $1,000 letter of credit escrow for two years to collateralize its working capital adjustment and certain other indemnification obligations relating to the Prince Transactions. 17. FINANCIAL INSTRUMENTS Financial instruments that potentially subject the Company to credit risk consist principally of cash and cash equivalents and trade receivables. The Company places its cash and cash equivalents with high quality financial institutions in various countries. The Company sells to customers in a variety of industries, markets and countries. Concentrations of credit risk with respect to receivables arising from these sales are limited due to the large number of customers comprising the Company's customer base. Ongoing credit evaluations of customers' financial conditions are performed and, generally, no collateral is required. The Company maintains appropriate reserves for uncollectible receivables. The carrying amounts of cash and cash equivalents, trade receivables, trade payables and short-term debt is considered to be representative of their fair value because of their short maturities. The fair values of the Company's Senior Secured Notes and Senior Subordinated Notes are estimated based on quoted market prices. At June 30, 2004 the fair values of the Company's Senior Secured Notes and Senior Subordinated Notes were $114,450 and $43,706, respectively, and the related carrying amounts were $105,000 and $48,029, F-33 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) respectively. At June 30, 2003 the fair value of the Company's Senior Subordinated Notes was $40,000 and the related carrying amount was $100,000. The fair value of the Company's other long-term debt does not differ materially from its carrying amount based on the variable interest rate structure of these obligations. The Company obtains third-party letters of credit in connection with certain inventory purchases and insurance obligations. The contract values of the letters of credit at June 30, 2004 and 2003 were $9,263 and $2,593, respectively. The difference between the carrying values and fair values of these letters of credit was not material. The Company operates internationally, with manufacturing and sales facilities in various locations around the world and utilizes certain financial instruments to manage its foreign currency and commodity exposures, primarily related to forecasted transactions. To qualify a derivative as a hedge at inception and throughout the hedge period, the Company formally documents the nature and relationships between hedging instruments and hedged items, as well as its risk-management objectives, strategies for undertaking the various hedge transactions and method of assessing hedge effectiveness. Additionally, for hedges of forecasted transactions, the significant characteristics and expected terms of a forecasted transaction must be specifically identified, and it must be probable that each forecasted transaction would occur. If it were deemed probable that the forecasted transaction would not occur, the gain or loss would be recognized in operations currently. Financial instruments qualifying for hedge accounting must maintain a specified level of effectiveness between the hedging instrument and the item being hedged, both at inception and throughout the hedged period. The Company hedges forecasted transactions for periods not exceeding the next twelve months. The Company does not engage in trading or other speculative uses of financial instruments. From time to time, the Company uses forward contracts and options to mitigate its exposure to changes in foreign currency exchange rates and as a means of hedging forecasted operating costs. When using options as a hedging instrument, the Company excludes the time value from the assessment of effectiveness. Pursuant to SFAS No. 133, all cumulative changes in a foreign currency option's fair value are deferred as a component of accumulated other comprehensive income until the underlying hedged transactions are reported on the Company's consolidated statement of operations and comprehensive income. The Company also utilizes, on a limited basis, certain commodity derivatives, primarily on copper used in its manufacturing process, to hedge the cost of its anticipated production requirements. The Company's foreign currency options and forward contracts and commodity futures contracts were designated as cash flow hedges and qualified for hedge accounting treatment. The Company deferred $9 and $81 of cumulative gains (net of losses) on various copper futures contracts designated as cash flow hedges as of June 30, 2004 and 2003, respectively. The fair value of commodity contracts is estimated based on quotes from the market makers of these instruments and represents the estimated amounts that the Company would expect to receive or pay to terminate the agreements as of the reporting date. 18. BUSINESS SEGMENTS The Company's reportable segments are Animal Health and Nutrition, Industrial Chemicals, Distribution and All Other. Reportable segments have been determined primarily on the basis of the nature of products and services and certain similar operating units have been aggregated. The Company's Animal Health and Nutrition segment manufactures and markets more than 500 formulations and concentrations of medicated feed additives and nutritional feed additives including antibiotics, antibacterials, anticoccidials, anthelmintics, trace minerals, vitamins, vitamin premixes and other animal health and nutrition products. The Industrial Chemicals segment manufactures and markets a number of chemicals for use in the pressure-treated wood, chemical catalyst, semiconductor, automotive, and aerospace industries. The Distribution segment markets and distributes a variety of industrial, specialty and fine organic chemicals and intermediates produced primarily by third parties. The All Other segment manufactures and markets a variety of specialty F-34 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) custom chemicals and copper-based fungicides. Intersegment sales and transfers were not significant. The following segment data includes information only for continuing operations.
ANIMAL CORPORATE HEALTH & INDUSTRIAL EXPENSES & 2004 SEGMENT DETAIL NUTRITION CHEMICALS DISTRIBUTION ALL OTHER ADJUSTMENTS TOTAL - ------------------- --------- ---------- ------------ --------- ----------- -------- Net Sales.................... $265,421 $42,253 $30,861 $19,739 $ -- $358,274 Operating income/(loss)...... 33,307 2,899 2,900 2,301 (17,132) 24,275 Depreciation and amortization............... 8,263 2,123 11 419 2,367 13,183 Identifiable assets.......... 185,601 26,146 7,715 5,696 16,211 241,369 Capital expenditures......... 3,850 2,216 6 115 57 6,244
ANIMAL CORPORATE HEALTH & INDUSTRIAL EXPENSES & 2003 SEGMENT DETAIL NUTRITION CHEMICALS DISTRIBUTION ALL OTHER ADJUSTMENTS TOTAL - ------------------- --------- ---------- ------------ --------- ----------- -------- Net Sales.................... $250,706 $48,797 $30,072 $12,171 $ -- $341,746 Operating income/(loss)...... 38,472 (1,855) 3,207 620 (14,948) 25,496 Depreciation and amortization............... 7,690 2,904 12 364 1,554 12,524 Identifiable assets.......... 190,864 33,191 9,154 5,726 12,811 251,746 Capital expenditures......... 5,669 2,836 -- 129 2 8,636
ANIMAL CORPORATE HEALTH & INDUSTRIAL EXPENSES & 2002 SEGMENT DETAIL NUTRITION CHEMICALS DISTRIBUTION ALL OTHER ADJUSTMENTS TOTAL - ------------------- --------- ---------- ------------ --------- ----------- -------- Net Sales.................... $239,602 $50,854 $27,852 $10,368 $ -- $328,676 Operating income/(loss)...... 28,298 (7,324) 2,345 1,164 (13,854) 10,629 Depreciation and amortization............... 7,438 3,535 12 321 1,049 12,355 Identifiable assets.......... 186,118 38,985 8,059 8,097 10,393 251,652 Capital expenditures......... 5,915 2,328 12 144 119 8,518
19. GEOGRAPHIC INFORMATION The following is information about the Company's geographic operations. Information is attributed to the geographic areas based on the location of the Company's subsidiaries.
2004 2003 2002 -------- -------- -------- NET SALES: United States...................................... $248,577 $233,942 $219,981 Europe............................................. 18,605 16,643 12,004 Israel............................................. 43,170 44,383 45,266 Latin America...................................... 26,800 25,235 28,970 Asia/Pacific....................................... 21,122 21,543 22,455 -------- -------- -------- Total.............................................. $358,274 $341,746 $328,676 ======== ======== ========
F-35 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2004 2003 2002 -------- -------- -------- PROPERTY, PLANT AND EQUIPMENT, NET: United States...................................... $ 13,836 $ 16,719 $ 19,370 Europe............................................. 20,732 20,463 17,451 Israel............................................. 9,157 10,990 12,647 Latin America...................................... 14,783 15,396 13,772 Asia/Pacific....................................... 278 337 258 -------- -------- -------- Total.............................................. $ 58,786 $ 63,905 $ 63,498 ======== ======== ========
20. CONSOLIDATING FINANCIAL STATEMENTS The units of Senior Secured Notes due 2007, consisting of US Senior Secured Notes issued by the Company (the "Parent Issuer") and Dutch Senior Secured Notes issued by Philipp Brothers Netherlands III B.V. (the "Dutch Issuer"), are guaranteed by certain subsidiaries. The Company and its U.S. subsidiaries ("U.S. Guarantor Subsidiaries"), excluding The Prince Manufacturing Company, Prince MFG, LLC and Mineral Resource Technologies, Inc. (until divested) (the "Unrestricted Subsidiaries", as defined in the indenture), fully and unconditionally guarantee all of the Senior Secured Notes on a joint and several basis. In addition, the Dutch Issuer's subsidiaries, presently consisting of Phibro Animal Health SA (the "Belgium Guarantor"), fully and unconditionally guarantee the Dutch Senior Secured Notes. The Dutch issuer and the Belgium Guarantor do not guarantee the US Senior Secured Notes. Other foreign subsidiaries ("Non-Guarantor Subsidiaries") do not presently guarantee the Senior Secured Notes. The U.S. Guarantor Subsidiaries include all domestic subsidiaries of the Company other than the Unrestricted Subsidiaries and include: CP Chemicals, Inc., Phibro-Tech, Inc., Prince Agriproducts, Inc, Phibrochem, Inc., Phibro Chemicals, Inc., Western Magnesium Corp., Phibro Animal Health Holdings, Inc., and Phibro Animal Health U.S., Inc. The Senior Subordinated Notes due 2008, issued by the Parent Issuer, are guaranteed by certain subsidiaries. The Company's U.S. subsidiaries, including the U.S. Guarantor Subsidiaries and the Unrestricted Subsidiaries, fully and unconditionally guarantee the Senior Subordinated Notes on a joint and several basis. The Dutch Issuer, Belgium Guarantor and Non-Guarantor Subsidiaries do not presently guarantee the Senior Subordinated Notes. The U.S. Guarantor Subsidiaries and Unrestricted Subsidiaries include all domestic subsidiaries of the Company including: CP Chemicals, Inc., Phibro-Tech, Inc., Prince Agriproducts, Inc., The Prince Manufacturing Company, Prince MFG, LLC, Mineral Resource Technologies, Inc. (until divested), Phibrochem, Inc., Phibro Chemicals, Inc., Western Magnesium Corp., Phibro Animal Health Holdings, Inc., and Phibro Animal Health U.S., Inc. The following consolidating financial data summarizes the assets, liabilities and results of operations and cash flows of the Parent Issuer, Unrestricted Subsidiaries, U.S. Guarantor Subsidiaries, Dutch Issuer, Belgium Guarantor and Non-Guarantor Subsidiaries. The Unrestricted Subsidiaries, U.S. Guarantor Subsidiaries, Dutch Issuer, Belgium Guarantor and Non-Guarantor Subsidiaries are directly or indirectly wholly owned as to voting stock by the Company. Investments in subsidiaries are accounted for by the Parent Issuer using the equity method. Income tax expense (benefit) is allocated among the consolidating entities based upon taxable income (loss) by jurisdiction within each group. The principal consolidation adjustments are to eliminate investments in subsidiaries and intercompany balances and transactions. F-36 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 2004 ------------------------------------------------------------------------------ PARENT UNRESTRICTED U.S. GUARANTOR DUTCH BELGIUM NON-GUARANTOR ISSUER SUBSIDIARIES SUBSIDIARIES ISSUER GUARANTOR SUBSIDIARIES -------- ------------ -------------- ------- --------- ------------- (IN THOUSANDS) ASSETS Current Assets: Cash and cash equivalents............ $ 136 $ -- $ 801 $ 17 $ 212 $ 4,402 Trade receivables........ 2,670 -- 26,996 -- 2,592 25,400 Other receivables........ 317 414 1,195 -- 72 768 Inventory................ 1,994 -- 37,890 -- 23,159 16,867 Prepaid expenses and other.................. 3,195 110 565 -- 1,018 3,800 -------- ------- -------- ------- ------- -------- Total current assets... 8,312 524 67,447 17 27,053 51,237 -------- ------- -------- ------- ------- -------- Property, plant & equipment, net........... 105 -- 13,730 -- 17,321 27,630 Intangibles................ -- -- 4,252 -- 1,569 5,874 Investment in subsidiaries............. 125,355 -- 3,619 1,604 -- -- Intercompany............... (14,995) 20,995 60,030 20,181 1,630 (12,497) Other assets............... 14,506 -- 1,056 -- -- 736 -------- ------- -------- ------- ------- -------- $133,283 $21,519 $150,134 $21,802 $47,573 $ 72,980 ======== ======= ======== ======= ======= ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities: Cash overdraft........... $ -- $ 10 $ 881 $ -- $ -- $ -- Loan payable to banks.... 10,996 -- -- -- -- -- Current portion of long-term debt......... -- -- 101 -- -- 1,250 Accounts payable......... 4,734 9 28,434 -- 2,258 11,537 Accrued expenses and other.................. 11,857 159 8,306 216 12,022 7,450 -------- ------- -------- ------- ------- -------- Total current liabilities.......... 27,587 178 37,722 216 14,280 20,237 -------- ------- -------- ------- ------- -------- Long-term debt............. 133,029 -- 2 20,000 -- 4,987 Intercompany debt.......... -- -- -- -- 30,553 44,791 Other liabilities.......... 11,822 -- 4,897 -- 1,136 4,431 -------- ------- -------- ------- ------- -------- Total liabilities...... 172,438 178 42,621 20,216 45,969 74,446 -------- ------- -------- ------- ------- -------- Redeemable Securities: Series C preferred stock.................. 24,678 -- -- -- -- -- -------- ------- -------- ------- ------- -------- Stockholders' Equity (Deficit): Series A preferred stock.................. 521 -- -- -- -- -- Common stock............. 2 1 31 -- -- -- Paid-in capital.......... 860 -- 112,004 21 52 1,537 Retained earnings (accumulated deficit)............... (57,964) 21,340 (4,339) (2,744) (2,757) 8,374 Accumulated other comprehensive income (loss): Gain on derivative instruments.......... 9 -- 9 -- -- -- Cumulative currency translation adjustment........... (7,261) -- (192) 4,309 4,309 (11,377) -------- ------- -------- ------- ------- -------- Total stockholders' equity (deficit)..... (63,833) 21,341 107,513 1,586 1,604 (1,466) -------- ------- -------- ------- ------- -------- $133,283 $21,519 $150,134 $21,802 $47,573 $ 72,980 ======== ======= ======== ======= ======= ======== AS OF JUNE 30, 2004 ---------------------------- CONSOLIDATION CONSOLIDATED ADJUSTMENTS BALANCE ------------- ------------ (IN THOUSANDS) ASSETS Current Assets: Cash and cash equivalents............ $ -- $ 5,568 Trade receivables........ -- 57,658 Other receivables........ -- 2,766 Inventory................ 79,910 Prepaid expenses and other.................. -- 8,688 --------- -------- Total current assets... -- 154,590 --------- -------- Property, plant & equipment, net........... -- 58,786 Intangibles................ -- 11,695 Investment in subsidiaries............. (130,578) -- Intercompany............... (75,344) -- Other assets............... -- 16,298 --------- -------- $(205,922) $241,369 ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities: Cash overdraft........... $ -- $ 891 Loan payable to banks.... -- 10,996 Current portion of long-term debt......... -- 1,351 Accounts payable......... -- 46,972 Accrued expenses and other.................. 40,010 --------- -------- Total current liabilities.......... -- 100,220 --------- -------- Long-term debt............. -- 158,018 Intercompany debt.......... (75,344) -- Other liabilities.......... -- 22,286 --------- -------- Total liabilities...... (75,344) 280,524 --------- -------- Redeemable Securities: Series C preferred stock.................. -- 24,678 --------- -------- Stockholders' Equity (Deficit): Series A preferred stock.................. -- 521 Common stock............. (32) 2 Paid-in capital.......... (113,614) 860 Retained earnings (accumulated deficit)............... (19,874) (57,964) Accumulated other comprehensive income (loss): -- Gain on derivative instruments.......... (9) 9 Cumulative currency translation adjustment........... 2,951 (7,261) --------- -------- Total stockholders' equity (deficit)..... (130,578) (63,833) --------- -------- $(205,922) $241,369 ========= ========
F-37 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 2004 ------------------------------------------------------------------------------------------------------------- PARENT UNRESTRICTED U.S. GUARANTOR DUTCH BELGIUM NON-GUARANTOR CONSOLIDATION CONSOLIDATED ISSUER SUBSIDIARIES SUBSIDIARIES ISSUER GUARANTOR SUBSIDIARIES ADJUSTMENTS BALANCE -------- ------------ -------------- ------- --------- ------------- ------------- ------------ (IN THOUSANDS) Net sales............ $ 21,868 $11,118 $215,591 $ -- $ 5,742 $103,955 $ -- $358,274 Net sales -- intercompany....... 150 2,598 468 -- 28,970 4,375 (36,561) -- Cost of goods sold... 17,318 10,139 160,136 -- 25,293 91,546 (36,561) 267,871 -------- ------- -------- ------- ------- -------- -------- -------- Gross profit....... 4,700 3,577 55,923 -- 9,419 16,784 -- 90,403 Selling, general and administrative expenses........... 20,238 1,299 25,317 4 2,676 16,594 -- 66,128 Costs of non-completed transaction........ 5,261 -- -- -- -- -- -- 5,261 -------- ------- -------- ------- ------- -------- -------- -------- Operating income (loss)........... (20,799) 2,278 30,606 (4) 6,743 190 -- 19,014 Other: Interest expense... 16,208 18 -- 1,806 95 491 -- 18,618 Interest (income)......... (4) -- -- -- -- (126) -- (130) Other (income) expense, net..... 578 -- (605) -- (265) (489) -- (781) Net (gain) on extinguishment of debt............. (23,226) -- -- -- -- -- -- (23,226) Intercompany interest and other............ (26,755) 1,892 16,392 (1,823) 3,335 6,959 -- -- (Profit) loss relating to subsidiaries..... (5,349) -- -- (2,124) -- -- 7,473 -- -------- ------- -------- ------- ------- -------- -------- -------- Income (loss) from continuing operations before income taxes..... 17,749 368 14,819 2,137 3,578 (6,645) (7,473) 24,533 Provision for income taxes.............. 1,185 221 1,294 -- 1,454 3,815 -- 7,969 -------- ------- -------- ------- ------- -------- -------- -------- Income (loss) from continuing operations....... 16,564 147 13,525 2,137 2,124 (10,460) (7,473) 16,564 Discontinued operations: Profit (loss) relating to discontinued operations....... (517) -- -- -- -- -- 517 -- (Loss) from discontinued operations (net of income taxes)........... -- (124) -- -- -- (1,501) -- (1,625) Gain (loss) from disposal of discontinued operations (net of income taxes)........... (3,197) -- (2,735) -- -- 3,843 -- (2,089) -------- ------- -------- ------- ------- -------- -------- -------- Net income (loss)........... $ 12,850 $ 23 $ 10,790 $ 2,137 $ 2,124 $ (8,118) $ (6,956) $ 12,850 ======== ======= ======== ======= ======= ======== ======== ========
F-38 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 2004 --------------------------------------------------------------- PARENT UNRESTRICTED U.S. GUARANTOR DUTCH BELGIUM ISSUER SUBSIDIARIES SUBSIDIARIES ISSUER GUARANTOR -------- ------------ -------------- -------- --------- (IN THOUSANDS) Operating Activities: Net income (loss)............... $ 12,850 $ 23 $10,790 $ 2,137 $2,124 Adjustment for discontinued operations.................... 3,714 124 2,735 -- -- -------- -------- ------- -------- ------ Income (loss) from continuing operations.................... 16,564 147 13,525 2,137 2,124 Adjustments to reconcile income (loss) from continuing operations to net cash provided (used) by operating activities: Depreciation and amortization................ 2,367 487 2,542 -- 2,669 Deferred income taxes......... 733 -- -- -- -- Net gain from sales of assets...................... -- -- (689) -- -- Net gain on extinguishment of debt........................ (23,226) -- -- -- -- Effects of changes in foreign currency.................... -- -- 84 -- (264) Other......................... 525 -- 395 -- -- Changes in operating assets and liabilities: Accounts receivable......... 79 336 (4,826) -- (945) Inventory................... 618 (543) 4,143 -- (8,762) Prepaid expenses and other..................... (268) 188 (479) -- 1,369 Other assets................ 1,997 -- (4,548) -- -- Intercompany................ (981) 17,331 (8,706) (22,336) 13,316 Accounts payable............ (370) (328) (2,368) -- (2,395) Accrued expenses and other..................... 2,803 (89) 5,089 216 2,742 Accrued costs of non- completed transaction..... 3,970 -- -- -- -- Cash provided (used) by discontinued operations....... (3,197) (652) (2,735) -- -- -------- -------- ------- -------- ------ Net cash provided (used) by operating activities........ 1,614 16,877 1,427 (19,983) 9,854 -------- -------- ------- -------- ------ Investing Activities: Capital expenditures............ (57) (62) (2,506) -- (1,613) Proceeds from sale of assets.... -- -- 1,057 -- -- Other investing................. (654) -- -- -- -- Discontinued operations......... 14,343 -- -- -- -- -------- -------- ------- -------- ------ Net cash provided (used) by investing activities........ 13,632 (62) (1,449) -- (1,613) -------- -------- ------- -------- ------ Financing Activities: Net (decrease) in cash overdraft..................... (350) (276) (160) -- -- Net (decrease) in short-term debt.......................... (26,882) -- -- -- -- Proceeds from long-term debt.... 85,000 -- -- 20,000 -- Payments of long-term debt...... (32,679) (13) (1,055) -- -- Payments of Pfizer obligations................... (20,075) -- -- -- (8,225) Transactions and transaction costs....................... (4,619) (16,645) (129) -- -- Debt refinancing costs.......... (15,548) -- -- -- -- Discontinued operations......... -- -- -- -- -- -------- -------- ------- -------- ------ Net cash provided (used) by financing activities........ (15,153) (16,934) (1,344) 20,000 (8,225) -------- -------- ------- -------- ------ Effect of exchange rate changes on cash......................... -- -- -- -- 11 -------- -------- ------- -------- ------ Net increase (decrease) in cash and cash equivalents............ 93 (119) (1,366) 17 27 Cash and cash equivalents at beginning of period............. 43 119 2,167 -- 185 -------- -------- ------- -------- ------ Cash and cash equivalents at end of period....................... $ 136 $ -- $ 801 $ 17 $ 212 ======== ======== ======= ======== ====== FOR THE YEAR ENDED JUNE 30, 2004 -------------------------------------------- NON-GUARANTOR CONSOLIDATION CONSOLIDATED SUBSIDIARIES ADJUSTMENTS BALANCE ------------- ------------- ------------ (IN THOUSANDS) Operating Activities: Net income (loss)............... $ (8,118) $(6,956) $ 12,850 Adjustment for discontinued operations.................... (2,342) (517) 3,714 -------- ------- -------- Income (loss) from continuing operations.................... (10,460) (7,473) 16,564 Adjustments to reconcile income (loss) from continuing operations to net cash provided (used) by operating activities: Depreciation and amortization................ 5,118 -- 13,183 Deferred income taxes......... (407) -- 326 Net gain from sales of assets...................... (3) -- (692) Net gain on extinguishment of debt........................ -- -- (23,226) Effects of changes in foreign currency.................... (368) -- (548) Other......................... 194 -- 1,114 Changes in operating assets and liabilities: -- Accounts receivable......... (1,866) -- (7,222) Inventory................... 8,204 -- 3,660 Prepaid expenses and other..................... (1,124) -- (314) Other assets................ (528) -- (3,079) Intercompany................ (6,097) 7,473 -- Accounts payable............ (189) -- (5,650) Accrued expenses and other..................... (3,796) -- 6,965 Accrued costs of non- completed transaction..... -- -- 3,970 Cash provided (used) by discontinued operations....... 4,395 -- (2,189) -------- ------- -------- Net cash provided (used) by operating activities........ (6,927) -- 2,862 -------- ------- -------- Investing Activities: Capital expenditures............ (2,006) -- (6,244) Proceeds from sale of assets.... 37 -- 1,094 Other investing................. (1) -- (655) Discontinued operations......... 532 -- 14,875 -------- ------- -------- Net cash provided (used) by investing activities........ (1,438) -- 9,070 -------- ------- -------- Financing Activities: Net (decrease) in cash overdraft..................... (9) -- (795) Net (decrease) in short-term debt.......................... (72) -- (26,954) Proceeds from long-term debt.... 4,661 -- 109,661 Payments of long-term debt...... (1,706) -- (35,453) Payments of Pfizer obligations................... -- -- (28,300) Transactions and transaction costs....................... -- -- (21,393) Debt refinancing costs.......... -- -- (15,548) Discontinued operations......... 1,005 -- 1,005 -------- ------- -------- Net cash provided (used) by financing activities........ 3,879 -- (17,777) -------- ------- -------- Effect of exchange rate changes on cash......................... 223 234 -------- ------- -------- Net increase (decrease) in cash and cash equivalents............ (4,263) -- (5,611) Cash and cash equivalents at beginning of period............. 8,665 11,179 -------- ------- -------- Cash and cash equivalents at end of period....................... $ 4,402 $ -- $ 5,568 ======== ======= ========
F-39 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 2003 -------------------------------------------------------------------------- U.S. NON- PARENT UNRESTRICTED GUARANTOR DUTCH BELGIUM GUARANTOR ISSUER SUBSIDIARIES SUBSIDIARIES ISSUER GUARANTOR SUBSIDIARIES -------- ------------ ------------ ------ --------- ------------ (IN THOUSANDS) ASSETS Current Assets: Cash and cash equivalents.... $ 43 $ 119 $ 2,167 $ -- $ 185 $ 8,665 Trade receivables............ 2,759 2,452 22,071 -- 1,542 23,890 Other receivables............ 957 3 733 -- 518 1,292 Inventory.................... 2,612 4,278 41,266 -- 13,460 26,233 Prepaid expenses and other... 3,267 458 981 -- 1,866 3,296 Current assets from discontinued operations.... -- 4,942 -- -- -- 4,334 -------- -------- -------- ------ ------- -------- Total Current Assets....... 9,638 12,252 67,218 -- 17,571 67,710 -------- -------- -------- ------ ------- -------- Property, plant & equipment, net.......................... 153 3,269 13,297 -- 17,049 30,137 Intangibles.................... -- -- -- -- 1,818 6,851 Investment in subsidiaries..... 103,574 -- 3,619 -- -- -- Intercompany................... 35,034 (19,431) 59,765 -- 6,731 (9,116) Other assets................... 11,516 710 1,122 -- -- 711 Other assets from discontinued operations................... -- 10,650 -- -- -- 2,675 -------- -------- -------- ------ ------- -------- $159,915 $ 7,450 $145,021 $ -- $43,169 $ 98,968 ======== ======== ======== ====== ======= ======== ) LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT ) Current Liabilities: Cash overdraft............... $ 350 $ 286 $ 1,041 $ -- $ -- $ 9 Loan payable to banks........ 37,878 -- -- -- -- -- Current portion of long-term debt....................... 21,599 66 381 -- -- 2,078 Accounts payable............. 3,304 2,350 25,926 -- 12,115 11,660 Accrued expenses and other... 7,943 1,151 9,931 -- 8,583 13,091 Current liabilities from discontinued operations.... -- 2,051 -- -- -- 3,506 -------- -------- -------- ------ ------- -------- Total Current Liabilities.............. 71,074 5,904 37,279 -- 20,698 30,344 -------- -------- -------- ------ ------- -------- Long-term debt................. 100,073 213 149 -- -- 1,828 Intercompany debt.............. -- -- -- -- 22,319 50,664 Other liabilities.............. 4,397 114 13,289 -- 1,256 2,185 Other liabilities from discontinued operations...... -- 198 -- -- -- 975 -------- -------- -------- ------ ------- -------- Total Liabilities.............. 175,544 6,429 50,717 -- 44,273 85,996 -------- -------- -------- ------ ------- -------- Redeemable Securities: Series B and C preferred stock...................... 68,881 -- -- -- -- -- -------- -------- -------- ------ ------- -------- Stockholders' Equity (Deficit): Series A preferred stock..... 521 -- -- -- -- -- Common stock................. 2 1 31 -- -- -- Paid-in capital.............. 860 -- 110,883 -- -- 5,179 Retained earnings (accumulated deficit)...... (79,489) 1,020 (16,499) -- (4,881) 17,862 Accumulated other comprehensive income (loss):.................... Gain on derivative instruments.............. 81 -- 81 -- -- -- Cumulative foreign currency translation adjustment... (6,485) -- (192) -- 3,777 (10,069) -------- -------- -------- ------ ------- -------- Total Stockholders' Equity (Deficit)....... (84,510) 1,021 94,304 -- (1,104) 12,972 -------- -------- -------- ------ ------- -------- $159,915 $ 7,450 $145,021 $ -- $43,169 $ 98,968 ======== ======== ======== ====== ======= ======== AS OF JUNE 30, 2003 ---------------------------- CONSOLIDATION CONSOLIDATED ADJUSTMENTS BALANCE ------------- ------------ (IN THOUSANDS) ASSETS Current Assets: Cash and cash equivalents.... $ 11,179 Trade receivables............ 52,714 Other receivables............ 3,503 Inventory.................... 87,849 Prepaid expenses and other... 9,868 Current assets from discontinued operations.... 9,276 --------- -------- Total Current Assets....... -- 174,389 --------- -------- Property, plant & equipment, net.......................... 63,905 Intangibles.................... 8,669 Investment in subsidiaries..... (107,193) -- Intercompany................... (72,983) -- Other assets................... 14,059 Other assets from discontinued operations................... 13,325 --------- -------- $(180,176) $274,347 ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT Current Liabilities: Cash overdraft............... $ 1,686 Loan payable to banks........ 37,878 Current portion of long-term debt....................... 24,124 Accounts payable............. 55,355 Accrued expenses and other... 40,699 Current liabilities from discontinued operations.... 5,557 --------- -------- Total Current Liabilities.............. -- 165,299 --------- -------- Long-term debt................. 102,263 Intercompany debt.............. (72,983) -- Other liabilities.............. 21,241 Other liabilities from discontinued operations...... 1,173 --------- -------- Total Liabilities.............. (72,983) 289,976 --------- -------- Redeemable Securities: Series B and C preferred stock...................... 68,881 --------- -------- Stockholders' Equity (Deficit): Series A preferred stock..... 521 Common stock................. (32) 2 Paid-in capital.............. (116,062) 860 Retained earnings (accumulated deficit)...... 2,498 (79,489) Accumulated other comprehensive income (loss):.................... Gain on derivative instruments.............. (81) 81 Cumulative foreign currency translation adjustment... 6,484 (6,485) --------- -------- Total Stockholders' Equity (Deficit)....... (107,193) (84,510) --------- -------- $(180,176) $274,347 ========= ========
F-40 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 2003 ----------------------------------------------------------- U.S. PARENT UNRESTRICTED GUARANTOR DUTCH BELGIUM ISSUER SUBSIDIARIES SUBSIDIARIES ISSUER GUARANTOR -------- ------------ ------------ ------ --------- (IN THOUSANDS) Net sales...................... $ 23,982 $22,332 $187,628 $ -- $ 6,625 Net sales -- intercompany...... 1,338 4,244 775 -- 26,994 Cost of goods sold............. 20,083 20,422 144,543 -- 31,435 -------- ------- -------- ------ ------- Gross profit................. 5,237 6,154 43,860 -- 2,184 Selling, general and administrative expenses...... 18,064 2,575 26,632 -- 1,868 -------- ------- -------- ------ ------- Operating income (loss)........ (12,827) 3,579 17,228 -- 316 Other: Interest expense............. 15,050 86 1 -- 62 Interest (income)............ (2) -- -- -- -- Other (income) expense, net........................ 3,283 -- (3,481) -- 1,283 Intercompany interest and other...................... (33,819) 4,952 18,997 -- 2,849 (Profit) loss relating to subsidiaries............... 4,036 -- -- -- -- -------- ------- -------- ------ ------- Income (loss) from continuing operations before income taxes...................... (1,375) (1,459) 1,711 -- (3,878) Provision for income taxes..... 924 52 570 -- 572 -------- ------- -------- ------ ------- Income (loss) from continuing operations................. (2,299) (1,511) 1,141 -- (4,450) Discontinued operations: Profit (loss) relating to discontinued operations.... 14,759 -- -- -- -- (Loss) from discontinued operations (net of income taxes)..................... -- (3,454) -- -- -- Gain (loss) from disposal of discontinued operations (net of income taxes)...... (30,019) -- -- -- -- -------- ------- -------- ------ ------- Net income (loss).......... $(17,559) $(4,965) $ 1,141 $ -- $(4,450) ======== ======= ======== ====== ======= FOR THE YEAR ENDED JUNE 30, 2003 ------------------------------------------- NON- GUARANTOR CONSOLIDATION CONSOLIDATED SUBSIDIARIES ADJUSTMENTS BALANCE ------------ ------------- ------------ (IN THOUSANDS) Net sales...................... $101,179 $ -- $341,746 Net sales -- intercompany...... 6,812 (40,163) -- Cost of goods sold............. 74,880 (40,163) 251,200 -------- -------- -------- Gross profit................. 33,111 -- 90,546 Selling, general and administrative expenses...... 15,911 65,050 -------- -------- -------- Operating income (loss)........ 17,200 -- 25,496 Other: Interest expense............. 1,082 16,281 Interest (income)............ (83) (85) Other (income) expense, net........................ 454 1,539 Intercompany interest and other...................... 7,021 -- (Profit) loss relating to subsidiaries............... -- (4,036) -- -------- -------- -------- Income (loss) from continuing operations before income taxes...................... 8,726 4,036 7,761 Provision for income taxes..... 7,942 10,060 -------- -------- -------- Income (loss) from continuing operations................. 784 4,036 (2,299) Discontinued operations: Profit (loss) relating to discontinued operations.... -- (14,759) -- (Loss) from discontinued operations (net of income taxes)..................... (11,123) (14,577) Gain (loss) from disposal of discontinued operations (net of income taxes)...... 29,336 (683) -------- -------- -------- Net income (loss).......... $ 18,997 $(10,723) $(17,559) ======== ======== ========
F-41 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 2003 ----------------------------------------------------------- U.S. PARENT UNRESTRICTED GUARANTOR DUTCH BELGIUM ISSUER SUBSIDIARIES SUBSIDIARIES ISSUER GUARANTOR -------- ------------ ------------ ------ --------- (IN THOUSANDS) Operating Activities: Net income (loss)............ $(17,559) $(4,965) $ 1,141 $ -- $(4,450) Adjustment for discontinued operations................. 15,260 3,454 -- -- -- -------- ------- -------- ------ ------- Income (loss) from continuing operations................. (2,299) (1,511) 1,141 -- (4,450) Adjustments to reconcile income (loss) from continuing operations to net cash provided (used) by operating activities: Depreciation and amortization............. 1,554 956 2,900 -- 2,019 Deferred income taxes...... -- -- -- -- -- Net gain from sales of assets................... -- -- (118) -- -- Effects of changes in foreign currency......... -- -- (399) -- 1,268 Other...................... 218 13 540 -- -- Changes in operating assets and liabilities: Accounts receivable...... 301 245 1,489 -- (322) Inventory................ 95 (61) (3,658) -- 2,270 Prepaid expenses and other.................. (702) (195) 558 -- (1,191) Other assets............. (3,171) -- 1,131 -- -- Intercompany............. 12,780 2,717 (12,285) -- 4,989 Accounts payable......... 2,280 714 12,542 -- 3,523 Accrued expenses and other.................. 1,415 95 2,326 -- (6,444) Cash provided (used) by discontinued operations.... -- (1,928) -- -- -- -------- ------- -------- ------ ------- Net cash provided (used) by operating activities..... 12,471 1,045 6,167 -- 1,662 -------- ------- -------- ------ ------- Investing Activities: Capital expenditures......... (2) (350) (2,573) -- (2,149) Proceeds from sale of assets..................... -- -- 2,530 -- -- Other investing.............. -- -- -- -- -- Discontinued operations...... -- (493) -- -- -- -------- ------- -------- ------ ------- Net cash provided (used) by Investing Activities..... (2) (843) (43) -- (2,149) -------- ------- -------- ------ ------- Financing Activities: Net (decrease) in cash overdraft.................. (226) (24) (4,151) -- -- Net (decrease) in short-term debt....................... (5,844) -- -- -- -- Proceeds from long-term debt....................... -- -- -- -- -- Payments of long-term debt... (6,813) (111) (415) -- -- Discontinued operations...... -- -- -- -- -- -------- ------- -------- ------ ------- Net cash provided (used) by financing activities..... (12,883) (135) (4,566) -- -- -------- ------- -------- ------ ------- Effect of exchange rate changes on cash...................... -- -- 9 -- 54 -------- ------- -------- ------ ------- Net increase (decrease) in cash and cash equivalents......... (414) 67 1,567 -- (433) Cash and cash equivalents at beginning of period.......... 457 52 600 -- 618 -------- ------- -------- ------ ------- Cash and cash equivalents at end of period................ $ 43 $ 119 $ 2,167 $ -- $ 185 ======== ======= ======== ====== ======= FOR THE YEAR ENDED JUNE 30, 2003 ------------------------------------------- NON- GUARANTOR CONSOLIDATION CONSOLIDATED SUBSIDIARIES ADJUSTMENTS BALANCE ------------ ------------- ------------ (IN THOUSANDS) Operating Activities: Net income (loss)............ $ 18,997 $(10,723) $(17,559) Adjustment for discontinued operations................. (18,213) 14,759 15,260 -------- -------- -------- Income (loss) from continuing operations................. 784 4,036 (2,299) Adjustments to reconcile income (loss) from continuing operations to net cash provided (used) by operating activities: Depreciation and amortization............. 5,095 12,524 Deferred income taxes...... 6,460 6,460 Net gain from sales of assets................... (9) (127) Effects of changes in foreign currency......... (479) 390 Other...................... (384) 387 Changes in operating assets and liabilities: Accounts receivable...... 2,097 3,810 Inventory................ (244) (1,598) Prepaid expenses and other.................. (1,592) (3,122) Other assets............. (592) (2,632) Intercompany............. (4,165) (4,036) -- Accounts payable......... 1,444 20,503 Accrued expenses and other.................. 2,253 (355) Cash provided (used) by discontinued operations.... 2,644 716 -------- -------- -------- Net cash provided (used) by operating activities..... 13,312 -- 34,657 -------- -------- -------- Investing Activities: Capital expenditures......... (3,562) (8,636) Proceeds from sale of assets..................... 35 2,565 Other investing.............. 737 737 Discontinued operations...... 1,856 1,363 -------- -------- -------- Net cash provided (used) by Investing Activities..... (934) -- (3,971) -------- -------- -------- Financing Activities: Net (decrease) in cash overdraft.................. (1,680) (6,081) Net (decrease) in short-term debt....................... (816) (6,660) Proceeds from long-term debt....................... 2,000 2,000 Payments of long-term debt... (8,675) (16,014) Discontinued operations...... 377 377 -------- -------- -------- Net cash provided (used) by financing activities..... (8,794) -- (26,378) -------- -------- -------- Effect of exchange rate changes on cash...................... 389 452 -------- -------- -------- Net increase (decrease) in cash and cash equivalents......... 3,973 -- 4,760 Cash and cash equivalents at beginning of period.......... 4,692 6,419 -------- -------- -------- Cash and cash equivalents at end of period................ $ 8,665 $ -- $ 11,179 ======== ======== ========
F-42 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 2002 ---------------------------------------------------------------- U.S. UNRESTRICTED GUARANTOR DUTCH BELGIUM PARENT ISSUER SUBSIDIARIES SUBSIDIARIES ISSUER GUARANTOR ------------- ------------ ------------ ------ --------- (IN THOUSANDS) Net sales.................... $ 24,578 $21,451 $173,952 $ -- $ 4,196 Net sales -- intercompany.... 1,114 4,212 924 -- 21,509 Cost of goods sold........... 20,837 19,400 135,378 -- 21,631 -------- ------- -------- ------ ------- Gross profit............... 4,855 6,263 39,498 -- 4,074 Selling, general and administrative expenses.... 16,786 2,623 32,959 -- 1,559 -------- ------- -------- ------ ------- Operating income (loss).... (11,931) 3,640 6,539 -- 2,515 Other: Interest expense........... 15,858 (29) (172) -- 365 Interest (income).......... (15) -- -- -- -- Other (income) expense, net...................... (2,001) -- (839) -- 2,294 Intercompany interest and other.................... (28,534) 5,210 12,467 -- 2,486 (Profit) loss relating to subsidiaries............. 17,913 -- -- -- -- -------- ------- -------- ------ ------- Income (loss) from continuing operations before income taxes...... (15,152) (1,541) (4,917) -- (2,630) Provision (benefit) for income taxes............... 10,059 (407) 4,636 -- (626) -------- ------- -------- ------ ------- Income (Loss) from continuing operations.... (25,211) (1,134) (9,553) -- (2,004) Discontinued Operations: Profit (loss) relating to discontinued operations............... (26,559) -- -- -- -- (Loss) from discontinued operations (net of income taxes)................... -- (2,930) -- -- -- -------- ------- -------- ------ ------- Net income (loss)........ $(51,770) $(4,064) $ (9,553) $ -- $(2,004) ======== ======= ======== ====== ======= FOR THE YEAR ENDED JUNE 30, 2002 ------------------------------------------- NON- GUARANTOR CONSOLIDATION CONSOLIDATED SUBSIDIARIES ADJUSTMENTS BALANCE ------------ ------------- ------------ (IN THOUSANDS) Net sales.................... $104,499 $ -- $328,676 Net sales -- intercompany.... 9,607 (37,366) -- Cost of goods sold........... 87,531 (37,366) 247,411 -------- -------- -------- Gross profit............... 26,575 -- 81,265 Selling, general and administrative expenses.... 16,709 70,636 -------- -------- -------- Operating income (loss).... 9,866 -- 10,629 Other: Interest expense........... 2,048 18,070 Interest (income).......... (331) (346) Other (income) expense, net...................... 3,895 3,349 Intercompany interest and other.................... 8,371 -- (Profit) loss relating to subsidiaries............. -- (17,913) -- -------- -------- -------- Income (loss) from continuing operations before income taxes...... (4,117) 17,913 (10,444) Provision (benefit) for income taxes............... 1,105 14,767 -------- -------- -------- Income (Loss) from continuing operations.... (5,222) 17,913 (25,211) Discontinued Operations: Profit (loss) relating to discontinued operations............... -- 26,559 -- (Loss) from discontinued operations (net of income taxes)................... (23,629) (26,559) -------- -------- -------- Net income (loss)........ $(28,851) $ 44,472 $(51,770) ======== ======== ========
F-43 PHIBRO ANIMAL HEALTH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 2002 ----------------------------------------------------------- U.S. PARENT UNRESTRICTED GUARANTOR DUTCH BELGIUM ISSUER SUBSIDIARIES SUBSIDIARIES ISSUER GUARANTOR -------- ------------ ------------ ------ --------- (IN THOUSANDS) Operating Activities: Net income (loss).................... $(51,770) $(4,064) $(9,553) $ -- $ (2,004) Adjustment for discontinued operations......................... 26,559 2,930 -- -- -- -------- ------- ------- ----- -------- Income (loss) from continuing operations......................... (25,211) (1,134) (9,553) -- (2,004) Adjustments to reconcile income (loss) from continuing operations to net cash provided (used) by operating activities: Depreciation and amortization...... 1,049 966 3,434 -- 2,252 Deferred income taxes.............. 9,297 (466) 5,356 -- -- Net gain from sales of assets...... -- -- -- -- -- Change in redemption amount of redeemable common stock.......... (378) -- -- -- -- Effects of changes in foreign currency......................... -- -- (100) -- 1,912 Other.............................. (43) 12 985 -- -- Changes in operating assets and liabilities: Accounts receivable.............. 1,299 278 1,932 -- 886 Inventory........................ 606 1,165 (2,915) -- (10,325) Prepaid expenses and other....... 210 (157) (1,550) -- 273 Other assets..................... (1,335) 1 2,519 -- 66 Intercompany..................... 473 4,753 2,164 -- 7,562 Accounts payable................. (719) (844) 1,460 -- 1,472 Accrued expenses and other....... (119) (225) (3,248) -- 3,487 Cash provided (used) by discontinued operations......................... -- (2,437) -- -- -- -------- ------- ------- ----- -------- Net cash provided (used) by operating activities............. (14,871) 1,912 484 -- 5,581 -------- ------- ------- ----- -------- Investing Activities: Capital expenditures................. (119) (192) (3,022) -- (1,939) Acquisition of a business............ -- -- -- -- (4,421) Proceeds from property damage claim.............................. -- -- 411 -- -- Proceeds from sale of assets......... -- -- -- -- -- Other investing...................... 613 -- -- -- -- Discontinued operations.............. -- (1,832) -- -- -- -------- ------- ------- ----- -------- Net cash provided (used) by investing activities............. 494 (2,024) (2,611) -- (6,360) -------- ------- ------- ----- -------- Financing Activities: Net increase (decrease) in cash overdraft.......................... 563 (116) 1,447 -- -- Net increase in short-term debt...... 13,520 -- -- -- -- Proceeds from long-term debt......... 2,000 322 -- -- -- Payments of long-term debt........... (2,541) (98) (396) -- -- Discontinued operations.............. -- -- -- -- -- -------- ------- ------- ----- -------- Net cash provided (used) by financing activities............. 13,542 108 1,051 -- -- -------- ------- ------- ----- -------- Effect of exchange rate changes on cash................................. -- -- -- -- 128 -------- ------- ------- ----- -------- Net increase (decrease) in cash and cash equivalents..................... (835) (4) (1,076) -- (651) Cash and cash equivalents at beginning of period............................ 1,292 56 1,676 -- 1,269 -------- ------- ------- ----- -------- Cash and cash equivalents at end of period............................... $ 457 $ 52 $ 600 $ -- $ 618 ======== ======= ======= ===== ======== FOR THE YEAR ENDED JUNE 30, 2002 ------------------------------------------- NON- GUARANTOR CONSOLIDATION CONSOLIDATED SUBSIDIARIES ADJUSTMENTS BALANCE ------------ ------------- ------------ (IN THOUSANDS) Operating Activities: Net income (loss).................... $(28,851) $ 44,472 $(51,770) Adjustment for discontinued operations......................... 23,629 (26,559) 26,559 -------- -------- -------- Income (loss) from continuing operations......................... (5,222) 17,913 (25,211) Adjustments to reconcile income (loss) from continuing operations to net cash provided (used) by operating activities: Depreciation and amortization...... 4,654 12,355 Deferred income taxes.............. (2,949) 11,238 Net gain from sales of assets...... (5) (5) Change in redemption amount of redeemable common stock.......... -- (378) Effects of changes in foreign currency......................... 308 2,120 Other.............................. 1,462 2,416 Changes in operating assets and liabilities: Accounts receivable.............. 1,651 6,046 Inventory........................ (2,522) (13,991) Prepaid expenses and other....... (1,595) (2,819) Other assets..................... 1,416 2,667 Intercompany..................... 2,961 (17,913) -- Accounts payable................. (7,975) (6,606) Accrued expenses and other....... 8,616 8,511 Cash provided (used) by discontinued operations......................... 1,349 (1,088) -------- -------- -------- Net cash provided (used) by operating activities............. 2,149 -- (4,745) -------- -------- -------- Investing Activities: Capital expenditures................. (3,246) (8,518) Acquisition of a business............ (2,761) (7,182) Proceeds from property damage claim.............................. -- 411 Proceeds from sale of assets......... 19 19 Other investing...................... (33) 580 Discontinued operations.............. (839) (2,671) -------- -------- -------- Net cash provided (used) by investing activities............. (6,860) -- (17,361) -------- -------- -------- Financing Activities: Net increase (decrease) in cash overdraft.......................... 1,544 3,438 Net increase in short-term debt...... 717 14,237 Proceeds from long-term debt......... -- 2,322 Payments of long-term debt........... (1,695) (4,730) Discontinued operations.............. (1,590) (1,590) -------- -------- -------- Net cash provided (used) by financing activities............. (1,024) -- 13,677 -------- -------- -------- Effect of exchange rate changes on cash................................. (125) 3 -------- -------- -------- Net increase (decrease) in cash and cash equivalents..................... (5,860) -- (8,426) Cash and cash equivalents at beginning of period............................ 10,552 14,845 -------- -------- -------- Cash and cash equivalents at end of period............................... $ 4,692 $ -- $ 6,419 ======== ======== ========
F-44 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
AS OF ------------------------ SEPTEMBER 30, JUNE 30, 2004 2004 ------------- -------- (IN THOUSANDS) ASSETS Current Assets: Cash and cash equivalents................................. $ 5,778 $ 5,568 Trade receivables, less allowance for doubtful accounts of $1,344 at September 30, 2004 and $1,358 at June 30, 2004................................................... 52,721 57,658 Other receivables......................................... 3,440 2,766 Inventories............................................... 87,122 79,910 Prepaid expenses and other current assets................. 7,707 8,688 -------- -------- Total current assets................................... 156,768 154,590 Property, plant and equipment, net.......................... 59,818 58,786 Intangibles................................................. 11,354 11,695 Other assets................................................ 15,611 16,298 -------- -------- $243,551 $241,369 ======== ======== LIABILITIES AND STOCKHOLDERS' DEFICIT Current Liabilities: Cash overdraft.............................................. $ 654 $ 891 Loans payable to banks...................................... 11,268 10,996 Current portion of long-term debt........................... 953 1,351 Accounts payable............................................ 38,892 46,972 Accrued expenses and other current liabilities.............. 47,331 40,010 -------- -------- Total current liabilities.............................. 99,098 100,220 Long-term debt.............................................. 157,992 158,018 Other liabilities........................................... 22,676 22,286 -------- -------- Total liabilities...................................... 279,766 280,524 -------- -------- Commitments and Contingencies Redeemable securities: Series C preferred stock.................................. 25,359 24,678 -------- -------- Stockholders' Deficit: Series A preferred stock.................................. 521 521 Common stock.............................................. 2 2 Paid-in capital........................................... 860 860 Accumulated deficit....................................... (58,787) (57,964) Accumulated other comprehensive income (loss): Gain on derivative instruments......................... 84 9 Cumulative currency translation adjustment............. (4,254) (7,261) -------- -------- Total stockholders' deficit............................ (61,574) (63,833) -------- -------- $243,551 $241,369 ======== ========
See notes to unaudited condensed consolidated financial statements. F-45 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, --------------------- 2004 2003 --------- --------- (IN THOUSANDS) Net sales................................................... $88,275 $84,950 Cost of goods sold.......................................... 65,653 63,790 ------- ------- Gross profit.............................................. 22,622 21,160 Selling, general and administrative expenses................ 16,594 15,785 ------- ------- Operating income.......................................... 6,028 5,375 Other: Interest expense.......................................... 5,246 3,933 Interest (income)......................................... (25) (242) Other (income) expense, net............................... 24 (585) ------- ------- Net (gain) on extinguishment of debt...................... -- -- Income from continuing operations before income taxes..... 783 2,269 Provision for income taxes.................................. 924 783 ------- ------- Income (loss) from continuing operations.................. (141) 1,486 DISCONTINUED OPERATIONS: (Loss) from discontinued operations (net of income taxes)................................................. -- (462) Gain on disposal of discontinued operations (net of income taxes)................................................. -- 231 ------- ------- Net income (loss)......................................... (141) 1,255 Other comprehensive income (loss): Change in derivative instruments, net of tax.............. 75 317 Change in currency translation adjustment................. 3,007 (859) ------- ------- Comprehensive income...................................... $ 2,941 $ 713 ======= ======= Net income (loss)......................................... (141) 1,255 Dividends and equity value accreted on Series B and C redeemable preferred stock................................ (682) (987) ------- ------- Net income (loss) available to common shareholders........ $ (823) $ 268 ======= =======
See notes to unaudited condensed consolidated financial statements. F-46 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 ------------------------------------------------------------------------------------------- PREFERRED COMMON STOCK ACCUMULATED OTHER STOCK ----------------------- PAID-IN ACCUMULATED COMPREHENSIVE SERIES A CLASS A CLASS B CAPITAL DEFICIT INCOME (LOSS) TOTAL --------- ---------- ---------- ------- ------------ ----------------- -------- (IN THOUSANDS) Balance, June 30, 2004... $521 $1 $1 $860 $(57,964) $(7,252) $(63,833) Dividends on Series C redeemable preferred stock............... (668) (668) Equity value accreted on Series C redeemable preferred stock............... (14) (14) Change in derivative instruments, net of tax................. 75 75 Foreign currency translation adjustment.......... 3,007 3,007 Net (loss)............. (141) (141) ---- -- -- ---- -------- ------- -------- Balance, September 30, 2004................... $521 $1 $1 $860 $(58,787) $(4,170) $(61,574) ==== == == ==== ======== ======= ========
See notes to unaudited condensed consolidated financial statements. F-47 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, --------------------- 2004 2003 -------- -------- (IN THOUSANDS) Operating activities: Net income (loss)......................................... $ (141) $ 1,255 Adjustment for discontinued operations.................... -- 231 ------- ------- Income (loss) from continuing operations.................. (141) 1,486 Adjustments to reconcile income (loss) from continuing operations to net cash provided (used) by operating activities: Depreciation and amortization........................... 3,355 3,168 Deferred income taxes................................... 68 53 Effects of changes in foreign currency.................. (122) (1,364) Other................................................... 47 153 Changes in operating assets and liabilities: Accounts receivable................................... 4,689 832 Inventories........................................... (4,602) (4,126) Prepaid expenses and other current assets............. 1,077 7 Other assets.......................................... (1) (375) Accounts payable...................................... (8,580) (5,483) Accrued expenses and other liabilities................ 7,695 7,293 Accrued costs of non-completed transaction............ (1,100) -- Cash provided (used) by discontinued operations............. -- (376) ------- ------- Net cash provided (used) by operating activities.......... 2,385 1,268 ------- ------- Investing activities: Capital expenditures...................................... (1,748) (852) Proceeds from sale of assets.............................. 12 12 Discontinued operations................................... -- 14,049 ------- ------- Net cash provided (used) by investing activities........ (1,736) 13,209 ------- ------- Financing activities: Net increase (decrease) in cash overdraft................. (237) 731 Net increase (decrease) in short-term debt................ 272 (280) Proceeds from long-term debt.............................. 445 1,500 Payments of long-term debt................................ (872) (944) Discontinued operations................................... -- 86 ------- ------- Net cash provided (used) by financing activities........ (392) 1,093 ------- ------- Effect of exchange rate changes on cash..................... (47) 168 ------- ------- Net increase (decrease) in cash and cash equivalents........ 210 15,738 Cash and cash equivalents at beginning of period............ 5,568 11,179 ------- ------- Cash and cash equivalents at end of period.................. $ 5,778 $26,917 ======= =======
See notes to unaudited condensed consolidated financial statements. F-48 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS) 1. GENERAL PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION: In the opinion of Phibro Animal Health Corporation (the "Company" or "PAHC"), the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly its financial position as of September 30, 2004 and its results of operations and cash flows for the three months ended September 30, 2004 and 2003. The condensed consolidated balance sheet as of June 30, 2004 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. Additionally it should be noted the accompanying condensed consolidated financial statements and notes thereto have been prepared in accordance with accounting standards appropriate for interim financial statements. While the Company believes that the disclosures presented are adequate to make the information contained herein not misleading, it is suggested that these financial statements be read in conjunction the Company's audited consolidated financial statements as found in the Company's annual report filed on Form 10-K for the year ended June 30, 2004. The Company's Mineral Resource Technologies, Inc. ("MRT") and La Cornubia S.A. (France) ("La Cornubia") businesses have been classified as discontinued operations as discussed in Note 6. The Company's condensed consolidated financial statements have been reclassified to report separately the financial position, operating results and cash flows of the discontinued operations. These footnotes present information only for continuing operations, unless otherwise noted. The results of operations for the three months ended September 30, 2004 may not be indicative of results for the full year. NEW ACCOUNTING PRONOUNCEMENTS: The Company has reviewed the Statements of Financial Accounting Standards and the FASB Interpretations of the Financial Accounting Standards Board and has determined that no new statements or interpretations have been issued which would apply to the Company's financial statements or disclosures. 2. RISKS, UNCERTAINTIES, AND LIQUIDITY The Company's ability to fund its operating plan depends upon the continued availability of borrowing under its domestic senior credit facility. The Company believes that it will be able to comply with the terms of its covenants under the domestic senior credit facility based on its forecasted operating plan. In the event of adverse operating results and/or violation of covenants under this facility, there can be no assurance that the Company would be able to obtain waivers or amendments on favorable terms, if at all. The Company's fiscal 2005 operating plan projects adequate liquidity throughout the year, with periods of reduced availability around the dates of the semi-annual interest payments due December 1, 2004 and June 1, 2005 related to its senior secured and senior subordinated notes. The Company is pursuing additional cost reduction activities, working capital improvement plans, and sales of non-strategic assets to ensure additional liquidity. The Company also has availability under foreign credit lines that likely would be available. The Company also has undertaken a strategic review of its manufacturing capabilities, and is currently increasing inventory levels of certain products to enhance future supply flexibility and reduce costs. There can be no assurance the Company will be successful in any of the above-noted actions. The use of antibiotics in medicated feed additives is a subject of legislative and regulatory interest. The issue of potential for increased bacterial resistance to certain antibiotics used in certain food-producing animals is the subject of discussions on a worldwide basis and, in certain instances, has led to government F-49 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) restrictions on the use of antibiotics in food-producing animals. The sale of feed additives containing antibiotics is a material portion of the Company's business. Should regulatory or other developments result in further restrictions on the sale of such products, it could have a material adverse impact on the Company's financial position, results of operations and cash flows. The testing, manufacturing, and marketing of certain of the Company's products are subject to extensive regulation by numerous government authorities in the United States and other countries. The Company has significant assets located outside of the United States, and a significant portion of the Company's sales and earnings are attributable to operations conducted abroad. The Company has assets located in Israel and a portion of its sales and earnings are attributable to operations conducted in Israel. The Company is affected by social, political and economic conditions affecting Israel, and any major hostilities involving Israel as well as the Middle East or curtailment of trade between Israel and its current trading partners, either as a result of hostilities or otherwise, could have a material adverse effect on the Company. The Company's operations, properties and subsidiaries are subject to a wide variety of complex and stringent federal, state, local and foreign environmental laws and regulations, including those governing the use, storage, handling, generation, treatment, emission, release, discharge and disposal of certain materials and wastes, the remediation of contaminated soil and groundwater, the manufacture, sale and use of pesticides and the health and safety of employees. As such, the nature of the Company's current and former operations and those of its subsidiaries exposes the Company and its subsidiaries to the risk of claims with respect to such matters. 3. INVENTORIES Inventories are valued at the lower of cost or market. Cost is determined principally under the first-in, first-out (FIFO) and average methods. Obsolete and unsaleable inventories are reflected at estimated net realizable value. Inventory costs include materials, direct labor and manufacturing overhead. Inventories are comprised of:
AS OF ------------------------ SEPTEMBER 20, JUNE 30, 2004 2004 ------------- -------- Raw materials............................................... $16,651 $16,313 Work-in-process............................................. 1,329 1,764 Finished goods.............................................. 69,142 61,833 ------- ------- Total inventory............................................. $87,122 $79,910 ======= =======
4. INTANGIBLES Product intangible cost arising from the acquisition of the medicated feed additive business of Pfizer, Inc. and the acquisition of the rights to sell amprolium was $14,832 and $14,925 at September 30, 2004 and June 30, 2004, respectively, with related accumulated amortization of $3,478 and $3,230 at September 30, 2004 and June 30, 2004, respectively. Amortization expense was $371 and $304 for the three months ended September 30, 2004 and 2003 respectively. 5. PRINCE TRANSACTIONS Effective December 26, 2003, the Company completed the divestiture of substantially all of the business and assets of Prince Quincy, Inc. (f/k/a The Prince Manufacturing Company ("PMC")), to a company F-50 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) ("Buyer") formed by Palladium Equity Partners II, LP and certain of its affiliates (the "Palladium Investors"), and the related reduction of the Company's preferred stock held by the Palladium Investors (collectively, the "Prince Transactions"). The divestiture of PMC has not been reflected as a discontinued operation due to the existence of the Backstop Indemnification Amount and continuing supply and service agreements. PMC is included in the Company's Industrial Chemicals segment. The results of operations of PMC were:
THREE MONTHS ENDED SEPTEMBER 30, 2003 ------------------ Net sales................................................... $5,683 Operating income............................................ 1,213 Depreciation and amortization............................... 243
6. DISCONTINUED OPERATIONS The Company divested MRT and shutdown La Cornubia during fiscal 2004. These businesses have been classified as discontinued operations. Operating results and gain on sale of MRT were:
THREE MONTHS ENDED SEPTEMBER 30, 2003 ------------------ OPERATING RESULTS: Net sales................................................... $ 3,327 Cost of goods sold.......................................... 3,135 Selling, general and administrative expenses................ 316 -------- Loss before income taxes.................................... (124) Provision for income taxes.................................. -- -------- (Loss) from operations...................................... $ (124) ======== GAIN ON SALE: Current assets.............................................. $ (5,813) Property, plant & equipment -- net and other assets......... (10,703) Current liabilities......................................... 2,911 Net proceeds of sale........................................ 13,836 -------- Gain on sale................................................ $ 231 ========
F-51 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) Operating results of La Cornubia were:
THREE MONTHS ENDED SEPTEMBER 30, 2003 ------------------ OPERATING RESULTS: Net sales................................................... $2,220 Cost of goods sold.......................................... 2,216 Selling, general and administrative expenses................ 376 Other (income).............................................. (50) Interest expense............................................ 16 ------ Loss before income taxes.................................... (338) Provision for income taxes.................................. -- ------ Loss from operations........................................ $ (338) ====== Depreciation and amortization............................... $ 100 ======
7. DEBT LOANS PAYABLE TO BANKS At September 30, 2004, loans payable to banks included $11,268 under the domestic senior credit facility with Wells Fargo Foothill, Inc. The weighted average interest rate under the domestic senior credit facility during the three months ended September 30, 2004 was 4.5%. As of September 24, 2004, the Company amended its domestic senior credit facility to: (i) increase the aggregate amount of borrowings available under the working capital and letter of credit facilities from $27,500 to $32,500; the amount of aggregate borrowings available under the working capital facility remained unchanged at $17,500; (ii) amend the EBITDA definition to exclude charges and expenses related to unsuccessful acquisitions and related financings in an aggregate amount not to exceed $5,300 for the period beginning January 1, 2004 and ending June 30, 2004; (iii) amend the definition of Additional Indebtedness to exclude advances under the working capital facility; (iv) amend the definition of Permitted Investments to allow other investments made during the period from January 1, 2004 through June 30, 2004 in an aggregate amount not to exceed $336; and (v) establish covenant EBITDA levels for the periods after June 30, 2004. The amendment was effective June 30, 2004 for items (i), (ii) and (iii); effective January 1, 2004 for item (iv); and effective September 24, 2004 for item (v). As of September 30, 2004, the Company was in compliance with the financial covenants of its domestic senior credit facility. The domestic senior credit facility requires, among other things, the maintenance of certain levels of trailing consolidated and domestic EBITDA (earnings before interest, taxes, depreciation and amortization) calculated on a monthly basis, and an acceleration clause should an event of default (as defined in the agreement) occur. In addition, there are certain restrictions on additional borrowings, additional liens on the Company's assets, guarantees, dividend payments, redemption or purchase of the Company's stock, sale of subsidiaries' stock, disposition of assets, investments, and mergers and acquisitions. The domestic senior credit facility contains a lock-box requirement and a material adverse change clause should an event of default (as defined in the agreement) occur. Accordingly, the amounts outstanding have been classified as short-term and are included in loans payable to banks in the consolidated balance sheet. F-52 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) LONG-TERM DEBT
AS OF ------------------------ SEPTEMBER 30, JUNE 30, 2004 2004 ------------- -------- Senior secured notes due December 1, 2007................... $105,000 $105,000 Senior subordinated notes due June 1, 2008.................. 48,029 48,029 Foreign bank loans.......................................... 5,912 6,237 Capitalized lease obligations and other..................... 4 103 -------- -------- 158,945 159,369 Less: current maturities.................................... 953 1,351 -------- -------- $157,992 $158,018 ======== ========
8. EMPLOYEE BENEFIT PLANS The Company and its domestic subsidiaries maintain noncontributory defined benefit pension plans for all eligible domestic nonunion employees who meet certain requirements of age, length of service and hours worked per year. The Company's Belgium subsidiary maintains a defined contribution and defined benefit plan for eligible employees. Components of net periodic pension expense were:
THREE MONTHS ENDED SEPTEMBER 30, ------------- DOMESTIC PENSION EXPENSE 2004 2003 - ------------------------ ----- ----- Service cost -- benefits earned during the year............. $ 287 $ 362 Interest cost on benefit obligation......................... 164 230 Expected return on plan assets.............................. (150) (210) Amortization of initial unrecognized net transition (asset)................................................... -- (1) Amortization of prior service costs......................... (17) (41) Amortization of net actuarial loss (gain)................... 2 16 ----- ----- NET PERIODIC PENSION COST -- DOMESTIC....................... $ 286 $ 356 ===== =====
THREE MONTHS ENDED SEPTEMBER 30, ------------- INTERNATIONAL PENSION EXPENSE 2004 2003 - ----------------------------- ----- ----- Service cost -- benefits earned during the year............. $122 $110 Interest cost on benefit obligation......................... 98 88 Expected return on plan assets.............................. (79) (71) Amortization of net actuarial loss.......................... 6 6 ---- ---- NET PERIODIC PENSION COST -- INTERNATIONAL.................. $147 $133 ==== ====
F-53 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) 9. CONTINGENCIES LITIGATION: On or about April 17, 1997, CP Chemicals, Inc. (a subsidiary, "CP") and the Company were served with a complaint filed by Chevron U.S.A. Inc. ("Chevron") in the United States District Court for the District of New Jersey, alleging that the operations of CP at its Sewaren plant affected adjoining property owned by Chevron and alleging that the Company, as the parent of CP, is also responsible to Chevron. In July 2002, a phased settlement agreement was reached and a Consent Order entered by the Court. That settlement is in the process of being implemented. The Company's and CP's portion of the settlement for past costs and expenses through the entry of the Consent Order was $495 and was included in selling, general and administrative expenses in fiscal 2002 and was paid in fiscal 2003. The Consent Order then provides for a period of due diligence investigation of the property owned by Chevron. The investigation has been conducted and the results are under review. The investigation costs are being split with one other defendant, Vulcan Materials Company. Upon completion of the review of the results of the investigation, a decision will be made whether to opt out of the settlement or proceed. If no party opts out of the settlement, the Company and CP will take title to the adjoining Chevron property, probably through the use of a three-member New Jersey limited liability company. In preparation to move forward, a limited liability company has been formed, with Vulcan Materials Company as the third member. The Company also has commenced negotiations with Chevron regarding its allocation of responsibility and associated costs under the Consent Order. While the costs cannot be estimated with any degree of certainty at this time, the Company believes that insurance recoveries will be available to offset some of those costs. The Company's Phibro-Tech subsidiary was named in 1993 as a potentially responsible party ("PRP") in connection with an action commenced under the Federal Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA") by the United States Environmental Protection Agency ("the EPA"), involving a former third-party fertilizer manufacturing site in Jericho, South Carolina. An agreement has been reached under which such subsidiary agreed to contribute up to $900 of which $635 has been paid as of September 30, 2004. Some recovery from insurance and other sources is expected but has not been recorded. The Company also has accrued its best estimate of any future costs. Phibro-Tech, Inc. has resolved certain alleged technical permit violations with the California Department of Toxic Substances Control and has reached an agreement to pay $425 over a six year period ending October 2008. In February 2000, the EPA notified numerous parties of potential liability for waste disposal at a licensed Casmalia, California disposal site, including a business, assets of which were originally acquired by a subsidiary in 1984. A settlement has been reached in this matter and the Company has paid $171 in full settlement. On or about April 5, 2002, the Company was served, as a potentially responsible party, with an information request from the EPA relating to a third-party superfund site in Rhode Island. The Company has investigated the matter, which relates to events in the 1950's and 1960's, and management does not believe that the Company has any liability in this matter. On or about August 13, 2004 the Company was served with a Request for Information pursuant to Section 104 of CERCLA and Section 3007 of RCRA relating to possible discharges into Turkey Creek in Sumter, South Carolina. The Company is preparing its response to the Request for Information and believes that, because its Sumter, South Carolina facility is distant from Turkey Creek and does not discharge into Turkey Creek, the likelihood of liability associated with this matter is remote. The Company and its subsidiaries are party to a number of claims and lawsuits arising out of the normal course of business including product liabilities and governmental regulation. Certain of these actions seek F-54 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) damages in various amounts. In most cases, such claims are covered by insurance. The Company believes that none of the claims or pending lawsuits, either individually or in the aggregate, will have a material adverse effect on its financial position. ENVIRONMENTAL REMEDIATION: The Company's operations, properties and subsidiaries are subject to a wide variety of complex and stringent federal, state, local and foreign environmental laws and regulations, including those governing the use, storage, handling, generation, treatment, emission, release, discharge and disposal of certain materials and wastes, the remediation of contaminated soil and groundwater, the manufacture, sale and use of pesticides and the health and safety of employees. As such, the nature of the Company's current and former operations and those of its subsidiaries exposes the Company and its subsidiaries to the risk of claims with respect to such matters. Under certain circumstances, the Company or any of its subsidiaries might be required to curtail operations until a particular problem is remedied. Known costs and expenses under environmental laws incidental to ongoing operations are generally included within operating results. Potential costs and expenses may also be incurred in connection with the repair or upgrade of facilities to meet existing or new requirements under environmental laws or to investigate or remediate potential or actual contamination and from time to time the Company establishes reserves for such contemplated investigation and remediation costs. In many instances, the ultimate costs under environmental laws and the time period during which such costs are likely to be incurred are difficult to predict. The Company's subsidiaries have, from time to time, implemented procedures at their facilities designed to respond to obligations to comply with environmental laws. The Company believes that its operations are currently in material compliance with such environmental laws, although at various sites its subsidiaries are engaged in continuing investigation, remediation and/or monitoring efforts to address contamination associated with their historic operations. The nature of the Company's and its subsidiaries' current and former operations exposes the Company and its subsidiaries to the risk of claims with respect to environmental matters and the Company cannot assure it will not incur material costs and liabilities in connection with such claims. Based upon its experience to date, the Company believes that the future cost of compliance with existing environmental laws, and liability for known environmental claims pursuant to such environmental laws, will not have a material adverse effect on the Company's financial position. Based upon information available, the Company estimates the cost of litigation proceedings described above and the cost of further investigation and remediation of identified soil and groundwater problems at operating sites, closed sites and third-party sites, and closure costs for closed sites to be approximately $2,870, which is included in current and long-term liabilities in the September 30, 2004 condensed consolidated balance sheet (approximately $2,933 at June 30, 2004). 10. GUARANTEES As part of the Prince Transactions (Note 5), as is normal for such transactions, the Company has agreed to indemnify the Palladium Investors for losses arising out of breach of representations, warranties and covenants. The Company's maximum liability under such indemnification is limited to $15,000. The Company agreed to indemnify the Palladium Investors for a portion, at the rate of $0.65 for every dollar, of the amount they receive in respect of the disposition of the Buyer for less than $21,000, up to a maximum payment by the Company of $4,000 (the "Backstop Indemnification Amount"). The Backstop Indemnification Amount would be payable on the earlier to occur of July 1, 2008 or six months after the redemption date of all of the Company's Senior Secured Notes due 2007 if such a disposition closes prior to such redemption and six months after the closing of any such disposition if the disposition closes after any F-55 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) such redemption. The Company's obligations with respect to the Backstop Indemnification Amount will cease if the Palladium Investors do not close the disposition of the Buyer by January 1, 2009. The maximum potential Backstop Indemnification Amount is included in other liabilities on the Company's condensed consolidated balance sheet. The Company established a $1,000 letter of credit escrow for two years to collateralize its working capital adjustment and certain other indemnification obligations relating to the Prince Transactions. 11. BUSINESS SEGMENTS The Company's reportable segments are Animal Health and Nutrition, Industrial Chemicals, Distribution and All Other. Reportable segments have been determined primarily on the basis of the nature of products and services and certain similar operating units have been aggregated. The Company's Animal Health and Nutrition segment manufactures and markets more than 500 formulations and concentrations of medicated feed additives and nutritional feed additives including antibiotics, antibacterials, anticoccidials, anthelmintics, trace minerals, vitamins, vitamin premixes and other animal health and nutrition products. The Industrial Chemicals segment manufactures and markets a number of chemicals for use in the pressure-treated wood, chemical catalyst, semiconductor, automotive, and aerospace industries. The Distribution segment markets and distributes a variety of industrial, specialty and fine organic chemicals and intermediates produced primarily by third parties. The All Other segment manufactures and markets a variety of specialty custom chemicals and copper-based fungicides. Intersegment sales and transfers were not significant. The following segment data includes information only for continuing operations.
ANIMAL HEALTH & INDUSTRIAL ALL CORPORATE THREE MONTHS ENDED SEPTEMBER 30, 2004 NUTRITION CHEMICALS DISTRIBUTION OTHER & OTHER TOTAL - ------------------------------------- --------- ---------- ------------ ------ --------- ------- Net sales.............................. $65,806 $8,393 $7,661 $6,415 $ -- $88,275 Operating income/(loss)................ 7,815 773 864 705 (4,129) 6,028 Depreciation and amortization.......... 2,195 403 2 100 655 3,355
ANIMAL HEALTH & INDUSTRIAL ALL CORPORATE THREE MONTHS ENDED SEPTEMBER 30, 2003 NUTRITION CHEMICALS DISTRIBUTION OTHER & OTHER TOTAL - ------------------------------------- --------- ---------- ------------ ------ --------- ------- Net sales.............................. $59,841 $11,982 $7,939 $5,188 $ -- $84,950 Operating income/(loss)................ 6,900 822 841 669 (3,857) 5,375 Depreciation and amortization.......... 2,029 649 3 115 372 3,168
ANIMAL HEALTH & INDUSTRIAL ALL CORPORATE IDENTIFIABLE ASSETS NUTRITION CHEMICALS DISTRIBUTION OTHER & OTHER TOTAL - ------------------- --------- ---------- ------------ ------ --------- -------- At September 30, 2004.................. $188,620 $25,632 $8,607 $5,818 $14,874 $243,551 At June 30, 2004....................... 185,601 26,146 7,715 5,696 16,211 241,369
12. CONSOLIDATING FINANCIAL STATEMENTS The units of Senior Secured Notes due 2007, consisting of US Senior Secured Notes issued by the Company (the "Parent Issuer") and Dutch Senior Secured Notes issued by Philipp Brothers Netherlands III B.V. (the "Dutch Issuer"), are guaranteed by certain subsidiaries. The Company and its U.S. subsidiaries ("U.S. Guarantor Subsidiaries"), excluding PMC, Prince MFG, LLC and MRT (until divested) (the "Unrestricted Subsidiaries", as defined in the indenture), fully and unconditionally guarantee all of the Senior Secured Notes on a joint and several basis. In addition, the Dutch Issuer's subsidiaries, presently consisting of Phibro Animal Health SA (the "Belgium Guarantor"), fully and unconditionally guarantee the Dutch Senior F-56 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) Secured Notes. The Dutch issuer and the Belgium Guarantor do not guarantee the US Senior Secured Notes. Other foreign subsidiaries ("Non-Guarantor Subsidiaries") do not presently guarantee the Senior Secured Notes. The U.S. Guarantor Subsidiaries include all domestic subsidiaries of the Company other than the Unrestricted Subsidiaries and include: CP Chemicals, Inc., Phibro-Tech, Inc., Prince Agriproducts, Inc, Phibrochem, Inc., Phibro Chemicals, Inc., Western Magnesium Corp., Phibro Animal Health Holdings, Inc., and Phibro Animal Health U.S., Inc. The Senior Subordinated Notes due 2008, issued by the Parent Issuer, are guaranteed by certain subsidiaries. The Company's U.S. subsidiaries, including the U.S. Guarantor Subsidiaries and the Unrestricted Subsidiaries, fully and unconditionally guarantee the Senior Subordinated Notes on a joint and several basis. The Dutch Issuer, Belgium Guarantor and Non-Guarantor Subsidiaries do not presently guarantee the Senior Subordinated Notes. The U.S. Guarantor Subsidiaries and Unrestricted Subsidiaries include all domestic subsidiaries of the Company including: CP Chemicals, Inc., Phibro-Tech, Inc., Prince Agriproducts, Inc., PMC, Prince MFG, LLC, MRT (until divested), Phibrochem, Inc., Phibro Chemicals, Inc., Western Magnesium Corp., Phibro Animal Health Holdings, Inc., and Phibro Animal Health U.S., Inc. The following consolidating financial data summarizes the assets, liabilities and results of operations and cash flows of the Parent Issuer, Unrestricted Subsidiaries, U.S. Guarantor Subsidiaries, Dutch Issuer, Belgium Guarantor and Non-Guarantor Subsidiaries. The Unrestricted Subsidiaries, U.S. Guarantor Subsidiaries, Dutch Issuer, Belgium Guarantor and Non-Guarantor Subsidiaries are directly or indirectly wholly owned as to voting stock by the Company. Investments in subsidiaries are accounted for by the Parent Issuer using the equity method. Income tax expense (benefit) is allocated among the consolidating entities based upon taxable income (loss) by jurisdiction within each group. The principal consolidation adjustments are to eliminate investments in subsidiaries and intercompany balances and transactions. F-57 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) CONDENSED CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 30, 2004 ------------------------------------------------------------------------------ PARENT UNRESTRICTED U.S. GUARANTOR DUTCH BELGIUM NON-GUARANTOR ISSUER SUBSIDIARIES SUBSIDIARIES ISSUER GUARANTOR SUBSIDIARIES -------- ------------ -------------- ------- --------- ------------- (IN THOUSANDS) ASSETS Current Assets: Cash and cash equivalents........... $ 184 $ -- $ 568 $ -- $ 202 $ 4,824 Trade receivables....... 2,828 -- 27,208 -- 2,015 20,670 Other receivables....... 338 -- 1,942 -- 133 1,027 Inventory............... 3,316 -- 36,410 -- 29,112 18,284 Prepaid expenses and other................. 2,278 -- 691 -- 863 3,875 -------- ------- -------- ------- ------- ------- Total current assets.............. 8,944 -- 66,819 -- 32,325 48,680 -------- ------- -------- ------- ------- ------- Property, plant & equipment, net.......... 136 -- 14,052 -- 17,270 28,360 Intangibles............... -- -- 4,146 -- 1,544 5,664 Investment in subsidiaries............ 107,628 -- 3,619 1,304 -- -- Intercompany.............. 8,802 -- 59,723 20,853 (1,833) (9,222) Other assets.............. 14,051 -- 833 -- -- 727 -------- ------- -------- ------- ------- ------- $139,561 $ -- $149,192 $22,157 $49,306 $74,209 ======== ======= ======== ======= ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities: Cash overdraft.......... $ -- $ -- $ 654 $ -- $ -- $ -- Loan payable to banks... 11,268 -- -- -- -- -- Current portion of long- term debt............. -- -- 3 -- -- 950 Accounts payable........ 3,985 -- 24,014 -- 1,567 9,326 Accrued expenses and other................. 15,328 -- 9,083 867 13,766 8,287 -------- ------- -------- ------- ------- ------- Total current liabilities......... 30,581 -- 33,754 867 15,333 18,563 -------- ------- -------- ------- ------- ------- Long-term debt............ 133,029 -- 1 20,000 -- 4,962 Intercompany debt......... -- -- -- -- 31,720 46,603 Other liabilities......... 12,166 -- 5,054 -- 949 4,507 -------- ------- -------- ------- ------- ------- Total liabilities..... 175,776 -- 38,809 20,867 48,002 74,635 -------- ------- -------- ------- ------- ------- Redeemable Securities: Series C preferred stock................. 25,359 -- -- -- -- -- -------- ------- -------- ------- ------- ------- Stockholders' Equity (Deficit): Series A preferred stock................. 521 -- -- -- -- -- Common stock............ 2 -- 31 -- -- -- Paid-in capital......... 860 -- 112,004 21 52 1,537 Retained earnings (accumulated deficit).............. (58,787) -- (1,484) (3,500) (3,517) 6,807 Accumulated other comprehensive income (loss):............... Gain on derivative instruments......... 84 -- 84 -- -- -- Cumulative currency translation adjustment.......... (4,254) -- (252) 4,769 4,769 (8,770) -------- ------- -------- ------- ------- ------- Total stockholders' equity (deficit).... (61,574) -- 110,383 1,290 1,304 (426) -------- ------- -------- ------- ------- ------- $139,561 $ -- $149,192 $22,157 $49,306 $74,209 ======== ======= ======== ======= ======= ======= AS OF SEPTEMBER 30, 2004 ---------------------------- CONSOLIDATION CONSOLIDATED ADJUSTMENTS BALANCE ------------- ------------ (IN THOUSANDS) ASSETS Current Assets: Cash and cash equivalents........... $ -- $ 5,778 Trade receivables....... -- 52,721 Other receivables....... -- 3,440 Inventory............... -- 87,122 Prepaid expenses and other................. -- 7,707 --------- -------- Total current assets.............. -- 156,768 --------- -------- Property, plant & equipment, net.......... -- 59,818 Intangibles............... -- 11,354 Investment in subsidiaries............ (112,551) -- Intercompany.............. (78,323) -- Other assets.............. -- 15,611 --------- -------- $(190,874) $243,551 ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities: Cash overdraft.......... $ -- $ 654 Loan payable to banks... -- 11,268 Current portion of long- term debt............. -- 953 Accounts payable........ -- 38,892 Accrued expenses and other................. -- 47,331 --------- -------- Total current liabilities......... -- 99,098 --------- -------- Long-term debt............ -- 157,992 Intercompany debt......... (78,323) -- Other liabilities......... -- 22,676 --------- -------- Total liabilities..... (78,323) 279,766 --------- -------- Redeemable Securities: Series C preferred stock................. -- 25,359 --------- -------- Stockholders' Equity (Deficit): Series A preferred stock................. -- 521 Common stock............ (31) 2 Paid-in capital......... (113,614) 860 Retained earnings (accumulated deficit).............. 1,694 (58,787) Accumulated other comprehensive income (loss):............... -- Gain on derivative instruments......... (84) 84 Cumulative currency translation adjustment.......... (516) (4,254) --------- -------- Total stockholders' equity (deficit).... (112,551) (61,574) --------- -------- $(190,874) $243,551 ========= ========
F-58 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 ------------------------------------------------- PARENT UNRESTRICTED U.S. GUARANTOR DUTCH ISSUER SUBSIDIARIES SUBSIDIARIES ISSUER ------- ------------ -------------- ------- (IN THOUSANDS) Net sales................ $ 5,929 $ -- $56,675 $ -- Net sales -- intercompany... 56 -- 93 -- Cost of goods sold....... 4,620 -- 41,634 -- ------- -------- ------- ------- Gross profit........... 1,365 -- 15,134 -- Selling, general and administrative expenses............... 4,903 -- 6,956 6 ------- -------- ------- ------- Operating income (loss)............... (3,538) -- 8,178 (6) Other: Interest expense....... 4,352 -- (2) 650 Interest (income)...... (1) -- -- -- Other (income) expense, net.................. 1 -- (228) -- Intercompany interest and other............ (7,527) -- 5,449 (660) (Profit) loss relating to subsidiaries...... (532) -- -- (1,567) ------- -------- ------- ------- Income (loss) from continuing operations before income taxes................ 169 -- 2,959 1,571 Provision for income taxes.................. 310 -- 104 -- ------- -------- ------- ------- Income (loss) from continuing operations........... (141) -- 2,855 1,571 Discontinued operations: Profit (loss) relating to discontinued operations........... -- -- -- -- (Loss) from discontinued operations (net of income taxes)........ -- -- -- -- Gain (loss) from disposal of discontinued operations (net of income taxes)........ -- -- -- -- ------- -------- ------- ------- Net income (loss)...... $ (141) $ -- $ 2,855 $ 1,571 ======= ======== ======= ======= FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 -------------------------------------------------------- BELGIUM NON-GUARANTOR CONSOLIDATION CONSOLIDATED GUARANTOR SUBSIDIARIES ADJUSTMENTS BALANCE --------- ------------- ------------- ------------ (IN THOUSANDS) Net sales................ $1,668 $24,003 $ -- $88,275 Net sales -- intercompany... 6,204 1,075 (7,428) -- Cost of goods sold....... 4,699 22,128 (7,428) 65,653 ------ ------- ------- ------- Gross profit........... 3,173 2,950 -- 22,622 Selling, general and administrative expenses............... 553 4,176 -- 16,594 ------ ------- ------- ------- Operating income (loss)............... 2,620 (1,226) -- 6,028 Other: Interest expense....... 11 235 -- 5,246 Interest (income)...... -- (24) -- (25) Other (income) expense, net.................. (59) 310 -- 24 Intercompany interest and other............ 939 1,799 -- -- (Profit) loss relating to subsidiaries...... -- -- 2,099 -- ------ ------- ------- ------- Income (loss) from continuing operations before income taxes................ 1,729 (3,546) (2,099) 783 Provision for income taxes.................. 162 348 -- 924 ------ ------- ------- ------- Income (loss) from continuing operations........... 1,567 (3,894) (2,099) (141) Discontinued operations: Profit (loss) relating to discontinued operations........... -- -- -- -- (Loss) from discontinued operations (net of income taxes)........ -- -- -- -- Gain (loss) from disposal of discontinued operations (net of income taxes)........ -- -- -- -- ------ ------- ------- ------- Net income (loss)...... $1,567 $(3,894) $(2,099) $ (141) ====== ======= ======= =======
F-59 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 ------------------------------------------------ PARENT UNRESTRICTED U.S. GUARANTOR DUTCH ISSUER SUBSIDIARIES SUBSIDIARIES ISSUER ------- ------------ -------------- ------ (IN THOUSANDS) Operating Activities: Net income (loss)............ $ (141) $ -- $2,855 $1,571 Adjustment for discontinued operations................. -- -- -- -- ------- ---- ------ ------ Income (loss) from continuing operations................. (141) -- 2,855 1,571 Adjustments to reconcile income (loss) from continuing operations to net cash provided (used) by operating activities: Depreciation and amortization............. 655 -- 703 -- Deferred income taxes...... -- -- -- -- Net gain from sales of assets................... -- -- -- -- Effects of changes in foreign currency......... -- -- (227) -- Other...................... 3 -- 31 -- Changes in operating assets and liabilities:......... Accounts receivable...... (161) -- 216 -- Inventory................ (1,322) -- 3,251 -- Prepaid expenses and other.................. 896 -- (267) -- Other assets............. (175) -- 173 -- Intercompany............. (2,988) 5 (2,153) (2,238) Accounts payable......... (749) 6 (4,441) -- Accrued expenses and other.................. 3,813 (1) 781 650 ------- ---- ------ ------ Net cash provided (used) by operating activities..... (169) 10 922 (17) ------- ---- ------ ------ Investing Activities: Capital expenditures......... (55) -- (834) -- Proceeds from sale of assets..................... -- -- -- -- ------- ---- ------ ------ Net cash provided (used) by investing activities..... (55) -- (834) -- ------- ---- ------ ------ Financing Activities: Net (decrease) in cash overdraft.................. -- (10) (227) -- Net (decrease) in short-term debt....................... 272 -- -- -- Proceeds from long-term debt....................... -- -- -- -- Payments of long-term debt... -- -- (99) -- ------- ---- ------ ------ Net cash provided (used) by financing activities..... 272 (10) (326) -- ------- ---- ------ ------ Effect of exchange rate changes on cash...................... -- -- 5 -- ------- ---- ------ ------ Net increase (decrease) in cash and cash equivalents......... 48 -- (233) (17) Cash and cash equivalents at beginning of period.......... 136 -- 801 17 ------- ---- ------ ------ Cash and cash equivalents at end of period................ $ 184 $ -- $ 568 $ -- ======= ==== ====== ====== FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 -------------------------------------------------------- BELGIUM NON-GUARANTOR CONSOLIDATION CONSOLIDATED GUARANTOR SUBSIDIARIES ADJUSTMENTS BALANCE --------- ------------- ------------- ------------ (IN THOUSANDS) Operating Activities: Net income (loss)............ $1,567 $(3,894) $(2,099) $ (141) Adjustment for discontinued operations................. -- -- -- -- ------ ------- ------- ------- Income (loss) from continuing operations................. 1,567 (3,894) (2,099) (141) Adjustments to reconcile income (loss) from continuing operations to net cash provided (used) by operating activities: Depreciation and amortization............. 713 1,284 -- 3,355 Deferred income taxes...... -- 68 -- 68 Net gain from sales of assets................... -- (1) -- (1) Effects of changes in foreign currency......... (59) 164 -- (122) Other...................... -- 14 -- 48 Changes in operating assets and liabilities:......... Accounts receivable...... 618 4,016 -- 4,689 Inventory................ (5,409) (1,122) -- (4,602) Prepaid expenses and other.................. 107 341 -- 1,077 Other assets............. -- 1 -- (1) Intercompany............. 2,450 2,825 2,099 -- Accounts payable......... (724) (2,288) -- (8,196) Accrued expenses and other.................. 997 (29) -- 6,211 ------ ------- ------- ------- Net cash provided (used) by operating activities..... 260 1,379 -- 2,385 ------ ------- ------- ------- Investing Activities: Capital expenditures......... (274) (585) -- (1,748) Proceeds from sale of assets..................... -- 12 -- 12 ------ ------- ------- ------- Net cash provided (used) by investing activities..... (274) (573) -- (1,736) ------ ------- ------- ------- Financing Activities: Net (decrease) in cash overdraft.................. -- -- -- (237) Net (decrease) in short-term debt....................... -- -- -- 272 Proceeds from long-term debt....................... -- 445 -- 445 Payments of long-term debt... -- (773) -- (872) ------ ------- ------- ------- Net cash provided (used) by financing activities..... -- (328) -- (392) ------ ------- ------- ------- Effect of exchange rate changes on cash...................... 4 (56) (47) ------ ------- ------- ------- Net increase (decrease) in cash and cash equivalents......... (10) 422 -- 210 Cash and cash equivalents at beginning of period.......... 212 4,402 5,568 ------ ------- ------- ------- Cash and cash equivalents at end of period................ $ 202 $ 4,824 $ -- $ 5,778 ====== ======= ======= =======
F-60 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 2004 ------------------------------------------------------------------------------ PARENT UNRESTRICTED U.S. GUARANTOR DUTCH BELGIUM NON-GUARANTOR ISSUER SUBSIDIARIES SUBSIDIARIES ISSUER GUARANTOR SUBSIDIARIES -------- ------------ -------------- ------- --------- ------------- (IN THOUSANDS) ASSETS Current Assets: Cash and cash equivalents............. $ 136 $ -- $ 801 $ 17 $ 212 $ 4,402 Trade receivables......... 2,670 -- 26,996 -- 2,592 25,400 Other receivables......... 317 414 1,195 -- 72 768 Inventory................. 1,994 -- 37,890 -- 23,159 16,867 Prepaid expenses and other................... 3,195 110 565 -- 1,018 3,800 -------- ------- -------- ------- ------- -------- Total Current Assets.... 8,312 524 67,447 17 27,053 51,237 -------- ------- -------- ------- ------- -------- Property, plant & equipment, net............ 105 -- 13,730 -- 17,321 27,630 Intangibles................ -- -- 4,252 -- 1,569 5,874 Investment in subsidiaries.............. 125,355 -- 3,619 1,604 -- -- Intercompany............... (14,995) 20,995 60,030 20,181 1,630 (12,497) Other assets............... 14,506 -- 1,056 -- -- 736 -------- ------- -------- ------- ------- -------- $133,283 $21,519 $150,134 $21,802 $47,573 $ 72,980 ======== ======= ======== ======= ======= ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities: Cash overdraft............ $ -- $ 10 $ 881 $ -- $ -- $ -- Loan payable to banks..... 10,996 -- -- -- -- -- Current portion of long- term debt............... -- -- 101 -- -- 1,250 Accounts payable.......... 4,734 9 28,434 -- 2,258 11,537 Accrued expenses and other................... 11,857 159 8,306 216 12,022 7,450 -------- ------- -------- ------- ------- -------- Total Current Liabilities........... 27,587 178 37,722 216 14,280 20,237 -------- ------- -------- ------- ------- -------- Long-term debt............. 133,029 -- 2 20,000 -- 4,987 Intercompany debt.......... -- -- -- -- 30,553 44,791 Other liabilities.......... 11,822 -- 4,897 -- 1,136 4,431 -------- ------- -------- ------- ------- -------- Total Liabilities....... 172,438 178 42,621 20,216 45,969 74,446 -------- ------- -------- ------- ------- -------- Redeemable Securities: Series C preferred stock................... 24,678 -- -- -- -- -- -------- ------- -------- ------- ------- -------- Stockholders' Equity (Deficit): Series A preferred stock................... 521 -- -- -- -- -- Common stock.............. 2 1 31 -- -- -- Paid-in capital........... 860 -- 112,004 21 52 1,537 Retained earnings (accumulated deficit)... (57,964) 21,340 (4,339) (2,744) (2,757) 8,374 Accumulated other comprehensive income (loss): Gain on derivative instruments............... 9 -- 9 -- -- -- Cumulative currency translation adjustment.... (7,261) -- (192) 4,309 4,309 (11,377) -------- ------- -------- ------- ------- -------- Total Stockholders' Equity (Deficit)...... (63,833) 21,341 107,513 1,586 1,604 (1,466) -------- ------- -------- ------- ------- -------- $133,283 $21,519 $150,134 $21,802 $47,573 $ 72,980 ======== ======= ======== ======= ======= ======== AS OF JUNE 30, 2004 ---------------------------- CONSOLIDATION CONSOLIDATED ADJUSTMENTS BALANCE ------------- ------------ (IN THOUSANDS) ASSETS Current Assets: Cash and cash equivalents............. $ -- $ 5,568 Trade receivables......... -- 57,658 Other receivables......... -- 2,766 Inventory................. 79,910 Prepaid expenses and other................... -- 8,688 --------- -------- Total Current Assets.... -- 154,590 --------- -------- Property, plant & equipment, net............ -- 58,786 Intangibles................ -- 11,695 Investment in subsidiaries.............. (130,578) -- Intercompany............... (75,344) -- Other assets............... -- 16,298 --------- -------- $(205,922) $241,369 ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities: Cash overdraft............ $ -- $ 891 Loan payable to banks..... -- 10,996 Current portion of long- term debt............... -- 1,351 Accounts payable.......... -- 46,972 Accrued expenses and other................... 40,010 --------- -------- Total Current Liabilities........... -- 100,220 --------- -------- Long-term debt............. -- 158,018 Intercompany debt.......... (75,344) -- Other liabilities.......... -- 22,286 --------- -------- Total Liabilities....... (75,344) 280,524 --------- -------- Redeemable Securities: Series C preferred stock................... -- 24,678 --------- -------- Stockholders' Equity (Deficit): Series A preferred stock................... -- 521 Common stock.............. (32) 2 Paid-in capital........... (113,614) 860 Retained earnings (accumulated deficit)... (19,874) (57,964) Accumulated other comprehensive income (loss): Gain on derivative instruments............... (9) 9 Cumulative currency translation adjustment.... 2,951 (7,261) --------- -------- Total Stockholders' Equity (Deficit)...... (130,578) (63,833) --------- -------- $(205,922) $241,369 ========= ========
F-61 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 ------------------------------------------------ PARENT UNRESTRICTED U.S. GUARANTOR DUTCH ISSUER SUBSIDIARIES SUBSIDIARIES ISSUER ------- ------------ -------------- ------ (IN THOUSANDS) Net sales................... $ 5,697 $5,683 $48,095 $ -- Net sales -- intercompany... 45 1,339 209 -- Cost of goods sold.......... 4,508 5,134 35,893 -- ------- ------ ------- ----- Gross profit.............. 1,234 1,888 12,411 -- Selling, general and administrative expenses... 4,673 675 6,221 -- ------- ------ ------- ----- Operating income (loss)... (3,439) 1,213 6,190 -- Other: Interest expense.......... 3,712 11 -- -- Interest (income)......... -- -- -- -- Other (income) expense, net..................... 228 -- (242) -- Intercompany interest and other................... (5,992) 1,082 2,539 -- (Profit) loss relating to subsidiaries............ (2,874) -- -- -- ------- ------ ------- ----- Income (loss) from continuing operations before income taxes..... 1,487 120 3,893 -- Provision for income taxes..................... 1 16 218 -- ------- ------ ------- ----- Income (loss) from continuing operations... 1,486 104 3,675 -- Discontinued operations: Profit (loss) relating to discontinued operations.............. (462) -- -- -- (Loss) from discontinued operations (net of income taxes)........... -- (124) -- -- Gain from disposal of discontinued operations (net of income taxes)... 231 -- -- -- ------- ------ ------- ----- Net income (loss)....... $ 1,255 $ (20) $ 3,675 $ -- ======= ====== ======= ===== FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 -------------------------------------------------------- BELGIUM NON-GUARANTOR CONSOLIDATION CONSOLIDATED GUARANTOR SUBSIDIARIES ADJUSTMENTS BALANCE --------- ------------- ------------- ------------ (IN THOUSANDS) Net sales................... $ 992 $24,483 $ -- $84,950 Net sales -- intercompany... 9,269 770 (11,632) -- Cost of goods sold.......... 9,196 20,691 (11,632) 63,790 ------ ------- -------- ------- Gross profit.............. 1,065 4,562 -- 21,160 Selling, general and administrative expenses... 524 3,692 15,785 ------ ------- -------- ------- Operating income (loss)... 541 870 -- 5,375 Other: Interest expense.......... -- 210 3,933 Interest (income)......... (30) (212) (242) Other (income) expense, net..................... (978) 407 (585) Intercompany interest and other................... 696 1,675 -- (Profit) loss relating to subsidiaries............ -- -- 2,874 -- ------ ------- -------- ------- Income (loss) from continuing operations before income taxes..... 853 (1,210) (2,874) 2,269 Provision for income taxes..................... 333 215 783 ------ ------- -------- ------- Income (loss) from continuing operations... 520 (1,425) (2,874) 1,486 Discontinued operations: Profit (loss) relating to discontinued operations.............. -- -- 462 -- (Loss) from discontinued operations (net of income taxes)........... -- (338) (462) Gain from disposal of discontinued operations (net of income taxes)... -- -- 231 ------ ------- -------- ------- Net income (loss)....... $ 520 $(1,763) $ (2,412) $ 1,255 ====== ======= ======== =======
F-62 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 ------------------------------------------------- PARENT UNRESTRICTED U.S. GUARANTOR DUTCH ISSUER SUBSIDIARIES SUBSIDIARIES ISSUER -------- ------------ -------------- ------ (IN THOUSANDS) Operating Activities: Net income (loss)............ $ 1,255 $ (20) $ 3,675 $ -- Adjustment for discontinued operations................. 231 124 -- -- -------- ------- ------- ----- Income (loss) from continuing operations................. 1,486 104 3,675 -- Adjustments to reconcile income (loss) from continuing operations to net cash provided (used) by operating activities: Depreciation and amortization............. 372 243 630 -- Deferred income taxes...... -- -- -- -- Net gain from sales of assets................... -- -- -- -- Effects of changes in foreign currency......... -- -- (164) -- Other...................... 126 -- 319 -- Changes in operating assets and liabilities: Accounts receivable...... 119 83 (1,351) -- Inventory................ (778) (1,305) (9,995) -- Prepaid expenses and other.................. 433 404 (955) -- Other assets............. (530) 1 78 -- Intercompany............. (11,621) 523 7,744 -- Accounts payable......... (1,176) 289 (996) -- Accrued expenses and other.................. 4,015 (9) (174) -- Cash provided (used) by discontinued operations.... 231 (652) -- -- -------- ------- ------- ----- Net cash provided (used) by operating activities..... (7,323) (319) (1,189) -- -------- ------- ------- ----- Investing Activities: Capital expenditures......... -- (32) (286) -- Proceeds from sale of assets..................... -- -- -- -- Other investing.............. -- -- -- -- Discontinued operations...... 13,788 -- -- -- -------- ------- ------- ----- Net cash provided (used) by investing activities..... 13,788 (32) (286) -- -------- ------- ------- ----- Financing Activities: Net (decrease) in cash overdraft.................. 18 277 365 -- Net (decrease) in short-term debt....................... (6,280) -- -- -- Proceeds from long-term debt....................... -- -- -- -- Payments of long-term debt... (203) (12) (143) -- Other financing.............. -- -- -- -- Discontinued operations...... -- -- -- -- -------- ------- ------- ----- Net cash provided (used) by financing activities..... (6,465) 265 222 -- -------- ------- ------- ----- Effect of exchange rate changes on cash.............. -- -- 2 -- -------- ------- ------- ----- Net increase (decrease) in cash and cash equivalents.... -- (86) (1,251) -- Cash and cash equivalents at beginning of period.......... 43 119 2,167 -- -------- ------- ------- ----- Cash and cash equivalents at end of period................ $ 43 $ 33 $ 916 $ -- ======== ======= ======= ===== FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 -------------------------------------------------------- BELGIUM NON-GUARANTOR CONSOLIDATION CONSOLIDATED GUARANTOR SUBSIDIARIES ADJUSTMENTS BALANCE --------- ------------- ------------- ------------ (IN THOUSANDS) Operating Activities: Net income (loss)............ $ 520 $(1,763) $(2,412) $ 1,255 Adjustment for discontinued operations................. -- 338 (462) 231 ------- ------- ------- ------- Income (loss) from continuing operations................. 520 (1,425) (2,874) 1,486 Adjustments to reconcile income (loss) from continuing operations to net cash provided (used) by operating activities: Depreciation and amortization............. 632 1,291 3,168 Deferred income taxes...... -- 53 53 Net gain from sales of assets................... -- 1 1 Effects of changes in foreign currency......... (913) (287) (1,364) Other...................... -- (293) 152 Changes in operating assets and liabilities: Accounts receivable...... 544 1,437 832 Inventory................ 6,828 1,124 (4,126) Prepaid expenses and other.................. 441 (316) 7 Other assets............. -- 76 (375) Intercompany............. (7,853) 8,333 2,874 -- Accounts payable......... (2,152) (1,448) (5,483) Accrued expenses and other.................. 2,641 820 7,293 Cash provided (used) by discontinued operations.... -- 45 (376) ------- ------- ------- ------- Net cash provided (used) by operating activities..... 688 9,411 -- 1,268 ------- ------- ------- ------- Investing Activities: Capital expenditures......... (226) (308) (852) Proceeds from sale of assets..................... -- 12 12 Other investing.............. -- -- -- Discontinued operations...... -- 261 14,049 ------- ------- ------- ------- Net cash provided (used) by investing activities..... (226) (35) -- 13,209 ------- ------- ------- ------- Financing Activities: Net (decrease) in cash overdraft.................. -- 71 731 Net (decrease) in short-term debt....................... -- 6,000 (280) Proceeds from long-term debt....................... -- 1,500 1,500 Payments of long-term debt... -- (586) (944) Other financing.............. -- -- -- Discontinued operations...... -- 86 86 ------- ------- ------- ------- Net cash provided (used) by financing activities..... -- 7,071 -- 1,093 ------- ------- ------- ------- Effect of exchange rate changes on cash.............. 16 150 168 ------- ------- ------- ------- Net increase (decrease) in cash and cash equivalents.... 478 16,597 -- 15,738 Cash and cash equivalents at beginning of period.......... 185 8,665 11,179 ------- ------- ------- ------- Cash and cash equivalents at end of period................ $ 663 $25,262 $ -- $26,917 ======= ======= ======= =======
F-63 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) 13. SUBSEQUENT EVENTS ISSUANCE OF ADDITIONAL 13% SENIOR SECURED NOTES: On December 21, 2004, the Company completed a private offering of 22,491 additional units consisting of $18,207 13% Senior Secured Notes due 2007 of the Company (the "U.S. Notes") and $4,284 13% Senior Secured Notes due 2007 (the "Dutch Notes" and together with the U.S. Notes, the "Additional Notes") of Philipp Brothers Netherlands III B.V., an indirect wholly-owned subsidiary of the Company (the "Dutch Issuer" and together with the Company, the "Issuers"). The Additional Notes were issued under the Indenture dated October 21, 2003, as amended and supplemented (the "Indenture") under which the Issuers previously issued 105,000 units consisting of $85,000 aggregate principal amount of U.S. Notes and $20,000 aggregate principal amount of Dutch Notes. The proceeds from the sale of the Additional Notes will be used to refinance a portion of the Company's indebtedness under its domestic senior credit facility. AMENDMENT TO THE SENIOR DOMESTIC CREDIT FACILITY: On December 21, 2004, concurrent with the completion of the offering of the Additional Notes, the Company amended the domestic senior credit facility to: (i) amend the EBITDA definition to exclude charges and expenses related to the sale of the Belgium Plant in an aggregate amount not to exceed $26,800 for purposes of calculating a certain financial covenant; (ii) amend the Indenture reserve definition to include scheduled payments of interest due on the Additional Notes; (iii) amend the maximum aggregate amount of borrowing available under the working capital facility to permit a temporary increase to $22,500 and for its reduction to $17,500 on such borrowings being refinanced by the proceeds of the Additional Notes; (iv) amend the Permitted Investments definition to include investments in connection with the sale of the Belgium Plant and transfer of certain equipment, together with other assets and rights related to the production of virginiamycin, to Philipp Brothers Brasil Holdings Ltda, ("PAH Brazil") or in connection with alternative production arrangements; and (v) provide for the issuance of the Additional Notes and the sale of the Belgium Plant and related transactions. SALE OF BELGIUM PLANT: On December 16, 2004, Phibro Animal Health SA, ("PAH Belgium") entered into an agreement with GlaxoSmithKline Biologicals ("GSK") to sell to GSK substantially all of PAH Belgium's facilities in Rixensart, Belgium ("the Belgium Plant") as follows (U.S. dollar amounts at the December 16, 2004 exchange rate): (i) the transfer of substantially all of the land and buildings and certain equipment of PAH Belgium at the Belgium Plant, as well as the industrial activities and intellectual property relating to certain solvent technology of PAH Belgium for a purchase price of EUR 6,200 ($8,238), payable at closing; (ii) the transfer to GSK of a majority of the employees of the Belgium Plant and the corresponding responsibility for statutory severance obligations; (iii) GSK agreeing to be responsible for costs of removal, by demolition or otherwise, certain buildings not to be used by it, but for PAH Belgium to reimburse GSK up to a maximum of EUR 700 ($930) for such removal costs; (iv) in recognition of the benefits to PAHC from the proposed transaction, PAH Belgium agreeing to pay to GSK EUR 1,500 ($1,993) within six months from the closing date, EUR 1,500 ($1,993) within eighteen months from the closing date, EUR 1,500 ($1,993) within thirty months from the closing date, and EUR 500 ($664) within forty-two months from the closing date; (v) PAH Belgium retaining certain excess land (valued at approximately EUR 400 ($531)) and being able to sell such land for its own account; (vi) PAH Belgium being responsible for certain plant closure costs and legally required severance indemnities in connection with workforce reductions, estimated in total to be EUR 7,700 ($10,231), of which an amount estimated to be approximately EUR 4,100 ($5,448) would be payable at or around the closing and an aggregate amount so estimated to be approximately EUR 3,600 ($4,783) would be payable over periods up to thirteen years; and (vii) PAH Belgium retaining any or all equipment at the Belgium Plant, and being able to sell such equipment for the account of PAH Belgium or transfer such F-64 PHIBRO ANIMAL HEALTH CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) equipment, together with other assets and rights related to the production of virginiamycin, to PAH Brazil which owns a facility in Guarulhos, Brazil or in connection with alternative production arrangements. The foregoing transactions and agreements are subject to a closing that is expected to occur no earlier than July 1, 2005 nor later than June 30, 2006. The Dutch Notes and related guarantees are secured by a mortgage on the Belgium Plant which will be released in connection with the closing of the sale of the Belgium Plant to GSK. The carrying value of the Belgium Plant and related assets at September 30, 2004 is EUR 13.908 ($18,480). The Company is in the process of evaluating the accounting for this transaction and will record an impairment loss, if required, in the second quarter ended December 31, 2004. In addition, the company will expense severance, plant closure and other related costs in the period in which such liabilities are incurred in accordance with Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or disposal Activities". As of the date of this filing, estimates of such costs are in process of being determined. F-65 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors of Philipp Brothers Netherlands I B.V.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and comprehensive loss, changes in stockholders' deficit and cash flows present fairly, in all material respects, the financial position of Philipp Brothers Netherlands I B.V. and its subsidiaries at June 30, 2004 and June 30, 2003, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2004, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Florham Park, New Jersey January 10, 2005 F-66 PHILIPP BROTHERS NETHERLANDS I B.V. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, --------------------- 2004 2003 --------- --------- (U.S.$ IN THOUSANDS) ASSETS CURRENT ASSETS: Cash, including restricted balance of $175 at June 30, 2004 and 2003.......................................... $ 422 $ 689 Trade receivables, less allowance for doubtful accounts of $39 and $58 at June 30, 2004 and 2003, respectively.... 4,344 3,090 Other receivables......................................... 304 711 Inventories............................................... 32,611 22,768 Prepaid expenses and other current assets................. 4,020 4,429 Trade receivables -- related parties...................... 7,917 11,116 -------- -------- TOTAL CURRENT ASSETS................................... 49,618 42,803 PROPERTY, PLANT AND EQUIPMENT, net.......................... 30,588 30,732 INTANGIBLES................................................. 1,569 1,818 OTHER ASSETS................................................ 1,084 -- -------- -------- $ 82,859 $ 75,353 ======== ======== LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Accounts payable.......................................... $ 3,223 $ 12,928 Accrued expenses and other current liabilities............ 13,438 9,160 Trade payables -- related parties......................... 1,687 922 -------- -------- TOTAL CURRENT LIABILITIES.............................. 18,348 23,010 LONG-TERM DEBT.............................................. 20,000 -- OTHER LIABILITIES........................................... 2,897 2,905 NOTES PAYABLE -- RELATED PARTIES............................ 55,124 60,034 -------- -------- TOTAL LIABILITIES...................................... 96,369 85,949 -------- -------- STOCKHOLDERS' DEFICIT: Paid-in capital........................................... 7,405 3,877 Accumulated deficit....................................... (14,860) (10,258) Cumulative foreign currency translation adjustment........ (6,055) (4,215) -------- -------- TOTAL STOCKHOLDERS' DEFICIT............................ (13,510) (10,596) -------- -------- $ 82,859 $ 75,353 ======== ========
The accompanying notes are an integral part of the consolidated financial statements F-67 PHILIPP BROTHERS NETHERLANDS I B.V. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE YEARS ENDED JUNE 30, ------------------------------ 2004 2003 2002 -------- -------- -------- (U.S.$ IN THOUSANDS) NET SALES................................................... $15,601 $15,467 $14,639 NET SALES -- RELATED PARTIES................................ 34,357 31,216 32,261 ------- ------- ------- TOTAL SALES............................................... 49,958 46,683 46,900 COST OF GOODS SOLD.......................................... 37,940 38,744 35,856 ------- ------- ------- GROSS PROFIT.............................................. 12,018 7,939 11,044 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................ 6,966 5,205 5,071 ------- ------- ------- OPERATING INCOME.......................................... 5,052 2,734 5,973 OTHER: Interest expense.......................................... 2,097 251 185 Interest expense -- related parties....................... 6,624 7,336 6,397 Other (income) expense, net............................... (681) 1,650 231 Other (income) expense, net -- related parties............ -- 2,880 -- ------- ------- ------- (LOSS) BEFORE INCOME TAXES................................ (2,988) (9,383) (840) PROVISION FOR INCOME TAXES.................................. 1,614 359 (10) ------- ------- ------- NET LOSS.................................................. (4,602) (9,742) (830) OTHER COMPREHENSIVE INCOME (LOSS): Change in currency translation adjustment................. (1,840) 2,669 (3,612) ------- ------- ------- COMPREHENSIVE LOSS........................................ $(6,442) $(7,073) $(4,442) ======= ======= =======
The accompanying notes are an integral part of the consolidated financial statements F-68 PHILIPP BROTHERS NETHERLANDS I B.V. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003 AND 2002 --------------------------------------------------- FOREIGN CURRENCY PAID-IN (ACCUMULATED TRANSLATION CAPITAL DEFICIT) ADJUSTMENT TOTAL -------- ------------- ------------ --------- (U.S.$ IN THOUSANDS) BALANCE, JUNE 30, 2001............................ $ 25 $ 314 $(3,272) $ (2,933) Contribution from parent........................ 1,922 1,922 Net (loss)...................................... (830) (830) Foreign currency translation adjustment......... (3,612) (3,612) ------ -------- ------- -------- BALANCE, JUNE 30, 2002............................ $1,947 $ (516) $(6,884) $ (5,453) ====== ======== ======= ======== Contribution from parent........................ 1,930 1,930 Net (loss)...................................... (9,742) (9,742) Foreign currency translation adjustment......... 2,669 2,669 ------ -------- ------- -------- BALANCE, JUNE 30, 2003............................ $3,877 $(10,258) $(4,215) $(10,596) ====== ======== ======= ======== Contribution from parent........................ 3,528 3,528 Net (loss)...................................... (4,602) (4,602) Foreign currency translation adjustment......... (1,840) (1,840) ------ -------- ------- -------- BALANCE, JUNE 30, 2004............................ $7,405 $(14,860) $(6,055) $(13,510) ====== ======== ======= ========
The accompanying notes are an integral part of the consolidated financial statements F-69 PHILIPP BROTHERS NETHERLANDS I B.V. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, ---------------------------- 2004 2003 2002 ------- ------- -------- (U.S.$ IN THOUSANDS) OPERATING ACTIVITIES: Net (loss)................................................ $(4,602) $(9,742) $ (830) Adjustments to reconcile net (loss) to net cash used by operating activities: Depreciation and amortization.......................... 3,558 2,449 2,889 Deferred taxes......................................... 112 1,376 862 Allocated selling, general and administrative expenses from parent.......................................... 2,217 1,930 1,922 Effects of changes in foreign currency and other....... (378) 1,419 (474) Changes in operating assets and liabilities: Accounts receivable.................................. (1,287) (572) 1,469 Inventories.......................................... (9,699) (1,398) (13,181) Prepaid expenses and other current assets............ 354 (2,534) (791) Other assets......................................... -- -- 66 Related party receivables and payables............... 6,227 6,611 1,466 Accounts payable..................................... (2,169) 3,540 971 Accrued expenses and other liabilities............... 4,022 (6,611) 5,021 ------- ------- -------- NET CASH USED BY OPERATING ACTIVITIES............. (1,645) (3,532) (610) ------- ------- -------- INVESTING ACTIVITIES: Capital expenditures...................................... (3,024) (4,260) (2,657) Acquisition of a business................................. -- -- (4,422) Other investing........................................... (189) -- -- ------- ------- -------- NET CASH USED BY INVESTING ACTIVITIES............. (3,213) (4,260) (7,079) ------- ------- -------- FINANCING ACTIVITIES: Net increase (decrease) in intercompany debt.............. (7,176) 7,578 809 Proceeds from long-term debt.............................. 20,000 -- -- Payment of Pfizer obligations............................. (8,225) -- -- ------- ------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES......... 4,599 7,578 809 ------- ------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... (8) 78 86 ------- ------- -------- NET DECREASE IN CASH AND CASH EQUIVALENTS......... (267) (136) (6,794) CASH AND CASH EQUIVALENTS at beginning of period............ 689 825 7,619 ------- ------- -------- CASH AND CASH EQUIVALENTS at end of period.................. $ 422 $ 689 $ 825 ======= ======= ======== Supplemental Cash Flow Information: Interest paid............................................. $ 89 $ 88 $ -- Income taxes paid......................................... 63 956 358
The accompanying notes are an integral part of the consolidated financial statements F-70 PHILIPP BROTHERS NETHERLANDS I B.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (U.S. $ IN THOUSANDS) 1. DESCRIPTION OF BUSINESS Philipp Brothers Netherlands I B.V., a company organized under the laws of The Netherlands, (the "Company") is a global manufacturer and marketer of a broad range of animal health and nutrition products, specifically medicated feed additives ("MFA"), which the Company sells throughout the world predominately to the poultry, swine and cattle markets. The Company is a direct wholly-owned subsidiary of Phibro Animal Health Holdings, Inc ("PAH Holdings") and an indirect wholly-owned subsidiary of Phibro Animal Health Corporation ("PAHC"). PAHC has agreed to fund the Company's cash flows to the extent required through January 31, 2006. On November 30, 2000, PAHC purchased the medicated feed additive ("MFA") business of Pfizer, Inc. The Company, the Company's subsidiaries and PAH Holdings were part of that acquisition. In connection with the MFA acquisition additional purchase price of $4,422, was earned and paid in 2002. All earn-out requirements have been satisfied and no further payments are necessary. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION: The consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries, including Phibro Animal Health SA ("PAH Belgium") and Philipp Brothers Brasil Holdings Ltda. ("PAH Brazil"). All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements. The Company presents its consolidated financial statements on the basis of its fiscal year ending June 30. All references to years 2004, 2003, and 2002 in these financial statements refer to the fiscal year ended June 30 of that year. RISKS AND UNCERTAINTIES: The use of antibiotics in medicated feed additives is a subject of legislative and regulatory interest. The issue of potential for increased bacterial resistance to certain antibiotics used in certain food-producing animals is the subject of discussions on a worldwide basis and, in certain instances, has led to government restrictions on the use of antibiotics in food-producing animals. The sale of feed additives containing antibiotics is a material portion of the Company's business. Should regulatory or other developments result in further restrictions on the sale of such products, it could have a material adverse impact on the Company's financial position, results of operations and cash flows. The testing, manufacturing, and marketing of certain products are subject to extensive regulation by numerous government authorities in the United States and other countries. A significant portion of the Company's sales and earnings are attributable to transactions with related parties. USE OF ESTIMATES: Preparation of the Company's financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. Actual results F-71 PHILIPP BROTHERS NETHERLANDS I B.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) could differ from these estimates. Significant estimates include reserves for bad debts, inventory obsolescence, environmental matters, depreciation and amortization periods of long-lived assets, recoverability of long-lived assets and realizability of deferred tax assets and actuarial assumptions related to the Company's pension plan. REVENUE RECOGNITION: Revenue is recognized upon transfer of title and when risk of loss passes to the customer, generally at time of shipment. Net sales reflect total sales billed, less reductions for goods returned and trade discounts. CASH: Cash includes cash in banks. Cash also includes cash, of a subsidiary of the Company, which is on deposit in a restricted bank account under a contractual obligation with a customer, in the amount of $175 at June 30, 2004 and 2003. This cash was subsequently released during December 2004. ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS: Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company's best estimate of the probable credit losses in its existing accounts receivable. The allowance is based on historical write-off experience and is reviewed periodically. Past due balances are reviewed individually for collectibility. Account balances are charged against the allowance when the Company feels that it is probable that the receivable will not be recovered. The allowance for doubtful accounts was:
2004 2003 2002 ---- ---- ---- Balance at beginning of period.............................. $ 58 $20 $25 Provision for bad debts..................................... -- 38 -- Bad debt write-offs......................................... (19) -- (5) ---- --- --- Balance at end of period.................................... $ 39 $58 $20 ==== === ===
INVENTORIES: Inventories are valued at the lower of cost or market. Cost is determined principally under the first-in, first-out (FIFO) method. Obsolete and unsaleable inventories are reflected at estimated net realizable value. Inventory costs include materials, direct labor and manufacturing overhead. Inventories are comprised of:
AS OF JUNE 30, ----------------- 2004 2003 ------- ------- Raw materials............................................... $ 1,454 $ 2,016 Work-in-process............................................. 585 220 Finished goods.............................................. 30,572 20,532 ------- ------- Total inventory............................................. $32,611 $22,768 ======= =======
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated at cost. Depreciation is charged to results of operations using the straight-line method based upon the assets' estimated useful lives ranging from 8 to 20 years for buildings and improvements and 3 to 10 years for machinery and equipment. F-72 PHILIPP BROTHERS NETHERLANDS I B.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company capitalizes costs that extend the useful life or productive capacity of an asset. Repair and maintenance costs are expensed as incurred. In the case of disposals, the assets and related accumulated depreciation are removed from the accounts, and the net amounts, less proceeds from disposal, are included in the statements of operations and comprehensive loss. DEFERRED FINANCING COSTS: Deferred financing costs related to the 13% Senior Secured Notes due 2007 were allocated to the Company from PAHC and were $1,311 net of accumulated amortization of $227 at June 30, 2004. These deferred financing costs are being amortized over the life of the notes. Amortization expense was $227 for 2004. INTANGIBLES: Product intangibles cost arising from the MFA acquisition was $2,191 and $2,069 at June 30, 2004 and 2003, respectively, and accumulated amortization of $622 and $251 at June 30, 2004 and 2003, respectively. Amortization expense was $252, $156 and $201 for 2004, 2003 and 2002, respectively. Amortization expense from the MFA acquisition for each of the next five years from 2005 to 2009 is expected to be approximately $250 per year. These product intangible costs are being amortized on a straight-line basis over ten years with 6 1/2 years remaining at June 30, 2004. FOREIGN CURRENCY TRANSLATION: Financial position and results of operations of the Company are measured using the Euro as the functional currency. Assets and liabilities are translated at the exchange rates in effect at each fiscal year end. The translation adjustments related to assets and liabilities that arise from the use of differing exchange rates from period to period are included in cumulative foreign currency translation adjustment on the Company's balance sheet. Income statement accounts are translated at the average rates of exchange prevailing during the year. Foreign currency transaction gains and losses primarily arise from short-term intercompany balances. Net foreign currency transaction (gains) losses were $(378), $1,419 and $(474) for 2004, 2003 and 2002, respectively, and were included in other (income) expense, net in the consolidated statements of operations and comprehensive loss. PAHC considers long-term notes payable with related parties to be balances for which settlement is not planned or anticipated in the foreseeable future. PAHC considers these balances to be part of the net investment and, accordingly, foreign currency transaction (gains) losses from such items are recorded in cumulative foreign currency translation adjustment on the Company's balance sheet. RECOVERABILITY OF LONG-LIVED ASSETS: The Company evaluates the recoverability of long-lived assets, including intangible assets, when events or circumstances indicate that a diminution in value may have occurred, using financial indicators such as historical and future ability to generate cash flows from operations. The Company's policy is to record an impairment loss in the period it is determined the carrying amount of the asset may not be recoverable. This determination is based on an evaluation of such factors as the occurrence of a significant event, a significant change in the environment in which the business operates, or if the expected future net cash flows (undiscounted and without interest or income taxes) are less than the carrying amount of the assets. F-73 PHILIPP BROTHERS NETHERLANDS I B.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) INCOME TAXES: Income tax expense includes The Netherlands, Belgium and Brazil income taxes. The tax effect of certain temporary differences between amounts recognized for financial reporting purposes and amounts recognized for tax purposes are reported as deferred income taxes. Deferred tax balances are adjusted to reflect tax rates, based on current tax laws, which will be in effect in the years in which the temporary differences are expected to reverse. Valuation allowances are established as necessary to reduce deferred tax assets to amounts more likely than not to be realized. RESEARCH AND DEVELOPMENT EXPENDITURES: Research and development expenditures are expensed as incurred, recorded in selling, general and administrative expenses and were $520, $273 and $273 for 2004, 2003 and 2002, respectively. NEW ACCOUNTING PRONOUNCEMENTS: The Company adopted the following new and revised accounting pronouncements in fiscal 2004: Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits, an amendment to FASB Statements No. 87, 88, and 106 (revised 2003)" ("SFAS No. 132"). This revision to SFAS No. 132 relates to employers' disclosures about pension plans and other postretirement benefit plans. SFAS No. 132 now requires additional disclosures to describe the types of plan assets, investment strategy, measurement date(s), plan obligations, cash flows, and components of net periodic benefit cost recognized during interim periods of defined pension plans and other defined postretirement plans. The additional disclosures required by this revision to SFAS No. 132 have been provided. FASB Interpretation No. 46, "Consolidation of Variable Interest Entities (revised December 2003)" ("FIN No. 46"). This revision to FIN No. 46 clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements", to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. The adoption of FIN No. 46 did not result in a material impact on the Company's financial statements. The Company will adopt the following new accounting pronouncements during 2005: Statement of Financial Accounting Standards No. 151, "Inventory Costs, an amendment to Accounting Research Bulletin No. 43, Chapter 4" ("SFAS No. 151"). SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing" to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB No. 43, Chapter 4, previously stated that "...under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require treatment as current period charges...." SFAS No. 151 requires that those items be recognized as current period charges regardless of whether they meet the criterion of "so abnormal". In addition, SFAS No. 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 30, 2005 and the provisions of this statement shall be applied prospectively. The Company is currently assessing the impact of this statement. Statement of Financial Accounting Standards No. 153, "Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29" ("SFAS No. 153"). SFAS No. 153 amends APB Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly F-74 PHILIPP BROTHERS NETHERLANDS I B.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) as a result of the exchange. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after December 2004. The provisions of this statement shall be applied prospectively. The Company is currently assessing the impact of this statement. 3. REFINANCING On October 21, 2003, PAHC issued 105,000 units consisting of $85,000 of 13% Senior Secured Notes due 2007 of PAHC and $20,000 13% Senior Secured Notes due 2007 of Philipp Brothers Netherlands III B.V., an indirect wholly-owned subsidiary of the Company. Certain proceeds from the issuance were to satisfy its outstanding obligations to Pfizer Inc., including $8,225 of accounts payable. 4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is comprised of:
AS OF JUNE 30, ----------------- 2004 2003 ------- ------- Land........................................................ $ 4,199 $ 4,287 Buildings and improvements.................................. 10,267 8,820 Machinery and equipment..................................... 25,321 23,859 ------- ------- 39,787 36,966 Less: accumulated depreciation.............................. (9,199) (6,234) ------- ------- $30,588 $30,732 ======= =======
Depreciation expense was $3,079, $2,293 and $2,688 for 2004, 2003 and 2002, respectively. 5. RELATED PARTY TRANSACTIONS The Company transacts business with PAHC and certain of its subsidiaries. The amounts of these transactions, and the related receivables and payables, reflected in the Company's financial statements are as follows:
2004 2003 2002 ------- ------- ------- Product sales........................................... $34,357 $31,216 $32,261 Product purchases....................................... 913 3,086 4,028 Receivables at June 30.................................. 7,917 11,116 16,730 Payables at June 30..................................... 1,687 922 1,989
The Company has notes payable to related parties. These notes bear interest at 6%, 9%, 13% and 13.125% per annum and interest is payable annually on December 31. The Company's related interest obligations to related parties will be payable only to the extent that the Company's cash flows are sufficient to service such obligations. These notes mature on June 23, 2006, September 22, 2006, December 1, 2007 and July 2, 2011. These notes payable are included in notes payable -- related parties on the Company's consolidated balance sheet. During August and September 2001, Odda, a Norwegian subsidiary of PAHC, issued $2,000 of 9 7/8% promissory notes, with a 5-year maturity, to PAH Brazil. During 2003 PAHC determined it would permanently shutdown and no longer fund the operations of Odda, and on February 28, 2003 Odda filed for bankruptcy in Norway. As a result of the bankruptcy, during 2003, the Company recorded a reserve of $2,280 for the principal amount of the promissory notes plus accrued interest. This reserve was included in other F-75 PHILIPP BROTHERS NETHERLANDS I B.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (income) expense, net -- related parties on the Company's consolidated statements of operations and comprehensive loss. Cost allocations from PAHC and certain other related parties are included in selling, general and administrative expenses on the Company's consolidated statements of operations and comprehensive loss. These allocations are based upon the ratio of the Company's third party sales to the third party sales of PAHC and certain other related parties, and represent administrative costs incurred by these entities in support of the operations of the Company. These cost allocations amounted to $2,217, $1,930 and $1,922 for 2004, 2003 and 2002, respectively. PAHC and the certain other related parties have decided not to seek repayment for these amounts from the Company and contributed these amounts as additional capital to the Company. 6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities are comprised of:
AS OF JUNE 30, ----------------- 2004 2003 ------- ------- Employee related expenses................................... $ 3,264 $ 2,876 Tax accruals................................................ 8,167 5,188 Interest accruals........................................... 217 -- Other accrued liabilities................................... 1,790 1,096 ------- ------- $13,438 $ 9,160 ======= =======
7. DEBT In October 2003 PAHC issued 105,000 units, consisting of $85,000 of 13% Senior Secured Notes due 2007 of PAHC (the "US Senior Notes") and $20,000 of 13% Senior Secured Notes due 2007 of Philipp Brothers Netherlands III B.V. (the "Dutch Senior Notes" and together with the US Senior notes, the "Senior Secured Notes"), (the "Dutch issuer"), an indirect wholly-owned subsidiary of the Company. The Dutch Senior Notes are senior secured obligations of the Dutch issuer and are guaranteed on a senior secured basis by PAHC and by the restricted subsidiaries of the Dutch issuer, presently consisting of Phibro Animal Health SA. The Dutch Senior Notes and related guarantees are secured by a pledge of all the accounts receivable, a security interest or floating charge on the inventory to the extent permitted by applicable law, and a mortgage on substantially all of the real property of the Dutch issuer and each of its restricted subsidiaries, a pledge of 100% of the capital stock of each subsidiary of the Dutch issuer, and a pledge of the intercompany loans made by the Dutch issuer to its restricted subsidiaries. The indenture governing the Senior Secured Notes provides for optional make-whole redemptions at any time prior to June 1, 2005, optional redemption on or after June 1, 2005, and requires PAHC to make certain offers to purchase Senior Secured Notes upon a change of control, upon certain asset sales and from fifty percent (50%) of excess cash flow (as such terms are defined in the indenture). The indenture contains certain covenants with respect to PAHC, the Company and the guarantors, which restrict, among other things, (a) the incurrence of additional indebtedness, (b) the payment of dividends and other restricted payments, (c) the creation of certain liens, (d) the sale of assets, (e) certain payment restrictions affecting subsidiaries, and (f) transactions with affiliates. The indenture restricts the Company's ability to consolidate, or merge with or into, or to transfer all or substantially all of its assets to, another person. F-76 PHILIPP BROTHERS NETHERLANDS I B.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8. EMPLOYEE BENEFIT PLANS The Company's Belgium subsidiary maintains a defined benefit plan for eligible employees. The benefits provided by the plan are based upon years of service and the employees' average compensation, as defined. The measurement date for the plan was June 30, 2004 and 2003, respectively. Reconciliations of changes in benefit obligations, plan assets, and funded status of the plans were:
JUNE 2004 JUNE 2003 --------- --------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year..................... $6,595 $4,251 Service cost................................................ 467 310 Employee contributions...................................... 27 100 Interest cost............................................... 374 259 Benefits paid............................................... (3) (29) Actuarial (gain) or loss.................................... (475) 879 Exchange rate impact........................................ 338 825 ------ ------ Benefit obligation at end of year........................... $7,323 $6,595 ====== ======
At June 30, 2004 and 2003, the accumulated benefit obligations were $4,383 and $4,248, respectively.
JUNE 2004 JUNE 2003 --------- --------- CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year.............. $4,566 $2,882 Actual return on plan assets................................ 435 204 Employer contributions...................................... 558 841 Employee contributions...................................... 27 100 Benefits paid............................................... (3) (29) Exchange rate impact........................................ 245 568 ------ ------ Fair value of plan assets at end of year.................... $5,828 $4,566 ====== ======
JUNE 2004 JUNE 2003 --------- --------- FUNDED STATUS Funded status of the plan................................... $(1,495) $(2,029) Unrecognized net actuarial (gain) or loss................... 368 961 ------- ------- (Accrued) pension cost...................................... $(1,127) $(1,068) ======= =======
The Company expects to contribute $602 to the plan during fiscal 2005. The Company's policy is to fund the plan in amounts which comply with contribution limits imposed by law. F-77 PHILIPP BROTHERS NETHERLANDS I B.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Components of net periodic pension expense were:
2004 2003 2002 ----- ----- ----- Service cost -- benefits earned during the year............. $ 467 $ 310 $ 217 Interest cost on benefit obligation......................... 374 259 164 Expected return on plan assets.............................. (300) (203) (123) Amortization of net actuarial loss.......................... 22 -- -- ----- ----- ----- Net periodic pension cost................................... $ 563 $ 366 $ 258 ===== ===== =====
Significant actuarial assumptions for the plan were:
2004 2003 2002 ---- ---- ---- Discount rate for service and interest...................... 5.5% 5.8% 5.8% Expected rate of return on plan assets...................... 6.0% 6.0% 6.0% Rate of compensation increase............................... 3.0% 3.0% 3.0% Discount rate for year-end benefit obligation............... 5.5% 5.5% 5.8%
Estimated future benefit payments, including benefits attributable to future service, are as follows: 2005........................................................ $ 37 2006........................................................ 38 2007........................................................ 40 2008........................................................ 41 2009........................................................ 42 2010-2014................................................... 1,817
The Company's plan target allocations for fiscal 2005 and the weighted asset allocation of plan assets as of June 30, 2004 and 2003 are as follows:
2005 2004 2003 ---- ---- ---- Debt securities............................................. 59% 62% 79% Equity securities........................................... 25% 21% 20% Other....................................................... 16% 17% 1%
The expected long-term rate of return for the plan's total assets is based on the expected return of each of the above categories, weighted based on the target allocation for each class. Equity securities are expected to return 7.5% over the long-term, while debt securities are expected to return 5.5%. The Company assumed the liability for the plan during 2002 as part of the MFA acquisition from Pfizer. The Company's Brazil subsidiary provides a savings plan, under which eligible employees may make a pre-tax contribution of up to 12% of base compensation. The Company makes a matching contribution equal to the employee's contribution up to the first 6% of base compensation. All employee contributions are subject to the maximum amounts permitted under statutory income tax guidelines. Expense related to the Company's contribution under this plan was $58, $41 and $39 for 2004, 2003 and 2002, respectively. In addition the Company's Brazil subsidiary makes a supplemental retirement contribution on behalf of certain eligible employees transferred to the Company in December 2000. Expense related to the Company's contribution was $30, $24 and $30 in 2004, 2003 and 2002, respectively. F-78 PHILIPP BROTHERS NETHERLANDS I B.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 9. INCOME TAXES
2004 2003 2002 ------- ------- ----- Loss before income taxes.................................. $(2,988) $(9,383) $(840) ======= ======= ===== Current tax provision (benefit)........................... $ 1,502 $(1,017) $(872) Deferred tax provision.................................... 112 1,376 862 ------- ------- ----- Provision (benefit) for income taxes...................... $ 1,614 $ 359 $ (10) ======= ======= =====
Reconciliations of the statutory income tax rate and the Company's effective income tax rate are:
2004 2003 2002 ----- ----- ----- % % % Statutory income tax rate................................... (34.0) (34.0) (34.0) Foreign tax rate differences................................ 9.3 1.5 (36.4) Expenses with no tax benefit................................ 34.2 6.4 72.4 Changes in valuation allowance.............................. 33.8 27.2 -- Other....................................................... 10.7 2.7 (3.2) ----- ----- ----- Effective income tax rate................................... 54.0 3.8 (1.2) ===== ===== =====
The tax effects of significant temporary differences that comprise deferred tax assets and deferred tax liabilities at June 30, 2004 and 2003 were:
AS OF JUNE 30, ----------------- 2004 2003 ------- ------- Deferred tax assets: Depreciation.............................................. $ 7 $ 7 Inventory................................................. 615 615 Net operating loss carry forwards......................... 3,686 1,849 Other..................................................... 97 11 ------- ------- 4,405 2,482 Less: valuation allowance................................. (3,686) (1,849) ------- ------- 719 633 ------- ------- Deferred tax liabilities: Depreciation.............................................. (1,022) (990) Other..................................................... (1,143) (977) ------- ------- (2,165) (1,967) ------- ------- Net deferred tax liability.................................. $(1,446) $(1,334) ======= =======
Deferred taxes are included in the following line items on the Company's consolidated balance sheets:
AS OF JUNE 30, ----------------- 2004 2003 ------- ------- Prepaid expenses and other current assets................... $ 315 $ 315 Other liabilities........................................... (1,761) (1,649) ------- ------- $(1,446) $(1,334) ======= =======
F-79 PHILIPP BROTHERS NETHERLANDS I B.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company has incurred losses in recent years and has reassessed the likelihood of recovering net deferred tax assets, resulting in the recording of valuation allowances due to the uncertainty of future profitability. The Company will continue to evaluate the likelihood of recoverability of these deferred tax assets based upon actual and expected operating performance. 10. SUBSEQUENT EVENTS ISSUANCE OF ADDITIONAL 13% SENIOR SECURED NOTES: On December 21, 2004, PAHC completed a private offering of 22,491 additional units consisting of $18,207 13% Senior Secured Notes due 2007 of PAHC (the "U.S. Notes") and $4,284 13% Senior Secured Notes due 2007 (the "Dutch Notes" and together with the U.S. Notes, the "Additional Notes") of Philipp Brothers Netherlands III B.V., an indirect wholly-owned subsidiary of the Company (the "Dutch Issuer" and together with PAHC, the "Issuers"). The Additional Notes were issued under the Indenture dated October 21, 2003, as amended and supplemented (the "Indenture") under which the Issuers previously issued 105,000 units consisting of $85,000 aggregate principal amount of U.S. Notes and $20,000 aggregate principal amount of Dutch Notes. The proceeds from the sale of the Additional Notes will be used to refinance a portion of PAHC's indebtedness under its domestic senior credit facility. SALE OF BELGIUM PLANT: On December 16, 2004 PAH Belgium entered into an agreement with GlaxoSmithKline Biologicals ("GSK") to sell to GSK substantially all of PAH Belgium's facilities in Rixensart, Belgium ("the Belgium Plant") as follows (U.S. dollar amounts at the December 16, 2004 exchange rate): (i) the transfer of substantially all of the land and buildings and certain equipment of PAH Belgium at the Belgium Plant, as well as the industrial activities and intellectual property relating to certain solvent technology of PAH Belgium for a purchase price of EUR 6,200 ($8,238), payable at closing; (ii) the transfer to GSK of a majority of the employees of the Belgium Plant and the corresponding responsibility for statutory severance obligations; (iii) GSK agreeing to be responsible for costs of removal, by demolition or otherwise, certain buildings not to be used by it, but for PAH Belgium to reimburse GSK up to a maximum of EUR 700 ($930) for such removal costs; (iv) in recognition of the benefits to PAHC from the proposed transaction, PAH Belgium agreeing to pay to GSK EUR 1,500 ($1,993) within six months from the closing date, EUR 1,500 ($1,993) within eighteen months from the closing date, EUR 1,500 ($1,993) within thirty months from the closing date, and EUR 500 ($664) within forty-two months from the closing date; (v) PAH Belgium retaining certain excess land (valued at approximately EUR 400 ($531)) and being able to sell such land for its own account; (vi) PAH Belgium being responsible for certain plant closure costs and legally required severance indemnities in connection with workforce reductions, estimated in total to be EUR 7,700 ($10,231), of which an amount estimated to be approximately EUR 4,100 ($5,448) would be payable at or around the closing and an aggregate amount so estimated to be approximately EUR 3,600 ($4,783) would be payable over periods up to thirteen years; and (vii) PAH Belgium retaining any or all equipment at the Belgium Plant, and being able to sell such equipment for the account of PAH Belgium or transfer such equipment, together with other assets and rights related to the production of virginiamycin, to PAH Brazil which owns a facility in Guarulhos, Brazil or in connection with alternative production arrangements. The foregoing transactions and agreements are subject to a closing that is expected to occur no earlier than July 1, 2005 nor later than June 30, 2006. The Dutch Notes and related guarantees are secured by a mortgage on the Belgium Plant which will be released in connection with the closing of the sale of the Belgium Plant to GSK. F-80 PHILIPP BROTHERS NETHERLANDS I B.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The carrying value of the Belgium Plant and related assets at September 30, 2004 is EUR 13,098 ($18,480). The Company is in the process of evaluating the accounting for this transaction and will record an impairment loss, if required in the second quarter ended December 31, 2004. In addition, the Company will expense severance, plant closure and other related costs in the period in which such liabilities are incurred in accordance with Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". As of the date of this filing, estimates of such costs are in process of being determined. 11. FINANCIAL INSTRUMENTS Financial instruments that potentially subject the Company to credit risk consist principally of cash and trade receivables. The Company places its cash with high quality financial institutions. The Company sells to customers in a variety of industries, markets and countries. Concentrations of credit risk with respect to receivables arising from these sales are limited due to the large number of customers comprising the Company's customer base. Ongoing credit evaluations of customers' financial conditions are performed and, generally, no collateral is required. The Company maintains appropriate reserves for uncollectible receivables. The carrying amounts of cash, trade receivables and trade payables is considered to be representative of their fair value because of their short maturities. The fair value of the Company's Dutch Senior Notes is estimated based on quoted market prices. At June 30, 2004 the fair value of the Company's Dutch Senior Notes was $21,800 and the related carrying amount was $20,000. 12. BUSINESS SEGMENTS The Company has determined that it operates only in one segment. The Company manufactures and markets numerous formulations and concentrations of medicated feed additives including antibiotics, antibacterials, anticoccidials, anthelmintics, and other animal health and nutrition products. 13. GEOGRAPHIC INFORMATION The following is information about the Company's geographic operations. Information is attributed to the geographic areas based on the location of the Company's subsidiaries.
2004 2003 2002 ------- ------- ------- TOTAL SALES Europe................................................ $34,713 $33,619 $25,705 South America......................................... 15,245 13,064 21,195 ------- ------- ------- Total................................................. $49,958 $46,683 $46,900 ======= ======= =======
2004 2003 2002 ------- ------- ------- PROPERTY, PLANT AND EQUIPMENT, NET Europe................................................ $17,320 $17,049 $14,399 South America......................................... 13,268 13,683 11,799 ------- ------- ------- Total................................................. $30,588 $30,732 $26,198 ======= ======= =======
F-81 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors of Phibro Animal Health SA (Belgium): In our opinion, the accompanying balance sheets and the related statements of operations and comprehensive (loss), changes in stockholders' equity and cash flows present fairly, in all material respects, the financial position of Phibro Animal Health SA (Belgium) at June 30, 2004 and June 30, 2003, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2004, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Florham Park, New Jersey January 10, 2005 F-82 PHIBRO ANIMAL HEALTH SA (BELGIUM) BALANCE SHEETS
AS OF JUNE 30, --------------------- 2004 2003 --------- --------- (U.S.$ IN THOUSANDS) ASSETS CURRENT ASSETS: Cash, including restricted balance of $175 at June 30, 2004 and 2003.......................................... $ 212 $ 185 Trade receivables, less allowance for doubtful accounts of $13 and $22 at June 30, 2004 and 2003, respectively.... 2,592 1,542 Other receivables......................................... 72 518 Inventories............................................... 23,159 13,460 Prepaid expenses and other current assets................. 1,018 1,866 Trade receivables -- related parties...................... 4,527 8,553 ------- ------- TOTAL CURRENT ASSETS................................... 31,580 26,124 PROPERTY, PLANT AND EQUIPMENT, net.......................... 17,321 17,049 INTANGIBLES................................................. 1,569 1,818 ------- ------- $50,470 $44,991 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable.......................................... $ 2,258 $12,115 Accrued expenses and other current liabilities............ 8,291 4,804 Trade payables -- related parties......................... 2,879 1,835 ------- ------- TOTAL CURRENT LIABILITIES.............................. 13,428 18,754 OTHER LIABILITIES........................................... 2,897 2,905 NOTES PAYABLE -- RELATED PARTIES............................ 30,571 22,306 ------- ------- TOTAL LIABILITIES...................................... 46,896 43,965 ------- ------- STOCKHOLDERS' EQUITY: Paid-in capital........................................... 1,896 1,186 Accumulated deficit....................................... (2,631) (3,937) Cumulative foreign currency translation adjustment........ 4,309 3,777 ------- ------- TOTAL STOCKHOLDERS' EQUITY............................. 3,574 1,026 ------- ------- $50,470 $44,991 ======= =======
The accompanying notes are an integral part of the financial statements F-83 PHIBRO ANIMAL HEALTH SA (BELGIUM) STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED JUNE 30, ------------------------------ 2004 2003 2002 -------- -------- -------- (U.S.$ IN THOUSANDS) NET SALES................................................... $ 5,742 $ 6,625 $ 4,196 NET SALES -- RELATED PARTIES................................ 28,970 26,994 21,509 ------- ------- ------- TOTAL SALES............................................... 34,712 33,619 25,705 COST OF GOODS SOLD.......................................... 25,293 31,435 21,631 ------- ------- ------- GROSS PROFIT.............................................. 9,419 2,184 4,074 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................ 3,334 2,595 2,018 ------- ------- ------- OPERATING INCOME (LOSS)................................... 6,085 (411) 2,056 OTHER: Interest expense.......................................... 95 62 365 Interest expense -- related parties....................... 3,335 2,849 2,486 Other (income) expense, net............................... (265) 1,283 2,294 ------- ------- ------- INCOME (LOSS) BEFORE INCOME TAXES......................... 2,920 (4,605) (3,089) PROVISION (BENEFIT) FOR INCOME TAXES........................ 1,614 (1,086) (1,098) ------- ------- ------- NET INCOME (LOSS)......................................... 1,306 (3,519) (1,991) OTHER COMPREHENSIVE INCOME: Change in currency translation adjustment................. 532 2,401 1,319 ------- ------- ------- COMPREHENSIVE INCOME (LOSS)............................... $ 1,838 $(1,118) $ (672) ======= ======= =======
The accompanying notes are an integral part of the financial statements F-84 PHIBRO ANIMAL HEALTH SA (BELGIUM) STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003 AND 2002 ------------------------------------------------------ FOREIGN CURRENCY PAID-IN (ACCUMULATED TRANSLATION CAPITAL DEFICIT) ADJUSTMENT TOTAL --------- -------------- ------------- --------- (U.S.$ IN THOUSANDS) BALANCE, JUNE 30, 2001............................ $ -- $ 1,573 $ 57 $ 1,630 Contribution from parent........................ 459 459 Net (loss)...................................... (1,991) (1,991) Foreign currency translation adjustment......... 1,319 1,319 ------ ------- ------ ------- BALANCE, JUNE 30, 2002............................ $ 459 $ (418) $1,376 $ 1,417 ====== ======= ====== ======= Contribution from parent........................ 727 727 Net (loss)...................................... (3,519) (3,519) Foreign currency translation adjustment......... 2,401 2,401 ------ ------- ------ ------- BALANCE, JUNE 30, 2003............................ $1,186 $(3,937) $3,777 $ 1,026 ====== ======= ====== ======= Contribution from parent........................ 710 710 Net (loss)...................................... 1,306 1,306 Foreign currency translation adjustment......... 532 532 ------ ------- ------ ------- BALANCE, JUNE 30, 2004............................ $1,896 $(2,631) $4,309 $ 3,574 ====== ======= ====== =======
The accompanying notes are an integral part of the financial statements F-85 PHIBRO ANIMAL HEALTH SA (BELGIUM) STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, ---------------------------- 2004 2003 2002 ------- ------- -------- (U.S.$ IN THOUSANDS) OPERATING ACTIVITIES: Net income (loss)......................................... $ 1,306 $(3,519) $ (1,991) Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation and amortization.......................... 2,669 2,019 2,252 Deferred taxes......................................... 112 142 (178) Allocated selling, general and administrative expenses from parent.......................................... 658 727 459 Effects of changes in foreign currency and other....... (264) 1,268 1,912 Changes in operating assets and liabilities: Accounts receivable.................................. (945) (322) 886 Inventories.......................................... (8,762) 2,270 (10,325) Prepaid expenses and other current assets............ 1,369 (1,191) 273 Other assets......................................... -- -- 66 Related party receivables and payables............... 5,135 1,557 4,022 Accounts payable..................................... (2,395) 3,523 1,472 Accrued expenses and other liabilities............... 2,790 (8,244) 3,193 ------- ------- -------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES...................................... 1,673 (1,770) 2,041 ------- ------- -------- INVESTING ACTIVITIES: Capital expenditures...................................... (1,613) (2,149) (1,938) Acquisition of a business................................. -- -- (4,422) Other investing........................................... -- -- -- ------- ------- -------- NET CASH USED BY INVESTING ACTIVITIES............. (1,613) (2,149) (6,360) ------- ------- -------- FINANCING ACTIVITIES: Net increase in intercompany debt......................... 8,181 3,432 3,540 Payment of Pfizer obligations............................. (8,225) -- -- ------- ------- -------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES...................................... (44) 3,432 3,540 ------- ------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... 11 54 128 ------- ------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..................................... 27 (433) (651) CASH AND CASH EQUIVALENTS at beginning of period............ 185 618 1,269 ------- ------- -------- CASH AND CASH EQUIVALENTS at end of period.................. $ 212 $ 185 $ 618 ======= ======= ======== Supplemental Cash Flow Information: Interest paid............................................. $ 55 $ 88 $ -- Income taxes paid......................................... -- 366 358
The accompanying notes are an integral part of the financial statements F-86 PHIBRO ANIMAL HEALTH SA (BELGIUM) NOTES TO FINANCIAL STATEMENTS (U.S.$ IN THOUSANDS) 1. DESCRIPTION OF BUSINESS Phibro Animal Health SA, a company organized under the laws of Belgium, (the "Company") is a manufacturer and marketer of a broad range of animal health and nutrition products, specifically medicated feed additives ("MFA"), which the Company sells in various markets predominately to the poultry, swine and cattle markets. The Company is a direct wholly-owned subsidiary of Philipp Brothers Netherlands III B.V. ("BV III") and an indirect wholly-owned subsidiary of both Philipp Brothers Netherlands I B.V. ("BV I") and Phibro Animal Health Corporation ("PAHC"). On November 30, 2000, PAHC purchased the medicated feed additive ("MFA") business of Pfizer, Inc. The Company, BV III and BV I were part of that acquisition. In connection with the MFA acquisition additional purchase price of $4,422 was earned and paid in 2002. All earn-out requirements have been satisfied and no further payments are necessary. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION: The Company presents its financial statements on the basis of its fiscal year ending June 30. All references to years 2004, 2003, and 2002 in these financial statements refer to the fiscal year ended June 30 of that year. RISKS AND UNCERTAINTIES: The use of antibiotics in medicated feed additives is a subject of legislative and regulatory interest. The issue of potential for increased bacterial resistance to certain antibiotics used in certain food-producing animals is the subject of discussions on a worldwide basis and, in certain instances, has led to government restrictions on the use of antibiotics in food-producing animals. The sale of feed additives containing antibiotics is a material portion of the Company's business. Should regulatory or other developments result in further restrictions on the sale of such products, it could have a material adverse impact on the Company's financial position, results of operations and cash flows. The testing, manufacturing, and marketing of certain products are subject to extensive regulation by numerous government authorities in the United States and other countries. A significant portion of the Company's sales and earnings are attributable to transactions with related parties. USE OF ESTIMATES: Preparation of the Company's financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. Actual results could differ from these estimates. Significant estimates include reserves for bad debts, inventory obsolescence, environmental matters, depreciation and amortization periods of long-lived assets, recoverability of long-lived assets and realizability of deferred tax assets and actuarial assumptions related to the Company's pension plan. REVENUE RECOGNITION: Revenue is recognized upon transfer of title and when risk of loss passes to the customer, generally at time of shipment. Net sales reflect total sales billed, less reductions for goods returned and trade discounts. F-87 PHIBRO ANIMAL HEALTH SA (BELGIUM) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) CASH: Cash includes cash in banks. Cash also includes cash on deposit in a restricted bank account under a contractual obligation with a customer, in the amount of $175 at June 30, 2004 and 2003. This cash was subsequently released during December 2004. ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS: Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company's best estimate of the probable credit losses in its existing accounts receivable. The allowance is based on historical write-off experience and is reviewed periodically. Past due balances are reviewed individually for collectibility. Account balances are charged against the allowance when the Company feels that it is probable that the receivable will not be recovered. The allowance for doubtful accounts was:
2004 2003 2002 ---- ---- ----- Balance at beginning of period.............................. $22 $-- $ -- Provision for bad debts..................................... -- 22 -- Bad debt write-offs......................................... (9) -- -- --- --- ----- Balance at end of period.................................... $13 $22 $ -- === === =====
INVENTORIES: Inventories are valued at the lower of cost or market. Cost is determined principally under the first-in, first-out (FIFO) method. Obsolete and unsaleable inventories are reflected at estimated net realizable value. Inventory costs include materials, direct labor and manufacturing overhead. Inventories are comprised of:
AS OF JUNE 30, ----------------- 2004 2003 ------- ------- Raw materials............................................... $ 910 $ 820 Work-in-process............................................. 166 60 Finished goods.............................................. 22,083 12,580 ------- ------- Total inventory............................................. $23,159 $13,460 ======= =======
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated at cost. Depreciation is charged to results of operations using the straight-line method based upon the assets' estimated useful lives ranging from 8 to 20 years for buildings and improvements and 3 to 10 years for machinery and equipment. The Company capitalizes costs that extend the useful life or productive capacity of an asset. Repair and maintenance costs are expensed as incurred. In the case of disposals, the assets and related accumulated depreciation are removed from the accounts, and the net amounts, less proceeds from disposal, are included in the statements of operations and comprehensive income (loss). INTANGIBLES: Product intangibles cost arising from the MFA acquisition was $2,191 and $2,069 at June 30, 2004 and 2003, respectively, and accumulated amortization of $622 and $251 at June 30, 2004 and 2003, respectively. F-88 PHIBRO ANIMAL HEALTH SA (BELGIUM) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Amortization expense was $252, $156 and $201 for 2004, 2003 and 2002, respectively. Amortization expense from the MFA acquisition for each of the next five years from 2005 to 2009 is expected to be approximately $250 per year. These product intangible costs are being amortized on a straight-line basis over ten years with 6 1/2 years remaining at June 30, 2004. FOREIGN CURRENCY TRANSLATION: Financial position and results of operations of the Company are measured using the Euro as the functional currency. Assets and liabilities are translated at the exchange rates in effect at each fiscal year end. The translation adjustments related to assets and liabilities that arise from the use of differing exchange rates from period to period are included in cumulative foreign currency translation adjustment on the Company's balance sheet. Income statement accounts are translated at the average rates of exchange prevailing during the year. Foreign currency transaction gains and losses primarily arise from short-term intercompany balances. Net foreign currency transaction (gains) losses were $(264), $1,268 and $1,912 for 2004, 2003 and 2002, respectively, and were included in other (income) expense, net in the statements of operations and comprehensive income (loss). PAHC considers long-term notes payable with related parties to be balances for which settlement is not planned or anticipated in the foreseeable future. PAHC considers these balances to be part of the net investment and, accordingly, foreign currency transaction (gains) losses from such items are recorded in cumulative foreign currency translation adjustment on the Company's balance sheet. RECOVERABILITY OF LONG-LIVED ASSETS: The Company evaluates the recoverability of long-lived assets, including intangible assets, when events or circumstances indicate that a diminution in value may have occurred, using financial indicators such as historical and future ability to generate cash flows from operations. The Company's policy is to record an impairment loss in the period it is determined the carrying amount of the asset may not be recoverable. This determination is based on an evaluation of such factors as the occurrence of a significant event, a significant change in the environment in which the business operates, or if the expected future net cash flows (undiscounted and without interest or income taxes) are less than the carrying amount of the assets. INCOME TAXES: Income tax expense includes Belgium income taxes. The tax effect of certain temporary differences between amounts recognized for financial reporting purposes and amounts recognized for tax purposes are reported as deferred income taxes. Deferred tax balances are adjusted to reflect tax rates, based on current tax laws, which will be in effect in the years in which the temporary differences are expected to reverse. Valuation allowances are established as necessary to reduce deferred tax assets to amounts more likely than not to be realized. RESEARCH AND DEVELOPMENT EXPENDITURES: Research and development expenditures are expensed as incurred, recorded in selling, general and administrative expenses and were $122 for 2004. There were no research and development expenditures in 2003 and 2002. F-89 PHIBRO ANIMAL HEALTH SA (BELGIUM) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NEW ACCOUNTING PRONOUNCEMENTS: The Company adopted the following new and revised accounting pronouncements in fiscal 2004: Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits, an amendment to FASB Statements No. 87, 88, and 106 (revised 2003)" ("SFAS No. 132"). This revision to SFAS No. 132 relates to employers' disclosures about pension plans and other postretirement benefit plans. SFAS No. 132 now requires additional disclosures to describe the types of plan assets, investment strategy, measurement date(s), plan obligations, cash flows, and components of net periodic benefit cost recognized during interim periods of defined pension plans and other defined postretirement plans. The additional disclosures required by this revision to SFAS No. 132 have been provided. FASB Interpretation No. 46, "Consolidation of Variable Interest Entities (revised December 2003)" ("FIN No. 46"). This revision to FIN No. 46 clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements", to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. The adoption of FIN No. 46 did not result in a material impact on the Company's financial statements. The Company will adopt the following new accounting pronouncements during 2005: Statement of Financial Accounting Standards No. 151, "Inventory Costs, an amendment to Accounting Research Bulletin No. 43, Chapter 4" ("SFAS No. 151"). SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing" to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB No. 43, Chapter 4, previously stated that ". . . under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require treatment as current period charges. . . ." SFAS No. 151 requires that those items be recognized as current period charges regardless of whether they meet the criterion of "so abnormal". In addition, SFAS No. 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 30, 2005 and the provisions of this statement shall be applied prospectively. The Company is currently assessing the impact of this statement. Statement of Financial Accounting Standards No. 153, "Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29" ("SFAS No. 153"). SFAS No. 153 amends APB Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after December 2004. The provisions of this statement shall be applied prospectively. The Company is currently assessing the impact of this statement. 3. REFINANCING On October 21, 2003, PAHC issued 105,000 units consisting of $85,000 of 13% Senior Secured Notes due 2007 of PAHC and $20,000 13% Senior Secured Notes due 2007 of Philipp Brothers Netherlands III B.V., the direct parent of the Company. Certain proceeds from the issuance were to satisfy its outstanding obligations to Pfizer Inc., including $8,225 of accounts payable. F-90 PHIBRO ANIMAL HEALTH SA (BELGIUM) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is comprised of:
AS OF JUNE 30, ----------------- 2004 2003 ------- ------- Land........................................................ $ 1,912 $ 1,806 Buildings and improvements.................................. 6,153 5,811 Machinery and equipment..................................... 16,425 14,133 ------- ------- 24,490 21,750 Less: accumulated depreciation.............................. (7,169) (4,701) ------- ------- $17,321 $17,049 ======= =======
Depreciation expense was $2,417, $1,863 and $2,051 for 2004, 2003 and 2002, respectively. 5. RELATED PARTY TRANSACTIONS The Company transacts business with PAHC and certain of its subsidiaries. The amounts of these transactions, and the related receivables and payables, reflected in the Company's financial statements are as follows:
2004 2003 2002 ------- ------- ------- Product sales........................................... $28,970 $26,994 $21,509 Product purchases....................................... 3,553 5,344 3,498 Receivables at June 30.................................. 4,527 8,553 9,770 Payables at June 30..................................... 2,879 1,835 1,371
The Company has notes payable to related parties. These notes bear interest at 13.125% per annum and interest is payable annually on December 31. The Company's related interest obligations to related parties will be payable only to the extent that the Company's cash flows are sufficient to service such obligations. These notes mature on December 7, 2007 and July 2, 2011. These notes payable are included in notes payable -- related parties on the Company's balance sheet. Cost allocations from PAHC and certain other related parties are included in selling, general and administrative expenses on the Company's statements of operations and comprehensive income (loss). These allocations are based upon the ratio of the Company's third party sales to the third party sales of PAHC and certain other related parties, and represent administrative costs incurred by these entities in support of the operations of the Company. These cost allocations amounted to $658, $727 and $459 for 2004, 2003 and 2002, respectively. PAHC and the certain other related parties have elected not to seek repayment for these amounts from the Company and have contributed these amounts as additional capital to the Company. F-91 PHIBRO ANIMAL HEALTH SA (BELGIUM) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities are comprised of:
AS OF JUNE 30, --------------- 2004 2003 ------ ------ Employee related expenses................................... $2,507 $2,053 Tax accruals................................................ 4,059 2,072 Other accrued liabilities................................... 1,725 679 ------ ------ $8,291 $4,804 ====== ======
7. DEBT GUARANTEED In October 2003 PAHC issued 105,000 units, consisting of $85,000 of 13% Senior Secured Notes due 2007 of PAHC (the "US Senior Notes") and $20,000 of 13% Senior Secured Notes due 2007 of Philipp Brothers Netherlands III B.V. (the "Dutch Senior Notes" and together with the US Senior notes, the "Senior Secured Notes"), (the "Dutch issuer"), the direct parent of the Company. The Dutch Senior Notes are senior secured obligations of the Dutch issuer and are guaranteed on a senior secured basis by PAHC and by the restricted subsidiaries of the Dutch issuer, presently consisting of the Company. The Dutch Senior Notes and related guarantees are secured by a pledge of all the accounts receivable, a security interest or floating charge on the inventory to the extent permitted by applicable law, and a mortgage on substantially all of the real property of the Dutch issuer and each of its restricted subsidiaries, a pledge of 100% of the capital stock of each subsidiary of the Dutch issuer, and a pledge of the intercompany loans made by the Dutch issuer to its restricted subsidiaries. The indenture governing the Senior Secured Notes provides for optional make-whole redemptions at any time prior to June 1, 2005, optional redemption on or after June 1, 2005, and requires PAHC to make certain offers to purchase Senior Secured Notes upon a change of control, upon certain asset sales and from fifty percent (50%) of excess cash flow (as such terms are defined in the indenture). The indenture contains certain covenants with respect to PAHC, the Company and the guarantors, which restrict, among other things, (a) the incurrence of additional indebtedness, (b) the payment of dividends and other restricted payments, (c) the creation of certain liens, (d) the sale of assets, (e) certain payment restrictions affecting subsidiaries, and (f) transactions with affiliates. The indenture restricts the Company's ability to consolidate, or merge with or into, or to transfer all or substantially all of its assets to, another person. 8. EMPLOYEE BENEFIT PLANS The Company maintains a defined benefit plan for eligible employees. The benefits provided by the plan are based upon years of service and the employees' average compensation, as defined. The measurement date for the plan was June 30, 2004 and 2003, respectively. F-92 PHIBRO ANIMAL HEALTH SA (BELGIUM) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Reconciliations of changes in benefit obligations, plan assets, and funded status of the plans were:
JUNE 2004 JUNE 2003 --------- --------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year..................... $6,595 $4,251 Service cost................................................ 467 310 Employee contributions...................................... 27 100 Interest cost............................................... 374 259 Benefits paid............................................... (3) (29) Actuarial (gain) or loss.................................... (475) 879 Exchange rate impact........................................ 338 825 ------ ------ Benefit obligation at end of year........................... $7,323 $6,595 ====== ======
At June 30, 2004 and 2003, the accumulated benefit obligations were $4,383 and $4,248, respectively.
JUNE 2004 JUNE 2003 --------- --------- CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year.............. $4,566 $2,882 Actual return on plan assets................................ 435 204 Employer contributions...................................... 558 841 Employee contributions...................................... 27 100 Benefits paid............................................... (3) (29) Exchange rate impact........................................ 245 568 ------ ------ Fair value of plan assets at end of year.................... $5,828 $4,566 ====== ======
JUNE 2004 JUNE 2003 --------- --------- FUNDED STATUS Funded status of the plan................................... $(1,495) $(2,029) Unrecognized net actuarial (gain) or loss................... 368 961 ------- ------- (Accrued) pension cost...................................... $(1,127) $(1,068) ======= =======
The Company expects to contribute $602 to the plan during fiscal 2005. The Company's policy is to fund the plan in amounts which comply with contribution limits imposed by law. Components of net periodic pension expense were:
2004 2003 2002 ----- ----- ----- Service cost -- benefits earned during the year............. $ 467 $ 310 $ 217 Interest cost on benefit obligation......................... 374 259 164 Expected return on plan assets.............................. (300) (203) (123) Amortization of net actuarial loss.......................... 22 -- -- ----- ----- ----- Net periodic pension cost................................... $ 563 $ 366 $ 258 ===== ===== =====
F-93 PHIBRO ANIMAL HEALTH SA (BELGIUM) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Significant actuarial assumptions for the plan were:
2004 2003 2002 ---- ---- ---- Discount rate for service and interest...................... 5.5% 5.8% 5.8% Expected rate of return on plan assets...................... 6.0% 6.0% 6.0% Rate of compensation increase............................... 3.0% 3.0% 3.0% Discount rate for year-end benefit obligation............... 5.5% 5.5% 5.8%
Estimated future benefit payments, including benefits attributable to future service, are as follows: 2005........................................................ $ 37 2006........................................................ 38 2007........................................................ 40 2008........................................................ 41 2009........................................................ 42 2010-2014................................................... 1,817
The Company's plan target allocations for fiscal 2005 and the weighted asset allocation of plan assets as of June 30, 2004 and 2003 are as follows:
2005 2004 2003 ---- ---- ---- Debt securities............................................. 59% 62% 79% Equity securities........................................... 25% 21% 20% Other....................................................... 16% 17% 1%
The expected long-term rate of return for the plan's total assets is based on the expected return of each of the above categories, weighted based on the target allocation for each class. Equity securities are expected to return 7.5% over the long-term, while debt securities are expected to return 5.5%. The Company assumed the liability for the plan during 2002 as part of the MFA acquisition from Pfizer. 9. INCOME TAXES
2004 2003 2002 ------ ------- ------- Income (loss) before income taxes........................ $2,920 $(4,605) $(3,089) ====== ======= ======= Current tax provision (benefit).......................... $1,502 $(1,228) $ (920) Deferred tax provision (benefit)......................... 112 142 (178) ------ ------- ------- Provision (benefit) for income taxes..................... $1,614 $(1,086) $(1,098) ====== ======= =======
Reconciliations of the statutory income tax rate to the Company's effective tax rate are:
2004 2003 2002 ---- ----- ----- % % % Statutory income tax rate................................... 34.0 (34.0) (40.0) Expenses with no tax benefit................................ 16.9 5.4 6.0 Changes in valuation allowance.............................. (6.5) 4.1 -- Other....................................................... 10.9 0.9 (1.5) ---- ----- ----- Effective income tax rate................................... 55.3 (23.6) (35.5) ==== ===== =====
F-94 PHIBRO ANIMAL HEALTH SA (BELGIUM) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The tax effects of significant temporary differences that comprise deferred tax assets and deferred tax liabilities at June 30, 2004 and 2003 were:
AS OF JUNE 30, ----------------- 2004 2003 ------- ------- Deferred tax assets: Depreciation.............................................. $ 7 $ 7 Inventory................................................. 615 615 Net operating loss carry forwards......................... -- 191 Other..................................................... 97 11 ------- ------- 719 824 Less: valuation allowance................................. -- (191) ------- ------- 719 633 ------- ------- Deferred tax liabilities: Depreciation.............................................. (1,022) (990) Other..................................................... (1,143) (977) ------- ------- (2,165) (1,967) ------- ------- Net deferred tax liability.................................. $(1,446) $(1,334) ======= =======
Deferred taxes are included in the following line items on the Company's balance sheets:
AS OF JUNE 30, ----------------- 2004 2003 ------- ------- Prepaid expenses and other current assets................... $ 315 $ 315 Other liabilities........................................... (1,761) (1,649) ------- ------- $(1,446) $(1,334) ======= =======
The Company incurred losses in 2003 and prior years and assessed the likelihood of recovering net deferred tax assets, which resulted in the recording of valuation allowances. In 2004 the Company had taxable income and utilized the net operating loss carry forwards from 2003 and prior years. The Company will continue to evaluate the likelihood of recoverability of the remaining deferred tax assets based upon actual and expected operating performance. 10. SUBSEQUENT EVENTS ISSUANCE OF ADDITIONAL 13% SENIOR SECURED NOTES: On December 21, 2004, PAHC completed a private offering of 22,491 additional units consisting of $18,207 13% Senior Secured Notes due 2007 of PAHC (the "U.S. Notes") and $4,284 13% Senior Secured Notes due 2007 (the "Dutch Notes" and together with the U.S. Notes, the "Additional Notes") of Philipp Brothers Netherlands III B.V., the direct parent of the Company (the "Dutch Issuer" and together with PAHC, the "Issuers"). The Additional Notes were issued under the Indenture dated October 21, 2003, as amended and supplemented (the "Indenture") under which the Issuers previously issued 105,000 units consisting of $85,000 aggregate principal amount of U.S. Notes and $20,000 aggregate principal amount of Dutch Notes. The proceeds from the sale of the Additional Notes will be used to refinance a portion of PAHC's indebtedness under its domestic senior credit facility. F-95 PHIBRO ANIMAL HEALTH SA (BELGIUM) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) SALE OF BELGIUM PLANT: On December 16, 2004 the Company entered into an agreement with GlaxoSmithKline Biologicals ("GSK") to sell to GSK substantially all of the Company's facilities in Rixensart, Belgium ("the Belgium Plant") as follows (U.S. dollar amounts at the December 16, 2004 exchange rate): (i) the transfer of substantially all of the land and buildings and certain equipment of the Company at the Belgium Plant, as well as the industrial activities and intellectual property relating to certain solvent technology of the Company for a purchase price of EUR 6,200 ($8,238), payable at closing; (ii) the transfer to GSK of a majority of the employees of the Belgium Plant and the corresponding responsibility for statutory severance obligations; (iii) GSK agreeing to be responsible for costs of removal, by demolition or otherwise, certain buildings not to be used by it, but for the Company to reimburse GSK up to a maximum of EUR 700 ($930) for such removal costs; (iv) in recognition of the benefits to PAHC from the proposed transaction, the Company agreeing to pay to GSK EUR 1,500 ($1,993) within six months from the closing date, EUR 1,500 ($1,993) within eighteen months from the closing date, EUR 1,500 ($1,993) within thirty months from the closing date, and EUR 500 ($664) within forty-two months from the closing date; (v) the Company retaining certain excess land (valued at approximately EUR 400 ($531)) and being able to sell such land for its own account; (vi) the Company being responsible for certain plant closure costs and legally required severance indemnities in connection with workforce reductions, estimated in total to be EUR 7,700 ($10,231), of which an amount estimated to be approximately EUR 4,100 ($5,448) would be payable at or around the closing and an aggregate amount so estimated to be approximately EUR 3,600 ($4,783) would be payable over periods up to thirteen years; and (vii) the Company retaining any or all equipment at the Belgium Plant, and being able to sell such equipment for the account of the Company or transfer such equipment, together with other assets and rights related to the production of virginiamycin, to Philipp Brothers Brasil Holdings Ltda., a related party, which owns a facility in Guarulhos, Brazil or in connection with alternative production arrangements. The foregoing transactions and agreements are subject to a closing that is expected to occur no earlier than July 1, 2005 nor later than June 30, 2006. The Dutch Notes and related guarantees are secured by a mortgage on the Belgium Plant which will be released in connection with the closing of the sale of the Belgium Plant to GSK. The carrying value of the Belgium Plant and related assets at September 30, 2004 is EUR 13,908 ($18,480). The Company is in the process of evaluating the accounting for this transaction and will record an impairment loss, if required, in the second quarter ended December 31, 2004. In addition, the Company will expense severance, plant closure and other related costs in the period in which such liabilities are incurred in accordance with Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". As of the date of this filing, estimates of such costs are in process of being determined. 11. FINANCIAL INSTRUMENTS Financial instruments that potentially subject the Company to credit risk consist principally of cash and trade receivables. The Company places its cash with high quality financial institutions. The Company sells to customers in a variety of industries, markets and countries. Concentrations of credit risk with respect to receivables arising from these sales are limited due to the large number of customers comprising the Company's customer base. Ongoing credit evaluations of customers' financial conditions are performed and, generally, no collateral is required. The Company maintains appropriate reserves for uncollectible receivables. The carrying amounts of cash, trade receivables and trade payables is considered to be representative of their fair value because of their short maturities. F-96 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The following summaries are subject to the complete text of the statutes and organizational documents of the Registrants described below and are qualified in their entirety by reference thereto. Phibro Animal Health Corporation and Phibro Chemicals, Inc. are New York corporations. Phibro-Tech, Inc., Prince Agriproducts, Inc., Phibro Animal Health Holdings, Inc., and Phibro Animal Health U.S., Inc. are Delaware corporations. Phibrochem, Inc. and C P Chemicals, Inc. are New Jersey Corporations. Western Magnesium Corp. is a California corporation. 1. Phibro Animal Health Corporation and Phibro Chemicals, Inc., each a New York corporation. Under Sections 721 through 725 of the New York Business Corporation Law (the "NYBCL"), a corporation has broad powers to indemnify its directors, officers and other employees. These sections (i) provide that the statutory indemnification and advancement of expenses provisions of the NYBCL are not exclusive, provided that no indemnification may be made to or on behalf of any director or officer if a judgment or other final adjudication adverse to the director or officer establishes that his or her acts were committed in bad faith or were the result of active and deliberate dishonesty and were material to the cause of action so adjudicated, or that he or she personally gained in fact a financial profit or other advantage to which he or she was not legally entitled, (ii) establish procedures for indemnification and advancement of expenses that may be contained in the certificate of incorporation or by-laws, or, when authorized by either of the foregoing, set forth in a resolution of the shareholders or directors or an agreement providing for indemnification and advancement of expenses, (iii) apply a single standard for statutory indemnification for third-party and derivative suits by providing that indemnification for third-party and derivative suits by providing that indemnification is available if the director or officer acted in good faith, for a purpose which he or she reasonably believed to be in the best interests of the corporation, and in criminal actions, had no reasonable cause to believe that his or her conduct was unlawful and (iv) permit the advancement of litigation expenses upon receipt of an undertaking to repay such advance if the director or officer is ultimately determined not to be entitled to indemnification or to the extent the expenses advanced exceed the indemnification to which the director or officer is entitled. Section 726 of the NYBCL permits the purchase of insurance to indemnify a corporation or its officers and directors to the extent permitted. Article Sixth of the Certificate of Incorporation of Phibro Animal Health Corporation provides that each and every person who may become a director of the corporation shall be relieved from any liability that might exist through contracting or dealing with the corporation for the benefit of himself or any firm, association or corporation in which he is or may be in any manner interested, provided that the interest in any such contract or transaction of any such director shall be fully disclosed. Article Sixth further provides that the corporation shall indemnify each director and officer against expenses reasonably incurred by him in connection with any action, suit, or proceeding to which he may be made a party by reason of his being or having been a director or officer of the corporation, to the fullest extent permitted by the NYBCL. Article Eighth provides that, to the fullest extent permitted by the NYBCL, the personal liability of directors of the corporation to the corporation or its shareholders for damages for any breach of duty in such capacity is eliminated. Article VI of the By-Laws of Phibro Chemicals, Inc. provides that, to the fullest extent permitted by the laws of the State of New York, a director of the corporation shall not be liable to the corporation or the shareholders for monetary damages for breach of fiduciary duty as director. Article VI further provides that each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "proceeding"), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity as a II-1 director, officer, employee or agent in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the corporation to the fullest extent authorized by the laws of the State of New York, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the corporation to provide broader indemnification rights than said law permitted the corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith and such indemnification shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of his or her heirs, executors and administrators; provided, however that the corporation shall indemnify any such person seeking indemnification in connection with a proceeding initiated by such person only if such proceeding was authorized by the Board of Directors of the corporation. Such right to indemnification shall be a contract right and shall include the right to be paid by the corporation the expense incurred in defending any such proceeding in advance of its final disposition; provided, however, that if the laws of the State of New York require, the payment of such expenses incurred by a director or officer in advance of the final disposition of a proceeding shall be made only upon delivery to the corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified by the corporation. The corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the corporation would have the power to indemnify such person against such expense, liability or loss under the laws of the State of New York. 2. Phibro-Tech, Inc., Prince Agriproducts, Inc., Phibro Animal Health Holdings, Inc., and Phibro Animal Health U.S., Inc., each a Delaware corporation. Section 145 of the Delaware General Corporation Law ("DGCL") provides generally and in pertinent part that a Delaware corporation may indemnify its directors and officers who are or were party or are threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, other than an action by or in the right of the corporation, by reason of the fact that they are or were a director, officer, employee or agent of the corporation, or are or were serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by them in connection with such action, suit or proceeding if they acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe their conduct was unlawful. Section 145 further provides that a Delaware corporation may indemnify its directors and officers who were or are a party or are threatened to be a made party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that they are or were a director, officer, employee or agent of the corporation, or are or were serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by them in connection with the defense or settlement of such action or suit if they acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. Section 102(b)(7) of the DGCL provides that a certificate of incorporation may contain a provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director provided that such provision shall not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, II-2 (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL (relating to liability for unauthorized acquisitions or redemptions of, or dividends on, capital stock) or (iv) for any transaction from which the director derived an improper personal benefit. PHIBRO-TECH, INC. Article Nine of the Certificate of Incorporation of Phibro-Tech, Inc. provides that the corporation shall indemnify, to the full extent permitted by Section 145 of the DGCL, as amended from time to time, all persons whom it may indemnify pursuant thereto. Article V of the By-Laws of Phibro-Tech, Inc. provides that the corporation, to the full extent permitted by the laws of the State of Delaware, shall indemnify any person who, was or is made a party to or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (including any appeal thereof), whether civil, criminal, administrative or investigative in nature (other than an action by or in the right of the corporation), by reason of the fact that such person is or was a director or officer of the corporation, or it at a time when he was a director or officer of the corporation, is or was serving at the request of, or to represent the interests of, the corporation as a director, officer, partner, fiduciary, employee or agent (a "Subsidiary Officer") of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise (and "Affiliated Entity"), against expenses (including attorneys' fees and disbursements), costs, judgment, fines, penalties and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interest of the corporation, and with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful; provided, however, that the corporation shall not be obligated to indemnify against any amount paid in settlement unless the corporation has consented to such settlement, which consent shall not be unreasonably withheld. The termination or any action suit or proceeding by judgment, order, settlement or conviction or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that the person did not act in good faith and in a manner which such person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, that such person had reasonable cause to believe that his or her conduct was unlawful. Article V further provides that the corporation, to the full extent permitted by the laws of the State of Delaware, shall indemnify any person who was or is made a party to or is threatened to be made a party to any threatened, pending or completed action or suit (including any appeal thereof) brought in the right of the corporation to procure a judgment in its favor by reason of the fact that such person is or was a director or officer of the corporation, or, if at a time when he was a director or officer to the corporation, is or was serving at the request or, or to represent the interests of, the corporation as a Subsidiary Officer of an Affiliated Entity against expenses (including attorneys' fees and disbursements) and costs actually and reasonably incurred by such person in connection with such action or suit if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation, and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to the corporation unless, and except to the extent that, the Court of Chancery of the State of Delaware or the court in which such judgment was rendered shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses and costs as the Court of Chancery of the State of Delaware or such other court shall deem proper. Any indemnification described in the preceding paragraph shall be made by the corporation only as authorized in the specific case upon a determination that indemnification is proper under the circumstances because such person has met the applicable standard as set forth above. Such determination shall be made (a) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to the action, suit or proceeding in respect of which indemnification is sought or by majority vote of the members of a committee of the Board of Directors composed of at least three members each of whom is not a party to such action, suit or proceeding, or (b) if such quorum is not obtainable and/or such a committee is not established or obtainable, or, even if obtainable, if a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (c) by the stockholders. Expenses and costs incurred by an officer or director in defending II-3 any such action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt or an undertaking by or on behalf of such person to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the corporation. In addition, the corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of, or to represent the interests of, the corporation as a Subsidiary Officer of any Affiliated Entity, against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person's status as such, whether or not the corporation would have the power to indemnify such person against such liability under the provisions of Article V or applicable law. PRINCE AGRIPRODUCTS, INC. Article IX of the Certificate of Incorporation of Prince Agriproducts, Inc. provides that the corporation shall indemnify each director and officer thereof against all costs and expenses reasonably incurred by or imposed upon him in connection with or arising out of any action, suit or proceeding in which he may be involved or to which he may be made a party by reason of his being or having been a director of officer of the corporation, except in relation to matters as to which he shall be finally adjudged in any such action, suit or proceeding to be liable for negligence or misconduct in the performance of his duty as such director or officer. In the case of settlement of any such action, suit or proceeding, such director or officer shall be indemnified by the corporation against the cost and expense of such settlement, including any amount paid to the corporation or to such other corporation, reasonably incurred by him, after and only after (a) the corporation shall have been advised by independent counsel that such director or officer is not liable for negligence or misconduct in the performance of his duty as such director or officer in relation to the matters covered by such action, suit or proceeding, and that such cost and expense does not substantially exceed the expense which might reasonably be incurred by such director or officer in conducting such action, suit or proceeding to a final conclusion, or (b) the holders of a majority of the shares of the capital stock of the corporation issued and outstanding in the hands of disinterested persons and entitled to vote shall by vote at any annual meeting of the stockholders, or at any special meeting called for the purpose, approve such settlement and the indemnification of such director or officer. "Disinterested persons" as used therein shall mean any (w) person other than a director or officer who, at the time, is or may, as such director or officer, be entitled to indemnification pursuant to the foregoing provisions, (x) any corporation or organization of which any such person owns of record or beneficially five per cent (5%) or more of the voting stock, (y) any firm or association of which any such person is a member, and (z) any spouse, child, parent, brother or sister or any such stockholder. PHIBRO ANIMAL HEALTH HOLDINGS, INC. Article Eighth of the Certificate of Incorporation of Phibro Animal Health Holdings, Inc. provides that the corporation shall, to the fullest extent permitted by law, as the same is now or may hereafter be in effect, indemnity each person (including the heirs, executors, administrators and other personal representatives of such person) against expenses, including attorneys' fees, judgements, fines and amounts paid in settlement, actually and reasonably incurred by such person in connection with any threatened, pending or completed suit, action or proceeding (whether civil, criminal, administrative or investigative in nature or otherwise) in which such person may be involved by reason of the fact that he or she is or was a director or officer of the corporation or is or was serving any other incorporated or unincorporated enterprise in such capacity at the request of the corporation. Section 6 of the By-Laws of Phibro Animal Health Holdings, Inc. provides that Each person who was or is a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "proceeding"), by reason of the fact that he, or a person of whom he is the legal representative, is or was a director or officer of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action or inaction in an official capacity or in any other capacity while serving as director, officer, employee or agent, shall be indemnified and held harmless by the corporation to the fullest II-4 extent permitted by the General Corporation Law of Delaware, as amended from time to time, against all costs, charges, expenses, liabilities and losses (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith, and that indemnification shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of his heirs, executors and administrators; provided, however, that, except as provided in section 6.2, the corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by that person, only if that proceeding (or part thereof) was authorized by the Board. The right to indemnification conferred in these by-laws shall be a contract right and shall include the right to be paid by the corporation the expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that, if the General Corporation Law of Delaware, as amended from time to time, requires, the payment of such expenses incurred by a director or officer in his capacity as a director or officer (and not in any other capacity in which service was or is rendered by that person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of a proceeding shall be made only upon delivery to the corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced, if it shall ultimately be determined that such director or officer is not entitled to be indemnified under these by-laws or otherwise. The corporation may, by action of its Board, provide indemnification to employees and agents of the corporation with the same scope and effect as the foregoing indemnification of directors and officers. PHIBRO ANIMAL HEALTH U.S., INC. Article Eighth of the Certificate of Incorporation of Phibro Animal Health U.S., Inc. provides that the corporation shall, to the fullest extent permitted by law, as the same is now or may hereafter be in effect, indemnity each person (including the heirs, executors, administrators and other personal representatives of such person) against expenses, including attorneys' fees, judgements, fines and amounts paid in settlement, actually and reasonably incurred by such person in connection with any threatened, pending or completed suit, action or proceeding (whether civil, criminal, administrative or investigative in nature or otherwise) in which such person may be involved by reason of the fact that he or she is or was a director or officer of the corporation or is or was serving any other incorporated or unincorporated enterprise in such capacity at the request of the corporation. Section 6 of the By-Laws of Phibro Animal Health U.S., Inc. provides that Each person who was or is a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "proceeding"), by reason of the fact that he, or a person of whom he is the legal representative, is or was a director or officer of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action or inaction in an official capacity or in any other capacity while serving as director, officer, employee or agent, shall be indemnified and held harmless by the corporation to the fullest extent permitted by the General Corporation Law of Delaware, as amended from time to time, against all costs, charges, expenses, liabilities and losses (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith, and that indemnification shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of his heirs, executors and administrators; provided, however, that, except as provided in section 6.2, the corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by that person, only if that proceeding (or part thereof) was authorized by the Board. The right to indemnification conferred in these by-laws shall be a contract right and shall include the right to be paid by the corporation the expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that, if the General Corporation Law of Delaware, as amended from time to time, requires, the payment of such expenses incurred by a director or officer in his capacity as a director or officer (and not in any other capacity in which service was or is rendered by that person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of a proceeding shall be made only upon delivery to II-5 the corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced, if it shall ultimately be determined that such director or officer is not entitled to be indemnified under these bylaws or otherwise. The corporation may, by action of its Board, provide indemnification to employees and agents of the corporation with the same scope and effect as the foregoing indemnification of directors and officers. 3. C P Chemicals, Inc. and Phibrochem, Inc, each a New Jersey corporation. Section 14A:3-5 of the New Jersey Business Corporation Act ("NJBCA") provides that a New Jersey business corporation shall have the power to indemnify a corporate agent against expenses and liabilities in connection with any proceeding involving such persons by reason of his serving or having served in such capacity or for such person's acts taken in such capacity as a director, officer, employee or agent of the corporation if such actions were taken in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal proceeding, if he had no reasonable cause to believe his conduct was unlawful, provided that any such proceeding is not by or in the right of the corporation. Section 14A:3-5 further provides that a New Jersey corporation shall have the power to indemnify its corporate agent against expenses incurred in connection with any proceeding by or in the right of the corporation to procure a judgment in its favor which involves such person by reason of his serving or having served in such capacity, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation. However, in such proceeding no indemnification shall be provided in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation, unless and only to the extent that the Superior Court or the court in which such proceeding was brought shall determine upon application that despite the adjudication of liability, but in view of all circumstances of the case, such person is fairly and reasonably entitled to indemnification for such expenses as the Superior Court or such other court shall deem proper. Section 14A:3-5 defines a "corporate agent" as any person who is or was a director, officer, employee or agent of the indemnifying corporation or of any constituent corporation absorbed by the indemnifying corporation in a consolidation or merger and any person who is or was a director, officer, trustee, employee or agent of any other enterprise, serving as such at the request of the indemnifying corporation, or of any such constituent corporation, or the legal representative of any such director, officer, trustee, employee or agent. Section 14A:2-7(3) of the NJBCA enables a corporation in its certificate of incorporation to limit the liability of directors and officers of the corporation to the corporation or its shareholders. Specifically, the certificate of incorporation may provide that directors and officers of the corporation will not be personally liable for money damages for breach of a duty as a director or an officer, except for any breach of duty based upon an act or omission (i) in breach of the director's or officer's duty of loyalty to the corporation or its shareholders, (ii) not in good faith or involving a knowing violation of law, or (iii) resulting in the receipt by such director of an improper personal benefit. C P CHEMICALS, INC. Article VII, Section 7 of the By-Laws of C P Chemicals, Inc. provides that the corporation shall indemnify its officers, directors, employees and agents to the extent permitted by the General Corporation Law of New Jersey. PHIBROCHEM, INC. Article VII of the By-Laws of Phibrochem, Inc. provides that, to the fullest extent permitted by the NJBCA as the same exists or may be amended, a director of the corporation shall not be liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as director. Article VII further provides that each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "proceeding"), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such II-6 proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the corporation to the fullest extent authorized by the NJBCA, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the corporation to provide broader indemnification rights than said law permitted the corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith and such indemnification shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of his or her heirs, executors and administrators; provided, however that the corporation shall indemnify any such person seeking indemnification in connection with a proceeding or part thereof initiated by such person only if such proceeding or part thereof was authorized by the Board of Directors of the corporation. Such right to indemnification shall be a contract right and shall include the right to be paid by the corporation the expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that if the NJBCA requires, the payment of such expenses incurred by a director or officer in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of a proceeding shall be made only upon delivery to the corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified by the corporation The corporation may, by action of its Board of Directors, provide indemnification to employees and agents of the corporation with the same scope and effect as the foregoing indemnification of directors and officers. Article VII further provides that the corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the corporation would have the power to indemnify such person against such expense, liability or loss under the NJBCA. 4. Western Magnesium Corp., a California corporation. Section 317 of the California General Corporation Law provides generally and in pertinent part that a California corporation may indemnify its directors and officers against expenses, judgments, fines and settlements actually and reasonably incurred in connection with any threatened, pending or completed civil, criminal, administrative or investigative action, other than an action by or in the right of the corporation, if, in connection with the matters in issue, they acted in good faith and in a manner the person reasonably believed to be in the best interests of the corporation and, in the case of a criminal proceeding, had no reasonable cause to believe the conduct of the person was unlawful. Section 317 further provides that, in connection with the defense or settlement of any action by or in the right of the corporation, a California corporation may indemnify its directors and officers against expenses actually and reasonably incurred by that person in connection with the defense or settlement of the action if the person acted in good faith, in a manner the person believed to be in the best interest of the corporation and its shareholders. Section 317 further provides that a California corporation may grant its directors and officer additional rights of indemnification through Articles of Incorporation and By-Laws provisions, and otherwise. 5. Philipp Brothers Netherlands III B.V. Dutch law in general provides that a company organized under Dutch law in The Netherlands may indemnify its managing directors against managing directors' liability, provided, however, that such indemnity cannot include; acts of wilful intent (opzet) by the managing directors; intentional violations of law, gaining of personal profits or other advantages to which the managing director(s) was not entitled (including violation of insider trading rules insofar these have been committed intentionally and whereby the director has relied on internal or external correct advice). Further, under Dutch law, it is uncertain whether such indemnity can cover liability of a managing director for grossly negligent (grove nalatigheid) or intentionally reckless (bewuste roekeloosheid) wrongful acts committed by that managing director. In bankruptcy situations, the indemnity may not always be upheld II-7 in cases where gross negligence can be proven. Furthermore, it is uncertain whether the indemnity can cover liability of a managing director vis-a-vis the Company in case of serious fault (ernstig verwijt) on the basis of article 2:9 Dutch Civil Code, but generally speaking leading legal doctrine has taken the view that granting of an indemnity of internal liability vis-a-vis the Company on the basis of article 2:9 Dutch Civil Code is not permitted. The criterium of serious fault relates to the criterium gross negligence. 6. Phibro Animal Health SA Under Belgian law, directors and the statutory auditor may be liable for damages to the company, a trustee in bankruptcy and third parties in case of improper performance of their duties, violation of the company's Articles of Association or the Companies Act, or tortious misconduct. Under certain circumstances, directors may also be criminally liable. One or more stockholders holding at least one percent of our common stock or holding shares representing a fractional value in our capital of at least EUR 1,250,000 can, under certain conditions provided in the Companies Act, sue the directors and the statutory auditor derivatively on behalf of the company. A simple majority of the stockholders at a duly convened stockholders meeting may discharge directors and the statutory auditor from liability to the company relating to the performance of their respective duties after the presentation of a management report and the annual accounts by the company's directors and presentation of the statutory auditors' report to the company's stockholders. This discharge prohibits stockholders who voted in favor of the discharge from bringing derivative suits on behalf of the company on such grounds. A general discharge of director or auditor liability does not relieve such persons from liability to third parties or for violations of the Companies Act or the Articles of Association. Violations of the Articles of Association may only be discharged if specifically disclosed to the stockholders. Notwithstanding a general discharge, directors and auditors may be held liable in the performance of their duties for the company, if the stockholders were not aware of the true situation of the company at the time the discharge was voted. II-8 ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ----------- ---------------------- 3.1 Composite Certificate of Incorporation of Phibro Animal Health Corporation(14) 3.2 By-laws of Phibro Animal Health Corporation(1) 3.3 Certificate of Incorporation of Phibro-Tech, Inc.(1) 3.4 By-Laws of Phibro-Tech, Inc.(1) 3.5 Certificate of Incorporation of C P Chemicals, Inc.(19) 3.6 By-Laws of C P Chemicals, Inc.(1) 3.7 Certificate of Incorporation of Prince Agriproducts, Inc.(1) 3.8 By-Laws of Prince Agriproducts, Inc.(1) 3.9 Certificate of Incorporation of Phibro Animal Health Holdings, Inc.(19) 3.10 By-Laws of Phibro Animal Health Holdings, Inc.(19) 3.11 Certificate of Incorporation of Phibro Animal Health U.S., Inc.(19) 3.12 By-Laws of Phibro Animal Health U.S., Inc.(19) 3.13 Certificate of Incorporation of Phibrochem, Inc.(1) 3.15 By-Laws of Phibrochem, Inc.(1) 3.16 Certificate of Incorporation of Phibro Chemicals, Inc.(1) 3.17 By-Laws of Phibro Chemicals, Inc.(1) 3.18 Certificate of Incorporation of Western Magnesium Corp.(1) 3.19 By-Laws of Western Magnesium Corp.(1) 3.20 Articles of Association and Deed of Incorporation of Philipp Brothers Netherlands III B.V.(19) 3.21 Articles of Association of Phibro Animal Health SA.(19) 4.1 Indenture, dated as of June 11, 1998, among Registrant, the Guarantors named therein and The Chase Manhattan Bank, as trustee, relating to the 9 7/8% Senior Subordinated Notes due 2008 of Registrant, and exhibits thereto, including Form of 9 7/8% Senior Subordinated Note due 2008 of Company.(1) 4.1.1 First Supplemental Indenture, dated as of January 15, 1999, among Registrant, the Guarantors named therein and The Chase Manhattan Bank, as trustee, relating to the 9 7/8% Senior Subordinated Notes due 2008 of Registrant.(10) 4.1.2 Second Supplemental Indenture, dated as of March 19, 2003, among Registrant, the Guarantors named therein and JPMorgan Chase Bank, as trustee, relating to the 9 7/8% Senior Subordinated Notes due 2008 of Registrant.(10) 4.1.3 Third Supplemental Indenture, dated as of June 10, 2003, among Registrant, the Guarantors named therein and JPMorgan Chase Bank, as trustee, relating to the 9 7/8% Senior Subordinated Notes due 2008 of Registrant.(10) 4.1.4 Fourth Supplemental Indenture, dated as of October 1, 2003, among Registrant, the Guarantors named therein and JPMorgan Chase Bank, as trustee, relating to the 9 7/8% Senior Subordinated Notes due 2008 of Registrant.(11) 4.1.5 Fifth Supplemental Indenture, dated as of October 21, 2003, among Registrant, the Guarantors named therein and JPMorgan Chase Bank, as trustee, relating to the 9 7/8% Senior Subordinated Notes due 2008 of Registrant.(12) 4.1.6 Sixth Supplemental Indenture, dated as of June 25, 2004, among Registrant, the Guarantors named therein and JPMorgan Chase Bank, as trustee, relating to the 9 7/8% Senior Subordinated Notes due 2008 of Registrant.(16) 4.2 Indenture, dated as of October 21, 2003, by and among Phibro Animal Health Corporation and Philipp Brothers Netherlands III B.V., as Issuers, the Guarantors named therein, and HSBC Bank USA, as Trustee and Collateral Agent.(13)
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EXHIBIT NO. DESCRIPTION OF EXHIBIT - ----------- ---------------------- 4.2.1 First Supplemental Indenture, dated as of June 25, 2004, by and among Phibro Animal Health Corporation and Philipp Brothers Netherlands III B.V., as Issuers, the Guarantors named therein, and HSBC Bank USA, National Association as Trustee and Collateral Agent.(16) 4.2.2 Second Supplemental Indenture, dated as of December 8, 2004, by and among Phibro Animal Health Corporation and Philipp Brothers Netherlands III B.V., as Issuers, the Guarantors named therein, and HSBC Bank USA, National Association as Trustee and Collateral Agent.(18) Certain instruments which define the rights of holders of long-term debt of Registrant and its consolidated subsidiaries have not been filed as Exhibits to this Report since the total amount of securities authorized under any such instrument does not exceed 10% of the total assets of Registrant and its subsidiaries on a consolidated basis, as of June 30, 2004. For a description of such indebtedness, see Note 8 of Notes to Consolidated Financial Statements. Registrant hereby agrees to furnish copies of such instruments to the Securities and Exchange Commission upon its request. 5.1 Opinion of Golenbock Eiseman Assor Bell & Peskoe LLP.(20) 5.2 Opinion of Allen & Overy LLP.(20) 5.3 Opinion of Allen & Overy LLP.(20) 10.1 Manufacturing and Supply Agreement, dated as of the 12th day of May 2004, by and between Merial Limited, Koffolk, Ltd., and Phibro Animal Health Corporation.(20) 10.2 Lease, dated September 27, 2004 between Phibro Animal Health Corporation and Hartz Mountain Industries, Inc.(19) 10.3 Lease, dated June 30, 1995, between First Dice Road Co. and Phibro-Tech, Inc., as amended May 1998.(1) 10.4 Lease, dated December 24, 1981, between Koffolk (1949) Ltd. and Israel Land Administration.(1) 10.5 Master Lease Agreement, dated February 27, 1998, between General Electric Capital Corp., Registrant and Phibro-Tech, Inc.(1) 10.6 Stockholders Agreement, dated December 29, 1987, by and between Registrant, Charles H. Bendheim, Jack C. Bendheim and Marvin S. Sussman.(1) 10.7 Employment Agreement, dated December 29, 1987, by and between Phibro Animal Health Corporation and Marvin S. Sussman.(1)++ 10.8 Stockholders Agreement, dated February 21, 1995, between James O. Herlands and Phibro-Tech, Inc., as amended as of June 11, 1998.(1) 10.9 Form of Severance Agreement, dated as of February 21, 1995, between Phibro Animal Health Corporation and James O. Herlands.(1)++ 10.10 Agreement of Limited Partnership of First Dice Road Company, dated June 1, 1985, by and among Western Magnesium Corp., Jack Bendheim, Marvin S. Sussman and James O. Herlands, as amended November 1985.(1) 10.11 Philipp Brothers Chemicals, Inc. Retirement Income and Deferred Compensation Plan Trust, dated as of January 1, 1994, by and between Registrant on its own behalf and on behalf of C P Chemicals, Inc., Phibro-Tech, Inc. and the Trustee thereunder; Philipp Brothers Chemicals, Inc. Retirement Income and Deferred Compensation Plan, dated March 18, 1994 "Retirement Income and Deferred Compensation Plan").(1)++ 10.11.1 First, Second and Third Amendments to Retirement Income and Deferred Compensation Plan.(2)++ 10.12 Form of Executive Income Deferred Compensation Agreement, each dated March 11, 1990, by and between Registrant and each of Jack Bendheim, James Herlands and Marvin Sussman.(1)++ 10.13 Form of Executive Income Split Dollar Agreement, each dated March 1, 1990, by and between Registrant and each of Jack Bendheim, James Herlands and Marvin Sussman.(1)++ 10.14 Administrative Consent Order, dated March 11, 1991, issued by the State of New Jersey Department of Environmental Protection, Division of Hazardous Waste Management, to C.P. Chemicals, Inc.(1)
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EXHIBIT NO. DESCRIPTION OF EXHIBIT - ----------- ---------------------- 10.15 Agreement for Transfer of Ownership, dated as of June 8, 2000, between C. P. Chemicals, Inc. ("CP") and the Township of Woodbridge ("Township"), and related Environmental Indemnification Agreement, between CP and Township, and Lease, between Township and CP.(2) 10.16 Stockholders' Agreement, dated as of January 5, 2000, among shareholders of Penick Holding Company ("PHC"), and Certificate of Incorporation of PHC and Certificate of Designation, Preferences and Rights of Series A Redeemable Cumulative Preferred Stock of PHC.(2) 10.17 Asset Purchase Agreement, dated as of September 28, 2000, among Pfizer, Inc., the Asset Selling Corporations (named therein) and Registrant, and various exhibits and certain Schedules thereto.(3)+ 10.17.1 Amendment, dated August 11, 2003 to Asset Purchase Agreement, dated as of September 28, 2000, among Pfizer, Inc., the Asset Selling Corporations (named therein) and Registrant.(10) 10.18 Stock Purchase Agreement, dated as of November 30, 2000, between Registrant and the Purchasers (as defined therein).(4) 10.19 Stockholders' Agreement, dated as of November 30, 2000, among Registrant, the Investor Stockholders (as defined therein) and Jack C. Bendheim.(4) 10.20 United States Asset Purchase Agreement between Phibro-Tech, Inc. and Nufarm, Inc. dated as of May 1, 2001.(5) 10.20.1 Amendment No. 1 to United States Asset Purchase Agreement between Phibro-Tech, Inc. and Nufarm, Inc. dated as of June 14, 2001.(6) 10.21 Supply Agreement between Phibro-Tech, Inc. and Nufarm, Inc. dated as of May 1, 2001.(5) 10.22 License Agreement between Phibro-Tech, Inc. and Nufarm, Inc. dated as of May 1, 2001.(5) 10.23 Management and Advisory Services Agreement dated November 30, 2000 between Registrant and Palladium Equity Partners, L.L.C.(7)++ 10.24 Employment Agreement, dated May 28, 2002, by and between Registrant and Gerald K. Carlson.(8)++ 10.25 Consulting Agreement dated as of November 1, 2004, by and between Phibro Animal Health Corporation and David McBeath.(19)++ 10.26 Stock Purchase Agreement, dated August 14, 2003, by and between Registrant and Cemex, Inc.(9) 10.27 Loan and Security Agreement, dated October 21, 2003, by and among, the lenders identified on the signature pages thereto, Wells Fargo Foothill, Inc., and Phibro Animal Health Corporation ("Parent), and each of Parent's Subsidiaries identified on the signature pages thereto.(13) 10.27.1 Amendment Number One to Loan and Security Agreement dated November 14, 2003.(12) 10.27.2 Amendment Number Two to Loan and Security Agreement dated April 29, 2004.(14) 10.27.3 Amendment Number Three to Loan and Security Agreement dated September 24, 2004.(16) 10.27.4 Amendment Number Four to Loan and Security Agreement dated December 20, 2004.(18) 10.28 Intercreditor and Lien Subordination Agreement, dated as of October 21, 2003, made by and among Wells Fargo Foothill, Inc., HSBC Bank USA, Phibro Animal Health Corporation ("Par- ent") and those certain subsidiaries of the Parent party thereto.(12) 10.28.1 Amendment One to Intercreditor Agreement dated December 20, 2004.(18) 10.29 Purchase and Sale Agreement dated as of December 26, 2003 by and among Phibro Animal Health Corporation ("PAHC"), Prince MFG, LLC ("Prince MFG"), The Prince Manufacturing Company ("Prince" and together with PAHC and Prince MFG, the "Phibro Parties"), Palladium Equity Partners II, L.P. ("PEP II"), Palladium Equity Partners II-A, L.P., ("PEP II-A"), Palladium Equity Investors II, L.P. ("PEI II", and together with PEP II and PEP II-A, the "Investor Stockholders", and Prince Mineral Company, Inc. ("Buyer")(15) 10.30 Environmental Indemnification Agreement dated as of December 26, 2003 between the Phibro Parties and Buyer.(15) 10.31 Amendment to Stockholders Agreement dated as of December 26, 2003 between PAHC, the Investor Stockholders and Jack Bendheim.(15)
II-11
EXHIBIT NO. DESCRIPTION OF EXHIBIT - ----------- ---------------------- 10.32 Advisory Fee Agreement dated as of December 26, 2003 between Buyer and PAHC.(15) 10.33 Purchase Agreement by and between Phibro Animal Health SA and Glaxosmithkline Biologicals SA, dated December 16, 2004.(20) 12 Computation of Ratio of Earnings to Fixed Charges.(19) 21 List of Subsidiaries.(19) 23.1 Consent of PricewaterhouseCoopers LLP.(19) 23.2 Consent of Golenbock Eiseman Assor Bell & Peskoe LLP (included in Exhibit 5.1).(20) 23.3 Consent of Allen & Overy LLP (included in Exhibit 5.2).(20) 23.4 Consent of Allen & Overy LLP (included in Exhibit 5.3).(20) 24.1 Powers of Attorney (included on signature pages hereof). 25.1 Statement of Eligibility of HSBC Bank USA, National Association on Form T-1.(19) 99.1 Form of Letter of Transmittal.(20) 99.2 Form of Notice of Guaranteed Delivery.(20) 99.3 Form of Letter to Holders of Units.(20) 99.4 Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees Concerning Offer For All Outstanding.(20) 99.5 Form of Letter to Clients Concerning Offer For All Outstanding Units.(20) 99.6 Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9.(20)
- --------------- (1) Filed as an Exhibit to the Registrant's Registration Statement on Form S-4, No. 333-64641. (2) Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2000. (3) Filed as an Exhibit to the Registrant's Report on Form 10-Q for the quarter ended September 30, 2000. (4) Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated November 30, 2000. (5) Filed as an Exhibit to the Registrant's Report on Form 10-Q for the quarter ended March 31, 2001. (6) Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated June 14, 2001. (7) Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2001. (8) Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2002. (9) Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated September 11, 2003, as amended by the Registrant's Form 8-K/A dated June 2, 2004. (10) Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2003. (11) Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated October 2, 2003. (12) Filed as an Exhibit to the Registrant's Report on Form 10-Q for the quarter ended September 30, 2003. (13) Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated October 31, 2003. (14) Filed as an Exhibit to the Registrant's Report on Form 10-Q for the quarter ended March 31, 2004. (15) Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated January 12, 2004. (16) Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2004. (17) Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated December 9, 2004. (18) Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated December 23, 2004. (19) Filed herewith. II-12 (20) To be filed by amendment. (+) A request for confidential treatment has been granted for portions of such document. Confidential portions have been omitted and furnished separately to the SEC in accordance with Rule 406(b). (++) This Exhibit is a management compensatory plan or arrangement. ITEM 22. UNDERTAKINGS. (a) The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (b) The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (c) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-13 (d) The undersigned registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. (e) The undersigned registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. II-14 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has caused this registration statement to be signed by the undersigned, thereunto duly authorized, in the city of Ridgefield Park, State of New Jersey on January 14, 2005. PHIBRO ANIMAL HEALTH CORPORATION By: /s/ JACK C. BENDHEIM ------------------------------------ Jack C. Bendheim Chairmain of the Board By: /s/ GERALD K. CARLSON ------------------------------------ Gerald K. Carlson Chief Executive Officer KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of Jack C. Bendheim and Gerald K. Carlson, severally, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place or stead, in any and all capacities, to sign the within Registration Statement and any and all amendments thereto, and to file the same, and all exhibits thereto, and any other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons on behalf of the registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ GERALD K. CARLSON Chief Executive Officer January 14, 2005 - -------------------------------------- (Principal Executive Officer) Gerald K. Carlson /s/ JACK C. BENDHEIM Director, Chairman of the Board January 14, 2005 - -------------------------------------- (Principal Executive Officer) Jack C. Bendheim /s/ RICHARD G. JOHNSON Chief Financial Officer January 14, 2005 - -------------------------------------- (Principal Financial Officer and Richard G. Johnson Principal Accounting Officer) /s/ MARVIN S. SUSSMAN Director January 14, 2005 - -------------------------------------- Marvin S. Sussman /s/ JAMES O. HERLANDS Director January 14, 2005 - -------------------------------------- James O. Herlands /s/ SAM GEJDENSON Director January 14, 2005 - -------------------------------------- Sam Gejdenson
II-15 Pursuant to the requirements of the Securities Act of 1933, the registrant has caused this registration statement to be signed by the undersigned, thereunto duly authorized, in the city of Ridgefield Park, State of New Jersey on January 14, 2005. PHILIPP BROTHERS NETHERLANDS III B.V. By: /s/ JACK C. BENDHEIM ------------------------------------ Jack C. Bendheim Managing Director By: /s/ JOSEPH KATZENSTEIN ------------------------------------ Joseph Katzenstein Managing Director KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jack C. Bendheim his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place or stead, in any and all capacities, to sign the within Registration Statement and any and all amendments thereto, and to file the same, and all exhibits thereto, and any other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons on behalf of the registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ JACK C. BENDHEIM Managing Director (Principal January 14, 2005 ------------------------------------------------ Executive Officer, Principle Jack C. Bendheim Financial Officer and Principal Accounting Officer) /s/ JOSEPH KATZENSTEIN Managing Director January 14, 2005 ------------------------------------------------ Joseph Katzenstein
II-16 Pursuant to the requirements of the Securities Act of 1933, the registrant has caused this registration statement to be signed by the undersigned, thereunto duly authorized, in the city of Ridgefield Park, State of New Jersey on January 14, 2005. PHIBRO-TECH, INC. By: /s/ JACK C. BENDHEIM ------------------------------------ Jack C. Bendheim Chief Executive Officer KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jack C. Bendheim, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place or stead, in any and all capacities, to sign the within Registration Statement and any and all amendments thereto, and to file the same, and all exhibits thereto, and any other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons on behalf of the registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ JACK C. BENDHEIM Director and Chief January 14, 2005 ------------------------------------------------ Executive Officer (Principal Jack C. Bendheim Executive Officer) /s/ MARVIN S. SUSSMAN Director January 14, 2005 ------------------------------------------------ Marvin S. Sussman /s/ JAMES O. HERLANDS Director January 14, 2005 ------------------------------------------------ James O. Herlands /s/ W. DWIGHT GLOVER President January 14, 2005 ------------------------------------------------ W. Dwight Glover /s/ DAVID C. STOBEK Vice President, Chief Financial January 14, 2005 ------------------------------------------------ Officer (Principle Financial David C. Storbeck Officer and Principal Accounting Officer)
II-17 Pursuant to the requirements of the Securities Act of 1933, the registrant has caused this registration statement to be signed by the undersigned, thereunto duly authorized, in the city of Ridgefield Park, State of New Jersey on January 14, 2005. PRINCE AGRIPRODUCTS, INC. By: /s/ JACK C. BENDHEIM ------------------------------------ Jack C. Bendheim Chief Executive Officer KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jack C. Bendheim, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place or stead, in any and all capacities, to sign the within Registration Statement and any and all amendments thereto, and to file the same, and all exhibits thereto, and any other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons on behalf of the registrant in the capacities and on the dates indicated.
SIGNATURE DATE TITLE --------- ---- ----- /s/ JACK C. BENDHEIM Director, President and Chief January 14, 2005 ------------------------------------------------ Executive Officer (Principal Jack C. Bendheim Executive Officer) /s/ MARVIN S. SUSSMAN Director and President January 14, 2005 ------------------------------------------------ Marvin S. Sussman /s/ JAMES O. HERLANDS Director January 14, 2005 ------------------------------------------------ James O. Herlands /s/ DAVID C. STORBECK Vice President, Chief Financial January 14, 2005 ------------------------------------------------ Officer (Principle Financial David C. Storbeck Officer and Principal Accounting Officer)
II-18 Pursuant to the requirements of the Securities Act of 1933, the registrants have caused this registration statement to be signed by the undersigned, thereunto duly authorized, in the city of Ridgefield Park, State of New Jersey on January 14, 2005. PHIBRO ANIMAL HEALTH HOLDINGS, INC. PHIBRO ANIMAL HEALTH U.S., INC. By: /s/ JACK C. BENDHEIM ------------------------------------ Jack C. Bendheim Chief Executive Officer KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jack C. Bendheim, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place or stead, in any and all capacities, to sign the within Registration Statement and any and all amendments thereto, and to file the same, and all exhibits thereto, and any other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons on behalf of the registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ JACK C. BENDHEIM Director and Chief Executive January 14, 2005 ------------------------------------------------ Officer (Principal Jack C. Bendheim Executive Officer) /s/ MARVIN S. SUSSMAN Director January 14, 2005 ------------------------------------------------ Marvin S. Sussman /s/ JAMES O. HERLANDS Director January 14, 2005 ------------------------------------------------ James O. Herlands /s/ DAVID C. STORBECK Vice President, Chief Financial January 14, 2005 ------------------------------------------------ Officer (Principle Financial David C. Storbeck Officer and Principal Accounting Officer)
II-19 Pursuant to the requirements of the Securities Act of 1933, the registrants have caused this registration statement to be signed by the undersigned, thereunto duly authorized, in the city of Ridgefield Park, State of New Jersey on January 14, 2005. C P CHEMICALS, INC. PHIBRO CHEMICALS, INC. PHIBRO CHEM, INC. WESTERN MAGNESIUM CORP. By: /s/ JACK C. BENDHEIM ------------------------------------ Jack C. Bendheim President and Chief Executive Officer KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jack C. Bendheim, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place or stead, in any and all capacities, to sign the within Registration Statement and any and all amendments thereto, and to file the same, and all exhibits thereto, and any other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons on behalf of the registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ JACK C. BENDHEIM Director and Chief Executive January 14, 2005 ------------------------------------------------ Officer (Principal Jack C. Bendheim Executive Officer) /s/ MARVIN S. SUSSMAN Director January 14, 2005 ------------------------------------------------ Marvin S. Sussman /s/ JAMES O. HERLANDS Director January 14, 2005 ------------------------------------------------ James O. Herlands /s/ DAVID C. STORBECK Vice President, Chief January 14, 2005 ------------------------------------------------ Financial David C. Storbeck Officer (Principle Financial Officer and Principal Accounting Offier
II-20 Pursuant to the requirements of the Securities Act of 1933, the registrant has caused this registration statement to be signed by the undersigned, thereunto duly authorized, in the city of Ridgefield Park, State of New Jersey on January 14, 2005. PHIBRO ANIMAL HEALTH SA By: /s/ JACK C. BENDHEIM ------------------------------------ Jack C. Bendheim Director KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jack C. Bendheim, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place or stead, in any and all capacities, to sign the within Registration Statement and any and all amendments thereto, and to file the same, and all exhibits thereto, and any other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons on behalf of the registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ JACK C. BENDHEIM (Principal Executive Officer, January 14, 2005 - -------------------------------------- Principal Financial Officer and Jack C. Bendheim Principal Accounting Officer) /s/ MARVIN S. SUSSMAN Director January 14, 2005 - -------------------------------------- Marvin S. Sussman /s/ JAMES O. HERLANDS Director January 14, 2005 - -------------------------------------- James O. Herlands
II-21 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBIT ----------- ---------------------- 3.1 Composite Certificate of Incorporation of Phibro Animal Health Corporation(14) 3.2 By-laws of Phibro Animal Health Corporation(1) 3.3 Certificate of Incorporation of Phibro-Tech, Inc.(1) 3.4 By-Laws of Phibro-Tech, Inc.(1) 3.5 Certificate of Incorporation of C P Chemicals, Inc.(19) 3.6 By-Laws of C P Chemicals, Inc.(1) 3.7 Certificate of Incorporation of Prince Agriproducts, Inc.(1) 3.8 By-Laws of Prince Agriproducts, Inc.(1) 3.9 Certificate of Incorporation of Phibro Animal Health Holdings, Inc.(19) 3.10 By-Laws of Phibro Animal Health Holdings, Inc.(19) 3.11 Certificate of Incorporation of Phibro Animal Health U.S., Inc.(19) 3.12 By-Laws of Phibro Animal Health U.S., Inc.(19) 3.13 Certificate of Incorporation of Phibrochem, Inc.(1) 3.15 By-Laws of Phibrochem, Inc.(1) 3.16 Certificate of Incorporation of Phibro Chemicals, Inc.(1) 3.17 By-Laws of Phibro Chemicals, Inc.(1) 3.18 Certificate of Incorporation of Western Magnesium Corp.(1) 3.19 By-Laws of Western Magnesium Corp.(1) 3.20 Articles of Association and Deed of Incorporation of Philipp Brothers Netherlands III B.V.(19) 3.21 Articles of Association of Phibro Animal Health SA.(19) 4.1 Indenture, dated as of June 11, 1998, among Registrant, the Guarantors named therein and The Chase Manhattan Bank, as trustee, relating to the 9 7/8% Senior Subordinated Notes due 2008 of Registrant, and exhibits thereto, including Form of 9 7/8% Senior Subordinated Note due 2008 of Company.(1) 4.1.1 First Supplemental Indenture, dated as of January 15, 1999, among Registrant, the Guarantors named therein and The Chase Manhattan Bank, as trustee, relating to the 9 7/8% Senior Subordinated Notes due 2008 of Registrant.(10) 4.1.2 Second Supplemental Indenture, dated as of March 19, 2003, among Registrant, the Guarantors named therein and JPMorgan Chase Bank, as trustee, relating to the 9 7/8% Senior Subordinated Notes due 2008 of Registrant.(10) 4.1.3 Third Supplemental Indenture, dated as of June 10, 2003, among Registrant, the Guarantors named therein and JPMorgan Chase Bank, as trustee, relating to the 9 7/8% Senior Subordinated Notes due 2008 of Registrant.(10) 4.1.4 Fourth Supplemental Indenture, dated as of October 1, 2003, among Registrant, the Guarantors named therein and JPMorgan Chase Bank, as trustee, relating to the 9 7/8% Senior Subordinated Notes due 2008 of Registrant.(11) 4.1.5 Fifth Supplemental Indenture, dated as of October 21, 2003, among Registrant, the Guarantors named therein and JPMorgan Chase Bank, as trustee, relating to the 9 7/8% Senior Subordinated Notes due 2008 of Registrant.(12) 4.1.6 Sixth Supplemental Indenture, dated as of June 25, 2004, among Registrant, the Guarantors named therein and JPMorgan Chase Bank, as trustee, relating to the 9 7/8% Senior Subordinated Notes due 2008 of Registrant.(16) 4.2 Indenture, dated as of October 21, 2003, by and among Phibro Animal Health Corporation and Philipp Brothers Netherlands III B.V., as Issuers, the Guarantors named therein, and HSBC Bank USA, as Trustee and Collateral Agent.(13) 4.2.1 First Supplemental Indenture, dated as of June 25, 2004, by and among Phibro Animal Health Corporation and Philipp Brothers Netherlands III B.V., as Issuers, the Guarantors named therein, and HSBC Bank USA, National Association as Trustee and Collateral Agent.(16)
EXHIBIT NO. DESCRIPTION OF EXHIBIT ----------- ---------------------- 4.2.2 Second Supplemental Indenture, dated as of December 8, 2004, by and among Phibro Animal Health Corporation and Philipp Brothers Netherlands III B.V., as Issuers, the Guarantors named therein, and HSBC Bank USA, National Association as Trustee and Collateral Agent.(18) Certain instruments which define the rights of holders of long-term debt of Registrant and its consolidated subsidiaries have not been filed as Exhibits to this Report since the total amount of securities authorized under any such instrument does not exceed 10% of the total assets of Registrant and its subsidiaries on a consolidated basis, as of June 30, 2004. For a description of such indebtedness, see Note 8 of Notes to Consolidated Financial Statements. Registrant hereby agrees to furnish copies of such instruments to the Securities and Exchange Commission upon its request. 5.1 Opinion of Golenbock Eiseman Assor Bell & Peskoe LLP.(20) 5.2 Opinion of Allen & Overy LLP.(20) 5.3 Opinion of Allen & Overy LLP.(20) 10.1 Manufacturing and Supply Agreement, dated as of the 12th day of May 2004, by and between Merial Limited, Koffolk, Ltd., and Phibro Animal Health Corporation.(20) 10.2 Lease, dated September 27, 2004 between Phibro Animal Health Corporation and Hartz Mountain Industries, Inc.(19) 10.3 Lease, dated June 30, 1995, between First Dice Road Co. and Phibro-Tech, Inc., as amended May 1998.(1) 10.4 Lease, dated December 24, 1981, between Koffolk (1949) Ltd. and Israel Land Administration.(1) 10.5 Master Lease Agreement, dated February 27, 1998, between General Electric Capital Corp., Registrant and Phibro-Tech, Inc.(1) 10.6 Stockholders Agreement, dated December 29, 1987, by and between Registrant, Charles H. Bendheim, Jack C. Bendheim and Marvin S. Sussman.(1) 10.7 Employment Agreement, dated December 29, 1987, by and between Phibro Animal Health Corporation and Marvin S. Sussman.(1)++ 10.8 Stockholders Agreement, dated February 21, 1995, between James O. Herlands and Phibro-Tech, Inc., as amended as of June 11, 1998.(1) 10.9 Form of Severance Agreement, dated as of February 21, 1995, between Phibro Animal Health Corporation and James O. Herlands.(1)++ 10.10 Agreement of Limited Partnership of First Dice Road Company, dated June 1, 1985, by and among Western Magnesium Corp., Jack Bendheim, Marvin S. Sussman and James O. Herlands, as amended November 1985.(1) 10.11 Philipp Brothers Chemicals, Inc. Retirement Income and Deferred Compensation Plan Trust, dated as of January 1, 1994, by and between Registrant on its own behalf and on behalf of CP Chemicals, Inc., Phibro-Tech, Inc. and the Trustee thereunder; Philipp Brothers Chemicals, Inc. Retirement Income and Deferred Compensation Plan, dated March 18, 1994 "Retirement Income and Deferred Compensation Plan").(1)++ 10.11.1 First, Second and Third Amendments to Retirement Income and Deferred Compensation Plan.(2)++ 10.12 Form of Executive Income Deferred Compensation Agreement, each dated March 11, 1990, by and between Registrant and each of Jack Bendheim, James Herlands and Marvin Sussman.(1)++ 10.13 Form of Executive Income Split Dollar Agreement, each dated March 1, 1990, by and between Registrant and each of Jack Bendheim, James Herlands and Marvin Sussman.(1)++ 10.14 Administrative Consent Order, dated March 11, 1991, issued by the State of New Jersey Department of Environmental Protection, Division of Hazardous Waste Management, to C.P. Chemicals, Inc.(1) 10.15 Agreement for Transfer of Ownership, dated as of June 8, 2000, between C.P. Chemicals, Inc. ("CP") and the Township of Woodbridge ("Township"), and related Environmental Indemnification Agreement, between CP and Township, and Lease, between Township and CP.(2)
EXHIBIT NO. DESCRIPTION OF EXHIBIT ----------- ---------------------- 10.16 Stockholders' Agreement, dated as of January 5, 2000, among shareholders of Penick Holding Company ("PHC"), and Certificate of Incorporation of PHC and Certificate of Designation, Preferences and Rights of Series A Redeemable Cumulative Preferred Stock of PHC.(2) 10.17 Asset Purchase Agreement, dated as of September 28, 2000, among Pfizer, Inc., the Asset Selling Corporations (named therein) and Registrant, and various exhibits and certain Schedules thereto.(3)+ 10.17.1 Amendment, dated August 11, 2003 to Asset Purchase Agreement, dated as of September 28, 2000, among Pfizer, Inc., the Asset Selling Corporations (named therein) and Registrant.(10) 10.18 Stock Purchase Agreement, dated as of November 30, 2000, between Registrant and the Purchasers (as defined therein).(4) 10.19 Stockholders' Agreement, dated as of November 30, 2000, among Registrant, the Investor Stockholders (as defined therein) and Jack C. Bendheim.(4) 10.20 United States Asset Purchase Agreement between Phibro-Tech, Inc. and Nufarm, Inc. dated as of May 1, 2001.(5) 10.20.1 Amendment No. 1 to United States Asset Purchase Agreement between Phibro-Tech, Inc. and Nufarm, Inc. dated as of June 14, 2001.(6) 10.21 Supply Agreement between Phibro-Tech, Inc. and Nufarm, Inc. dated as of May 1, 2001.(5) 10.22 License Agreement between Phibro-Tech, Inc. and Nufarm, Inc. dated as of May 1, 2001.(5) 10.23 Management and Advisory Services Agreement dated November 30, 2000 between Registrant and Palladium Equity Partners, L.L.C.(7)++ 10.24 Employment Agreement, dated May 28, 2002, by and between Registrant and Gerald K. Carlson.(8)++ 10.25 Consulting Agreement dated as of November 1, 2004, by and between Phibro Animal Health Corporation and David McBeath.(19)++ 10.26 Stock Purchase Agreement, dated August 14, 2003, by and between Registrant and Cemex, Inc.(9) 10.27 Loan and Security Agreement, dated October 21, 2003, by and among, the lenders identified on the signature pages thereto, Wells Fargo Foothill, Inc., and Phibro Animal Health Corporation ("Parent"), and each of Parent's Subsidiaries identified on the signature pages thereto.(13) 10.27.1 Amendment Number One to Loan and Security Agreement dated November 14, 2003.(12) 10.27.2 Amendment Number Two to Loan and Security Agreement dated April 29, 2004.(14) 10.27.3 Amendment Number Three to Loan and Security Agreement dated September 24, 2004.(16) 10.27.4 Amendment Number Four to Loan and Security Agreement dated December 20, 2004.(18) 10.28 Intercreditor and Lien Subordination Agreement, dated as of October 21, 2003, made by and among Wells Fargo Foothill, Inc., HSBC Bank USA, Phibro Animal Health Corporation ("Parent") and those certain subsidiaries of the Parent party thereto.(12) 10.28.1 Amendment One to Intercreditor Agreement dated December 20, 2004.(18) 10.29 Purchase and Sale Agreement dated as of December 26, 2003 by and among Phibro Animal Health Corporation ("PAHC"), Prince MFG, LLC ("Prince MFG"), The Prince Manufacturing Company ("Prince" and together with PAHC and Prince MFG, the "Phibro Parties"), Palladium Equity Partners II, L.P. ("PEP II"), Palladium Equity Partners II-A, L.P., ("PEP II-A"), Palladium Equity Investors II, L.P. ("PEI II", and together with PEP II and PEP II-A, the "Investor Stockholders", and Prince Mineral Company, Inc.("Buyer")(15) 10.30 Environmental Indemnification Agreement dated as of December 26, 2003 between the Phibro Parties and Buyer.(15) 10.31 Amendment to Stockholders Agreement dated as of December 26, 2003 between PAHC, the Investor Stockholders and Jack Bendheim.(15) 10.32 Advisory Fee Agreement dated as of December 26, 2003 between Buyer and PAHC.(15) 10.33 Purchase Agreement by and between Phibro Animal Health SA and Glaxosmithkline Biologicals SA, dated December 16, 2004(20) 12 Computation of Ratio of Earnings to Fixed Charges.(19)
EXHIBIT NO. DESCRIPTION OF EXHIBIT ----------- ---------------------- 21 List of Subsidiaries.(19) 23.1 Consent of PricewaterhouseCoopers LLP.(19) 23.2 Consent of Golenbock Eiseman Assor Bell & Peskoe LLP (included in Exhibit 5.1).(20) 23.3 Consent of Allen & Overy LLP (included in Exhibit 5.2).(20) 23.4 Consent of Allen & Overy LLP (included in Exhibit 5.3).(20) 24.1 Powers of Attorney (included on signature pages hereof). 25.1 Statement of Eligibility of HSBC Bank USA, National Association on Form T-1.(19) 99.1 Form of Letter of Transmittal.(20) 99.2 Form of Notice of Guaranteed Delivery.(20) 99.3 Form of Letter to Holders of Units.(20) 99.4 Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees Concerning Offer For All Outstanding(20) 99.5 Form of Letter to Clients Concerning Offer For All Outstanding Units(20) 99.6 Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9.(20)
- --------------- (1) Filed as an Exhibit to the Registrant's Registration Statement on Form S-4, No. 333-64641. (2) Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2000. (3) Filed as an Exhibit to the Registrant's Report on Form 10-Q for the quarter ended September 30, 2000. (4) Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated November 30, 2000. (5) Filed as an Exhibit to the Registrant's Report on Form 10-Q for the quarter ended March 31, 2001. (6) Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated June 14, 2001. (7) Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2001. (8) Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2002. (9) Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated September 11, 2003, as amended by the Registrant's Form 8-K/A dated June 2, 2004. (10) Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2003. (11) Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated October 2, 2003. (12) Filed as an Exhibit to the Registrant's Report on Form 10-Q for the quarter ended September 30, 2003. (13) Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated October 31, 2003. (14) Filed as an Exhibit to the Registrant's Report on Form 10-Q for the quarter ended March 31, 2004. (15) Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated January 12, 2004. (16) Filed as an Exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2004. (17) Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated December 9, 2004. (18) Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated December 23, 2004. (19) Filed herewith. (20) To be filed by amendment. (+) A request for confidential treatment has been granted for portions of such document. Confidential portions have been omitted and furnished separately to the SEC in accordance with Rule 406(b). (++) This Exhibit is a management compensatory plan or arrangement. EX-3.5 2 y04700exv3w5.txt CERTIFICATE OF INCORPORATION Exhibit 3.5 CERTIFICATE OF INCORPORATION -of- COPPER PIGMENT & CHEMICAL WORKS, INC. THIS IS TO CERTIFY, that we, Hannah Burstein, Pauline Kent and Joel L. Bohrer, do hereby associate ourselves into a corporation, under and by virtue of the provisions of an Act of the Legislature of the State of New Jersey, entitled, "An Act Concerning Corporations (Revised Statutes, 1937, Title 14)", and the several supplements thereto and acts amendatory thereof, and do severally agree to take the number of shares of capital stock set opposite our respective names. FIRST: The name of the corporation is COPPER PIGMENT & CHEMICAL WORKS, INC. SECOND: The location of the principal office in this State is at No. 60 Park Place, Newark, New Jersey. The name of the agent therein and in charge thereof, upon whom process against this corporation may be served, is MARTIN SIMON. THIRD: The objects for which this corporation is formed are: To conduct the business of buying, selling or dealing in and with vegetable, animal or mineral matter of all descriptions, whether new or used and without regard to the shape or form in which the same may be, and in connection with this general purpose, to do any and all things in connection, with such materials including handling, processing, reforming, re-constituting, disintegrating or treating such material in any way in which the company may deem advantageous, including the manufacturing of products therefrom in any shape or form. For the purpose of conducting its business to maintain in such plants of whatever description the same may be as the business may require, and to maintain such stores, warehouses, depots or plants in such places or places as may be in the best interests of the business. To do any and all the foregoing things in any part of the world, either as principal, agent, broker, sales agency, contractor, trustee, or in any capacity which shall be in the best interest of the company. To conduct its business and have one or more offices and unlimitedly and without restriction and to hold, purchase, lease, mortgage, and convey, real and personal property in or out of the State, and in such place and places in the several states and territories of the United States, the District of Columbia, colonial possession or territorial acquisitions of the United States and in foreign countries as shall from time to time be found necessary and convenient for the purpose of the company's business. To borrow or lend money and in this connection to make and issue, or to receive, promissory notes, bills of exchange, bonds, debentures and evidences of indebtedness of the company or of others, secured by mortgage, pledge or otherwise, without limit as to the amount, and, with security for the same in any lawful manner as may be determined by the board of directors. Subject to the provisions of law, the company may purchase or otherwise acquire, hold, and re-issue the shares of its capital stock. To do any or all of the things in this certificate set forth, as objects, purposes, powers or otherwise, to the same extent and as fully as natural persons might or could do. FOURTH: The total authorized capital stock of the corporation is one hundred shares without nominal or par value. All or any part of the shares of common stock bearing no par value may be issued by the corporation from time to time, and for such consideration as from time to time may be fixed by the Board of Directors, and as provided by law, and any and all shares bearing no par value so issued for which the considerations so fixed has been paid or delivered, shall be deemed fully paid and non-assessable and the holders of such shares shall not be liable for the corporation or its creditors in respect to such shares. FIFTH: The name and post office addresses of the incorporators, and the number of shares subscribed for by each, the aggregate of such subscription being the amount -2- of capital stock with which this corporation will commence business, is as follows: NAME P. O. ADDRESS NO. OF SHARES. Hannah Burstein 60 Park Pl., Newark, N. J. 8 Pauline Kent 60 Park Pl., Newark, N. J. 1 Joel L. Bohrer 60 Park Pl., Newark, N. J. 1 SIXTH: The period of existence of this corporation is perpetual. IN WITNESS WHEREOF, we have hereunto set our hands and seals this 12th day of November, 1953. /s/ Hannah Burstein Signed, Sealed and --------------------------- HANNAH BURSTEIN Delivered in the /s/ Pauline Kent Presence of: --------------------------- PAULINE KENT /s/ Martin Simon /s/ Joel L. Bohrer - ----------------------- ---------------------------- MARTIN SIMON JOEL L. BOHRER STATE OF NEW JERSEY : ss COUNTY OF ESSEX : BE IT REMEMBERED that on this 12th day of November, 1953, before me, the subscriber, an Attorney at Law of New Jersey, personally appeared Hannah Burstein, Pauline Kent, and Joel L. Bohrer, who I am satisfied are the persons named in and who executed the foregoing Certificate, and I, having first made known to them the contents thereof, they did acknowledge that they signed, sealed and delivered the same as their voluntary act and deed for the used and purposes therein expressed. /s/ Martin Simon ---------------------------- MARTIN SIMON An Attorney at Law State of New Jersey CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION of COPPER PIGMENT & CHEMICAL WORKS, INC. ------------------------------------- The location of the principal office in this State is at No. 60 Park Place, in the City of Newark, County of Essex. The name of the agent therein and in charge thereof upon whom process against this corporation may be served, is Martin Simon. RESOLUTION OF DIRECTORS: ------------------------ The Board of Directors of Copper Pigment & Chemical Works, Inc., a corporation of New Jersey, on this 17th day of April, 1958, do hereby RESOLVE and DECLARE that it is advisable to change the capital stock structure of the company by dividing the same into three classes, and for that purpose to amend Article Fourth of the certificate of incorporation to read as follows: "FOURTH: The amount of the total authorized capital stock of the corporation is one hundred (100) shares without nominal or par value. All or any part of the shares of Common Stock having no par value may be issued by the corporation from time to time, and for such consideration as from time to time may be fixed by the Board of Directors, and as provided by law, and any and all shares having no par value so issued for which the consideration so fixed has been paid or delivered, shall be deemed fully paid and non-assessable, and the holders of such shares shall not be liable to the corporation or its creditors in respect to such shares. Said shares shall be divided into three classes as follows: Class A, which shall consist of forty-five (45) shares; Class B, which shall consist of forty-five (45) shares; Class C, which shall consist of (10) shares. All voting power shall be vested in the Class A capital stock and the Class B capital stock, and no voting power whatsoever shall be vested in the Class C capital stock. The Board of Directors of the Corporation shall consist of four Directors. The holders of the Class A capital stock shall have the exclusive right to vote for and elect two Directors, and the holders of Class B capital stock shall have the right to vote for and elect two Directors. In the event of a vacancy, for any reason, on the Board of Directors, the holders of the class of stock which originally elected the Director whose office may be vacant, shall exclusively be entitled to elect a successor to fill such vacancy. The two members of the Board of Directors to be elected by the holders of the Class A capital stock shall be designated as Class A Directors, and the two members of the Board of Directors to be elected by the holders of the Class B capital stock shall be designated as Class B Directors. Any and all dividends which may be distributed by the corporation, if, as and when declared by the Board of Directors shall be distributed pro rata, without regard to class, among the holders of the Class A, Class B, and Class C capital stock, in accordance with the number of shares of any class held by them. In the event of any liquidation, dissolution or winding up of the corporation, whether voluntary of involuntary, the assets of the corporation shall be distributed pro rata, without regard to class, among the holders of the Class A, Class B, and Class C capital stock, in accordance with the number of shares of any class held by them. -2- The one hundred (100) shares of capital stock of the corporation now issued and outstanding, having no par value, are hereby changed as follows: Forty-five (45) shares thereof are hereby changed into forty-five (45) shares of Class A capital stock, having no par value; forty-five (45) shares thereof are hereby changed into forty-five (45) shares of Class B capital stock, having no par value and ten (10) shares thereof are hereby changed into ten (10) shares of Class C capital stock, having no par value. Be it further RESOLVED, that the foregoing proposed amendment in the Certificate of Incorporation of the company shall be submitted for action thereon by the stockholders of the company at a special meeting thereof to be held on the 17th day of April, 1985, at 11:00 o'clock in the forenoon, and that notice of the time, place and purposes of such meeting shall be given in accordance with the requirements of the By-Laws of the company, consistent with the proposed amendment. CERTIFICATE OF CHANGE --------------------- COPPER PIGMENT & CHEMICAL WORKS, INC., a corporation of New Jersey, does hereby certify that it has adopted the foregoing amendment to its certificate of incorporation, the said amendment having been declared by resolution of the Board of Directors of the said corporation, as above recited, to be advisable, and having been duly and regularly assented to by the unanimous vote of all the stockholders, at a meeting duly called by the Board of Directors for that purpose; and the written assent of the said stockholders is hereto appended. IN WITNESS WHEREOF, said corporation has caused this certificate to be signed by its President and Secretary -3- and its corporate seal to be hereto affixed the 17th day of April, 1958. /s/ Albert Kerzner ---------------------------- Albert Kerzner President ATTEST: /s/ Norman Feldman - ----------------------------- Norman Feldman Secretary STATE OF NEW JERSEY ) ) SS: COUNTY OF ESSEX ) BE IT REMEMBERED, that on this 22nd day of April, 1958, before me, the subscriber, a Notary Public of New Jersey, personally appeared Norman Feldman, Secretary of Copper Pigment & Chemical Works, Inc., the corporation mentioned in and which executed the foregoing certificate, who, being by me duly sworn, on his oath says that he is such secretary, and that the seal affixed to said certificate is the corporate seal of said corporation, the same being well known to him; that Albert Kerzner is President of said corporation, and that he signed said certificate and affixed said seal thereto, and delivered said certificate by authority of the Board of Directors and with the unanimous assent of the stockholders of said corporation as and for his voluntary act and deed, and the voluntary act and deed of said corporation in the presence of deponent, who thereupon subscribed his name thereto as witness. And deponent further says that the assent hereto appended is signed by all the stockholders of said corporation. Subscribed and sworn to before me the day and year /s/ Norman Feldman first above written. ---------------------- Norman Feldman Secretary [SEAL] /s/ Anna Mae Zukauskas - ---------------------- Anna Mae Zukauskas of New Jersey NOTARY PUBLIC OF NEW JERSEY MY COMMISSION EXPIRES NOV. 2, 1961 STOCKHOLDERS' ASSENT TO CHANGE ------------------------------ We, the undersigned, being all of the stockholders of Copper Pigment & Chemical Works, Inc., having, at a meeting regularly called for the purpose, voted in favor of amending and changing the certificate of incorporation as set forth in the resolution of the Directors above recited, do now, pursuant to the statute in such case made and provided, hereby give our written assent to said change. WITNESS our hands this 17th day of April, 1958. Stockholders No. of Shares ------------ ------------- /s/ Edward Ehrenkrantz 1 - ---------------------- Edward Ehrenkrantz /s/ Norman Feldman 10 - ---------------------- Norman Feldman /s/ Albert Kerzner 88 - ---------------------- Albert Kerzner /s/ Ivan Kerzner 1 - ---------------------- Ivan Kerzner CERTIFICATE OF AMENDMENT of the CERTIFICATE OF INCORPORATION -of- COPPER PIGMENT & CHEMICAL WORKS, INC. ------------------------------------- To: The Secretary of State State of New Jersey Pursuant to the provisions of Section 14A:9-2(4) and Section 14A:9-4(a), Corporations, General, of the New Jersey Statutes, the undersigned Corporation executes the executes the following Certificate of Amendment to its Certificate of Incorporation: 1. The name of the Corporation is COPPER PIGMENT & CHEMICAL WORKS, INC. 2. THE CERTIFICATE OF INCORPORATION WAS FILED BY THE SECRETARY OF State on November 16, 1953. 3. Paragraph ""FIRST'' of the Certificate of Incorporation is hereby amended to read as follows: ""FIRST: The name of the Corporation shall be C P CHEMICALS, INC.'' The foregoing amendment to the Certificate of Incorporation was duly adopted at Special Joint Meeting of the Board of Directors and Stockholders held October 6th, 1972. by the unanimous affirmative vote of all of the directors of the Corporation and of the holders of all of the issued and outstanding shares of the Corporation entitled to vote thereon. 4. At the time of the adoption of said amendment, there were issued and outstanding forty-five (45) shares of the Class A capital stock of the Corporation, forty-five (45) shares of the Class B capital stock of the Corporation and ten (10) shares of the Class C capital stock of the Corporation of which only the Class A and Class B shares of such stock were entitled to vote thereon. IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment to its Certificate of Incorporation to be signed by its President this 26th day of October, 1972. COPPER PIGMENT & CHEMICAL WORKS, INC., By: /s/ Norman Feldman ---------------------------------- NORMAN FELDMAN, President CERTIFICATE OF MERGER OF C.P. CHEMICALS, INC. (a Georgia corporation) INTO C.P. CHEMICALS, INC. (a New Jersey corporation) TO: The Secretary of State State of New Jersey Pursuant to the provisions of Section 14A:1O-7 Corporations, General, of the New Jersey Statutes, the undersigned corporations hereby execute the following Certificate of Merger. ARTICLE ONE The names of the corporations proposing to merge and the names of the States under the laws of which such corporations are organized, are as follows:
Name of Corporation State of Incorporation ------------------- ---------------------- C.P. Chemicals, Inc. New Jersey (formerly known as Copper Pigment & Chemical Works, Inc.) C.P. Chemicals Inc. Georgia (formerly known as Vertac Metal Chemicals Inc.)
ARTICLE TWO The laws of Georgia, the State under which such foreign corporation is organized, permit such merger and the applicable provisions of the laws of said jurisdiction under which such foreign corporation was organized have been or, upon compliance with filing and recording requirements will have been complied with. ARTICLE THREE The name of the surviving corporation shall be C.P. Chemicals, Inc. and it shall be governed by the laws of the State of New Jersey. The total authorized capital stock of the surviving corporation shall. be, as presently existing, 2,500 shares of common stock, each having a par value of $1.00. The address of the surviving corporation's registered office is Arbor Street, Seawaren, New Jersey 07077 and the name of its registered agent at. such address is Mr. Norman Feldman. ARTICLE FOUR The Plan of Merger, a copy of which is annexed hereto as Exhibit "A", was approved by the sole shareholder and the board of directors of C.P. CHEMICALS, INC., a New Jersey corporation, the surviving corporation, in the manner prescribed by the New Jersey Business Corporation Act, and was approved by the undersigned foreign corporation in the manner prescribed by the laws of the State under which it is organized. No vote of the shareholders of the surviving corporation was required because of the applicability of the provisions of Section 14A:l0-3(4), Title 14A, Revised Statutes of New Jersey. ARTICLE FIVE As to each corporation whose shareholders are entitled to vote, the number of shares entitled to vote thereon, and if the shares of any class or series are entitled to vote thereon as a class, the designation and number of shares of each such class or series, is as follows;
Designation of Number Class or Series of Shares Total Number Entitled to of Such of Shares Vote as a Class or Entitled Class Series Name of Corporation to Vote (if any) (if any) - ------------------- ------------ --------------- --------- C.P. Chemicals, Inc.
(N J.) 2,500 None None C.P. Chemicals, Inc. (GA,) 1,000 None None
ARTICLE SIX As to each corporation whose shareholders are entitled to vote, the number of shares that voted for and against the merger respectively, and the number of shares of any class or series entitled to vote as a class, if any, that voted for and against the merger are:
Total Shares Total Shares Name of Corporation Voted For Voted Against - ------------------- ------------------ ------------- C.P. Chemicals Inc. 2,500 None (N.J.) C.P. Chemicals Inc 1,000 None (GA.)
ARTICLE SEVEN The effective date of this Certificate shall be October 31, 1985 or the date of the filing thereof by the Secretary of State of New Jersey, whichever date shall be later. IN WITNESS WHEREOF each of the undersigned corporations has caused this Certificate of Merger to be executed in its name by its President as of the 11th day of October, 1985. C.P. CHEMICALS INC. (N.J.) By: /s/ Jack C. Bendheim Jack C Bendheim, Vice President C.P. CHEMICALS, INC. (GA) By: /s/ Jack C. Bendheim Jack C. Bendheim, Vice President STATEMENT OF POST MERGER ADDRESS OF C. P. CHEMICALS INC (GA.) ------------------------- A MERGED CORPORATION To: The Secretary of State State of Georgia C. P. CHEMICALS, INC., a domestic corporation baying been merged into C. P. CHEMICALS INC., a New Jersey corporation being a foreign corporation, the undersigned corporation hereby designates the following post-office address, to which the Secretary of State may mail a copy of any process against the undersigned corporation that may be served on him or to which any other communications intended for the corporation shall be mailed: Arbor Street, Seawaren, New Jersey 07077 Dated this 11th day of October, 1985 C.P. CHEMICALS, INC. (N.J.) By: /s/ Jack C. Bendheim ------------------------------------- Jack C. Bendheim, Vice President CERTIFICATE OF MERGER OF SOUTHERN CALIFORNIA CHEMICAL CO., INC. (a California corporation) INTO C.P. CHEMICALS, INC. (a New Jersey corporation) TO: The Secretary of State State of New Jersey Pursuant to the provisions of Section 14A:lO-7 Corporations, General, of the New Jersey Statutes, the undersigned corporations hereby execute the following Certificate at Merger. ARTICLE ONE The names of the corporations proposing to merge and the names of the States under the laws of which such corporations are organized, are as follows: Name of Corporation State of Incorporation C.P. Chemicals, Inc. New Jersey (formerly known as Copper Pigment & Chemical Works, Inc.) Southern California Chemical California Co., Inc. ARTICLE TWO The laws of California, the State under which such foreign corporation is organized, permit merger and the applicable provisions of the laws of said jurisdiction under which such foreign corporation was organized have been, or, upon compliance with filing and recording requirements will have been, complied with. ARTICLE THREE The name of the surviving corporation shall be C.P. CHEMICALS, INC. and it shall be governed by the laws of the State of New Jersey. The total authorized capital Stock of the surviving corporation shall be, as presently existing, 2,500 shares of common stock, each having a par value of $1.00. The address of the surviving corporation's registered office is Arbor Street, Seawaren, New Jersey 07077 and the name of its registered agent at such address is Mr. Norman Feldman ARTICLE FOUR The Plan of Merger, a copy of which is annexed hereto as Exhibit A was approved by the board of directors of C.P. CHEMICALS, INC., a New Jersey corporation, the surviving corporation, in the manner prescribed by the New Jersey Business Corporation Act, and was approved by the' undersigned foreign corporation in the manner prescribed by the laws of the State under which it is organized. No vote of the shareholders of the surviving corporation was required because of the applicability of the provisions of Section 14A:10-3(4), Title 14A, Revised Statutes of New Jersey. ARTICLE FIVE The effective date of this Certificate shall be July 31, 1987 or the date of the filing hereof by the Secretary of State of New Jersey, whichever date shall be later. IN WITNESS WHEREOF, each of the undersigned corporations has caused this Certificate of Merger to be executed in its name by its President as of the 21st day of July, 1997. C.P. CHEMICALS, INC. By: /s/ Jack C. Bendheim ------------------------------------ Jack C. Bendheim, President SOUTHERN CALIFORNIA CHEMICAL CO., INC. By: /s/ Jack C. Bendheim ------------------------------------ Jack C. Bendheim, President EXHIBIT A PLAN OF MERGER OF SOUTHERN CALIFORNIA CHEMICAL CO. INC. INTO C.P. CHEMICALS, INC. 1. It is proposed to merge Southern California Chemical Co., Inc., a California corporation, into C.P. Chemicals, Inc., a New Jersey corporation, so that the latter corporation shall be the surviving corporation. Said corporations are hereinafter referred to, respectively, as the California corporation and the New Jersey or surviving corporation. 2. The terms and conditions of the merger are as follows: (a) On the effective date of this Plan, all of the shares of stock of the California corporation which shall be authorized, issued or outstanding shall be surrendered and canceled and each of the certificates evidencing said shares shall be endorsed to indicate their cancellation by reason of merger pursuant to this Plan. (b) The authorized, issued and outstanding shares of the New Jersey corporation, the surviving corporation, shall not be changed in any respect, and no change shall be effected with respect to the provisions of the certificate of incorporation of said surviving corporation. (c) Upon the effective date of this Plan, the separate existence of the California corporation shall cease and said corporation shall be merged into the surviving corporation and the surviving corporation shall possess all the rights, privileges, powers, and franchises of a public and private nature and shall be subject to all the duties at said California corporation: all of the rights, privileges, powers and franchises of laid California corporation, and all property, real, personal, and mixed, and all debts due to said California corporation on whatever account shall be vested in the surviving corporation; and all property, rights, privileges, powers, contracts, and franchises and every other interest of said California corporation shall be thereafter effectively the property of the surviving corporation as they were of said California corporation; but all rights of creditor, and all liens upon any property of said California corporation shall be preserved unimpaired and all debts, liabilities and duties of said California corporation shall thenceforth attach to the surviving corporation and be enforceable against said surviving corporation to the same extent as if said debts, liabilities and duties had been incurred or contracted by said surviving corporation. (d) if, at any time, the surviving consider that any further assignments or assurances in law or any other acts or deeds are necessary or desirable to vest in the surviving corporation, according to the terms hereof, the title to any property or rights of said California corporation, the proper officers and directors of said California corporation shall make and execute all such assignments and assurances and do all things necessary or proper to vest title in such property or rights in the surviving corporation and Otherwise to carry out the purposes of this Plan. (e) Upon the effective date of the merger, the assets and liabilities of maid California corporation shall be carried on the books of the surviving corporation at the amounts at which they are respectively carried on such date on the books of said California corporation. The capital surplus and earned surplus of the surviving corporation shall be the sum of the respective capital surpluses and earned surpluses of the corporations party to this Plan, subject in each case to such intercompany or accounting adjustments as may be appropriate or may be required to give effect to the merger. The aggregate amount, if any, of the net assets of the corporations party to this Plan which was legally available for the payment of dividends immediately prior to the merger, to the extent that the value thereof is not transferred to stated capital by the issuance of shares or otherwise, shall continue to be available for payment of dividends by the surviving corporation. (f) The directors and officers of the corporation shall continue in office until they resign and their successors are duly elected. (g) The by-laws of the surviving corporation, as they shall exist on the effective date of this merger, shall be and remain the by-laws of the surviving corporation until the same shall be altered, amended or repealed as therein provided. 4. The effective date of this Plan shall be July 31, 1987 or as soon thereafter as the Certificate of Merger with respect to the Merger is filed by the Secretary of State of New Jersey, whichever is later. 5. The President, other officers and directors of each of the corporations which are party to this Plan shall be authorized and directed to prepare and execute such agreements, certificates and other documents as may be necessary in order to carry out this Plan. 6. Anything herein or elsewhere to the contrary notwithstanding, this Plan may be terminated and abandoned by mutual consent of the Board of Directors of either corporation party hereto at any time prior to the effective date of this Plan, If, in the opinion of said Boards of Directors the merger is impractical or undesirable for any reason whatsoever. Dated: July 21, 1987 C.P. CHEMICALS, INC. By: /s/ Jack C. Bendheim -------------------- Jack C. Bendheim President SOUTHERN CALIFORNIA CHEMICAL CO., INC. By: /s/ Jack C. Bendheim -------------------- Jack C. Bendheim, President CERTIFICATE OF MERGER OF C. P. INORGANICS, INC. (An Illinois Corporation) AND CHEM-EX CORPORATION (An Illinois Corporation) INTO C. P. CHEMICALS, INC. (A New Jersey Corporation) UNDER SECTION 14A:l0-7 CORPORATIONS, GENERAL, OF NEW JERSEY STATUTES Pursuant to the provisions of Section 14A:l0-7 Corporations, General, of New Jersey Statutes, the undersigned corporations hereby execute the following Certificate of Merger: 1. (a) The name of each subsidiary corporation to be merged is as follows: C.P. Inorganic., Inc. (incorporated in Illinois) Chem-Ex Corporation (incorporated in Illinois) (b) The name of the surviving corporation is C.P. Chemicals, Inc., (incorporated in New Jersey), and following the merger its name shall be C.P. Chemicals, Inc. Following the merger the surviving corporation shall continue to be governed by the laws of the State of New Jersey. 2. The laws of Illinois, the state under which such foreign subsidiary corporations are organized, permit such merger: and the applicable provisions of the laws of such jurisdiction have been, or upon compliance with filing and recording requirements will have been, complied with. 3. The total authorized capital stock of the surviving corporation shall be, as presently existing, 2,500 shares of common stock, par value $1.00 per share. The address of the surviving corporations registered office is Arbor Street, Sewaren, New Jersey 07077, and the name of the registered agent at such address is Mr. I. David Paley. 4. As to each subsidiary corporation to be merged, the designation and number of outstanding shares of each class, and the number of such shares of each class owned by the surviving corporation, are as follows: C.P. Inorganics. Inc. (incorporated in Illinois): 525 shares of common stock outstanding; 525 shares of common stock owned by the surviving corporation Chem-Ex Corporation (incorporated in Illinois): 1,000 shares of common stock outstanding; 1,000 shares of common stock owned by the surviving corporation. The number of shares of each subsidiary corporation outstanding and owned by the surviving corporation, as set forth above, is not subject to change prior to the effective date of the merger. 5. The Plan of Merger, a copy of which is annexed hereto as Exhibit "A" hereof, was adopted by the board of directors of C.P. Chemicals, Inc., a New Jersey Corporation and the surviving corporation, on March 1, 1993, in the manner prescribed by the New Jersey Business Corporation Act, and was approved by the undersigned foreign corporations in the manner prescribed by the laws of the State of Illinois, under which they are organized. No vote of the shareholders of the surviving corporation was required because of the applicability of the provisions of Section 14A: 10-3(4), Title 14A, Revised Statutes of New Jersey. IN WITNESS WHEREOF, each of the undersigned corporations has caused this Certificate of merger to be executed in its name by its President as of the lst day of March, 1993. C.P. CHEMICALS, INC. By: /s/ I. David Paley -------------------------------- I. David Paley, President C.P. INORGANICS INC By: /s/ Jack C. Bendheim -------------------------------- Jack C. Bendheim, President CHEM-EX CORPORATION By: /s/ Jack C. Bendheim -------------------------------- Jack C. Bendheim, President EXHIBIT "A" PLAN OF MERGER FIRST: (a) The name of each subsidiary corporation to be merged is as follows: C.P. Inorganics, Inc. (incorporated in Illinois) and Chem-Ex Corporation (incorporated in Illinois). (b) The name of the surviving corporation is C.P. Chemicals, Inc. (incorporated in New Jersey), and following the merger its name shall be C.P. Chemicals, Inc. SECOND: (a) As to each subsidiary corporation to be merged, the designation and number of outstanding shares of each class, and the number of such shares of each class owned by the surviving corporation, are as follows: C.P. Inorganics. Inc.: 525 shares of common stock outstanding; 525 shares of common stock owned by the surviving corporation. Chem-Ex Corporation.: 1,000 shares of common stock outstanding; 1,000 shares of common stock owned by the surviving corporation. (b) The number of shares of each subsidiary corporation outstanding and owned by the surviving corporation, set forth above in paragraph "SECOND (a)", is not subject to change prior to the effective date of the merger. THIRD: The terms and conditions of the merger are as follows: (a) On the effective date of this Plan, all of the issued and outstanding shares of stock of the subsidiary corporations to be merged hereunder, identified in paragraph "FIRST (a)" hereof, shall be surrendered and canceled, and each of the certificates evidencing such shares shall be endorsed to indicate their cancellation by reason of merger pursuant to this Plan. (b) The issued and outstanding shares of the surviving corporation, identified in paragraph "FIRST (b)" hereof, shall not be changed in any respect, and no change shall be effected with respect to the provisions of the certificate of incorporation of such surviving corporation. (c) On the effective date of this Plan, the separate existence of each of the subsidiary corporations identified in paragraph "FIRST (a)" hereof shall cease and such corporations shall be merged into the surviving corporation, and the surviving corporation shall possess all rights, privileges, powers and franchises of a public and private nature and shall be subject to all the duties of each such subsidiary corporation; all of the rights, privileges, powers and franchises of each such subsidiary corporation, and all property, real, personal, and mixed (including all debts due to any of such subsidiary corporations on whatever account) of each such subsidiary corporation, shall be vested in the surviving corporation; and all property, rights, privileges, powers, contracts, and franchises and every other interest of each such subsidiary corporation shall be thereafter effectively the property of the surviving corporation as they were of the respective subsidiary corporations; but all rights of creditors and all liens upon any property of any such subsidiary corporation shall be preserved unimpaired, and all debts, liabilities and duties of each such subsidiary corporation shall thenceforth attach to the surviving corporation and be enforceable against such surviving corporation to the same extent AS it such debts, liabilities and duties had been incurred or contracted by the surviving corporation. (d) If, at any time, the surviving corporation shall consider that any further assignments or assurances in law or any other acts or deeds are necessary or desirable to vest in the surviving corporation, according to the terms hereof, the title to any property or rights of any merging subsidiary corporation, the proper officers and directors of such subsidiary corporation shall make and execute all such assignments and assurances and do all things necessary or proper to vest title in such property or rights in the surviving corporation and otherwise to carry out the purposes of this Plan. (e) On the effective date of this Plan, the assets and liabilities of each merging subsidiary corporation shall be carried on the books of the surviving corporation at the amounts at which they are respectively carried on such date on the books of the subsidiary corporations. The capital surplus and earned surplus of the surviving corporation shall be the sum of the respective capital surpluses and earned surpluses of the merging subsidiary corporations and the surviving corporation, subject in each case to such inter company or accounting adjustments as may be appropriate. The aggregate amount, if any, of the net assets of the merging subsidiary corporations and the surviving corporation which was legally available for the payment of dividends immediately prior to the merger, to the extent that the value thereof is not transferred to stated capital by the issuance of shares or otherwise, shall continue to be available for payment of dividends by the surviving corporation. (f) The directors and officers of the surviving corporation shall continue in office until the expiration of their terms and the election of their respective successors, or until their earlier death, resignation or removal. (g) The by-laws of the surviving corporation, as they shall exist on the effective date of this merger, shall be and remain the by-laws of the surviving corporation until the same shall be altered, amended or repealed as therein provided. FOURTH: The effective date of this Plan shall be the later of the following: (I) the date on which the Certificate of Merger with respect to the merger is filed by the Secretary of State of New Jersey; FIFTH: Under Illinois law, shareholders of a merging subsidiary corporation have the right to dissent to a proposed merger. As stated above in paragraph "SECOND (a)," C. P. Chemicals, Inc., the surviving corporation under the present Plan of Merger, owns all of the outstanding shares of each merging subsidiary corporation, both of which are incorporated in Illinois. Distribution of this Plan of Merger shall constitute notice to the sole shareholder of the subsidiary corporations of its right to dissent under Illinois law. Adoption of this Plan of Merger by the unanimous written consent of the directors of C.P. Chemicals, Inc., the sole shareholder of the subsidiary corporation., shall constitute the written consent of such sole shareholder for the merger. SIXTH: The President, Treasurer/Secretary, and other officers and directors of the surviving corporation are hereby authorized and directed to prepare and execute such agreements, certificates and other documents as may be necessary or appropriate in order to carry out this Plan. SEVENTH: Anything herein or elsewhere to the contrary notwithstanding, this Plan may be terminated and abandoned by consent of the Board of Directors of the surviving corporation at any time prior to the effective date of this Plan, if, in the opinion of such Board of Directors, the merger is impractical or undesirable for any reason whatever. CERTIFICATE OF MERGER OF KEYSTONE PLATING SUPPLY, INC. (A Michigan Corporation) INTO C. P. CHEMICALS, INC. (A New Jersey Corporation) UNDER SECTION 14A:lO-7 CORPORATIONS, GENERAL, OF NEW JERSEY STATUTES Pursuant to the provisions of Section 14A:lO-7 Corporations, General, of New Jersey Statutes, the undersigned corporations hereby execute the following Certificate of Merger: 1. (a) The name of the subsidiary corporation to be merged is as follows: Keystone Plating Supply, Inc. (incorporated in Michigan). (b) The name of the surviving corporation is C.P. Chemicals, Inc. (incorporated in New Jersey), and following the ( merger its name shall be C.P. Chemicals, Inc. Following the merger the surviving corporation shall continue to be governed by the laws of the State of New Jersey. 2. The laws of Michigan, the state under which such foreign subsidiary corporation is organized, permit such merger; and the applicable provisions of the laws of such jurisdiction have been, or upon compliance with filing and recording requirements will have been, complied with. 3. The total authorized capital stock of the surviving corporation shall be, as presently existing, 2,500 shares of common stock, par value $1.00 per share. The address of the surviving corporation's registered office is Arbor Street, Sewaren, New Jersey 07077, and the name of the registered agent at such address is Mr. I. David Paley. 4. As to the subsidiary corporation to be merged, the designation and number of outstanding shares of each class, and the number of such shares of each class owned by the surviving corporation, are as follows: Keystone Plating Supply, Inc. (incorporated in Michigan): 1 share of common stock outstanding: 1 share of common stock owned by the surviving corporation. The number of shares of the subsidiary corporation outstanding and owned by the surviving corporation, as set forth above, is not subject to change prior to the effective date of the merger. 5. The Plan of Merger, a copy of which is annexed hereto as Exhibit "A" hereof, was adopted by the board of directors of C.P. Chemicals, Inc., a New Jersey Corporation and the surviving corporation, on December 10, 1993, in the manner prescribed by the New Jersey Business Corporation Act, and was approved by the undersigned foreign corporation (Keystone Plating Supply, Inc.) in the manner prescribed by the laws of the State of Michigan, under which it is organized. No vote of the shareholders of the surviving corporation was required because of the applicability of the provisions of Section 14A: 10-3(4), Title 14A, Revised Statutes of New Jersey. IN WITNESS WHEREOF, each of the undersigned corporations has caused this Certificate of merger to be executed in its name by its President as of the 10th day of December, 1993. C.P. CHEMICALS, INC. By: /s/ I. David Paley ------------------ I. David Paley, President KEYSTONE PLATING SUPPLY, INC By: /s/ Jack C. Bendheim -------------------- Jack C. Bendheim, President EXHIBIT "A" PLAN OF MERGER FIRST: (a) The name of the subsidiary corporation to be merged is as follows: Keystone Plating Supply, Inc. (incorporated in Michigan). (b) The name of the surviving corporation is C P. Chemicals, Inc. (incorporated in New Jersey), and following the merger its name shall be C.P. Chemicals, Inc. SECOND: (a) As to the subsidiary corporation to be merged, the designation and number of outstanding shares of each class, and the number of such shares of each class owned by the surviving corporation, are as follows: 1. share of common stock outstanding; 1 share of common stock owned by the surviving corporation. (b) The number of shares of the subsidiary corporation outstanding and owned by the surviving corporation, set forth above in paragraph "SECOND (a)", is not subject to change prior to the effective date of the merger. THIRD: The terms and conditions of the merger are as follows: (a) On the effective date of this Plan, all of the issued and outstanding shares of stock of the subsidiary corporation to be merged hereunder, identified in paragraph "FIRST (a)" hereof, shall be surrendered and canceled, and each of the certificates evidencing such shares shall be endorsed to indicate their cancellation by reason of merger pursuant to this Plan. (b) The issued and outstanding shares of the surviving corporation, identified in paragraph "FIRST (b)" hereof, shall not be changed in any respect, and no change shall be effected with respect to the provisions of the certificate of incorporation of such surviving corporation. (c) On the effective date of this Plan, the separate existence of the subsidiary corporation identified in paragraph "FIRST (a)" hereof shall cease and such corporation shall be merged into the surviving corporation, and the surviving corporation shall possess all rights, privileges, powers and franchises of a public and private nature and shall be subject to all the duties of such subsidiary corporation; all of the rights, privileges, powers and franchises of such subsidiary corporation, and all property, real, personal, and mixed (including all debts due to such subsidiary corporation on whatever account) of such subsidiary corporation, shall be vested in the surviving corporation; and all property, rights, privileges, powers, contracts, and franchises and every other interest of such subsidiary corporation shall be thereafter effectively the property of the surviving corporation as they were of the subsidiary corporation; but all rights of creditors and all liens upon any property of such subsidiary corporation shall be preserved unimpaired, and all debts, liabilities and duties of such subsidiary corporation shall thenceforth attach to the surviving corporation and be enforceable against such surviving corporation to the same extent as if such debts, liabilities and duties had been incurred or contracted by the surviving corporation. (d) If, at any time, the surviving corporation shall consider that any further assignments or assurances in law or any other acts or deeds are necessary or desirable to vest in the surviving corporation, according to the terms hereof, the title to any property or rights of the merging subsidiary corporation, the proper officers and directors of such subsidiary corporation shall make and execute all such assignments and assurances and do all things necessary or proper to vest title in such property or rights in the surviving corporation and otherwise to carry out the purposes of this Plan. (e) On the effective date of this Plan, the assets and liabilities of the merging subsidiary corporation shall be carried on the books of the surviving corporation at the amounts at which they are respectively carried on such date on the books of the subsidiary corporation. The capital surplus and earned surplus of the surviving corporation shall be the sum of the capital surplus and earned surplus of the merging subsidiary corporation and the surviving corporation, subject to such intercompany or accounting adjustments as may be appropriate. The aggregate amount, if any, of the net assets of the merging subsidiary corporation and the surviving corporation which was legally available for the payment of dividends immediately prior to the merger, to the extent that the value thereof is not transferred to stated capital by the issuance of shares or otherwise, shall continue to be available for payment of dividends by the surviving corporation. (f) The directors and officers of the surviving corporation shall continue in office until the expiration of their terms and the election of their respective successors, or until their earlier death, resignation or removal. (g) The by-laws of the surviving corporation, as they shall exist on the effective date of this merger, shall be and remain the by-laws of the surviving corporation until the same shall be altered, amended or repealed as therein provided. FOURTH: The effective date of this Plan shall be the later of the following: (i) the date on which the Certificate of Merger with respect to the merger is filed by the Secretary of State of New Jersey; (ii) or the date on which the Certificate of Merger with respect to the merger is filed with the Secretary of State of Michigan: or (iii) December 31, 1993. FIFTH: Under Michigan law, shareholders of a merging subsidiary corporation have the right to dissent to a proposed merger. As stated above in paragraph "SECOND (a)," C. P. Chemicals, Inc., the surviving corporation under the present Plan of Merger, owns all of the outstanding shares of the merging subsidiary corporation, which is incorporated in Michigan. Distribution of this Plan of Merger shall constitute notice to the sole shareholder of the subsidiary corporation of its right to dissent under Michigan law. Adoption of this Plan of Merger by the unanimous written consent of the directors of C.P. Chemicals, Inc., the sole shareholder of the subsidiary corporation, shall constitute the written consent of such sole shareholder for the merger. SIXTH: The President, Treasurer/Secretary, and other officers and directors of the surviving corporation are hereby authorized and directed to prepare and execute such agreements, certificates and other documents as may be necessary or appropriate in order to carry out this Plan. SEVENTH: Anything herein or elsewhere to the contrary notwithstanding, this Plan may be terminated and abandoned by consent of the Board of Directors of the surviving corporation at any time prior to the effective date of this Plan, if, in the opinion of such Board of Directors, the merger is impractical or undesirable for any reason whatever. CERTIFICATE OF MERGER OF SEABOARD MINERAL SUPPLY, INC. (A Pennsylvania Corporation) INTO C. P. CHEMICALS, INC. (A New Jersey Corporation) UNDER SECTIONS 14A:10-5.l AND 14A:l0-7 OF THE NEW JERSEY BUSINESS CORPORATION ACT The undersigned domestic corporation, C. P. Chemicals, Inc., and its wholly-owned foreign subsidiary, Seaboard Mineral Supply, Inc., desiring to merge, do hereby certify as follows: 1. Names of Merging and Surviving Corporations. (a) The name of the subsidiary corporation to be merged is Seaboard Mineral Supply, Inc. (incorporated in Pennsylvania) (b) The name of the surviving corporation is C. P. Chemicals, Inc. (incorporated in New Jersey), and following the merger its name shall continue to be C. P. Chemicals, Inc. 2. Plan of Merger. The Plan of Merger is set forth on Exhibit "A" attached hereto and hereby made a part hereof. 3. Approval By Directors. The Board of Directors of the surviving parent corporation approved the Plan of Merger on May 27, 1994. 4. Subsidiary Shares Outstanding and Owned By Surviving Parent Corporation. As to the subsidiary corporation to be merged, the designation and number of outstanding shares of each class, and the number of such shares of each class owned by the surviving corporation, are as follows: 1,000 shares of common stock outstanding; 1,000 shares of common stock owned by the surviving corporation. The number of shares of the subsidiary corporation outstanding and owned by the surviving corporation, as set forth above, is not subject to change prior to the effective date of the merger. 5. Additional Information Relating to Foreign Corporation. The applicable provisions of the laws of the Commonwealth of Pennsylvania, the jurisdiction under which the foreign subsidiary corporation to be merged hereunder is organized, have been, or, upon compliance with filing and recording requirements, will have been, complied with in connection with the proposed merger. IN WITNESS WHEREOF, the undersigned corporations have signed this certificate on the 27 day of May, 1994. Surviving Corporation: C.P. CHEMICALS, INC. (A New Jersey Domestic Corporation) /s/ I. David Paley --------------------------- I. David Paley, President Corporation To Be Merged: SEABOARD MINERAL SUPPLY, INC. (A Pennsylvania Corporation and 100% Subsidiary of C. P. Chemicals, Inc.) /s/ Marvin S. Sussman --------------------------- Marvin S. Sussman, President PLAN OF MERGER FIRST: (a) The name of the constituent corporation to be merged is as follows: Seaboard Mineral Supply, Inc., a Pennsylvania corporation which is a wholly-owned subsidiary of the surviving corporation. The name of the surviving corporation is C.P. Chemicals, Inc., a New Jersey corporation, and following the merger its name shall continue to be C. P. Chemicals, Inc. SECOND: (a) As to the corporation to be merged, the designation and number of outstanding shares of each class and series, and the voting rights thereof, including information relating to class voting, if any, are as follows:
No. of Voting Rights and Class Series Shares Outstanding Class Voting ----- ------ ------------------ ------------------ Common None 1,000 Full voting rights (no class voting)
(b) As to the surviving corporation, the designation and number of outstanding shares of each class and series, and the voting rights thereof, including information relating to class voting, if any, are as follows:
No. of Voting Rights and Class Series Shares Outstanding Class Voting ----- ------ ------------------ ------------------ Common None 2,500 Full voting rights (no class voting)
(c) The number of outstanding shares in each class of the corporation to be merged and of the surviving corporation, as set forth above in subparagraphs (a) and (b) of paragraph "SECOND," is not subject to change prior to the effective date of the merger. THIRD: The terms and conditions of the merger are as follows: On the effective date of this Plan: (i) all of the issued and outstanding shares of the corporation to be merged shall be canceled, and each of the certificates evidencing such shares shall be endorsed to indicate their cancellation by reason of merger pursuant to this Plan. FOURTH: The Certificate of Incorporation of the surviving corporation will be not be amended in connection with the merger. FIFTH: (a) On the effective date of this Plan, the separate existence of the corporation to be merged shall cease and such corporation shall be merged into the surviving corporation, and the surviving corporation shall possess all the rights, privileges, powers and franchises of a public and private nature and shall be subject to all the duties of such corporation to be merged; all of the rights, privileges, powers and franchises of such corporation to be merged, and all property, real, personal, and mixed (including all debts due to such corporation on whatever account) of such corporation to be merged, shall be vested in the surviving corporation; and all property, rights, privileges, powers, contracts, and franchises and every other interest of such corporation to be merged shall be thereafter effectively the property of the surviving corporation as they were of the corporation to be merged; but all rights of creditors and all liens upon any property of such corporation to be merged shall be preserved unimpaired, and all debts, liabilities and duties of such corporation to be merged shall thenceforth attach to the surviving corporation and be enforceable against such surviving corporation to the same extent as if such debts, liabilities and duties had been incurred or contracted by the surviving corporation. (b) If, at any time, the surviving corporation shall consider that any further assignments or assurances in law or any other acts or deeds are necessary or desirable to vest in the surviving corporation, according to the terms hereof, the title to any property or rights of the merging corporation, the proper officers and directors of such merging corporation shall make and execute all such assignments and assurances and do all things necessary or proper to vest title in such property or rights in the surviving corporation and otherwise to carry out the purposes of this Plan. (c) On the effective date of this Plan, the assets and liabilities of the merging corporation shall be carried on the books of the surviving corporation at the amounts at which they are carried on such date on the books of the merging corporation. The capital surplus and earned surplus of the surviving corporation shall be the sum of the capital surpluses and earned surpluses of the merging corporation and the surviving corporation, subject to such intercompany or accounting adjustments as may be appropriate. The aggregate amount, if any, of the net assets of the merging corporation and the surviving corporation which was legally available for the payment of dividends immediately prior to the merger, to the extent that the value thereof is not transferred to stated capital by the issuance of shares or otherwise, shall continue to be available for payment of dividends by the surviving corporation. (d) The directors and officers of the surviving corporation shall continue in office until the expiration of their terms and the election of their respective successors, or until their earlier death, resignation or removal. (e) The by-laws of the surviving corporation, as they shall exist on the effective date of this merger, shall be and remain the by-laws of the surviving corporation until the same shall be altered, amended or repealed as therein provided. SIXTH: The effective date of this Plan shall be the date on which the Certificate of Merger with respect to the merger is filed by the Secretary of State of New Jersey. SEVENTH: The President, Treasurer/Secretary, and other officers and directors of the merging and of the surviving corporation are hereby authorized and directed to prepare and execute such agreements, certificates and other documents as may be necessary or appropriate in order to carry out this Plan. EIGHTH: Anything herein or elsewhere to the contrary notwithstanding, this Plan may be terminated and abandoned by consent of the Board of Directors of the merging corporation or of the surviving corporation at any time prior to the effective date of this Plan, if, in the opinion of such Board of Directors, the merger is impractical or undesirable for any reason whatever. FILED OCT 22 2003 State Treasurer Certificate of Amendment to the Certificate of Incorporation of C P Chemicals, Inc. (Formerly Copper Pigment & Chemical Works, Inc.) Pursuant to the provisions of Section 14A:9-2(4) and Section 14A:9-4(5), Corporation General, of the New Jersey Statutes, the undersigned corporation executes the following Certificate of Amendment to its Certificate of Incorporation: 1. The name of the corporation is: C P Chemicals, Inc. (Formerly Copper Pigment & Chemical Works, Inc.) 2. The following amendment to the Certificate of Incorporation was approved by the Board of Directors and thereafter duly adopted by the sole shareholder of the corporation on the 21st day of October 2003; Resolved, that Article Third of the Certificate of Incorporation be amended to read as follows; (Article) Third: The objects for which this corporation is formed are; - --------------- To conduct the business of buying, selling or dealing in and with vegetable, animal or mineral matter of all descriptions, whether new or used and without regard to the shape or form in which the same amy be, and in connection with this general purpose, to do any and all things in connection with such materials including handling, processing, reforming, re-constituting, disintegrating or treating such material in any way in which the company may deem advantageous, including the manufacturing of products therefrom in any shape or form. For the purpose of conducting its business to maintain such plants of whatever description the same may be as the business may require, and to maintain such stores, warehouses, depots or plants in such place or places as may be in the best interests of the business. To do any and all the foregoing things in any part of the world, either as principal, agent, broker, sales agency, contractor, trustee, or in any capacity which shall be in the best interest of the Company. To conduct its business and have one or more officers and unlimitedly and without restriction and to hold, purchase, lease, mortgage, and convey, real and personal property in or out of the State, and in such place and places in the several states and territories of the United States, the District of Columbia, colonial possession or territorial acquisitions of the United States and in foreign countries as shall from time to time be found necessary and convenient for the purpose of the company's business. To borrow or lend money and in this connection, to make and issue, or receive, promissory notes, bills of exchange, bonds, debentures and evidences of indebtedness of the company or of others, secured by mortgage, pledge or otherwise, without limit as to the amount, and with security for the same in any lawful manner as may be determined by the board of directors. Subject to the provisions of law, the company may purchase or otherwise acquire, hold and re-issue the shares of its capital stock. To do any or all of these things this certificate sets forth, as objects, purpose, powers or otherwise, to the same extent and as fully as natural persons might or could do. And in general, to carry on any other business in connection with the foregoing, and to have and exercise all the powers conferred by Title 14A, Corporations, General;, of the New Jersey Statutes, and to do any or all of the things hereinbefore set forth to the same extent as natural persons might or could do, and in any part of the world. 3. With respect to the corporation, the following table shows the number of shares entitled to vote thereon, the number of shares voted for, and the number of shares voted against the amendment. Shares Shares Shares Entitled to For Against Shareholder Vote Amendment Amendment ----------- ---- --------- --------- Phibro Animal Health 2,500 2,500 0 Corporation 4. This amendment is effective upon filing. By: /s/ David C. Storbeck ----------------------------------------------- Name: David C. Storbeck Title: Chief Financial Officer, Vice President Dated this 21st day of October, 2003 EX-3.9 3 y04700exv3w9.txt CERTIFICATE OF INCORPORATION Exhibit 3.9 CERTIFICATE OF INCORPORATION OF PHIBRO ANIMAL HEALTH HOLDINGS, INC. The undersigned incorporator, in order to form a corporation under the General Corporation Law of Delaware, certifies as follows: FIRST: The name of the corporation is Phibro Animal Health Holdings, Inc. SECOND: The registered office of the corporation is to be located at 1013 Centre Road, Wilmington, Delaware, 19805-1297, New Castle County. The name of its registered agent at that address is Corporation Service Company. THIRD: The purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. FOURTH: The corporation shall have the authority to issue 1,000 shares of common stock, par value $0.01 per share. FIFTH: The name and mailing address of the incorporator are as follows: Alexa D. Isbell Proskauer Rose LLP 1585 Broadway New York, New York 10036 SIXTH: Whenever a compromise or arrangement is proposed between the corporation and its creditors or any class of them and/or between the corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of the corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for the corporation under the provisions of Section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for the corporation under the provisions of Section 279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of the corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of the corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of the corporation as a consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of the corporation, as the case may be, and also on the corporation. SEVENTH: A director of this corporation shall not be personally liable to the corporation or its stockholders for monetary damages for the breach of any fiduciary duty as a director, except in the case of (a) any breach of the director's duty of loyalty to the corporation or its stockholders, (b) acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (c) under section 174 of the General Corporation Law of the State of Delaware or (d) for any transaction from which the director derives an improper personal benefit. Any repeal or modification of this Article by the stockholders of the corporation shall not adversely affect any right or protection of a director of the corporation existing at the time of such repeal or modification with respect to acts or omissions occurring prior to such repeal or modification. EIGHTH: The corporation shall, to the fullest extent permitted by law, as the same is now or may hereafter be in effect, indemnify each person (including the heirs, executors, administrators and other personal representatives of such person) against expenses including attorneys' fees, judgments, fines and amounts paid in settlement, actually and reasonably incurred by such person in connection with any threatened, pending or completed suit, action or proceeding (whether civil, criminal, administrative or investigative in nature or otherwise) in which such person may be involved by reason of the fact that he or she is or was a director or officer of the corporation or is or was serving any other incorporated or unincorporated enterprise in such capacity at the request of the corporation. NINTH: Unless, and except to the extent that, the by-laws of the corporation shall so require, the election of directors of the corporation need not be by written ballot. TENTH: The corporation hereby confers the power to adopt, amend or repeal bylaws of the corporation upon the directors. IN WITNESS WHEREOF, I have hereunto set my hand this eleventh day of July, 2000. /s/ Alexa D. Isbell ------------------------- Sole Incorporator EX-3.10 4 y04700exv3w10.txt BY-LAWS Exhibit 3.10 BY-LAWS OF PHIBRO ANIMAL HEALTH HOLDINGS, INC. 1. MEETINGS OF STOCKHOLDERS. 1.1 Annual Meeting. The annual meeting of stock-holders shall be held on the first Monday of June in each year, or as soon thereafter as practicable, and shall be held at a place and time determined by the board of directors (the "Board"). 1.2 Special Meetings. Special meetings of the stockholders may be called by resolution of the Board or the president and shall be called by the president or secretary upon the written request (stating the purpose or purposes of the meeting) of a majority of the directors then in office or of the holders of a majority of the outstanding shares entitled to vote. Only business related to the purposes set forth in the notice of the meeting may be transacted at a special meeting. 1.3 Place and Time of Meetings. Meetings of the stockholders may be held in or outside Delaware at the place and time specified by the Board or the officers or stockholders requesting the meeting. 1.4 Notice of Meetings; Waiver of Notice. Written notice of each meeting of stockholders shall be given to each stockholder entitled to vote at the meeting, except that (a) it shall not be necessary to give notice to any stockholder who submits a signed waiver of notice before or after the meeting, and (b) no notice of an adjourned meeting need be given, except when required under section 1.5 below or by law. Each notice of a meeting shall be given, personally or by mail, not fewer than 10 nor more than 60 days before the meeting and shall state the time and place of the meeting, and, unless it is the annual meeting, shall state at whose direction or request the meeting is called and the purposes for which it is called. If mailed, notice shall be considered given when mailed to a stockholder at his address on the corporation's records. The attendance of any stockholder at a meeting, without protesting at the beginning of the meeting that the meeting is not lawfully called or convened, shall constitute a waiver of notice by him. 1.5 Quorum. At any meeting of stockholders, the presence in person or by proxy of the holders of a majority of the shares entitled to vote shall constitute a quorum for the transaction of any business. In the absence of a quorum, a majority in voting interest of those present or, if no stockholders are present, any officer entitled to preside at or to act as secretary of the meeting, may adjourn the meeting until a quorum is present. At any adjourned meeting at which a quorum is present, any action may be taken that might have been taken at the meeting as originally called. No notice of an adjourned meeting need be given, if the time and place are announced at the meeting at which the adjournment is taken, except that, if adjournment is for more than 30 days or if, after the adjournment, a new record date is fixed for the meeting, notice of the adjourned meeting shall be given pursuant to section 1.4. 1.6 Voting; Proxies. Each stockholder of record shall be entitled to one vote for each share registered in his name. Corporate action to be taken by stockholder vote, other than the election of directors, shall be authorized by a majority of the votes cast at a meeting of stockholders, except as otherwise provided by law or by section 1.8. Directors shall be elected in the manner provided in section 2.1. Voting need not be by ballot, unless requested by a majority of the stockholders entitled to vote at the meeting or ordered by the chairman of the meeting. Each stockholder entitled to vote at any meeting of stockholders or to express consent to or dissent from corporate action in writing without a meeting may authorize another person to act for him by proxy. No proxy shall be valid after three years from its date, unless it provides otherwise. 1.7 List of Stockholders. Not fewer than 10 days prior to the date of any meeting of stockholders, the secretary of the corporation shall prepare a complete list of stockholders entitled to vote at the meeting, arranged in alphabetical order and showing the address of each stockholder and the number of shares registered in his name. For a period of not fewer than 10 days prior to the meeting, the list shall be available during ordinary business hours for inspection by any stockholder for any purpose germane to the meeting. During this period, the list shall be kept either (a) at a place within the city where the meeting is to be held, if that place shall have been specified in the notice of the meeting, or (b) if not so specified, at the place where the meeting is to be held. The list shall also be available for inspection by stockholders at the time and place of the meeting. 1.8 Action by Consent Without a Meeting. Any action required or permitted to be taken at any meeting of stockholders may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not fewer than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voting. Prompt notice of the taking of any such action shall be given to those stockholders who did not consent in writing. 2. BOARD OF DIRECTORS. 2.1 Number, Qualification, Election and Term of Directors. The business of the corporation shall be managed by the entire Board, which initially shall consist of three (3) directors. The number of directors may be changed by resolution of a majority of the Board or by the stockholders, but no decrease may shorten the term of any incumbent director. Directors shall be elected at each annual meeting of stockholders by a plurality of the votes cast and shall hold office until the next annual meeting of stockholders and until the election and qualification of their respective successors, subject to the provisions of section 2.9. As used in these by-laws, the term "entire Board" means the total number of directors the corporation would have, if there were no vacancies on the Board. 2.2 Quorum and Manner of Acting. A majority of the entire Board shall constitute a quorum for the transaction of business at any meeting, except as provided in section 2.10. Action of the Board shall be authorized by the vote of the majority of the directors present at the time of the vote, if there is a quorum, unless otherwise provided by law or these by-laws. In the absence of a quorum, a majority of the directors present may adjourn any meeting from time to time until a quorum is present. 2.3 Place of Meetings. Meetings of the Board may be held in or outside Delaware. 2.4 Annual and Regular Meetings. Annual meetings of the Board, for the election of officers and consideration of other matters, shall be held either (a) without notice immediately after the annual meeting of stockholders and at the same place, or (b) as soon as practicable after the annual meeting of stockholders, on notice as provided in section 2.6. Regular meetings of the Board may be held without notice at such times and places as the Board determines, If the day fixed for a regular meeting is a legal holiday, the meeting shall be held on the next business day. 2.5 Special Meetings. Special meetings of the Board may be called by the president or by a majority of the directors. 2.6 Notice of Meetings; Waiver of Notice. Notice of the time and place of each special meeting of the Board, and of each annual meeting not held immediately after the annual meeting of stockholders and at the same place, shall be given to each director by mailing it to him at his residence or usual place of business at least three days before the meeting, or by delivering or telephoning or telegraphing it to him at least two days before the meeting. Notice of a special meeting also shall state the purpose or purposes for which the meeting is called. Notice need not be given to any director who submits a signed waiver of notice before or after the meeting or who attends the meeting without protesting at the beginning of the meeting the transaction of any business because the meeting was not lawfully called or convened. Notice of any adjourned meeting need not be given, other than by announcement at the meeting at which the adjournment is taken. 2.7 Board or Committee Action Without a Meeting. Any action required or permitted to be taken by the Board or by any committee of the Board may be taken without a meeting, if all the members of the Board or the committee consent in writing to the adoption of a resolution authorizing the action. The resolution and the written consents by the members of the Board or the committee shall be filed with the minutes of the proceedings of the Board or the committee. 2.8 Participation in Board or Committee Meetings by Conference Telephone. Any or all members of the Board or any committee of the Board may participate in a meeting of the Board or the committee by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participation by such means shall constitute presence in person at the meeting. 2.9 Resignation and Removal of Directors. Any director may resign at any time by delivering his resignation in writing to the president or secretary of the corporation, to take effect at the time specified in the resignation; the acceptance of a resignation, unless required by its terms, shall not be necessary to make it effective. Any or all of the directors may be removed at any time, either with or without cause, by vote of the stockholders. 2.10 Vacancies. Any vacancy in the Board, including one created by an increase in the number of directors, may be filled for the unexpired term by a majority vote of the remaining directors, though less than a quorum. 2.11 Compensation. Directors shall receive such compensation as the Board determines, together with reimbursement of their reasonable expenses in connection with the performance of their duties. A director also may be paid for serving the corporation or its affiliates or subsidiaries in other capacities. 3. COMMITTEES. 3.1 Executive Committee. The Board, by resolution adopted by a majority of the entire Board, may designate an executive committee of one or more directors, which shall have all the powers and authority of the Board, except as otherwise provided in the resolution, section 141(c) of the General Corporation Law of Delaware or any other applicable law. The members of the executive committee shall serve at the pleasure of the Board. All action of the executive committee shall be reported to the Board at its next meeting. 3.2 Other Committees. The Board, by resolution adopted by a majority of the entire Board, may designate other committees of one or more directors, which shall serve at the Board's pleasure and have such powers and duties as the Board determines. 3.3 Rules Applicable to Committees. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In case of the absence or disqualification of any member of a committee, the member or members present at a meeting of the committee and not disqualified, whether or not a quorum, may unanimously appoint another director to act at the meeting in place of the absent or disqualified member. All action of a committee shall be reported to the Board at its next meeting. Each committee shall adopt rules of procedure and shall meet as provided by those rules or by resolutions of the Board. 4. OFFICERS. 4.1 Number; Security. The executive officers of the corporation shall be the president, one or more vice presidents (including an executive vice president, if the Board so determines), a secretary and a treasurer. Any two or more offices may be held by the same person. The board may require any officer, agent or employee to give security for the faithful performance of his duties. 4.2 Election; Term of Office. The executive officers of the corporation shall be elected annually by the Board, and each such officer shall hold office until the next annual meeting of the Board and until the election of his successor, subject to the provisions of section 4.4. 4.3 Subordinate Officers. The Board may appoint subordinate officers (including assistant secretaries and assistant treasurers), agents or employees, each of whom shall hold office for such period and have such powers and duties as the Board determines. The Board may delegate to any executive officer or committee the power to appoint and define the powers and duties of any subordinate officers, agents or employees. 4.4 Resignation and Removal of Officers. Any officer may resign at any time by delivering his resignation in writing to the president or secretary of the corporation, to take effect at the time specified in the resignation; the acceptance of a resignation, unless required by its terms, shall not be necessary to make it effective. Any officer elected or appointed by the Board or appointed by an executive officer or by a committee may be removed by the Board either with or without cause, and in the case of an officer appointed by an executive officer or by a committee, by the officer or committee that appointed him or by the president. 4.5 Vacancies. A vacancy in any office may be filled for the unexpired term in the manner prescribed in sections 4.2 and 4.3 for election or appointment to the office. 4.6 Chairman. The Chairman of the Board shall preside over all meetings of the Board at which he is present, and shall have such other powers and duties as chairman of the boards of corporations usually have or the Board assigns to him. 4.7 The Chief Executive Officer. Subject to the control of the Board, the chief executive officer of the corporation shall manage and direct the daily business and affairs of the corporation and shall communicate to the Board, and any Committee thereof, reports, proposals and recommendations for their respective consideration or action. He may do and perform all acts on behalf of the Corporation and shall preside at all meetings of the stockholders if present thereat, and in the absence of the Chairman of the Board of Directors have such powers and perform such duties as the Board or the chairman may from time to time prescribe or as may be prescribed in these By-laws, and in the event of the absence, incapacity or inability to act of the chairman, then the chief executive officer shall perform the duties and exercise the powers of the chairman. 4.8 The President. Subject to the control of the Board, the president shall have general supervision over the business of the corporation and shall have such other powers and duties as presidents of corporations usually have or as the Board assigns to him. 4.9 Vice President. Each vice president shall have such powers and duties as the Board or the president assigns to him. 4.10 The Treasurer. The treasurer shall be in charge of the corporation's books and accounts. Subject to the control of the Board, he shall have such other powers and duties as the Board or the president assigns to him. 4.11 The Secretary. The secretary shall be the secretary of, and keep the minutes of, all meetings of the Board and the stockholders, shall be responsible for giving notice of all meetings of stockholders and the Board, and shall keep the seal and, when authorized by the Board, apply it to any instrument requiring it. Subject to the control of the Board, he shall have such powers and duties as the Board or the president assigns to him. In the absence of the secretary from any meeting, the minutes shall be kept by the person appointed for that purpose by the presiding officer. 4.12 Salaries. The Board may fix the officers' salaries, if any, or it may authorize the president to fix the salary of any other officer. 5. SHARES. 5.1 Certificates. The corporation's shares shall be represented by certificates in the form approved by the Board. Each certificate shall be signed by the president or a vice president, and by the secretary or an assistant secretary or the treasurer or an assistant treasurer, and shall be sealed with the corporation's seal or a facsimile of the seal. Any or all of the signatures on the certificate may be a facsimile. 5.2 Transfers. Shares shall be transferable only on the corporation's books, upon surrender of the certificate for the shares, properly endorsed. The Board may require satisfactory surety before issuing a new certificate to replace a certificate claimed to have been lost or destroyed. 5.3 Determination of Stockholders of Record. The Board may fix, in advance, a date as the record date for the determination of stockholders entitled to notice of or to vote at any meeting of the stockholders, or to express consent to or dissent from any proposal without a meeting, or to receive payment of any dividend or the allotment of any rights, or for the purpose of any other action. The record date may not be more than 60 or fewer than 10 days before the date of the meeting or more than 60 days before any other action. 6. INDEMNIFICATION AND INSURANCE. 6.1 Right to Indemnification. Each person who was or is a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "proceeding"), by reason of the fact that he, or a person of whom he is the legal representative, is or was a director or officer of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action or inaction in an official capacity or in any other capacity while serving as director, officer, employee or agent, shall be indemnified and held harmless by the corporation to the fullest extent permitted by the General Corporation Law of Delaware, as amended from time to time, against all costs, charges, expenses, liabilities and losses (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith, and that indemnification shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of his heirs, executors and administrators; provided, however, that, except as provided in section 6.2, the corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by that person, only if that proceeding (or part thereof) was authorized by the Board. The right to indemnification conferred in these by-laws shall be a contract right and shall include the right to be paid by the corporation the expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that, if the General Corporation Law of Delaware, as amended from time to time, requires, the payment of such expenses incurred by a director or officer in his capacity as a director or officer (and not in any other capacity in which service was or is rendered by that person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of a proceeding shall be made only upon delivery to the corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced, if it shall ultimately be determined that such director or officer is not entitled to be indemnified under these by-laws or otherwise. The corporation may, by action of its Board, provide indemnification to employees and agents of the corporation with the same scope and effect as the foregoing indemnification of directors and officers. 6.2 Right of Claimant to Bring Suit. If a claim under section 6.1 is not paid in full by the corporation within 30 days after a written claim has been received by the corporation, the claimant may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant also shall be entitled to be paid the expense of prosecuting that claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition, where the required undertaking, if any, is required and has been tendered to the corporation) that the claimant has failed to meet a standard of conduct that makes it permissible under Delaware law for the corporation to indemnify the claimant for the amount claimed. Neither the failure of the corporation (including its Board, its independent legal counsel or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is permissible in the circumstances because he has met that standard of conduct, nor an actual determination by the corporation (including its Board, its independent counsel or its stockholders) that the claimant has not met that standard of conduct, shall be a defense to the action or create a presumption that the claimant has failed to meet that standard of conduct. 6.3 Non-Exclusivity of Rights. The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this section 6 shall not be exclusive of any other right any person may have or hereafter acquire under any statute, provision of the certificate of incorporation, by-law, agreement, vote of stockholders or disinterested directors or otherwise. 6.4 Insurance. The corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the corporation would have the power to indemnify such person against that expense, liability or loss under Delaware law. 6.5 Expenses as a Witness. To the extent any director, officer, employee or agent of the corporation is by reason of such position, or a position with another entity at the request of the corporation, a witness in any action, suit or proceeding, he shall be indemnified against all costs and expenses actually and reasonably incurred by him or on his behalf in connection therewith. 6.6 Indemnity Agreements. The corporation may enter into agreement with any director, officer, employee or agent of the corporation providing for indemnification to the fullest extent permitted by Delaware law. 7. MISCELLANEOUS. 7.1 Seal. The Board shall adopt a corporate seal, which shall be in the form of a circle and shall bear the corporation's name and the year and state in which it was incorporated. 7.2 Fiscal Year. The Board may determine the corporation's fiscal year. Until changed by the Board, the last day of the corporation's fiscal year shall be December 31. 7.3 Voting of Shares in Other Corporations. Shares in other corporations held by the corporation may be represented and voted by an officer of this corporation or by a proxy or proxies appointed by one of them. The Board may, however, appoint some other person to vote the shares. 7.4 Amendments. By-laws may be amended, repealed or adopted by the stockholders. EX-3.11 5 y04700exv3w11.txt CERTIFICATE OF INCORPORATION Exhibit 3.11 CERTIFICATE OF INCORPORATION OF PHIBRO ANIMAL HEALTH U.S., INC. The undersigned incorporator, in order to form a corporation under the General Corporation Law of Delaware, certifies as follows: FIRST: The name of the corporation is Phibro Animal Health U.S, Inc. SECOND: The registered office of the corporation is to be located at 1013 Centre Road, Wilmington, Delaware, 19805-1297, New Castle County. The name of its registered agent at that address is Corporation Service Company. THIRD: The purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. FOURTH: The corporation shall have the authority to issue 1,000 shares of common stock, par value $0.01 per share. FIFTH: The name and mailing address of the incorporator are as follows: Alexa D. Isbell Proskauer Rose LLP 1585 Broadway New York, New York 10036 SIXTH: Whenever a compromise or arrangement is proposed between the corporation and its creditors or any class of them and/or between the corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of the corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for the corporation under the provisions of Section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for the corporation under the provisions of Section 279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of the corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of the corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of the corporation as a consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of the corporation, as the case may be, and also on the corporation. SEVENTH: A director of this corporation shall not be personally liable to the corporation or its stockholders for monetary damages for the breach of any fiduciary duty as a director, except in the case of (a) any breach of the director's duty of loyalty to the corporation or its stockholders, (b) acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (c) under section 174 of the General Corporation Law of the State of Delaware or (d) for any transaction from which the director derives an improper personal benefit. Any repeal or modification of this Article by the stockholders of the corporation shall not adversely affect any right or protection of a director of the corporation existing at the time of such repeal or modification with respect to acts or omissions occurring prior to such repeal or modification. EIGHTH: The corporation shall, to the fullest extent permitted by law, as the same is now or may hereafter be in effect, indemnify each person (including the heirs, executors, administrators and other personal representatives of such person) against expenses including attorneys' fees, judgments, fines and amounts paid in settlement, actually and reasonably incurred by such person in connection with any threatened, pending or completed suit, action or proceeding (whether civil, criminal, administrative or investigative in nature or otherwise) in which such person may be involved by reason of the fact that he or she is or was a director or officer of the corporation or is or was serving any other incorporated or unincorporated enterprise in such capacity at the request of the corporation. NINTH: Unless, and except to the extent that, the by-laws of the corporation shall so require, the election of directors of the corporation need not be by written ballot. TENTH: The corporation hereby confers the power to adopt, amend or repeal bylaws of the corporation upon the directors. IN WITNESS WHEREOF, I have hereunto set my hand this eleventh day of July, 2000. /s/ Alexa D. Isbell -------------------------- Sole Incorporator EX-3.12 6 y04700exv3w12.txt BY-LAWS Exhibit 3.12 BY-LAWS OF PHIBRO ANIMAL HEALTH U.S., INC. 1. MEETINGS OF STOCKHOLDERS. 1.1 Annual Meeting. The annual meeting of stock-holders shall be held on the first Monday of June in each year, or as soon thereafter as practicable, and shall be held at a place and time determined by the board of directors (the "Board"). 1.2 Special Meetings. Special meetings of the stockholders may be called by resolution of the Board or the president and shall be called by the president or secretary upon the written request (stating the purpose or purposes of the meeting) of a majority of the directors then in office or of the holders of a majority of the outstanding shares entitled to vote. Only business related to the purposes set forth in the notice of the meeting may be transacted at a special meeting. 1.3 Place and Time of Meetings. Meetings of the stockholders may be held in or outside Delaware at the place and time specified by the Board or the officers or stockholders requesting the meeting. 1.4 Notice of Meetings; Waiver of Notice. Written notice of each meeting of stockholders shall be given to each stockholder entitled to vote at the meeting, except that (a) it shall not be necessary to give notice to any stockholder who submits a signed waiver of notice before or after the meeting, and (b) no notice of an adjourned meeting need be given, except when required under section 1.5 below or by law. Each notice of a meeting shall be given, personally or by mail, not fewer than 10 nor more than 60 days before the meeting and shall state the time and place of the meeting, and, unless it is the annual meeting, shall state at whose direction or request the meeting is called and the purposes for which it is called. If mailed, notice shall be considered given when mailed to a stockholder at his address on the corporation's records. The attendance of any stockholder at a meeting, without protesting at the beginning of the meeting that the meeting is not lawfully called or convened, shall constitute a waiver of notice by him. 1.5 Quorum. At any meeting of stockholders, the presence in person or by proxy of the holders of a majority of the shares entitled to vote shall constitute a quorum for the transaction of any business. In the absence of a quorum, a majority in voting interest of those present or, if no stockholders are present, any officer entitled to preside at or to act as secretary of the meeting, may adjourn the meeting until a quorum is present. At any adjourned meeting at which a quorum is present, any action may be taken that might have been taken at the meeting as originally called. No notice of an adjourned meeting need be given, if the time and place are announced at the meeting at which the adjournment is taken, except that, if adjournment is for more than 30 days or if, after the adjournment, a new record date is fixed for the meeting, notice of the adjourned meeting shall be given pursuant to section 1.4. 1.6 Voting; Proxies. Each stockholder of record shall be entitled to one vote for each share registered in his name. Corporate action to be taken by stockholder vote, other than the election of directors, shall be authorized by a majority of the votes cast at a meeting of stockholders, except as otherwise provided by law or by section 1.8. Directors shall be elected in the manner provided in section 2.1. Voting need not be by ballot, unless requested by a majority of the stockholders entitled to vote at the meeting or ordered by the chairman of the meeting. Each stockholder entitled to vote at any meeting of stockholders or to express consent to or dissent from corporate action in writing without a meeting may authorize another person to act for him by proxy. No proxy shall be valid after three years from its date, unless it provides otherwise. 1.7 List of Stockholders. Not fewer than 10 days prior to the date of any meeting of stockholders, the secretary of the corporation shall prepare a complete list of stockholders entitled to vote at the meeting, arranged in alphabetical order and showing the address of each stockholder and the number of shares registered in his name. For a period of not fewer than 10 days prior to the meeting, the list shall be available during ordinary business hours for inspection by any stockholder for any purpose germane to the meeting. During this period, the list shall be kept either (a) at a place within the city where the meeting is to be held, if that place shall have been specified in the notice of the meeting, or (b) if not so specified, at the place where the meeting is to be held. The list shall also be available for inspection by stockholders at the time and place of the meeting. 1.8 Action by Consent Without a Meeting. Any action required or permitted to be taken at any meeting of stockholders may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not fewer than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voting. Prompt notice of the taking of any such action shall be given to those stockholders who did not consent in writing. 2. BOARD OF DIRECTORS. 2.1 Number, Qualification, Election and Term of Directors. The business of the corporation shall be managed by the entire Board, which initially shall consist of three (3) directors. The number of directors may be changed by resolution of a majority of the Board or by the stockholders, but no decrease may shorten the term of any incumbent director. Directors shall be elected at each annual meeting of stockholders by a plurality of the votes cast and shall hold office until the next annual meeting of stockholders and until the election and qualification of their respective successors, subject to the provisions of section 2.9. As used in these by-laws, the term "entire Board" means the total number of directors the corporation would have, if there were no vacancies on the Board. 2.2 Quorum and Manner of Acting. A majority of the entire Board shall constitute a quorum for the transaction of business at any meeting, except as provided in section 2.10. Action of the Board shall be authorized by the vote of the majority of the directors present at the time of the vote, if there is a quorum, unless otherwise provided by law or these by-laws. In the absence of a quorum, a majority of the directors present may adjourn any meeting from time to time until a quorum is present. 2.3 Place of Meetings. Meetings of the Board may be held in or the election and 2.4 Annual and Regular Meetings. Annual meetings of the Board, for the election of officers and consideration of other matters, shall be held either (a) without notice immediately after the annual meeting of stockholders and at the same place, or (b) as soon as practicable after the annual meeting of stockholders, on notice as provided in section 2.6. Regular meetings of the Board may be held without notice at such times and places as the Board determines, If the day fixed for a regular meeting is a legal holiday, the meeting shall be held on the next business day. 2.5 Special Meetings. Special meetings of the Board may be called by the president or by a majority of the directors. 2.6 Notice of Meetings; Waiver of Notice. Notice of the time and place of each special meeting of the Board, and of each annual meeting not held immediately after the annual meeting of stockholders and at the same place, shall be given to each director by mailing it to him at his residence or usual place of business at least three days before the meeting, or by delivering or telephoning or telegraphing it to him at least two days before the meeting. Notice of a special meeting also shall state the purpose or purposes for which the meeting is called. Notice need not be given to any director who submits a signed waiver of notice before or after the meeting or who attends the meeting without protesting at the beginning of the meeting the transaction of any business because the meeting was not lawfully called or convened. Notice of any adjourned meeting need not be given, other than by announcement at the meeting at which the adjournment is taken. 2.7 Board or Committee Action Without a Meeting. Any action required or permitted to be taken by the Board or by any committee of the Board may be taken without a meeting, if all the members of the Board or the committee consent in writing to the adoption of a resolution authorizing the action. The resolution and the written consents by the members of the Board or the committee shall be filed with the minutes of the proceedings of the Board or the committee. 2.8 Participation in Board or Committee Meetings by Conference Telephone. Any or all members of the Board or any committee of the Board may participate in a meeting of the Board or the committee by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participation by such means shall constitute presence in person at the meeting. 2.9 Resignation and Removal of Directors. Any director may resign at any time by delivering his resignation in writing to the president or secretary of the corporation, to take effect at the time specified in the resignation; the acceptance of a resignation, unless required by its terms, shall not be necessary to make it effective. Any or all of the directors may be removed at any time, either with or without cause, by vote of the stockholders. 2.10 Vacancies. Any vacancy in the Board, including one created by an increase in the number of directors, may be filled for the unexpired term by a majority vote of the remaining directors, though less than a quorum. 2.11 Compensation. Directors shall receive such compensation as the Board determines, together with reimbursement of their reasonable expenses in connection with the performance of their duties. A director also may be paid for serving the corporation or its affiliates or subsidiaries in other capacities. 3. COMMITTEES. 3.1 Executive Committee. The Board, by resolution adopted by a majority of the entire Board, may designate an executive committee of one or more directors, which shall have all the powers and authority of the Board, except as otherwise provided in the resolution, section 141(c) of the General Corporation Law of Delaware or any other applicable law. The members of the executive committee shall serve at the pleasure of the Board. All action of the executive committee shall be reported to the Board at its next meeting. 3.2 Other Committees. The Board, by resolution adopted by a majority of the entire Board, may designate other committees of one or more directors, which shall serve at the Board's pleasure and have such powers and duties as the Board determines. 3.3 Rules Applicable to Committees. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In case of the absence or disqualification of any member of a committee, the member or members present at a meeting of the committee and not disqualified, whether or not a quorum, may unanimously appoint another director to act at the meeting in place of the absent or disqualified member. All action of a committee shall be reported to the Board at its next meeting. Each committee shall adopt rules of procedure and shall meet as provided by those rules or by resolutions of the Board. 4. OFFICERS. 4.1 Number; Security. The executive officers of the corporation shall be the president, one or more vice presidents (including an executive vice president, if the Board so determines), a secretary and a treasurer. Any two or more offices may be held by the same person. The board may require any officer, agent or employee to give security for the faithful performance of his duties. 4.2 Election; Term of Office. The executive officers of the corporation shall be elected annually by the Board, and each such officer shall hold office until the next annual meeting of the Board and until the election of his successor, subject to the provisions of section 4.4. 4.3 Subordinate Officers. The Board may appoint subordinate officers (including assistant secretaries and assistant treasurers), agents or employees, each of whom shall hold office for such period and have such powers and duties as the Board determines. The Board may delegate to any executive officer or committee the power to appoint and define the powers and duties of any subordinate officers, agents or employees. 4.4 Resignation and Removal of Officers. Any officer may resign at any time by delivering his resignation in writing to the president or secretary of the corporation, to take effect at the time specified in the resignation; the acceptance of a resignation, unless required by its terms, shall not be necessary to make it effective. Any officer elected or appointed by the Board or appointed by an executive officer or by a committee may be removed by the Board either with or without cause, and in the case of an officer appointed by an executive officer or by a committee, by the officer or committee that appointed him or by the president. 4.5 Vacancies. A vacancy in any office may be filled for the unexpired term in the manner prescribed in sections 4.2 and 4.3 for election or appointment to the office. 4.6 Chairman. The Chairman of the Board shall preside over all meetings of the Board at which he is present, and shall have such other powers and duties as chairman of the boards of corporations usually have or the Board assigns to him. 4.7 The Chief Executive Officer. Subject to the control of the Board, the chief executive officer of the corporation shall manage and direct the daily business and affairs of the corporation and shall communicate to the Board, and any Committee thereof, reports, proposals and recommendations for their respective consideration or action. He may do and perform all acts on behalf of the Corporation and shall preside at all meetings of the stockholders if present thereat, and in the absence of the Chairman of the Board of Directors have such powers and perform such duties as the Board or the chairman may from time to time prescribe or as may be prescribed in these By-laws, and in the event of the absence, incapacity or inability to act of the chairman, then the chief executive officer shall perform the duties and exercise the powers of the chairman. 4.8 The President. Subject to the control of the Board, the president shall have general supervision over the business of the corporation and shall have such other powers and duties as presidents of corporations usually have or as the Board assigns to him. 4.9 Vice President. Each vice president shall have such powers and duties as the Board or the president assigns to him. 4.10 The Treasurer. The treasurer shall be in charge of the corporation's books and accounts. Subject to the control of the Board, he shall have such other powers and duties as the Board or the president assigns to him. 4.11 The Secretary. The secretary shall be the secretary of, and keep the minutes of, all meetings of the Board and the stockholders, shall be responsible for giving notice of all meetings of stockholders and the Board, and shall keep the seal and, when authorized by the Board, apply it to any instrument requiring it. Subject to the control of the Board, he shall have such powers and duties as the Board or the president assigns to him. In the absence of the secretary from any meeting, the minutes shall be kept by the person appointed for that purpose by the presiding officer. 4.12 Salaries. The Board may fix the officers' salaries, if any, or it may authorize the president to fix the salary of any other officer. 5. SHARES. 5.1 Certificates. The corporation's shares shall be represented by certificates in the form approved by the Board. Each certificate shall be signed by the president or a vice president, and by the secretary or an assistant secretary or the treasurer or an assistant treasurer, and shall be sealed with the corporation's seal or a facsimile of the seal. Any or all of the signatures on the certificate may be a facsimile. 5.2 Transfers. Shares shall be transferable only on the corporation's books, upon surrender of the certificate for the shares, properly endorsed. The Board may require satisfactory surety before issuing a new certificate to replace a certificate claimed to have been lost or destroyed. 5.3 Determination of Stockholders of Record. The Board may fix, in advance, a date as the record date for the determination of stockholders entitled to notice of or to vote at any meeting of the stockholders, or to express consent to or dissent from any proposal without a meeting, or to receive payment of any dividend or the allotment of any rights, or for the purpose of any other action. The record date may not be more than 60 or fewer than 10 days before the date of the meeting or more than 60 days before any other action. 6. INDEMNIFICATION AND INSURANCE. 6.1 Right to Indemnification. Each person who was or is a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "proceeding"), by reason of the fact that he, or a person of whom he is the legal representative, is or was a director or officer of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action or inaction in an official capacity or in any other capacity while serving as director, officer, employee or agent, shall be indemnified and held harmless by the corporation to the fullest extent permitted by the General Corporation Law of Delaware, as amended from time to time, against all costs, charges, expenses, liabilities and losses (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith, and that indemnification shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of his heirs, executors and administrators; provided, however, that, except as provided in section 6.2, the corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by that person, only if that proceeding (or part thereof) was authorized by the Board. The right to indemnification conferred in these by-laws shall be a contract right and shall include the right to be paid by the corporation the expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that, if the General Corporation Law of Delaware, as amended from time to time, requires, the payment of such expenses incurred by a director or officer in his capacity as a director or officer (and not in any other capacity in which service was or is rendered by that person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of a proceeding shall be made only upon delivery to the corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced, if it shall ultimately be determined that such director or officer is not entitled to be indemnified under these by-laws or otherwise. The corporation may, by action of its Board, provide indemnification to employees and agents of the corporation with the same scope and effect as the foregoing indemnification of directors and officers. 6.2 Right of Claimant to Bring Suit. If a claim under section 6.1 is not paid in full by the corporation within 30 days after a written claim has been received by the corporation, the claimant may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant also shall be entitled to be paid the expense of prosecuting that claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition, where the required undertaking, if any, is required and has been tendered to the corporation) that the claimant has failed to meet a standard of conduct that makes it permissible under Delaware law for the corporation to indemnify the claimant for the amount claimed. Neither the failure of the corporation (including its Board, its independent legal counsel or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is permissible in the circumstances because he has met that standard of conduct, nor an actual determination by the corporation (including its Board, its independent counsel or its stockholders) that the claimant has not met that standard of conduct, shall be a defense to the action or create a presumption that the claimant has failed to meet that standard of conduct. 6.3 Non-Exclusivity of Rights. The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this section 6 shall not be exclusive of any other right any person may have or hereafter acquire under any statute, provision of the certificate of incorporation, by-law, agreement, vote of stockholders or disinterested directors or otherwise. 6.4 Insurance. The corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the corporation would have the power to indemnify such person against that expense, liability or loss under Delaware law. 6.5 Expenses as a Witness. To the extent any director, officer, employee or agent of the corporation is by reason of such position, or a position with another entity at the request of the corporation, a witness in any action, suit or proceeding, he shall be indemnified against all costs and expenses actually and reasonably incurred by him or on his behalf in connection therewith. 6.6 Indemnity Agreements. The corporation may enter into agreement with any director, officer, employee or agent of the corporation providing for indemnification to the fullest extent permitted by Delaware law. 7. MISCELLANEOUS. 7.1 Seal. The Board shall adopt a corporate seal, which shall be in the form of a circle and shall bear the corporation's name and the year and state in which it was incorporated. 7.2 Fiscal Year. The Board may determine the corporation's fiscal year. Until changed by the Board, the last day of the corporation's fiscal year shall be December 31. 7.3 Voting of Shares in Other Corporations. Shares in other corporations held by the corporation may be represented and voted by an officer of this corporation or by a proxy or proxies appointed by one of them. The Board may, however, appoint some other person to vote the shares. 7.4 Amendments. By-laws may be amended, repealed or adopted by the stockholders. EX-3.20 7 y04700exv3w20.txt ARTICLES OF ASSOCIATION AND DEED OF INCORPORATION Exhibit 3.20 ARTICLES OF ASSOCIATION: Article 1. Definitions. 1.1 In these Articles of Association. the following terms shall have the following meanings: "Share" means a share in the capital of the Company. "Shareholder" means a holder of one or more Shares. "General Meeting" or "General Meeting of Shareholders" means the body of the Company consisting of the Shareholders or (as the case may be) a meeting of Shareholders (or their representatives) and other persons entitled to attend such meetings. "Managing Director" means a member of the Management Board; unless stated otherwise this includes each Managing Director A and each Managing Director B. "Management Board" means the management board of the Company. "in writing" means by letter, by telecopier, by e-mail, or by message which is transmitted via any other current means of communication and which can be received in the written form. "Distributable Equity" means the part of the Company's equity which exceeds the aggregate of the issued capital and the reserves which must be maintained pursuant to the law. "Company" means the company the internal organisation of which is governed by these Articles of Association. 1.2 References to "Articles" refer to articles which are part of these Articles of Association, except where expressly indicated otherwise. Article 2. Name and Official Seat. 2.1 The Company's name is: Philipp Brothers Netherlands III B.V. 2.2 The official seat of the Company is in Amsterdam. Article 3. Objects. The objects of the Company are: (a) to incorporate. to participate in any way whatsoever in, to manage, to supervise businesses and companies; (b) to finance businesses and companies; (c) to borrow, to lend and to raise funds, including the issue of bonds, promissory notes or other securities or evidence of indebtedness as well as to enter into agreements in connection with aforementioned activities; (d) to render advice and services to businesses and companies with which the Company forms a group and to third parties; (e) to grant guarantees. to bind the Company and to pledge its assets for obligations of businesses and companies with which it forms a group and on behalf of third parties; (f) to acquire, alienate, manage and exploit registered property and items of properly in general; (g) to trade in currencies, securities and items of property in general; (h) to develop and trade in patents, trade marks, licenses, know-how and other industrial property rights; (i) to perform any and all activities of an industrial, financial or commercial nature; and to do all that is connected therewith or may be conducive thereto, all to be interpreted in the broadest sense. Article 4. Authorised Capital. 4.1 The authorised capital of the Company is ninety thousand euro (EUR 90,000). 4.2 The authorised capital of the Company is divided into nine hundred (900) Shares with a nominal value of one hundred euro (EUR 100) each. 4.3 All Shares shall be registered. No share certificates shall be issued. Article 5. Register of Shareholders. 5.1 The Management Board shall keep a register of Shareholders in which the names and addresses of all Shareholders are recorded. 5.2 Section 2:194 of the Dutch Civil Code applies to the register of Shareholders. Article 6. Issuance of Shares. 6.1 Shares may be issued pursuant to a resolution of the General Meeting. The General Meeting may transfer this authority to another body of the Company and may also revoke such transfer. 6.2 A resolution to issue Shares shall stipulate the issue price and the other conditions of issue. 6.3 The issue of a Share shall furthermore require a notarial deed, to be executed for that purpose before a civil law notary registered in the Netherlands, to which deed those involved in the issuance shall be parties. 6.4 Upon issuance of Shares, each Shareholder shall have a right of pre-emption in proportion to the aggregate nominal value of his Shares, subject to the relevant limitations prescribed by law and the provisions of Article 6.5. 6.5 Prior to each single issuance of Shares, the right of pre-emption may be limited or excluded by the body of the Company competent to issue such Shares. 6.6 The full nominal value of each Share must be paid upon subscription. Article 7. Own Shares; Reduction of the Issued Capital. 7.1 The Company and its subsidiaries may acquire fully paid in Shares or depositary receipts thereof: with due observance of the limitations prescribed by law. 7.2 The Company and its subsidiaries may grant loans with a view to a subscription for or an acquisition of Shares or depositary receipts thereof, but not in excess of the amount of the Company's distributable reserves. 7.3 The General Meeting may resolve to reduce the Company's issued capital in accordance with the relevant provisions prescribed by law. Article 8. Transfer of Shares. 8.1 The transfer of a Share shall require a notarial deed, to be executed for that purpose before a civil law notary registered in the Netherlands, to which deed those involved in the transfer shall be parties. 8.2 Unless the Company itself is party to the transfer, the rights attributable to the Share can only be exercised after the Company has acknowledged said transfer or said deed has been served upon it, in accordance with the relevant provisions of the law. Article 9. Share Transfer Restrictions (Offer to co-Shareholders). 9.1 The provisions of this Article 9 below are applicable to a transfer of one or more Shares, unless (i) all Shareholders have granted permission for the intended transfer in writing, which permission shall then be valid for a period of three months, or (ii) the Shareholder concerned is obliged by law to transfer his Shares to a former Shareholder. 9.2 A transfer of one or more Shares can only be effected after the Shares have been offered for sale to the co-Shareholders first. The relevant Shareholder (the "Offeror") shall make the offer by means of a written notification to the Management Board, stating the number of Shares he wishes to transfer and the person or persons to whom he wishes to transfer the Shares. The Management Board shall give notice of the offer to the co-Shareholders. Co-Shareholders interested in purchasing one or more of the offered Shares (the "Interested Parties") must notify the Management Board of their interest. If the Company itself is a co-Shareholder, it shall only be entitled to act as an Interested Party with the consent of the Offeror. 9.3 The price for which the offered Shares can be purchased by the Interested Parties shall be set by the Offeror and the Interested Parties in joint consultation or by one or more experts designated by them. If an agreement on the price or on the expert or experts, as the case may be, is not reached, the price shall be set by one or more independent experts to be designated, at the request of one or more of the parties concerned, by the chairperson of the Chamber of Commerce and Factories where the Company is registered in the Commercial Register. 9.4 Within one month of the set price having been notified to them, the Interested Parties must give notice to the Management Board of the number of the offered Shares they wish to purchase. Once the notice mentioned in the preceding sentence has been given, an Interested Party can only withdraw with the consent of the other Interested Parties. 9.5 If the Interested Parties together wish to purchase more Shares than have been offered the offered Shares shall be distributed among them. The Interested Parties shall decide together upon the distribution. If an agreement on the distribution is not reached. the Management Board shall determine the distribution, as tar as possible in propol1ion to the total nominal value of the Shares held by each Interested Pat1y at the time of the distribution. The number of offered Shares allocated to an Interested Party cannot exceed the number of Shares he wishes to purchase. 9.6 The Offeror may withdraw his offer up to one month from the day on which he is informed of the Interested Party or Pal1ies to whom he can sell all offered Shares and at what price. 9.7 If it becomes apparent that none of the co-Shareholders is an Interested Party or that not all offered Shares will be purchased against payment in cash by one or more Interested Parties, the Offeror may, within a period of three months, freely transfer all the offered Shares, but not part thereof, to the person or persons listed in the offer. Article 10. Pledging of Shares and Usufruct in Shares. 10.1 The provisions of Article 8 shall apply by analogy to the pledging of Shares and to the creation or transfer of a usufruct in Shares. 10.2 If a Share is pledged or if a usufruct is created in a Share, the voting rights attributable to such Share may not be assigned to the pledgee or usufructuary. Article 11. Depositary Receipts for Shares. The Company shall not cooperate in the issuance of depositary receipts for Shares. Article 12. Managing Directors. 12.1 The Management Board shall consist of at least one Managing Director A and one Managing Director B. Both individuals and legal entities can be Managing Directors. 12.2 Managing Directors are appointed, as a Managing Director A or as a Managing Director B, by the General Meeting. 12.3 A Managing Director may be suspended or removed by the General Meeting at any time. 12.4 The authority to establish remuneration and other conditions of employment for Managing Directors is vested in the General Meeting. Article 13. Duties, Decision-making Process and Allocation of Duties. 13.1 The Management Board shall be entrusted with the management of the Company. 13.2 The Management Board may establish rules regarding its decision-making process and working methods. In this context, the Management Board may also determine the duties which each Managing Director shall be particularly responsible for. The General Meeting may resolve that such rules and allocation of duties must be put in writing and that such rules and allocation of duties shall he subject to its approval. 13.3 Management Board resolutions at all times may be adopted in writing, provided the proposal concerned is submitted to all Managing Directors then in office and none of them objects to this manner of adopting resolutions. Article 14. Representation; Conflicts of Interest. 14.1 The Company shall be represented by the Management Board. The authority to represent the Company shall also be vested in one Managing Director A and one Managing Director B acting jointly. 14.2 The Management Board may appoint officers with general or limited power to represent the Company. Each officer shall be competent to represent the Company, subject to the restrictions imposed on him. The Management Board shall determine each officer's title. The authority of an officer thus appointed may not extend to any transaction where the Company has a conflict of interest with the officer concerned or with one or more Managing Directors. 14.3 In the event of a conflict of interest between the Company and a Managing Director, the provisions of Article 14.1 shall continue to apply unimpaired unless the General Meeting has appointed one or more other persons to represent the Company in the case at hand or in general in the event of such a conflict. A resolution of the Management Board with respect to a matter involving a conflict of interest with a Managing Director in a private capacity shall be subject to the approval of the General Meeting, but the absence of such approval shall not affect the authority of the Management Board or the Managing Directors to represent the Company. Article 15. Approval of Management Board Resolutions. 15.1 The General Meeting may require Management Board resolutions to be subject to its approval. The Management Board shall be notified in writing of such resolutions, which shall be clearly specified. 15.2 The absence of approval by the General Meeting of a resolution referred to in this Article 15 shall not affect the authority of the Management Board or the Managing Directors to represent the Company. Article 16. Vacancy or Inability to Act. If a seat on the Management Board is vacant (`ontstentenis') or a Managing Director is unable to perform his duties (`belet'), the remaining Managing Directors or Managing Director shall be temporarily entrusted with the management of the Company. If all seats on the Management Board are vacant or all Managing Directors are unable to perform their duties, the management of the Company shall be temporarily entrusted to the person designated for that purpose by the General Meeting. Article 17. Financial Year and Annual Accounts. 17.1 The Company's financial year shall run from the first day of July through the thirtieth day of June. 17.2 Annually, not later than five months after the end of the financial year, save where this period is extended by the General Meeting by not more than six months by reason of special circumstances, the Management Board shall prepare annual accounts, and shall deposit the same for inspection by the Shareholders at the Company's office. 17.3 Within the same period, the Management Board shall also deposit the annual report for inspection by the Shareholders, unless Section 2:396, subsection 6, or Section 2:403 of the Dutch Civil Code applies to the Company. 17.4 The annual accounts shall consist of a balance sheet, a profit and loss account and explanatory notes. 17.5 The annual accounts shall be signed by the Managing Directors. If the signature of one or more of them is missing, this shall be stated and reasons for this omission shall be given. 17.6 The Company may, and if the law so requires shall, appoint an accountant to audit the annual accounts. Such appointment shall be made by the General Meeting. 17.7 The General Meeting shall adopt the annual accounts. 17.8 After adoption of the annual accounts, the General Meeting shall pass a resolution concerning release of the Managing Directors from liability for the exercise of their duties, insofar as the exercise of such duties is reflected in the annual accounts or otherwise disclosed to the General Meeting prior to the adoption of the annual accounts. The scope of a release from liability shall be subject to limitations by virtue of the law. Article 18. Profits and Distributions. 18.1 The allocation of profits accrued in a financial year shall be determined by the General Meeting. 18.2 Distribution of profits shall be made after adoption of the annual accounts if permissible under the law given the contents of the annual accounts. 18.3 The General Meeting may resolve to make interim distributions and/or to make distributions at the expense of any reserve of the Company. 18.4 Distributions may be made only up to an amount which does not exceed the amount of the Distributable Equity. Article 19. General Meetings of Shareholders. 19.1 The annual General Meeting of Shareholders shall be held within six months after the end of the financial year. 19.2 Other General Meetings of Shareholders shall be held as often as the Management Board deems such necessary. 19.3 Shareholders representing in the aggregate at least one-tenth of the Company's issued capital may request the Management Board to convene a General Meeting of Shareholders, stating specifically the business to be discussed. If the Management Board has not given proper notice of a General Meeting of Shareholders within four weeks following receipt of such request such that the meeting can be held within six weeks after receipt of the request, the applicants shall be authorised to convene a meeting themselves. Article 20. Notice, Agenda and Venue of Meetings. 20.1 Notice of General Meetings of Shareholders shall be given by the Management Board, without prejudice to the provisions of Article 19.3. 20.2 Notice of the meeting shall be given no later than on the fifteenth day prior to the day of the meeting. 20.3 The notice convening the meeting shall specify the business to be discussed. Other business not specified in such notice may be announced at a later date, with due observance of the term referred to in Article 20.2. 20.4 The notice of the meeting shall be sent to the addresses of the Shareholders shown in the register of Shareholders. 20.5 General Meetings of Shareholders are held in the municipality in which, according to these Articles of Association, the Company has its official seat. General Meetings of Shareholders may also be held elsewhere, in which case valid resolutions of the General Meeting may only be adopted if all of the Company's issued capital is represented. Article 21. Admittance and Rights at Meetings. 21.1 Each Shareholder shall be entitled to attend the General Meetings of Shareholders, to address the meeting and to exercise his voting rights. Shareholders may be represented in a meeting by a proxy authorised in writing. 21.2 At a meeting, each person present with voting rights must sign the attendance list. The chairperson of the meeting may decide that the attendance list must also be signed by other persons present at the meeting. 21.3 The Managing Directors shall have the right to give advice in the General Meetings of Shareholders. 21.4 The chairperson of the meeting shall decide on the admittance of other persons to the meeting. Article 22. Chairperson and Secretary of the Meeting. 22.1 The chairperson of a General Meeting of Shareholders shall be appointed by a majority of the votes cast by the persons with voting rights present at the meeting. 22.2 The chairperson of the meeting shall appoint a secretary for the meeting. Article 23. Minutes; Recording of Shareholders' Resolutions. 23.1 The secretary of a General Meeting of Shareholders shall keep minutes of the proceedings at the meeting. The minutes shall be adopted by the chairperson and the secretary of the meeting and as evidence thereof shall be signed by them. 23.2 The Management Board shall keep record of all resolutions adopted by the General Meeting. If the Management Board is not represented at a meeting, the chairperson of the meeting shall ensure that the Management Board is provided with a transcript of the resolutions adopted, as soon as possible after the meeting. The records shall be deposited at the Company's office for inspection by the Shareholders. On application, each of them shall be provided with a copy of or an extract from the records. Article 24. Adoption of Resolutions in a Meeting. 24.1 Each Share confers the right to cast one vote. 24.2 To the extent that the law or these Articles of Association do not provide otherwise, all resolutions of the General Meeting shall be adopted by a simple majority of the votes cast, without a quorum being required. 24.3 If there is a tie in voting, the proposal shall be deemed to have been rejected. 24.4 If the formalities for convening and holding of General Meetings of Shareholders, as prescribed by law or these Articles of Association, have not been complied with, valid resolutions of the General Meeting may only be adopted in a meeting, if in such meeting all of the Company's issued capital is represented and such resolution is carried by unanimous vote. Article 25. Adoption of Resolutions without holding Meetings. 25.1 Shareholders may adopt resolutions of the General Meeting in writing without holding a meeting, provided they are adopted by the unanimous vote of all Shareholders entitled to vote. The provisions of Article 21.3 shall apply by analogy. 25.2 Each Shareholder must ensure that the Management Board is informed of the resolutions thus adopted as soon as possible in writing. The Management Board shall keep record of the resolutions adopted and it shall add such records to those referred to in Article 23.2. Article 26. Amendment of the Articles of Association. The General Meeting may resolve to amend these Articles of Association. When a proposal to amend these Articles of Association is to be made to the General Meeting, the notice convening the General Meeting must state so and a copy of the proposal, including the verbatim text thereof: shall be deposited and kept available at the Company's office for inspection by the Shareholders, until the conclusion of the meeting. Article 27. Dissolution and Liquidation. 27.1 The Company may be dissolved pursuant to a resolution to that effect by the General Meeting. When a proposal to dissolve the Company is to be made to the General Meeting, this must be stated in the notice convening the General Meeting. 27.2 If the Company is dissolved pursuant to a resolution of the General Meeting, each person who is Managing Director B at the time the dissolution takes effect shall become liquidator of the dissolved Company's property. Each person who is Managing Director A at the time the dissolution takes effect shall cease to be Managing Director by operation of law as of that moment Notwithstanding the provisions of Article 14.1, each liquidator shall be solely authorised to represent the Company. 27.3 During liquidation, the provisions of these Articles of Association, subject to Article 27.2, shall remain in force to the extent possible. 27.4 The balance remaining after payment of the debts of the dissolved Company shall be transferred to the Shareholders in proportion to the aggregate nominal value of the Shares held by each. 27.5 In addition, the liquidation shall be subject to the relevant provisions of Book 2, Title I, of the Dutch Civil Code. -0-0-0- DEED OF AMENDMENT OF ARTICLES OF ASSOCIATION (Philip Brothers Netherlands III B. V.) This sixteenth day of June two thousand and four, there appeared before me, Christiaan Maria Stokkermans, civil law notary in Amsterdam: Wieger ten Hove, with office address at Apollolaan 15, 1077 AB Amsterdam, the Netherlands, born in Almelo, the Netherlands, on the sixteenth day of April nineteen hundred and seventy-seven. The person appearing declared the following: The sole shareholder of the Company, as defined hereinafter, has resolved on the twenty-eighth day of May two thousand and four to partially amend the Articles of Association of Philipp Brothers Netherlands III B.V., a private limited liability company under Dutch law (`besloten vennootschap met beperkte aansprakelijkheid'), having its official seat in Amsterdam, the Netherlands, its office address at Rokin 55, 1012 KK Amsterdam, the Netherlands, and registered in the Commercial Register under number 34195548 (the "Company"), as well as to authorise the person appearing to have this deed executed. The adoption of such resolutions is evidenced by a shareholder's resolution attached to this deed (Annex). The Articles of Association of the Company were established at the incorporation of the Company, by a deed, executed on the eleventh day of September two thousand and three before Chr.M. Stokkermans, civil law notary in Amsterdam, with respect to which a ministerial Statement of No Objections was granted on the twentieth day of August two thousand and three, under number BV 1250665. The Articles of Association of the Company have not been amended since. In implementing the aforementioned resolution, the Articles of Association of the Company are hereby amended as follows. Amendment A. The definition "Managing Director" in Article 1, paragraph 1 is amended and shall forthwith read as follows: ""Managing Director" means a member of the Management Board; unless stated otherwise this includes each Managing Director A and each Managing Director B.". Amendment B. Article 12, paragraph 1 is amended and shall forthwith read as follows: "12.1 The Management Board shall consist of at least one Managing Director A and one Managing Director B. Both individuals and legal entities can be Managing Directors.". Amendment C. Article 12. paragraph 2 is amended and shall forthwith read as follows: "12.2 Managing Directors are appointed, as a Managing Director A or as a Managing Director B, by the General Meeting.". Amendment D. Article 14. paragraph 1. last sentence is amended and shall forthwith read as follows: "The authority to represent the Company shall also be vested in one Managing Director A and one Managing Director B acting jointly.". Amendment E. Article 16 is amended and shall forthwith read as follows: "Article 16. Vacancy or Inability to Act. If a seat on the Management Board is vacant (`ontstentenis') or a Managing Director is unable to perform his duties (`belet'), the remaining Managing Directors or Managing Director shall be temporarily entrusted with the management of the Company. If all scats on the Management Board are vacant or all Managing Directors are unable to perform their duties, the management of the Company shall be temporarily entrusted to the person designated for that purpose by the General Meeting.". Amendment F. Article 27 paragraphs 2 and 3 is amended and shall forthwith read as follows: "27.2 If the Company is dissolved pursuant to a resolution of the General Meeting, each person who is Managing Director B at the time the dissolution takes effect shall become liquidator of the dissolved Company's property. Each person who is Managing Director A at the time the dissolution takes effect shall cease to be Managing Director by operation or law as of that moment. Notwithstanding the provisions of Article 14.1. each liquidator shall be solely authorised to represent the Company. 27.3 During liquidation, the provisions of these Articles of Association, subject to Article 27.2, shall remain in force to the extent possible.". Finally, the person appearing has declared: Statement of No Objections. With respect to the foregoing amendment of the Articles of Association, a ministerial Statement of No Objections was granted on the fourteenth day of June two thousand and four. under number BV 1250665, which is evidenced by a written statement from the Dutch Ministry of Justice attached to this deed (Annex). Close. The person appearing is known to me, civil law notary. This deed was executed in Amsterdam on the date first above written. Before reading out, a concise summary and an explanation of the contents of this deed were given to the person appearing. The person appearing then declared that he had taken note of and agreed to the contents of this decd and did not want the complete deed to be read to him. Thereupon, after limited reading, this deed was signed by the person appearing and by me, civil law notary. DEED OF INCORPORATION (Philipp Brothers Netherlands III B.V.) This eleventh day of September two thousand and three, there appeared before me, Christiaan Maria Stokkermans, civil law notary in Amsterdam: Wieger ten Hove, with office address at Apollolaan 15, 1077 AB Amsterdam (the Netherlands), born in Almelo (the Netherlands) on the sixteenth day of April nineteen hundred and seventy-seven, in this respect acting as attorney-in-fact of: Philipp Brothers Netherlands II B.V., a private limited liability company (`besloten vennootschap met beperkte aansprakelijkheid') under Dutch law, having its official seat in Amsterdam, its office address at Koningslaan 34, 1075 AD Amsterdam, and registered in the Dutch Commercial Register under number 34146090 (the "Incorporator"). The aforementioned proxy appears from a written power of attorney attached to this deed (Annex). The person appearing declared the following: The Incorporator hereby incorporates a private limited liability company under Dutch law (`besloten vennootschap met beperkte aansprakelijkheid'), with the following Articles of Association. \ ARTICLES OF ASSOCIATION: Article 1. Definitions. 1.1 In these Articles of Association. the following terms shall have the following meanings: "Share" means a share in the capital of the Company. "Shareholder" means a holder of one or more Shares. "General Meeting" or "General Meeting of Shareholders" means the body of the Company consisting of the Shareholders or (as the case may be) a meeting of Shareholders (or their representatives) and other persons entitled to attend such meetings. "Managing Director" means a member of the Management Board. "Management Board" means the management board of the Company. "in writing" means by letter, by telecopier, bye-mail, or by message which is transmitted via any other current means of communication and which can be received in the written form. "Distributable Equity" means the part of the Company's equity which exceeds the aggregate of the issued capital and the reserves which must be maintained pursuant to the law. "Company" means the company the internal organisation of which is governed by these Articles of Association. 1.2 References to "Articles" refer to articles which are part of these Articles of Association, except where expressly indicated otherwise. Article 2. Name and Official Seat. 2.1 The Company's name is: Philipp Brothers Netherlands III B.V. 2.2 The official seat of the Company is in Amsterdam. Article 3. Objects. The objects of the Company are: (a) to incorporate. to participate in any way whatsoever in, to manage, to supervise businesses and companies; (b) to finance businesses and companies; (c) to borrow, to lend and to raise funds, including the issue of bonds, promissory notes or other securities or evidence of indebtedness as well as to enter into agreements in connection with aforementioned activities; (d) to render advice and services to businesses and companies with which the Company forms a group and to third parties; (e) to grant guarantees. to bind the Company and to pledge its assets for obligations of businesses and companies with which it forms a group and on behalf of third parties; (f) to acquire, alienate, manage and exploit registered property and items of properly in general; (g) to trade in currencies, securities and items of property in general; (h) to develop and trade in patents, trade marks, licenses, know-how and other industrial property rights; (i) to perform any and all activities of an industrial, financial or commercial nature; and to do all that is connected therewith or may be conducive thereto, all to be interpreted in the broadest sense. Article 4. Authorised Capital. 4.1 The authorised capital of the Company is ninety thousand euro (EUR 90,000). 4.2 The authorised capital of the Company is divided into nine hundred (900) Shares with a nominal value of one hundred euro (EUR 100) each. 4.3 All Shares shall be registered. No share certificates shall be issued. Article 5. Register of Shareholders. 5.1 The Management Board shall keep a register of Shareholders in which the names and addresses of all Shareholders are recorded. 5.2 Section 2:194 of the Dutch Civil Code applies to the register of Shareholders. Article 6. Issuance of Shares. 6.1 Shares may be issued pursuant to a resolution of the General Meeting. The General Meeting may transfer this authority to another body of the Company and may also revoke such transfer. 6.2 A resolution to issue Shares shall stipulate the issue price and the other conditions of issue. 6.3 The issue of a Share shall furthermore require a notarial deed, to be executed for that purpose before a civil law notary registered in the Netherlands, to which deed those involved in the issuance shall be parties. 6.4 Upon issuance of Shares, each Shareholder shall have a right of pre-emption in proportion to the aggregate nominal value of his Shares, subject to the relevant limitations prescribed by law and the provisions of Article 6.5. 6.5 Prior to each single issuance of Shares, the right of pre-emption may be limited or excluded by the body of the Company competent to issue such Shares. 6.6 The full nominal value of each Share must be paid upon subscription. Article 7. Own Shares; Reduction of the Issued Capital. 7.1 The Company and its subsidiaries may acquire fully paid in Shares or depositary receipts thereof: with due observance of the limitations prescribed by law. 7.2 The Company and its subsidiaries may grant loans with a view to a subscription for or an acquisition of Shares or depositary receipts thereof, but not in excess of the amount of the Company's distributable reserves. 7.3 The General Meeting may resolve to reduce the Company's issued capital in accordance with the relevant provisions prescribed by law. Article 8. Transfer of Shares. 8.1 The transfer of a Share shall require a notarial deed, to be executed for that purpose before a civil law notary registered in the Netherlands, to which deed those involved in the transfer shall be parties. 8.2 Unless the Company itself is party to the transfer, the rights attributable to the Share can only be exercised after the Company has acknowledged said transfer or said deed has been served upon it, in accordance with the relevant provisions of the law. Article 9. Share Transfer Restrictions (Offer to co-Shareholders). 9.1 The provisions of this Article 9 below are applicable to a transfer of one or more Shares, unless (i) all Shareholders have granted permission for the intended transfer in writing, which permission shall then be valid for a period of three months, or (ii) the Shareholder concerned is obliged by law to transfer his Shares to a former Shareholder. 9.2 A transfer of one or more Shares can only be effected after the Shares have been offered for sale to the co-Shareholders first. The relevant Shareholder (the "Offeror") shall make the offer by means of a written notification to the Management Board, stating the number of Shares he wishes to transfer and the person or persons to whom he wishes to transfer the Shares. The Management Board shall give notice of the offer to the co-Shareholders. Co-Shareholders interested in purchasing one or more of the offered Shares (the "Interested Parties") must notify the Management Board of their interest. If the Company itself is a co-Shareholder, it shall only be entitled to act as an Interested Party with the consent of the Offeror. 9.3 The price for which the offered Shares can be purchased by the Interested Parties shall be set by the Offeror and the Interested Parties in joint consultation or by one or more experts designated by them. If an agreement on the price or on the expert or experts, as the case may be, is not reached, the price shall be set by one or more independent experts to be designated, at the request of one or more of the parties concerned, by the chairperson of the Chamber of Commerce and Factories where the Company is registered in the Commercial Register. 9.4 Within one month of the set price having been notified to them, the Interested Parties must give notice to the Management Board of the number of the offered Shares they wish to purchase. Once the notice mentioned in the preceding sentence has been given, an Interested Party can only withdraw with the consent of the other Interested Parties. 9.5 If the Interested Parties together wish to purchase more Shares than have been offered the offered Shares shall be distributed among them. The Interested Parties shall decide together upon the distribution. If an agreement on the distribution is not reached. the Management Board shall determine the distribution, as tar as possible in propol1ion to the total nominal value of the Shares held by each Interested Pat1y at the time of the distribution. The number of offered Shares allocated to an Interested Party cannot exceed the number of Shares he wishes to purchase. 9.6 The Offeror may withdraw his offer up to one month from the day on which he is informed of the Interested Party or Pal1ies to whom he can sell all offered Shares and at what price. 9.7 If it becomes apparent that none of the co-Shareholders is an Interested Party or that not all offered Shares will be purchased against payment in cash by one or more Interested Parties, the Offeror may, within a period of three months, freely transfer all the offered Shares, but not part thereof, to the person or persons listed in the offer. Article 10. Pledging of Shares and Usufruct in Shares. 10.1 The provisions of Article 8 shall apply by analogy to the pledging of Shares and to the creation or transfer of a usufruct in Shares. 10.2 If a Share is pledged or if a usufruct is created in a Share, the voting rights attributable to such Share may not be assigned to the pledgee or usufructuary. Article 11. Depositary Receipts for Shares. The Company shall not cooperate in the issuance of depositary receipts for Shares. Article 12. Managing Directors. 12.1 The Management Board shall consist of at least one Managing Directors. Both individuals and legal entities can be Managing Directors. 12.2 Managing Directors are appointed by the General Meeting. 12.3 A Managing Director may be suspended or removed by the General Meeting at any time. 12.4 The authority to establish remuneration and other conditions of employment for Managing Directors is vested in the General Meeting. Article 13. Duties, Decision-making Process and Allocation of Duties. 13.1 The Management Board shall be entrusted with the management of the Company. 13.2 The Management Board may establish rules regarding its decision-making process and working methods. In this context, the Management Board may also determine the duties which each Managing Director shall be particularly responsible for. The General Meeting may resolve that such rules and allocation of duties must be put in writing and that such rules and allocation of duties shall he subject to its approval. 13.3 Management Board resolutions at all times may be adopted in writing, provided the proposal concerned is submitted to all Managing Directors then in office and none of them objects to this manner of adopting resolutions. Article 14. Representation; Conflicts of Interest. 14.1 The Company shall be represented by the Management Board. Each Managing Director shall also be authorised to represent the Company. 14.2 The Management Board may appoint officers with general or limited power to represent the Company. Each officer shall be competent to represent the Company, subject to the restrictions imposed on him. The Management Board shall determine each officer's title. The authority of an officer thus appointed may not extend to any transaction where the Company has a conflict of interest with the officer concerned or with one or more Managing Directors. 14.3 In the event of a conflict of interest between the Company and a Managing Director, the provisions of Article 14.1 shall continue to apply unimpaired unless the General Meeting has appointed one or more other persons to represent the Company in the case at hand or in general in the event of such a conflict. A resolution of the Management Board with respect to a matter involving a conflict of interest with a Managing Director in a private capacity shall be subject to the approval of the General Meeting, but the absence of such approval shall not affect the authority of the Management Board or the Managing Directors to represent the Company. Article 15. Approval of Management Board Resolutions. 15.1 The General Meeting may require Management Board resolutions to be subject to its approval. The Management Board shall be notified in writing of such resolutions, which shall be clearly specified. 15.2 The absence of approval by the General Meeting of a resolution referred to in this Article 15 shall not affect the authority of the Management Board or the Managing Directors to represent the Company. Article 16. Vacancy or Inability to Act. If a seat on the Management Board is vacant (`ontstentenis') or a Managing Director is unable to perform his duties (`belet'), the remaining Managing Directors or Managing Director shall be temporarily entrusted with the management of the Company. If all seats on the Management Board are vacant or all Managing Directors or the sole Managing Director, as the case may be, are unable to perform their duties, the management of the Company shall be temporarily entrusted to the person designated for that purpose by the General Meeting. Article 17. Financial Year and Annual Accounts. 17.1 The Company's financial year shall run from the first day of July through the thirtieth day of June. 17.2 Annually, not later than five months after the end of the financial year, save where this period is extended by the General Meeting by not more than six months by reason of special circumstances, the Management Board shall prepare annual accounts, and shall deposit the same for inspection by the Shareholders at the Company's office. 17.3 Within the same period, the Management Board shall also deposit the annual report for inspection by the Shareholders, unless Section 2:396, subsection 6, or Section 2:403 of the Dutch Civil Code applies to the Company. 17.4 The annual accounts shall consist of a balance sheet, a profit and loss account and explanatory notes. 17.5 The annual accounts shall be signed by the Managing Directors. If the signature of one or more of them is missing, this shall be stated and reasons for this omission shall be given. 17.6 The Company may, and if the law so requires shall, appoint an accountant to audit the annual accounts. Such appointment shall be made by the General Meeting. 17.7 The General Meeting shall adopt the annual accounts. 17.8 After adoption of the annual accounts, the General Meeting shall pass a resolution concerning release of the Managing Directors from liability for the exercise of their duties, insofar as the exercise of such duties is reflected in the annual accounts or otherwise disclosed to the General Meeting prior to the adoption of the annual accounts. The scope of a release from liability shall be subject to limitations by virtue of the law. Article 18. Profits and Distributions. 18.1 The allocation of profits accrued in a financial year shall be determined by the General Meeting. 18.2 Distribution of profits shall be made after adoption of the annual accounts if permissible under the law given the contents of the annual accounts. 18.3 The General Meeting may resolve to make interim distributions and/or to make distributions at the expense of any reserve of the Company. 18.4 Distributions may be made only up to an amount which does not exceed the amount of the Distributable Equity. Article 19. General Meetings of Shareholders. 19.1 The annual General Meeting of Shareholders shall be held within six months after the end of the financial year. 19.2 Other General Meetings of Shareholders shall be held as often as the Management Board deems such necessary. 19.3 Shareholders representing in the aggregate at least one-tenth of the Company's issued capital may request the Management Board to convene a General Meeting of Shareholders, stating specifically the business to be discussed. If the Management Board has not given proper notice of a General Meeting of Shareholders within four weeks following receipt of such request such that the meeting can be held within six weeks after receipt of the request, the applicants shall be authorised to convene a meeting themselves. Article 20. Notice, Agenda and Venue of Meetings. 20.1 Notice of General Meetings of Shareholders shall be given by the Management Board, without prejudice to the provisions of Article 19.3. 20.2 Notice of the meeting shall be given no later than on the fifteenth day prior to the day of the meeting. 20.3 The notice convening the meeting shall specify the business to be discussed. Other business not specified in such notice may be announced at a later date, with due observance of the term referred to in Article 20.2. 20.4 The notice of the meeting shall be sent to the addresses of the Shareholders shown in the register of Shareholders. 20.5 General Meetings of Shareholders are held in the municipality in which, according to these Articles of Association, the Company has its official seat. General Meetings of Shareholders may also be held elsewhere, in which case valid resolutions of the General Meeting may only be adopted if all of the Company's issued capital is represented. Article 21. Admittance and Rights at Meetings. 21.1 Each Shareholder shall be entitled to attend the General Meetings of Shareholders, to address the meeting and to exercise his voting rights. Shareholders may be represented in a meeting by a proxy authorised in writing. 21.2 At a meeting, each person present with voting rights must sign the attendance list. The chairperson of the meeting may decide that the attendance list must also be signed by other persons present at the meeting. 21.3 The Managing Directors shall have the right to give advice in the General Meetings of Shareholders. 21.4 The chairperson of the meeting shall decide on the admittance of other persons to the meeting. Article 22. Chairperson and Secretary of the Meeting. 22.1 The chairperson of a General Meeting of Shareholders shall be appointed by a majority of the votes cast by the persons with voting rights present at the meeting. 22.2 The chairperson of the meeting shall appoint a secretary for the meeting. Article 23. Minutes; Recording of Shareholders' Resolutions. 23.1 The secretary of a General Meeting of Shareholders shall keep minutes of the proceedings at the meeting. The minutes shall be adopted by the chairperson and the secretary of the meeting and as evidence thereof shall be signed by them. 23.2 The Management Board shall keep record of all resolutions adopted by the General Meeting. If the Management Board is not represented at a meeting, the chairperson of the meeting shall ensure that the Management Board is provided with a transcript of the resolutions adopted, as soon as possible after the meeting. The records shall be deposited at the Company's office for inspection by the Shareholders. On application, each of them shall be provided with a copy of or an extract from the records. Article 24. Adoption of Resolutions in a Meeting. 24.1 Each Share confers the right to cast one vote. 24.2 To the extent that the law or these Articles of Association do not provide otherwise, all resolutions of the General Meeting shall be adopted by a simple majority of the votes cast, without a quorum being required. 24.3 If there is a tie in voting, the proposal shall be deemed to have been rejected. 24.4 If the formalities for convening and holding of General Meetings of Shareholders, as prescribed by law or these Articles of Association, have not been complied with, valid resolutions of the General Meeting may only be adopted in a meeting, if in such meeting all of the Company's issued capital is represented and such resolution is carried by unanimous vote. Article 25. Adoption of Resolutions without holding Meetings. 25.1 Shareholders may adopt resolutions of the General Meeting in writing without holding a meeting, provided they are adopted by the unanimous vote of all Shareholders entitled to vote. The provisions of Article 21.3 shall apply by analogy. 25.2 Each Shareholder must ensure that the Management Board is informed of the resolutions thus adopted as soon as possible in writing. The Management Board shall keep record of the resolutions adopted and it shall add such records to those referred to in Article 23.2. Article 26. Amendment of the Articles of Association. The General Meeting may resolve to amend these Articles of Association. When a proposal to amend these Articles of Association is to be made to the General Meeting, the notice convening the General Meeting must state so and a copy of the proposal, including the verbatim text thereof: shall be deposited and kept available at the Company's office for inspection by the Shareholders, until the conclusion of the meeting. Article 27. Dissolution and Liquidation. 27.1 The Company may be dissolved pursuant to a resolution to that effect by the General Meeting. When a proposal to dissolve the Company is to be made to the General Meeting, this must be stated in the notice convening the General Meeting. 27.2 If the Company is dissolved pursuant to a resolution of the General Meeting, the Managing Directors shall become liquidators of the dissolved Company's property. 27.3 During liquidation, the provisions of these Articles of Association shall remain in force to the extent possible. 27.4 The balance remaining after payment of the debts of the dissolved Company shall be transferred to the Shareholders in proportion to the aggregate nominal value of the Shares held by each. 27.5 In addition, the liquidation shall be subject to the relevant provisions of Book 2, Title I, of the Dutch Civil Code. Article 28. Final Provision. The first financial year of the Company shall end on the thirtieth day of June two thousand and four. Finally, the person appearing has declared: Issued Capital. At incorporation, the issued capital of the Company equals eighteen thousand euro (EUR 18,000) and is divided into one hundred eighty (180) shares with a nominal value of one hundred euro (EUR 100) each (the "Issued Shares"). All of the Issued Shares are hereby subscribed for by the Incorporator. The Issued Shares are issued at par. The Issued Shares have been paid It)!" in cash. Payment in foreign currency was permitted. The documents which must be attached by virtue of Section 2:203a of the Dutch Civil Code have been attached to this deed (Annex). The Company hereby accepts the payments made for the Issued Shares. First Managing Directors. The first Managing Director of the Company is; the Incorporator. Statement of No Objections. With respect to the incorporation in question a ministerial Statement of No Objections was granted on the twentieth day of August two thousand and three, under number BV 1250665, which is evidenced by a written statement from the Dutch Ministry of Justice attached to this deed (Annex). Close. The person appearing is known to me, civil law notary. This deed was executed in Amsterdam on the date first above written. Before reading out, a concise summary and an explanation of the contents of this deed were given to the person appearing. The person appearing then declared that he had taken note of and agreed to the contents of this deed and did not want the complete deed to be read to him. Thereupon, after limited reading, this deed was signed by the person appearing and by me, civil law notary. EX-3.21 8 y04700exv3w21.txt ARTICLES OF ASSOCIATION Exhibit 3.21 PHIBRO ANIMAL HEALTH SOCIETE ANONYME RUE DE L'INSTITUT 87A 1330 RIXENSART RPR NIVELLES 0472931319 COORDINATED VERSION OF THE ARTICLES OF ASSOCIATION AFTER THE AMENDMENTS MADE ON 17 NOVEMBER 2003 CHAPTER I. NAME - REGISTERED OFFICE - PURPOSE - TERM ARTICLE 1 LEGAL FORM - NAME The company is constituted as a public limited liability company (Naamloze Vennootschap/Societe Anonyme). Its name is "PHIBRO ANIMAL HEALTH". ARTICLE 2 REGISTERED OFFICE The registered office of the company is situated at rue de l'Institut 87a, 1330 Rixensart. It may be transferred to any other place in Belgium by decision of the board of directors, subject to the application of the laws on the use of languages. The company may, by decision of the board of directors, establish administrative offices and operating offices, subsidiaries, branches and warehouses in Belgium or abroad. ARTICLE 3 PURPOSE The Company's object is, in Belgium and abroad, in its own name or in the name of third parties, for its own account or for the account of third parties, the fabrication, distribution and sale of medical additive products for the alimentation of animals. In respect thereof, the Company may co-operate with, participate in, or hold interests in other companies, directly or indirectly in any way whatsoever. The Company may grant security to secure its own obligations or to secure obligations of third parties, including the companies that are part of the group of which the company forms part, by amongst other things mortgage or pledge its goods, including the own business. The Company may in general carry out all commercial, industrial, financial, movable and immovable transactions directly or indirectly related to its object or that would be likely to facilitate the achievement thereof ARTICLE 4 TERM The company is incorporated for an indefinite term. CHAPTER II. CAPITAL - SHARES - BONDS ARTICLE 5 COMPANY'S CAPITAL The share capital amounts to sixty-one thousand five hundred and three Euros and 50 cent (EUR 61,503.50). It is represented by two thousand four hundred eighty one (2,481) shares, without nominal value. ARTICLE 6 CAPITAL INCREASE BY CONTRIBUTION IN CASH In case of a capital increase the new shares to be subscribed in cash must first be offered to the existing shareholders, pro rata to the part of the capital constituted by their shares. The preferential subscription right may be exercised during a period of not less than fifteen days from the date on which the subscription is opened. Such period shall be determined by the general meeting. The issue with preferential subscription right and the time period within which it may be exercised shall be announced in accordance with Article 593 of the Company Code. The subscription rights shall be negotiable during the entire subscription. After expiration of the period in which the subscription rights may be exercised, provided that no public offer to investors was made, the board of directors shall have the right to decide whether third parties may take part in the capital increase or whether the fact that shareholders did not or only partially use their preferential subscription right, has as consequence that the proportional part of the shareholders who already used their right to subscribe shall be increased. The board of directors also determines the modalities for the next subscription. The general meeting may restrict or cancel the preferential subscription right in the interest of the company, respecting the quorum and majority requirements for modifications of the article of association. In that event a proposal to this effect must be specified in the notice and the board of directors and the statutory auditor or, in his absence, an auditor or an accountant registered on the Roll of Practising Accountants of the Institute of Accountants and appointed by the board of directors, must make the reports provided in Article 596 of the Company Code. These reports shall be mentioned in the agenda and shall be communicated to the shareholders. In the event of a restriction or cancellation of the preferential subscription right the general meeting may provide that when allocating the newly issued priority shall be given to the existing shareholders in which event the subscription term must amount to ten days. When the preferential subscription right is restricted or cancelled in favour of one or more particular persons who are not employees of the company or of one of its subsidiaries the conditions set forth in Article 598 of the Company Code must be respected. ARTICLE 7 CAPITAL INCREASE BY CONTRIBUTION IN KIND In the event that a capital increase includes any contribution in kind, the statutory auditor or, in his absence, an auditor to be appointed by the board of directors, shall prior thereto make a report in respect thereof. In a special report to which the report of the auditor is attached, the board of directors shall explain why both the contribution and the proposed capital increase are important for the company and, if applicable, also why the conclusions of the appended report are not followed. Notwithstanding Article 586, second paragraph, of the Company Code the shares entirely or partially corresponding to a contribution in kind, must be paid up immediately. ARTICLE 8 CALLING UP ON SHARES Payments on not fully paid-up shares must occur at the place and on the date set by the board of directors which is solely competent in this matter; the membership rights attached to these shares shall be suspended until the payments, duly called and due, have been made. After due notice has been given by registered letter which has remained unanswered for one month, the board of directors may revoke the shareholder's rights and sell those shares which have not been fully paid up, either directly to the other shareholders, or through the intermediary of a stock trading company. In this case the price of the transfer is calculated on the basis of the net assets of the company as they appear on the last balance sheet approved by the shareholders. Payments must be made according to the conditions established by the board of directors. ARTICLE 9 NATURE OF THE SHARES All the shares are and shall remain registered shares. Title to a registered share shall be proved by the registration in the register of shares. Any transfer of shares shall only be effective after registration in the register of shares of the declaration of transfer, which shall be dated and signed by the transferor and the transferee, or their representatives, or after complying with the formalities required by the law in respect of the assignment of receivables. If the share belongs to bare owners and usufructuaries, all the rights related to the shares, including the voting right, will be exercised by the usufructuaries. ARTICLE 10 TRANSFER OF SHARES , CONVERTIBLE BONDS AND WARRANTS Transfer of shares is not subject to any restrictions. This rule is also applicable to all shares of the company as well as to all possible convertible bonds and warrants issued by the company. ARTICLE 11 BUY-IN OF OWN SHARES With respect of the articles of the Company Code, the company can acquire its own shares or certificates. ARTICLE 12 NON-VOTING SHARES In accordance with Articles 480, 481 and 482 of the Company Code the company may proceed to the creation of shares without voting rights, provided that the formalities which apply for modifications of the articles of association are respected. ARTICLE 13 BONDS, WARRANTS AND CERTIFICATES The company may at any time issue bonds upon decision by the board of directors. However, issuance of bonds convertible into shares or warrants may only be authorised by the general meeting deliberating according to the formalities which apply for modifications of the articles of association. The company can, in its own interest, grant co-operation to a third party for issuing by this third party of certificates representing the shares of the company in accordance with Article 503 of the Company Code. The company can decide to take at his charge the costs related to issuing certificates and to the incorporation and the work of the entity issuing the certificates. The holders of the certificates, the entity issuing them or third parties can only invoke the co-operation of the company for issuing certificates if the company has confirmed its co-operation in writing to the issuing entity. The entity issuing the certificates regarding registered shares has to identify itself as such to the company. The company notes this in the register of shares. CHAPTER III. MANAGEMENT AND SUPERVISION ARTICLE 14 COMPOSITION OF THE BOARD OF DIRECTORS The company is managed by a board of at least three directors, natural or legal persons (bodies corporate), who need not be shareholders, appointed by the general meeting of shareholders for a maximum term of six years, and which may be revoked by the latter at all times. If on a general meeting of shareholders it has been determined that the company has only two shareholders, the board of directors may be composed of two directors until the general meeting of shareholders following the determination, which may be done by all means, that there are more than two shareholders. In the case that the board of directors is composed of two members, the provision - mentioned in article 15 of these articles of association - pursuant to which the chairman of the board of directors has a decisive vote has no effect. In case a legal person is appointed director, it is obliged to appoint a permanent representative-individual amongst its partners, managers, directors or employees who will take care of the director's activities in the name and for the account of the legal person Regarding the appointment and the dismissal of the permanent representative the same rules regarding the publication apply as if it would do this activities in its own name and for its own account. The directors can be re-elected. The outgoing director remains in function as long as the general meeting does not appoint a new director, for any reason whatsoever. In case of an early vacancy within the board of directors, for any reason whatsoever, the remaining directors are entitled to provisionally appoint a new director until the general meeting appoints a new director. The appointment is put on the agenda of the first coming general meeting. The board of directors appoints a chairman from among its members. Failing appointment or in the event of absence the chairmanship shall be assumed by the oldest among the directors present. ARTICLE 15 MEETINGS - DELIBERATIONS AND RESOLUTIONS A meeting of the board of directors is called by the chairman, a managing director or two directors, at least three days before the date of the meeting. The notice is validly done by letter, air mail, fax or e-mail. The director who attends the meeting or is represented there shall be considered as having received due notice. A director can also waive his right to plead the lack of notice or any irregularity in the notice, before or after the meeting which he did not attend. The meetings of the board of directors shall be held in Belgium or abroad, at the place indicated in the notice. Any director can, by means of a document carrying his signature (including a digital signature as mentioned in article 1322 paragraph 2 of the Civil Code) of which notice is give either in writing, by fax or e-mail or any other means of communication mentioned in article 2281 of the Civil Code give power to another member of the board to represent him at a specific meeting. A director can represent more than one co-director and can cast, together with his own vote, as many votes as he received powers. Except in the event of force majeure the board of directors can only validly deliberate and decide if at least fifty percent of its members are present or represented. Should this condition not be met a new meeting must be called which shall validly deliberate and decide on the items on the agenda of the previous meeting if at least two directors are present or represented. The board of directors can deliberate by way of telephone or video conference. Every decision of the board shall be made by a simple majority of the votes of the directors present or represented, and in the event of abstention of one or more among them, by the majority of the other directors. In the event of equality of votes the vote of the person chairing the meeting will be decisive. In exceptional cases when the urgent necessity and the interest of the company require so, the decisions of the board of directors can be taken by unanimous written agreement of the directors. This procedure can not be applied to determine the annual accounts or the use of the authorised capital. Without prejudice to the exceptions mentioned in the Company Code, a director, who has directly or indirectly a financial interest conflicting with a decision or transaction of the board of directors, must inform the other directors thereof before the board of directors decide and the board of directors and the company must comply Article 523 of the Company Code. The decisions of the board of directors are recorded in minutes which shall be signed by the chairman, the secretary and the members who wish to do so. These minutes shall be inserted in a special register. The powers are attached to the minutes of the meeting for which they are granted. Copies and extracts to be produced in court or elsewhere, shall be validly signed by the chairman, the managing director or by two directors. ARTICLE 16 AUTHORITY OF THE BOARD OF DIRECTORS Section 1 Generally The board of directors shall have the broadest competence to perform all acts which are necessary or useful for the realisation of the corporate purpose, with the exception of those reserved to the general meeting by the law. Section 2 Advisory committees The board may nominate under its responsibility one or more advisory committees. It will determine their composition and mission. Section 3 Daily management The board may delegate the daily management of the company, the management of one or more branches of its activities or the execution of the decisions of the board to one or more directors, managers or proxy holders, who need not be shareholders. The board, and, in respect of the daily management, the persons in charge of the daily management may also delegate special powers to one or more persons of their choice. Section 4. Management committee Pursuant to Article 524bis of the Company Code, the board of directors may delegate his management competence to a management committee, provided that the transfer of those management competence does not concern the transfer of the general management of the company or does not involve the transfer of competences which, according to other legal provisions, are reserved to the board of directors. The requirements regarding the designation of the members of the management committee, their dismissal, their remuneration, the term of their appointment and the procedure of the management committee shall be determined by the board of directors. The board of directors shall be charged with the control of the management committee. If a member of the management committee has a direct or indirect personal and conflicting interest of financial nature in a decision or transaction within the authority of the management committee, he must so notify the other members prior to a decision by the management committee. Furthermore the provisions of Article 524ter of the Company Code must be taken into consideration. ARTICLE 17 REPRESENTATION OF THE COMPANY The company is validly represented towards third parties, before the courts and in official deeds, including those for which the intervention of a civil servant or a notary is required, by the chairman of the board of directors alone, by two directors acting jointly and, within the limits of the daily management, by the managing directors for the daily management alone. Moreover, within the framework of their mandate, it is validly represented by special proxyholders. In addition, the company may be represented abroad by any person expressly appointed for this purpose by the board of directors. ARTICLE 18 EXPENSES OF DIRECTORS The normal and justified expenses and costs which the directors can claim as having been made in the exercise of their function shall be compensated and be charged to general costs. ARTICLE 19 CONTROL The control of the financial situation, the annual accounts and the regularity of the transactions to be reported on in the annual accounts is conferred to one or more statutory auditors. The statutory auditors are appointed by the general meeting of shareholders from among the members, natural persons or bodies corporate, of the Institute of Chartered Accountants. They have the title of auditors. The statutory auditors shall be appointed for a renewable term of three years. The general meeting can only dismiss them for legal reasons, at the risk of liability for damages. However, as long as the company can benefit from the exceptions provided in Article 141, 2(degree) of the Company Code, every shareholder has, according to Article 166 of the Company Code, the individual right of investigation and control which are vested in a statutory auditor. Nevertheless the general meeting of shareholders shall at all times have the right to appoint an auditor, irrespective of legal criteria. In the event that no auditor is appointed, every shareholder may appoint an accountant to represent him. The remuneration of such accountant is payable by the company if he is appointed with its approval, or if this remuneration is charged to it by virtue of a judicial decision. In these cases the remarks of the accountant are communicated to the company. CHAPTER IV. GENERAL MEETINGS OF SHAREHOLDERS ARTICLE 20 DATE The annual meeting shall be held on the third Tuesday of November at 10.00. Should this day be a legal holiday, the meeting will take place on the next working day. If the procedure of written decision making mentioned in article 33 of these articles of association is applied, the company needs to receive the letter mentioning the agenda and the propositions of the decisions to be taken at the latest on the day of the annual meeting as prescribed in these articles of association, signed and approved by all shareholders. Extraordinary or special general meetings of shareholders may be called each time the company's interests requires so. These general meetings of shareholders may be called by the board of directors or by the statutory auditors and must be called at the request of the shareholders representing one/fifth of the company's capital. The general meetings of shareholders shall be held at the registered office of the company or in any other place communicated in the notice or otherwise. ARTICLE 2 NOTICES The notices to convene a general meeting shall contain the agenda and is given by registered letter sent to the holders of registered shares, the directors, statutory auditors, the holders of registered bonds and warrants and the holders of registered certificates issued in cooperation with the company, 15 days before the meeting. The persons who need to be called to a general meeting pursuant to the Company Code and who attend the meeting or are represented thereon shall be considered as having received due notice. The above mentioned persons can also waive their right to plead lack of notice or any irregularity in the notice, before or after a meeting which they did not attend. ARTICLE 22 DISPOSAL OF DOCUMENTS Together with the notice, a copy of the documents which mandatory must be provided pursuant to the Company Code is sent to the holders of registered shares, the directors and (if applicable) the statutory auditors. A copy of these documents is also immediately sent to the persons who have fulfilled the formalities to be admitted to the meeting as described in the articles of association at the latest seven days before the meeting. The persons who have fulfilled these formalities after this date will receive a copy of these documents on the general meeting. As of fifteen days before the general meeting and on submission of his financial instrument, each holder of shares, bonds, warrants or holder of a certificate issued in cooperation with the company can obtain a free copy of these documents at the registered office of the company. In case the procedure of written decision-making mentioned in article 33 of these articles of association has been chosen, the board of directors will send copy of the documents which need to be sent according to the Company Code to the persons holding registered shares and to the statutory auditors together with the aforementioned notice. Every person holding warrants or certificates issued in co-operation with the company can, upon production of his stock, obtain a free copy of these documents as of fifteen days before the general shareholders' meeting. ARTICLE 23 DEPOSIT OF SHARES To be admitted to the general meeting each owner of shares must, if this is required in the notice, at least three days before the date set for the meeting make known in written to the board of directors of his intention to participate in the meeting, or else deposit his certificates for registered shares, at the office or with an institution indicated thereto in the notice. If the board of directors requires so in the notice, the holders of dematerialised shares must within the same period dispose an acknowledgement of non-disposability drafted by the accepted account holder or by the liquidation institution at the place, indicated in the notice. The holder of bonds, warrants and certificates which have been issued with the collaboration of the company may attend the general meeting, but only with advisory power, with obedience of the conditions of admission for the shareholders. For the application of this article, Saturdays, Sundays and legal holidays are not considered to be working days. ARTICLE 24 REPRESENTATION Each shareholder may be represented at the general meeting of shareholders by a proxyholder, who needs not to be a shareholder. The proxies need to be signed (including a digital signature as provided for by article 1322, paragraph 2 of the Civil Code). The proxies may be given in writing, by telegram, e-mail or any other means mentioned in article 2281 of the Civil Code and shall be deposited at the bureau of the meeting. Moreover, the board of directors can demand that they are deposited at a place indicated by it three working days before the general shareholders' meeting. For the purpose of this Article Saturdays, Sundays and legal holidays are not considered to be working days. ARTICLE 25 ATTENDANCE LIST The shareholders or their proxy holders are obliged, before being admitted to the meeting, to sign the attendance list indicating the surname, first name(s) and residence or the name and registered office of the shareholders and the number of shares they represent. ARTICLE 26 COMPOSITION OF THE BUREAU - MINUTES The general meetings of shareholders shall be chaired by the chairman of the board of directors or, in the latter's absence, by his substitute or by a member of the meeting appointed by the meeting. The chairman of the meeting appoints the secretary. Should the number of persons attending allow this, the meeting will appoint two vote counters upon proposal of the chairman. The minutes of the general meetings of shareholders shall be signed by the members of the bureau and the shareholders who wish to do so. These minutes shall be kept in a special register. ARTICLE 27 DUTY TO REPLY BY DIRECTORS AND STATUTORY AUDITORS The directors reply to the questions submitted to them by the shareholders in connection with their report or with the items on the agenda provided that the communications of figures and facts will not prejudice seriously the company, the shareholders or the employees of the company. The statutory auditors reply to the questions submitted to them by the shareholders in connection with their report. ARTICLE 28 ADJOURNMENT OF THE ANNUAL SHAREHOLDERS' MEETING The board of directors has the right to adjourn the decision of the general shareholders' meeting as mentioned in article 20 of these articles of association regarding the approval of the annual accounts for three weeks. This adjournment does not affect any other decision taken, except if the general shareholders' meeting decides otherwise in this regard. The board of directors needs to re-convoke the general shareholders' meeting, with the same agenda, within a period of three weeks. The formalities that need to be satisfied to attend the first meeting, including the possible deposit of stocks or proxies remain valid for the second meeting. New depositions will be allowed within the terms and under the same conditions as mentioned in the articles of association. The adjournment can only take place once. The second general shareholders' meeting definitively decides about the adjourned items of the agenda. ARTICLE 29 DELIBERATION - QUORUM REQUIREMENTS No meeting can deliberate on items which are not included on the agenda, unless all shares are present at the meeting and the decisions are taken by unanimous votes. The general meeting of shareholders can validly deliberate, irrespective of the number of shares present or represented, except in the cases where the law specifies a certain quorum of attendance. ARTICLE 30 VOTING RIGHTS Each share carries one vote. The voting takes place by show of hands or by call-out of names unless the general shareholders' meeting decides otherwise by simple majority of votes. Each shareholder can also vote by letter by way of a form drafted by the board of directors, containing the following mentions: (i) identification of the shareholder, (ii) number of votes he is entitled to and (iii) for any decision that needs to be taken by the general shareholders' meeting according to its agenda the notion "yes", "no" or "abstention". The shareholder voting by letter is obliged to satisfy the formalities necessary to be allowed to participate to the general shareholders' meeting according to article 23 of these articles of association. ARTICLE 31 MAJORITY Except in the cases provided for by law, the decisions are taken by the majority of votes taking part at the voting, irrespective of the number of shares present at the meeting. An abstention shall be considered as a negative vote. ARTICLE 32 EXTRAORDINARY GENERAL MEETINGS In the event the meeting of shareholders must decide on: - -a modification of the articles of association; - -an increase or decrease of the company's capital; - -the issuance of shares below par value; - -the cancellation or restriction of the preferential subscription right; - -the issuance of convertible bonds or warrants; - -the dissolution of the company; The purpose of the decision to be taken must be specifically mentioned in the notice for the meeting and at least fifty percent of the shares representing the entire capital must be represented at the meeting. If this latter condition is not met, a new meeting must be called, which shall validly decide on these issues, irrespective of the number of shares represented. The decisions on the above mentioned subjects shall only be validly taken at a majority of three quarters of the votes participating in the voting. An abstention shall be considered as a negative vote. This article is without prejudice to the other requirements of majority provided for by the Company Code in relation to the modification of the company's purpose, the purchase, pledging or alienation by the company of its own shares, the transformation of the company into a company with another legal form and the dissolution of the company in the event its net assets amount to less than one quarter of the capital as a result of its losses. ARTICLE 33 WRITTEN DECISION-MAKING Except for the decisions that need to be taken before Notary Public, the shareholders can decide unanimously and in writing on all issues for which the general shareholders' meeting is competent. For this purpose, the board of directors will send a letter, by mail, fax, e-mail or any other means of communication to all shareholders and statutory auditors, mentioning the agenda and the propositions of the decisions to be taken, with request to the shareholders to approve the propositions and to send the letter back to the seat of the company or any other place mentioned in the letter, duly signed and within the term mentioned in the letter. If the approval of all shareholders regarding the items of the agenda and regarding the procedure in writing is not received within this period, the decisions are deemed not to be taken. The persons holding bonds or registered warrants, as well as the persons holding registered certificates issued with co-operation of the company, have the right to take note of the decisions take at the seat of the company. ARTICLE 34 COPIES AND EXTRACTS FROM MINUTES Copies and/or extracts of the minutes of the general meetings to be supplied to third parties are signed by the chairman of the board of directors, by a managing director or by two directors. They must stipulate under their signature their title. CHAPTER V. ACCOUNTING YEAR - ANNUAL ACCOUNTS - DIVIDENDS - DISTRIBUTION OF PROFITS ARTICLE 35 ACCOUNTING YEAR - ANNUAL ACCOUNTS - ANNUAL REPORT The accounting year starts on 1 July and shall end on 30 June of the following year. At the end of each accounting year the board of directors draws up an inventory and the annual accounts which consist of the balance sheet, the profit and loss statement and the comments. These documents shall be drawn up in conformity with the law and shall be filed with the National Bank of Belgium. The annual accounts shall, in view of their publication, be validly signed by a director or by a person in charge of the daily management or a person expressly authorised for this purpose by the board of directors. In addition the directors will draft each year a report according to Articles 95 and 96 of the Company Code. However, the directors are not required to draft an annual report as long as the company meets the conditions set by Article 94 of the Company Code ARTICLE 36 DISTRIBUTION OF PROFITS From the net profits of the company at least five percent (5%) shall be set aside each year to constitute the legal reserve. Such deduction shall no longer be required as soon as this legal reserve reaches one tenth of the share capital. Upon proposal of the board of directors the general meeting shall decide on the allocation of the balance of the net profits. ARTICLE 37 DISTRIBUTION The distribution of dividends decided by the general meeting takes place on the dates and places determined by the latter or by the board of directors. Dividends not collected become prescribed after five years. ARTICLE 38 INTERIM DIVIDENDS The board of directors has the power to distribute an interim dividend on the profits of the accounting year, subject to compliance with the provisions of Article 618 of the Company Code. ARTICLE 39 PROHIBITED DISTRIBUTION Any distribution of dividends made in violation of the law must be reimbursed by the shareholder who received it, if the company proves that the shareholder knew that the payment was in violation of the regulations or could not be ignorant thereof in view of the circumstances. CHAPTER VI. DISSOLUTION AND LIQUIDATION ARTICLE 40 LOSSES a) If, as a result of losses suffered, the net assets have decreased to less than fifty percent of the corporate capital, the general meeting must meet within a period of maximum two months following the date on which such loss is or should have been established by virtue of legal or statutory provisions, in order to, as the case may be, deliberate and decide on the dissolution of the company and possibly on other measures announced in the agenda, according to the formalities which apply for modifications of the articles of association. The board of directors justifies its proposals in a special report which shall be made available to the shareholders at the registered office of the company fifteen days before the general meeting. b) If, as a result of losses suffered, the net assets have decreased to less than one fourth of the share capital, the dissolution of the company may be pronounced when it is approved by one/fourth of the votes cast at the meeting. c) If the net assets have decreased below the legal minimum amount set out in Article 439 of the Company Code, each interested party may request the dissolution of the company before the court. If the case arises, the court may grant the company a period of time during which it must regularise its situation. ARTICLE 41 DISSOLUTION AND LIQUIDATION If the company is dissolved one or more liquidators shall be appointed by the general meeting. If no decision has been taken on this subject the directors are legally considered to be the liquidators, not only for the purpose of receiving notices and notifications, but also for actually liquidating the company, and not only vis-a-vis third parties, but also vis-a-vis the shareholders. They dispose of the powers set forth in Articles 186 and 187 of the Company Code, without further authorization by the general meeting. However, the general meeting may at all times restrict these powers by simple majority. All assets of the company must be sold unless the general meeting decides otherwise. If not all the shares have been paid up to the same extent, the liquidators restore the balance, either by making additional calls, or by making prior payments. ARTICLE 42 JOINING OF ALL SHARES IN ONE HAND The fact that all shares are joined in one single hand does not cause a judicial dissolution or a dissolution in justice. If within one year no new shareholder has entered the company or it is not validly transmitted in a limited liability company or dissolved, the single shareholder is deemed severally liable for all obligations of the company originated after the joining of all shares in his hand until a new shareholder has entered the company or until the announcement of the transmission into a limited liability company or of its dissolution. The fact that all shares are joined in one hand, as well as the identity of the single shareholder need to be mentioned in the company file held at the commercial court competent for the area where the company is located. The single shareholder exercises the powers of the general shareholders' meeting. He can transfer these powers. The decisions of the single shareholder acting on behalf of the general shareholders meeting are mentioned in the register kept at the seat of the company. The agreements between the single shareholder and the company are inscribed in a document that needs to be deposited together with the annual accounts, unless it concerns current transactions taken place under normal circumstances. CHAPTER VII. GENERAL PROVISIONS ARTICLE 43 ELECTION OF DOMICILE Every director and liquidator of the company residing abroad is deemed, for the duration of his function, to have elected domicile at the registered office of the company where all communications, notifications and summonses can be validly served. The holders of registered shares must inform the company of any change of address. Failing notification they are deemed having elected domicile at their previous address. ARTICLE 44 DEMATERIALISED STOCKS The provision in these articles of association regarding dematerialised stocks will become applicable as soon as the Royal Decrees concerned become applicable. EX-10.2 9 y04700exv10w2.txt LEASE EXHIBIT 10.2 LEASE, dated September 27, 2004, between HARTZ MOUNTAIN INDUSTRIES, INC., a New York corporation, having an office at 400 Plaza Drive, P.O. Box 1515, Secaucus, New Jersey 07096-1515 ("Landlord"), and PHIBRO ANIMAL HEALTH CORPORATION, a New York corporation, having an office at One Parker Plaza, 400 Kelby Street, 14th Floor, Fort Lee, New Jersey 07024 ("Tenant"). ARTICLE 1 - DEFINITIONS 1.01. As used in this Lease (including in all Exhibits and any Riders attached hereto, all of which shall be deemed to be part of this Lease) the following words and phrases shall have the meanings indicated: A. Advance Rent: $65,147.50. B. Additional Charges: All amounts that become payable by Tenant to Landlord hereunder other than the Fixed Rent. C. Architect: As Landlord may designate. D. Base Year: Calendar year 2005. E. Broker: Newmark Real Estate of New Jersey LLC and Leonard Krupat Associates. F. Building: The building or buildings now or hereafter located on the Land and known as 65 Challenger Boulevard (aka Challenger Road), Ridgefield Park, New Jersey. G. Building Fraction: a fraction the numerator of which is the Rentable Floor Area of the Building (approximately 166,284 square feet) and the denominator of which is the aggregate Rentable Floor Area of the buildings in the Development. If the aggregate Rentable Floor Area of the buildings in the Development shall be changed due to any construction Or alteration, the denominator of the Building Fraction shall be increased or decreased to reflect such change; provided however that for purposes of determining the Building Fraction during the term of this Lease, the denominator shall not be less than 1,067,413. H. Business Days: All days except Saturdays, Sundays, days observed by the federal or state government as legal holidays and such other holidays as shall be designated as holidays by the applicable building service union employees' service contract or by the applicable operating engineers' contract. I. Business Hours: 9:00 A.M. to 6:00 P.M. J. Calendar Year: Any twelve-month period commencing on a January 1. K. Commencement Date: The earlier of (a) the date on which both: (i) the Demised Premises shall be Ready for Occupancy, and (ii) actual possession of the Demised Premises shall have been delivered to Tenant by notice to Tenant, or (b) the date Tenant, or anyone claiming under or through Tenant, first occupies the Demised Premises or any part thereof for any purpose other than the performance of Tenant's Work. It is contemplated that the Commencement Date shall occur on or before December 15, 2004. L. Common Areas: All areas, spaces and improvements in the Building and on the Land which Landlord makes available from time to time for the common use and benefit of the tenants and occupants of the Building and which are not exclusively available for use by a single tenant or occupant, including, without limitation, parking areas, roads, walkways, sidewalks, landscaped and planted areas, community rooms, if any, the managing agent's office, if any, and public rest rooms, if any. M. Demised Premises: The space that is or will be located on the third (3rd) floor of the Building and that is indicated on the floor plan(s) attached hereto as Exhibit A. Landlord and Tenant have agreed that for purposes of this Lease, Demised Premises as set forth on Exhibit A contains 33,990 square feet of Rentable Floor Area. N. Development: All Lands and improvements now existing or hereafter constructed located in the area bounded by Overpeck Lake on the east; lands of Bergen County Park Commission on the north; Interstate Route 95 on the west and U.S. Route 46 on the south. O. Development Common Areas: The roads and bridges that from time to time service and provide access to the Development for the common use of the tenants, invitees, occupants of the Development, that are maintained by Landlord or its related entities. P. Expiration Date: The date that is the day before the seventh (7th) anniversary of the Fixed Rent Commencement Date if the Fixed Rent Commencement Date is the first day of a month, or the seventh (7th) anniversary of the last day of the month in which the Fixed Rent Commencement Date occurs if the Fixed Rent Commencement Date is not the first day of a month. However, if the Term is extended by Tenant's effective exercise of Tenant's right, if any, to extend the Term, the "Expiration Date" shall be changed to the last day of the last extended period as to which Tenant shall have effectively exercised its right to extend the Term. For the purposes of this definition, the earlier termination of this Lease shall not affect the "Expiration Date." Q. Fixed Rent: From the Fixed Rent Commencement Date through the day before the fifth (5th) anniversary of the Fixed Rent Commencement Date if the Fixed Rent Commencement Date is the first day of a month, or the fifth (5th) anniversary of the last day of the month in which the Fixed Rent Commencement Date occurs if the Fixed Rent Commencement Date is not the first day of a month, an amount at the annual rate of $23.00 per square foot multiplied by the Rentable Floor Area of the Demised Premises (i.e. $781,770.00 per annum); and thereafter through the original Expiration Date at an amount at the annual rate of $25.50 per square foot multiplied by the Rentable Floor Area of the Demised Premises (i.e. $866,745.00 per annum). Q1. Fixed Rent Commencement Date: The date which is six (6) months following the 4 Commencement Date. R. Intentionally Omitted. S. Guarantor: None. T. Insurance Requirements: Rules, regulations, orders and other requirements of the applicable board of underwriters and/or the applicable fire insurance rating organization and/or any other similar body performing the same or similar functions and having jurisdiction or cognizance over the Land and Building, whether now or hereafter in force. U. Land: The Land upon which the Building and Common Areas are located. The Land is described on Exhibit B. V. Landlord's Work: The materials and work to be furnished, installed and performed by Landlord in accordance with the provisions of Article 5. W. Legal Requirements: Laws and ordinances of all federal, state, city, town, county, borough and village governments, and rules, regulations, orders and directives of all departments, subdivisions, bureaus, agencies or offices thereof, and of any other governmental, public or quasi-public authorities having jurisdiction over the Land and Building, whether now or hereafter in force, including, but not limited to, those pertaining to environmental matters. X. Mortgage: A mortgage and/or a deed of trust. Y. Mortgagee: A holder of a mortgage or a beneficiary of a deed of trust. Z. Operating Expenses: The sum of the following: (1) the cost and expense (whether or not within the contemplation of the parties) for the repair, replacement, maintenance, policing, insurance and operation of the Building and Land (including the Parking Deck) and (2) the Building Fraction of the sum of (a) the cost and expense for the repair, replacement, maintenance, policing, insurance and operation of the Development Common Areas; (b) the real estate taxes, if any, attributable to the Development Common Areas (the Real Estate Taxes with respect to the Land and the Building being excluded from Operating Expenses pursuant to subsection (xv) below, and being covered by Section 6.01 of this Lease); and (3) the Parking Charges. The "Operating Expenses" shall, include, without limitation, the following: (i) the cost for rent, casualty, liability, boiler and fidelity insurance, (ii) if an independent managing agent is employed by Landlord, the fees payable to such agent (provided the same are competitive with the fees payable to independent managing agents of comparable facilities in Bergen County), and (iii) costs and expenses incurred for legal, accounting and other professional services (including, but not limited to, costs and expenses for in-house or staff legal counselor outside counsel at rates not to exceed the reasonable and customary charges for any such services as would be imposed in an arms length third party agreement for such services. In all years including the Base Year and subsequent to Base Year, if Landlord is itself managing the Building and has not employed an independent third party for such management, Landlord shall be entitled to 15% of the resulting total of all of the foregoing items making up "Operating Expenses" for Landlord's home office administration and overhead cost and expense. All items included in Operating Expenses shall be determined in 5 accordance with generally accepted accounting principles consistently applied. The items making up Operating Expenses shall not include the following: (i) Costs for which Landlord is specifically reimbursed by Tenant or any other tenant (other than through operating expense provisions), or by insurance carried pursuant to this Lease; (ii) Interest or principal on mortgages of the Land and Building or the Development, if any, and costs relating to financing or refinancing, rents under underlying leases or Superior Leases, and any ground rent, additional rent, or other charges under underlying leases or Superior Leases, unless otherwise includable in Operating Expenses (but not in duplication thereof); (iii) Rent concessions or expenditures for any tenant alteration, renovation, decoration, redecoration or finish of any other tenant space in the Building or in other buildings in the Development whether performed in connection with the occupancy of such space by a new tenant or in connection with a renewal of a lease for such space by the existing tenant thereof or the relocation of a tenant or otherwise with respect to such tenancy; (iv) Leasing commissions, marketing and advertising costs related to leasing space in the Building and all finder's fees and all other leasing expenses incurred in procuring tenants, including without limitation, tenant space preparation and relocation costs; (v) The cost of repairs, replacements or other work incurred by reason of fire, casualty, or condemnation to the extent same is reimbursed by insurance proceeds, provided that if any non-reimbursement is due to Landlord's failure to pay the applicable insurance premiums or Landlord is otherwise at fault for such non-reimbursement, then such non-reimbursed amounts shall not be included Operating Expenses; (vi) Any cost or other sum, representing an amount paid to an affiliated corporation, entity, or person which is in excess of the amount which would be paid in the absence of such relationship; (vii) Costs and expenses for legal, accounting and other professional services (including, but not limited to, costs and expenses for in-house or staff legal counselor outside counsel) incurred in connection with any negotiation of any lease in the Building, enforcement of lease provisions (other than relating to Common Areas or Rules and Regulations) ort the collection of rent, any relationships or disputes with any former tenants, prospective tenants, or other lawful occupants of the Building, preparation of financial statements for Mortgagees, preparation of Landlord's income tax returns (other than in connection with Real Estate Taxes); (viii) Capital improvements by Landlord, except as follows: to the extent any of the expenditures by Landlord making up Operating Expenses hereunder would be classified as capital expenditure items pursuant to generally accepted accounting principles then only an amount, per annum, equal to the cost of such items amortized over the useful life of such item, as reasonably determined by Landlord, together with interest thereon at the Prime Rate as announced in the Wall Street Journal (or a successor index reasonably selected by Landlord), shall be included annually in 6 Operating Expenses with respect to (1) the capital expenditures of Landlord for the repair, replacement and/or restoration as appropriate to the Building and Land in the ordinary course consistent with that of a first class office building and uses ancillary thereto; (2) the capital expenditures of Landlord in connection with any change in Legal Requirements enacted subsequent to the Commencement Date; and/or (3) the capital expenditures of Landlord which reduce any component of Operating Expenses, but to only to the extent of such reduction; but excluding any capital expenditures for additions to the Building to the extent such additions increase the Rentable Floor Area of the Building or capital expenditures made from insurance or condemnation proceeds in connection with the restoration of any casualty or condemnation of the Building; (ix) With respect to the Development Common Areas, capital expenditures under generally accepted accounting principals with respect to office buildings and retail premises in the Development occupied or offered for sale or lease other than the Building; (x) Income and franchise taxes of Landlord or its affiliated entities (other than the Building Share of any taxes imposed upon the property owner's association pursuant to the Declaration)--including corporate, unincorporated business, estate or inheritance tax or charges imposed upon or assessed against Landlord, provided however, that nothing in this subsection (ix) shall be deemed to limit the provisions of Section 6.0 I hereof (for the purposes hereof "Declaration" shall mean that certain Reciprocal Construction, Operation and Easement Agreement dated as of June 27, 1986, as amended and recorded in the Office of the Bergen County Clerk in Deed Book 7019, page 360, as amended in Deed Book 7411, page 459 and Deed Book 7545, page 862, as the same may be hereafter further amended); (xi) Lease takeover or termination costs incurred by Landlord in connection with any other lease in the Building, including any payments required to be made in connection with the termination of such lease. (xii) Depreciation and amortization in connection with the Building or the Building equipment, fixtures, or systems except as otherwise specifica11y provided in subsection (viii); (xiii) The cost of electricity (including applicable taxes) and other utilities furnished directly to leased areas of the Building or other areas of the Building offered for lease (other than the Demised Premises) as measured by meters, or if there be no meters, as determined by a reputable independent electrical consultant mutually acceptable to Landlord and Tenant, and the cost of other utilities furnished to such other leased areas of the Building or other areas of the Building offered for lease (other than the Demised Premises) as measured by meters or, if there be no meters, as determined by a reputable independent consultant mutually acceptable to Landlord and Tenant; (xiv) Salaries, fringe benefits, administrative expenses and any other compensation of personnel above the grade of vice president, property management or equally held positions (if any such personnel perform services for premises other than the Building, the salaries, fringe benefits, administrative expenses and other compensation of such personnel shall be allocated pro rata between the Building and such other premises); 7 (xv) Real Estate Taxes with respect to the Land and the Building (which are provided for in Section 6.01 hereof); (xvi) Bad debt or rent loss reserves; and (xvii) Any interest, fine, penalty or other late charge payable by Landlord (other than if caused by the act of Tenant, or Tenant's agents or invitees). AA. Parking Charges: The cost and expense of the repair, replacement, striping, maintenance, policing, insurance, real estate taxes (without duplication of Real Estate Taxes included in Operating Expenses under subsection(b) of Section 1.01Z), utilities, and landscaping attributable to the pro rata share of the parking deck(s) allocated to the Building. The pro rata share shall be determined based upon the number of parking spaces allocated to the Building divided by the total number of the parking spaces in the parking deck(s). The parking charges shall include expenses attributable only to the parking deck(s) and shall not include expenses attributable to any other improvements. BB. Permitted Uses: Executive and general offices of a character consistent with that of a first class office building. CC. Person: A natural person or persons, a partnership, a corporation, or any other form of business or legal association or entity. DD. Ready for Occupancy: The condition of the Demised Premises when for the first time either(a) the Landlord's Work shall have been substantially completed and a temporary, permanent, or continuing Certificate of Occupancy shall have been issued permitting use of the Demised Premises for the Permitted Uses, or (b) the following have occurred: (1) the Landlord's Work shall have been substantially completed to the extent required such that the non-completion of any remaining Landlord's Work would not prevent the issuance of a temporary, permanent or continuing Certificate of Occupancy, permitting the lawful occupancy of the Demised Premises by Tenant upon completion of Tenant's Work by Tenant. In the event Landlord delivers the Demised Premises to Tenant under a temporary Certificate of Occupancy, Landlord shall diligently pursue the completion of any remaining items of Landlord's Work required to be completed as a condition of such temporary certificate of Occupancy. The Landlord's Work shall be deemed substantially completed notwithstanding the fact that minor or insubstantial details of construction, mechanical adjustment or decoration remain to be performed, the noncompletion of which does not materially interfere with Tenant's use of the Demised Premises. Landlord shall use commercially reasonable efforts to complete any Punchlist Item within thirty (30) days after the Commencement Date (which time period may be extended to the extent any such Punchlist item requires more than thirty (30) days to obtain materials or installation, provided Landlord diligently pursues such materials or installation). EE. Real Estate Taxes: The real estate taxes, assessments and special assessments imposed upon the Building and Land by any federal, state, municipal or other governments or governmental bodies or authorities, and any expenses incurred by Landlord in contesting such taxes or assessments and/or the assessed value of the Building and Land, which expenses shall be allocated to the period of time to which such expenses relate. If at any time during the Term the methods of taxation prevailing 8 on the date hereof shall be altered so that in lieu of, or as an addition to or as a substitute for, the whole or any part of such real estate taxes, assessments and special assessments now imposed on real estate there shall be levied, assessed or imposed (a) a tax, assessment, levy, imposition, license fee or charge wholly or partially as a capital levy or otherwise on the rents received therefrom, or (b) any other such additional or substitute real estate tax, assessment, levy, imposition or charge, then all such taxes, assessments, levies, impositions, fees or charges or the part thereof so measured or based shall be deemed to be included within the term "Real Estate Taxes" for the purposes hereof. Absent an alteration in the method of taxation as set forth above, and except with respect to charges imposed in lieu of real estate taxes, assessments and special assessments, "Real Estate Taxes" shall not be deemed to include Landlord's personal and corporate income taxes, inheritance and estate taxes, franchise, gift and transfer taxes. FF. Rent: The Fixed Rent and the Additional Charges. GG. Rentable Floor Area: As to the Demised Premises, the sum of the floor area stated in square feet bounded by the exterior faces of the exterior walls, or by the exterior or Common Area face of any wall between the Demised Premises and any portion of the Common Areas, or by the center line of any wall between the Demised Premises and space leased or available to be leased to a tenant or occupant plus fifteen (15%). Any reference to Rentable Floor Area of a building shall mean the floor area of all levels or stories of such building, excluding any roof, except such portion thereof( other than cooling towers, elevator penthouses, mechanical rooms, chimneys and staircases, entrances and exits) as is permanently enclosed, and including any interior basement level or mezzanine area not occupied or used by a tenant on a continuing or repetitive basis, and any mechanical room, enclosed or interior truck dock, interior Common Areas, and areas used by Landlord for storage, for housing meters and/or other equipment or for other purposes. Any reference to the Rentable Floor Area is intended to refer to the Rentable Floor Area of the entire area in question irrespective of the person(s) who may be the owner(s) of all or any part thereof HH. Rules and Regulations: Rules and Regulations: The reasonable rules and regulations that may be promulgated by Landlord from time to time, which may be reasonably changed by Landlord from time to time. The Rules and Regulations now in effect are attached hereto as Exhibit D. II. Security Deposit: $800,000.00 Letter of Credit, subject to the terms and provisions of Article 8 hereof. JJ. Successor Landlord: As defined in Section 9.03. KK. Superior Lease: Any lease to which this Lease is, at the time referred to, subject and subordinate. As of the date hereof, the Superior Lease is that certain Lease of Second Redevelopment Parcel by and between the Village of Ridgefield Park, as landlord and Landlord, as tenant, dated January 17, 1986, as amended, as evidenced by a Memorandum of Lease dated February 9, 1999 and recorded March 23, 1999 in the Bergen County Clerk's Office in Deed Book 8146, page 581, as the same may be hereafter further amended. LL. Superior Lessor: The lessor of a Superior Lease or its successor in interest, at the time 9 referred to. MM. Superior Mortgage: Any Mortgage to which this Lease is, at the time referred to, subject and subordinate. NN. Superior Mortgagee: The Mortgagee of a Superior Mortgage at the time referred to. OO. Tenant's Fraction: The Tenant's Fraction shall mean the fraction, the numerator of which shall be the Rentable Floor Area of the Demised Premises and the denominator of which shall be the Rentable Floor Area of the Building (20.44%). If the size of the Demised Premises or the Building shall be changed from the initial size thereof, due to any taking, any construction or alteration work or otherwise, the Tenant's Fraction shall be changed to the fraction the numerator of which shall be the Rentable Floor Area of the Demised Premises and the denominator of which shall be the Rentable Floor Area of the Building. In the event Landlord reasonably determines that Tenant's utilization of any item of Operating Expenses exceeds the fraction referred to above, Tenant's Fraction with respect to such item shall, at Landlord's option, mean the percentage of any such item (but not less than the fraction referred to above) which Landlord reasonably estimates as Tenant's proportionate share thereof. PP. Tenant's Property: As defined in Section 16.02. QQ. Tenant's Work: The facilities, materials and work which may be undertaken by or for the account of Tenant (other than the Landlord's Work) to equip, decorate and furnish the Demised Premises for Tenant's occupancy. RR. Term: The period commencing on the Commencement Date and ending at II :59 p.m. of the Expiration Date, but in any event the Term shall end on the date when this Lease is earlier terminated in accordance with the provisions of this Lease. SS. Unavoidable Delays: A delay arising from or as a result of a strike, lockout, or labor difficulty, explosion, sabotage, accident, riot or civil commotion, act of war, fire or other catastrophe, Legal Requirement, or an act of the other party, and any cause beyond the reasonable control of that party, provided that the party asserting such Unavoidable Delay has exercised its commercially reasonable efforts to minimize such delay. 10 ARTICLE 2 - DEMISE AND TERM 2.01. Landlord hereby leases to Tenant, and Tenant hereby hires from Landlord, the Demised Premises, for the Term. Within ten (10) days after request by Landlord following the Commencement Date, the parties hereto shall enter into an agreement in form and substance reasonably satisfactory to Landlord setting forth the Commencement Date. ARTICLE 3 - RENT 3.01. Tenant shall pay the Fixed Rent in equal monthly installments in advance on the first day of each and every calendar month during the Term commencing on the Fixed Rent Commencement Date (except that Tenant shall pay, upon the execution and delivery of this Lease by Tenant, the Advance Rent, to be applied against the first installment or installments of Fixed Rent becoming due under this Lease). If the Fixed Rent Commencement Date occurs on a day other than the first day of a calendar month and/or the Lease is terminated on a date other than the last day of a month (other than pursuant to Article 27 or 28 hereof), the Fixed Rent for any such partial calendar months of the Term shall be prorated. 3.02. The Rent shall be paid in lawful money of the United States to Landlord at its office, or such other place, or Landlord's agent, as Landlord shall (upon not less than fifteen (15) days prior written notice to Tenant) designate. Tenant shall pay the Rent promptly when due without notice or demand therefor and without any abatement, deduction or setoff for any reason whatsoever, except as may be expressly provided in this Lease. If Tenant makes any payment to Landlord by check, same shall be by check of Tenant and Landlord shall not be required to accept the check of any other Person, and any check received by Landlord shall be deemed received subject to collection. If any check is mailed by Tenant, Tenant shall post such check in sufficient time prior to the date when payment is due so that such check will be received by Landlord on or before the date when payment is due. Tenant shall assume the risk of lateness or failure of delivery of the mails, and no lateness or failure of the mails will excuse Tenant from its obligation to have made the payment in question when required under this Lease. 3.03. No payment by Tenant or receipt or acceptance by Landlord of a lesser amount than the correct Rent shall be deemed to be other than a payment on account, nor shall any endorsement or statement on any check or any letter accompanying any check or payment be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance or pursue any other remedy in this Lease or at law provided. 3.04. If Tenant is in arrears in payment of Rent, Tenant waives Tenant's right, if any, to designate the items to which any payments made by Tenant are to be credited, and Landlord may apply any payments made by Tenant to such items as Landlord sees fit, irrespective of, and notwithstanding any designation or request by, Tenant, as to the items to which any such payments shall be credited. 3.05. In the event that any installment of Rent due hereunder shall be overdue for more than five 11 (5) Business Days, a "Late Charge" equal to four percent (4%) or the maximum rate permitted by law, whichever is less ("Late Payment Rate") for Rent so overdue may be charged by Landlord for each month or part thereof that the same remains overdue ("Late Payment Rate"). Provided Tenant is not otherwise in default under this Lease beyond applicable notice and cure periods, Landlord shall waive the Late Charge with respect to Tenant's first late payment of Rent within any calendar year, provided further that Tenant pays such late Rent within ten (10) days after written notice that same has not been paid. In the event that any check tendered by Tenant to Landlord is returned for insufficient funds, Tenant shall pay to Landlord, in addition to the charge imposed by the preceding sentence, a fee of $50.00. Any such Late Charges if not previously paid shall, at the option of the Landlord, be added to and become part of the next succeeding Rent payment to be made hereunder. ARTICLE 4 - USE OF DEMISED PREMISES 4.01. Tenant shall use and occupy the Demised Premises for the Permitted Uses, and Tenant shall not use or permit or suffer the use of the Demised Premises or any part thereof for any other purpose. 4.02. If any governmental license or permit, other than a Certificate of Occupancy, shall be required for the proper and lawful conduct of Tenant's business in the Demised Premises or any part thereof, Tenant shall duly procure and thereafter maintain such license or permit, and submit the same to Landlord for inspection. Tenant shall at all times comply with the terms and conditions of each such license or permit. Tenant shall not at any time use or occupy, or suffer or permit anyone to use or occupy the Demised Premises, or do or permit anything to be done in the Demised Premises, in any manner which (a) violates the Certificate of Occupancy for the Demised Premises or for the Building; (b) causes, or is liable to cause, injury to the Building or any equipment, facilities or systems therein; (c) constitutes a violation of the Legal Requirements or Insurance Requirements; (d) impairs, or tends to impair, the character, reputation or appearance of the Building as a first-class office building; (e) impairs, or tends to impair, the proper and economic maintenance, operation and repair of the Building and/or its equipment, facilities or systems; or (f) unreasonably annoys or inconveniences, or tends to unreasonably annoy or inconvenience, other tenants or occupants of the Building. 4.03. Tenant, its agents and employees shall, from and after the Commencement Date, during the Term, be permitted access to the Building twenty-four hours per day, seven days per week, subject however to any temporary closure required due to emergency or to effect repairs or maintenance to the Building in accordance with the terms of this Lease. Landlord shall in the event of such temporary closure use reasonable efforts to minimize interference by Landlord with Tenant's use of the Demised Premises or means of ingress or egress to and from the Demised Premises. ARTICLE 5 - PREPARATION OF DEMISED PREMISES 5.01.(a) The Demised Premises shall be completed and prepared by Landlord for Tenant's occupancy in the manner described in, and subject to the provisions of, this Article 5. Except as expressly provided to the contrary in this Lease, the taking of possession by Tenant of the Demised 12 Premises shall be conclusive evidence as against Tenant that the Demised Premises and the Building were in good and satisfactory condition at the time such possession was taken. Except as expressly provided to the contrary in this Lease, Tenant is. leasing the Demised Premises "as is" on the date hereof, subject to reasonable wear and tear. Tenant shall provide Landlord with written notice of any claimed defects in workmanship or materials in Landlord's Work (except for any defects in the Demised Premises or the Building which were not known or reasonably discoverable by Tenant by observation or an inspection ["Latent Defects"]), and any items of work performed by Landlord of a minor or insubstantial nature ("Punchlist Items") not later than thirty (30) days after Tenant receives notice from Landlord that the Demised Premises are Ready for Occupancy, and with respect to any Latent Defects, within thirty (30) days after tenant becomes aware of such defect. (b) Tenant shall, upon execution hereof, provide Landlord with all information Landlord needs to prepare working drawings for the construction of Landlord's Work. Such information shall include, but not be limited to layout of the Demised Premises, electrical, mechanical, plumbing & structural requirements, materials & finishes. Within fifteen (15) days of Landlord's receipt of all necessary information, Landlord shall deliver working drawings to Tenant. Tenant shall, within five (5) days of its receipt of working drawings, review and approve the working drawings by giving Landlord written notice thereof. If Tenant does not respond within said five (5) day period, the working drawings shall be deemed approved. If Tenant disapproves of the working drawings, it shall specify in detail the reasons for its disapproval. If Tenant makes changes in the working drawings which materially impact the Landlord's ability to complete the Landlord's Work on time, the provisions of Section 5.02 shall apply. Within five (5) days after the working drawings are approved Or deemed approved, Landlord shall submit to Tenant commercially reasonable prices (or Landlord's commercially reasonable estimates if prices are not then determined), for the construction of all items comprising Landlord's Work, including those items in excess of Landlords' Work. Tenant shall, within two (2) Business Days of its receipt of prices, review and approve the prices by giving Landlord written notice thereof; upon approval of such prices by Tenant, Landlord shall perform such Landlord's Work in a prompt and diligent manner. If Tenant does not respond within said two (2) Business Day period, the prices shall be deemed approved. If Tenant disapproves of any prices, the provisions of Section 5.02 shall apply. (c) In the event that Landlord is unable to deliver to Tenant possession of the Demised Premises Ready for Occupancy by December 31, 2004 (subject, however, to Section 5.02 below), the Fixed Rent Commencement Date shall be extended one day for each day occurring after such date through and including the day immediately preceding the Commencement Date. (d) In the event that Landlord is unable to deliver to Tenant possession of the Demised Premises Ready for Occupancy by March 31, 2005 (subject, however, to Section 5.02 below), the Fixed Rent Commencement Date shall be extended two (2) days for each day occurring after such date through and including the day immediately preceding the Commencement Date. (e) In the event that Landlord is unable to deliver to Tenant possession of the Demised Premises by May 1, 2005 (subject, however, to Section 5.02 below) (the "Termination Deadline"), Tenant shall have the right to terminate this Lease upon written notice given to Landlord not later than five (5) days following the Termination Deadline, whereupon the Advance Rent and Security Deposit shall be returned to Tenant and this Lease shall be of no further force Or effect and the parties hereto shall have 13 no further liability to one another hereunder. 5.02. If the substantial completion of the Landlord's Work shall be delayed due to (a) any actor omission of Tenant (including, but not limited to, for purposes of the Section 5.02, any of its employees, agents or contractors), without limitation, [i] any delays due to changes in or additions to the Landlord's Work requested or caused by Tenant, or [ii] any delays by Tenant in the submission of plans, drawings, specifications or other information or in approving any working drawings or estimates or in giving any authorizations or approvals) which materially impact the Landlord's ability to complete the Landlord's Work on time, or (b) any additional time needed for the completion of the Landlord's Work by the inclusion in the Landlord's Work of any items specified by Tenant that require long lead time for delivery or installation which materially impact the Landlord's ability to complete the Landlord' s Work on time, then the Demised Premises shall be deemed Ready for Occupancy on the date when they would have been ready but for such delay(s). The Demised Premises shall be conclusively presumed to be in satisfactory condition on the Commencement Date except for the minor or insubstantial details of which Tenant gives Landlord notice within thirty (30) days after the Commencement Date specifying such details with reasonable particularity. 5.03. Payment for Landlord's Work: (i) Payment for Landlord's Work: Upon substantial completion of Landlord's Work, Tenant shall pay for the cost of all of Landlord's Work as herein set forth within ten (10 days of notice or invoice. The cost of Landlord's Work ("Landlord's Cost") shall be deemed to be the cost of labor, materials, equipment and services necessary for the performance of Landlord's Work, plus twelve (12%) percent. (ii) Tenants Credit Notwithstanding the foregoing, Tenant shall be entitled to a credit of Fifteen and 00/100 Dollars ($15.00) multiplied by the number of square feet of Rentable Floor Area Space of the Demised Premises (i.e. 33,990 X $15.00 = $509,850.00) (the "Credit") to reduce the amount payable by Tenant to Landlord for Landlord's Cost of Landlord's Work. Landlord shall not be required to give or apply such credit unless this Lease is in full force and effect, and provided further that Tenant is not in default under this Lease (which has not been cured within any applicable notice and cure period), and until Tenant has cured any defaults by it under the Lease (within any applicable notice and cure period), if any. In the event the amount of the Credit which Tenant is entitled to hereunder exceeds the amount of Landlord's Cost, any remaining balance shall be credited against future installments of Rent payable by Tenant under the Lease. 5.04. Landlord reserves the right, at any time and from time to time, to increase, reduce or change the number, type, size, location, elevation, nature and use of any of the Common Areas and the Building and any other buildings and other improvements on the Land, including, without limitation, the right to move and/or remove same, provided same shall not unreasonably block Or interfere with Tenant's means of ingress or egress to and from the Demised Premises and provided any such changes are performed in a good workman-like manner. 14 ARTICLE 6 - TAX AND OPERATING EXPENSE PAYMENTS 6.01. Tenant shall pay to Landlord, as hereinafter provided, Tenant's Fraction of the Real Estate Taxes. Tenant's Fraction of the Real Estate Taxes shall be the Real Estate Taxes in respect of the Building for the then current Calendar Year in question, less the Real Estate Taxes attributable to the Building for Base Year, multiplied by the Tenant's Fraction, plus the Real Estate Taxes in respect of the Land for the then current Calendar Year in question, less the Real Estate Taxes attributable to the Land for the Base Year, multiplied by the Tenant's Fraction. If any portion of the Building shall be exempt from all or any part of the Real Estate Taxes, then for the period of time when such exemption is in effect, the Rentable Floor Area on such exempt portion shall be excluded when making the above computations in respect of the part of the Real Estate Taxes for which such portion shall be exempt. Landlord shall estimate the annual amount of Tenant's Fraction of the Real Estate Taxes (which estimate may be changed by Landlord at any time and from time to time, but not more than once each Calendar Year), and Tenant shall pay to Landlord 1/12th of the amount so estimated on the first day of each month in advance. Tenant shall also pay to Landlord within thirty (30) days after notice or invoice from time to time the amount which, together with said monthly installments, will be sufficient in Landlord's estimation to pay Tenant's Fraction of any Real Estate Taxes. When the amount of any .item comprising Real Estate Taxes is finally determined for a real estate fiscal tax year, Landlord shall submit to Tenant a statement in reasonable detail of the same, and the figures used for computing Tenant's Fraction of the same, and if Tenant's Fraction so stated is more or less than the amount theretofore paid by Tenant for such item based on Landlord's estimate, Tenant shall pay to Landlord the deficiency within thirty (30) days after submission of such statement, or Landlord shall, at its sole election, either refund to Tenant the excess or apply same to future installments of Real Estate Taxes due hereunder. Any Real Estate Taxes for a real estate fiscal tax year, a part of which is included within the Term and a part of which is not so included, shall be apportioned on the basis of the number of days in the real estate fiscal tax year included in the Term, and the real estate fiscal tax year for any improvement assessment will be deemed to be the one-year period commencing on the date when such assessment is due, except that if any improvement assessment is payable in installments, the real estate fiscal tax year for each installment will be deemed to be the one-year period commencing on the date when such installment is due. The above computations shall be made by Landlord in accordance with generally accepted accounting principles, and the Rentable Floor Area referred to will be based upon the average of the Rentable Floor Area in existence on the rust day of each month during the period in question. In addition to the foregoing, Tenant shall be responsible for any increase in Real Estate Taxes attributable to assessments for improvements installed by or for the account of Tenant (other than Landlord's Work) at the Demised Premises. If the Demised Premises are not separately assessed, the amount of any such increase shall be determined by reference to the records of the tax assessor. 6.02. Tenant shall pay to Landlord, as hereinafter provided, Tenant's Fraction of the Operating Expenses. Tenant's Fraction of the Operating Expenses shall be the Operating Expenses for the Calendar Year in question, less the Operating Expenses for the Base Year, multiplied by Tenant's Fraction. Landlord shall estimate Tenants Fraction of the Operating Expenses for such Calendar Year (which estimate may be reasonably changed by Landlord from time to time, but not more than once each Calendar Year), and Tenant shall pay to Landlord 1/12th of the amount so estimated on the first day of each month in advance. If at any time Landlord changes its estimate of Tenant's Fraction of the Operating Expenses for the then current Calendar Year or partial Calendar Year, Landlord shall give 15 written notice to Tenant of such change and within thirty (30) days after such notice Landlord and Tenant shall adjust for any overpayment or underpayment during the prior months of the then Current Calendar Year or partial Calendar Year. After the end of each Calendar Year, including any partial Calendar Year at the beginning of the Term, and after the end of the Term, Landlord shall submit to Tenant a statement in reasonable detail stating Tenant's Fraction of the Operating Expenses for such Calendar Year, or partial Calendar Year in the event the Term shall begin on a date other than a January 1st and/or end on a date other than a December 31st, as the case may be, and stating the Operating Expenses for the period in question and the figures used for computing Tenant's Fraction, and if Tenant's Fraction so stated for such period is more or less than the amount paid for such period, Tenant shall pay to Landlord the deficiency within ten (10) days after submission of such statement, or Landlord shall, at its sole election, within thirty (30) days either refund to Tenant the excess or apply same to future installments of Operating Expenses due hereunder. All computations shall be made in accordance with generally accepted accounting principles. 6.03. Landlord shall, within thirty (30) days after written request from Tenant (given no later than one hundred twenty (120) days after the issuance of the Landlord's statement of Real Estate Taxes or Operating Expenses pursuant to Section 6.01 or 6.02 hereof which Tenant desires to review), provide Tenant with such information as Tenant may reasonably request to permit Tenant to verify the charges first appearing in such statement including, without limitation access to and review of Landlord's relevant books, records and other financial information. Each such statement given by Landlord pursuant to Section 6.01 or Section 6.02 shall be conclusive and binding upon Tenant unless before the date which is one hundred twenty (120) days after the receipt of such statement, Tenant shall notify Landlord in writing that it disputes the correctness of the statement, specifying the particular respects in which the statement is claimed to be incorrect. If such dispute is not settled by agreement, either party may submit the dispute to arbitration as provided in Article 36. Pending the determination of such dispute by agreement or arbitration as aforesaid, Tenant shall, within ten (10) days after receipt of such statement, pay the Additional Charges in accordance with Landlord's statement, without prejudice to Tenant's position. If the dispute shall be determined in Tenant's favor, Landlord shall reimburse Tenant the amount of Tenant's overpayment resulting from compliance with Landlord's statement, and if such overpayment is the result of an overestimation by Landlord of any Additional Charge by more than seven percent (7%), such overpayment shall be reimbursed to Tenant, within thirty (30) days after such determination, together with interest thereon at the Prime Rate as announced in the Wall Street Journal (or a successor index reasonably selected by Landlord), or at Landlord's option, Landlord may apply same to the next future installments of Real Estate Taxes due hereunder, with the balance of any such overpayment by Tenant, if any, remaining after such credit to Tenant to be refunded to Tenant within thirty (30) days of such determination. ARTICLE 7 - COMMON AREAS 7.01. So long as Tenant is not in default in the payment of Fixed Rent under this Lease beyond any applicable notice or cure period, subject to the provisions of Section 5.04, Landlord will operate, manage, equip, light, repair and maintain, or cause to be operated, managed, equipped, lighted, repaired and maintained, the Common Areas for their intended purposes.. Landlord reserves the right, at any 16 time and from time to time, to construct within the Common Areas kiosks, fountains, aquariums, planters, pools and sculptures, and to install vending machines, telephone booths, benches and the like, provided same shall not unreasonably block or interfere with Tenant's means of ingress or egress to and from the Demised Premises. 7.02. So long as Tenant is not in default in the payment of Fixed Rent under this Lease beyond any applicable notice or cure period, Tenant and its subtenants and concessionaires, and their respective officers, employees, agents, customers and invitees, shall have the non-exclusive right, in common with Landlord and all others to whom Landlord has granted or may hereafter grant such right, but subject to the Rules and Regulations, to use the Common Areas. Landlord reserves the right, at any time and from time to time, to close temporarily all or any portions of the Common Areas when in Landlord's reasonable judgment any such closing is necessary or desirable (a) to make repairs or changes or to effect construction, (b) to prevent the acquisition of public rights in such areas, (c) to discourage unauthorized parking, or (d) to protect or preserve natural persons or property. Landlord may do such other acts in and to the Common Areas as in its judgment may be desirable to improve or maintain same. So long as this Lease remains in full force and effect, Landlord shall provide Tenant, without charge (except as a component of Operating Expenses), with thirty-four (34) reserved (in reasonable proximity to the entrance of the Building) and one hundred two (102) unreserved parking spaces in the Parking Deck serving the Building. 7.03. Tenant agrees that it, any subtenant or licensee and their respective officers, employees, contractors and agents will park their automobiles and other vehicles only where and as permitted by Landlord. Tenant will, if and when so requested by Landlord, furnish Landlord with the license numbers of any vehicles of Tenant, any subtenant or licensee and their respective officers, employees and agents. ARTICLE 8 - SECURITY 8.01. Tenant has deposited with Landlord the Security Deposit as security for the full and faithful payment and performance by Tenant of Tenant's obligations under this Lease. If Tenant defaults in the full and prompt payment and performance of any of its obligations under this Lease, including, without limitation, the payment of Rent, Landlord may use, apply or retain the whole or any part of the Security Deposit to the extent required for the payment of any Rent or any other sums as to which Tenant is in default or for any sum which Landlord may expend or may be required to expend by reason of Tenant's default in respect of any of Tenant's obligations under this Lease, inducting, without limitation, any damages or deficiency in the reletting of the Demised Premises, whether such damages or deficiency accrue before or after summary proceedings or other re-entry by Landlord. If Landlord shall so use, apply or retain the whole or any part of the security, Tenant shall within ten (10) days of demand immediately deposit with Landlord a sum equal to the amount so used, applied and retained, as security as aforesaid. If Tenant shall fully and faithfully pay and perform all of Tenant's obligations under this Lease, the Security Deposit or any balance thereof to which Tenant is entitled shall be returned or paid over to Tenant within thirty (30) days after the date on which this Lease shall expire, and after delivery to Landlord of entire possession of the Demised Premises in accordance with the terms of this Lease. In the event of any sale or leasing of the Land, Landlord shall transfer the security 17 to which Tenant is entitled to the vendee or lessee and Landlord shall thereupon be released by Tenant from all liability for the return or payment thereof; and Tenant shall look solely to the new landlord for the return or payment of the same; and the provisions hereof shall apply to every transfer or assignment made of the same to a new landlord. Tenant shall not assign or encumber or attempt to assign or encumber the monies deposited herein as security, and neither Landlord nor its successors or assigns shall be bound by any such assignment, encumbrance, attempted assignment or attempted encumbrance. (b) In lieu of the cash security required by this Lease, Tenant shall provide to Landlord an irrevocable Letter of Credit in the amount of the Security Deposit in form and substance satisfactory to Landlord and issued by a savings bank; a savings and loan association or a commercial bank, organized and existing under the laws of the United States or any state thereof and having offices in New York or New Jersey (with fifty (50) miles of the Demised Premises) reasonably approved by Landlord and otherwise substantially in the form of Exhibit F, annexed hereto and made a part hereof. Landlord shall have the right, upon written notice to Tenant (except for Tenant's non-payment of Rent or for Tenant's failure to comply with Article 8.03 for which no notice shall be required), and regardless of the exercise of any other remedy the Landlord may have by reason of a default, to draw upon said Letter of Credit to cure any default of Tenant or for any purpose authorized by section 8.01(a) of this Lease and if Landlord does so, Tenant shall, within ten (10) days after demand, additionally fund the Letter of Credit with the amount so drawn so that Landlord shall have the full deposit on hand at all times during the Term of the Lease and for a period of thirty (30) days thereafter. If Tenant shall fully and faithfully pay and perform all of Tenant's obligations under this Lease, the Letter of Credit or any balance thereof to which Tenant is entitled shall be returned to Tenant within thirty (30) days after the date on which this Lease shall expire and Tenant has delivered to Landlord entire possession of the Demised Premises in accordance with the terms of this Lease. In the event of a sale of the Building or a lease of the Building subject to this Lease, Landlord shall transfer the security to the vendee or lessee. (c) For purposes of the delivery of the Security Deposit contemporaneously with the execution and delivery of this Lease, Landlord agrees to accept a Letter of Credit Security Deposit from Wells Fargo Bank, N.A. (herein, the "LC Bank") On a form (notwithstanding the form of Exhibit F) commercially reasonable to both Landlord and the LC Bank.. Tenant shall use its best efforts to cause the LC Bank to issue the Letter of Credit no later than October 4,2004. Failure to deliver the Letter of Credit Security Deposit to Landlord by October 15, 2004 shall constitute an event of default hereunder (without applicability of grace periods of notice to Tenant), entitling Landlord to terminate this Lease and otherwise exercise its remedies hereunder. Tenant acknowledges that Landlord shall not be required to implement or commence any portion or aspect of Landlord's Work until such time as such Letter of Credit Security Deposit shall have been delivered to Landlord, and the dates set forth in Sections 5.01 (c), (d) and (e) (i.e., December 31, 2004, March 31,2005 and May 1,2005, respectively and subject further to the provisions of Section 5.02 hereof) shall be extended one day for each day occurring between the date of this Lease and the date the Letter of Credit Security Deposit shall have been delivered to Landlord in accordance with the terms and provisions of this Article 8. 18 8.02. The Letter of Credit shall expire not earlier than thirty (30) days after the Expiration Date of this Lease. Upon Landlord's prior consent, the Letter of Credit may be of the type which is automatically renewed on an annual basis (Annual Renewal Date), provided however, in such event Tenant shall maintain the Letter of Credit and its renewals in full force and effect during the entire Term of this Lease (including any renewals or extensions) and for a period of thirty (30) days thereafter. The Letter of Credit will contain a provision requiring the issuer thereof to give the beneficiary (Landlord) sixty (60) days' advance written notice of its intention not to renew the Letter of Credit on the next Annual Renewal Date. 8.03. In the event Tenant shall fail to deliver to Landlord a substitute Revocable Letter of Credit, in the amount stated above, on or before thirty (30) days prior to the next Annual Renewal Date, said failure shall be deemed a default under this Lease. Landlord may, in its discretion treat this the same as a default in the payment of Rent or any other default and pursue the appropriate remedy. In addition, and not in limitation, Landlord shall be permitted to draw upon the Letter of Credit as in the case of any other default by Tenant under the Lease. 8.04. (a) Provided Tenant is not in default of its obligations under this Lease (beyond any applicable notice and cure period and Tenant timely cures any such default by the earlier to occur of the proposed reduction in such Security Deposit and the expiration of such notice and cure period), Landlord shall consent to a reduction of the Security Deposit in the amount of $100,000.00 on the second (2nd) anniversary of the Commencement Date resulting in a total Security Deposit of $700,000.00; such reduction shall be reflected by an amendment or replacement of the Letter of Credit reducing the amount of the Letter of Credit in the amount of $100,000.00 resulting in a Total Security Deposit of $700,000.00. If such reduction is accomplished by a replacement of the Letter of Credit with a new Letter of Credit, Landlord shall promptly return the old Letter of Credit upon receipt of the new Letter of Credit in the form and content required hereunder. In no event however shall the Letter of Credit contain a provision for its automatic reduction; (b) Provided Tenant is not in default of its obligations under this Lease(beyond any applicable notice and cure period and Tenant timely cures any such default by the earlier to occur of the proposed reduction in such Security Deposit and the expiration of such notice and cure period), Landlord shall consent to a reduction of the Security Deposit in the amount of $100,000.00 on the third (3rd) anniversary of the Commencement Date resulting in a total Security Deposit of $600,000.00; such reduction shall be reflected by an amendment or replacement of the Letter of Credit reducing the Letter of Credit in the amount of $100,000.00 resulting in a total Security Deposit of $600,000.00. If such reduction is accomplished by a replacement of the Letter of Credit with a new Letter of Credit, Landlord shall promptly return the old Letter of Credit upon receipt of the new Letter of Credit in the form and content required hereunder. In no event however shall the Letter of Credit contain a provision for its automatic reduction; (c) Provided Tenant is not in default of its obligations under this Lease(beyond any applicable notice and cure period and Tenant timely cures any such default by the earlier to occur of the proposed reduction in such Security Deposit and the expiration of such notice and cure period), Landlord shall consent to a reduction of the Security Deposit in the amount of $100,000.00 on the fourth (4th) anniversary of the Commencement Date resulting in a total Security Deposit of $500,000.00; such 19 reduction shall be reflected by an amendment or replacement of the Letter of Credit reducing the Letter of Credit in the amount of $100,000.00 resulting in a total Security Deposit of $500,000.00. If such reduction is accomplished by a replacement of the Letter of Credit with a new Letter of Credit, Landlord shall promptly return the old Letter of Credit upon receipt of the new Letter of Credit in the form and content required hereunder. In no event however shall the Letter of Credit contain a provision for its automatic reduction; and (d) Provided Tenant is not in default of its obligations under this Lease(beyond any applicable notice and cure period and Tenant timely cures any such default by the earlier to occur of the proposed reduction in such Security Deposit and the expiration of such notice and cure period), Landlord shall consent to a reduction of the Security Deposit in the amount of $200,000.00 on the fifth (5th) anniversary of the Commencement Date resulting in a total Security Deposit of $300,000.00; such reduction shall be reflected by an amendment or replacement of the Letter of Credit reducing the Letter of Credit in the amount of $200,000.00 resulting in a total Security Deposit of $300,000.00. If such reduction is accomplished by a replacement of the Letter of Credit with a new Letter of Credit, Landlord shall promptly return the old Letter of Credit upon receipt of the new Letter of Credit in the form and content required hereunder. In no event however shall the Letter of Credit contain a provision for its automatic reduction. ARTICLE 9 - SUBORDINATION 9.01. This Lease, and all rights of Tenant hereunder, are and shall be subject and subordinate to all ground leases and underlying leases of the Land and/or the Building now or hereafter existing and to all Mortgages which may now or hereafter affect the Land and/or building and/or any of such leases, whether or not such Mortgages or leases shall also cover other lands and/or buildings, to each and every advance made or hereafter to be made under such Mortgages, and to all renewals, modifications, replacements and extensions of such leases and such Mortgages and spreaders and consolidations of such Mortgages. The provisions of this Section 9.01 shall be self-operative and no further instrument of subordination shall be required. In confirmation of such subordination, Tenant shall within ten (10) days after request execute, acknowledge and deliver any instrument that Landlord, the lessor under any such lease or the Mortgagee of any such Mortgage or any of their respective successors in interest may reasonably request to evidence such subordination. 9.02. If any act or omission of Landlord would give Tenant the right, immediately or after lapse of a period of time, to cancel or terminate this Lease, or to claim a partial or total eviction, Tenant shall not exercise such right (a) until it has given written notice of such act or omission to Landlord and each Superior Mortgagee and each Superior Lessor whose name and address shall previously have been furnished to Tenant in writing, and (b) until a reasonable period for remedying such act or omission shall have elapsed following the giving of such notice and following the time when such Superior Mortgagee or Superior Lessor shall have become entitled under such Superior Mortgage or Superior Lease, as the case may be, to remedy the same (which reasonable period shall in no event be less than the period to which Landlord would be entitled under this Lease or otherwise, after similar notice, to effect such remedy), provided such Superior Mortgagee or Superior Lessor shall with due diligence give Tenant notice of intention to, and commence and continue to, remedy such act or omission. 20 9.03. If any Superior Lessor or Superior Mortgagee shall succeed to the rights of Landlord under this Lease, whether through possession or foreclosure action or delivery of a new lease or deed, then at the request of such party so succeeding to Landlord's rights ("Successor Landlord") and upon such Successor Landlord's written agreement to accept Tenant's attornment, Tenant shall attorn to and recognize such Successor Landlord as Tenant's landlord under this Lease and shall within ten (10) days of request execute and deliver any instrument that such Successor Landlord may reasonably request to evidence such attornment. Upon such attornment this Lease shall continue in full force and effect as a direct lease between the Successor Landlord and Tenant upon all of the terms, conditions and covenants as are set forth in this Lease except that the Successor Landlord shall not (a) be liable for any previous act or omission of Landlord under this Lease; (b) be subject to any offset, not expressly provided for in this Lease, which theretofore shall have accrued to Tenant against Landlord; (c) be liable for the return of any Security Deposit, in whole or in part, to the extent that same is not paid over to the Successor Landlord; or (d) be bound by any previous modification of this Lease or by any previous prepayment of more than one month's Fixed Rent or Additional Charges, unless such modification or prepayment shall have been expressly approved in writing by the Superior Lessor of the Superior Lease or the Mortgagee of the Superior Mortgage through or by reason of which the Successor Landlord shall have succeeded to the rights of Landlord under this Lease. 9.04. If any then present or prospective Superior Mortgagee shall require any modification(s) of this Lease, Tenant shall within ten (10) days of request execute and deliver to Landlord such instruments effecting such modification(s) as Landlord shall request, provided that such modification(s) do not adversely affect in any material respect any of Tenant's rights or materially increase Tenant's obligation under this Lease. 9.05 Landlord shall request that its current and any future Superior Lessor or Superior Mortgagee provide Tenant with a Non-Disturbance Subordination and Attornment Agreement (herein referred to as an "SNDA") on said Superior Lessor's or Superior Mortgagee's then standard form. The failure or refusal of such Superior Lessor or Superior Mortgagee to provide such SNDA shall not effect the Tenant's obligations under this Lease or be construed as a breach of this Lease by Landlord or such Superior Mortgagee or Superior Lessor. ARTICLE 10 - QUIET ENJOYMENT 10.01. So long as Tenant pays all of the Rent and performs all of Tenant's other obligations hereunder, Tenant shall peaceably and quietly have, hold and enjoy the Demised Premises without hindrance, ejection or molestation by Landlord or any person lawfully claiming through or under Landlord, subject, nevertheless, to the provisions of this Lease and to Superior Leases and Superior Mortgages. 21 ARTICLE 11 - ASSIGNMENT, SUBLETTING AND MORTGAGING 11.01. Tenant shall not, whether voluntarily, involuntarily, or by operation of law or otherwise, (a) assign or otherwise transfer this Lease, or offer or advertise to do so, (b) sublet the Demised Premises or any part thereof, or offer or advertise to do so, Or allow the same to be used, occupied or utilized by anyone other than Tenant, or (c) mortgage, pledge, encumber or otherwise hypothecate this Lease in any manner whatsoever, without in each instance obtaining the prior written consent of Landlord. Landlord agrees not to unreasonably withhold its consent to the subletting of the Demised Premises or an assignment of this Lease. In determining reasonableness, Landlord may take into consideration all relevant factors surrounding the proposed sublease and assignment, including, without limitation, the following: (i) The business reputation of the proposed assignee or subtenant and its officers or directors in relation to the other tenants or occupants of the Building or Development; (ii) the nature of the business and the proposed use of the Demised Premises by the proposed assignee or subtenant in relation to the other tenants or occupants of the Building or Development; (iii) whether the proposed assignee or subtenant is then a tenant (or subsidiary, affiliate or parent of a tenant) of other space in the Building or Development (in the event Landlord or its affiliates have or reasonably anticipate having within two (2) months of the date of the commencement of such proposed assignment or subletting, a substantially equivalent sized space for a substantially equivalent term available in a property in the Development owned or managed by Landlord or any of its affiliates); (iv) the financial condition of the proposed assignee or subtenant; (v) restrictions, if any, contained in leases or other agreements affecting the Building and the Development; and (vi) the effect that the proposed assignee's or subtenant's occupancy or use of the Demised Premises would have upon the operation and maintenance of the Building and the Development. In any event, at no time shall there he more than three (3) subtenants of the Demised Premises permitted. In the event the Demised Premises are sublet or this Lease is assigned, Tenant shall pay to Landlord as an Additional Charge the following amounts less the actual reasonable expense incurred by Tenant in connection with such assignment or subletting, as substantiated by Tenant, in writing, to Landlord's reasonable satisfaction, including, without limitation, a reasonable brokerage fee and reasonable legal fees including but not limited to the cost and expenses for in-house or staff legal counsel or outside counsel at rates not to exceed the reasonable and customary charges for any such legal services as would be imposed in an arms length third party agreement for such services), as the case maybe: (i) in the case of an assignment, an amount equal to fifty percent(50%) of all sums and other consideration paid to Tenant by the assignee for or by reason of such assignment, and (ii) in the case of a sublease, fifty percent (50%) of any rents, additional charge or other consideration payable under the sublease to Tenant by the subtenant which is in excess of the Fixed Rent and Additional Charges accruing during the term of the sublease in respect of the subleased space (at the rate per square foot payable by Tenant hereunder) pursuant to the terms hereof. So long as Tenant is not in default in the payment of Fixed Rent under this Lease beyond any applicable notice or cure period, and provided Tenant complies with the provisions of this Article 11, Landlord agrees that Landlord shall notify Tenant of Landlord's approval or disapproval (specifying the basis for disapproval) of any request for consent submitted to Landlord within fifteen (15) Business 22 Days after receipt by Landlord of Tenant's request for such approval, together with all supporting materials or information required under this Article 11. All requests for approval shall be in writing and given in accordance. with Article 34 hereof. 11.02. If at any time (a) the original Tenant named herein, (b) the then Tenant, (c) any Guarantor, or (d) any Person owning a majority of the voting stock of, or directly or indirectly controlling, the then Tenant shall be a corporation or partnership or limited liability company, any transfer of voting stock or partnership interest or membership interest resulting in the person(s) who shall have owned a majority of such corporation's shares of voting stock or the general partners' interest in such partnership, or membership interest as the case may be, immediately before such transfer, ceasing to own a majority of such shares of voting stock or general partner's interest or membership interest, as the case may be, except as the result of transfers by inheritance, shall be deemed to be an assii,,'l1ment of this Lease as to which Landlord's consent shall have been required, and in any such event Tenant shall notify Landlord. The provisions of this Section 11.02 shall not be applicable to any corporation all the outstanding voting stock of which is listed on a national securities exchange (as defined in the Securities Exchange Act of 1934, as amended) or is traded in the over-the-counter market with quotations reported by the National Association of Securities Dealers through its automated system for reporting quotations, and shall not apply to transactions (a) with a corporation or entity into or with which the then Tenant is merged or consolidated or to which substantially all of the then Tenant's assets are transferred or (b) with any entity or corporation which controls or is controlled by the then Tenant or is under common control with the then Tenant (all such entities referred to in (a) and (b) hereof collectively referred to as "Affiliates"), provided that in any of such events (i) the successor to Tenant has a net worth computed in accordance with generally accepted accounting principles at least equal to the greater of (l) the net worth of Tenant immediately prior to such merger, consolidation or transfer, or (2) the net worth of the original Tenant on the date of this Lease, and (ii) proof satisfactory to Landlord of such net worth shall have been delivered to Landlord at least 10 days prior to the effective date of any such transaction. For the purposes of this Section, the words "voting stock" shall refer to shares of stock or ownership regularly entitled to vote for the election of directors of the corporation or management of such entity. Landlord shall have the right at any time and from time to time during the Term to inspect the stock Or ownership record books of the corporation or entity to which the provisions of this Section 11.02 apply, and Tenant will permit Landlord to review same at Tenant's offices, at reasonable times and upon reasonable advance written notice. 11.03 If this Lease is assigned, whether or not in violation of this Lease, Landlord may collect rent from the assignee. If the Demised Premises or any part thereof are sublet or used or occupied by anybody other than Tenant, whether or not in violation of this Lease, Landlord may, after default by Tenant, and expiration of Tenant's time to cure such default, collect rent from the subtenant or occupant. In either event, Landlord may apply the net amount collected to the Rent, but no such assignment, subletting, occupancy or collection shall be deemed a waiver of any of the provisions of Section 11.01 or Section 11.02, or the acceptance of the assignee, subtenant or occupant as tenant, or a release of Tenant from the performance by Tenant of Tenant's obligations under this Lease. The consent by Landlord to any assignment, mortgaging, subletting or use or occupancy by others shall not in any way be considered to relieve Tenant from obtaining the express written consent of Landlord to any other or further assignment, mortgaging or subletting or use or occupancy by others not expressly permitted by this Article 11. References in this Lease to use or occupancy by others (that is, anyone 23 other than Tenant) shall not be construed as limited to subtenants and those claiming under or through subtenants but shall be construed as including also licensees and others claiming under or through Tenant, immediately or remotely. 11.04. Any permitted assignment or transfer, whether made with Landlord's consent pursuant to Section 11.01 or without Landlord's consent if permitted by Section 11.02, shall be made only if, and shall not be effective until, the assignee shall execute, acknowledge and deliver to Landlord an agreement in form and substance satisfactory to Landlord whereby the assignee shall assume Tenant's obligations under this Lease and whereby the assignee shall agree that all of the provisions in this Article 11 shall, notwithstanding such assignment or transfer, continue to be binding upon it in respect to all future assignments and transfers. Notwithstanding any assignment or transfer, whether or not in violation of the provisions of this Lease, and notwithstanding the acceptance of Rent by Landlord from an assignee, transferee, or any other party, the original Tenant and any other person(s) who at any time was or were Tenant shall remain fully liable for the payment of the Rent and for Tenant's other obligations under this Lease. 11.05. The liability of the original named Tenant and any other Person(s) (including but not limited to any Guarantor) who at any time are or become responsible for Tenant's obligations under this Lease shall not be discharged, released or impaired by any agreement extending the time of, or modifying any of the terms or obligations under this Lease, or by any waiver or failure of Landlord to enforce, any of this Lease. 11.06. The listing of any name other than that of Tenant, whether on the doors of the Demised Premises or the Building directory, or otherwise, shall not operate to vest any right or interest in this Lease or in the Demised Premises, nor shall it be deemed to be the consent of Landlord to any assignment or transfer of this Lease or to any sublease of the Demised Premises or to the use or occupancy thereof by others. Notwithstanding anything contained in this Lease to the contrary, Landlord shall have the absolute right to withhold its consent to an assignment or subletting to a Person who is otherwise a tenant or occupant of the Building, or of a building owned or managed by Landlord or its affiliated entities in the Development (in the event Landlord or its affiliates have or reasonably anticipate having within two (2) months of the date of the commencement of such proposed assignment or subletting, a substantially equivalent sized space for a substantially equivalent term available in a property in the Development owned or managed by Landlord or any of its affiliates). 11.07. Without limiting any of the provisions of Article 27, if pursuant to the Federal Bankruptcy Code (or any similar law hereafter enacted having the same general purpose), Tenant is permitted to assign this Lease notwithstanding the restrictions contained in this Lease, adequate assurance of future performance by an assignee expressly permitted under such Code shall be deemed to mean the deposit of cash security in an amount equal to the sum of one (1) year's Fixed Rent plus an amount equal to the Additional Charges for the Calendar Year preceding the year in which such assignment is intended to become effective, which deposit shall be held by Landlord for the balance of the Term, without interest, as security for the full performance of all of Tenant's obligations under this Lease, to be held and applied in the manner specified for security in Section 8.01. 11.08. If Tenant shall propose to assign or in any manner transfer this Lease or any interest 24 therein, or sublet the Demised Premises or any part or parts thereof, or grant any concession or license or otherwise permit occupancy of all or any part of the Demised Premises by any person, Tenant shall give notice thereof to Landlord, together with a copy of the proposed instrument (or material terms) that is to accomplish same and such financial and other information pertaining to the proposed assignee, transferee, subtenant, concessionaire or licensee as Landlord shall reasonably require. If Landlord consents to the subject transaction (or if Landlord's consent is not required to same) if Tenant does not consummate the subject transaction within one hundred twenty (120) days, Tenant shall again be required to comply with the provisions of this Section 11.08 in connection with any such transaction as if the notice by Tenant referred to above in this Section 11.08 had not been given. Notwithstanding anything contained in this Lease to the contrary, Landlord shall not be obligated to entertain or consider any request by Tenant to consent to any proposed assignment of this Lease, or sublet of all or any part of the Demised Premises unless each request by Tenant is accompanied by a non-refundable fee payable to Landlord in the amount of One Thousand Dollars ($1,000.00) to cover Landlord's administrative, legal, and other costs and expenses incurred in processing each of Tenant's requests. Neither Tenant's payment nor Landlord's acceptance of the foregoing fee shall be construed to impose any obligation whatsoever upon Landlord to consent to Tenant's request. . ARTICLE 12 - COMPLIANCE WITH LAWS 12.01. Tenant shall, subject to the provisions of the last sentence of this Section 12.01, comply with all Legal Requirements which shall, in respect of the Demised Premises or the use and occupation thereof, or the abatement of any nuisance in, on or about the Demised Premises, impose any violation, order or duty on Landlord or Tenant; and Tenant shall pay all the costs, expenses, fines, penalties and damages which may be imposed upon Landlord or any Superior Lessor by reason of or arising out of Tenant's failure to fully and promptly comply with and observe the provisions of this Section 12.01. However, Tenant need not comply with any such law or requirement of any public authority so long as Tenant shall be contesting the validity thereof, or the applicability thereof to the Demised Premises, in accordance with Section 12.02. Any Legal Requirements with respect to the Building (inclusive of the Demised Premises) or the Common Areas which do not arise as the result of (i) Tenant's specific manner of use of the Demised Premises (or its subtenants licensees, agents or invitees) (in contradistinction to its general use of the Demised Premises for the Permitted Uses), (ii) the business of Tenant (or its subtenants licensees, agents or invitees) or (iii) Tenant's Work or any alterations or installations of Tenant (or its subtenants licensees, agents or invitees) shall be performed by Landlord and the cost thereof included in Operating Expenses, subject to the provisions of sub-section (viii) thereof. 12.02. Tenant may contest, by appropriate proceedings prosecuted diligently and in good faith, the validity, or applicability to the Demised Premises, of any Legal Requirement, provided that (a) Landlord shall not be subject to criminal penalty or to prosecution for a crime, and neither the Demised Premises nor any part thereof shall be subject to being condemned or vacated, by reason of non-compliance or otherwise by reason of such contest; (b) before the commencement of such contest, Tenant shall furnish to Landlord either (i) the bond of a surety company reasonably satisfactory to Landlord, which bond shall be, as to its provisions and form, reasonably satisfactory to Landlord, and 25 shall be in an amount at least equal to 125% of the cost of such compliance (as estimated by a reputable contractor designated by Landlord) and shall indemnify Landlord against the cost thereof and against all liability for damages, interest, penalties and expenses (including reasonable attorneys' fees and expenses), resulting from or incurred in connection with such contest or non-compliance, or (ii) other security in place of such bond reasonably satisfactory to Landlord; (c) such non-compliance or contest shall not constitute or result in any violation of any Superior Lease or Superior Mortgage, or if any such Superior Lease and/or Superior Mortgage shall permit such non-compliance or contest on condition of the taking of action or furnishing of security by Landlord, such action shall be taken and such security shall be furnished at the expense of Tenant; and (d) Tenant shall keep Landlord advised as to the status of such proceedings. Without limiting the application of the above, Landlord shall be deemed subject to prosecution for a crime if Landlord, or its managing agent, or any officer, director, partner, shareholder or employee of Landlord or its managing agent, as an individual, is charged with a crime of any kind or degree whatsoever, whether by service of a summons or otherwise, unless such charge is withdrawn before Landlord or its managing agent, or such officer, director, partner, shareholder or employee of Landlord or its managing agent (as the case may be) is required to plead or answer thereto. Notwithstanding anything contained in this Lease to the contrary, Tenant shall not file any Real Estate Tax Appeal with respect to the Land, Building or the Demised Premises. ARTICLE 13 - INSURANCE AND INDEMNITY 13.01. Landlord shall maintain or cause to be maintained All Risk insurance in respect of the Building and other improvements on the Land normally covered by such insurance (except for the property Tenant is required to cover with insurance under Section 13.02 and similar property of other tenants and occupants of the Building or buildings and other improvements which are on land neither owned by nor leased to Landlord) for the benefit of Landlord, any Superior Lessors, any Superior Mortgagees and any other parties Landlord may at any time and from time to time designate, as their interests may appear, but not for the benefit of Tenant, and shall maintain rent insurance as required by any Superior Lessor or any Superior Mortgagee. The All Risk insurance will be in the amounts required by any Superior Lessor or any Superior Mortgagee but not less than the amount sufficient to avoid the effect of the co-insurance provisions of the applicable policy or policies, and, notwithstanding the foregoing, in amounts, and with endorsements and deductibles, customarily maintained by landlords' of comparable first class office buildings. Landlord may, but shall not be required to also maintain any other forms and types of insurance which Landlord deems commercially reasonable in respect of the Building and Land. Landlord shall have the right to provide any insurance maintained or caused to be maintained by it under blanket policies. 13.02. Tenant shall maintain the following insurance: (a) commercial general liability insurance in respect of the Demised Premises and the conduct and operation of business therein, having a limit of liability not less than a $5,000,000. per occurrence for bodily injury or property damage. coverage to include but not be limited to premises/operations, completed operations, contractual liability and product liability, (b) automobile liability insurance covering all owned, hired and non-owned vehicles used by the Tenant in connection with the premises and any loading or unloading of such vehicles, with a limit of liability not less than $2,000,000 per accident and (c) worker's compensation and employers liability insurance as required by statutes, but in any event not less than 26 $500,000. for Employers Liability; (d) All Risk insurance in respect of loss or damage to Tenant's stock in trade, fixtures, furniture, furnishings, removable floor coverings, equipment, signs and all other property of Tenant in the Demised Premises in an amount equal to the full replacement value thereof as same might increase from time to time; and (e) such other insurance as Landlord may reasonably require. Such insurance shall include coverage for property of others in the care, custody and control of Tenant in amounts sufficient to cover the replacement value of such property, to the extent of Tenant's liability therefor. Landlord may at any time and from time to time (but not more than once every five (5) years) require that the limits for the general liability insurance to be maintained by Tenant be increased to the limits that new tenants in the Building are required by Landlord to maintain. Tenant shall deliver to Landlord and any additional insured(s) certificates for such fully paid-for policies upon execution hereof. Tenant shall procure and pay for renewals of such insurance from time to time before the expiration thereof, and Tenant shall deliver to Landlord and any additional insured(s) certificates therefor at least twenty (20) days before the expiration of any existing policy. Tenant shall, upon ten (10) Business Day's prior written request provide Landlord with copies of such insurance policies. Upon written request all such policies shall be issued by companies acceptable to Landlord, having a Bests Rating of not less than A, Class VII (or an S&P rating of A if requested by Landlord), and licensed to do business in New Jersey, and all such policies shall contain a provision whereby the same cannot be canceled unless Landlord and any additional insured(s) are given at least thirty (30) days' prior written notice of such cancellation. The policies and certificates of insurance (such certificates to be on Acord form 27 or 28 their applicable equivalent as reasonable requested by Landlord) to be obtained by Tenant pursuant to this Section 13.02 (other than workers compensation insurance) shall name Landlord as an additional insured and, at Landlord's request, shall also name any Superior Lessors or Superior Mortgagees as additional insureds, and the following phrase must be typed on the certificate of insurance: "Hartz Mountain Industries, Inc., and its respective subsidiaries, affiliates, associates, joint ventures, and partnerships, and (if Landlord has so requested) Superior Lessors and Superior Mortgagees are hereby named as additional insureds as their interests may appear. It is intended for this insurance to be primary and non-contributing." Tenant shall give Landlord at least twenty (20) days' prior written notice that any such policy is being canceled or replaced. 13.03. Tenant shall not do, permit or suffer to be done any act, matter, thing or failure to act in respect of the Demised Premises or use or occupy the Demised Premises or conduct or operate Tenant's business in any manner objectionable to any insurance company or companies whereby the fire insurance or any other insurance then in effect in respect of the Land and Building or any part thereof shall become void or suspended or whereby any premiums in respect of insurance maintained by Landlord shall be higher than those which would normally have been in effect for the occupancy contemplated under the Permitted Uses. In case of a breach of the provisions of this Section 13.03, in addition to all other rights and remedies of Landlord hereunder, Tenant shall (a) indemnify Landlord and the Superior Lessors and hold Landlord and the Superior Lessors harmless from and against any loss which would have been covered by insurance which shall have become void or suspended because of such breach by Tenant and (b) pay to Landlord any and all increases of premiums on any insurance, including, without limitation, rent insurance, resulting from any such breach. 13.04. Tenant shall indemnify and hold harmless Landlord and all Superior Lessors and its and their respective partners, joint venturers, directors, officers, agents, servants and employees from and against any and all claims arising from or in connection with (a) the conduct or management of the 27 Demised Premises or of any business therein, or any work or thing whatsoever done, or any condition created (other than by Landlord) in the Demised Premises during the Term or during the period of time, if any, prior to the Commencement Date that Tenant may have been given access to the Demised Premises; (b) any act, omission or negligence of Tenant or any of its subtenants or licensees or its or their partners, joint venturers, directors, officers, agents, employees or contractors; (c) any accident, injury or damage whatever (unless caused solely by Landlord's negligence) occurring in the Demised Premises; and (d) any breach or default by Tenant in the full and prompt payment and performance of Tenant's obligations under this Lease; together with all costs, expenses and liabilities incurred in or in connection with each such claim or action or proceeding brought thereon, including, without limitation, all attorneys' fees and expenses. In case any action or proceeding is brought against Landlord and/or any Superior Lessor and/or its or their partners, joint venturers, directors, officers, agents and/or employees by reason of any such claim, Tenant, upon notice from Landlord or such Superior Lessor, shall resist and defend such action or proceeding by counsel reasonably satisfactory to Landlord. Landlord shall indemnify and hold harmless Tenant and its partners, directors, officers, agents, servants and employees from and against any and all claims arising from any tortuous act or omission of Landlord, or negligence of Landlord or its agents or partners, joint ventures, directors, officers, or employees in the conduct or management of the Common Areas; together with all costs, expenses and liabilities incurred in or in connection with each such claim or action or proceeding brought thereon, including, without limitation, reasonable attorneys' fees and expenses; provided however that in no event shall Landlord or its agents or partners, joint ventures, directors, officers, or employees be responsible or liable for (and the forgoing indemnity and hold harmless excludes) any consequential or special damages. In the event any action or proceeding is brought against Tenant and/or its directors, officers, agents and/or employees by reason of any such claim, Landlord, upon notice from Tenant, shall resist and defend such action or proceeding by counsel reasonably satisfactory to Tenant. Counsel satisfactory to Landlord's insurance carrier shall be deemed satisfactory to Tenant for purposes of this paragraph. 13.05. Neither Landlord nor any Superior Lessor shall be liable or responsible for, and Tenant hereby releases Landlord and each Superior Lessor from, all liability and responsibility to Tenant and any person claiming by, through or under Tenant, by way of subrogation or otherwise, for any injury, loss or damage to any person or property in or around the Demised Premises or to Tenant's business irrespective of the cause of such injury, loss or damage, and Tenant shall require its insurers to include in all of Tenant's insurance policies which could give rise to a right of subrogation against Landlord or any Superior Lessor a clause or endorsement whereby the insurer waives any rights of subrogation against Landlord and such Superior Lessors or permits the insured, prior to any loss, to agree with a third party to waive any claim it may have against said third party without invalidating the coverage under the insurance policy. Landlord hereby releases Tenant from, all liability and responsibility to and any person claiming by, through or under Landlord, byway of subrogation with respect to matters covered by the All-Risk insurance policies carried by Landlord pursuant to Section 13.01 hereof which could give rise to a right of subrogation against Tenant and Landlord shall require its insurers to include in Landlord's All Risk insurance policies carried pursuant to Section 13.01 hereof which could give rise to a right of subrogation against Tenant a clause or endorsement whereby the insurer waives any rights of subrogation against Tenant or permits the insured, prior to any loss, to agree with a third party to waive any claim it may have against said third party without invalidating the coverage under the 28 insurance policy. ARTICLE 14 - RULES AND REGULATIONS 14.01. Tenant and its employees and agents shall faithfully observe and comply with the Rules and Regulations and such reasonable changes therein (whether by modification, elimination or addition) as Landlord at any time or times hereafter may make and communicate to Tenant, which in Landlord's judgment, shall be necessary for the reputation, safety, care or appearance of the Land and Building, or the preservation of good order therein, or the operation or maintenance of the Building or its equipment and fixtures, or the Common Areas; provided, however, that in case of any conflict or inconsistency between the provisions of this Lease and any of the Rules and Regulations, the provisions of this Lease shall control. Landlord shall not discriminatorily enforce any Rule or Regulation against Tenant, which Landlord is not enforcing, to the extent applicable, against the other tenants in the Building. Nothing in this Lease contained shall be construed to impose upon Landlord any duty or obligation to enforce the Rules and Regulations against any other tenant or any employees or agents of any other tenant, and Landlord shall not be liable to Tenant for violation of the Rules and Regulations by any other tenant or its employees, agents, invitees or licensees. ARTICLE 15 - ALTERATIONS 15.01. Tenant shall not make any structural alterations or additions to the Demised Premises, or make any holes or cuts in the walls (other than deminimus holes in the interior walls for the hanging of pictures in connection with customary office decoration), ceilings, roofs, or floors thereof, or change the exterior color or architectural treatment of the Demised Premises, or make any non-structural alterations costing Seventy-Five Thousand Dollars ($75,000.00) or more in the aggregate (herein referred to as the "Threshold Amount"), without On each occasion first obtaining the consent of Landlord; which consent with respect to non-structural alterations costing less than the Threshold Amount shall not be unreasonably withheld or delayed or conditioned. In all events Tenant shall submit to Landlord plans and specifications for such work at the time Landlord's consent is sought, or if no consent is required, prior to commencement of such proposed alterations. Tenant shall pay to Landlord, within twenty (20) days after invoice or notice, the reasonable cost and expense of Landlord in (a) reviewing said plans and specifications and (b) inspecting the alterations to determine whether the same are being performed in accordance with the approved plans and specifications and all Legal Requirements and Insurance Requirements, including, without limitation, the fees of any architect or engineer employed by Landlord for such purpose. Before proceeding with any permitted alteration which will cost more than $75,000 (exclusive of the costs of decorating work and items constituting Tenant's Property), as estimated by a reputable contractor reasonably approved by Landlord, Tenant shall obtain and deriver to Landlord either (i) a performance bond and a labor and materials payment bond (issued by a corporate surety licensed to do business in New Jersey), each in an amount equal to 125% of such estimated cost and in form satisfactory to Landlord, or (ii) such other security as shall be satisfactory to Landlord. Tenant shall fully and promptly comply with and observe the Rules and Regulations then in force in respect of the making of alterations. Any review or approval by Landlord of any plans and/or specifications with respect to any alterations is solely for Landlord's benefit, and 29 without any representation or warranty whatsoever to Tenant in respect of the adequacy, correctness or efficiency thereof or otherwise. 15.02. Tenant shall obtain all necessary governmental permits and certificates for the commencement and prosecution of permitted alterations and for final approval thereof upon completion (other than with respect to Landlord' s Work performed by Landlord or its contractors), and shall cause alterations to be performed in compliance therewith and with all applicable Legal Requirements and Insurance Requirements. Alterations shall be diligently performed in a good and workmanlike manner, using new materials and equipment at least equal in quality and class to the better of (a) the original installations of the Building, or (b) the then standards for the Building established by Landlord. Alterations shall be performed by contractors first approved by Landlord; provided, however, that any alterations in or to the mechanical, electrical, sanitary, heating, ventilating, air conditioning or other systems of the Building shall be performed only by the contractor(s) reasonably designated by Landlord. Alterations shall be made in such manner as not to unreasonably interfere with or delay and as not to impose any additional expense upon Landlord in the construction, maintenance, repair or operation of the Building; and if any such additional expense shall be incurred by Landlord as a result of Tenant's making of any alterations, Tenant shall pay any such additional expense within ten (10) days of demand. Throughout the making of alterations, Tenant shall carry, or cause to be carried, worker's compensation insurance in statutory limits and general liability insurance, with completed operation endorsement, for any occurrence in or about the Building, under which Landlord and its managing agent and any Superior Lessor whose name and address shall previously have been furnished to Tenant shall be named as parties insured, in such limits as Landlord may reasonably require, with insurers reasonably satisfactory to Landlord. Tenant shall furnish Landlord with reasonably satisfactory evidence that such insurance is in effect at or before the commencement of alterations and, on request, at reasonable intervals thereafter during the making of alterations. ARTICLE 16 - LANDLORD'S AND TENANT'S PROPERTY 16.01 All fixtures, equipment, improvements and appurtenances attached to or built into the Demised Premises at the commencement of or during the Term, whether or not by or at the expense of Tenant, shall be and remain a part of the Demised Premises, shall be deemed to be the property of Landlord and shall not be removed by Tenant, except as provided in Section 16.02. Further, any carpeting or other personal property in the Demised Premises on the Commencement Date, unless installed and paid for by Tenant, shall be and shall remain Landlord's property and shall not be removed by Tenant. 16.02. All movable partitions, business and trade fixtures, machinery and equipment, communications equipment and office equipment, whether or not attached to or built into the Demised Premises, which are installed in the Demised Premises by or for the account of Tenant without expense to Landlord and can be removed without structural damage to the Building and all furniture, furnishings, and other movable personal property owned by Tenant and located in the Demised Premises (collectively, "Tenant's Property") shall be and shall remain the property of Tenant and may be removed by Tenant at any time during the Term; provided that if any of the Tenant's Property is removed, Tenant shall repair or pay the cost of repairing any damage to the Demised Premises, the 30 Building or the Common Areas resulting from the installation and/or removal thereof. Any equipment or other property for which Landlord shall have granted any allowance or credit to Tenant shall not be deemed to have been installed by or for the account of Tenant without expense to Landlord, shall not be considered as the Tenant's Property and shall be deemed the property of Landlord. 16.03. At or before the Expiration Date or the date of any earlier termination of this Lease, or within fifteen (15) days after such an earlier termination date, Tenant shall remove from the Demised Premises all of the Tenant's Property (except such items thereof as Landlord shall have expressly permitted to remain, which property shall become the property of Landlord if not removed), and Tenant shall repair any damage to the Demised Premises, the Building and the Common Areas resulting from any installation and/or removal of the Tenant's Property. Any items of the Tenant's Property which shall remain in the Demised Premises after the Expiration Date or after a period of fifteen (15) days following an earlier termination date, may, at the option of Landlord, be deemed to have been abandoned, and in such case such items may be retained by Landlord as its property or disposed of by Landlord, without accountability, in such manner as Landlord shall determine at Tenant's Expense. Tenant shall not be required to remove any telecommunication and/or data cabling installed by, or on behalf, of Tenant, in the Demised Premises during the Term; provided such cabling is not in excess of the reasonable and customary cabling for general office use and was installed as part of a permitted alteration pursuant to Article 15 hereof. ARTICLE 17 - REPAIRS AND MAINTENANCE 17.01. Tenant shall, throughout the Term, take good care of the Demised Premises, the fixtures and appurtenances therein. Tenant shall be responsible for all repairs, interior and exterior, structural and nonstructural, ordinary and extraordinary, in and to the Demised Premises, and the Building (including the facilities and systems thereof) and the Common Areas the need for which arises out of (a) the performance or existence of the Tenant's Work or alterations, (b) the installation, use or operation of the Tenant's Property in the Demised Premises, (c) the moving of the Tenant's Property in or out of the Building, or (d) the act, omission, misuse or neglect of Tenant or any of its subtenants or its or their employees, agents, contractors or invitees. Tenant shall promptly replace all scratched, damaged or broken doors and glass in and about the Demised Premises and shall be responsible for all repairs, maintenance and replacement of wall and floor coverings in the Demised Premises and for the repair and maintenance of all sanitary and electrical fixtures and equipment therein. Tenant shall promptly make all repairs in or to the Demised Premises for which Tenant is responsible, and any repairs required to be made by Tenant to the mechanical, electrical, sanitary, heating, ventilating, air-conditioning or other systems of the Building shall be performed only by contractor(s) designated by Landlord. Any other repairs in or to the Building and the facilities and systems thereof for which Tenant is responsible shall be performed by Landlord, upon written notice to Tenant, at Tenant's expense; but Landlord may, at its option, before commencing any such work or at any time thereafter, require Tenant to furnish to Landlord such reasonable security, in form (including, without limitation, a bond issued by a corporate surety licensed to do business in New Jersey) and amount, as Landlord shall deem reasonably necessary to assure the payment for such work by Tenant. Tenant shall not permit or suffer the overloading of the floors of the Demised Premises beyond 80 pounds per square foot. 31 17.02. Landlord shall make all structural repairs and replacements to the Building, including, the facilities and systems thereof, roof and roof membrane and the exterior walls of the Building (except as hereinabove provided in Section 17.01 and except for those repairs and maintenance for which Tenant is responsible pursuant to any of the provisions of this Lease) and the cost thereof shall be included in Operating Expenses, for which Tenant shall pay Tenant's Fraction. Landlord shall keep and maintain the Common Areas in accordance with Section 7.01 hereof and the cost thereof shall be included in Operating Expenses, for which Tenant shall pay Tenant's Fraction. 17.03. Except as otherwise expressly provided in this Lease, Landlord shall have no liability to Tenant, nor shall Tenant's covenants and obligations under this Lease be reduced or abated in any manner whatsoever, by reason of any inconvenience, annoyance, interruption or injury to business arising from Landlord's doing any repairs, maintenance, or changes which Landlord is required or permitted by this Lease, or required by Law, to make in or to any portion of the Building. ARTICLE 18 - ELECTRIC ENERGY 18.01. Tenant shall purchase the electric energy required by it in the Demised Premises at its own expense on a direct-metered basis from the public utility servicing the Building, and Landlord shall permit the risers, conduits and feeders in the Building, to the extent available, suitable and safely capable, to be used for the purpose of transmitting such electric energy to the Demised Premises. Landlord shall not be liable for any failure, inadequacy or defect in the character or supply of electric current furnished to the Demised Premises. If Landlord is permitted by law to provide electric energy to the Demised Premises by re-registering meters sub-metering or otherwise and to collect any charges for electric energy, Landlord shall have the right to do so, in which event Tenant shall pay to Landlord upon receipt of bills therefor charges for electric energy provided the rates and charges for such electric energy shall not be more than the rates Tenant would be charged for electric energy if furnished directly to Tenant by the public utility which would otherwise have furnished electric energy (provided however that in the event of sub-metering, Tenant shall also pay to Landlord, as an Additional Charge, the cost of meter reading). Landlord represents to Tenant that the electrical installations servicing the Demised Premises is capable of furnishing six (6) watts (demand load) per rentable square foot of the Demised Premises. The cost of separately metering or sub-metering the Demised Premises shall be a component of Landlord's Work and applied against the Credit. 18.02. Tenant's use of electric energy in the Demised Premises shall not at any time exceed the capacity of any of the electrical conductors and equipment in or otherwise serving the Demised Premises. In order to insure that such capacity is not exceeded and to avert possible adverse effect upon the Building's electric service, Tenant shall not, without Landlord's prior consent in each instance (which shall not be unreasonably withheld), connect any fixtures, appliances or equipment to the Building's electric distribution system or make any alteration or addition to the electric system of the Demised Premises existing on the Commencement Date. Should Landlord grant such consent, all additional risers or other equipment required therefor shall be provided by Landlord and the cost thereof shall be paid by Tenant to Landlord within thirty (30) days after notice or invoice. 32 ARTICLE 19 - HEAT, VENTILATION AND AIR-CONDITIONING 19.01. So long as Tenant is not in default in the payment of Fixed Rent under this Lease beyond any applicable notice or cure period, Landlord shall maintain and operate the heating, ventilating and air-conditioning systems ("HVAC") serving the Demised Premises, and shall furnish HVAC in the Demised Premises as may be reasonably required (except as otherwise provided in this Lease and except for any special requirements of Tenant arising tram its particular use of the Demised Premises) for reasonably comfortable occupancy of the Demised Premises, during Business Hours on Business Days within the limits consistent with the standards typically maintained in comparable office buildings situated within the Development and/or the Village of Ridgefield Park. If Tenant shall require HVAC at any other time, Landlord shall furnish such service for such times upon not less than six (6) hours advance notice from Tenant, and Tenant shall pay to Landlord within ten (10) days of demand Landlord's then established charges therefor. As of the date of this Lease, Landlord's charge is thirty dollars ($30) per hour for overtime HVAC. 19.02. The performance by Landlord of its obligation under Section 19.01 in respect of HVAC is conditioned on the connected electric load within the Demised Premises not exceeding three and one-half (3 1/2) watts per usable square foot in the Demised Premises and the occupancy of the Demised Premises not exceeding one (I) person for each two hundred (200) square feet of Rentable Floor Area. Use of the Demised Premises, or any part thereof, in a manner exceeding the HVAC design conditions (including occupancy and connected electrical load), or rearrangement of partitioning which interferes with normal operation of the HVAC in the Demised Premises, or the use of computer or data processing machines or other machines or equipment, may require changes in the HVAC systems servicing the Demised Premises, in order to provide comfortable occupancy. Such changes, so occasioned, shall be made by Tenant, at its expense, as alterations in accordance with the provisions of Article 15, but only to the extent permitted and upon the conditions set forth in Article 15. ARTICLE 20 - OTHER SERVICES; SERVICE INTERRUPTION 20.01. So long as Tenant is not in default in the payment of Fixed Rent under this Lease beyond any applicable notice or cure period, Landlord shall provide elevator service to the Demised Premises during Business Hours on Business Days, and Landlord shall have at least one (1) elevator subject to call at all other times. The use of the elevators shall be subject to the Rules and Regulations. 20.02. So long as Tenant is not in default in the payment of Fixed Rent under this Lease beyond any applicable notice or cure period, Landlord shall cause the Demised Premises, including the exterior and the interior of the windows thereof, to be cleaned in a manner standard to the Building and in accordance with the standards set forth in Exhibit E. Tenant shall pay to Landlord within fifteen (15) days after invoice or written demand the costs incurred by Landlord for (a) extra cleaning work in the Demised Premises required because of (i) misuse or neglect on the part of Tenant or its subtenants or its or their employees or visitors, (ii) use of portions of the Demised Premises for preparation, serving, consumption of food or beverages, training rooms, data processing or reproducing operations, private lavatories or toilets or other special purposes requiring greater or more difficult cleaning work than 33 office areas, (iii) interior glass partitions or unusual quantity of interior glass surfaces, and (iv) non-building standard materials Or finishes installed by Tenant or at its request, and (b) removal from the Demised Premises and the Building of any refuse and rubbish of Tenant in excess of that ordinarily accumulated in business office occupancy or at times other than Landlord's standard cleaning times, and (c) the use of the Demised Premises by Tenant other than during Business Hours on Business Days if such use results in additional cleaning services. 20.03. Landlord, its cleaning contractor and their employees shall have access to the Demised Premises after 5:30 P.M. and before 8:00 A.M. and shall have the right to use, without charge therefor, all light, power and water in the Demised Premises reasonably required to clean the Demised Premises as required under Section 20.02. 20.04. So long as Tenant is not in default in the payment of Fixed Rent under this Lease beyond any applicable notice or cure period, Landlord shall furnish adequate hot and cold water to the Demised Premises for drinking, lavatory and cleaning purposes. If Tenant uses water for any other purpose Landlord may install and maintain, at Tenant's expense, meters to measure Tenant's consumption of cold water air and/or hot water for such other purpose. Tenant shall reimburse Landlord for the quantities of cold water and hot water shown on such meters within fifteen (15) days after invoice or written demand. 20.05. So long as Tenant is not in default in the payment of Fixed Rent under this Lease beyond any applicable notice or cure period, and provided Tenant is in occupancy of the Demised Premises under this Lease, Landlord shall provide a full time security guard posted in the lobby of Building on duty during Business Hours on Business Days. 20.06. So long as Tenant is not in default in the payment of Fixed Rent under this Lease beyond any applicable notice or cure period, and provided Tenant and/or its Affiliates, collectively, are in occupancy of not less than seventy-five (75%) percent of the Demised Premises under this Lease Landlord shall, subject to the last sentence of this Section 20.06, maintain or cause to be maintained during the Term a food service concession located within and serving the Building on Business Days during normal breakfast and lunch periods, serving limited breakfast and lunch fare, including, but not necessarily limited to, hot and cold beverages, breakfast foods, sandwiches, salads, limited hot entrees and the like. So long as Tenant is not in default in the payment of Fixed Rent under this Lease beyond any applicable notice or cure period, and provided Tenant and/or its Affiliates, collectively, are in occupancy of not less than seventy-five (75%) percent of the Demised Premises under this Lease, if for any reason the initial (or any successor or replacement) person(s) or entity operating such food service concession shall cease operations at the Building, Landlord agrees to diligently procure a replacement operator to resume a food service concession providing the services set forth in the immediately preceding sentence. ARTICLE 21 - ACCESS, CHANGES AND NAME 21.01. Except for the space within the inside surfaces of all walls, hung ceilings; floors, windows and doors bounding the Demised Premises, all of the Building, including, without limitation, 34 exterior Building walls, core corridor walls and doors and any core corridor entrance, any terraces or roofs adjacent to the Demised Premises, and any space in or adjacent to the Demised Premises used for shafts, stacks, pipes, conduits, fan rooms, ducts, electric or other utilities, sinks or other Building facilities and the use thereof, as well as access thereto through the Demised Premises for the purpose of operating, maintenance, decoration and repair, are reserved to Landlord. Landlord also reserves the right, to install, erect, use and maintain pipes, ducts and conduits in and through the Demised Premises, provided such work or installation is (i) is properly enclosed, (ii) does not reduce the rentable square footage of the Demised Premises, and (iii) is performed in a reasonably prompt manner so as to minimize any disturbance to Tenant's business operations, after not less ten (10) days advance notice (except that no notice shall be required in cases of emergency). Furthermore, Landlord, at its expense, shall substantially restore the Demised Premises to its condition immediately prior to Landlord's access to the Demised Premises. 21.02. Landlord and its agents shall have the right to enter and/or pass through the Demised Premises at any time or times, upon reasonable advance notice (except that in an emergency advance notice shall not be required), (a) to examine the Demised Premises and to show them to actual and prospective Superior Lessors, Superior Mortgagees, or prospective purchasers of the Building, and (b) to make such repairs, alterations, additions and improvements in or to the Demised Premises and/or in or to the Building or its facilities and equipment as Landlord is required or desires to make. Landlord shall be allowed to take all materials into and upon the Demised Premises that may be required in connection therewith, without any liability to Tenant and without any reduction of Tenant's obligations hereunder. During the period of twelve (12) months prior to the Expiration Date, Landlord and its agents may exhibit the Demised Premises to prospective tenants. 21.03. If at any time any windows of the Demised Premises are temporarily darkened or obstructed by reason of any repairs, improvements, maintenance and/or cleaning in or about the Building, or if any part of the Building or the Common Areas, other than the Demised Premises, is temporarily or permanently closed or inoperable, the same shall not be deemed a constructive eviction and shall not result in any reduction or diminution of Tenant's obligations under this Lease. 21.04. [Intentionally Omitted]. 21.05. Landlord reserves the right, at any time and from time to time, to make such changes, alterations, additions and improvements in or to the Building and the fixtures and equipment thereof as Landlord shall deem necessary or desirable. 21.06. Landlord may adopt any name for the Building. Landlord reserves the right to change the name and/or address of the Building at any time. ARTICLE 22 - MECHANICS' LIENS AND OTHER LIENS 22.01. Nothing contained in this Lease shall be deemed, construed or interpreted to imply any consent or agreement on the part of Landlord to subject Landlord's interest or estate to any liability under any mechanic's or other lien law. If any mechanic's or other lien or any notice of intention to file 35 a lien is filed against the Land, or any part thereof, or the Demised Premises, or any part thereof, for any work, labor, service or materials claimed to have been performed or furnished for or on behalf of Tenant or anyone holding any part of the Demised Premises through or under Tenant, Tenant shall cause the same to be canceled and discharged of record by payment, bond or order of a court of competent jurisdiction within fifteen (15) days after notice by Landlord to Tenant. ARTICLE 23 - NON-LIABILITY AND INDEMNIFICATION 23.01. Neither Landlord nor any partner, joint venturer, director, officer, agent, servant or employee of Landlord shall be liable to Tenant for any loss, injury or damage to Tenant or to any other Person, or to its or their property, irrespective of the cause of such injury, damage or loss, unless caused by or resulting from the negligence of Landlord, its agents, servants or employees in the operation or maintenance of the Land or Building without contributory negligence on the part of Tenant or any of its subtenants or licensees or its or their employees, agents or contractors. Provided, however that nothing contained in the preceding sentence shall be construed as limiting Landlord's or Tenant's obligations under Section 13.04 of this Lease. Further, neither Landlord nor any partner, joint venturer, director, officer, agent, servant or employee of Landlord shall be liable (a) for any such damage caused by other tenants or Persons in, upon or about the Land or Building, or caused by operations in construction of any private, public or quasi-public work; or (b) even if negligent, for consequential damages arising out of any loss of use of the Demised Premises or any equipment or facilities therein by Tenant or any Person claiming through or under Tenant. 23.02. Intentionally Omitted. 23.03. Notwithstanding any provision to the contrary, Tenant shall look solely to the estate and property of Landlord in and to the Land and Building (or the proceeds received by Landlord on a sale of such estate and property but not the proceeds of any financing or refinancing thereof) in the event of any claim against Landlord arising out of or in connection with this Lease, the relationship of Landlord and Tenant or Tenant's use of the Demised Premises or the Common Areas, and Tenant agrees that the liability of Landlord arising out of or in connection with this Lease, the relationship of Landlord and Tenant or Tenant's use of the Demised Premises or the Common Areas shall be limited to such estate and property of Landlord (or sale proceeds). No other properties or assets of Landlord or any partner, joint venturer, director, officer, agent, servant or employee of Landlord shall be subject to levy, execution or other enforcement procedures for the satisfaction of any judgement (or other judicial process) or for the satisfaction of any other remedy of Tenant arising out of, or in connection with, this Lease, the relationship of Landlord and Tenant or Tenant's use of the Demised Premises or the Common Areas and if Tenant shall acquire a lien on or interest in any other properties or assets by judgment or otherwise, Tenant shall within ten (10) days release such lien on or interest in such other properties and assets by executing, acknowledging and delivering to Landlord an instrument to that effect prepared by Landlord's attorneys. Tenant hereby waives the right of specific performance and any other remedy allowed in equity to the extent specific performance or such other remedy would cause Landlord to incur liability for the payment of money to Tenant, Landlord's liability for the payment of money being limited solely to the estate and property of Landlord in and to the Land and Building (or the proceeds received by Landlord on a sale of such estate and property but not the proceeds of any 36 financing or refinancing thereof) as provided in the first sentence of this Section. ARTICLE 24 - DAMAGE OR DESTRUCTION 24.01. If the Building or the Demised Premises shall be partially or totally damaged or destroyed by fire or other casualty (and if this Lease shall not be terminated as in this Article 24 hereinafter provided), Landlord shall repair the damage and restore and rebuild the Building and/or the Demised Premises (except for the Tenant's Property) with reasonable dispatch after notice to it of the damage or destruction and the collection of the insurance proceeds attributable to such damage. 24.02. Subject to the provisions of Section 24.05, if all or part of the Demised Premises shall be damaged or destroyed or rendered completely or partially untenantable on account of fire or other casualty, the Rent shall be abated or reduced, as the case may be, in the proportion that the untenantable area of the Demised Premises bears to the total area of the Demised Premises, for the period from the date of the damage or destruction to (a) the date the damage to the Demised Premises shall be substantially repaired, or (b) if the Building and not the Demised Premises is so damaged or destroyed, the date on which the Demised Premises shall be made tenantable; provided, however, should Tenant reoccupy a portion of the Demised Premises during the period the repair or restoration work is taking place and prior to the date that the Demised Premises are substantially repaired or made tenantable the Rent allocable to such reoccupied portion, based upon the proportion which the area of the reoccupied portion of the Demised Premises bears to the total area of the Demised Premises, shall be payable by Tenant from the date of such occupancy. 24.03. If (a) the Building or the Demised Premises shall be totally damaged or destroyed by fire or other casualty, or (b) the Building shall be so damaged or destroyed by fire or other casualty (whether or not the Demised Premises are damaged or destroyed) that its repair or restoration requires the expenditure, as estimated by a reputable contractor or architect designated by Landlord, of more than twenty percent (20%) (or ten percent [10%] if such casualty occurs during the last two [2] years of the Term) of the full insurable value of the Building immediately prior to the casualty, or (c) the Building shall be damaged or destroyed by fire or other casualty (whether or not the Demised Premises are damaged or destroyed) and either the loss shall not be covered by Landlord's insurance or the net insurance proceeds (after deducting all expenses in connection with obtaining such proceeds) shall, in the estimation of a reputable contractor or architect designated by Landlord be insufficient to pay for the repair or restoration work, then in either such case Landlord may terminate this Lease by giving Tenant notice to such effect within ninety (90) days after the date of the fire or other casualty which notice shall be effective thirty (30) days thereafter, and, provided Tenant is not in default of the payment of Rent, Landlord shall promptly return to Tenant the Security Deposit and any Rent prepaid for the period subsequent to the date of such casualty. 24.04. Tenant shall not be entitled to terminate this Lease and no damages, compensation or claim shall be payable by Landlord for inconvenience, loss of business or annoyance arising from any repair or restoration of any portion of the Demised Premises or of the Building pursuant to this Article 24. Landlord shall use its best efforts to make such repair or restoration promptly and in such manner as not unreasonably to interfere with Tenant's use and occupancy of the Demised Premises, but 37 Landlord shall not be required to do such repair or restoration work except during Business Hours on Business Days. 24.05. Notwithstanding any of the foregoing provisions of this Article 24, if by reason of some act or omission on the part of Tenant or any of its subtenants or its or their partners, directors, officers, servants, employees, agents or contractors, either (a) Landlord or any Superior Lessor or any Superior Mortgagee shall be unable to collect all of the insurance proceeds (including, without limitation, rent insurance proceeds) applicable to damage or destruction of the Demised Premises or the Building by fire or other casualty, or (b) the Demised Premises or the Building shall be damaged or destroyed or rendered completely or partially untenantable on account of fire or other casualty, then, without prejudice to any other remedies which may be available against Tenant, there shall be no abatement or reduction of the Rent. Further, nothing contained in this Article 24 shall relieve Tenant from any liability that may exist as a result of any damage or destruction by fire or other casualty. 24.06. Landlord will not carry insurance of any kind on the Tenant's Property, and, except as provided by law or by reason of Landlord's breach of any of its obligations hereunder, shall not be obligated to repair any damage to or replace the Tenant's Property. 24.07. The provisions of this Article 24 shall be deemed an express agreement governing any case of damage or destruction of the Demised Premises and/or Building by fire or other casualty, and any law providing for such a contingency in the absence of an express agreement, now or hereafter in force, shall have no application in such case. 24.08 In the event of (i) damage or destruction with respect to the Demised Premises which prevents the use and occupancy of more than fifty (50%) of the Demised Premises by Tenant, or (ii) damage or destruction with respect to the Building the repair or restoration of which requires the expenditure, as estimated by a reputable contractor or architect designated by Landlord, of more than twenty-five percent (25%) of the full insurable value of the Building immediately prior to the casualty, then in either of such events Landlord shall and Tenant (provided such damage or destruction prevents the use and occupancy of the Demised Premises by Tenant) shall have the right to request within thirty (30) days after such event the Architect to determine the estimated time for restoration. The Landlord shall cause the Architect to provide notice to Landlord and Tenant of such determination (the "Architect's Notice") within thirty (30) days after notice from Landlord or Tenant requesting such determination. If the Architect determines that the restoration of referred to above is estimated to take more than eighteen (18) months from the date of the casualty (or more than six (6) months if such damage or destruction occurs in the last year of the Term) (such applicable restoration period hereinafter referred to as the "Applicable Restoration Period"), Landlord and Tenant shall each have the right to terminate this Lease, upon thirty (30) days prior written notice to the other, given within thirty (30) days of the Architect's Notice (provided, however that Tenant's right to terminate shall be conditioned upon (i) Tenant not being in monetary or material non-monetary default under this Lease beyond any applicable notice and cure period (and in any event curing such default(s) prior to termination) and (ii) Tenant being prevented from using and occupying the Demised Premises or portion thereof affected for a period of not less than eighteen (18) months as reasonably estimated by the Architect (or more than six (6) months from the date of casualty if such damage or destruction occurs in the last year of the Term) 38 and (iii) subject to nullification if Landlord completes such restoration prior to the expiration of thirty days after receipt by Landlord of the notice of termination); In the event this Lease is not terminated pursuant to the foregoing paragraph and Landlord fails to substantially complete restoration of the Building within the Applicable Restoration Period (subject to extension by Landlord as the result of Unavoidable Delay), Tenant shall have the right, as its sole remedy, to cancel and terminate this Lease; upon thirty (30) days prior written notice to Landlord, given within thirty (30) days after the expiration of the Applicable Restoration Period (provided, however that Tenant's right to terminate shall be conditioned upon (i) Tenant not being in monetary or material non-monetary default under this Lease beyond any applicable notice and cure period (and in any event curing such default(s) prior to termination) and (ii) Tenant being prevented from using and occupying the Demised Premises or portion thereof affected for a period of not less than eighteen (18) months as reasonably estimated by the Architect (or more than six (6) months from the date of casualty if such damage or destruction occurs in the last year of the Term) and (iii) subject to nullification if Landlord completes such restoration prior to the expiration of thirty days after receipt by Landlord of the notice of termination). In the event this Lease is terminated pursuant to this section 24.08, Landlord shall, provided Tenant is not in default of the payment of Rent, promptly return to Tenant the Security Deposit and any Rent prepaid for the period subsequent to the date of such casualty. Landlord's right to terminate the Lease pursuant to this Section 24.08 shall be in addition to and not in limitation of Landlord's other rights pursuant to this Article 24. Nothing contained herein shall be construed as limiting Landlord's right to collect the full amount of the proceeds of rent insurance or business interruption insurance. ARTICLE 25 - EMINENT DOMAIN 25.01 If the whole of the Demised Premises shall be taken by any public or quasi-public authority under the power of condemnation, eminent domain or expropriation, or in the event of conveyance of the whole of the Demised Premises in lieu thereof, this Lease shall terminate as of the day possession shall be taken by such authority. If 25% or less of the Rentable Floor Area of the Demised Premises shall be so taken or conveyed, this Lease shall terminate only in respect of the part so taken or conveyed as of the day possession shall be taken by such authority. If more than 25% of the Rentable Floor Area of the Demised Premises shall be so taken or conveyed, this Lease shall terminate only in respect of the part so taken or conveyed as of the day possession shall be taken by such authority, but either party shall have the right to terminate this Lease upon notice given to the other party within 30 days after such taking possession. If more than 25% of the Rentable Floor Area of the Building shall be so taken or conveyed, Landlord may, by notice to Tenant, terminate this Lease as of the day possession shall be taken. If so much of the parking facilities shall be so taken or conveyed that the number of parking spaces necessary, in Landlord's judgment, for the continued operation of the Building shall not be available, Landlord shall, by notice to Tenant, terminate this Lease as of the day possession shall be taken. If this Lease shall continue in effect as to any portion of the Demised Premises not so taken or conveyed, the Rent shall be computed as of the day possession shall be taken on the basis of the remaining Rentable Floor Area of the Demised Premises. Except as specifically provided herein, in the event of any such taking or conveyance there shall be no reduction in Rent. If this Lease shall continue in effect, Landlord shall, at its expense, but shall be obligated only to the 39 extent of the net award or other compensation (after deducting all expenses in connection with obtaining same) available to Landlord for the improvements taken or conveyed (excluding any award or other compensation for land or for the unexpired portion of the term of any Superior Lease), make all necessary alterations so as to constitute the remaining Building a complete architectural and tenantable unit, except for the Tenant's Property, and Tenant shall make all alterations or replacements to the Tenant's Property and decorations in the Demised Premises. All awards and compensation for any taking or conveyance, whether for the whole or a part of the Land or Building, the Demised Premised or otherwise, shall be the property of Landlord, and Tenant hereby assigns to Landlord all of Tennant's right, title and interest in and to any and all such awards and compensation, including, without limitation, any award or compensation for the value of the unexpired portion of the Term. Tenant shall be entitled to claim, prove and receive in the condemnation proceeding such award or compensation as may be allowed for the Tenant's Property and for loss of business, good will, and depreciation or injury to and cost of removal of the Tenant's Property, but only if such award or compensation shall be made by the condemning authority in addition to, and shall not result in a reduction of, the award or compensation made by it to Landlord. 25.02. If the temporary use or occupancy of all or any part of the Demised Premises shall be taken during the Term, Tenant shall be entitled, except as hereinafter set forth, to receive that portion of the award or payment for such taking which represents compensation for the use and occupancy of the Demised Premises, for the taking of the Tenant's Property and for moving expenses, and Landlord shall be entitled to receive that portion which represents reimbursement for the cost of restoration of the Demised Premises. This Lease shall be and remain unaffected by such taking and Tenant shall continue to be responsible for all of its obligations hereunder insofar as such obligations are not affected by such taking and shall continue to pay the Rent in full when due. If the period of temporary use or occupancy shall extend beyond the Expiration Date, that part of the award or payment which represents compensation for the use and occupancy of the Demised Premises (or a part thereof) shall be divided between Landlord and Tenant so that Tenant shall receive (except as otherwise provided below) so much thereof as represents compensation for the period up to and including the Expiration Date and Landlord shall receive so much thereof as represents compensation for the period after the Expiration Date. All monies to be paid to Tenant as, or as part of, an award or payment for temporary use and occupancy for a period beyond the date to which the Rent has been paid shall be received, held and applied by the first Superior Mortgagee (or if there is no Superior Mortgagee, by Landlord as a trust fund) for payment of the Rent becoming due hereunder. ARTICLE 26 - SURRENDER 26.01. On the Expiration Date, or upon any earlier termination of this Lease, or upon any re-entry by Landlord upon the Demised Premises, Tenant shall quit and surrender the Demised Premises to Landlord "broom-clean" and in good order, condition and repair, except for ordinary wear and tear and such damage or destruction as Landlord is required to repair or restore under this Lease, and Tenant shall remove all of Tenant's Property therefrom except as otherwise expressly provided in this Lease. 26.02. If Tenant remains in possession of the Demised Premises after the expiration of the Term, Tenant shall be deemed to be occupying the Demised Premises at the sufferance of Landlord 40 subject to all of the provisions of this Lease, except that the monthly Fixed Rent shall be twice the Fixed Rent in effect during the last month of the Term. 26.03. No act or thing done by Landlord or its agents shall be deemed an acceptance of a surrender of the Demised Premises, and no agreement to accept such surrender shall be valid unless in writing and signed by Landlord. ARTICLE 27 - CONDITIONS OF LIMITATION 27.01. This Lease is subject to the limitation that whenever Tenant or any Guarantor (a) shall make an assignment for the benefit of creditors, or (b) shall commence a voluntary case or have entered against it an order for relief under any chapter of the Federal Bankruptcy Code (Title 11 of the United States Code) or any similar order or decree under any federal or state law, now in existence, or hereafter enacted having the same general purpose, and such order or decree shall have not been stayed or vacated within 30 days after entry, or (c) shall cause, suffer, permit or consent to the appointment of a receiver, trustee, administrator, conservator, sequestrator, liquidator or similar official in any federal, state or foreign judicial or nonjudicial proceeding, to hold, administer and/or liquidate all or substantially all of its assets, and such appointment shall not have been revoked, terminated, stayed or vacated and such official discharged of his duties within 30 days of his appointment, then Landlord, at any time after the occurrence of any such event, may give Tenant a notice of intention to end the Term at the expiration of five (5) days from the date of service of such notice of intention, and upon the expiration of said five (5) day period, whether or not the Term shall theretofore have commenced, this Lease shall terminate with the same effect as if that day were the expiration date of this Lease, but Tenant shall remain liable for damages as provided in Article 29. 27.02. This Lease is subject to the further limitations that: (a) if Tenant shall default in the payment of any Rent, or (b) if Tenant shall, whether by action or inaction, be in default of any of its obligations under this Lease (other than a default in the payment of Rent) and such default shall continue and not be remedied within fifteen (15) days after Landlord shall have given to Tenant a notice specifying the same, or, in the case of a default which cannot with due diligence be cured within a period of fifteen (15) days and the continuance of which for the period required for cure will not subject Landlord or any Superior Lessor to prosecution for a crime (as more particularly described in the last sentence of Section 12.02) or termination of any Superior Lease or foreclosure of any Superior Mortgage, if Tenant shall not, (i) within said fifteen (15) day period advise Landlord of Tenant's intention to take all steps necessary to remedy such default, (ii) duly commence within said fifteen (15) day period, and thereafter diligently prosecute to completion all steps necessary to remedy the default, and (iii) complete such remedy within a reasonable time after the date of said notice by Landlord, or (c) if any event shall occur or any contingency shall arise whereby this Lease would, by operation of law or otherwise, devolve upon or pass to any person, firm or corporation other than Tenant, except as expressly permitted by Article 11, or (d) if Tenant shall vacate or abandon the Demised Premises, then in any of said cases Landlord may give to Tenant a notice of intention to end the Term at the expiration of five (5) days from the date of the service of such notice of intention, and upon the expiration of said five (5) days, whether or not the Term shall theretofore have commenced, this Lease shall terminate with the same effect as if that day were the expiration date of this Lease, but Tenant shall remain liable 41 for damages as provided in Article 29. ARTICLE 28 - RE-ENTRY BY LANDLORD 28.01. If this Lease shall terminate as provided in Article 27, Landlord or Landlord's agents and employees may immediately or at any time thereafter re-enter the Demised Premises, or any part thereof, either by summary dispossess proceedings or by any suitable action or proceeding at law without being liable to indictment, prosecution or damages therefor, and may repossess the same, and may remove any Person therefrom, to the end that Landlord may have, hold and enjoy the Demised Premises. The word "re-enter," as used herein, is not restricted to its technical legal meaning. If this Lease is terminated under the provisions of Article 27, or if Landlord shall re-enter the Demised Premises under the provisions of this Article 28, or in the event of the termination of this Lease, or of re-entry, by or under any summary dispossess or other proceedings or action or any provision of law by reason of default hereunder on the part of Tenant, Tenant shall thereupon pay to Landlord the Rent payable up to the time of such termination of this Lease, or of such recovery of possession of the Demised Premises by Landlord, as the case may be, and shall also pay to Landlord damages as provided in Article 29. 28.02. In the event of a breach or threatened breach by Tenant of any of its obligations under this Lease, Landlord shall also have the right of injunction. The special remedies to which Landlord may resort hereunder are cumulative and are not intended to be exclusive of any other remedies to which Landlord may lawfully be entitled at any time and Landlord may invoke any remedy allowed at law or in equity as if specific remedies were not provided for herein. 28.03. If this Lease shall terminate under the provisions of Article 27, or if Landlord shall re-enter the Demised Premises under the provisions of this Article 28, or in the event of the termination of this Lease, or of re-entry, by or under any summary dispossess or other proceeding or action or any provision of law by reason of default hereunder on the part of Tenant, Landlord shall be entitled to retain all monies, if any, paid by Tenant to Landlord, whether as Advance Rent, security or otherwise, but such monies shall be credited by Landlord against any Rent due from Tenant at the time of such termination or re-entry or, at Landlord's option, against any damages payable by Tenant under Article 29 or pursuant to law. ARTICLE 29 - DAMAGES 29.01. If this Lease is terminated under the provisions of Article 27, or if Landlord shall re-enter the Demised Premises under the provisions of Article 28, or in the event of the termination of this Lease, or of re-entry, by or under any summary dispossess or other proceeding or action or any provision of law by reason of default hereunder on the part of Tenant, Tenant shall pay as Additional Charges to Landlord, at the election of Landlord, either or any combination of such damages as Landlord may be entitled as a matter of Law, or in equity or by contract, including but not limited to: sums equal to the Fixed Rent and the Additional Charges which would have been payable by 42 Tenant had this Lease not so terminated, or had Landlord not so re-entered the Demised Premises, payable upon the due dates therefor specified herein following such termination or such re-entry and until the Expiration Date, provided, however, that if Landlord shall relet the Demised Premises during said period, Landlord shall credit Tenant with the net rents received by Landlord from such reletting, such net rents to be determined by first deducting from the gross rents as and when received by Landlord from such reletting the expenses incurred or paid by Landlord in terminating this Lease or in re-entering the Demised Premises and in securing possession thereof, as well as the expenses of reletting, including, without limitation, altering and preparing the Demised Premises for new tenants, brokers' commissions, legal fees, and all other expenses properly chargeable against the Demised Premises and the rental therefrom, it being understood that any such reletting may be for a period shorter or longer than the period ending on the Expiration Date; but in no event shall Tenant be entitled to receive any excess of such net rents over the sums payable by Tenant to Landlord hereunder, nor shall Tenant be entitled in any suit for the collection of damages pursuant to this subsection (b) to a credit in respect of any rents from a reletting, except to the extent that such net rents are actually received by Landlord. If the Demised Premises or any part thereof should be relet in combination with other space, then proper apportionment on a square foot basis shall be made of the rent received from such reletting and of the expenses of reletting; or If the Demised Premises or any part thereof should be re-let by Landlord before presentation of proof of such damages to any court, commission or tribunal, the amount of rent reserved upon such re-letting shall, prima facie, be the fair and reasonable rental value for the Demised Premises, or part thereof, so re-let during the term of the re-letting. Landlord shall not be liable in any way whatsoever for its failure to re-let the Demised Premises or any part thereof, or if the Demised Premises or any part thereof are re-let, for its failure to collect the rent under such re-letting, and no such failure to re-let or failure to collect rent shall release or affect Tenant's liability for damages or otherwise under this Lease. Landlord shall use commercially reasonable efforts to re-let the Demised Premises to mitigate Landlord's damages. For the purposes hereof either of the following shall create an irrebuttable presumption that Landlord has fulfilled such obligation: (a) Landlord shall (i) include the availability of the Demised Premises in Landlord's monthly listing to brokers (if any), commencing with the first such report (if any) issued following Landlord's recovery of possession of the Demised Premises, and ending upon re-leasing of the Demised Premises; and (ii) include the availability of the Demised Premises in Landlord's periodic real estate guide or website (if any), following Landlord's recovery of possession of the Demised Premises, and ending upon re-leasing of the Demised Premises; and (iii) shall hold an "Open House" for the Demised Premises within forty-five (45) days of Landlord's recovery of possession of the Demised Premises; or (b) Landlord may engage an independent commercial real estate broker to re-let the Demised Premises, the cost and expense of which shall be an element of Landlord's damages in addition to any other damages recoverable pursuant to Section 29.01 hereof. Nothing contained herein shall require Landlord to re-let the Demised Premises prior to or with any preference over the leasing of any other similar premises of Landlord or any affiliate of Landlord, nor shall any rental of such other premises reduce the damages which Landlord would be entitled to recover from Tenant. In the event Tenant, on behalf of itself or any and all persons claiming through or under Tenant, attempts to raise a defense or assert any affirmative obligations on Landlord's part to mitigate such damages or re-let the Demised Premises other than as provided herein, Tenant shall reimburse Landlord for any costs and expenses incurred by Landlord as a result of any such defense or assertion, 43 including but not limited to Landlord's attorneys' fees incurred in connection therewith. 29.02. Suit or suits for the recovery of such damages or, any installments thereof, may be brought by Landlord at any time and from time to time at its election, and nothing contained herein shall be deemed to require Landlord to postpone suit until the date when the Term would have expired if it had not been so terminated under the provisions of Article 27, or under any provision of law, or had Landlord not re-entered the Demised Premises. Nothing herein contained shall be construed to limit or preclude recovery by Landlord against Tenant of any sums or damages to which, in addition to the damages particularly provided above, Landlord may lawfully be entitled by reason of any default hereunder on the part of Tenant. Nothing herein contained shall be construed to limit or prejudice the right of Landlord to prove for and obtain as damages by reason of the termination of this Lease or re-entry of the Demised Premises for the default of Tenant under this Lease, an amount equal to the maximum allowed by any statute or rule of law in effect at the time, whether or not such amount be greater than, equal to, or less than any of the sums referred to in Section 29.01. 29.03. In addition, if this Lease is terminated under the provisions of Article 27, or if Landlord shall re-enter the Demised Premises under the provisions of Article 28, Tenant covenants that: (a) the Demised Premises then shall be in the same condition as that in which Tenant has agreed to surrender the same to Landlord at the Expiration Date; (b) Tenant shall have performed prior to any such termination any obligation of Tenant contained in this Lease for the making of any alteration or for restoring or rebuilding the Demised Premises or the Building, or any part thereof; and (c) for the breach of any covenant of Tenant set forth above in this Section 29.03, Landlord shall be entitled immediately, without notice or other action by Landlord, to recover, and Tenant shall pay, as and for liquidated damages therefor, the cost of performing such covenant (as reasonably estimated by an independent contractor selected by Landlord). 29.04. In addition to any other remedies Landlord may have under this Lease, and without reducing or adversely affecting any of Landlord's rights and remedies under this Article 29, if any Rent or damages payable hereunder by Tenant to Landlord are not paid as and when due, the same shall bear interest at the Late Payment Rate or the maximum rate permitted by law, whichever is less, from the due date thereof until paid, and the amounts of such interest shall be Additional Charges hereunder. 29.05. In addition to any remedies which Landlord may have under this Lease, if there shall be a default hereunder by Tenant which shall not have been remedied within the applicable grace period, Landlord shall not be obligated to furnish to Tenant or the Demised Premises any HVAC services outside of Business Hours or Business Days, or any extra or additional cleaning services; and the discontinuance of any one or more such services shall be without liability by Landlord to Tenant and shall not reduce, diminish or otherwise affect any of Tenant's covenants and obligations under this Lease. ARTICLE 30 - AFFIRMATIVE WAIVERS 30.01. Tenant, on behalf of itself and any and all persons claiming through or under Tenant, does hereby waive and surrender all right and privilege which it, they or any of them might have under 44 or by reason of any present or future law, to redeem the Demised Premises or to have a continuance of this Lease after being dispossessed or ejected from the Demised Premises by process of law or under the terms of this Lease or after the termination of this Lease as provided in this Lease. 30.02. Landlord and Tenant hereby waive trial by jury in any action, proceeding or counterclaim brought by either against the other on any matter whatsoever arising out of or in any way connected with this Lease, the relationship of Landlord and Tenant, and Tenant's use or occupancy of the Demised Premises and use of the Common Area, including, without limitation, any claim of injury or damage, and any emergency and other statutory remedy with respect thereto. Tenant shall not interpose any counterclaim of any kind in any action or proceeding commenced by Landlord to recover possession of the Demised Premises. ARTICLE 31 - NO WAIVERS 31.01. The failure of either party to insist in any one or more instances upon the strict performance of any one or more of the obligations of this Lease, or to exercise any election herein contained, shall not be construed as a waiver or relinquishment for the future of the performance of such one or more obligations of this Lease or of the right to exercise such election, but the same shall continue and remain in full force and effect with respect to any subsequent breach, act or omission. The receipt by Landlord of Fixed Rent or Additional Charges with knowledge of breach by Tenant of any obligation of this Lease shall not be deemed a waiver of such breach. ARTICLE 32 - CURING TENANT'S DEFAULTS 32.01. If Tenant shall default in the performance of any of Tenant's obligations under this Lease, Landlord, without thereby waiving such default, may (but shall not be obligated to) perform the same for the account and at the expense of Tenant, without notice in a case of emergency, and in any other case only if such default continues after the expiration of fifteen (15) days from the date Landlord gives Tenant notice of the default. Charges for any expenses incurred by Landlord in connection with any such performance by it for the account of Tenant, and charges reasonably incurred for all costs, expenses and disbursements of every kind and nature whatsoever, including reasonable attorneys' fees and expenses, involved in collecting or endeavoring to collect the Rent or any part thereof or enforcing or endeavoring to enforce any rights against Tenant or Tenant's obligations hereunder, under or in connection with this Lease or pursuant to law, including any such cost, expense and disbursement involved in instituting and prosecuting summary proceedings or in recovering possession of the Demised Premises after default by Tenant or upon the expiration of the Term or sooner termination of this Lease, and interest on all sums advanced by Landlord under this Article at the Late Payment Rate or the maximum rate permitted by law, whichever is less, shall be payable by Tenant and may be invoiced by Landlord to Tenant monthly, or immediately, or at any time, at Landlord's option, and such amounts shall be due and payable within ten (10) days of demand. 45 ARTICLE 33 - BROKER 33.01. Tenant and Landlord each represents to the other that no broker except the Broker was instrumental in bringing about or consummating this Lease and that they respectively had no conversations or negotiations with any broker except the Broker concerning the leasing of the Demised Premises. Tenant and Landlord each agrees to indemnify and hold harmless the other against and from any claims by any Person claiming to have dealt with or on behalf of the indemnifying party for any brokerage commissions and all costs, expenses and liabilities in connection therewith, including, without limitation, reasonable attorneys' fees and expenses, arising. out of any conversations or negotiations had by the indemnifying party with any broker other than the Broker. Landlord shall pay any brokerage commissions due the Broker pursuant to a separate agreement between Landlord and the Broker. ARTICLE 34 - NOTICES 34.01. Any notice, statement, demand, consent, approval or other communication required or permitted to be given, rendered or made by either party to the other, pursuant to this Lease or pursuant. to any applicable Legal Requirement, shall be in writing and shall be deemed to have been properly given, rendered or made only if hand delivered (with an acknowledged written receipt) or sent by United States registered or certified mail, return receipt requested, or by a nationally recognized courier service, addressed to the other party at the addresses hereinabove set forth (except that after the Commencement Date, Tenant's address, unless Tenant shall give written notice to the contrary, shall be the Building), and as to Landlord, to the attention of General Counsel with a concurrent notice to the attention of Controller, and shall be deemed to have been given, rendered or made, if by hand delivery, when so delivered, if by United States postal mail, on the second Business Day after the day so mailed, unless mailed outside the State of New Jersey, in which case it shall be deemed to have been given, rendered or made on the third Business Day after the day so mailed, and if by overnight delivery, on the date of delivery. Either party may, by notice as aforesaid, designate a different address or addresses for notices, statements, demands, consents, approvals or other communications intended for it. In addition, upon and to the extent requested by Landlord in writing, copies of notices shall be sent to the Superior Mortgagee. ARTICLE 35 - ESTOPPEL CERTIFICATES 35.01. Tenant and Landlord shall, at any time and from time to time, as requested by the other, upon not less than ten (10) days' prior notice, execute and deliver to the other or upon request of Landlord to a Superior Mortgagee or Superior Lessor a statement certifying that this Lease is unmodified and in full force and effect (or if there have been modifications, that the same is in full force and effect as modified and stating the modifications), certifying the dates to which the Fixed Rent and Additional Charges have been paid, stating whether or not, to the best knowledge of the party giving the statement, the requesting party is in default in performance of any of its obligations under this Lease, and, if so, specifying each such default of which the party giving the statement shall have knowledge, and stating whether or not, to the best knowledge of the party giving the statement, any 46 event has occurred which with the giving of notice or passage of time, or both, would constitute such a default of the requesting party, and, if so, specifying each such event; any such statement delivered pursuant hereto shall be deemed a representation and warranty to be relied upon by the party requesting the certificate and by others with whom such party may be dealing, regardless of independent investigation. Tenant also shall include in any such statement such other information concerning this Lease as Landlord may reasonably request. ARTICLE 36 - ARBITRATION 36.01. Landlord may at any time request arbitration, and Tenant may at any time when not in default in the payment of any Rent request arbitration, of any matter in dispute but only where arbitration is expressly provided for in this Lease. The party requesting arbitration shall do so by giving notice to that effect to the other party, specifying in said notice the nature of the dispute, and said dispute shall be determined in Newark, New Jersey, by a single arbitrator, in accordance with the rules then obtaining of the American Arbitration Association (or any comparable organization designated by Landlord and Tenant). The award in such arbitration may be enforced on the application of either party by the order or judgment of a court of competent jurisdiction. The fees and expenses of any arbitration shall be borne by the parties equally, but each party shall bear the expense of its own attorneys and experts and the additional expenses of presenting its own proof. If Tenant gives notice requesting arbitration as provided in this Article, Tenant shall simultaneously serve a duplicate of the notice on each Superior Mortgagee and Superior Lessor whose name and address shall previously have been furnished to Tenant, and such Superior Mortgagees and Superior Lessor shall have the right to participate in such arbitration. ARTICLE 37 - MEMORANDUM OF LEASE 37.01. Tenant shall not record this Lease. However, at the request of Landlord, Tenant shall within ten (10) days execute, acknowledge and deliver to Landlord a memorandum of lease in respect of this Lease sufficient for recording. Such memorandum shall not be deemed to change or otherwise affect any of the obligations or provisions of this Lease. Whichever party records such memorandum of Lease shall pay all recording costs and expenses, including any taxes that are due upon such recording. ARTICLE 38 - [Intentionally Omitted] ARTICLE 39 - MISCELLANEOUS 39.01. Tenant expressly acknowledges and agrees that Landlord has not made and is not making, and Tenant, in executing and delivering this Lease, is not relying upon, any warranties, representations, promises or statements, except to the extent that the same are expressly set forth in this Lease or in any other written agreement(s) which may be made between the parties concurrently with the execution and delivery of this Lease. All understandings and agreements heretofore had between 47 the parties are merged in this Lease and any other written agreement(s) made concurrently herewith, which alone fully and completely express the agreement of the parties and which are entered into after full investigation. Neither party has relied upon any statement or representation not embodied in this Lease or in any other written agreement(s) made concurrently herewith. The submission of this Lease to Tenant does not constitute by Landlord a reservation of, or an option to Tenant for, the Demised Premises, or an offer to lease on the terms set forth herein and this Lease shall become effective as a lease agreement only upon execution and delivery thereof by Landlord and Tenant. 39.02. No agreement shall be effective to change, modify, waive, release, discharge, terminate or effect an abandonment of this Lease, in whole or in part, unless such agreement is in writing, refers expressly to this Lease and is signed by the party against whom enforcement of the change, modification, waiver, release, discharge, termination or effectuation of abandonment is sought. 39.03. If Tenant shall at any time request Landlord to sublet or let the Demised Premises for Tenant's account, Landlord or its agent is authorized to receive keys for such purposes without releasing Tenant from any of its obligations under this Lease, and Tenant hereby releases Landlord of any liability for loss or damage to any of the Tenant's Property in connection with such subletting or letting. 39.04. Except as otherwise expressly provided in this Lease, the obligations under this Lease shall bind and benefit the successors and assigns of the parties hereto with the same effect as if mentioned in each instance where a party is named or referred to; provided, however, that (a) no violation of the provisions of Article 11 shall operate to vest any rights in any successor or assignee of Tenant and (b) the provisions of this Section 39.04 shall not be construed as modifying the conditions of limitation contained in Article 27. 39.05. Except for Tenant's obligations to pay Rent, the time for Landlord or Tenant, as the case may be, to perform any of its respective obligations hereunder shall be extended if and to the extent that the performance thereof shall be prevented due to any Unavoidable Delay. Except as expressly provided to the contrary, the obligations of Tenant hereunder shall not be affected, impaired or excused, nor shall Landlord have any liability whatsoever to Tenant, (a) because Landlord is unable to fulfill, or is delayed in fulfilling, any of its obligations under this Lease due to any of the matters set forth in the first sentence of this Section 39.05, or (b) because of any failure or defect in the supply, quality or character of electricity, water or any other utility or service furnished to the Demised Premises for any reason beyond Landlord's reasonable control. Notwithstanding the foregoing in the event of an interruption of any of the services provided by Landlord in Articles 18, 19 and 20, Landlord shall use commercially reasonable efforts to cause such services to be restored in a reasonably prompt and diligent manner, and, in the event such services are interrupted for a period in excess of five (5) consecutive days, and Tenant's use of the Demised Premises is prevented thereby, Tenant shall be entitled to a per diem abatement of Rent for each day thereafter Until the services are so . restored, to the extent Landlord is entitled to collect the proceeds of rent insurance with respect thereto. 39.06. Any liability for payments hereunder (including, without limitation, Additional Charges) shall survive the expiration of the Term or earlier termination of this Lease. 48 39.07. If Tenant shall request Landlord's consent and Landlord shall fail or refuse to give such consent, Tenant shall not be entitled to any damages for any withholding by Landlord of its consent; Tenant's sole remedy shall be an action for specific performance or injunction, and such remedy shall be available only in those cases where Landlord has expressly agreed in writing not to unreasonably withhold or delay its consent or where as a matter of law Landlord may not unreasonably withhold its consent. 39.08. If an excavation shall be made upon land adjacent to or under the Building, or shall be authorized to be made, Tenant shall afford to the Person causing or authorized to cause such excavation, license to enter the Demised Premises for the purpose of performing such work as said Person shall reasonably deem necessary or desirable to preserve and protect the Building from injury or damage and to support the same by proper foundations, without any claim for damages Or liability against Landlord and without reducing or otherwise affecting Tenant's obligations under this Lease provided (i) such entry shall be at reasonable times, upon reasonable notice, and with minimal disturbance to Tenant's business, (ii) such party shall name Tenant as an additional insured on its general liability insurance policy, (iii) Tenant shall not be required to incur any costs resulting from, or in connection with, the performance of such work, (iv) such party shall indemnify and bold Tenant harmless from, and against, any liability (except to the extent caused as a result of the negligence or intentional wrongful act of Tenant or its agents, employees, invitees or contractors) arising from such access and such work, and (vi) such party shall restore the Demised Premises to its condition prior to such entry. 39.09. Tenant shall not exercise its rights under Article 15 or any other provision of this Lease in a manner which would violate Landlord's union contracts or create any work stoppage, picketing, labor disruption or dispute or any interference with the business of Landlord or any tenant or occupant of the Building. 39.10. Tenant shall give reasonably prompt notice to Landlord of (but in no event later than five (5) days after Tenant first becomes aware of) (a) any occurrence in or about the Demised Premises for which Landlord might be liable, (b) any fire or other casualty in the Demised Premises, (c) any damage to or defect in the Demised Premises, including the fixtures and equipment thereof, for the repair of which Landlord might be responsible, and (d) any damage to or defect in any part of the Building's sanitary, electrical, heating, ventilating, air-conditioning, elevator or other systems located in or passing through the Demised Premises or any part thereof. 39.11. This Lease shall be governed by and construed in accordance with the laws of the State of New Jersey. Tenant hereby irrevocably agrees that any legal action or proceeding arising out of or relating to this Lease may be brought in the Courts of the State of New Jersey, or the Federal District Court for the District of New Jersey, as Landlord may elect. By execution and delivery of this Lease, Tenant hereby irrevocably accepts and submits generally and unconditionally for itself and with respect to its properties, to the jurisdiction of any such court in any such action or proceeding, and hereby waives in the case of any such action or proceeding brought in the courts of the State of New Jersey, or Federal District Court for the District of New Jersey, any defenses based on jurisdiction, venue or forum non conveniens. If any provision of this Lease shall be invalid or unenforceable, the remainder of this Lease shall not be affected and shall be enforced to the extent permitted by law. The table of 49 contents, captions, headings and titles in this Lease are solely for convenience of reference and shall not affect its interpretation. This Lease shall be construed without regard to any presumption or other rule requiring construction against the party causing this Lease to be drafted. If any words or phrases in this Lease shall have been stricken out or otherwise eliminated, whether or not any other words or phrases have been added, this Lease shall be construed as if the words or phrases so stricken out or otherwise eliminated were never included in this Lease and no implication or inference shall be drawn from the fact that said words or phrases were so stricken out or otherwise eliminated. Each covenant, agreement, obligation or other provision of this Lease on Tenant's part to be performed, shall be deemed and construed as a separate and independent covenant of Tenant, not dependent on any other provision of this Lease. All terms and words used in this Lease, regardless of the number or gender in which they are used, shall be deemed to include any other number and any other gender as the context may require. Tenant specifically agrees to pay all of Landlord's costs, reasonable charges and expenses, including attorneys' fees, incurred in connection with any document review requested by Tenant pursuant to Article 6 of this Lease and upon submission of bills therefor. In the event Landlord permits Tenant to examine Landlord's books and records with respect to any Additional Charge imposed under this Lease, such examination shall be conducted at Tenant's sole cost and expense and shall be conditioned upon Tenant retaining an independent accounting firm for such purposes which shall not be compensated on any type of contingent fee basis with respect to such examination. Wherever in this Lease or by law Landlord is authorized to charge or recover costs and expenses for legal services or attorneys' fees, same shall include, without limitation, the costs and expenses for in-house or staff legal counsel or outside counsel at rates not to exceed the reasonable and customary charges for any such services as would be imposed in an arms length third party agreement for such services. 39.12. Within thirty (30) days of each anniversary date of this Lease, Tenant shall annually furnish to Landlord a copy of its then current audited financial statement which shall be employed by Landlord for purposes of financing the Premises and not distributed otherwise without prior authorization of Tenant. Any material adverse change of Tenant's financial condition shall be furnished to Landlord in writing forthwith and without request by Landlord for same. 39.13. Landlord and Tenant acknowledge that (i) Tenant has contemporaneously herewith submitted to Landlord a form of Waiver and Consent by Real Property Owner (herein, the "Consent") in favor of Wells Fargo Foothill, Inc. ("Wells Fargo") which Tenant has requested that Landlord execute and deliver to Wells Fargo, and (ii) Landlord has contemporaneously herewith provided to Wells Fargo via Tenant, Landlord's comments to the Consent. So long as Tenant is not in default in the payment of Fixed Rent under this Lease beyond any applicable notice or cure period, Landlord agrees that it shall negotiate in good faith with Wells Fargo the form of Consent and promptly execute and deliver to Wells Fargo such Consent in form and substance reasonably satisfactory to both Landlord and Wells Fargo. 39.14. Landlord shall deliver the Demised Premises to Tenant on the Commencement Date with Landlord's Work substantially completed, vacant, "broom-clean", free of all hazardous materials (including, without limitation, asbestos, asbestos containing materials, and polychlorinated biphenyls) in excess of amounts permitted pursuant to applicable Legal Requirements, free of all tenants and other parties with rights of occupancy, with all electrical, mechanical, plumbing, and the HVAC servicing the Demised Premises in good working order and condition, in substantial compliance with all applicable 50 laws, rules, regulations, ordinances, and codes (including, without limitation, the Americans with Disabilities Act of 1990, as amended) to enable Tenant to occupy the Demised Premises for the Permitted Uses. Landlord represents to Tenant, (i) that to the best of its knowledge, no default exists, or would exist, but for the giving of notice or passage of time, or both; under any Superior Lease or Superior Mortgage, and (Ii) that this Lease and Tenant's use of the Demised Premises for the Permitted' Uses does not require the prior consent of any Superior Mortgagee or Superior Lessor, or if such consent is required, that Landlord shall obtain same, and (iii) that Landlord has no knowledge of any condemnation proceedings commenced, or to be commenced, against all, or part of, the Building. IN WITNESS WHEREOF, Landlord and Tenant have duly executed this Lease as of the day and year first above written. HARTZ MOUNTAIN INDUSTRIES, INC. ("Landlord") BY: /s/ Irwin A. Horwowitz ----------------------------------- Irwin A. Horowitz Executive Vice President [Corporate Seal] PHIBRO ANIMAL HEALTH CORPORATION ("Tenant") BY: /s/ David C. Storbeck ---------------------------- Name: David C. Storbeck [Corporate Seal] Title: VP Finance & Treasure Copyright(C)Hartz Mountain Industries, Inc. 2004. All Rights Reserved. No portion of this document may be reproduced without the express written consent of Hartz Mountain Industries, Inc. 51 RIDER TO LEASE DATED SEPTEMBER 27, 2004, BETWEEN HARTZ MOUNTAIN INDUSTRIES, INC., AS LANDLORD AND PHIBRO ANIMAL HEALTH CORPORATION, AS TENANT. R1. If any of the provisions of this Rider shall conflict with any of the provisions, printed or typewritten, of this Lease, such conflict shall resolve in every instance in favor of the provisions of this Rider. R2. Extension of Term. Provided Tenant is in compliance with all of the terms and conditions contained herein, and provided Tenant has not assigned this Lease or sublet all or any portion of the Demised Premises (other than to a permitted assignment or subletting to an Affiliate of Tenant) and is itself (or its Affiliate) in occupation and conducting business in the whole of the Demised Premises in accordance with the terms of this Lease, Tenant expressly acknowledging and agreeing that the option rights contained herein are personal to the original named Tenant, Tenant shall have one (I) option to extend the Term of its lease of the Demised Premises, from the date upon which this Lease would otherwise expire for one (1) separate extended period of five (5) years (the "Extended Period"), upon the following terms and conditions: 1. If Tenant elects to exercise said option, it shall do so by giving notice of such election to Landlord on or before the date which is one (1) year before the beginning of the Extended Period for which the Term is to be extended by the exercise of such option. Tenant agrees that it shall have forever waived its right to exercise such option if it shall fail for any reason whatsoever to give such notice to Landlord by the time provided herein for the giving of such notice, whether such failure is inadvertent or intentional, time being of the essence as to the exercise of such option. 2. If Tenant elects to exercise said option, the Term shall be automatically extended for the Extended Period covered by the option so exercised without execution of an extension or renewal lease. Within ten (10) days after request of either party following the effective exercise of such option, however, Landlord and Tenant shall execute, acknowledge and deliver to each other duplicate originals of an instrument in recordable form confirming that such option was effectively exercised. 3. The Extended Period shall be upon the same terms and conditions as are in effect immediately preceding the commencement of such Extended Period; provided, however, that Tenant shall have no right or option to extend the Term for any period of time beyond the expiration of the Extended Period and, provided further, that in the Extended Period the Fixed Rent shall be as follows: The Fixed Rent during the Extended Period shall be Fair Market Value ("FMV"). If the parties are unable to agree on the FMV within thirty (30) days of Tenant's exercise of its option, the parties shall choose a licensed Real Estate Appraiser who shall determine the FMV. The cost of said Real Estate Appraiser shall be borne equally by the parties. If the parties are unable to agree on a licensed Real Estate Appraiser within forty-five (45) days of Tenant's exercise of its option, each party shall select one Appraiser to appraise the FMV. All appraisals shall be rendered within thirty (30) days of appointment of the respective Appraiser appointed under 52 this paragraph. If the difference between the two appraisals is 20% or less of the lower appraisal, then the FMV shall be the average of the two appraisals. If the difference between the two appraisals is greater than 20% of the lower appraisal, the two Appraisers shall select a third licensed Real Estate Appraiser to appraise the FMV. The FMV shall in such case be the average of the three appraisals. The cost of the third appraisal shall be borne equally by the parties. Anything to the contrary contained herein notwithstanding, the Fixed Rent for the Extended Period shall not be less than the Fixed Rent for the period immediately preceding the Extended Period for which the Fixed Rent is being calculated. 4. Any termination, expiration, cancellation or surrender of this Lease shall terminate any right or option for the Extended Period(s) not yet exercised. . 5. Landlord shall have the right, for thirty (30) days after receipt of notice of Tenant's election to exercise any option to extend the Term, to reject Tenant's election if Tenant gave such notice while Tenant was in default in the performance of any of its obligations under the Lease, and. such rejection shall automatically render Tenant's election to exercise such option null and void and of no effect (unless such default is cured within any applicable notice and cure period). 6. The options provided herein to extend the Term of the Lease may not be severed from the Lease or separately sold, assigned or otherwise transferred. R3. Tenant Expansion Option. (a) Provided Tenant is not in default of its obligations under this Lease beyond any applicable notice or cure period, and provided Tenant has not assigned this Lease (except to an Affiliate) and is itself ( or its Affiliate) in occupation and conducting business in the Demised Premises in accordance with the terms of this Lease, Tenant expressly acknowledging and agreeing that the rights contained herein are personal to the original named Tenant, (and any Affiliate), and Landlord agrees, that Tenant shall have the option (the "Option"), to be exercised by written notice to Landlord at any time prior to December 31,2004, to lease approximately 10,000 square feet of additional Rentable Floor Area located on the second (2nd) floor of the Building ("Option Premises") as may be designated by Landlord at the same rental rate, and upon all of the other terms and conditions provided for in this Lease (including, without limitation, the perfoffi1ance by Landlord of Landlord's Work in the Option Premises, and an additional credit to Tenant in the sum of $15.00 per square foot of such additional Rentable Floor Area for the performance of Landlord's Work therein, subject to the terms of Section 5.03(ii) hereof) and a proportionate increase in the parking (reserved and unreserved) provided pursuant to and utilizing the same ratios as utilized in Section 7.02, and Landlord shall deliver and Tenant shall execute a lease amendment confirming the Option Premises shall be incorporated into the Demised Premises, in accordance with the terms of this Paragraph R3. Time is of the essence with respect to Tenant's exercise of the Option. (b) If Tenant shall fail to notify Landlord in writing of its election to enter into a modification to the Lease incorporating the Option Premises, on or before December 31, 2004, then the right granted to 53 the tenant as set forth in this Paragraph R3 shall automatically terminate. Tenant agrees that it shall have waived its right to exercise such right if it shall fail for any reason whatsoever to give such notice to Landlord by the time provided herein for the giving of such notice, whether such failure is inadvertent or intentional, time being of the essence as to the exercise of such right. (c) If Tenant shall not elect to lease the Option Premises On or before December 31, 2004, then, Landlord may thereafter enter into a lease for such Option Premises (or any other space on the 2nd floor) free of the restrictions herein stated. (d) This Option granted to Tenant shall be a one-time right and in any event shall become null and void upon the earlier to occur of (i) 11:59pm December 31, 2004 if not exercised, (ii) the termination of this Lease. R4. Base Year Gross-Up. If the Building is not a least ninety percent (90%) occupied during the Base Year, the Operating Expenses for the Base Year will be adjusted to reflect ninety percent (90%) occupancy of the Building. HARTZ MOUNTAIN INDUSTRIES, INC. ("Landlord") BY: /s/ Irwin A. Horowitz ----------------------------------- Irwin A. Horowitz Executive Vice President [Corporate Seal] PHIBRO ANIMAL HEALTH CORPORATION ("Tenant") BY: /s/ David C. Storbeck ---------------------------- Name: David C. Storbeck [Corporate Seal] Title: VP Finance & Treasurer 54 EX-10.25 10 y04700exv10w25.txt CONSULTING AGREEMENT EXHIBIT 10.25 CONSULTING AGREEMENT This Consulting Agreement ("Agreement") is made and effective this 1st day of November 2004, by and between Lifebio Ltd. (Consultancy) and Phibro Animal Health Corporation, One Parker Plaza, 14th Floor, Fort Lee, NJ 07024 ("Company"). NOW, THEREFORE, Consultancy and Company agree as follows: 1. ENGAGEMENT. Company hereby engages the Consultancy for the services of David G. McBeath (Consultant) and Consultancy accept the engagement, to provide to Company the following services: Consultant shall provide advice and assistance in connection with strategic and operational issues related to its global business. 2. TERM. Consultant shall provide services to Company pursuant to this Agreement for a term commencing as of January 1, 2005 and ending June 30, 2005 unless earlier terminated in accordance with Section 10 herein. The term of this Agreement may be extended by mutual agreement of the parties. 3. PLACE OF WORK. Consultant shall render services at Consultant's location or at such other places as may be mutually agreed as appropriate for the performance of particular services. 4. TIME. Consultant's daily schedule and hours worked under this Agreement on a given day shall generally be subject to Consultant's discretion, provided that Consultant and Company anticipate that Consultant shall work ten (10) days per month from January 1, 2005 through June 30, 2005. The Consultant will not be expected to work weekends nor to work in the United States more than 5 days per month. When the Consultant is at his Ayr location, the company will contact him between the hours of 2:00 PM and 6:00 PM Consultant's local time. Company relies upon Consultant to devote sufficient time as is reasonably necessary to fulfill the spirit and purpose of this Agreement. Consultant further agrees to be available for meetings at such times and at such locations as the Company may reasonably require. 5. PAYMENT. Company shall pay Consultancy One Thousand ((pound)1,000.00) GBP per day for the period January 1, 2005 through June 30, 2005. Payments shall be made via direct transfer on the last working day of the month into the account specified by Consultancy. Consultant shall be reimbursed for all reasonable out of pocket expenses and business class travel, evidenced by a written receipt, incurred in connection with the performance of services under this Agreement. The Company will provide Consultant an Amex Credit Card to be used for expenses incurred in this assignment. Expenses otherwise incurred shall be invoiced monthly with payment to be direct deposit to the account specified by Consultancy. 6. INTELLECTUAL PROPERTY. Consultant hereby assigns any and all rights, title and interest, including, but not limited to, patents, copyrights, trade secrets and any and all proprietary rights to any inventions, processes, creations, plans, programs, or any other material developed in the course of performance of services pursuant to this Agreement. All work performed hereunder and any and all materials, products, inventions, processes, creations, plans, programs or any other material developed or produced in the course of performance of service pursuant to this Agreement shall be the property of the Company and all title and interest therein shall vest in the Company. All such materials which would qualify for copyright protection under US copyright laws shall be deemed to be "works made for hire" under such copyright laws. Both parties acknowledge and agree, however, that Consultant shall retain the right to use its knowledge, experience, expertise and know-how for other projects for other clients notwithstanding the provisions of this Agreement. Consultant agrees to give the Company such assistance, at the Company's expense, as may be required to perfect any assignment of rights described in this Section 6. 7. PUBLICATIONS. Consultant agrees that any proposed publication written or prepared by Consultant as part of Consultant's services under the Agreement or that relates to the work performed hereunder must be reviewed and approved in writing by the Company prior to submission for publication. 8. CONFIDENTIALITY. As part of the performance of services hereunder, the Company may disclose to Consultant certain Confidential Information. "Confidential Information" for the purposes of this Agreement shall include Company's proprietary and confidential information such as, but not limited to, customer lists, business plans, marketing plans, financial information, designs, drawing, specifications, models, software, source codes and object codes. During the term of this Agreement, and thereafter for a period of two (2) years, Consultant shall not, except as provided herein, without the prior written consent of Company, disclose to anyone any Confidential Information. The Confidential Information will be kept confidential by Consultant and will not be used in any way detrimental to Company. The Confidential Information will not be used other than in connection with the services provided hereunder. This Agreement will be inoperative as to such portions of the Confidential Information which (i) are or become generally available to the public through no fault or action by Consultant, (ii) are or become available to Consultant on a nonconfidential basis from a source, other than Company, provided that such source is not prohibited from disclosing such portions to Consultant by a contractual, legal or fiduciary obligation to Company, (iii) was in possession of Consultant prior to its disclosure hereunder, or (iv) has been or is independently acquired or developed by Consultant without violating any of the Consultant's obligations under this Agreement and without the use of any Confidential Information. Company acknowledges that Consultant may have confidential information from other persons or entities and Consultant shall not be required nor expected to reveal or utilize such confidential information in the performance of the services hereunder. 9. NON-COMPETE. During the term of this Agreement, Consultant shall not directly or indirectly, either for his own account, or as a partner, shareholder, officer, director, employee, agent or otherwise; own, manage, operate, control, be employed by, participate in, consult with, perform services for, or otherwise be connected with any Medicated Feed Additive business the same as or similar to the business conducted by the Company. 10. TERMINATION. This Agreement may be terminated by either party, for any reason, upon thirty (30) days written notice to the other party. A. This Agreement may be terminated by Company: i. Without notice, if Consultant is unable to provide the consulting services by reason of temporary or permanent illness, disability, incapacity or death. ii. Without notice upon breach or default of any obligation of Consultant pursuant to Section 8, Confidentiality, or Section 9, Non-Compete, of this Agreement. iii. Upon breach or default by Consultant of any other material obligation in this Agreement, which breach or default is not cured within five (5) days of written notice from Company. B. Consultancy may terminate this Agreement: i. Upon breach or default of any material obligation of Company, which breach or default is not cured within five (5) days of written notice from Consultancy. ii. Without notice, if Company files protection under the federal bankruptcy laws, or any bankruptcy petition or petition for receiver is commenced by a third party against Company, any of the foregoing of which remains undismissed for a period of sixty (60) days. 11. ASSIGNMENT. Neither party shall assign or delegate this Agreement or any rights, duties or obligations hereunder to any other person and/or entity without prior express written approval to the other. Subject to the foregoing, this Agreement shall inure to the benefit of and be binding upon the successors, legal representatives and assignees of the parties hereto. 12. INDEPENDENT CONTRACTOR. Consultant is and throughout this Agreement shall be an independent contractor and not an employee, partner or agent of Company. Consultant shall not be entitled to nor receive any benefit normally provided to Company's employees such as, but not limited to, vacation payment, retirement, health care or sick pay. Company shall not be responsible for withholding income or other taxes from the payments made to Consultant. Consultant shall be solely responsible for filing all returns and paying any income, social security or other tax levied upon or determined with respect to the payments made to Consultant pursuant to this Agreement. 13. TOOLS AND SUPPLIES. The Company will provide the Consultant a laptop computer and US mobile telephone. Consultancy shall be solely responsible for procuring, paying for and maintaining any other tools or supplies necessary or appropriate for the performance of Consultant's services hereunder. 14. CHANGES. Consultancy agrees to promptly inform the Company of any event or change in circumstances, which could reasonable affect Consultant's ability to perform hereunder in the manner contemplated by the parties. 15. REPRESENTATIONS. Consultancy warrants and represents that it has the full right and authority to enter into this Agreement and that Consultant has no obligations or commitments inconsistent with this Agreement and/or its performance hereunder relating to Non-Competition, Confidentiality or Intellectual Property. Consultant acknowledges that no institution or employer with which Consultant is or was associated places any restriction upon Consultant's consulting activities, which would affect Consultant's performance under this Agreement. 16 NON-DISPARAGEMENT. Consultancy and Consultant agree that Consultant will not disparage or assist, encourage or induce others to disparage Company or any of its subsidiaries or affiliated entities. For the purposes of this Agreement, the term "disparage" includes, without limitation, comments or statements, whether written or oral or whether in connection with any judicial or administrative proceeding or not, which would adversely affect in any manner (i) the conduct of the business of Company or its affiliated entities (including, without limitation, any business plans or prospects) or (ii) the business reputation of Company or its affiliated entities. Consultant agrees to use his best efforts to prevent others with whom Consultant has a personal or professional relationship from disparaging Company as well. This obligation shall also survive the termination of this Agreement. 17 CONTROLLING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey. 18. HEADINGS. The headings in this Agreement are inserted for convenience only and shall not be used to define, limit or describe the scope of this Agreement or any of the obligations herein. 19. FINAL AGREEMENT. This Agreement constitutes the final understanding and agreement between the parties with respect to the subject matter hereof and supersedes all prior negotiations, understandings and agreements between the parties, whether written or oral. This Agreement may be amended, supplemented or changed only by an agreement in writing signed by both of the parties. 20. NOTICES. Any notice required to be given or otherwise given pursuant to this Agreement shall be in writing and shall be hand delivered, mailed by certified mail, return receipt requested or sent by recognized overnight courier service as follows: If to Consultancy: Mr. David G. McBeath Carwinshoch, Carrick Hills, Ayr KA7 4LD, Scotland If to Company: Daniel A. Welch Phibro Animal Health Corporation One Parker Plaza, 14th Floor Fort Lee, NJ 07024 21. CONFLICT. In the event of any conflict, ambiguity or inconsistency between this Agreement and any other document which may be annexed hereto, the terms of this Agreement shall govern. 22. SEVERABILITY. If any term of this Agreement is held by a court of competent jurisdiction to be invalid or unenforceable, then this Agreement, including all of the remaining terms, will remain in full force and effect as if such invalid or unenforceable term had never been included. 23. SURVIVAL OF PROVISIONS. Section 6, Intellectual Property, Section 8, Confidentiality and Section 16, Non-Disparagement shall survive termination of this Agreement and remain in full force and affect. IN WITNESS WHEREOF, this Agreement has been executed by the parties as of the date first above written. Phibro Animal Health Corporation By: /s/ Daniel A. Welch /s/ David G. McBeath --------------------------------- --------------------------- Daniel A. Welch David G. McBeath Senior Vice President, Human Resources CONSULTING AGREEMENT This Consulting Agreement ("Agreement") is made and effective this 13th day of December 2004, by and between Lifebio Ltd. (Consultancy) and Phibro Animal Health Corporation, One Parker Plaza, 14th Floor, Fort Lee, NJ 07024 ("Company"). NOW, THEREFORE, Consultancy and Company agree as follows: 1. ENGAGEMENT. Company hereby engages the Consultancy for the services of David G. McBeath (Consultant) and Consultancy accept the engagement, to provide to Company the following services: Consultant shall provide advice and assistance in connection with strategic and operational issues related to its global business. 2. TERM. Consultant shall provide services to Company pursuant to this Agreement for a term commencing as of July 1, 2005 and ending December 31, 2005 unless earlier terminated in accordance with Section 10 herein. The term of this Agreement may be extended by mutual agreement of the parties. 3. PLACE OF WORK. Consultant shall render services at Consultant's location or at such other places as may be mutually agreed as appropriate for the performance of particular services. 4. TIME. Consultant's daily schedule and hours worked under this Agreement on a given day shall generally be subject to Consultant's discretion, provided that Consultant and Company anticipate that Consultant shall work five (5) days per month from July 1, 2005 through December 31, 2005. The Consultant will not be expected to work weekends nor to work in the United States more than 5 days per month. When the Consultant is at his Ayr location, the company will contact him between the hours of 2:00 PM and 6:00 PM Consultant's local time. Company relies upon Consultant to devote sufficient time as is reasonably necessary to fulfill the spirit and purpose of this Agreement. Consultant further agrees to be available for meetings at such times and at such locations as the Company may reasonably require. 5. PAYMENT. Company shall pay Consultancy One Thousand ((pound)1,100.00) GBP per day for the period July 1, 2005 through December 31, 2005. Payments shall be made via direct transfer on the last working day of the month into the account specified by Consultancy. Consultant shall be reimbursed for all reasonable out of pocket expenses and business class travel, evidenced by a written receipt, incurred in connection with the performance of services under this Agreement. The Company will provide Consultant an Amex Credit Card to be used for expenses incurred in this assignment. Expenses otherwise incurred shall be invoiced monthly with payment to be direct deposit to the account specified by Consultancy. Upon satisfactory completion of the assignment, the Company shall pay the Consultant a completion bonus of Fifteen Thousand ((pound)15,000) GBP. 6. INTELLECTUAL PROPERTY. Consultant hereby assigns any and all rights, title and interest, including, but not limited to, patents, copyrights, trade secrets and any and all proprietary rights to any inventions, processes, creations, plans, programs, or any other material developed in the course of performance of services pursuant to this Agreement. All work performed hereunder and any and all materials, products, inventions, processes, creations, plans, programs or any other material developed or produced in the course of performance of service pursuant to this Agreement shall be the property of the Company and all title and interest therein shall vest in the Company. All such materials which would qualify for copyright protection under US copyright laws shall be deemed to be "works made for hire" under such copyright laws. Both parties acknowledge and agree, however, that Consultant shall retain the right to use its knowledge, experience, expertise and know-how for other projects for other clients notwithstanding the provisions of this Agreement. Consultant agrees to give the Company such assistance, at the Company's expense, as may be required to perfect any assignment of rights described in this Section 6. 7. PUBLICATIONS. Consultant agrees that any proposed publication written or prepared by Consultant as part of Consultant's services under the Agreement or that relates to the work performed hereunder must be reviewed and approved in writing by the Company prior to submission for publication. 8. CONFIDENTIALITY. As part of the performance of services hereunder, the Company may disclose to Consultant certain Confidential Information. "Confidential Information" for the purposes of this Agreement shall include Company's proprietary and confidential information such as, but not limited to, customer lists, business plans, marketing plans, financial information, designs, drawing, specifications, models, software, source codes and object codes. During the term of this Agreement, and thereafter for a period of two (2) years, Consultant shall not, except as provided herein, without the prior written consent of Company, disclose to anyone any Confidential Information. The Confidential Information will be kept confidential by Consultant and will not be used in any way detrimental to Company. The Confidential Information will not be used other than in connection with the services provided hereunder. This Agreement will be inoperative as to such portions of the Confidential Information which (i) are or become generally available to the public through no fault or action by Consultant, (ii) are or become available to Consultant on a nonconfidential basis from a source, other than Company, provided that such source is not prohibited from disclosing such portions to Consultant by a contractual, legal or fiduciary obligation to Company, (iii) was in possession of Consultant prior to its disclosure hereunder, or (iv) has been or is independently acquired or developed by Consultant without violating any of the Consultant's obligations under this Agreement and without the use of any Confidential Information. Company acknowledges that Consultant may have confidential information from other persons or entities and Consultant shall not be required nor expected to reveal or utilize such confidential information in the performance of the services hereunder. 9. NON-COMPETE. During the term of this Agreement, Consultant shall not directly or indirectly, either for his own account, or as a partner, shareholder, officer, director, employee, agent or otherwise; own, manage, operate, control, be employed by, participate in, consult with, perform services for, or otherwise be connected with any Medicated Feed Additive business the same as or similar to the business conducted by the Company. 10. TERMINATION. This Agreement may be terminated by either party, for any reason, upon thirty (30) days written notice to the other party. A. This Agreement may be terminated by Company: i. Without notice, if Consultant is unable to provide the consulting services by reason of temporary or permanent illness, disability, incapacity or death. ii. Without notice upon breach or default of any obligation of Consultant pursuant to Section 8, Confidentiality, or Section 9, Non-Compete, of this Agreement. iii. Upon breach or default by Consultant of any other material obligation in this Agreement, which breach or default is not cured within five (5) days of written notice from Company. B. Consultancy may terminate this Agreement: i. Upon breach or default of any material obligation of Company, which breach or default is not cured within five (5) days of written notice from Consultancy. ii. Without notice, if Company files protection under the federal bankruptcy laws, or any bankruptcy petition or petition for receiver is commenced by a third party against Company, any of the foregoing of which remains undismissed for a period of sixty (60) days. 11. ASSIGNMENT. Neither party shall assign or delegate this Agreement or any rights, duties or obligations hereunder to any other person and/or entity without prior express written approval to the other. Subject to the foregoing, this Agreement shall inure to the benefit of and be binding upon the successors, legal representatives and assignees of the parties hereto. 12. INDEPENDENT CONTRACTOR. Consultant is and throughout this Agreement shall be an independent contractor and not an employee, partner or agent of Company. Consultant shall not be entitled to nor receive any benefit normally provided to Company's employees such as, but not limited to, vacation payment, retirement, health care or sick pay. Company shall not be responsible for withholding income or other taxes from the payments made to Consultant. Consultant shall be solely responsible for filing all returns and paying any income, social security or other tax levied upon or determined with respect to the payments made to Consultant pursuant to this Agreement. 13. TOOLS AND SUPPLIES. The Company will provide the Consultant a laptop computer and US mobile telephone. Consultancy shall be solely responsible for procuring, paying for and maintaining any other tools or supplies necessary or appropriate for the performance of Consultant's services hereunder. 14. CHANGES. Consultancy agrees to promptly inform the Company of any event or change in circumstances, which could reasonable affect Consultant's ability to perform hereunder in the manner contemplated by the parties. 15. REPRESENTATIONS. Consultancy warrants and represents that it has the full right and authority to enter into this Agreement and that Consultant has no obligations or commitments inconsistent with this Agreement and/or its performance hereunder relating to Non-Competition, Confidentiality or Intellectual Property. Consultant acknowledges that no institution or employer with which Consultant is or was associated places any restriction upon Consultant's consulting activities, which would affect Consultant's performance under this Agreement. 16. NON-DISPARAGEMENT. Consultancy and Consultant agree that Consultant will not disparage or assist, encourage or induce others to disparage Company or any of its subsidiaries or affiliated entities. For the purposes of this Agreement, the term "disparage" includes, without limitation, comments or statements, whether written or oral or whether in connection with any judicial or administrative proceeding or not, which would adversely affect in any manner (i) the conduct of the business of Company or its affiliated entities (including, without limitation, any business plans or prospects) or (ii) the business reputation of Company or its affiliated entities. Consultant agrees to use his best efforts to prevent others with whom Consultant has a personal or professional relationship from disparaging Company as well. This obligation shall also survive the termination of this Agreement. 17. CONTROLLING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey. 18. HEADINGS. The headings in this Agreement are inserted for convenience only and shall not be used to define, limit or describe the scope of this Agreement or any of the obligations herein. 19. FINAL AGREEMENT. This Agreement constitutes the final understanding and agreement between the parties with respect to the subject matter hereof and supersedes all prior negotiations, understandings and agreements between the parties, whether written or oral. This Agreement may be amended, supplemented or changed only by an agreement in writing signed by both of the parties. 20. NOTICES. Any notice required to be given or otherwise given pursuant to this Agreement shall be in writing and shall be hand delivered, mailed by certified mail, return receipt requested or sent by recognized overnight courier service as follows: If to Consultancy: Mr. David G. McBeath Carwinshoch, Carrick Hills, Ayr KA7 4LD, Scotland If to Company: Daniel A. Welch Phibro Animal Health Corporation One Parker Plaza, 14th Floor Fort Lee, NJ 07024 21. CONFLICT. In the event of any conflict, ambiguity or inconsistency between this Agreement and any other document which may be annexed hereto, the terms of this Agreement shall govern. 22. SEVERABILITY. If any term of this Agreement is held by a court of competent jurisdiction to be invalid or unenforceable, then this Agreement, including all of the remaining terms, will remain in full force and effect as if such invalid or unenforceable term had never been included. 23. SURVIVAL OF PROVISIONS. Section 6, Intellectual Property, Section 8, Confidentiality and Section 16, Non-Disparagement shall survive termination of this Agreement and remain in full force and affect. IN WITNESS WHEREOF, this Agreement has been executed by the parties as of the date first above written. Phibro Animal Health Corporation By: /s/ Daniel A. Welch /s/ David G. McBeath -------------------------------- --------------------------- Daniel A. Welch David G. McBeath Senior Vice President, Human Resources EX-12 11 y04700exv12.txt COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Exhibit 12 PHIBRO ANIMAL HEALTH CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Dollars in thousands)
3 MONTHS ENDED FISCAL YEARS ENDED JUNE 30, SEPTEMBER 30, ------------------------------------------------------- -------- -------- 2000 2001 2002 2003 2004 2003 2004 -------- -------- -------- -------- -------- -------- -------- Pre-tax income (loss) income from continuing operations before loss from equity investments $ 1,934 $ (9,563) $(10,121) $ 7,960 $ 25,048 $ 2,392 $ 783 Interest capitalized net of amortization of capitalized interest - - (263) (73) - - - Fixed Charges: Interest expensed and capitalized and amortization of deferred debt issuance cost 14,520 17,919 18,347 17,561 20,724 4,234 5,837 Interest portion of rental expense 473 592 671 740 814 185 203 -------- -------- -------- -------- -------- -------- -------- Total fixed charges 14,993 18,511 19,018 18,301 21,538 4,419 6,040 Total earnings $ 16,927 $ 8,948 $ 8,634 $ 26,188 $ 46,586 $ 6,811 $ 6,823 Ratio of earnings to fixed charges 1.1 - - 1.4 2.2 1.5 1.1 Deficiency in earnings available to cover fixed charges - (9,563) (10,384) - - - -
EX-21 12 y04700exv21.txt LIST OF SUBSIDIARIES . . . Exhibit 21 LIST OF SUBSIDIARIES Subsidiaries of Phibro Animal Health Corporation Jurisdiction of Organization C P Chemicals, Inc. New Jersey Ferro Metal and Chemical Corporation Limited U.K. Koffolk (1949), Ltd. Israel Odda Holdings AS Norway Prince Agriproducts, Inc. Delaware Western Magnesium Corp. California Phibro Chemicals, Inc. New York Phibrochem, Inc. New Jersey Phibro Animal Health Holdings, Inc. Delaware PMC Quincy, Inc. Illinois Subisidiaries of Phibro Animal Health Holdings, Inc. Jurisdiction of Organization Phibro Animal Health U.S., Inc. Delaware Philibro Animal Health de Argentina S.R.L. Argentina Phibro Animal Health Pty Limited Australia Phibro Animal Health Ltd Canada Philipp Brothers Animal Health Holdings, Inc. Chile Limitada Chile Phibro Animal Health de Costa Rica Ltda Costa Rica Phibro Corporation Limited Hong Kong/China Phibro Japan Company Limited Japan Phibro Corporation (M) Sdn Bhd Malaysia PB Animal Health de Mexico S. de R.L. de C.V. Mexico Phibro Animal Health (Proprietary) Limited South Africa Philibro Animal Health de Venezuela S.R.L. Venezuela PAH Management Company Limited U.K. Philipp Brothers Netherlands I B.V. The Netherlands Subsidiaries of Philipp Brothers Netherlands I B.V. Jurisdiction of Organization Philipp Brothers Netherlands II B.V. The Netherlands Subsidiaries of Philipp Brothers Netherlands II B.V. Jurisdiction of Organization Philipp Brothers Netherlands III B.V. The Netherlands Phibro Saude Animal International Ltda. Brazil Subsidiaries of Philipp Brothers Netherlands III B.V. Jurisdiction of Organization Phibro Animal Health SA Belgium Subsidiaries of C P Chemicals, Inc. Jurisdiction of Organization Phibro-Tech, Inc. Delaware Subsidiaries of Phibro-Tech, Inc. Jurisdiction of Organization LC Holding S.A. France
Subsidiaries of LC Holding S.A. Jurisdiction of Organization La Cornubia SA* France Subsidiaries of Koffolk (1949) Ltd. Jurisdiction of Organization Koffimex Ltd. Israel Planalquimica Industrial Ltda. Brazil Wychem Limited U.K. Agrozan, Ltd. Israel Subsidiaries of Ferro Metal and Chemical Corporation Limited Jurisdiction of Organization D.G. Bennett Chemicals Limited U.K Ferro Metal and Chemical Company Limited U.K. Subsidiaries of Odda Holdings AS Jurisdiction of Organization Odda Smelteverk AS Norway *In bankruptcy
EX-23.1 13 y04700exv23w1.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP Exhibit 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - -------------------------------------------------------- We hereby consent to the inclusion in this Registration Statement on Form S-4 of our report dated September 27, 2004, relating to the consolidated financial statements of Phibro Animal Health Corporation, which appears in such Registration Statement. We also consent to the inclusion of our reports dated January 10, 2004 relating to the consolidated financial statements of Philipp Brothers Netherlands I B.V. and the financial statements of Phibro Animal Health SA (Belgium), which appear in such Registration Statement. We also consent to the references to us under the headings "Experts" and "Summary Historical and Unaudited Consolidated Financial Data" in such Registration Statement. PricewaterhouseCoopers LLP Florham Park, NJ January 14, 2005 EX-25.1 14 y04700exv25w1.txt FORM T-1 CONFORMED COPY Exhibit 25.1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 - -------------------------------------------------------------------------------- FORM T-1 STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO SECTION 305(b)(2) HSBC BANK USA, NATIONAL ASSOCIATION (Exact name of trustee as specified in its charter) New York 20-1177241 (Jurisdiction of incorporation (I.R.S. Employer or organization if not a U.S. Identification No.) national bank) 452 Fifth Avenue, New York, NY 10018-2706 (212) 525-5600 (Zip Code) (Address of principal executive offices) Warren L. Tischler, SVP HSBC Bank USA 452 Fifth Avenue New York, New York 10018-2706 Tel: (212) 525-1311 (Name, address and telephone number of agent for service) PHIBRO ANIMAL HEALTH CORPORATION. PHILLIP BROTHERS NETHERLANDS III B.V. (Exact name of obligor as specified in its charter) New York 13-1840497 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) One Parker Plaza Fort Lee, New Jersey 07024 (Address of principal executive offices) (Zip Code) PHILIPP BROTHERS NETHERLANDS III B.V. The Netherlands Not Applicable (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) Rokin 55 1012 KK Amsterdam The Netherlands (201) 944 -6020 Not Applicable (Address of principal executive offices) (Zip Code) 13% Senior secured Units due 2007 (Title of Indenture Securities) General Item 1. General Information. Furnish the following information as to the trustee: (a) Name and address of each examining or supervisory authority to which it is subject. Comptroller of the Currency, New York, NY. Federal Deposit Insurance Corporation, Washington, D.C. Board of Governors of the Federal Reserve System, Washington, D.C. (b) Whether it is authorized to exercise corporate trust powers. Yes. Item 2. Affiliations with Obligor. If the obligor is an affiliate of the trustee, describe each such affiliation. None Item 3-15. Not Applicable Item 16. List of Exhibits
Exhibit - ------- T1A(i) (1) Copy of the Articles of Association of HSBC Bank USA, National Association. T1A(ii) (1) Certificate of the Comptroller of the Currency dated July 1, 2004 as to the authority of HSBC Bank USA, National Association to commence business. T1A(iii) Certificate of Fiduciary Powers dated August 18, 2004 for HSBC Bank USA, National Association T1A(iv) (1) Copy of the existing By-Laws of HSBC Bank USA, National Association. T1A(v) Not applicable. T1A(vi) Consent of HSBC Bank USA, National (2) Association required by Section 321(b) of the Trust Indenture Act of 1939. T1A(vii) Copy of the latest report of condition of the trustee (September 30, 2004), published pursuant to law or the requirement of its supervisory or examining authority. T1A(viii) Not applicable. T1A(ix) Not applicable.
(1) Exhibits previously filed with the Securities and Exchange Commission with Registration No. 333-118523 and incorporated herein by reference thereto. (2) Exhibits previously filed with the Securities and Exchange Commission with Registration No. 333-113911 and incorporated herein by reference thereto. SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939, the Trustee, HSBC Bank USA, National Association a national banking association organized and existing under the laws of the United States of America, has duly caused this statement of eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of New York and State of New York on the 13th day of January, 2005. HSBC BANK USA, NATIONAL ASSOCIATION By: /s/ Herawattee Alli ------------------------------------ Herawattee Alli Assistant Vice President EXHIBIT T1A (VII) Board of Governors of the Federal Reserve System OMB Number: 7100-0036 Federal Deposit Insurance Corporation OMB Number: 3064-0052 Office of the Comptroller of the Currency OMB Number: 1557-0081 FEDERAL FINANCIAL INSTITUTIONS EXAMINATION COUNCIL Expires March 31, 2007 Please refer to page i, Table of 1 Contents, for the required disclosure of estimated burden. CONSOLIDATED REPORTS OF CONDITION AND INCOME FOR A BANK WITH DOMESTIC AND FOREIGN OFFICES -- FFIEC 031 REPORT AT THE CLOSE OF BUSINESS SEPTEMBER 30, 2004 (20040630) ------------- (RCRI 9999) This report is required by law; 12 This report form is to be filed by U.S.C. Section 324 (State member banks); banks with branches and 12 U.S.C. Section 1817 (State nonmember consolidated subsidiaries in U.S. banks); and 12 U.S.C. Section 161 territories and possessions, Edge (National banks). or Agreement subsidiaries, foreign branches, consolidated foreign subsidiaries, or International Banking Facilities. NOTE: The Reports of Condition and The Reports of Condition and Income must be signed by an authorized Income are to be prepared in officer and the Report of Condition must accordance with Federal regulatory be attested to by not less than two authority instructions. directors (trustees) for State nonmember banks and three directors for State We, the undersigned directors member and National Banks. (trustees), attest to the correctness of this Report of Condition (including the I, Joseph R. Simpson, Controller supporting schedules) and declare ------------------------------ that it has been examined by us Name and Title of Officer Authorized and to the best of our knowledge to Sign Report and belief has been prepared in conformance with the instructions issued by the appropriate Federal regulatory authority and is true and correct. Of the named bank do hereby declare that these Reports of Condition and Income /s/ Sal H. Alfieri (including the supporting schedules) --------------------------------- have been prepared in conformance with Director (Trustee) the instructions issued by the appropriate Federal regulatory authority /s/ Bernard J. Kennedy and are true to the best of my knowledge --------------------------------- and believe. Director (Trustee) /s/ Joseph R. Simpson /s/ Martin Glynn - --------------------------------------- --------------------------------- Signature of Officer Authorized Director (Trustee) to Sign Report 11/9/04 - --------------------------------------- Date of Signature - -------------------------------------------------------------------------------- SUBMISSION OF REPORTS Each Bank must prepare its Reports of For electronic filing assistance, Condition and Income either: contact EDS Call report Services, 2150 N. Prospect Ave.,Milwaukee, WI 53202, telephone (800) 255-1571. (a) in electronic form and then file To fulfill the signature and the computer data file directly attestation requirement for the with the banking agencies' Reports of Condition and Income collection agent, Electronic Data for this report date, attach this System Corporation (EDS), by modem signature page to the hard-copy f or computer diskette; or the completed report that the bank places in its files. b) in hard-copy (paper) form and arrange for another party to convert the paper report to automated for. That party (if other than EDS) must transmit the bank's computer data file to EDS. FDIC Certificate Number 5 7 8 9 0 (RCRI 9030) http://WWW.BANKING.US.HSBC.COM HSBC Bank USA, NATIONAL ASSOCIATION Legal Title of Bank (TEXT 9010) Primary Internet Web Address of Bank (Home Page), if any (TEXT 4087) Wilmington ----------------------------------- (Example: www.examplebank.com) City (TEXT 9130) DE 19801 --------------------------------------------------- State Abbrev. (TEXT 9200) ZIP Code (TEXT 9220)
Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency REPORT OF CONDITION Consolidated domestic subsidiaries HSBC Bank USA, National Association of Buffalo - ---------------------------------------------------------------- Name of Bank City in the state of New York, at the close of business September 30, 2004
Thousands of dollars ASSETS Cash and balances due from depository institutions: a. Non-interest-bearing balances currency and coin $ 3,454,959 b. Interest-bearing balances 2,076,244 Held-to-maturity securities 3,741,506 Available-for-sale securities 14,349,537 Federal funds sold and securities purchased under agreements to resell: a. Federal funds sold in domestic offices 1,150,000 b. Securities purchased under agreements to resell 5,038,148 ------------ Loans and lease financing receivables: Loans and leases held for sale $ 1,320,163 ------------ Loans and leases net of unearned income $65,438,311 ----------- LESS: Allowance for loan and lease losses 339,332 ----------- Loans and lease, net of unearned income, allowance, and reserve $ 65,098,979 Trading assets 15,031,627 Premises and fixed assets 602,577 Other real estate owned 11,347 Investments in unconsolidated subsidiaries 270,750 Customers' liability to this bank on acceptances outstanding 86,959 Intangible assets: Goodwill 2,094,740 Intangible assets: Other intangible assets 378,843 Other assets 3,748,120 Total assets 118,454,499 ------------ LIABILITIES Deposits: In domestic offices 52,730,085 ------------ Non-interest-bearing 7,637,394 ----------- Interest-bearing 45,092,691 ----------- In foreign offices 23,319,518 ------------
Non-interest-bearing 340,118 Interest-bearing 22,979,400 ----------- Federal funds purchased and securities sold under agreements to repurchase: a. Federal funds purchased in domestic offices 267,105 b. Securities sold under agreements to repurchase 1,292,039 Trading Liabilities 10,368,929 Other borrowed money 15,443,222 Bank's liability on acceptances 86,959 Subordinated notes and debentures 2,542,854 Other liabilities 3,260,926 ------------ Total liabilities 109,311,637 ------------ Minority Interests in consolidated Subsidiaries 331 ------------ EQUITY CAPITAL Perpetual preferred stock and related surplus 0 Common Stock 2,000 Surplus 7,622,743 Retained earnings 1,560,994 Accumulated other comprehensive income -43,206 Other equity capital components 0 Total equity capital 9,142,531 Total liabilities, minority interests and equity capital 118,454,499 ------------
CORRESP 15 filename15.txt January 14, 2005 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Registration Statement on Form S-4 of Phibro Animal Health Corporation and its Subsidiaries and Philipp Brothers Netherlands III B.V. and its Subsidiary ------------------------------------------------------------ Ladies and Gentlemen: Phibro Animal Health Corporation, a New York corporation ("PAHC"), and Philipp Brothers Netherlands III B.V., a company organized under the laws of The Netherlands ("PB III" and, together with PAHC, the "Company"), and certain of PAHC's domestic subsidiaries (comprising C P Chemicals, Inc., a New Jersey corporation, Phibro Chemicals, Inc., a New York corporation, Phibrochem, Inc., a New Jersey corporation, Phibro-Tech, Inc., a Delaware corporation, Prince Agriproducts, Inc., a Delaware corporation, Phibro Animal Health Holdings, Inc., a Delaware corporation, Phibro Animal Health U.S., Inc., a Delaware corporation, and Western Magnesium Corp., a California corporation) and PB III's subsidiary, Phibro Animal Health SA, a company organized under the laws of Belgium, are herewith filing through the EDGAR system a Registration Statement on Form S-4, together with exhibits, in connection with the Company's offer to exchange (the "Exchange Offer") 127,491 Units consisting of $103,207,000 aggregate principal amount of 13% Senior Secured Notes due 2007 of PAHC and $24,284,000 aggregate principal amount of 13% Senior Secured Notes due 2007 of PB III, which Units are being registered under the Securities Act of 1933, as amended, pursuant to such Registration Statement, for 127,491 unregistered Units consisting of $103,207,000 aggregate principal amount of 13% Senior Secured Notes due 2007 of PAHC and $24,284,000 aggregate principal amount of 13% Senior Secured Notes due 2007 of PB III issued October 21, 2003 and December 21, 2004 under the same Indenture. The registration fee (the "Fee") for the Units is $15,006. The Company previously wired $13,303.50, of such Fee to SEC's lock-box facility at Mellon Bank, Pittsburgh, Pennsylvania, in connection with its Form S-4, SEC File No. 333-112942, filed on February 18, 2004, which was withdrawn before being declared effective. No securities were issued pursuant to such registration statement. The remaining $1,703 of the Fee is being wired by the Company concurrently herewith, to the SEC's lock-box facility. Securities and Exchange Commission January 14, 2005 Page 2 We hereby request that, to the extent possible, the Staff review the Registration Statement on a priority basis or otherwise expedite the review process. Please contact me (212-907-7370) or Richard Kaplan of this firm (212-907-7376) with any questions or comments relating to the Registration Statement or the Exchange Offer. Very truly yours, /s/ Lawrence M. Bell --------------------- cc: Phibro Animal Health Corporation Philipp Brothers Netherlands III B.V. Richard Kaplan, Esq. -----END PRIVACY-ENHANCED MESSAGE-----