SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended August 31, 1999 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _________ to _________.
Commission File No. 1-13479
AGRIBRANDS INTERNATIONAL, INC.
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(Exact name of registrant as specified in its charter)
MISSOURI 43-1794250
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(State of Incorporation) (I.R.S. Employer Identification No.)
9811 SOUTH FORTY DRIVE, ST. LOUIS, MISSOURI 63124
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(Address of principal executive offices) (Zip Code)
(314) 812-0500
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(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Name of each Exchange
Title of Each Class on which Registered
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Agribrands International, Inc. New York Stock Exchange, Inc.
Common Stock, par value $.01 per share
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the voting stock held by nonaffiliates of
the Registrant is $509,954,141, based upon the closing market price on October
1, 1999. Excluded from this figure is the voting stock held by Registrant's
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Directors, who are the only persons known to Registrant who may be considered to
be its "affiliates" as defined under Rule 12b-2.
The number of shares of Common Stock, $.01 par value, outstanding as of
the close of business on October 1, 1999: 10,363,016.
Documents Incorporated by Reference:
Portions of Registrant's Notice of Annual Meeting and Proxy Statement
relating to its 2000 Annual Meeting (to be filed) are incorporated by reference
into Part III of the Form 10-K.
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TABLE OF CONTENTS
Page
INTRODUCTION
Forward Looking Statements 4
Risk Factors 4
PART I
Item 1. Business 10
Item 2. Properties 17
Item 3. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 20
PART II
Item 5. Market for the Registrant's Common Equity and Related 21
Stockholder Matters
Item 6. Selected Financial Data 22
Item 7. Management's Discussion and Analysis of Financial Condition 23
And Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 37
Item 8. Financial Statements and Supplementary Data 37
Item 9. Changes in and Disagreements with Accountants on 66
Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant 66
Item 11. Executive Compensation 66
Item 12. Security Ownership of Certain Beneficial Owners and
Management 66
Item 13. Certain Relationships and Related Transactions 66
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K 66
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FORWARD-LOOKING STATEMENTS
Certain statements under "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business" and elsewhere in this
report constitute "forward-looking statements" within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. Any statements that express, or involve discussions as to, expectations,
beliefs, plans, objectives, assumptions or future events or performance (which
may use words or phrases such as "will likely result," "are expected to," "will
continue," "anticipates," "expects," "estimates," "intends," "plans,"
"projects," and "outlook") are not historical facts and may be forward-looking.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors that may cause the actual results, levels of activity, cost
savings, performance or achievements of the Company, or industry results, to be
materially different from any future results, levels of activity, cost savings,
performance or achievements expressed or implied by such forward-looking
statements, and accordingly, such statements should be read in conjunction with
and are qualified in their entirety by reference to, such risks, uncertainties
and other factors, which are described below and elsewhere in this report. Such
factors include, among others, the following: (i) changing conditions or market
trends in the animal feeds and agricultural products industries; (ii) general
economic and business conditions, including a regional recession in any of the
various regions of the world in which Agribrands operates; (iii) the ability of
the Company to implement its business strategy and maintain and enhance its
competitive strengths; (iv) the ability of the Company to recover its raw
material costs in the pricing of its products, (v) political and economic
instability in countries or regions where the Company's business is conducted,
(vi) the level of demand for Agribrands' products,(vii) the ability of the
Company to obtain financing for specific or general corporate purposes; (viii)
actions of competitors and government entities; (ix) availability of key
personnel; (x) industry capacity trends; and (xi) changes in the economic or
financial impact of, or failure to comply with, government regulations. As a
result of the foregoing and other factors, no assurance can be given as to
future results, levels of activity and achievements, and neither Agribrands nor
any other person assumes responsibility for the accuracy and completeness of
these forward-looking statements. Any forward-looking statements contained
herein speak solely as of the date as of which such statements are made, and
Agribrands undertakes no obligation to update any forward-looking statements to
reflect events or circumstances after the date on which such statements were
made or to reflect the occurrence of unanticipated events.
RISK FACTORS
Company and Industry Specific Risks
Limited Operating History as an Independent Company
The assets associated with Ralston Purina Company's ("Ralston")
international animal feeds and agricultural products business were first
contributed to Agribrands International, Inc. ("Agribrands" or the "Company") on
April 1, 1998 when the shares of Agribrands were distributed to the Ralston
shareholders (the "Distribution"). As a result, Agribrands has a limited
operating history as an independent company. While the business conducted by
Agribrands and its subsidiaries was profitable as part of Ralston, and has been
profitable since the Distribution, there is no assurance that it will continue
to be operated profitably as a stand-alone public company. In addition, from
time to time, certain local operations of Agribrands have operated at a loss.
Agribrands is no longer able to rely on Ralston for financial support or benefit
from its relationship with Ralston to obtain credit or receive favorable terms
for the purchase or sale of certain goods and services. In addition, except for
certain transitional services, Agribrands is responsible for its own corporate
administrative services such as tax, treasury, accounting, and legal that were
previously provided by Ralston.
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Obligations to Ralston
Under agreements entered into with Ralston at the time of the
Distribution, Agribrands has agreed to indemnify Ralston against, among other
things, liabilities relating to the operation of the Agribrands business and
other former businesses associated with Ralston's international animal feeds
operations, or the ownership of the assets utilized in those businesses, except
to the extent such were assumed or retained by Ralston. Agribrands has also
agreed that neither Agribrands nor its subsidiaries will enter into certain
transactions for three years following the Distribution, and to indemnify
Ralston and its shareholders as of the date of the Distribution against tax
liabilities incurred by reason of the Distribution being a taxable event if
Agribrands engages in any of the restricted transactions.
Animal Feeds Industry
The Company, as a supplier of animal feeds and other agricultural
products, is subject to the risks and uncertainties associated with the animal
production industry and the resulting fluctuations in demand for Agribrands'
products. The animal production industry, and consequently the animal feeds
industry, in a particular country can be negatively affected by a number of
factors, including the following: the market price of livestock, poultry and
other animals and their food products; alternative feed sources; changes in
consumer demand for, and consumption of, grain, meat, fish, milk and eggs;
outbreaks of diseases in humans or animals (such as BSE or "mad cow disease"
foot and mouth disease or aviarian virus); real estate values; urban
development; weather conditions; government farm programs; government
regulations; restrictive quota policies and trade policies and tariffs;
production difficulties, including capacity and supply surpluses and
constraints; and general economic conditions, either local, regional or global.
In certain markets, the increasing nutritional efficiency of available feeds has
resulted in lower volume demand for feeds. Profit pressure and overcapacity in
various markets have led to consolidation of both the feed production and animal
production industries in those markets. Larger animal producers have tended to
integrate their business by acquiring or constructing feed production facilities
to meet some or all of their feed requirements, and consequently have relied
less on outside suppliers of animal feeds.
Significant Competitive Activity
There is substantial excess capacity in the animal feed business
worldwide, including the countries in which the Company operates. The Company
currently faces intense, and as a result of consolidation may face increasingly
intense, competition from large multinational and other international as well as
local and regional feed manufacturers, cooperatives, single-owner establishments
and government feed companies. Some of these competitors are larger and have
greater financial resources than Agribrands, and in some countries cooperatives
and government feed companies may have significant financial and political
advantages. Because of limited technological or capital constraints on entry to
the animal feed industry and the extremely fragmented nature of the industry,
new competitors with relatively modest return objectives can arise in any market
at any time. In addition, lower priced alternative feed sources or methods of
feeding may be elected by Agribrands' customers during times of weak economic
conditions affecting their markets and operations.
Local animal production industries are consolidating as a result of
end-product price pressures and overcapacity, and management expects this trend
to continue. The tendency of large producers to vertically integrate their
businesses by acquiring or constructing feed production facilities has at times
led to significantly less reliance on outside suppliers of feed. As the
consolidation of animal producers continues, competition is likely to increase
among independent feed suppliers, and that industry is also likely to
consolidate.
Competition is based upon price, product quality and efficiency,
customer service and the ability to identify and satisfy animal production needs
in particular countries. The Company from time to time experiences price
pressure in certain of its markets as a result of competitors' pricing
practices. As the Company operates on an international basis and markets a broad
line of animal feeds and other agricultural products, it bears higher costs
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associated with a multi-layered distribution system, a complex production
system, and tax and financing obligations imposed by its international and
multi-currency structure. Such higher costs may restrict its ability to compete
in particular markets on the basis of price.
Also, low commodity prices may reduce the value of and demand for
complete feeds as livestock and poultry feeders switch to pre-mix or concentrate
products which are mixed with directly acquired commodities. A significant
reduction in demand for complete feeds could materially affect the utilization
of the Company's fixed assets thereby affecting its financial performance.
Raw Material Price Volatility
The prices of raw materials, such as grain, grain products and protein
ingredients, are susceptible to fluctuations, possibly volatile, due to weather
conditions, crop disease or pestilence, government regulations, (for example,
regulation of genetically modified organisms, "GMOs", Agribrands is
investigating the issues surrounding the use of GMO-free ingredients,) economic
climate, labor disputes or other unforeseen circumstances. Operating results may
be affected by the price volatility of raw materials which constitute a
substantial component of the cost of goods sold for the Company's business. The
rapid turnover of certain raw material inventory items and, for certain
products, the ability to substitute alternative lower cost ingredients to
produce feeds with specified nutritional characteristics at a lower total cost
may provide Agribrands with some protection against fluctuating raw material
prices. Agribrands believes that adequate supplies of its necessary raw
materials are available at the present time, but cannot predict future
availability or prices of such products and materials. Agribrands may from time
to time hedge its commodities purchases or otherwise take market positions in
various ingredients. Although they would be intended to ensure supply or
establish ingredient costs for anticipated sales volume, such transactions may
under certain circumstances magnify the adverse effect of unanticipated changes
in market prices.
Non-Compete Agreements
The Company has agreed with Ralston that, until April 1, 2003, the Company
will not engage in the manufacture, distribution or sale of foods for pets, pet
products, pet supplies, pet accessories, litter or personal care products for
cats, dogs or other pets, subject to certain limited exceptions. If the Company
does enter into any of those businesses following the restriction period, it
will not have the right to use the trademarks "Purina"(R), "Chow"(R) or the
"Checkerboard"(R) logo, on pet food products, other than products produced for
Ralston or provided by Ralston.
Year 2000 and European Economic and Monetary Union
Many computer systems, and other systems with embedded chip technology,
process dates based on two digits for the year of a transaction rather than a
full four digits. These systems are unable to properly process dates in the year
2000 and beyond. Agribrands utilizes a number of computer systems across its
entire worldwide operation. The Company has identified its significant software
coding issues related to the year 2000 date recognition for key financial and
operational systems.
Based on the Company's efforts to date, management believes that its
systems will be year 2000 compliant. The Company is working with its key
customers and suppliers to obtain assurances that their systems are year 2000
compliant. However, the Company does not have any control over these third
parties and, as a result, cannot currently determine to what extent future
operating results may be adversely effected by the failure of these third
parties to successfully address their year 2000 issues. In addition, the Company
operates in sixteen countries on four continents at various stages of economic
development and is dependent on systems operated by governments, financial
institutions, utilities, communications suppliers and others in each of these
countries. The failure of any infrastructural systems to be year 2000 compliant
could disrupt the Company's business for a period of time and if not quickly
resolved could have a material adverse effect on the Company.
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On January 1, 1999, eleven of the European Union countries (including
four countries where Agribrands' operations are located) adopted the Euro as
their single currency. There is now a fixed conversion rate between their
existing currencies ("legacy currencies") and the Euro. The legacy currencies
will remain legal tender in the participating countries during the transition
period from January 1, 1999 through January 1, 2002. Beginning on January 1,
2002, the European Central Bank will issue Euro-denominated bills and coins for
use in cash transactions. On or before July 1, 2002, the participating countries
will withdraw all legacy bills and coins and use the Euro as their legal
currency.
The Company's key financial information systems in Europe are equipped
to process both Euro and legacy currency transactions through the transition
period ending January 1, 2002; however, they are not ready to handle the July 1,
2002 withdrawal of all legacy currencies. Management is currently planning to
modify the Company's key financial systems so they can handle the July 1, 2002
mandatory conversion to the Euro. The Company has not yet incurred any costs
associated with the conversion. To modify the key financial systems so they can
handle the mandatory conversion, the Company anticipates incurring $0.2 million
of reprogramming costs and spending approximately $0.2 million on new software.
All reprogramming costs will be expensed as incurred, and all software costs
will be capitalized. The Company plans to complete system modifications and
necessary testing by September 1, 2001.
From a broader business perspective, conversion to the Euro may cause
pricing disparities in different markets to narrow, lowering the Company's
margins. Nevertheless, the Company believes the conversion to the Euro will not
have a material impact on the Company's consolidated financial results.
Foreign Operations Risk
Worldwide Regulatory and Political Risk
The Company has operating companies in 16 countries around the world
and is subject to government regulation and political risk in each market.
Because the Company operates primarily through its subsidiaries, it is subject
to regulation by numerous common market, national and local governmental
entities and agencies around the world. Changes in the laws or administrative
practices relating to foreign ownership and control, local employment and
benefits, air and water quality, noise pollution, underground fuel storage
tanks, waste handling and disposal as well as other regulations intended to
protect public health, the environment, currency exchange controls, alienability
of property, taxation or other matters in any jurisdiction could have a material
adverse effect on the operations and prospects of the Company in such
jurisdiction and as a whole. Countries differ widely with respect to legal and
political structure and stability and some of these countries lack stable legal
and regulatory systems. For example, many European countries, as well as the
European Union, have been very active in adopting and enforcing food handling
regulations, while many developing countries in which the Company operates have
not adopted or enforced significant regulation relating to food safety, the
environment, occupational safety, employment practices or other matters
extensively regulated in the United States. As such economies develop, it is
possible that new and expanded regulations may increase the risk and expense of
doing business in these countries. Governmental regulations may also restrict
the ability of the Company's operating subsidiaries to remit funds to the
Company, or impose minimum requirements as to the capital structure of local
operating companies.
In addition, the Company's operations may at times in the future be
subject to expropriation, confiscatory taxation or price controls, and political
and economic changes may damage operating and growth prospects by causing
political and regulatory uncertainty or economic difficulties. For example, in
Europe, any failure of a country in which the Company does business to join the
European Union or the European Monetary Union may have a negative effect on
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borrowing, exchange rates and economic stability in such country, and any delay
in the expansion or development of the European Unions may have a negative
effect on borrowing, exchange rates and economic stability in Europe as a whole.
Furthermore, conversion to the Euro may cause pricing disparities in different
markets to narrow, lowering the Company's margins.
Inflation and High Local Interest Rates
Many countries have in the recent past experienced, and in some cases
still experience, substantial or at times extremely high rates of inflation and
correspondingly high interest rates. Inflation, hyperinflation and rapid
fluctuations in inflation rates have had and may continue to have negative
effects on the currencies, economies, capital markets and the business
environment of certain countries and could have an adverse effect on various of
the Company's operating subsidiaries and investments in those countries,
including an adverse effect on their ability to obtain financing.
Currency Fluctuations
The monetary assets and liabilities of the Company's operating
subsidiaries are typically denominated in local currency. Consequently, their
value in Dollar terms will fluctuate with changes in the exchange rate between
the local currency and the Dollar. Agribrands periodically enters into foreign
exchange forward contracts to mitigate economic exposure to changes in exchange
rates, but does not, as a matter of policy, hedge against all such exposure. As
a result, the Company may experience economic loss with respect to its local
currency exposures. In addition, the Company's operating subsidiaries report
their results of operations and financial position in the local currency while
the Company reports its results of operations and other financial data in U.S.
Dollars. Accordingly, the Company's reported operating results and financial
position are affected by changes in currency exchange rates between those
currencies and the U.S. Dollar. For example, the Company experienced a
significant decline in the reported value of its investment in its Korean
operating subsidiary as a result of the sharp decline in the value of the Korean
Won during fiscal year 1998. Many of the currencies of the countries where the
Company operates have experienced steady devaluations relative to the U.S.
Dollar. Sudden major adjustments have occurred in the past, may again occur in
the future and could have a material adverse effect on the Company.
U.S. Regulation of International Commerce
The Company is subject to the Foreign Corrupt Practices Act ("FCPA"),
which generally prohibits U.S. companies and their intermediaries from bribing
foreign officials for the purpose of obtaining or keeping business or licenses
or otherwise obtaining favorable treatment. Although the Company has taken
precautions to comply with the FCPA, there can be no assurance that such
precautions will protect the Company against liability under the FCPA,
particularly as a result of actions which may have been taken in the past or
which may be taken in the future by agents and other intermediaries for whose
actions the Company may be held liable under the FCPA. In particular, the
Company may be held responsible for actions taken by its local agents even
though such agents may not be subject to the FCPA. Although these actions may be
customary under local practice, they may result in inadvertent violations of the
FCPA. Any determination that the Company has violated the FCPA could have a
material adverse effect on the Company.
Trade sanctions imposed by the United States in response to political
developments may limit the Company's access to suppliers or customers. In
addition, the Company may at times become subject to conflicting obligations
under the laws of the United States and the laws of the jurisdictions in which
it operates, including circumstances when trade sanctions or boycotts may be
imposed by the laws of one jurisdiction, while laws of the other jurisdiction
may expressly prohibit participation in such sanctions or boycott.
International Tax Risks
Income earned and distributions of those earnings and other payments by
the Company's operating subsidiaries are often subject to withholding and other
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taxes imposed by the jurisdictions in which such entities are formed or
operating. In general, a United States corporation may claim a foreign tax
credit against any federal income tax expense for local currency foreign
withholding taxes and foreign taxes paid directly by corporate entities in which
the company owns 10% or more of the voting stock. The ability to claim such
foreign tax credits and to utilize net foreign losses is, however, subject to
numerous limitations, and the ability of the Company to utilize these credits
may be limited because (i) tax rates are higher in certain jurisdictions than
the comparable tax rates in the United States or (ii) the Company may not be in
a tax-paying position in the United States. Intense focus by tax authorities on
intercompany transactions of international companies could lead to challenges of
the Company's tax treatment of such items which, if sustained, could generate
tax liabilities material to a particular quarter or annual period.
Reporting Standards and Financial Data
Companies operating overseas are subject to accounting, auditing and
financial standards and requirements that differ, in some cases significantly,
from those applicable under U.S. GAAP. The Company's ability to comply with the
informational and filing requirements will depend on the timely receipt of
accurate and complete financial and other information from the Company's
operating subsidiaries. The failure to receive such information on a timely
basis could have a material adverse effect on the Company, including preventing
it from satisfying its informational and filing requirements. Furthermore,
maintenance of adequate internal control systems may be made more difficult by
the geographical dispersion and autonomous management structure of the
Agribrands business.
Entering New Markets
Agribrands anticipates that it will continue to explore opportunities
to enter new geographic markets when appropriate opportunities are identified.
Opening new markets can result in increased earnings for the Company, but not
all such ventures are likely to be successful, which could have an adverse
effect on the overall operating results of the Company.
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PART I
ITEM 1. Business
General
The Company, incorporated in Missouri in 1997, is a leading
international producer and marketer of a broad line of animal feeds and other
agricultural and nutrition products for hogs, dairy cows, beef cattle, poultry
(broilers and layers), rabbits, horses, shrimp and fish. The Company operates 71
manufacturing plants in 16 countries on four continents. Management believes
that, among commercial producers of complete animal feeds, Agribrands is the
most geographically diversified company of its type in the world, and that its
local operations rank among the top three in share of the commercial animal feed
market in most of the countries in which it operates.
Agribrands business consists of the international animal feed and
agricultural products businesses conducted by Ralston prior to April 1, 1998,
when the shares of the Company were distributed to the Ralston shareholders.
Accordingly, the Company benefits from Ralston's over 100 years of experience in
the animal feeds and agricultural products industry, during which time it has
built and maintained a leading industry position by consistently providing
high-quality, research-proven products and customer service. The Company has
more than thirty years' experience operating across four continents.
The Commercial Feed Industry
Feed costs represent the largest component of the total cost to raise
animals used in the production of meat, fish, milk and eggs. The commercial feed
industry provides feed and feed components, generally to independent animal
producers who then market fully-grown animals, fish, milk or eggs to food
processing companies who finally supply retail food outlets and the consumer.
The animal production industry is driven by human consumption of
protein which is influenced by population and income. In developing economies,
consumption of animal protein generally rises with growth in disposable income
as consumers shift to more animal-based protein. After per-capita consumption
reaches saturation, growth or decline in consumption is driven by changes in
population. The commercial animal feed industry is driven by total animal
production and economic development. As an economy moves toward specialization,
animal production intensifies and competition drives out inefficiencies.
Commercial animal feed producers provide the benefits of efficient ingredient
procurement, value-added processing, and sophisticated formulation, which raises
the efficiency of animal production. However, as animal production techniques
evolve, even greater efficiencies can sometimes be gained by concentrating
production of a particular species of animal and establishing dedicated feed
production as part of a vertically integrated system.
Animal feed is produced by combining grains and proteins with desired
vitamins and minerals. Animal producers can achieve the desired ration by
purchasing a complete feed or by acquiring and combining the components. Broadly
speaking, commercial feed companies sell complete feeds (ready-to-eat rations
requiring no additional ingredients or processing), concentrates (requiring the
addition of some ingredient or ingredients, usually grain), premixes (vitamin
and mineral mix usually requiring the addition of grains and proteins), and
supplements (select vitamins and minerals added to other rations to deliver
targeted nutrition). The animal producer selects between these product types
based on the type of ration desired, availability of ingredients, and capability
to process the ingredients with on-farm equipment. Substantial levels of
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premixes are produced by large drug companies and sold to commercial feed
producers for processing with other ingredients.
Complete feed products are bulky and expensive to transport. Most
complete feeds and concentrates are sold within close proximity of the producing
feed mill. Where the local infrastructure is adequate, large customers generally
buy product in bulk, which is delivered by truck and placed directly in bins
connected to the animal production unit. Smaller customers typically purchase
bagged product and are generally served by distribution outlets rather than
direct from the plant. In very low-intensity farming areas and where commercial
feed is used as a supplement to other feed sources, retailers sometimes divide
bags into smaller units for sale.
The feed industry around the world prices on a cost-plus-margin basis.
Approximately 80% of the cost to produce feed is the cost of the ingredients.
Since the majority of ingredients are commodities traded on global markets, cost
positions are relatively transparent and the animal producer is aware of the
underlying ingredient costs. While decreased demand can place pressure on feed
producers' margins, industry participants generally retain their narrow margins
and suffer volume declines. The greatest impact of cyclical supply and demand
inequalities is usually borne by the animal producer who, when faced with an
end-product price less than the cost to raise an animal, reduces production
until favorable economics return.
Feed producers generally compete on the basis of cost per unit of feed
or projected total cost of feeding to achieve a specific animal output. Using
on-farm trial results, producers of premium-priced feeds attempt to demonstrate
to the farmer that the additional per-unit cost of the feed is more than
compensated by (1) the reduced amount of feed and time required to produce a
market-ready animal or output or (2) the improved quality of the end product
which itself can be sold at a premium. The producer uses this data to
demonstrate that the farmer's total profits are increased through use of the
more efficient, higher priced feed.
Animal nutrition research is central to development of more productive
feeds. Research provides increasingly precise information regarding the
biological factors that determine how nutritional qualities of ingredients and
additives are processed by animals, and the effect of feed manufacturing
processes and ingredient interactions on nutritional values. Feed manufacturers
use this knowledge on a regular basis to reformulate existing products using the
lowest cost combination of ingredients that can deliver the desired nutritional
values. In addition, research knowledge is the basis of the development of new
products that deliver enhanced nutrition for increased animal production or
improved end-product characteristics. The challenge for the feed manufacturer is
to develop new products whose increased value (in terms of the additional all-in
benefit to the farmer) exceeds any additional costs of ingredients or
processing.
Principal Products
The Company sells primarily complete feeds, but also sells concentrates,
premixes, supplements and animal health and sanitation products. The Company's
products are predominantly value-added premium offerings and are generally
marketed under the "Purina"(R) and "Chow"(R) trademarks and the
"Checkerboard"(R) logo, and product names such as "Omolene"(R) and
"Hi-Octane"(R).
Sources and Availability of Raw Materials
Feed is manufactured by processing a combination of grains, proteins,
vitamins, and minerals. Approximately 80% of the total cost to produce feed is
the cost of these ingredients, most of which are widely traded in
Dollar-denominated global commodity markets. Large multinational drug companies
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produce and sell globally the micro ingredients, such as vitamins. Vitamins and
minerals are also available from brokers, distributors and local companies.
Organizational Structure
The local markets served by Agribrands vary dramatically with respect
to locally available ingredients, animal species being raised, climate, real
estate values and economic conditions. In order to manage effectively in this
environment, day-to-day operating decisions are made by local managers with
extensive experience and with knowledge of local factors, who operate on a
highly autonomous basis. Regional and global management coordinate global
research efforts, assist with U.S.-based ingredient purchasing and market
surveillance, consult on process engineering and major capital additions and
leverage the considerable cumulative experience of the organization by
collecting and sharing management and administrative best practices across the
operating units.
Distribution Network
Agribrands' distribution network consists of over 3,400 independent
dealers, most of whom sell the Company's products on an exclusive basis. The
dealers are independent wholesalers who sell to animal producers and
(particularly where animal production is done at a very small scale)
redistribute to thousands of points of sale. More than 70% of the Company's
sales are made through these dealers, with the balance made through direct sales
primarily to large feeders. The Company offers assistance to dealers in
establishing sound financial and business practices, including training,
marketing support, promotional materials, and formal business management
programs, including assistance in obtaining bank financing. As a result, the
Company enjoys a high level of dealer loyalty.
Patents and Trademarks
At the time of the Distribution, Ralston entered into a Trademark
Agreement with Agribrands pursuant to which Ralston assigned to Agribrands all
of Ralston's rights in certain country specific trademarks associated solely
with the Agribrands business, such as "Omolene"(R) and "Hi-Octane"(R) and
granted to Agribrands a perpetual license, on a royalty-free basis, to use the
trademarks "Purina"(R) "Chow"(R) and the "Checkerboard" (R) logo, and certain
other trademarks with respect to agricultural and certain other products,
subject to the rights of Purina Mills, Inc. ("PMI") referred to below.
Agribrands does not have the right to use such trademarks on pet products, other
than products produced for Ralston or provided by Ralston.
The Company has agreed with Ralston that, until April 1, 2003, the
Company will not engage in the manufacture, distribution or sale of foods for
pets, pet products, pet supplies, pet accessories, litter or personal care
products for cats, dogs or other pets, subject to certain limited exceptions.
In 1986, Ralston sold the outstanding capital stock of its subsidiary,
Purina Mills, Inc. ("PMI") which was engaged in the animal feed and agricultural
products business in the United States. In connection with that sale, PMI was
granted a perpetual license in the United States with respect to certain
significant trademarks which are currently used by Agribrands outside of the
United States. Although Agribrands does not currently compete with PMI in the
United States, there are no restrictions on Agribrands' right to expand into the
United States market, subject to the exclusive rights of PMI to utilize such
trademarks, trade
12
<PAGE>
names and certain proprietary technologies in the United States. PMI may expand
into markets outside the United States, subject to the exclusive rights of the
Company as described above, and is competing with Agribrands in the Philippines.
Seasonality of Business
Sales prices and volume can both be impacted by seasonal factors.
Agricultural product sales prices are directly influenced by changes in the
underlying commodity prices for the raw materials used to formulate animal
feeds. Commodity prices are usually at their lowest in the months immediately
following the fall harvest. Sales volume may fluctuate somewhat seasonally as
temperature affects caloric intake and breeding cycles. For example, the
Company's Mexican subsidiary sells the vast majority of its shrimp feed between
June and October due to the nature of the shrimp farming cycle and location of
the customers.
Currently, seasonal factors have a limited impact on the Company's
total performance in any given period. Seasonality of commodity prices does not
materially affect earnings due to the industry practice of pricing at a
relatively constant margin over ingredient costs. With the possible exception of
shrimp feed sales, seasonally driven changes in sales volume do not materially
affect sales or earnings due to the geographic and species diversification of
Agribrands' operations.
Competition
The animal feed business has substantial excess capacity on a worldwide
basis, including excess capacity in the countries where the Company operates.
The Company faces competition in most of its markets from other feed
manufacturers, including, in certain countries, large multinational corporations
(such as Nutreco, Ridley, Cargill and Charoen Pokphand), cooperatives,
single-owner establishments, and government feed companies. Some of these
competitors are larger and have greater financial resources than Agribrands, and
in some countries cooperatives and government feed companies may have
significant financial and political advantages. Because of limited technological
or capital constraints on entry into the animal feed business, new competitors
with relatively modest return objectives can arise in any market at any time. In
addition, less effective but lower priced feed sources become an attractive
alternative to Agribrands' products when livestock, poultry and other animal end
product prices are low and customers are unwilling to pay a premium for quality
feeds. Although the strength of competitors varies by geographic area and
product line, Agribrands believes that no other commercial producer of complete
feeds produces and markets as broad a line of animal feed products in as many
countries as Agribrands.
Local animal production industries are consolidating in concert with
the broader development of the local economies. This trend is expected to
continue. In the past, Agribrands has been successful in evolving with the
sector and generating sales to progressively larger producers. However, the
tendency of large producers to vertically integrate their businesses by
acquiring or constructing feed production facilities has at times led to
significantly less reliance on outside suppliers of feed. As the consolidation
of animal producers continues, competition is likely to increase among
independent feed suppliers, and this industry is also likely to consolidate.
Agribrands believes that the superiority of its products and its reputation for
service and knowledge about animal nutrition needs should allow it to
effectively compete in the face of such trends.
13
<PAGE>
Much of the competition in the animal feeds and agricultural products
industry centers around price, due to the commodity-like aspects of basic animal
feed. However, Agribrands believes that product quality, customer service and
the ability to identify and satisfy animal production needs in individual
markets are also significant competitive factors. Agribrands also believes it
has significant advantages due to its extensive dealer distribution network, its
nutritional expertise, its ability to convert its research and technology into
products which meet the diverse requirements of its customers in different
markets under different economic circumstances, its high level of customer
service, the responsiveness of its locally autonomous structure, and the
breadth, quality and efficacy of its product lines.
The animal feeds and agricultural products business is expected to
remain highly competitive in the foreseeable future. Future growth opportunities
are expected to depend on the Company's ability to implement its strategies for
competing effectively in new, growing agricultural markets, maintaining
effective cost controls, making strategic acquisitions, effectively managing
customers changing preferences for complete feeds, concentrates or premixes, and
developing and implementing methods for more efficient manufacturing and
distribution operations, while at the same time maintaining aggressive pricing
and promotion of its products.
Research and Development
Agribrands' research and engineering development is coordinated centrally
but conducted on a decentralized basis in each of the three regions (Americas,
Europe and Asia). Fundamental research is conducted in cooperation with leading
agricultural research universities, institutes and commercial entities such as
Cornell University (U.S.A.), Massey University (New Zealand), INRA (France),
Lethbridge Research Center (Canada) and Guelph University (Canada). Agribrands
provides funding for leading edge research in exchange for the rights to
commercially apply the results.
Research projects are selected based on priorities established by the
Agribrands' research and technology team and an Agribrands interdisciplinary
product steering group. The product steering group is composed of senior
management, research, engineering, operating personnel and specialists for key
animal species groups.
The Agribrands research team consists of more than 25 persons with
postgraduate or doctoral degrees in animal nutrition, veterinary medicine or
agricultural sciences. In 1999, Agribrands expenditures for research and
development amounted to $7.0 million.
During fiscal year 2000 the Company is bringing a newly developed
product to market. The product consists of a proprietary blend of enzymes to be
applied to feed ingredients using a patented application process. The product is
intended to improve ruminant (multiple stomach animals, such as cows) animal
digestion. The product and process will be marketed under the brand name
"PROMOTE Natural Energy Technology(TM)". Enzymes are naturally occurring
proteins that are present in all living animals and act as catalysts in the
digestive process. Agribrands secured a license to utilize the patented
application process during fiscal year 1999 from The Lethbridge Research Center
in Alberta, Canada.
14
<PAGE>
Governmental Regulation and Environmental Matters
Agribrands' operations are subject to regulation by various common
market and local governmental entities and agencies, national and local laws and
regulations with respect to environmental matters, including air and water
quality, noise pollution, underground fuel storage tanks, waste handling and
disposal and other regulations intended to protect public health and the
environment. Many European countries, as well as the European Union, have been
very active in adopting and enforcing environmental regulations. In many
countries in which Agribrands operates, there has not been significant
governmental regulation relating to the environment, occupational safety,
employment practices or other business matters routinely regulated in the United
States. As such economies develop, it is possible that new regulations may
increase the risk and expense of doing business in such countries. Evolving
environmental and zoning requirements have led to Agribrands relocating two of
its Korean facilities from urban areas to industrial sites.
While it is difficult to quantify with certainty the potential
financial impact of actions regarding expenditures for environmental matters,
particularly remediation, and future capital expenditures for environmental
control equipment; in the opinion of management, based upon the information
currently available, the ultimate liability arising from such environmental
matters will not have a material effect on Agribrands' financial position but
could be material to capital expenditures or earnings.
Employees
The Company, as a whole, employs 50 employees in the United States and
approximately 5,012 in foreign jurisdictions.
15
<PAGE>
Executive Officers of the Registrant
The following is a list of all the executive officers (7) of Agribrands
as of August 31, 1999. All of these officers were elected by the Board and serve
in such positions until their successors shall have been duly elected and
qualified. There are no family relationships between any of the executive
officers.
Name Age Positions
William P. Stiritz 65 Chairman of the Board, Chief Executive Officer and
President of Agribrands since 1998. Mr. Stiritz
joined Ralston in 1963 and served as Chief Executive
Officer and President of Ralston from 1982 until his
retirement in 1997.
David R. Wenzel 36 Chief Financial Officer of Agribrands since 1998.
Mr. Wenzel served as the Chief Financial Officer of
Ralston's international agricultural products
business since 1996. He joined Ralston's Protein
Technologies subsidiary as Director of Strategic
Planning in 1993 and in 1994 became Director of
Corporate Planning for Ralston. Prior to joining
Ralston, Mr. Wenzel was a Manager, Tax Services, for
PricewaterhouseCoopers LLP in its St. Louis office.
Bill G. Armstrong 51 Chief Operating Officer of Agribrands since 1998.
Mr. Armstrong served as Executive Vice President of
Operations of Ralston's international agricultural
products business during 1997 and Regional Chief
Executive Officer - South Asia from 1995 to 1997. He
served as Managing Director of Ralston's
international agricultural products Philippine
operations from 1992 to 1995.
Kim Ki Yong 54 Chief Operating Officer - North Asia Region of
Agribrands since 1998. Mr. Kim served as Regional
Chief Executive Officer - North Asia of Ralston's
international agricultural products business since
1995 and President and Chief Executive Officer of
Ralston's international agricultural products Korean
operations from 1993 to 1995.
Eric M. Poole 54 Chief Operating Officer - Europe Region of
Agribrands since 1998. Mr. Poole served as Vice
President - Americas of Ralston's international
agricultural products operations from 1993 to 1995;
and as international agricultural products Regional
Chief Executive Officer - Europe from 1995 to 1998.
Michael J. Costello 47 Secretary and General Counsel of Agribrands since
1998. Mr. Costello served as International Counsel
of Ralston's international animal and human foods
businesses from 1989 to 1998.
Robert W. Rickert, Jr. 48 Treasurer of Agribrands since 1998. Mr. Rickert
served as Director of International Financial
Services of Ralston's international agricultural
products business from 1990 to 1998; Director
International Finance - Latin America, Middle East,
and Africa from 1988 to 1992; and Manager,
International Finance from 1986 to 1988.
16
<PAGE>
ITEM 2. PROPERTIES
Agribrands' principal properties are its animal feed manufacturing
facilities. Shown below are the locations of the principal facilities of
Agribrands, all of which, except as indicated, are owned by Agribrands or its
wholly owned subsidiaries. Agribrands' facilities in the Peoples Republic of
China are located on sites subject to long-term lease agreements. Due to
restrictions on foreign land ownership, Agribrands facilities in the Philippines
are leased from a company which owns the sites. Agribrands' Philippine affiliate
owns forty percent of the shares of the leasing company. Agribrands leases the
office space in St. Louis County, Missouri where its principal executive offices
are located. Although a substantial number of these manufacturing facilities are
more than twenty years old, management believes the Company's facilities are
adequately maintained and are suitable and adequate for the purposes for which
they are used. During the fiscal year ended August 31, 1999, the utilization of
these facilities averaged approximately 70% of capacity, and management believes
that existing capacity should be sufficient for anticipated needs.
17
<PAGE>
BRAZIL MEXICO
Canoas Cuautitlan
Inhumas Guadalajara
Maringa(3) Merida (2)
Paulinia Mexicali
Recife Monterrey
Volta Redonda Obregon
Salamanca
CANADA Tehuacan
Addison, Ontario
Courtice, Ontario (1) PEOPLE'S REPUBLIC OF CHINA
Drummondville, Quebec Fushun (2)
Palmerston, Ontario Langfang
St. Romuald, Quebec Nanjing (2)
Strathroy, Ontario Yantai (2)
Woodstock, Ontario
PERU
COLUMBIA Arequipa (1)
Bogota(1) Chiclayo
Buga Lima
Cartagena
Giron (1) PHILIPPINES
Ibaque (1) Pulilan
Medellin (1) Villasis
Mosquera
PORTUGAL
FRANCE Benavente (3)
Courchelettes Cantenhede
Limoges (2)
Longue SPAIN
Pommevic Benavente
St. Ybard (2) Don Hermanas
Sorcy La Coruna
Marcilla
GUATEMALA Merida
Guatemala City Torrejon
Valencia
HUNGARY
Kaposvar TURKEY
Karcag Bolu
Gonen
ITALY Luleburgaz
Borgoratto (3)
Sospiro VENEZUELA
Spessa Barcelona
San Felice Cabimas (2)(3)
Termoli Maracaibo
Maracay
KOREA Hatcheries - Valencia, Venezuela
Kimhae
Kunsan
Songtan
18
<PAGE>
(1) Leased (2) Joint Venture (3) To be Divested
In addition to the properties identified above, Agribrands and its
subsidiaries own and/or operate sales offices, regional offices, laboratories,
storage facilities, distribution centers and terminals and related properties.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to legal proceedings and claims arising out of
its business that cover a wide range of matters, including trade regulation,
contracts, environmental issues, product liability, patent and trademark
matters, and taxes.
In August 1999, Agribrands (together with Cargill, Incorporated, The
Iams Company and by subsequent amended pleading Carl S. Akey, Inc.) filed a
complaint in the U.S. District Court for the Northern District of Illinois
against F. Hoffman-LaRoche Ltd., Hoffman LaRoche Inc., Roche Vitamins Inc., BASF
Aktiengesellschaft, BASF Corporation, Rhone-Poulenc S.A., Rhone-Poulenc Inc.,
Rhone-Poulenc Animal Nutrition Inc., Lonza A.G., Lonza, Inc., Takeda Chemical
Industries, Ltd., Takeda Vitamin & Food USA, Inc., EISAI Co. Ltd., EISAI
Corporation of North America, EISAI U.S.A. Inc. DAIICHI Pharmaceutical Co.,
Ltd., DAIICHI Fine Chemicals, Inc., Chinook Group Limited, Chinook Group, Inc.,
DuCoa, L.P., E. I. Dupont De Nemours and Company, DCV Inc., Bioproducts, Inc.,
Roland Bronnimann, Kuno Sommer, John W. Kennedy, Robert Samuelson, Lindell
Hilling, J. L. (Pete) Fischer and Antonio Felix. The complaint alleges that the
defendants conspired globally to fix the prices of vitamins and allocate
customers in support of such arrangement in violation of the U.S. antitrust
laws. The defendants have admitted in criminal proceedings to participating in
such practices. Agribrands believes that it will be successful in recovering
damages arising from these practices. The timing of recovery and the amount of
damages are difficult to determine due to the multiple variables which will
influence the determination of damages such as period of time covered, percent
of overcharge, purchasing entity, as well as other issues and defenses which may
be asserted by the defendants. As of August 31, 1999, the Company has not
recognized any gain in its financial statements for this matter.
In the fall of 1997, Agribrands' wholly owned subsidiary, Agribrands
Philippines, Inc. (formerly Purina Philippines, Inc.), applied for renewal of a
warehouse license to store corn and rice and by-products at its Pulilan
facility. The Philippines National Food Authority ("NFA"), the governmental
agency that administers the Philippines laws and regulations governing the corn
and rice industry, advised Agribrands Philippines by letter dated October 31,
1997 that its license renewal application was denied. The letter cited
Philippines legislation and regulations requiring that businesses operating in
the corn and rice industry not have more than 40% foreign ownership. Since the
NFA believes that Agribrands Philippines is in the corn and rice industry, it
has requested Agribrands Philippines to file a divestment plan in order to
comply with the 40% maximum foreign ownership requirement.
Agribrands Philippines has appealed the denial of its license renewal,
and on January 23, 1998, Agribrands Philippines received notification that it
may operate its warehouse under a "provisional permit" pending the resolution of
the appeal. The appeal is pending in the Office of the President. Agribrands
Philippines believes it does not need a warehouse license, as it believes it is
not engaged in the corn and rice industry as defined by law. Furthermore,
Agribrands Philippines believes that it should not be subject to the NFA
regulation based upon its original Board of Investments One Stop investment
approval of a 100% foreign owned investment. Agribrands Philippines intends to
pursue its appeal in the Philippines legal system.
19
<PAGE>
In the event that Agribrands Philippines is required to file a
divestiture plan, it is expected, based on previous case precedents, that a plan
would be approved that would permit the necessary divestiture over a
considerable period of time.
Various tax and labor claims have been asserted against the Agribrands
business in Brazil. The claims arose principally from monetary corrections made
in connection with the institution of economic plans by prior Brazilian
administrations to control inflation.
Many of the legal matters are in preliminary stages, involve complex
issues of law and fact and may proceed for protracted periods of time. The
amount of the eventual liability, if any, from these proceedings cannot be
determined with certainty; however, in the opinion of Agribrands management,
based upon the information presently known, as well as upon the limitation of
certain of its liabilities under the Agreement and Plan of Reorganization
between Ralston and Agribrands for the spin-off of Agribrands, the ultimate
liability of Agribrands, if any, arising from the pending legal proceedings, as
well as from asserted legal claims and known potential legal claims which are
probable of assertion, taking into account established accruals for estimated
liabilities, should not be material to the financial position of Agribrands but
could be material to results of operations or cash flows for a particular
quarter or annual period.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
20
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the New York Stock Exchange
under the symbol "AGX". There were 10,965 shareholders of record on October 1,
1999. The Company has not paid cash dividends in 1999 and does not intend to
begin paying cash dividends in fiscal year 2000.
The following table sets forth, for the twelve months ended August 31,
1999, and the five months ended August 31, 1998, the range of high and low sale
prices of Agribrands common stock as reported on the NYSE Composite Tape.
AGRIBRANDS COMMON STOCK
MARKET PRICES
HIGH LOW DIVIDENDS
1999
Fourth Quarter $48.75 $34.06 --
Third Quarter $37.37 $30.94 --
Second Quarter $35.50 $26.69 --
First Quarter $31.69 $21.44 --
1998
Fourth Quarter $35.69 $29.13 --
Third Quarter (April 1 - May 31) $42.69 $32.25 --
21
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FIVE YEAR FINANCIAL SUMMARY
(In millions except per share data)
For the year ended August 31,
--------------------------------------------------------------------------
STATEMENT OF EARNINGS DATA 1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Tons of feed product sold 5.0 5.2 5.1 4.8 4.3
Net sales $ 1,261.5 $ 1,410.1 $ 1,527.6 $ 1,401.3 $ 1,147.2
Income over ingredient cost 356.7 345.8 361.7 333.3 298.0
Depreciation and amortization 24.8 21.2 21.9 20.4 17.5
Provisions for restructuring - 3.0 3.2 8.3 1.8
Gain on sale of property (2.3) - - (3.6) (1.6)
Interest expense 8.0 12.0 10.9 13.0 12.1
Investment income (10.2) (5.2) (4.2) (3.6) (4.9)
Foreign exchange loss 1.5 12.8 3.7 8.3 4.0
Earnings before income taxes 70.4 34.2 33.1 24.9 33.4
Income taxes 26.4 20.4 24.4 14.0 18.7
Net earnings (a)(b) $ 44.0 $ 13.8 $ 8.7 $ 10.9 $ 14.7
Earnings per share:
Basic (c) $ 4.16 $ 1.29 $ .82 $ 1.02 $ 1.37
Diluted (c) $ 4.11 $ 1.29 $ .82 $ 1.02 $ 1.37
August 31,
--------------------------------------------------------------------------
BALANCE SHEET DATA 1999 1998 1997 1996 1995
------------- ---------- ------------- ------------- -------------
Working capital $ 186.4 $ 153.7 $ 46.7 $ 59.4 $ 37.4
Net property 174.0 176.6 156.9 145.6 137.1
Additions (during the period) 25.9 44.6 44.1 28.5 27.1
Depreciation (during the period) 22.7 19.3 19.6 19.1 17.3
Total assets 566.2 578.4 481.2 497.8 407.8
Long-term debt 11.5 14.2 22.8 41.3 34.3
Shareholders equity $ 373.3 $ 339.4 $ 198.1 $ 190.3 $ 139.9
Average common shares outstanding:
Basic (c) 10.6 10.7 10.7 10.7 10.7
Diluted (c) 10.7 10.7 10.7 10.7 10.7
<FN>
- ------------------------------------------------
(a) After-tax provisions for restructuring reduced net earnings by $1.7 in the year ended August 31, 1998, $3.2 in
1997, $7.2 in 1996 and $1.0 in 1995.
(b) After-tax gain on the sale of property increased net earnings by $1.5 in the year ended August 31, 1999, $2.9 in
1996 and $1.1 in 1995.
(c) Assumes 10.7 million shares outstanding for all periods prior to the Distribution Date.
</FN>
</TABLE>
22
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is a summary of the key factors management
considers necessary in reviewing Agribrands results of operations, operating
segment results, liquidity and capital resources. Management has also included a
section on Key Measures and Concepts for Understanding the Business.
Agribrands is a leading international producer and marketer of formula
animal feeds and other agricultural products. Prior to April 1, 1998, the
Company was a wholly-owned subsidiary of Ralston. On that date, Ralston
distributed the common stock of the Company to its shareholders in a tax-free
spin-off. The Company is a successor to Ralston's over 100 years of experience
in the animal feeds and agricultural products industry.
The production and sale of animal feed was the primary business of
Ralston when it was established in 1894. From that date until the Distribution,
Ralston built and maintained its industry position by consistently providing
high-quality, research-proven products and customer service. Although this
business originated in the United States, it expanded throughout the world,
entering the Americas (outside of the United States) in 1927, Europe in 1957 and
Asia in 1967. The Company now operates 71 manufacturing plants in 16 countries,
and has more than thirty years' experience operating across four continents. The
primary animal feed business of Agribrands is conducted almost exclusively
outside the United States. In 1986, Ralston sold Purina Mills, Inc., its U.S.
animal feeds and agricultural products business, to an unrelated third party.
Purina Mills is unrelated to Agribrands.
23
<PAGE>
REVIEW OF CONSOLIDATED RESULTS OF OPERATIONS
Unless otherwise noted, all references to prices, costs and margins
reflect U.S. Dollar results after translation of foreign currency financial
statements in accordance with Statement of Financial Accounting Standards No. 52
(FAS 52).
Net Sales
Consolidated net sales decreased $148.6 million or 10.5% in 1999 as result
of lower volume and lower average selling prices. Feed volume declined 215,000
metric tons or 4.2% in 1999 with most of the decline occurring in Europe and
Asia. Average selling prices declined $18 per ton or 6.7% in 1999 reflecting
lower commodity costs relative to 1998, consistent with the feed industry's
practice of adjusting prices to reflect changes in ingredient costs.
Consolidated net sales decreased $117.5 million or 7.7% in 1998 primarily as a
result of lower commodity costs.
Operating Profit
Operating profit increased $8.1 million or 13.7% in 1999 due to lower
operating expenses in Europe and improved margins in Asia. Operating profit
increased $12.6 million or 27.0% in 1998 as improved margins and increased
volume in the Americas region and lower operating expenses in Europe more than
offset a decline in Asia's profitability and higher corporate administrative
expenses. Operating profit excludes provisions for restructuring, gains on sale
of property, interest expense and other income and expense.
Restructuring activities
In 1998, Agribrands recorded provisions for restructuring which reduced
earnings before income taxes and net earnings by $3.0 million and $1.7 million,
respectively. These charges represented primarily severance costs and fixed
asset write-offs associated with the streamlining of Agribrands' operations in
Europe. The restructuring provided for the severance of approximately 40
employees, most of whom were released prior to August 31, 1998. These
restructuring actions resulted in pre-tax cost savings of $0.9 million in 1998
and were expected to result in annual savings of approximately $2.0 million.
In 1997, Agribrands recorded provisions for restructuring which reduced
earnings before income taxes and net earnings by $3.2 million. These charges
primarily represented severance costs and fixed asset write-offs related to the
August 1997 closing of a production facility in Portugal. Beginning in 1998,
these restructuring actions were expected to result in annual savings of
approximately $1.0 million.
Gain on Sale of Property
In 1999, Agribrands realized a $1.8 million gain on the sale of land in
Korea and a $0.5 million gain on the sale of property in Spain. The sale of
these assets is not expected to have a material impact on future operations.
24
<PAGE>
Interest Expense and Other Income/Expense
Interest expense decreased $4.0 million in 1999 as a result of both
lower average borrowings and lower interest rates. Interest expense increased
$1.1 million in 1998 primarily due to higher interest rates in the markets where
the Company held debt.
Other income/expense, net, changed favorably by $18.8 million in 1999.
Foreign exchange losses were $1.5 million in 1999 versus $12.8 million in 1998.
Investment income was $5.0 million higher in 1999 due to higher levels of
interest bearing investments. Other income/expense, net, changed unfavorably by
$10.6 million in 1998 compared to 1997. Foreign exchange losses were
substantially higher in 1998 as a result of losses on U.S. Dollar denominated
debt in Korea and Colombia and losses on local currency denominated assets in
Mexico, where the Company then used hyper-inflationary accounting. Investment
income was $1.0 million higher in 1998 compared to 1997 because of higher levels
of interest bearing investments. Earnings for 1998 were also adversely impacted
by a $2.5 million charge to write off deferred financing costs associated with a
credit facility the Company elected not to close.
Net Earnings
Net earnings were $44.0 million for the year ended August 31, 1999
compared to $13.8 million in 1998 and $8.7 million in 1997. Income taxes, which
include federal, state and foreign taxes, were 37.5%, 59.6% and 73.7% of pre-tax
earnings in 1999, 1998 and 1997, respectively. The effective tax rate in 1999
was favorably impacted by a reduction in valuation allowances against tax loss
carryforwards in France and Spain and tax credit carryforwards in Mexico. The
effective tax rate in 1999 would have been lower had the Company not recorded a
$4.0 million valuation allowance against foreign tax credits awarded in the
United States for which no tax benefit is expected to be realized. The effective
rates in 1998 and 1997 were unfavorably impacted by both losses in countries for
which no tax benefit could be recognized and incremental taxes allocated by
Ralston. See Note 10 of the Company's Notes to Financial Statements for more
information concerning income taxes.
25
<PAGE>
<TABLE>
<CAPTION>
REVIEW OF SEGMENT RESULTS
(Dollars in millions)
Corporate and
Americas Europe Asia Tradico Consolidated
-------------- ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Year Ended August 31, 1999:
- --------------------------
Net sales $ 572.5 $ 341.8 $ 344.6 $ 2.6 $ 1,261.5
Operating profit $ 33.4 $ 15.6 $ 33.0 $ (14.6) $ 67.4
Tons of feed product sold 2,165,000 1,500,000 1,297,000 1,000 4,963,000
Income over ingredient cost $ 147.3 $ 115.0 $ 94.5 $ (0.1) $ 356.7
Year Ended August 31, 1998:
- --------------------------
Net sales $ 625.6 $ 397.2 $ 387.3 - $ 1,410.1
Operating profit $ 33.5 $ 11.9 $ 28.2 $ (14.3) $ 59.3
Tons of feed product sold 2,190,000 1,585,000 1,403,000 - 5,178,000
Income over ingredient cost $ 145.2 $ 115.2 $ 85.4 - $ 345.8
Year Ended August 31, 1997:
- --------------------------
Net sales $ 599.6 $ 467.7 $ 460.3 - $ 1,527.6
Operating profit $ 16.0 $ 5.1 $ 32.8 $ (7.2) $ 46.7
Tons of feed product sold 2,004,000 1,686,000 1,388,000 - 5,078,000
Income over ingredient cost $ 127.1 $ 123.2 $ 111.4 - $ 361.7
</TABLE>
Refer to Note 4 of the Consolidated Financial Statements for a description of
each segment.
26
<PAGE>
Americas
Net sales in the Americas segment (which excludes the United States)
decreased $53.1 million or 8.5% in 1999. Average selling prices declined $21 per
ton in 1999 as a result of substantially lower ingredient costs everywhere
except in Colombia where a new value added tax on certain ingredient purchases
went into effect on January 1, 1999. Weakness in consumer purchasing power
caused 1999 volume to decline in Brazil, Colombia and Peru. These volume
declines were mostly offset by increased volume in Mexico and Venezuela. In
Mexico, volumes increased mainly in the hog and poultry lines. In Venezuela,
volume to large poultry feeders increased in 1999. Net sales in the Americas
increased $26.0 million or 4.3% in 1998 compared to 1997 due to incremental
revenue from higher volume, which was only partially offset by a $14 per ton
decline in average selling prices. The 1998 decline in average selling prices
primarily reflects the decline in commodity costs. Volume for the Americas
segment increased 9.3% in 1998, primarily as a result of increased feed sales in
Mexico. Agribrands' operations in Mexico experienced increased demand in 1998
due to improved economic conditions compared to the prior year.
Operating profit in the Americas stayed flat in 1999 as a $2.1 million
improvement in income over ingredient cost ("IOIC") was mostly offset by a $1.8
million charge to settle a claim by a former joint venture partner in Chile.
IOIC improved on higher volume and higher margins in Venezuela and Mexico;
however, the improvement was partially offset by weakness in Brazil, Colombia
and Peru. Operating profit increased $17.5 million or 109.4% in 1998. The
improvement in operating profit and IOIC in 1998 was broad-based but most
notable in Mexico, where increased shrimp feed sales, with their overall higher
margins, helped improve profitability.
Europe
Net sales in Europe decreased $55.4 million or 13.9% in 1999 and $70.5
million or 15.1% in 1998. The decline in net sales for both years resulted from
a combination of lower volume and lower average selling prices. Volume declined
85,000 tons in 1999 mainly as a result of the December 1998 sale of an
unprofitable subsidiary of the Company's subsidiary in France. The 1999 decline
in volume was mitigated somewhat by increased sales of cattle feed in Spain.
Volume declined 101,000 tons in 1998 due to plant closures and a rabbit epidemic
that caused a decline in feed consumption. Average selling prices declined $23
per ton or 9.1% in 1999 and $27 per ton or 9.7% in 1998. The lower selling
prices reflect lower ingredient costs relative to the prior year, consistent
with the feed industry's practice of adjusting prices to reflect changes in
ingredient costs.
IOIC in Europe declined $0.2 million in 1999 as the reduction in volume
was largely offset by an improvement in margins. IOIC declined $8.0 million in
1998 largely due to the reduction in volume.
Operating profit in Europe increased $3.7 million or 31.1% in 1999 and
$6.8 million or 133.3% in 1998 due to a reduction in operating expenses. The
Europe segment's operating expenses declined in both years as a result of cost
savings from prior year restructurings and translation of local currency costs
at weaker foreign currency exchange rates.
Asia
Net sales in Asia decreased $42.7 million or 11.0% in 1999 due to a
combination of lower volume and lower ingredient costs. Volume in Asia declined
106,000 tons or 7.6%. Nearly all of this volume decline occurred in Korea, where
low hog prices following last year's recession reduced demand for the Company's
higher-price, higher-performance hog feeds. Average selling prices in Asia
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declined by $10 per ton or 3.8% primarily as a result of lower ingredient costs.
Net sales in Asia decreased $73.0 million or 15.9% in 1998. Volume for the Asia
region was essentially flat for 1998. Net sales declined in 1998 due to lower
ingredient costs and devaluation of the local currencies against the U.S. Dollar
in excess of local currency selling price increases. During fiscal year 1998,
both the Korean Won and Philippine Peso devalued approximately one-third against
the Dollar.
In 1999, the Asia segment's IOIC improved by $12 per ton and $9.1
million overall reflecting a significant movement toward pre-crisis unit
margins, specifically in Korea. In 1998, IOIC declined $19 per ton and $26.0
million overall as local pricing adjustments were unable to offset the full
effect of the 1998 devaluation of the Asian currencies versus the U.S. Dollar.
Operating profit in Asia increased $4.8 million or 17.0% in 1999 as
some of the increase in IOIC was offset by an increase in operating expenses.
This increase in operating expenses occurred primarily as a result of capital
expenditures made in 1998 including the purchase of one plant and the
construction of another in China. Operating profit in Asia decreased $4.6
million or 14.0% in 1998. The 1998 decline in IOIC was largely offset by a
reduction in operating expenses which primarily resulted from translating
relatively stable local currency costs at significantly weaker foreign currency
exchange rates versus the U.S. Dollar.
Corporate and Tradico
The corporate and Tradico segment is located in the United States. This
segment contains certain corporate items which are not allocated to other
segments. Tradico, a division within the Company, acquires and resells
ingredients, equipment and feed products primarily to affiliates. In fiscal year
1999, net sales to non-affiliates consisted primarily of ingredient sales
together with some shipments of feed products.
On an operating profit basis, the corporate and Tradico segment recorded a
loss (primarily related to unallocated corporate administrative items) of $14.6
million in 1999, $14.3 million in 1998 and $7.2 million in 1997. Corporate
administrative expenses increased $7.1 million in 1998, reflecting the
stand-alone cost structure of the Company versus the lower overhead expenses
incurred while Ralston owned the Agribrands Businesses.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations increased by $77.3 million or 232.1% in 1999 due
to increased cash earnings and favorable changes in working capital items,
particularly accounts receivable and inventories. Accounts receivable decreased
by $20 million in 1999 primarily as a result of collecting $12.9 million due
from Ralston at the end of last year. In addition, receivables in Italy declined
by around $5 million due to a combination of reduced sales and collection of
accounts receivable for value added tax. Consolidated inventories decreased by
$12.7 million in 1999 due to lower volumes in Asia, lower worldwide commodity
prices and strategic grain purchases made by Mexico in August 1998. Cash flow
from operations decreased by $34.5 million or 50.9% in 1998 due to unfavorable
changes in working capital items including the $12.9 million receivable from
Ralston recorded in connection with the Distribution.
Capital expenditures, primarily to replace or enhance existing
production facilities and equipment, were $25.9 million, $44.6 million and $44.1
million in fiscal years 1999, 1998 and 1997, respectively. The Company expects
capital expenditures in fiscal year 2000 to be at or near the level for 1999.
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The Company has a formal review procedure for the authorization of capital
expenditures. Anticipated capital expenditures are expected to be funded with
existing cash reserves as well as cash generated from operations.
Agribrands is continually evaluating new investment opportunities. In
fiscal year 1998, Agribrands invested $16.6 million to purchase businesses in
Venezuela, Italy and China. These acquisitions were funded through a combination
of funds provided by Ralston and local country borrowings. Assuming these
acquisitions had occurred as of September 1, 1997, they would not have had a
material effect on net sales or net earnings during any of the periods
presented.
Agribrands' capital expenditures and acquisitions in fiscal years 1998
and 1997 were partially funded with investments by and advances from Ralston.
Net proceeds from Ralston were $141.9 million in fiscal year 1998 and $13.7
million in fiscal year 1997. In accordance with the Agreement and Plan of
Reorganization, Agribrands was spun off from Ralston in 1998 with approximately
$105.0 million of cash and receivables from Ralston (offset by approximately
$80.0 million of debt retained by Agribrands and its affiliates).
The Company's working capital requirements for inventories and
receivables are influenced somewhat by seasonality, the availability of raw
materials and changes in commodity costs, and as a result may fluctuate widely.
The Company has generally financed its seasonal and other working capital needs
through short-term borrowings provided by local foreign banks and branches of
multi-national banks. Intercompany loans are also used by the Company to finance
working capital if the loans reduce external local borrowing costs by more than
the opportunity cost of lower U.S. invested reserves. In 1999, the Company
reduced its short-term borrowings to $18.5 million from $46.9 million in 1998.
The Company's foreign affiliates have established uncommitted credit lines with
several lenders in order to assure availability of working capital. On August
31, 1999, total unused, uncommitted lines of credit were approximately $200
million. This includes approximately $90 million of uncommitted lines of credit
for the Company's Korean subsidiary.
Cash on hand, cash flow from operations and borrowings under various
lines of credit are Agribrands' primary sources of liquidity. Management has a
strong focus on cash flow and the effective use of excess cash flow. The
combined operating, cash and equity position of Agribrands should continue to
provide the capital flexibility necessary to fund future opportunities as well
as to meet existing obligations.
KEY MEASURES AND CONCEPTS FOR UNDERSTANDING THE BUSINESS
Income over Ingredient Cost (IOIC)
The commercial animal feed industry generally prices products on the
basis of aggregate ingredient cost plus a per-unit margin. As ingredient prices
fluctuate, the changes are generally passed on to customers through changes in
the Company's product pricing. Income over ingredient cost (which is equal to
net sales minus the cost of ingredients), rather than sales Dollars, is the key
indicator of revenue performance because of the distortions in sales Dollars
caused by changes in commodity prices. Management also monitors IOIC per ton to
evaluate trends in pricing and relative product value.
Dollar-Responsive Economics of International Feed Operations
Feed is manufactured by processing a combination of grains, proteins,
vitamins, and minerals. Approximately 80% of the total cost to produce feed is
the cost of these ingredients, most of which are widely traded in
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Dollar-denominated global commodity markets. Excluding logistics costs, the
Dollar values (and costs) of ingredients around the world are broadly
comparable. Local currency prices for ingredients, therefore, typically adjust
quickly to reflect changes in quoted Dollar prices and changes in the exchange
rate between the local currency and the Dollar. As raw materials inventories are
replenished after an exchange rate change, new local currency ingredient costs
are reflected in local currency feed prices.
The margin added to ingredient costs is less responsive to exchange
rate changes because industry pricing is often established by local competitors.
Nevertheless, exchange rates between the U.S. and other countries (particularly
countries with systemic high inflation like many of those where the Company
operates) are related closely to differentials between the U.S. and local
inflation and interest rates. As a result, Dollar-translated IOIC levels of the
Company's international operations generally fluctuate closely around long-term
norms, particularly on a consolidated basis.
Dollar-Based Earnings Before Interest, Taxes, Depreciation and Amortization
(EBITDA)
Management believes the required method of translating foreign currency
financial statements for most of the Company's foreign affiliates (that is using
the local currency as functional currency) can distort the economic impact of
certain items, specifically costs of goods sold and foreign exchange gains and
losses (see Note 2 of the Company's Notes to Financial Statements for more
information concerning the Company's translation procedures). Because of the
Company's earnings mix, these distortions can have a disproportionate effect on
reported results. For this reason, management believes it is important to
understand the Company's operational results computed using the U.S. Dollar as
the functional currency.
Dollar-based accounting was required practice prior to the issuance of
FAS 52 in 1981 and continues to be required for U.S. affiliates operating in
hyper-inflationary environments. This exception is in recognition of the
possible distortions of local-currency based accounting. "Hyper-inflationary"
accounting is limited under FAS 52 to countries with cumulative inflation
greater than 100% over three years. This fails to cover numerous countries
(including those in which the Company generates the majority of its earnings)
with consistently higher inflation than the U.S., whose currency values remain
unstable (typically devaluing over time).
When exchange rates fluctuate, earnings results using U.S. Dollar-based
accounting differ from results under local currency based accounting in three
important ways:
o Cost of goods sold are measured using the exchange rate at the
time inventory was purchased rather than the exchange rate at the
time finished product was sold.
o Foreign exchange gains and losses are computed on local currency
denominated assets and liabilities rather than U.S.
Dollar-denominated assets and liabilities.
o Depreciation is computed by applying the appropriate factor to the
historical Dollar value of the asset rather than by applying the
appropriate factor to the historical local currency value and
translating the result at the current exchange rate.
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Because of its principal focus on cash flows, management uses
Dollar-based EBITDA as a key determinant of awards for corporate management
under its annual incentive plan. The following table provides a reconciliation
of pre-tax earnings to Dollar-based EBITDA for fiscal years 1999 and 1998 (Data
was not available to present 1997 numbers):
------------------------------------------------------------------------------
Dollar-based EBITDA
(Dollars in millions)
Year ended August 31,
---------------------
1999 1998
--------- -------
Earnings before Income Taxes $ 70.4 $ 34.2
Add: Provisions for restructuring - 3.0
Gain on sale of property (2.3) -
Depreciation and amortization 24.8 21.2
Interest expense 8.0 12.0
------- ------
EBITDA reported under FAS 52 $ 100.9 $ 70.4
Adjustments to report EBITDA on a U.S. Dollar basis:
1) Difference in cost of sales for ingredient costs (6.1) (16.6)
2) Reversal of foreign exchange loss reported under
FAS 52 1.5 12.8
3) Dollar-based foreign exchange gain 3.7 12.6
------- ------
EBITDA reported on a U.S. Dollar basis $ 100.0 $ 79.2
======= =======
Explanation of adjustments to EBITDA:
1) Difference in cost of sales for ingredient costs--The operations in the
Americas (specifically Brazil and Colombia) accounted for the majority of
the adjustment in 1999 while the operations in the Americas and Asia
accounted for nearly all of the adjustment in 1998. Ingredient costs were
lower under FAS 52 in both years due to devaluation of the local
currencies against the Dollar. Under Dollar-based accounting, inventories
are initially recorded and maintained in Dollars.
2) Reversal of foreign exchange loss reported under FAS 52--In 1999, foreign
exchange losses reported under FAS 52 in Brazil were only partially
offset by gains in Mexico and Korea. In 1998, the operations in Colombia,
Mexico and Korea accounted for most of the $12.8 million foreign exchange
loss reported under FAS 52.
3) Dollar-based foreign exchange gain--In 1999, Dollar-based foreign
exchange gains realized in Brazil, Colombia, Italy and Mexico were
partially offset by losses in Korea and the Philippines. Except in
Mexico, the Company had net local currency liabilities in each of these
countries during 1999. Where the local currency weakened against the
Dollar (Brazil, Colombia and Italy), this liability decreased in Dollar
terms (a foreign exchange gain). Where the local currency strengthened
against the Dollar, (Korea and the Philippines), this liability increased
in Dollar terms (a loss). In Mexico, the Company had net local currency
denominated assets during 1999 which increased in Dollar value (a foreign
exchange gain) as the Mexican Peso strengthened against the Dollar. In
1998, Asian currencies weakened against the Dollar generating nearly all
of the $12.6 million foreign exchange gain on net obligations denominated
in the local Asian currencies.
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MARKET RISK SENSITIVITY AND INFLATION RISK
Commodity Price Risks
The availability and price of agricultural products are subject to wide
fluctuations due to unpredictable factors such as weather conditions, government
regulations, economic climate or other unforeseen circumstances. The Company
utilizes highly correlative and effective commodity futures contracts and
options to manage certain of these exposures. The Company hedges only firm
commitments or anticipated transactions, and Company policy prohibits the use of
commodity derivatives for speculation. The potential loss in fair value at
August 31, 1999 and 1998 of the Company's commodity positions, excluding
inventory on hand and fixed price contracts, resulting from a hypothetical 10%
adverse change in commodity prices is $0.4 million and $0.2 million,
respectively.
Interest Rate Risks
At August 31, 1999, the Company's debt portfolio was comprised of
approximately 60% variable rate debt and 40% fixed rate debt. With respect to
the Company's variable rate debt, a hypothetical 10% adverse change in interest
rates would have had an unfavorable impact of around $0.5 million on the
Company's interest expense for 1999. With respect to the Company's fixed rate
debt outstanding at August 31, 1999, a hypothetical 10% adverse change in
interest rates would have resulted in approximately a $0.3 million change in the
market value of the Company's fixed rate debt.
Foreign Currency Exchange Risks
International operations account for almost all of Agribrands' revenue
and operating income. Foreign currency accounting exposures arise from
transactions, including firm commitments and anticipated transactions,
denominated in a currency other than an entity's functional currency and from
foreign denominated revenues and profits translated into U.S. Dollars. At a
consolidated level, economic exposures to U.S. Dollar values of the Company's
assets and liabilities arise because many assets or liabilities are denominated
in local currencies subject to fluctuating rates of exchange with the Dollar.
Agribrands periodically enters into foreign exchange forward contracts
to mitigate Agribrands' economic exposure to changes in exchange rates. Company
policy allows foreign currency hedging transactions only for identifiable
foreign currency exposures, and therefore, Agribrands does not enter into
foreign currency contracts for trading purposes where the objective is to
generate profits. The potential loss in fair value at August 31, 1999 and 1998
for such net currency positions resulting from a hypothetical 10% adverse change
in foreign currency exchange rates is $0.8 million and $0.3 million,
respectively.
Because of the U.S. Dollar responsiveness of the Company's international
feed operations, management does not believe that fluctuations in the exchange
rate between the Dollar and a local currency materially impact the present value
of projected future Dollar-translated cash flows from the local operation. As a
result, Agribrands does not generally hedge the accounting exposure of its net
investments in foreign subsidiaries. The net investment in Agribrands' foreign
subsidiaries and affiliates translated into Dollars using the year-end exchange
rates is approximately $228 million and $205 million at August 31, 1999, and
1998, respectively. The potential accounting loss in value of Agribrands' net
investment in foreign subsidiaries resulting from a hypothetical 10% adverse
change in quoted foreign currency exchange rates at August 31, 1999 and 1998 is
approximately $20.7 million and $18.7 million, respectively.
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Inflation
Management recognizes that inflationary pressures may have an adverse
effect on Agribrands through higher asset replacement costs and related
depreciation and higher material costs. In addition, hyperinflationary
conditions have occurred in many of the countries in which Agribrands operates.
Agribrands tries to minimize these effects through geographical diversification,
cost reductions and productivity improvements as well as price increases to
maintain reasonable profit margins. It is management's view that inflation has
not had a significant impact on the consolidated operations in the three years
ended August 31, 1999.
Seasonality
Sales prices and volume can both be impacted by seasonal factors.
Agricultural product sales prices are directly influenced by changes in the
underlying commodity prices for the raw materials used to formulate animal
feeds. Commodity prices are usually at their lowest in the months immediately
following the fall harvest. Sales volume may fluctuate somewhat seasonally as
temperature affects caloric intake and breeding cycles. For example, the
Company's Mexican subsidiary sells the vast majority of its shrimp feed between
June and October due to the nature of the shrimp farming cycle.
Currently, seasonal factors have a limited impact on the Company's
total performance in any given period. Seasonality of commodity prices does not
materially affect earnings due to the industry practice of pricing at a
relatively constant margin over ingredient costs. With the possible exception of
shrimp feed sales, seasonally driven changes in sales volume do not materially
affect sales or earnings due to the geographic and species diversification of
Agribrands' operations.
YEAR 2000 COSTS
Many old computer systems, and other systems with embedded chip technology,
process dates based on two digits for the year of a transaction rather than a
full four digits. These systems are unable to properly process dates in the year
2000 and beyond. Agribrands utilizes a number of computer systems across its
worldwide operations. The Company has identified its significant software coding
issues related to the year 2000 date recognition for key financial and
operational systems. The Company estimates that it has resolved approximately
95% of its identified year 2000 coding issues. Agribrands spent approximately
$1.2 million to replace existing hardware and software during the year ended
August 31, 1999. The Company incurred costs for year 2000 reprogramming of
existing systems of approximately $0.9 million and $0.6 million during the years
ended August 31, 1999 and 1998, respectively. To make all of its systems year
2000 compliant, the Company estimates incurring an additional $0.2 million of
reprogramming costs. In addition, the Company expects to spend an additional
$0.3 million on new hardware and software. Completion of all reprogramming,
testing and implementation of new hardware and software is expected to occur by
November 30, 1999. All costs related to the reprogramming of existing systems
for the year 2000 issue are expensed as incurred. Costs of new hardware and
software are capitalized.
Based on the Company's efforts to date, management believes that its
key computer systems and other systems containing embedded chip technology will
be year 2000 compliant before January 1, 2000. The Company has identified its
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key customers and suppliers and is working with them to obtain assurances that
their systems are year 2000 compliant. However, the Company does not have any
control over these third parties and, as a result, cannot currently determine to
what extent future operating results may be adversely affected by the failure of
these third parties to successfully address their year 2000 issues. In addition,
the Company operates in sixteen countries on four continents at various stages
of economic development and is dependent on systems operated by governments,
financial institutions, utilities, communications suppliers and others in each
of these countries. The failure of any of such infrastructural systems to be
year 2000 compliant could disrupt the Company's business for a period of time
and if not quickly resolved could have a material adverse effect on the Company.
The Company believes that its geographic diversification and transactional
independence between business units significantly mitigate the risk of material
adverse effect from year 2000 disruptions. In the event disruptions do occur,
the Company's local operations are expected to respond in the same fashion as
they periodically do for disruptions from local natural disasters.
EUROPEAN ECONOMIC MONETARY UNION (EMU)
On January 1, 1999, eleven of the European Union countries (including
four countries where Agribrands' operations are located) adopted the Euro as
their single currency, and there is now a fixed conversion rate between their
existing currencies ("legacy currencies") and the Euro. Following the
introduction of the Euro, the legacy currencies will remain legal tender in the
participating countries during the transition period from January 1, 1999
through January 1, 2002. Beginning on January 1, 2002, the European Central Bank
will issue Euro-denominated bills and coins for use in cash transactions. On or
before July 1, 2002, the participating countries will withdraw all legacy bills
and coins and use the Euro as their legal currency.
The Company's key financial information systems in Europe are equipped
to process both Euro and legacy currency transactions through the transition
period ending January 1, 2002; however, they are not ready to handle the July 1,
2002 withdrawal of all legacy currencies. Management is currently planning to
modify the Company's key financial systems so they can handle the July 1, 2002
mandatory conversion to the Euro. The Company has not yet incurred any costs
associated with the conversion. To modify the key financial systems so they can
handle the mandatory conversion, the Company anticipates incurring $0.2 million
of reprogramming costs and spending approximately $0.2 million on new software.
All reprogramming costs will be expensed as incurred, and all software costs
will be capitalized. The Company plans to complete system modifications and
necessary testing by September 1, 2001.
From a broader business perspective, conversion to the Euro may cause
pricing disparities in different markets to narrow, lowering the Company's
margins. Nevertheless, the Company believes the conversion to the Euro will not
have a material impact on the Company's consolidated financial results.
OUTLOOK
Near-Term Operating Results
Excluding the combined effect of current local environmental factors,
near-term earnings are likely to remain relatively stable. The majority of the
Company's earnings come from affiliates that are well established in their local
markets and have achieved good coverage in the premium segment across most lines
of commercially raised animals. While certain product lines are growing steadily
34
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in some locations (for example, shrimp feed in Mexico), other lines may be
declining elsewhere (for example, rabbit feed in Europe).
It is difficult to forecast near-term earnings trends accurately also
due to the number of environmental factors that may move results up or down from
a "normalized" level. Local agricultural markets are highly responsive to a
number of variables including macro-economic conditions, weather, and current
concerns over food and environmental safety. Typically, large and small changes
in factors like these across the 16 countries where the Company operates will
randomly influence consolidated earnings.
However, in 1999 the Company enjoyed strong, or greatly improved,
macro-economic fundamentals in a majority of its larger markets, including
Korea, the Philippines, Mexico, and Venezuela. The impact of local conditions in
these markets more than offset that of difficult conditions in Brazil and
Hungary so that the combined effect from local factors was unusually positive.
Should macro-economic conditions be less positive in fiscal year 2000, the
Company will be challenged to match fiscal 1999 financial performance.
Longer-Term Operating Trends
The Company's traditional operating model is often most effective in
emerging markets, with large numbers of small animal producers. Longer-term
prospects for the individual operations are heavily dependent on the evolving
structures of the local animal production industries. Commercial feed is only
one element of a traditional system of animal production where each stage is
performed independently. Under appropriate circumstances, animal production
becomes more concentrated and efficient and the needs of animal producers change
with consequences for the feed manufacturer. In the most extreme case, an
entirely integrated production model arises, decreasing the potential number of
animals available to be fed by commercial feed producers.
The extent of changes to local animal production methods and the speed
at which those changes arise is dependent on many factors, including overall
economic development, trade policy initiatives, and popular and governmental
attitudes toward food safety, food security and environmental issues. These
dynamics already play an important role in the variation of profitability and
growth trends across the Agribrands portfolio.
The Company has built up substantial cash reserves (and expects
existing operations to continue producing free cash flows) which may be applied
toward investments and programs intended to leverage the Company's core
capabilities in ingredient knowledge, nutritional expertise and rural
distribution, and position the Company to prosper in environments both favorable
and hostile to the traditional commercial feed proposition.
Monetary Factors
As with operating earnings, financial costs and income can be difficult to
forecast due, in particular, to foreign exchange gains and losses generated by
volatile exchange rates and changing capital structures within the foreign
affiliates. Currently, the Company's most significant exposures to foreign
exchange gains and losses impacting net earnings are in Mexican Pesos, Brazilian
Real, Canadian Dollars, Korean Won, and Colombian Pesos. Management focuses on
the exchange gains and losses as computed using U.S.
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<PAGE>
Dollar-based accounting. These too can be volatile as management may not hedge
Dollar-based exchange risks when the benefit does not seem to outweigh the cost.
With respect to income taxes, management projects an ongoing effective tax
rate of around 35%, absent unforeseen foreign losses. This rate may be subject
to one-time reductions should it become more likely than not that the Company
will be able to utilize excess foreign tax credits and net operating loss
carryforwards whose benefits have not been recognized due to uncertainty about
the Company's long-term tax position.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
See MARKET RISK SENSITIVITY AND INFLATION RISK and Note 5 of the
Company's Notes to Financial Statements for management's quantitative and
qualitative disclosure about market risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF MANAGEMENT
The management of Agribrands International, Inc. has prepared the
accompanying consolidated financial statements for the years ended August 31,
1999, 1998 and 1997 and is responsible for their integrity and objectivity. The
statements were prepared in conformity with accounting principles generally
accepted in the United States, applying certain estimates and judgments as
required.
The Company maintains accounting and internal control systems which it
believes are adequate to provide reasonable assurance that assets are
safeguarded against loss from unauthorized use or disposition and financial
records are reliable for preparing financial statements. The selection and
training of qualified personnel, the establishment and communication of
accounting and administrative policies and procedures, and an extensive program
of internal audits, are important elements of these control systems.
The Board of Directors, through its Audit Committee consisting solely
of non-management directors, meets periodically with management, internal
auditors and the independent accountants to discuss audit and financial
reporting matters. Both the internal auditors and PricewaterhouseCoopers LLP
have direct access to the Audit Committee.
The report of PricewaterhouseCoopers LLP appears below.
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of Agribrands International, Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of earnings, of cash flows, of shareholders
equity, of comprehensive income (loss) present fairly, in all material respects,
the financial position of Agribrands International, Inc. and its subsidiaries at
August 31, 1999 and 1998, and the results of their operations and their cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
St. Louis, Missouri
October 8, 1999
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AGRIBRANDS INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF EARNINGS
Year Ended August 31
(Dollars in Millions)
1999 1998 1997
---------- ---------- ----------
Net Sales $ 1,261.5 $ 1,410.1 $ 1,527.6
---------- ---------- ----------
Costs and Expenses
Cost of products sold 1,050.6 1,207.2 1,322.0
Selling, general and administrative 143.5 143.6 158.9
Interest 8.0 12.0 10.9
Provisions for restructuring - 3.0 3.2
Gain on sale of property (2.3) - -
Other (income)/expense, net (8.7) 10.1 (0.5)
---------- ---------- ----------
1,191.1 1,375.9 1,494.5
---------- ---------- ----------
Earnings before Income Taxes 70.4 34.2 33.1
Income Taxes 26.4 20.4 24.4
---------- ---------- ----------
Net Earnings $ 44.0 $ 13.8 $ 8.7
========== ========== ==========
Earnings Per Share
Basic $ 4.16 $ 1.29 $ .82
========== ========== ==========
Diluted $ 4.11 $ 1.29 $ .82
========== ========== ==========
The above financial statement should be read in conjunction with the Notes to
Financial Statements.
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AGRIBRANDS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
August 31
(Dollars in Millions)
1999 1998
-------- --------
Assets
Current Assets
Cash and cash equivalents $ 174.5 $ 136.5
Short-term investments 3.5 1.5
Receivables, less allowance for doubtful accounts 77.0 103.0
Inventories 81.3 98.8
Other current assets 4.6 11.1
-------- ---------
Total Current Assets 340.9 350.9
-------- ---------
Investments and Other Assets 51.3 50.9
Property, Plant and Equipment - net 174.0 176.6
-------- ---------
Total $ 566.2 $ 578.4
======== =========
Liabilities and Shareholders Equity
Current Liabilities
Current maturities of long-term debt $ 2.4 $ 8.7
Notes payable 18.5 46.9
Accounts payable and accrued liabilities 125.1 132.8
Income taxes 8.5 8.8
--------- ---------
Total Current Liabilities 154.5 197.2
--------- ---------
Long-Term Debt 11.5 14.2
Deferred Income Taxes 3.7 2.7
Other Liabilities 23.2 24.9
Shareholders Equity
Common stock, $.01 par value, authorized
50,000,000 shares 0.1 0.1
Capital in excess of par value 419.5 419.5
Retained earnings 50.1 6.1
Common stock in treasury, at cost (10.8) -
Accumulated other comprehensive loss (85.6) (86.3)
--------- ---------
Total Shareholders Equity 373.3 339.4
--------- ---------
Total $ 566.2 $ 578.4
========= =========
The above financial statement should be read in conjunction with the Notes to
Financial Statements.
40
<PAGE>
<TABLE>
AGRIBRANDS INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended August 31
(Dollars in Millions)
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash Flow from Operations
Net earnings $ 44.0 $ 13.8 $ 8.7
Adjustments to reconcile net earnings to cash from operations:
Depreciation and amortization 24.8 21.2 21.9
Foreign exchange loss 1.5 12.8 3.7
Non-cash restructuring - 0.7 2.2
Deferred income taxes 1.9 (5.1) 1.9
Gain on sale of property (2.3) - -
Changes in assets and liabilities used in operations:
Decrease (increase) in accounts receivable 20.0 (6.5) (2.7)
Decrease (increase) in inventories 12.7 (4.1) 16.6
Decrease (increase) in other current assets 6.0 (1.2) (1.1)
Increase (decrease) in accounts payable and accrued liabilities 1.7 (6.0) 10.3
(Decrease) increase in income taxes payable (0.4) 3.3 0.7
Other, net 0.7 4.4 5.6
--------- --------- ----------
Net cash provided by operations 110.6 33.3 67.8
--------- --------- ----------
Cash Flow from Investing Activities
Acquisitions of businesses - (16.6) (3.3)
Property additions (25.9) (44.6) (44.1)
Proceeds from the sale of property 6.5 1.2 2.0
Purchase of key man life insurance (5.0) - -
Other, net (3.0) 0.3 6.9
--------- --------- ----------
Net cash used by investing activities (27.4) (59.7) (38.5)
--------- --------- ----------
Cash Flow from Financing Activities
Proceeds from issuance of long-term debt 11.0 19.0 3.8
Principal payments on long-term debt, including current maturities (16.8) (32.4) (5.3)
Net (decrease) increase in notes payable (27.3) 16.7 (33.3)
Treasury stock purchases (10.8) - -
Net transactions with Ralston - 141.9 13.7
--------- --------- ----------
Net cash (used by) provided by financing activities (43.9) 145.2 (21.1)
--------- --------- ----------
Effect of Exchange Rate Changes on Cash and Cash Equivalents (1.3) (7.5) (3.3)
--------- --------- ----------
Net Increase in Cash and Cash Equivalents 38.0 111.3 4.9
Cash and Cash Equivalents, Beginning of Period 136.5 25.2 20.3
--------- --------- ----------
Cash and Cash Equivalents, End of Period $174.5 $136.5 $ 25.2
========= ========= ==========
</TABLE>
The above financial statement should be read in conjunction with the Notes to
Financial Statements.
41
<PAGE>
<TABLE>
<CAPTION>
AGRIBRANDS INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
Three Years Ended August 31, 1999
(Dollars in Millions)
Accumulated
Ralston Capital in Common Other
Equity Common Excess of Retained Stock in Comprehensive
Investment Stock Par Value Earnings Treasury Loss
---------- ------ ----------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at August 31, 1996 $ 190.3
Net earnings 8.7
Net transactions with Ralston 20.5
Translation adjustment (21.4)
-------
Balance at August 31, 1997 $ 198.1
Net earnings 7.7
Net transactions with Ralston 142.8
Translation adjustment (15.3)
-------
Balance at March 31, 1998 $ 333.3
Distribution to Ralston's
shareholders (333.3) $ .1 $ 419.5 $ - $ - $ (86.3)
Net earnings - - - 6.1 - -
Translation adjustment - - - - - -
------- ------ ------- ------ ------ -------
Balance at August 31, 1998 $ - $ .1 $ 419.5 $ 6.1 $ - $ (86.3)
Net earnings - - - 44.0 - -
Treasury stock purchased - - - - (10.8) -
Activity under stock plans - - - - - -
Translation adjustment - - - - - 0.7
------- ------ ------- ------ ------ -------
Balance at August 31, 1999 $ - $ .1 $ 419.5 $ 50.1 $(10.8) $ (85.6)
======= ====== ======= ====== ====== =======
</TABLE>
The above financial statement should be read in conjunction with the Notes to
Financial Statements.
42
<PAGE>
AGRIBRANDS INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
Year Ended August 31
(Dollars in Millions)
1999 1998 1997
------ -------- ---------
Net earnings $ 44.0 $ 13.8 $ 8.7
Foreign currency translation adjustment 0.7 (15.3) (21.4)
------ -------- ---------
Comprehensive Income (Loss) $ 44.7 $ (1.5) $ (12.7)
====== ======== =========
The above financial statement should be read in conjunction with the Notes to
Financial Statements.
43
<PAGE>
AGRIBRANDS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions except per share data)
1. BASIS OF PRESENTATION
Effective April 1, 1998 (the "Distribution Date"), Agribrands
International, Inc. (the "Company" or "Agribrands") became an independent,
publicly owned company as a result of the distribution by Ralston Purina Company
("Ralston") of the Company's $.01 par value Common Stock to holders of Ralston
Common Stock at a distribution ratio of one for ten (the "Distribution"). Prior
to the Distribution, the Company was formed as a wholly owned subsidiary of
Ralston for the purpose of effecting the Distribution. Included in this
transaction was the transfer of substantially all of the assets and liabilities
related to the animal feeds and agricultural products businesses (the
"Agribrands Businesses"). Ralston's international pet products businesses ("RPI
Consumer") were not included in the spin-off. Ralston did not retain any
ownership interest in the Company.
Agribrands is one of the leading international producers and marketers
of animal feeds and, through its subsidiaries and joint venture partners,
operates 71 manufacturing plants in 16 countries. Its products are marketed
outside the United States under the "Purina"(R) and "Chow"(R) trademarks and the
"Checkerboard"(R) logo through a network of approximately 3,400 independent
dealers, as well as an independent and a direct sales force.
The Balance Sheets as of August 31, 1999 and 1998 and the Statement
of Earnings for the year ended August 31, 1999 are presented on a consolidated
basis. The Statement of Earnings for the year ended August 31, 1998 includes the
combined results of operations of the Agribrands Businesses under Ralston for
the seven months prior to the Distribution Date and the consolidated results of
operations of the Company for the five month period ended August 31, 1998. The
Statement of Earnings for all periods prior to the Distribution Date is
presented on a combined basis and reflects periods during which the Agribrands
Businesses operated primarily as wholly-owned subsidiaries of Ralston and its
subsidiaries. The combined financial statements include revenues and expenses
that are directly related to the Agribrands Businesses. All significant
intercompany transactions have been eliminated from the combined financial
statements.
RPI Consumer, while not included in the accompanying financial
statements, generally operated within the same subsidiaries and affiliates as
the Agribrands Businesses prior to the Distribution Date. See Note 13 for a more
complete discussion.
Certain previously reported amounts have been reclassified to make them
consistent with the current year presentation.
44
<PAGE>
AGRIBRANDS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions except per share data)
2. SUMMARY OF ACCOUNTING POLICIES
Agribrands' significant accounting policies, which conform to
accounting principles generally accepted in the United States and are applied on
a consistent basis among years, except as indicated, are described below:
Principles of Consolidation - These financial statements include the
accounts of Agribrands and its majority-owned subsidiaries. All significant
intercompany transactions have been eliminated. Investments in affiliated
companies, 20% through 50%-owned, are carried at equity.
Minority interests in earnings of subsidiaries and Agribrands' share of
the net earnings of unconsolidated companies carried at equity are included in
selling, general and administrative expenses.
Foreign Currency Translation - Financial statements of foreign
operations where the local currency is the functional currency are translated
using exchange rates in effect at period end for assets and liabilities and
average exchange rates during the period for results of operations. Related
translation adjustments are reported as a separate component of Shareholders
Equity.
For foreign operations where the U.S. Dollar is the functional currency
and for countries which are considered highly inflationary, translation
practices differ in that inventories, investments, properties, accumulated
depreciation and depreciation accounts are translated at historical rates of
exchange and related translation adjustments are included in earnings. Gains and
losses from foreign currency transactions are included in earnings.
Derivative Financial Instruments - All derivative financial instruments
held by the Company are designated as hedges of existing assets, liabilities,
firm commitments or identifiable transactions. They have a high degree of
correlation with the underlying exposure and are highly effective in offsetting
underlying price movements. Accordingly, gains and losses from changes in the
fair value of derivatives are deferred and included in the measurement of the
related transaction. Losses are not deferred if it is estimated that deferral
would lead to recognizing losses in later periods. If the underlying transaction
was no longer expected to occur, any gain or loss would be recognized
immediately in the Statement of Earnings. See Note 5 for additional information.
Cash Equivalents are considered to be all highly liquid investments
with a maturity of three months or less when purchased, including time deposits
of $19.2 and $12.8 at August 31, 1999 and 1998, respectively.
Short-term Investments are valued at cost which approximates market.
Inventories are valued generally at the lower of average cost or
market.
Property at Cost - Expenditures for new facilities and those which
substantially increase the useful lives of the property, including interest
during construction, are capitalized. Maintenance, repairs and minor renewals
are expensed as incurred. When properties are retired or otherwise disposed of,
the related cost and accumulated depreciation are removed from the accounts and
gains or losses on the dispositions are reflected in earnings.
45
<PAGE>
AGRIBRANDS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions except per share data)
Depreciation is generally provided on the straight-line basis by
charges to costs or expenses at rates based on the estimated useful lives of the
properties. Estimated useful lives range from 3 to 15 years for machinery and
equipment and 15 to 40 years for buildings. Depreciation expense was $22.7 in
1999, $19.3 in 1998 and $19.6 in 1997.
Goodwill, which is included in Investments and Other Assets, represents
the excess of cost over the net tangible assets of acquired businesses and is
amortized over periods of up to 40 years, with the majority being amortized over
a 25 year period.
Subsequent to acquisition, Agribrands continually evaluates whether
later events and circumstances have occurred that indicate the remaining
estimated useful life of businesses carrying goodwill may warrant revision or
that the remaining balance of goodwill may not be recoverable. The measurement
of possible impairment is based on the ability to recover the balance of
goodwill from expected future operating cash flows on an undiscounted basis. In
the opinion of management, no such impairment existed as of August 31, 1999 and
1998.
Revenue is recognized when products are shipped to customers. Sales
discounts, returns and allowances are included in net sales. The provision for
doubtful accounts is included in selling, general and administrative expenses.
Advertising Costs are expensed as incurred and were $13.9 in 1999,
$13.7 in 1998 and $16.8 in 1997.
Research and Development Costs are expensed as incurred and were $7.0
in 1999, $6.8 in 1998 and $6.9 in 1997.
Use of Estimates - The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Income Taxes - Agribrands follows the liability method of accounting
for income taxes. Deferred income taxes are recognized for the effect of
temporary differences between financial and tax reporting. No additional U.S.
taxes have been provided on earnings of foreign subsidiaries expected to be
reinvested indefinitely. Additional income taxes are provided, however, on
planned repatriation of foreign earnings after taking into account tax-exempt
earnings and applicable foreign tax credits. Deferred tax assets are reduced by
valuation allowances when, based on the weight of available evidence, it is more
likely than not that some or all of the deferred tax asset will not be realized.
Earnings per Share - Basic earnings per share are based on the weighted
average number of shares outstanding during the year including assumed shares
outstanding of 10.7 million for all periods prior to the Distribution Date.
Diluted earnings per share are adjusted for the dilutive effect of common stock
equivalents. See Note 11 for additional information.
46
<PAGE>
AGRIBRANDS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions except per share data)
New Accounting Standards - The Financial Accounting Standards Board
issued FAS 133, "Accounting for Derivative Instruments and Hedging Activities,"
in June 1998. The Company is evaluating the effects this statement will have on
its financial reporting and disclosures. The Company will adopt FAS 133 in
fiscal year 2001.
3. ACQUISITIONS
In January 1998, the Company acquired feed mills in Maracay, Venezuela
and Spessa, Italy for $4.3 and $7.3, respectively. Agribrands had previously
leased the feed mills in both Maracay and Spessa.
In December 1997, Agribrands invested $5.0 in Agribrands Purina
(Langfang) Feedmill Co., Ltd., a new wholly owned foreign subsidiary. The new
subsidiary utilized the funds to acquire a feed mill in Langfang, People's
Republic of China.
These acquisitions were accounted for using the purchase method of
accounting and the results of operations have been included in the Consolidated
Statement of Earnings from the date of acquisition. Assuming these acquisitions
had occurred as of the beginning of their respective fiscal years, they would
not have had a material effect on net sales, net earnings or earnings per share.
47
<PAGE>
AGRIBRANDS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions except per share data)
4. BUSINESS SEGMENT AND GEOGRAPHIC AREA INFORMATION
In fiscal year 1999, the Company adopted FAS 131, "Disclosures about
Segments of an Enterprise and Related Information." This standard requires
disclosure of segment information on the same basis as used internally for
evaluating segment performance. The Company and its subsidiaries are principally
engaged in the production and sale of agricultural animal feed. The Company's
businesses are organized by geographic area.
o The Americas segment consists of the Company's businesses in
Brazil, Canada, Colombia, Guatemala, Mexico, Peru and Venezuela.
o The Europe segment consists of the Company's businesses in France,
Hungary, Italy, Portugal, Spain and Turkey.
o The Asia segment consists of the Company's businesses in China,
the Philippines and South Korea.
o The corporate and Tradico segment is located in the United States.
It includes Tradico, which sources and resells ingredients,
equipment, and products primarily to affiliates. This segment
also includes certain corporate items that were not allocated to
the other segments.
Summarized below is the Company' business segment information for the
years ended August 31, 1999, 1998 and 1997. Prior years' information has been
restated for the adoption of FAS 131.
1999 1998 1997
----------- ----------- -----------
Net Sales - External
Americas $ 572.5 $ 625.6 $ 599.6
Europe 341.8 397.2 467.7
Asia 344.6 387.3 460.3
Corporate and Tradico (U.S.) 2.6 - -
--------- ---------- ---------
Total $ 1,261.5 $ 1,410.1 $ 1,527.6
========= ========== =========
Net Sales - Intersegment
Americas $ - $ - $ -
Europe - - -
Asia - - -
Corporate and Tradico (U.S.) 102.0 92.9 55.5
--------- ---------- ---------
Total $ 102.0 $ 92.9 $ 55.5
========= ========== =========
Depreciation & Amortization
Americas $ 7.9 $ 6.8 $ 6.9
Europe 8.0 8.3 8.6
Asia 8.1 5.9 6.4
Corporate and Tradico (U.S.) 0.8 0.2 -
--------- ---------- ---------
Total $ 24.8 $ 21.2 $ 21.9
========= ========== =========
48
<PAGE>
AGRIBRANDS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions except per share data)
1999 1998 1997
------- ------- -------
Operating Profit
Americas $ 33.4 $ 33.5 $ 16.0
Europe 15.6 11.9 5.1
Asia 33.0 28.2 32.8
Corporate and Tradico (U.S.) (14.6) (14.3) (7.2)
------- -------- -------
67.4 59.3 46.7
Provisions for restructuring - (3.0) (3.2)
Gain on sale of property 2.3 - -
Interest expense (8.0) (12.0) (10.9)
Other income/(expense), net 8.7 (10.1) 0.5
------- -------- -------
Earnings before Income Taxes $ 70.4 $ 34.2 $ 33.1
======= ======== =======
Capital Expenditures
Americas $ 11.1 $ 16.7 $ 13.3
Europe 5.6 7.7 14.4
Asia 9.1 19.5 16.4
Corporate and Tradico (U.S.) 0.1 0.7 -
------- -------- -------
Total $ 25.9 $ 44.6 $ 44.1
======= ======== =======
Total Assets
Americas $169.3 $ 188.7 $177.8
Europe 116.0 139.7 143.9
Asia 144.5 132.5 156.6
Corporate and Tradico (U.S.) 136.4 117.5 2.9
------- -------- -------
Total $566.2 $ 578.4 $481.2
======= ======== =======
Net sales and total assets for each of the Company's businesses were
assigned to the geographic area where that business is located. The Company's
businesses are located in sixteen countries (and the United States). No single
customer accounted for more than 10% of sales. Net sales attributed to South
Korea were $238.8, $281.4 and $330.3 in the years ended August 31, 1999, 1998
and 1997, respectively. Net sales attributed to Mexico were $154.3, $162.0 and
$128.1 in the years ended August 31, 1999, 1998 and 1997, respectively. Net
sales attributable to an individual country, other than South Korea and Mexico,
were not material for disclosure. Net property, plant and equipment attributed
to South Korea were $101.8 and $94.0 in the years ended August 31, 1999 and
1998, respectively. Net property, plant and equipment attributable to an
individual country, other than South Korea, were not material for disclosure.
49
<PAGE>
AGRIBRANDS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions except per share data)
5. FINANCIAL INSTRUMENTS
Derivatives - The Company currently uses forwards and option contracts
to manage foreign currency risk and futures and options to manage commodity
price risk. Derivatives used by the Company have an initial term of less than a
year, and all currently hedged transactions are expected to occur within the
next year. Because the Company hedges with instruments that have high
correlation with the underlying transaction pricing, changes in derivative fair
values are expected to be offset by changes in pricing.
The following summarizes the notional transaction amounts, carrying
amounts and fair values for all outstanding derivatives, by risk category and
instrument type, at August 31:
<TABLE>
<CAPTION>
1999 1998
-------------------------------------- ---------------------------------------
Notional Carrying Fair Notional Carrying Fair
Amount Amount Value Amount Amount Value
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Foreign Currency:
Forwards $ 7.3 $ - $ (0.1) $ 2.5 $ - $ -
Options - - - - - -
------- ------ -------- ------- ------ --------
7.3 - (0.1) 2.5 - -
------- ------ -------- ------- ------ --------
Commodity Price:
Futures 4.1 - (0.2) 2.3 - 0.3
Options 0.5 - - 1.8 - (0.1)
------- ------ -------- ------- ------ --------
4.6 - (0.2) 4.1 - 0.2
------- ------ -------- ------- ------ --------
Total of outstanding derivatives $ 11.9 $ - $ (0.3) $ 6.6 $ - $ 0.2
======= ====== ======== ======= ====== ========
</TABLE>
The fair value of derivative financial instruments is the amount that
Agribrands would receive (or pay) to terminate the specific agreements,
considering first, quoted market prices of comparable agreements, or in the
absence of quoted market prices, such factors as currency exchange rates and
remaining maturities.
Concentration of Credit Risk - The Company does not have a material
concentration of credit risk. Concentrations of credit risk with respect to
accounts receivable are limited due to the large number of customers, generally
short payment terms and their dispersion across geographic areas.
Nonderivative Financial Instruments - Nonderivative financial
instruments include cash equivalents, short-term investments, and short-term and
long-term debt. The carrying amounts for cash equivalents, short-term
investments and short-term debt approximate fair value. Agribrands has long-term
debt in numerous countries under a variety of terms and arrangements. Based on
quoted market prices for borrowing arrangements that are the same or similar to
the major components of its long-term debt, the Company believes the carrying
amounts for long-term debt approximate fair value.
50
<PAGE>
AGRIBRANDS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions except per share data)
6. INCENTIVE COMPENSATION PLANS
Under terms of the Company's 1998 incentive stock plan, officers,
directors and employees may be granted non-qualified stock options to purchase
the Company's common stock at no less than 100% of the market price on the date
the option is granted. The plan also authorizes the issuance of stock
appreciation rights (SARs) settled by cash payment. Options and SARs generally
vest over five years and have a maximum term of 10 years. At August 31, 1999 and
1998, a total of 0.8 million and 1.5 million shares, respectively, were
available for future awards under the plan.
There were 161,750 and 98,500 SARs outstanding at August 31, 1999 and
1998, respectively. The Company recognizes compensation expense for SARs based
on the amount that the Company's common share price exceeds the exercise price
and the percentage of vesting. During the year-ended August 31, 1999, the
Company recognized $0.7 of compensation expense for SARs. No compensation
expense was recognized for SARs in 1998 because the exercise prices of the SARs
were greater than the year-end market price of the common shares.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock options. Had compensation cost for the Company's stock
options been recognized based on the fair value on the grant date under the
methodology prescribed by FAS 123, the Company's net earnings and earnings per
share would have been reduced to the pro forma amounts indicated in the
following table. The pro forma amounts may not be representative of future pro
forma disclosures.
1999 1998
---------- ----------
Reported net earnings $ 44.0 $ 13.8
Pro forma net earnings 40.5 12.8
Reported diluted earnings per share $ 4.11 $ 1.29
Pro forma diluted earnings per share 3.78 1.20
The fair value of options granted (which is amortized to expense over
the options vesting period in determining the pro forma impact) is estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions:
1999 1998
---------- ----------
Risk-free interest rate 4.6% 5.7%
Expected life of option 8 years 9 years
Expected volatility of Agribrands stock 35.0% 30.0%
Expected dividend yield on Agribrands stock 0.0% 0.0%
51
<PAGE>
AGRIBRANDS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions except per share data)
The weighted average fair value of options granted during 1999 and 1998 is as
follows:
1999 1998
--------- --------
Fair value of each option granted $ 10.19 $ 18.62
Total number of options granted (in millions) 0.65 1.12
--------- --------
Total fair value of options granted (in millions) $ 6.6 $ 20.9
========= ========
The following summarizes stock option plan activity during the year
ended August 31:
<TABLE>
<CAPTION>
1999 1998
---------------------- ----------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
------- -------- ------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 1,115,000 $ 36.43 - $ -
Granted 646,250 22.00 1,122,500 36.41
Exercised (1,500) 30.06 - -
Cancelled (10,000) 29.85 (7,500) 34.25
--------- ---------
Outstanding at end of year 1,749,750 $ 31.14 1,115,000 $ 36.43
========= =========
Options exercisable at year end - - - -
========= =========
</TABLE>
A summary of stock options currently outstanding and exercisable at
August 31, 1999 is presented below:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------ -----------------------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Range of Remaining Exercise Exercise
Prices Number Life Price Number Price
- -------- ------ --------- -------- ------ ---------------
<S> <C> <C> <C> <C> <C>
$21-30 627,250 9 years $ 21.69 - $ -
$31-40 1,122,500 9 years $ 36.43 - $ -
--------- -----
$21-40 1,749,750 9 years $ 31.14 - $ -
</TABLE>
52
<PAGE>
AGRIBRANDS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions except per share data)
7. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
Certain foreign employees are covered by defined benefit pension plans,
some of which are required by local law or coordinated with government-sponsored
plans. These plans generally provide retirement or severance benefits based on
years of service and compensation. In addition, substantially all U.S.
administrative employees participate in the Company's defined contribution plan.
Total pension expense is presented below for the Company's principal
defined benefit pension plans (all foreign) and the Company's defined
contribution plans for the three years ended August 31:
1999 1998 1997
------- ------- ------
Defined benefit plans
Service cost for benefits earned during the year $ 1.6 $ 1.6 $ 1.7
Interest cost on projected benefit obligation 2.0 2.3 2.6
Assumed return on plan assets (1.6) (2.6) (3.0)
Amortization of:
Net actuarial (gain)/loss 0.1 (0.1) 0.1
Prior service cost 0.1 0.1 0.1
Transition asset (0.1) (0.3) (0.5)
------ ------- ------
Total costs for defined benefit plans 2.1 1.0 1.0
Defined contribution plans 0.3 0.1 -
------ ------- ------
Total $ 2.4 $ 1.1 $ 1.0
====== ======= ======
The key actuarial assumptions used in determining annual pension
expense for the principal defined benefit plans reflect weighted averages for
the component plans. These plans are located in various countries throughout the
world, and the assumptions were determined based on local economic conditions in
these countries. The assumptions were as follows:
1999 1998 1997
------ ------ -----
Discount rate 9.2% 9.2% 9.2%
Rate of increase of future compensation levels 7.4% 7.4% 7.3%
Long-term rate of return on assets 9.9% 9.4% 9.7%
The following tables summarize the changes in the projected benefit
obligation and the change in fair market value of plan assets for all of the
Company's principal defined benefit pension plans for the two years ended August
31:
53
<PAGE>
AGRIBRANDS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions except per share data)
1999 1998
------- -------
Change in Projected Benefit Obligation (PBO):
- --------------------------------------------
PBO, beginning of year $ 20.5 $ 32.6
Service cost 1.6 1.6
Interest cost 2.1 2.4
Employee contributions 0.2 0.2
Plan amendments 0.3 (0.9)
Actuarial gain/(loss) 1.3 (0.5)
Transfer to Ralston - (6.4)
Benefits paid (3.5) (2.1)
Translation adjustment 1.8 (6.4)
------- -------
PBO, end of year $ 24.3 $ 20.5
======= =======
Change in Plan Assets:
- ---------------------
Fair market value, beginning of year $ 14.6 $ 38.5
Actual return on plan assets 1.6 1.0
Employer contributions 4.0 3.0
Employee contributions 0.2 0.2
Transfer to Ralston - (21.9)
Benefits paid (3.4) (2.0)
Translation adjustment 1.5 (4.2)
------- -------
Fair market value, end of year $ 18.5 $ 14.6
======= =======
The following table provides a reconciliation of the funded status of
the principal defined benefit plans to the amounts recognized in the balance
sheet at August 31:
1999 1998
-------- -------
Funded status - plan assets (under)/over benefit
obligation $ (5.8) $ (5.9)
Unrecognized net loss 3.6 2.1
Unrecognized prior service cost 1.0 0.6
Unrecognized net asset at transition, net of
amortization (0.4) (0.4)
-------- -------
Net pension liability $ (1.6) $ (3.6)
======= =======
The net pension liability disclosed above does not include balance
sheet accruals for unfunded defined benefit plans of $12.3 and $12.4 as of
August 31, 1999 and 1998, respectively. These accruals approximate the actuarial
present value of vested benefits for these plans or represent accrual amounts
that comply with local regulations for required termination payments.
The Company currently does not provide other postretirement defined
benefits. Prior to the Distribution, Ralston provided defined benefit health
care and life insurance benefits for a limited group of retired employees.
Ralston also sponsored plans whereby certain management employees could defer
compensation in exchange for defined cash benefits after retirement. The cost of
these postretirement benefits allocated to Agribrands was not significant in
1998 or 1997.
54
<PAGE>
AGRIBRANDS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions except per share data)
8. PROVISIONS FOR RESTRUCTURING
In 1998, Agribrands recorded provisions for restructuring which reduced
earnings before income taxes by $3.0 and net earnings by $1.7. These charges
represented primarily severance costs and fixed asset write-offs associated with
the streamlining of Agribrands' operations in Europe. Provisions for
restructuring in 1997 related to the closing of production facilities and the
reorganization of certain administrative functions. All severance costs related
to these restructuring provisions were paid by August 31, 1999.
Components of the provisions for the years ended August 31 are as
follows:
1999 1998 1997
------ ------- -------
Severance $ - $ 2.2 $ 0.6
Other cash costs - 0.1 0.4
Fixed asset writedown - 0.7 2.2
------ ------- -------
$ - $ 3.0 $ 3.2
====== ======= =======
The following summarizes activity within the restructuring reserves:
1999 1998 1997
------ ------- -------
Balance at beginning of year $ 1.3 $ 1.4 $ 4.3
Provision during year - 3.0 3.2
Spending/fixed asset writedown during year (1.3) (3.1) (6.1)
------ ------ -------
Balance at end of year $ - $ 1.3 $ 1.4
====== ====== =======
9. OTHER (INCOME)/EXPENSE, NET
1999 1998 1997
------- -------- --------
Foreign exchange loss $ 1.5 $12.8 $ 3.7
Investment income (10.2) (5.2) (4.2)
Write-off financing costs - 2.5 -
------ ------ ------
$(8.7) $10.1 $(0.5)
====== ====== ======
In 1998, the Company incurred a $2.5 charge to write off financing
costs associated with a credit facility the Company elected not to close.
55
<PAGE>
AGRIBRANDS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions except per share data)
10. INCOME TAXES
The provisions for income taxes consisted of the following for the
years ended August 31:
1999 1998 1997
------- --------- --------
Currently payable:
United States $ 2.1 $ 1.7 $ 3.8
Foreign 16.7 19.1 14.5
Taxes on repatriation of foreign earnings 5.7 4.7 4.2
------- -------- -------
Total current 24.5 25.5 22.5
------- -------- -------
Deferred:
United States 0.3 (0.2) -
Foreign 1.6 (4.9) 1.9
------- -------- -------
Total deferred 1.9 (5.1) 1.9
------- -------- -------
$ 26.4 $ 20.4 $ 24.4
======= ======== =======
The source of pre-tax earnings was:
1999 1998 1997
------- -------- -------
United States $ 6.2 $ 1.2 $ 3.2
Foreign 64.2 33.0 29.9
------- -------- -------
Total $ 70.4 $ 34.2 $ 33.1
======= ======== =======
A reconciliation of income taxes with the amounts computed at the
statutory federal rate follows:
1999 1998 1997
------- -------- --------
Computed tax at federal statutory rate $ 24.6 $ 12.0 $ 11.6
Increases (decreases) in taxes resulting from:
Foreign tax rates other than domestic rate (3.1) (2.7) (1.0)
Taxes on repatriation of foreign earnings 5.7 4.7 4.2
U.S. foreign tax credits (4.0) (2.0) -
Change in valuation allowance 0.2 3.0 6.9
Incremental taxes allocated by Ralston - 1.1 3.8
Other, net 3.0 4.3 (1.1)
------- -------- ---------
$ 26.4 $ 20.4 $ 24.4
======= ======== =========
56
<PAGE>
AGRIBRANDS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions except per share data)
At August 31, deferred tax assets and deferred tax liabilities recorded
on the balance sheet are as follows:
1999 1998
----------- -----------
Deferred Tax Liabilities:
Depreciation and property differences $ 7.1 $ 6.3
Inventory differences 4.5 6.2
Retirement plans 3.4 2.3
Other tax liabilities, current 0.6 0.5
Other tax liabilities, non-current 10.1 9.2
-------- ---------
Gross deferred tax liabilities $ 25.7 $ 24.5
-------- ---------
Deferred Tax Assets:
Tax loss carryforwards $(11.2) $ (13.9)
Accrued expenses (7.2) (7.7)
Depreciation and property differences (6.3) (5.8)
Tax credits (6.1) (5.7)
Other tax assets, current (7.3) (5.8)
Other tax assets, non-current (3.6) (2.4)
-------- ---------
Gross deferred tax (assets) $(41.7) $ (41.3)
-------- ---------
Valuation allowance 19.7 19.5
-------- ---------
Net deferred tax liabilities $ 3.7 $ 2.7
======== =========
Approximately $0.6 of tax loss carryforwards and tax credits expired in
1999. Future expiration of tax loss carryforwards and tax credits, if not
utilized, are as follows: 2000 - $0.4, 2001 - $0.1, 2002 - $1.0, 2003 - $4.5,
2004 - $3.9 and beyond - $7.4. The valuation allowance is primarily attributed
to certain tax loss carryforwards generated outside the United States and
foreign tax credits awarded in the United States for which no tax benefit is
expected to be realized. If it becomes evident that sufficient future taxable
income will be available in the tax jurisdictions where these deferred tax
assets exist, the Company would release the valuation allowance accordingly.
At August 31, 1999, approximately $90.0 of foreign subsidiary net
earnings was considered permanently invested in those businesses. Accordingly,
U.S. income taxes have not been provided for such earnings. It is not
practicable to determine the amount of unrecognized deferred tax liabilities
associated with such earnings.
Prior to the Distribution Date, U.S. income tax payments, refunds,
credits, provision and deferred tax components were allocated to Agribrands in
accordance with Ralston's tax allocation policy. Such policy allocated tax
components included in the consolidated income tax return of Ralston to
Agribrands to the extent such components were generated by or related to
Agribrands. Tax payments due on income earned prior to the Distribution Date are
the responsibility of Ralston.
Had Agribrands' income tax provision been calculated as if Agribrands
was a single, stand-alone U.S. taxpayer during periods prior to the Distribution
Date, the income tax provision would have been lower by approximately $1.1 in
the seven months ended March 31, 1998 and $3.8 in the year ended August 31,
1997.
57
<PAGE>
AGRIBRANDS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions except per share data)
11. EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed using the average number
of common shares outstanding during the period. Diluted EPS gives effect to the
dilution that would occur if stock options were exercised. Basic and diluted EPS
computations for the three years ended August 31 follow:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Numerator:
Net earnings $ 44.0 $ 13.8 $ 8.7
=========== =========== ===========
Denominator:
Weighted average shares outstanding 10,570,405 10,668,571 10,668,571
Assumed conversion of stock options 135,657 - -
----------- ----------- -----------
Weighted average shares - assuming dilution 10,706,062 10,668,571 10,668,571
=========== =========== ===========
Basic earnings per share $ 4.16 $ 1.29 $ .82
=========== =========== ===========
Diluted earnings per share $ 4.11 $ 1.29 $ .82
=========== =========== ===========
</TABLE>
There were 10,668,571 shares of common stock outstanding at the
Distribution Date. The above EPS calculations assume 10,668,571 shares
outstanding for all periods prior to the Distribution Date. Stock options to
purchase 1,107,500 and 1,115,000 shares of common stock were outstanding during
1999 and 1998, respectively, but were not included in the computation of diluted
EPS because the exercise prices of the options were greater than the average
market price of the common shares.
12. PREFERRED AND COMMON STOCK
At August 31, 1999, 10,000,000 shares of $.01 par value preferred stock
were authorized and unissued. The Company's Board of Directors is expressly
authorized, prior to issuance, to set preferences, voting powers, annual
dividend rates (if any) and other terms and conditions relating to the shares.
The Company has been authorized to issue 50,000,000 shares of $.01 par
value common stock as of August 31, 1999. Activity for the Company's common
stock for the years ended August 31 is summarized below:
58
<PAGE>
AGRIBRANDS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions except per share data)
1999 1998
-------------- -------------
Common Stock Issued
Common stock issued at beginning of year 10,668,571 -
Distribution to Ralston's shareholders - 10,668,571
Shares cancelled (660) -
--------------- -------------
Common stock issued at end of year 10,667,911 10,668,571
--------------- -------------
Common Stock in Treasury
Treasury stock at beginning of year - -
Treasury stock purchased (288,848) -
Shares issued under stock plans 242 -
-------------- -------------
Treasury stock at end of year (288,606) -
-------------- -------------
Common Stock Outstanding 10,379,305 10,668,571
============== =============
On September 25, 1998, the Company's Board of Directors authorized the
purchase by the Company of up to 2,000,000 shares of Agribrands common stock in
open market transactions for general corporate purposes. At August 31, 1999,
there were 1,711,152 shares available for repurchase under this authorization.
13. RELATED PARTY ACTIVITY
Prior to the Distribution Date, the Agribrands Businesses and RPI
Consumer shared some general and administrative functions and distributed some
product through a combined distribution network. Costs of these shared
activities were allocated to the Company based on utilization or other methods
which management believes to be reasonable. Total costs of these shared
activities were $22.1 in the seven months ended March 31, 1998 and $46.0 in the
year ended August 31, 1997. Of such costs, allocations to Agribrands were $19.1
in the seven months ended March 31, 1998 and $38.7 in the year ended August 31,
1997.
Ralston also provided certain general and administrative services to
the Agribrands Businesses including finance, legal, facilities and systems.
These expenses were allocated to Agribrands based on utilization or other
methods which management believes to be reasonable. These allocations were $1.2
in the seven months ended March 31, 1998 and $2.0 in the year ended August 31,
1997.
59
<PAGE>
AGRIBRANDS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions except per share data)
14. LEGAL AND ENVIRONMENTAL MATTERS
The Company is subject to legal proceedings and claims arising out of
its business that cover a wide range of matters, including trade regulation,
contracts, environmental issues, product liability, patent and trademark
matters, and taxes.
In August 1999, Agribrands (together with Cargill, Incorporated, The
Iams Company and by subsequent amended pleading Carl S. Akey, Inc.) filed a
complaint in the U.S. District Court for the Northern District of Illinois
against a group of vitamin producers. The complaint alleges that the defendants
conspired globally to fix the prices of vitamins and allocate customers in
support of such arrangement in violation of the U.S. antitrust laws. The
defendants have admitted in criminal proceedings to participating in such
practices. Agribrands believes that it will be successful in recovering damages
arising from these practices. The timing of recovery and the amount of damages
are difficult to determine due to the multiple variables which will influence
the determination of damages such as period of time covered, percent of
overcharge, purchasing entity, as well as other issues and defenses which may be
asserted by the defendants. As of August 31, 1999, the Company has not
recognized any gain in its financial statements for this matter.
In the fall of 1997, Agribrands' wholly owned subsidiary, Agribrands
Philippines, Inc. (formerly Purina Philippines, Inc.), applied for renewal of a
warehouse license to store corn and rice and by-products at its Pulilan
facility. The Philippines National Food Authority ("NFA"), the governmental
agency that administers the Philippines laws and regulations governing the corn
and rice industry, advised Agribrands Philippines by letter dated October 31,
1997 that its license renewal application was denied. The letter cited
Philippines legislation and regulations requiring that businesses operating in
the corn and rice industry not have more than 40% foreign ownership. Since the
NFA believes that Agribrands Philippines is in the corn and rice industry, it
has requested Agribrands Philippines to file a divestment plan in order to
comply with the 40% maximum foreign ownership requirement.
Agribrands Philippines has appealed the denial of its license renewal,
and on January 23, 1998, received notification that it may operate its warehouse
under a "provisional permit" pending the resolution of the appeal. The appeal is
pending in the Office of the President. Agribrands Philippines believes it does
not need a warehouse license, as it believes it is not engaged in the corn and
rice industry as defined by law. Furthermore, Agribrands Philippines believes
that it should not be subject to the NFA regulation based upon its original
Board of Investments One Stop investment approval of a 100% foreign owned
investment. Agribrands Philippines intends to pursue its appeal in the
Philippines legal system.
In the event that Agribrands Philippines is required to file a
divestiture plan, it is expected, based on previous case precedents, that a plan
would be approved that would permit the necessary divestiture over a
considerable period of time.
Various tax and labor claims have been asserted against the Agribrands
Business in Brazil. The claims arose principally from monetary corrections made
in connection with the institution of economic plans by prior Brazilian
administrations to control inflation.
Many of the legal matters are in preliminary stages, involve complex
issues of law and fact and may proceed for protracted periods of time. The
amount of the eventual liability, if any, from these proceedings cannot be
determined with certainty; however, in the opinion of Agribrands management,
60
<PAGE>
AGRIBRANDS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions except per share data)
based upon the information presently known, as well as upon the limitation of
certain of its liabilities under the Agreement and Plan of Reorganization
between Ralston and Agribrands for the spin-off of Agribrands, the ultimate
liability of Agribrands, if any, arising from the pending legal proceedings, as
well as from asserted legal claims and known potential legal claims which are
probable of assertion, taking into account established accruals for estimated
liabilities, should not be material to the financial position of Agribrands but
could be material to results of operations or cash flows for a particular
quarter or annual period.
15. OTHER CONTINGENCIES AND COMMITMENTS
Guarantees - At August 31, 1999, Agribrands had third party guarantees
outstanding in the aggregate amount of approximately $9.4. These guarantees
relate to financial arrangements with customers, suppliers and other business
relations.
Sale of Receivables - Agribrands sells certain of its trade accounts
receivable and notes receivable to others subject to defined limited recourse
provisions. The Company is responsible for collection of the accounts and remits
the proceeds to the purchaser on a monthly basis. During 1999, Agribrands sold,
on average, accounts receivable totaling $0.8 each month. At August 31, 1999,
$0.5 of transferred receivables were outstanding and subject to recourse
provisions.
Other Commitments - Future minimum rental commitments under
noncancellable operating leases in effect as of August 31, 1999 were: 2000 -
$2.0, 2001 - $1.7, 2002 - $1.3, 2003 - $1.0, 2004 - $0.8 and thereafter - $0.5.
Total rental expense for all operating leases was $6.2 in 1999, $7.1 in 1998 and
$10.8 in 1997.
61
<PAGE>
AGRIBRANDS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions except per share data)
16. NOTES PAYABLE
Notes payable of $18.5 and $46.9 at August 31, 1999 and 1998,
respectively, had a weighted average interest rate of 10.3% and 18.0%,
respectively. At August 31, 1999, substantially all notes payable are
denominated in local currencies and are due to banks. Compensating balance
arrangements ensure future credit availability and do not restrict the
withdrawal of funds. Under these arrangements, Agribrands maintained average
compensating bank balances of $18.0 in 1999.
On August 31, 1999, total unused uncommitted lines of credit to
affiliates of Agribrands were approximately $200.
17. LONG-TERM DEBT
The detail of long-term debt as of August 31 follows:
1999 1998
-------- --------
Korean subsidiary, interest rate of 8.9%; due 2002 $ 6.7 $ -
Korean subsidiary, interest rate of 10.0% - 5.8
Korean subsidiary, interest rate of 11.0% - 3.7
Italian subsidiary, interest rate of 3.17%; due in annual
installments through 2004 2.5 -
Italian subsidiary, interest rate of 3.35% at August 31, 1.6 3.2
1999; due 2000
Other long-term debt with interest rates ranging from 1.0%
to 26.0%
3.1 10.2
-------- -------
13.9 22.9
Less: Current Maturities (2.4) (8.7)
-------- -------
$ 11.5 $ 14.2
======== =======
Aggregate maturities of long-term debt are $1.2, $8.1, $1.3 and $0.5
for the years ending August 31, 2001 through 2004, respectively.
62
<PAGE>
AGRIBRANDS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions except per share data)
18. SUPPLEMENTAL BALANCE SHEET INFORMATION
August 31
-----------------------
1999 1998
---------- ---------
Receivables (current)
Trade $ 69.1 $ 79.8
Value added tax 5.1 6.9
Receivable from Ralston - 12.9
Other 14.2 13.8
Allowance for doubtful accounts (11.4) (10.4)
--------- --------
$ 77.0 $ 103.0
========= ========
Inventories
Raw materials and supplies $ 61.1 $ 77.8
Finished products 20.2 21.0
--------- --------
$ 81.3 $ 98.8
========= ========
Investments and Other Assets
Goodwill (net of accumulated amortization of $ 29.1 $ 32.4
$6.5 in 1999 and $5.8 in 1998)
Investments in affiliated companies 6.3 6.5
Cash surrender value of key man life insurance 5.0 -
Long-term receivable for value added tax 4.6 3.8
Deferred charges and other assets 6.3 8.2
--------- --------
$ 51.3 $ 50.9
========= ========
Property, Plant and Equipment - net
Land $ 11.8 $ 11.0
Buildings 81.9 81.8
Machinery and equipment 249.1 241.9
Construction in progress 3.5 12.2
--------- --------
346.3 346.9
Accumulated depreciation (172.3) (170.3)
--------- --------
$ 174.0 $ 176.6
========= ========
Accounts Payable and Accrued Liabilities
Trade accounts payable $ 75.2 $ 81.4
Incentive compensation, salaries and vacations 15.4 15.8
Restructuring reserves - 1.3
Other items 34.5 34.3
--------- --------
$ 125.1 $ 132.8
========= ========
63
<PAGE>
AGRIBRANDS INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
(Dollars in millions except per share data)
August 31
------------------------
1999 1998
----------- ----------
Other Liabilities
Retirement and other employee benefits $ 18.1 $ 20.3
Minority interests 2.1 2.7
Other 3.0 1.9
-------- -------
$ 23.2 $ 24.9
======== =======
19. ALLOWANCE FOR DOUBTFUL ACCOUNTS
1999 1998 1997
-------- -------- ---------
Balance, beginning of year $ 10.4 $ 9.8 $ 7.2
Provision charged to expense 3.6 6.4 4.6
Write-offs, less recoveries (2.4) (4.0) (1.0)
Translation adjustment (0.2) (1.8) (1.0)
-------- -------- --------
Balance, end of year $ 11.4 $ 10.4 $ 9.8
======== ======== ========
20. SUPPLEMENTAL CASH FLOW STATEMENT INFORMATION
1999 1998 1997
-------- -------- --------
Interest paid $ 8.6 $ 11.8 $ 10.4
======== ======== ========
Income taxes paid $ 24.8 $ 22.6 $ 21.1
======== ======== ========
64
<PAGE>
AGRIBRANDS INTERNATIONAL, INC.
QUARTERLY FINANCIAL INFORMATION
(In millions except per share data)
(Unaudited)
The results of any single quarter are not necessarily indicative of
Agribrands' results for the year. The sum of the four quarters' earnings per
share will not necessarily equal the full year amount. The following tables
assume 10.7 million shares outstanding for all periods prior to the Distribution
Date.
<TABLE>
<CAPTION>
Fiscal 1999
First Second Third Fourth Full
Quarter Quarter Quarter Quarter Year
------------ ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Net sales $ 332.4 $ 310.7 $ 311.8 $ 306.6 $ 1,261.5
Gross profit 58.7 50.0 49.9 52.3 210.9
Net earnings 11.1 7.8 13.5 11.6 44.0
Diluted earnings per share 1.03 .72 1.27 1.08 4.11
</TABLE>
Fourth quarter 1999 net earnings include an after-tax gain on sale of
property of $1.2 ($.11 per share).
<TABLE>
<CAPTION>
Fiscal 1998
First Second Third Fourth Full
Quarter Quarter Quarter Quarter Year
------------ ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Net sales $ 374.8 $ 333.0 $ 351.1 $ 351.2 $ 1,410.1
Gross profit 56.1 46.4 46.7 53.7 202.9
Net earnings 4.0 2.0 3.4 4.4 13.8
Diluted earnings per share .37 .19 .32 .41 1.29
</TABLE>
Second quarter 1998 net earnings were reduced by $1.1 ($.10 per share)
due to provisions for restructuring. Fourth quarter 1998 net earnings were
reduced by $0.6 ($.06 per share) due to provisions for restructuring.
65
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding directors and the information appearing under
"Compliance with Section 16(a) of the Exchange Act" will be contained in the
Notice of the 2000 Annual Meeting and Proxy Statement, to be filed pursuant to
Regulation 14A, which is incorporated herein by reference.
The executive officers of the Company are listed under Item 1 of this
document.
ITEM 11. EXECUTIVE COMPENSATION
Information appearing under "Executive Compensation", "Compensation
Committee Interlocks and Insider Participation", "Nominating and Compensation
Committee Report on Executive Compensation", "Performance Graph", "Stock
Ownership" and the remuneration information under "Directors Meetings,
Committees and Fees" will be contained in the Notice of the 2000 Annual Meeting
and Proxy Statement, to be filed pursuant to Regulation 14A, which is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The discussion of the security ownership of certain beneficial owners
and management appearing under "Stock Ownership" will be contained in the Notice
of the 2000 Annual Meeting and Proxy Statement, to be filed pursuant to
Regulation 14A, which is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information appearing under "Compensation Committee Interlocks and
Insider Participation" will be contained in the Notice of the 2000 Annual
Meeting and Proxy Statement, to be filed pursuant to Regulation 14A, which is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1.) Financial Statements
The following financial statements are filed as a part of this document
under Item 8. Financial Statements and Supplementary Data.
Consolidated Statement of Earnings - for years ended August 31, 1999,
1998 and 1997
Consolidated Balance Sheet - for years ended August 31, 1999 and 1998
66
<PAGE>
Consolidated Statement of Cash Flows - for years ended August 31, 1999,
1998 and 1997
Consolidated Statement of Shareholders Equity - for years ended August
31, 1999, 1998, 1997 and 1996
Consolidated Statement of Comprehensive Income (loss)- for years ended
August 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
Report of Independent Accountants
(a)(2.) Financial Statement Schedules
All financial statement schedules have been included in the
consolidated financial statements or are either not applicable or not
significant.
(a)(3.) Exhibits (Listed by numbers corresponding to the Exhibit Table of Item
601 in Regulation S-K)
2.1 Agreement and Plan of Reorganization (Filed as Exhibit (10)(i) to
the Company's 10-Q filed for the Quarter Ending February 28, 1998)
3.1 Articles of Incorporation of Agribrands International, Inc. (Filed
as Exhibit 3.1 to the Company's Amendment No. 1 to Registration
Statement on Form 10 dated February 9, 1998)
3.2 Bylaws of Agribrands International, Inc. (Filed as Exhibit 3.2 to
the Company's Amendment No. 1 to Registration Statement on Form 10
dated February 9, 1998)
4.1 Rights Agreement (Filed as Exhibit 4.1 to the Company's Amendment
No. 1 to Registration Statement on Form 10 dated February 9, 1998)
10.1 Technology Transfer and License Agreement (Filed as Exhibit
(10)(ii) to the Company's Form 10-Q for the Period Ending February
28, 1998)
10.2 Trademark Agreement (Filed as Exhibit (10)(iii) to the Company's
Form 10-Q for the Period Ending February 28, 1998)
10.3 Credit Agreements (Long and Short Term) (Filed as Exhibit (10)(iv)
to the Company's Form 10-Q for the Period Ending February 28,
1998)
10.4 Tax Sharing Agreement (Filed as Exhibit 2.2 to the Company's
Amendment No. 3 to Registration Statement on Form 10 dated March
19, 1998)
10.5 Bridging Agreement (Filed as Exhibit 2.3 to the Company's
Amendment No. 3 to Registration Statement on Form 10 dated March
19, 1998)
*10.6 Incentive Stock Plan (Filed as Exhibit 10.1 to the Company's
Amendment No. 3 to Registration Statement on Form 10 dated March
19, 1998)
*10.7 Form of Management Continuity Agreement (Filed as Exhibit 10 to
the Company's Amendment No. 3 to Registration Statement on Form 10
dated February 9, 1998)
67
<PAGE>
*10.8 Non-Qualified Deferred Compensation Plan (Filed as Exhibit 10.2 to
the Company's Amendment No. 3 to Registration Statement on Form 10
dated March 19, 1998)
*10.9 Form of Non-Qualified Stock Option Agreement dated May 12, 1998,
with Chief Executive Officer of the Company (Filed as Exhibit 10.1
to Company's Form 10-Q for the Period Ending May 31, 1998)
*10.10 Form of Non-Qualified Stock Option Agreement dated May 29, 1998,
with certain executive officers of the Company (Filed as Exhibit
10.2 to the Company's Form 10-Q for the Period Ending May 31,
1998)
10.11 First Amendment to Agreement and Plan of Reorganization dated May
29, 1998 (Filed as Exhibit 10.11 to the Company's Form 10-K for
the fiscal year ended August 31, 1998)
*10.12 Form of Notice of Stock Appreciation Right dated May 29, 1998
(Filed as Exhibit 10.12 to the Company's Form 10-K for the fiscal
year ended August 31, 1998)
*10.13 Form of Indemnification Agreement between the Company and its
Directors (Filed as Exhibit 10.13 to the Company's Form 10-K for
the fiscal year ended August 31, 1998)
*10.14 Form of Indemnification Agreement between the Company and its
executive officers (Filed as Exhibit 10.14 to the Company's Form
10-K for the fiscal year ended August 31, 1998)
*10.15 Financial Planning Reimbursement Program (Filed as Exhibit 10.15
to the Company's Form 10-K for the fiscal year ended August 31,
1998)
*10.16 Form of Split Dollar Life Insurance Agreement (Filed as Exhibit
10.16 to the Company's Form 10-K for the fiscal year ended August
31, 1998)
*10.17 Form of letter amending the May 29, 1998 Non-Qualified Stock
Option Agreements (Filed as Exhibit 10.17 to the Company's Form
10-K for the fiscal year ended August 31, 1998)
10.18 Form of Separation Agreement with Gonzalo Dal Borgo dated April 7,
1999 (Filed as Exhibit 10.1 to the Company's Form 10-Q for the
period ending May 31, 1999)
21 Subsidiaries of the Company
23 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule
*Denotes a management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K.
No Current Reports on Form 8-K were filed by the Company during the
fourth quarter of its fiscal year ended August 31, 1999.
68
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, Agribrands International, Inc. has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AGRIBRANDS INTERNATIONAL, INC.
/s/ William P. Stiritz
-------------------------------------
William P. Stiritz
Chairman of the Board,
Chief Executive Officer and President
Date: October 27, 1999
KNOW ALL MEN BY THESE PRESENTS, that the below-named directors and
officers of Agribrands International, Inc. whose signature appears below
constitutes and appoints Michael J. Costello and William P. Stiritz and each of
them, his true and lawful attorney-in-fact and agent, with full power of
substitution and resolution, for him and in his name, place, and stead, in any
and all capacities, to sign any and all amendments to this report, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents 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 and to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or their substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ William P. Stiritz Chairman of the Board, October 27, 1999
- --------------------- Chief Executive Officer,
William P. Stiritz and President
/s/ David R. Wenzel Chief Financial Officer October 27, 1999
- ----------------------
David R. Wenzel
/s/ Douglas W. Faust Controller (Chief October 27, 1999
- ---------------------- Accounting Officer)
Douglas W. Faust
69
<PAGE>
/s/ David R. Banks Director October 27, 1999
- ----------------------
David R. Banks
/s/ Jay W. Brown Director October 27, 1999
- ----------------------
Jay W. Brown
/s/ M. Darrell Ingram Director October 27, 1999
- ----------------------
M. Darrell Ingram
/s/ H. Davis McCarty Director October 27, 1999
- ----------------------
H. Davis McCarty
/s/ Joe R. Micheletto Director October 27, 1999
- ----------------------
Joe R. Micheletto
/S/ Martin K. Sneider Director October 27, 1999
- ----------------------
Martin K. Sneider
70
Exhibit 21
<TABLE>
<CAPTION>
AGRIBRANDS INTERNATIONAL, INC. SUBSIDIARIES
Organized Under the
Name Of Subsidiaries Laws of
-------------------- -------------------
<S> <C>
AMERICAS
Agribrands do Brasil Ltda. Brazil
Agribrands Purina Canada Inc. Canada
Agribrands Purina Colombia S.A. Colombia
Incubadora del Centro S.A. Colombia
Industrias Purina Ltd. Grand Cayman Island
Agribrands Purina de Guatemala, S.A. Guatemala
Auto-Cafes Purina S.A. Guatemala
Agribrands Purina Mexico S.A. de C.V. Mexico
Alimentos Nutritivos, S.A. de C.V. Mexico
Industrias Purina S.A. de C.V. Mexico
Proveedora De Alimentos Ave-Pecuarios, S.A. de C.V. Mexico
Arecer Inmobiliaria, S.A. de C.V. Mexico
Latin American Agribusiness Development Corporation S.A. Panama
Agribrands Purina Peru S.A. Peru
Agribrands Purina Venezuela, C.A. Venezuela
Granjas Geneticas Porcinas de Venezuela, C.A. Venezuela
Nutrimentos Lomgimar, C.A. Venezuela
ASIA
Agribrands Purina (Fushun) Feedmill Co., Ltd. China
Agribrands Purina (Langfang) Feedmill Co., Ltd. China
Agribrands Purina Nanjing Feedmill Co., Ltd. China
Agribrands Purina (Yantai) Feedmill Co., Ltd. China
Agribrands Purina Korea, Inc. Korea
Agribrands Philippines, Inc. * Philippines
Agri Realty Company, Inc. Philippines
EUROPE
Agribrands Europe France, S.A. France
Cofanimo Sarl France
D.F.P. Entreprises S.A. France
D.F.P. Nutraliance France
Sorelap, S.A. France
Le Moulin Rouge Ponard et CIE S.A. France
Agribrands Europe Hungary Animal Feed And Trading Company Limited Hungary
AGX TECH Licensing and Services Limited Liability Company Hungary
Agribrands Europe Italia S.p.A. Italy
Ralston Purina Trading Italia S.r.l. Italy
Purina Portugal-Alimentacao e Sanidade Animal Lda. Portugal
Agribrands Europe Espana S.A. Spain
Tecnicas de Cogeneracion de Silla, S.L. Spain
Agribrands Purina Besin Maddeleri Sanayi Ve Ticaret A.S. Turkey
Agri Holding, Inc. Delaware
AGX Services, Inc. Delaware
</TABLE>
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-49739 and 333-49737) of Agribrands
International, Inc. of our report dated October 8, 1999 relating to the
financial statements, which appear in this Form 10-K.
PricewaterhouseCoopers LLP
St. Louis, Missouri
October 27, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE 8/31/99 AGRIBRANDS INTERNATIONAL,
INC. BALANCE SHEET AND STATEMENT OF EARNINGS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-END> AUG-31-1999
<CASH> 174,500
<SECURITIES> 3,500
<RECEIVABLES> 88,400
<ALLOWANCES> 11,400
<INVENTORY> 81,300
<CURRENT-ASSETS> 340,900
<PP&E> 346,300
<DEPRECIATION> 172,300
<TOTAL-ASSETS> 566,200
<CURRENT-LIABILITIES> 154,500
<BONDS> 11,500
<COMMON> 100
0
0
<OTHER-SE> 373,200
<TOTAL-LIABILITY-AND-EQUITY> 566,200
<SALES> 1,261,500
<TOTAL-REVENUES> 1,261,500
<CGS> 1,050,600
<TOTAL-COSTS> 1,050,600
<OTHER-EXPENSES> 128,900
<LOSS-PROVISION> 3,600
<INTEREST-EXPENSE> 8,000
<INCOME-PRETAX> 70,400
<INCOME-TAX> 26,400
<INCOME-CONTINUING> 44,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 44,000
<EPS-BASIC> 4.16
<EPS-DILUTED> 4.11
</TABLE>
