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, 2000 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. [ ]
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The aggregate market value of the voting stock held by nonaffiliates of the
Registrant is $423,643,137, based upon the closing market price on November 1,
2000. Excluded from this figure is the voting stock held by Registrant's
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 November 1, 2000: 9,813,851.
Documents Incorporated by Reference:
None.
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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 15
Item 3. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 18
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 19
Item 6. Selected Financial Data 20
Item 7. Management's Discussion and Analysis of Financial Condition
And Results of Operations 21
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 35
Item 8. Financial Statements and Supplementary Data 35
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 63
PART III
Item 10. Directors and Executive Officers of the Registrant 64
Item 11. Executive Compensation 69
Item 12. Security Ownership of Certain Beneficial Owners and Management 74
Item 13. Certain Relationships and Related Transactions 76
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 77
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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, or as to 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
Merger with Ralcorp Holdings, Inc.
See Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations - Proposed Merger.
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.
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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.
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
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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 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
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. 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"), 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.
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. There is now a fixed conversion rate between their existing
currencies ("legacy currencies") and the Euro. The legacy currencies
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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 during the transition period
from January 1, 1999 through 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 material costs related to the conversion, and future costs for
replacing computer equipment and reprogramming existing systems are not expected
to be material. 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 17 foreign countries outside the
United States 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 borrowing,
exchange rates and economic stability in such country, and any delay in the
expansion or development of the European Union may have a negative effect on
borrowing, exchange rates and economic stability in Europe as a whole.
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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 rarely hedges such exposures. 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 operating results of
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.
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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
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 Businesses and Markets
Agribrands anticipates that it will continue to explore opportunities to
enter new business segments in existing markets and new geographic markets when
appropriate opportunities are identified. Opening new business segments or
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, 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 70 manufacturing
plants in 17 countries outside the United States 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. The Company
acquired in July 2000 an animal health products distribution business in the
Philippines and in November 2000 an animal feed manufacturing facility in
Greenville, Mississippi.
Agribrands business consists primarily 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 business segment and geographic information appearing in Note 4 of the
Company's Notes to Financial Statements is incorporated herein by reference.
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
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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
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, which constitute approximately
80% of sales, 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 "Promote", "Omolene"(R) and "Hi-Octane"(R).
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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
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 approximately 4,000
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) or "Chow"(R) brands 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, 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 names
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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 has an animal feed business 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.
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
10
<PAGE>
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 approximately 30 persons with
postgraduate or doctoral degrees in animal nutrition, veterinary medicine or
agricultural sciences. In fiscal year 2000, Agribrands expenditures for research
and development amounted to $6.4 million.
During fiscal year 2000 the Company brought 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 animal (multiple stomach animals, such as cows) digestion.
The product and process will be marketed under the brand names "PROMOTE" and
"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.
11
<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 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 60 employees in the United States and
approximately 5,085 in foreign jurisdictions. Approximately 26% of Agribrands
international employees are represented by labor unions. The Company believes it
has good relations with its union and nonunion employees.
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<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 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, 2000, the utilization of these
facilities averaged approximately 70% of capacity, and management believes that
existing capacity should be sufficient for anticipated needs.
<PAGE>
BRAZIL MEXICO
Canoas Cuautitlan
Inhumas Guadalajara
Maringa(3) Merida (2)
Paulinia Mexicali
Sao L. Mata 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
COLOMBIA Arequipa (1)
Buga Chiclayo (4)
Cartagena Lima
Fontibon (1)
Giron (1) PHILIPPINES
Medellin (1) Pulilan
Mosquera Villasis
EL SALVADOR PORTUGAL
Soyapango (1) Benavente (3)(4)
Cantanhede
FRANCE
Courchelettes SPAIN
Limoges (2) Benavente, Zamora
Longue Dos Hermanas, Seville
Pommevic Marcilla, Navarra
St. Ybard (2) Merida, Badajoz
Sorcy Silla, Valencia
Torrejon, Madrid
GUATEMALA Uxes, La Coruna
Guatemala City
TURKEY
HUNGARY Bolu
Kaposvar Gonen
Karcag Luleburgaz
ITALY UNITED STATES
San Felice Greenville, MS (acquired in November 2000)
Sospiro
Spessa VENEZUELA
Termoli Barcelona
Cabimas (2)
KOREA Maracaibo
Kimhae Maracay
Kunsan Hatcheries - Valencia, Venezuela
Songtan
(1) Leased (2) Joint Venture (3) To be Divested (4) Inactive
13
<PAGE>
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 September of 2000, a shareholder suit was filed in the Circuit Court of
St. Louis County, Missouri against the Company and the individual members of the
Board of Directors alleging that the Directors failed to carry out their
fiduciary duties in recommending the merger with Ralcorp Holdings, Inc. which is
described below under Item 7. The suit requests: (i) the certification of a
class consisting of all of the shareholders, (ii) injunctive relief, (iii)
attorneys fees and expenses, and (iv) such other relief that the Court deems
appropriate. Agribrands has responded by denying the allegations. The Company
believes it has adequate insurance coverage for damages in excess of $2,500,000.
The Company is responsible for the costs of defense up to the deductible.
In August, 1999, Agribrands (together with Cargill, Incorporated, The Iams
Company and by subsequent amended pleading Carl S. Akey, Inc., Ralston Purina
Company and Ralcorp Holdings, 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. When the Company will
prevail and the amount of recoverable damages is 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, 2000, the Company has not recognized any gain in its financial statements
for this matter.
In October of 1997, Agribrands' wholly owned subsidiary, Agribrands
Philippines, Inc. (formerly Purina Philippines, Inc) ("API"), applied for
renewal of a warehouse license to store corn and rice and by-products therefrom
at its Pulilan facility. The Philippine National Food Authority ("NFA"), the
governmental agency that administers the Philippines laws and regulations
governing the corn and rice industry, advised API by letter dated October 31,
1997, that its license renewal application was denied. The letter cites
Philippines legislation and regulations that indicates that businesses operating
in the corn and rice industry cannot have more than 40% foreign ownership. Since
the NFA believes that API is in the corn and rice industry, they have requested
API to file a divestment plan in order to comply with the 40% maximum foreign
ownership requirement. API has appealed the denial of its license renewal, and
on January 23, 1998, API received notification that it may operate its warehouse
under a "provisional permit" pending the resolution of the appeal.
14
<PAGE>
In March of 2000, the Philippines adopted an act which repealed the law
restricting foreign participation in the corn and rice milling industry. The
effect of this act should moot the NFA action against API. API through its
counsel has filed a letter requesting confirmation from the NFA that it would
drop its proceedings against API as a result of this change in the law. To date,
API has not received a response from the NFA to its request. If the NFA were to
pursue its requirement for divestment, API would pursue its rights through the
Philippine legal system.
Even if the API was 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 substantial period of time.
Various tax, record keeping 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 and other statutory filing
requirements. The Company believes that no individual item is material to the
Company, and that it has adequately reserved for such claims in the aggregate.
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.
15
<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 approximately 10,439 shareholders of record on
November 1, 2000. The Company has not paid cash dividends in 2000 and does not
intend to begin paying cash dividends in fiscal year 2001.
The following table sets forth, for the twelve months ended August 31, 2000
and 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
2000
Fourth Quarter $42.00 $36.25 --
Third Quarter $43.63 $36.38 --
Second Quarter $47.32 $35.63 --
First Quarter $53.38 $44.00 --
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 --
16
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
FIVE YEAR FINANCIAL SUMMARY
(In millions except per share data)
For the year ended August 31,
--------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS AND CASH FLOWS DATA:
Tons of feed product sold 4.8 5.0 5.2 5.1 4.8
Net sales $ 1,193.1 $ 1,261.5 $ 1,410.1 $ 1,527.6 $ 1,401.3
Income over ingredient cost 334.6 356.7 345.8 361.7 333.3
Depreciation and amortization 25.2 24.8 21.2 21.9 20.4
Provisions for restructuring 1.4 - 3.0 3.2 8.3
Gain on sale of property - (2.3) - - (3.6)
Interest expense 3.0 8.0 12.0 10.9 13.0
Investment income (9.1) (10.2) (5.2) (4.2) (3.6)
Foreign exchange (gain)/loss (0.1) 1.5 12.8 3.7 8.3
Earnings before income taxes 66.9 70.4 34.2 33.1 24.9
Income taxes 21.9 26.4 20.4 24.4 14.0
Net earnings (a)(b) $ 45.0 $ 44.0 $ 13.8 $ 8.7 $ 10.9
Earnings per share:
Basic (c) $ 4.46 $ 4.16 $ 1.29 $ .82 $ 1.02
Diluted (c) $ 4.33 $ 4.11 $ 1.29 $ .82 $ 1.02
Weighted average shares outstanding:
Basic (c) 10.1 10.6 10.7 10.7 10.7
Diluted (c) 10.4 10.7 10.7 10.7 10.7
Cash provided (used) by:
Operations $ 39.7 $ 110.6 $ 33.3 $ 67.8 $ (18.3)
Investing activities (26.1) (25.5) (62.8) (38.5) (36.1)
Financing activities (15.6) (43.9) 145.2 (21.1) 61.1
August 31,
--------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------- ------------- ------------- ------------- -------------
Balance Sheet Data:
Working capital $ 205.0 $ 193.7 $ 153.7 $ 46.7 $ 59.4
Net property 168.4 174.0 176.6 156.9 145.6
Additions (during the period) 22.3 25.9 44.6 44.1 28.5
Depreciation (during the period) 22.9 22.7 19.3 19.6 19.1
Total assets 581.6 573.5 578.4 481.2 497.8
Long-term debt 10.7 11.5 14.2 22.8 41.3
Shareholders' equity $ 393.5 $ 373.3 $ 339.4 $ 198.1 $ 190.3
<FN>
------------------------------------------------
17
<PAGE>
(a) After-tax provisions for restructuring reduced net earnings by $1.4 in the year ended August 31, 2000, $1.7 in
1998, $3.2 in 1997 and $7.2 in 1996.
(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>
18
<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. This discussion does not take
into account any anticipated effects of the proposed merger described below.
Management has also included a section on key measures and concepts for
understanding the business.
Proposed Merger
On August 7, 2000, the Company and Ralcorp Holdings, Inc. ("Ralcorp")
announced that they had entered into an Agreement and Plan of Reorganization,
dated as of August 7, 2000 (the "Agreement"), which sets forth the terms and
conditions of the proposed merger of equals of Agribrands and Ralcorp. Pursuant
to the Agreement, Agribrands and Ralcorp will form a holding company ("Holding
Company") which will acquire all of the common stock of Agribrands and Ralcorp
through mergers of separate subsidiaries of the holding company with and into
each of Agribrands and Ralcorp (the "Reorganization"). Upon consummation of the
Reorganization, the shareholders of Agribrands will receive three shares of
Holding Company stock for each share of Agribrands stock exchanged. The
shareholders of Ralcorp will receive one share of Holding Company stock for each
share of Ralcorp stock exchanged. Alternatively, shareholders may elect to
receive $39 in cash per Agribrands share or $15 in cash per Ralcorp share. At
least 80% of each company's shares will be converted into stock of Holding
Company. Any excess cash elections will be reduced on a pro rata basis. Because
Agribrands and Ralcorp shareholders may elect to receive cash in lieu of shares
of the Holding Company common stock, the portion of the voting rights in the
Holding Company that will be held by former Agribrands and Ralcorp shareholders,
and thus the identity of the acquiring corporation for accounting purposes,
cannot be determined at this time.
Ralcorp was formed in 1994 through a spin-off from Ralston Purina Company
("Ralston"), and Agribrands was spun off from Ralston in 1998. William P.
Stiritz, Agribrands' Chairman, Chief Executive Officer and President, is
Chairman of the Board of Ralcorp. Joe R. Micheletto, Chief Executive Officer,
President and a director of Ralcorp, is a member of Agribrands' Board of
Directors. The Board of Directors of the Holding Company is to consist of the
current directors of Ralcorp and Agribrands.
The proposed merger with Ralcorp is subject to approval by two-thirds of
the shareholders of each company, receipt of a ruling from the Internal Revenue
Service that the merger will not affect the tax-free status of Agribrands'
spin-off from Ralston and customary regulatory approvals. The Agreement provides
that, if either party receives an unsolicited acquisition offer which its Board
of Directors considers to be a superior proposal, that party may terminate the
Agreement and accept the superior proposal, upon payment of a $5 million
termination fee to the other party.
A shareholder has filed a class action lawsuit seeking to enjoin the merger
and to secure other relief, including the recovery of attorneys' fees and
expenses. Another shareholder with more than a five (5%) shareholding has
objected to the merger in a letter filed with the Securities and Exchange
Commission (the "SEC").
The Company and Ralcorp have filed a preliminary joint proxy statement and
prospectus with the SEC.
The transaction is expected to be tax-free to shareholders to the extent
that they receive common stock of Holding Company. The combination is expected
to be accounted for using the purchase method of accounting. Completion of the
proposed merger is expected to occur during the third quarter of fiscal 2001.
19
<PAGE>
In connection with the proposed merger, the Company reviewed its employee
retention plans and obtained approval from the Board of Directors to implement
additional protections for certain employees in the event of a change in control
other than the merger with Ralcorp. The additional benefits consist of: (i) a
headquarters relocation benefit plan in which the St. Louis headquarters office
employees (other than individuals with management continuity agreements) would
be entitled to a minimum of six (6) months compensation in the event of a loss
of their employment due to the relocation of their job or the offices to outside
the St. Louis Metropolitan area within five years following a change in control;
(ii) extending the term of the separation compensation due under the management
continuity agreements for the corporate officers and certain vice-presidents by
an additional year following a change of control (extends the compensation due
to corporate officers to three years and to certain vice-presidents to two
years) and grant to certain other key employees a management continuity
agreement having a term of one-year; and (iii) indemnification of the corporate
officers, vice-presidents and certain key employees with management continuity
agreements in the event that any taxes become due under Section 280 G (excess
parachute tax) of the United States Internal Revenue Code as a result of a
termination following a change in control.
Description of 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. 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.
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 70 manufacturing plants in 17 countries
outside the United States, and has more than thirty years' experience operating
across four continents. The primary animal feed business of Agribrands is now
conducted almost exclusively outside the United States. In November of 2000, the
Company purchased a manufacturing facility located in Greenville, Mississippi
for approximately $1.5 million. This facility will be used to process
ingredients and manufacture feed products primarily for the Company's foreign
affiliates.
20
<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).
Because the Company operates predominantly outside of the United States, changes
in foreign exchange rates in relation to the Dollar can have a material impact
on the Company's reported results.
Net Sales
Consolidated net sales decreased $68.4 million or 5.4% in fiscal 2000 as
result of lower feed sales volume and lower average selling prices. Consolidated
sales volume declined 116,200 metric tons or 2.3% in 2000 as higher volume from
the Asia segment partially offset declines in Europe and the Americas. Average
selling prices declined $8 per ton or 3.2% in 2000 reflecting lower commodity
costs relative to 1999, consistent with the feed industry's practice of
adjusting prices to reflect changes in ingredient costs. Consolidated net sales
decreased $148.6 million or 10.5% in 1999 as result of both lower volume and
lower commodity costs.
Gross Profit
Gross profit was $197.1 million in 2000 compared to $210.9 million in 1999,
a decrease of $13.8 million, or 6.5%. Gross profit decreased primarily as a
result of both lower volume and lower margins in the Americas and Europe. The
decrease was mitigated to a large extent by better results from the Asia region.
In 1999, gross profit increased $8.0 million or 3.9% primarily due to higher
margins in all three regions.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $8.5 million or 5.9%
in 2000 due primarily to lower expenses in Europe, partially offset by higher
expenses in the Americas. In 1999, selling, general and administrative expenses
were flat compared to 1998 as lower expenses in Europe were offset by higher
expenses in the other regions, particularly in the Americas region.
Restructuring Activities
In 2000, Agribrands recorded provisions for restructuring which reduced
earnings before and after income taxes and net earnings by $1.4 million (as no
tax benefit was recognized). These charges provided for the termination of 37
production and administrative employees in connection with downsizing activities
in France and Colombia. As of August 31, 2000, 22 employees have been terminated
in connection with these charges. Beginning in 2001, these restructuring actions
are expected to result in annual pre-tax cost savings of approximately $1.2
million.
In 1998, Agribrands recorded provisions for restructuring, associated with
the streamlining of Agribrands' operations in Europe, which reduced earnings
before income taxes and net earnings by $3.0 million and $1.7 million,
respectively. The restructuring included a $2.2 million pre-tax charge to
provide for the severance of approximately 40 employees, all of whom have been
released as of August 31, 2000. The remaining pre-tax restructuring provisions
for 1998 were primarily related to impairment charges incurred in connection
with the closing of a plant in Italy.
21
<PAGE>
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.
Interest Expense and Other Income/Expense
Interest expense decreased $5.0 million in 2000 as a result of both lower
average borrowings and lower interest rates in the markets where the Company had
outstanding borrowings. Interest expense decreased $4.0 million in 1999 also as
a result of lower average borrowings and lower interest rates.
Other income/expense, net, changed favorably by $0.5 million in 2000. The
Company recorded a foreign exchange gain of $0.1 million in 2000 versus a loss
of $1.5 million in 1999. Investment income was $1.1 million lower in 2000 mainly
as a result of increased holdings of tax-free securities which have slightly
lower nominal returns. In 1999, other income/expense, net, changed favorably by
$18.8 million. 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. 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 $45.0 million for the year ended August 31, 2000 compared
to $44.0 million in 1999 and $13.8 million in 1998. Income taxes, which include
federal, state and foreign taxes, were 32.7%, 37.5% and 59.6% of pre-tax
earnings in 2000, 1999 and 1998, respectively. The effective tax rate in 2000
reflects some unusual items including a $6.8 million reduction in valuation
allowances against foreign tax credit carryforwards and other deferred tax
assets in the United States. Due to recently implemented tax planning
initiatives, the Company now believes it will generate sufficient foreign source
taxable income in the United States to realize a tax benefit for these deferred
tax assets. In contrast, the operations in Colombia, France and Peru sustained
losses in 2000 for which no tax benefit could be recognized. Excluding these
unusual items, the Company's effective tax rate in 2000 was approximately 38%
which is consistent with the rate in 1999. The effective tax rate in 1998 was
unfavorably impacted by both losses in foreign 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.
22
<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, 2000:
Net sales $ 548.6 $ 284.7 $ 358.7 $ 1.1 $ 1,193.1
Segment profitability* $ 23.3 $ 13.7 $ 40.2 $ (15.1) $ 62.1
Tons of feed product sold 2,100,100 1,357,800 1,388,500 400 4,846,800
Income over ingredient cost ** $ 138.9 $ 92.4 $ 103.4 $ (0.1) $ 334.6
Year Ended August 31, 1999:
Net sales $ 572.5 $ 341.8 $ 344.6 $ 2.6 $ 1,261.5
Segment profitability* $ 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
Segment profitability* $ 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
</TABLE>
* Segment profitability excludes provisions for restructuring and gains on sale
of property.
** 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.
Americas
Net sales in the Americas segment (which is fully described in Note 4 of
the Company's Notes to Financial Statements) decreased $23.9 million or 4.2% in
2000 and $53.1 million or 8.5% in 1999. The 2000 decline is primarily attributed
to a decrease in feed volume of 64,900 tons or 3.0%, most of which occurred in
Colombia and Mexico. The Company lost volume in Colombia as the local feed
market shrunk considerably in the face of an economic recession. In Mexico, the
reduction in feed tonnage occurred mainly in the Company's hog and profitable
shrimp lines. Favorable market prices for smaller shrimp and increased incidence
of shrimp disease (called "white spot") along the Pacific coast of Mexico
accelerated the harvesting of fiscal 2000's farmed shrimp populations. The 1999
decline in net sales for the Americas segment was primarily a result of lower
ingredient costs everywhere except in Colombia where a new value added tax on
certain ingredient purchases went into effect on January 1, 1999.
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<PAGE>
Segment profitability decreased $10.1 million or 30.2% in 2000 due to a
decline in income over ingredient cost ("IOIC") and an increase in operating
expenses. IOIC in the Americas declined $8.4 million largely due to lower volume
and lower margins in Colombia. Operating expenses for 1999 included a $1.8
million charge to settle a claim by a former joint venture partner in Chile.
Excluding this unusual charge, operating expenses in the Americas increased $3.5
million in 2000 primarily due to higher marketing and sales expenses in Brazil
and higher labor expenses in Mexico. Segment profitability stayed flat in 1999
compared to 1998 as a $2.1 million improvement in IOIC was mostly offset by the
$1.8 million charge related to the claim in Chile.
Europe
Net sales in Europe decreased $57.1 million or 16.7% in 2000 and $55.4
million or 13.9% in 1999. The decline in net sales for both years resulted from
a combination of lower sales volume and lower average selling prices. Feed
volume declined 142,200 tons or 9.5% in 2000 with most of the decline occurring
in Spain where favorable grazing conditions led to reduced demand for commercial
feed. Volume declined 85,000 tons in 1999 mainly as a result of the December
1998 sale of an unprofitable subsidiary of the Company's operations in France.
Average selling prices declined $18 per ton or 8.0% in 2000 and $23 per ton or
9.1% in 1999. 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.
Segment profitability decreased $1.9 million or 12.2% in 2000. IOIC in
Europe decreased $22.6 million or 19.7% in 2000 due to both lower feed volume
and lower margins. IOIC per ton declined $9 per ton primarily as a result of
translating relatively stable local currency margins at significantly weaker
exchange rates versus the U.S. Dollar. The decline in IOIC was mostly offset by
lower operating expenses which reflect the lower volumes as well as the
translation of local currency expenses at significantly weaker exchange rates.
Segment profitability increased $3.7 million or 31.1% in 1999 due to a $3.9
million reduction in operating expenses. The Europe segment's operating expenses
declined in 1999 as a result of cost savings from prior year restructurings and
translation of local currency costs at weaker foreign currency exchange rates
against the U.S. Dollar.
Asia
Net sales in Asia increased $14.1 million or 4.1% in 2000 due to a rise in
sales volume. Feed volume in Asia increased 91,500 tons or 7.1% as a result of
successful new product and marketing initiatives. Sales efforts were enhanced by
higher prices for live hogs which improved demand for hog feeds, the segment's
largest product line. Average selling prices in Asia declined by $7 per ton or
2.8% primarily as a result of lower ingredient costs. 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% in
1999. Nearly all of the 1999 volume decline occurred in Korea, where low hog
prices following the 1998 recession reduced demand for the Company's
higher-price, higher-performance hog feeds.
Segment profitability increased $7.2 million or 21.8% in 2000 and $4.8
million or 17.0% in 1999. IOIC in Asia increased $8.9 million or 9.4% in 2000
and $9.1 million or 10.7% in 1999. The increase in IOIC in 2000 reflected the
increase in sales volume whereas the 1999 increase in IOIC reflected a
significant movement toward pre-crisis (fiscal 1998) margins. The increases in
IOIC for both years were partially offset by higher operating expenses. In 2000,
operating expenses in Asia increased $1.7 million due to an increase in variable
expenses and depreciation associated with recent capital expenditures. These
items were only partially offset by a decrease in the provision for doubtful
accounts due to the overall improvement in credit quality since the 1998 Asian
crisis. In 1999, operating expenses increased $4.3 million primarily as a result
24
<PAGE>
of capital expenditures made in 1998 including the purchase of one plant and the
construction of another in China.
Corporate and Tradico
The Corporate and Tradico segment is located primarily 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 foreign affiliates. A
subsidiary named "Tradico, Inc." was incorporated in Missouri in August 2000 in
anticipation of the acquisition of a manufacturing facility in Greenville,
Mississippi. Over the course of fiscal year 2001 the activities of Tradico will
be transferred to Tradico, Inc. In fiscal year 2000, Tradico recorded
intersegment sales of $121.0 million, which have been fully eliminated from the
Corporate and Tradico results presented above. Net sales to non-affiliates
consisted primarily of ingredient sales together with some shipments of feed
products.
In terms of segment profitability, the Corporate and Tradico segment
recorded losses of $15.1 million in 2000, $14.6 million in 1999 and $14.3
million in 1998. These losses are primarily related to unallocated corporate
administrative items. Tradico's margins on intersegment sales have been
allocated to the segment/region that purchased the goods.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations decreased by $70.9 million or 64.1% in 2000
primarily due to unfavorable changes in working capital items, particularly
accounts receivable and inventories. Accounts receivable remained flat in 2000
but decreased by $16.4 million in 1999 primarily as a result of collecting $12.9
million from Ralston which was outstanding at August 31, 1998. Consolidated
inventories increased by $17.9 million in 2000 but decreased by $12.7 million in
1999. Inventories (predominantly raw materials) increased in 2000 due to
strategic wheat purchases made in Korea and lower sales volumes than planned in
Colombia and Mexico. Inventories decreased in 1999 due to lower volumes in Asia,
lower worldwide commodity prices and strategic grain purchases made by Mexican
operations in August 1998. 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 as discussed above.
Capital expenditures, primarily to replace or enhance existing production
facilities and equipment, were $22.3 million, $25.9 million and $44.6 million in
fiscal years 2000, 1999 and 1998, respectively. While the Company has no
material commitments for capital expenditures as of August 31, 2000, it expects
capital expenditures in fiscal year 2001 to be at or near the level for 2000.
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 2000, Agribrands invested $1.7 million to purchase all of the
outstanding common stock of Metrovet, Inc., an animal health products company
based in the Philippines. In 1998, Agribrands invested $16.6 million to purchase
businesses in Venezuela, Italy and China. Assuming these acquisitions had
occurred as of September 1, 1998, they would not have had a material effect on
net sales, net earnings or earnings per share during any of the periods
presented.
Agribrands' capital expenditures and acquisitions in fiscal 1998 were
partially funded with advances from Ralston. Net proceeds from Ralston were
$141.9 million in 1998. Agribrands was spun off from Ralston in 1998 with
25
<PAGE>
approximately $105.0 million of cash and receivables from Ralston and
approximately $80.0 million of debt.
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. Since its
spin-off, the Company's operating units have generally financed their seasonal
and other working capital needs through intercompany loans and advances provided
by the U.S. parent. Short-term borrowings provided by local foreign banks and
branches of multinational banks are also utilized. The Company increased its
short-term borrowings from $18.5 million at August 31, 1999 to $27.8 million at
August 31, 2000. The Company's foreign affiliates have established uncommitted
credit lines with several lenders in order to assure availability of working
capital. On August 31, 2000, total unused, uncommitted lines of credit were
approximately $190 million. This includes approximately $80 million of
uncommitted lines of credit for the Company's Korean subsidiary.
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 at management's discretion and depending on market
conditions. As of August 31, 2000, the Company had purchased 855,052 shares
pursuant to this authorization at an average cost of $39.54 per share.
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
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
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. Dollar and other currencies
(particularly in 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, consolidated, per unit
Dollar-translated IOIC levels 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
26
<PAGE>
losses (see Note 2 of the Company's Notes to Financial Statements for more
information concerning the Company's translation procedures). Because the
Company operates predominantly outside of the U.S., 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 versus the Dollar).
When exchange rates fluctuate, earnings results using U.S. Dollar-based
accounting differ from results under local currency based accounting in three
important ways. Under U.S. Dollar-based accounting:
o Cost of goods sold is 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 assets and
liabilities denominated in currencies other than the Dollar instead of
assets and liabilities denominated in currencies other than the local
currency.
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.
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 each of the three years ended August 31,
2000:
<TABLE>
Dollar-based EBITDA
(Dollars in Millions)
<CAPTION>
Year ended August 31,
----------------------------------------
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Earnings before Income Taxes $ 66.9 $ 70.4 $ 34.2
Adjustments:
o Depreciation and amortization 25.2 24.8 21.2
o Interest expense 3.0 8.0 12.0
o Investment income * (9.1) (10.2) (5.2)
o Provisions for restructuring 1.4 - 3.0
o Gain on sale of property - (2.3) -
---------- ---------- ---------
EBITDA reported after translation under FAS 52 $ 87.4 $ 90.7 $ 65.2
27
<PAGE>
Adjustments to report EBITDA on a U.S. Dollar basis:
1) Difference in cost of products sold (2.9) (6.1) (16.6)
2) Reversal of foreign exchange (gain)/loss
reported under FAS 52 (0.1) 1.5 12.8
3) Dollar-based foreign exchange gain 7.0 3.7 12.6
---------- ---------- ---------
EBITDA reported on a U.S. Dollar basis $ 91.4 $ 89.8 $ 74.0
========== ========== =========
</TABLE>
* The Company now excludes investment income from its reported EBITDA. In
previous reports, EBITDA did not reflect an adjustment for investment income.
EBITDA is defined as earnings before taxes adjusted for depreciation and
amortization, interest expense, investment income, provisions for restructuring
and gain on sale of property. EBITDA is a measure of performance which is not a
defined term in GAAP and is not intended to be superior to GAAP information.
Explanation of adjustments to EBITDA:
1) Difference in cost of products sold-- The operations in Europe and the
Americas accounted for all of the adjustments to the cost of products sold
in 2000 and 1999. The operations in the Americas and Asia accounted for
nearly all of the adjustment in 1998. Cost of sales was higher on a Dollar
basis in all three years as the Dollar strengthened versus most other
currencies during these years. Under Dollar-based accounting, inventories
are initially recorded and maintained in Dollars.
2) Reversal of foreign exchange (gain)/loss reported under FAS 52-- In 1999,
GAAP-based foreign exchange losses 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 2000, most of the $7.0 million
foreign exchange gain was generated in Europe where the Company carried net
local currency denominated liabilities. As the Euro and other European
currencies weakened against the Dollar during fiscal 2000, these
liabilities decreased significantly in Dollar terms resulting in a foreign
exchange gain. In 1999, Dollar-based foreign exchange gains realized in
Brazil, Colombia, Italy and Mexico were only partially offset by losses in
Korea and the Philippines. In 1998, nearly all of the $12.6 million foreign
exchange gain was generated in Asia where the Company carried net
obligations denominated in the local Asian currencies. As the local
currencies weakened against the Dollar, these obligations decreased
significantly in Dollar terms resulting in a foreign exchange gain.
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, 2000 and 1999 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 $0.1 million and $0.4 million,
respectively.
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<PAGE>
Interest Rate Risks
At August 31, 2000, the Company's debt portfolio was comprised of
approximately 51% variable rate debt and 49% 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 about $0.2 million on the
Company's interest expense for 2000. With respect to the Company's fixed rate
debt outstanding at August 31, 2000, a hypothetical 10% adverse change in
interest rates would have resulted in approximately a $0.2 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 its 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, 2000 and 1999 for such
net currency positions resulting from a hypothetical 10% adverse change in
foreign currency exchange rates is $0.6 million and $0.8 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 $243 million and $228 million at August 31, 2000, and
1999, 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, 2000 and 1999 is
approximately $22.1 million and $20.7 million, respectively.
Inflation
Management recognizes that inflationary pressures may have an adverse
effect on Agribrands through higher interest costs, 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. As mentioned earlier, the exchange rates
between the U.S. Dollar and other currencies are related closely to
differentials between the U.S. and local inflation rates. As a result, the
Dollar-translated profit margins of the Company's international operations
generally fluctuate closely around long-term norms, particularly on a
consolidated basis.
29
<PAGE>
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.
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 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 during the transition period
from January 1, 1999 through 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 material costs related to the conversion, and future costs for
replacing computer equipment and reprogramming existing systems are not expected
to be material. 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.
NEW ACCOUNTING STANDARDS
Effective September 1, 2000, the Company adopted Statement of Financial
Accounting Standards No. 133 (FAS 133), "Accounting for Derivative Instruments
and Hedging Activities". FAS 133 establishes standards for recognition and
measurement of derivatives and hedging activities. The transition adjustments
resulting from the adoption of this Statement will be immaterial to the
Company's results and financial position for fiscal 2001.
Effective July 1, 2000, the Company adopted Financial Accounting Standards
Board Interpretation No. 44 (FIN 44), "Accounting for Certain Transactions
Involving Stock Compensation". FIN 44 clarifies the accounting for modifications
to stock option plans.
30
<PAGE>
OUTLOOK
Long-Term Trends
The Company's core animal feed business is generally most effective and
profitable where animal production is less concentrated and ingredient
availability or cost is an issue for local animal production. Where these
circumstances exist, the Company has a high level of confidence in its ability
to deliver value.
Of the markets Agribrands already serves, Asia continues to have the best
long-term dynamics for the Company's traditional business. Animal production
continues to be widely disbursed and many areas are dependent on imported
ingredients. In addition, animal protein consumption in many locations remains
well below that of more developed nations and is increasing with growth in
discretionary income. If increased demand is met by expanding existing animal
production methods, these markets potentially represent opportunities for
substantial growth. However, there is always the risk that pressure to increase
production and reduce cost will overcome the economic or regulatory barriers
that sustain the less concentrated production model.
Animal production in portions of Latin America and Eastern Europe is
similarly well-suited for growth and profitability in the traditional feed
industry, and (excluding potential political instability) the Company
anticipates economic-development based growth from its businesses in Central
America, the Northern portions of South America, and Eastern Europe to continue.
There are other markets around the world that hold great potential for the
traditional feed business. However, it is difficult to foresee all variables
before establishing a business and ventures into new territories often fail due
to unexpected conditions or poor execution. In fiscal 2000, the Company
cautiously entered Poland through an agreement to provide management services to
an existing feed business (with an option to purchase the business later). For
the time being, management believes opportunities to grow or improve existing
operations should take precedence over further geographic expansion.
The Company also competes in a number of markets where animal production is
much more highly concentrated and inexpensive ingredients (versus the world
markets) are available consistently (particularly parts of Western Europe and
North America). In these markets, the Company's traditional model must be
adjusted if it is to bring meaningful value to much more efficient animal
production systems. Agribrands has realized varying degrees of success in
meeting this challenge and recognizes that production of certain species in some
locations no longer provides an opportunity for the Company unless it wants to
participate in integrated production systems directly. Thus far, Agribrands has
generally chosen to avoid the risks associated with direct ownership of animals.
At the same time, there are invariably other species groups within these markets
whose production dynamics (or because the Company has relevant proprietary
technologies) continue to offer opportunities for growth or penetration.
Almost without respect to geographic boundaries, certain product lines
within the Company's business appear likely to offer higher levels of growth.
The farmed fish industry, particularly shrimp farming, continues to grow rapidly
around the world, as does the population of pleasure horses among high-income
segments of the population. Improvement and expansion of product lines and
marketing for both of these species are a priority in many of Agribrands'
geographic markets. Because of the similarities in customer needs around the
world, the Company is moving to provide more direct global coordination of its
efforts to serve these species.
31
<PAGE>
In addition to efforts to grow the core animal feed business, the Company
is exploring entry into related lines of business where its technologies or
distribution offer it a competitive advantage. These include replication of the
Company's successful Brazilian animal health products business to other markets
and sales of proprietary value added ingredients (under our Promote brand name).
Sales and profits from these businesses today are not material to Agribrands
consolidated results, but are expected to grow at a much higher rate than those
of the Company's core businesses.
Based on actions the Company is taking to improve its ability to respond to
local conditions, attractive dynamics in certain key markets, initiatives in its
most attractive product lines and efforts to expand into related product lines,
management believes the Company can achieve long-term profit growth sufficient
to more than offset declines in other areas where changes to animal production
systems will, over time, reduce the value or viability of independently produced
commercial feed products.
Near-Term Operating Results
Current operating results can be significantly influenced by the combined
effect of numerous independent environmental and cyclical factors (such as
general local economic conditions, animal protein supply and demand imbalances,
weather and concerns over food safety) that may impact the local agricultural
markets the Company serves. Therefore, consolidated results can vary noticeably
from long-term trend lines.
In 1999, the majority of such factors acted to increase earnings over the
probable long-term trend line. In 2000, management believes these factors were
neutral to slightly negative, so that consolidated results were quite near
hypothetical long-term trends. However, the negative cyclical factors impacting
fiscal 2000 were most prevalent at year-end and, absent new factors, can be
expected to hold earnings below long-term trends for the first three to six
months of fiscal 2001.
Monetary Factors
The complexity of Agribrands' international structure also generates
variability in financial costs and income. In particular, exchange rate
movements and changes to capital structures within its foreign affiliates
generate foreign exchange gains and losses. Currently, the Company's most
significant exposures to foreign exchange gains and losses impacting net
earnings are U.S. Dollar liabilities carried in Mexico, Brazil, Korea, Colombia
and Canada. As discussed earlier, management believes it makes sense to focus
more on the Company's exposure to the change in the dollar value of net monetary
assets or liabilities in currencies other than the U.S. Dollar. Agribrands'
exposed position in this respect can also be significant as the cost of hedging
these exposures often exceeds the likely benefit. The Company currently has
significant net monetary asset or liability positions in Euros, Chinese
Renminbi, Colombian Pesos and Canadian Dollars.
The Company's income tax position is quite complex due to the interaction
between income taxes paid locally by its foreign affiliates, dividends and
royalties received from its affiliates and the method for determining the credit
the Company receives on its U.S. tax return for foreign income and withholding
taxes. Based on current projections for these relevant items, management
believes its global effective rate should remain around 35% to 40% for the
foreseeable future.
32
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
See MARKET RISK SENSITIVITY AND INFLATION RISK 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,
2000, 1999 and 1998 and is responsible for their integrity and objectivity. The
statements were prepared in conformity with accounting principles generally
accepted in the United States of America, 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 auditor and PricewaterhouseCoopers LLP have direct
access to the Audit Committee.
The report of PricewaterhouseCoopers LLP appears below.
33
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of Agribrands International, Inc.:
In our opinion, the accompanying consolidated balance sheet 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, 2000 and 1999, 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 of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, 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 our opinion.
/s/ PricewaterhouseCoopers LLP
--------------------------------
PricewaterhouseCoopers LLP
St. Louis, Missouri
October 6, 2000
34
<PAGE>
AGRIBRANDS INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF EARNINGS
Year Ended August 31
(Dollars in millions except per share data)
<TABLE>
<CAPTION>
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net Sales $ 1,193.1 $ 1,261.5 $ 1,410.1
----------- ----------- -----------
Costs and Expenses
Cost of products sold 996.0 1,050.6 1,207.2
Selling, general and administrative 135.0 143.5 143.6
Interest 3.0 8.0 12.0
Provisions for restructuring 1.4 - 3.0
Gain on sale of property - (2.3) -
Other (income)/expense, net (9.2) (8.7) 10.1
----------- ----------- -----------
1,126.2 1,191.1 1,375.9
----------- ----------- -----------
Earnings before Income Taxes 66.9 70.4 34.2
Income Taxes 21.9 26.4 20.4
----------- ----------- -----------
Net Earnings $ 45.0 $ 44.0 $ 13.8
=========== =========== ===========
Earnings Per Share
Basic $ 4.46 $ 4.16 $ 1.29
=========== =========== ===========
Diluted $ 4.33 $ 4.11 $ 1.29
=========== =========== ===========
</TABLE>
The above financial statement should be read in conjunction with the Notes to
Financial Statements.
35
<PAGE>
AGRIBRANDS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
August 31
(Dollars in millions)
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 174.6 $ 178.0
Receivables, less allowance for doubtful accounts 75.4 77.0
Inventories 96.6 81.3
Other current assets 7.1 11.9
----------- -----------
Total Current Assets 353.7 348.2
----------- -----------
Investments and Other Assets 59.5 51.3
Property, Plant and Equipment - net 168.4 174.0
----------- -----------
Total $ 581.6 $ 573.5
=========== ===========
Liabilities and Shareholders' Equity
Current Liabilities
Current maturities of long-term debt $ 0.4 $ 2.4
Notes payable 27.8 18.5
Accounts payable and accrued liabilities 116.0 125.1
Income taxes 4.5 8.5
----------- -----------
Total Current Liabilities 148.7 154.5
----------- -----------
Long-Term Debt 10.7 11.5
Deferred Income Taxes 9.4 11.0
Other Liabilities 19.3 23.2
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 95.1 50.1
Common stock in treasury, at cost (33.8) (10.8)
Accumulated other comprehensive loss (87.4) (85.6)
----------- -----------
Total Shareholders' Equity 393.5 373.3
----------- -----------
Total $ 581.6 $ 573.5
=========== ===========
</TABLE>
The above financial statement should be read in conjunction with the Notes to
Financial Statements.
36
<PAGE>
AGRIBRANDS INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended August 31
(Dollars in millions)
<TABLE>
<CAPTION>
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Cash Flow from Operations
Net earnings $ 45.0 $ 44.0 $ 13.8
Adjustments to reconcile net earnings to cash from operations:
Depreciation and amortization 25.2 24.8 21.2
Foreign exchange (gain)/loss (0.1) 1.5 12.8
Provision for doubtful accounts 1.3 3.6 6.4
Deferred income taxes 2.4 1.9 (5.1)
Gain on sale of property - (2.3) -
Changes in assets and liabilities used in operations:
Decrease (increase) in accounts receivable 0.3 16.4 (12.9)
(Increase) decrease in inventories (17.9) 12.7 (4.1)
Decrease (increase) in other current assets 0.1 6.0 (1.2)
(Increase) decrease in other assets (5.3) 0.8 3.5
(Decrease) increase in accounts payable and accrued liabilities (3.4) 1.7 (6.0)
(Decrease) increase in income taxes payable (3.7) (0.4) 3.3
Other, net (4.2) (0.1) 1.6
----------- ----------- -----------
Net cash provided by operations 39.7 110.6 33.3
----------- ----------- -----------
Cash Flow from Investing Activities
Acquisitions of businesses (1.7) - (16.6)
Property additions (22.3) (25.9) (44.6)
Proceeds from the sale of property 0.9 6.5 1.2
Proceeds from the sale of Korean pet food business 2.0 - -
Purchase of key man life insurance (5.0) (5.0) -
Other, net - (1.1) (2.8)
----------- ----------- -----------
Net cash used by investing activities (26.1) (25.5) (62.8)
----------- ----------- -----------
Cash Flow from Financing Activities
Proceeds from issuance of long-term debt - 11.0 19.0
Principal payments on long-term debt, including current maturities (2.7) (16.8) (32.4)
Net increase (decrease) in notes payable 10.1 (27.3) 16.7
Treasury stock purchases (23.0) (10.8) -
Net transactions with Ralston - - 141.9
----------- ----------- -----------
Net cash (used by) provided by financing activities (15.6) (43.9) 145.2
----------- ----------- -----------
Effect of Exchange Rate Changes on Cash and Cash Equivalents (1.4) (1.2) (9.7)
----------- ----------- -----------
Net (Decrease) Increase in Cash and Cash Equivalents (3.4) 40.0 106.0
Cash and Cash Equivalents, Beginning of Period 178.0 138.0 32.0
----------- ----------- -----------
Cash and Cash Equivalents, End of Period $ 174.6 $ 178.0 $ 138.0
=========== =========== ===========
</TABLE>
The above financial statement should be read in conjunction with the Notes to
Financial Statements.
37
<PAGE>
AGRIBRANDS INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Three Years Ended August 31, 2000
(Dollars in millions)
<TABLE>
<CAPTION>
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, 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)
Net earnings - - - 45.0 - -
Treasury stock purchased - - - - (23.0) -
Activity under stock plans - - - - - -
Translation adjustment - - - - - (1.8)
------------ --------- ----------- ---------- ------------ ---------------
Balance at August 31, 2000 $ - $ .1 $ 419.5 $ 95.1 $ (33.8) $ (87.4)
============ ========= =========== ========== ============ ===============
</TABLE>
The above financial statement should be read in conjunction with the Notes to
Financial Statements.
38
<PAGE>
AGRIBRANDS INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
Year Ended August 31
(Dollars in millions)
2000 1999 1998
---------- ---------- ----------
Net earnings $ 45.0 $ 44.0 $ 13.8
Foreign currency translation adjustment (1.8) 0.7 (15.3)
---------- ---------- ----------
Comprehensive Income (Loss) $ 43.2 $ 44.7 $ (1.5)
========== ========== ==========
The above financial statement should be read in conjunction with the Notes to
Financial Statements.
39
<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 in 1997 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
70 manufacturing plants in 17 countries outside the United States. 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
4,000 independent dealers, as well as an independent and a direct sales force.
The Balance Sheets as of August 31, 2000 and 1999 and the Statement of
Earnings for the years ended August 31, 2000 and 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.
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.
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. Minority interests in
consolidated subsidiaries are not material. 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 not material and 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
40
<PAGE>
adjustments are reported as a separate component of Shareholders' Equity. Gains
and losses that result from foreign currency transactions are included in
earnings.
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.
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 highly liquid investments with initial maturities
generally of three months or less. At August 31, 2000, cash and cash equivalents
consisted primarily of commercial paper, money market funds and other highly
liquid investments.
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.
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 $22.9 in
2000, $22.7 in 1999 and $19.3 in 1998.
Goodwill, which is included in Investments and Other Assets, represents the
excess of cost over the fair value of the net identifiable assets of acquired
businesses and is amortized evenly over periods of up to 25 years.
Impairment of Long-Lived Assets - The Company reviews long-lived assets,
including goodwill, for impairment whenever events or changes in business
circumstances indicate that the remaining useful life may warrant revision or
that the carrying amount of the long-lived asset may not be fully recoverable.
The Company performs undiscounted cash flow analyses to determine if an
impairment exists. If an impairment is determined to exist, any related
impairment charge is calculated based on fair value. Impairment losses on assets
to be disposed of, if any, are based on the estimated proceeds to be received,
less costs of disposal.
Revenue is recognized when products are shipped to customers. Risk of loss
generally transfers to the customer when products are shipped from the plant.
Sales discounts, returns and allowances are included in net sales. The provision
41
<PAGE>
for doubtful accounts is included in selling, general and administrative
expenses.
Advertising Costs are expensed as incurred and were $12.1 in 2000, $13.9 in
1999 and $13.7 in 1998.
Research and Development Costs are expensed as incurred and were $6.4 in
2000, $7.0 in 1999 and $6.8 in 1998.
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 the period 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.
New Accounting Standards - Effective September 1, 2000, the Company adopted
Statement of Financial Accounting Standards No. 133 (FAS 133), "Accounting for
Derivative Instruments and Hedging Activities". FAS 133 establishes standards
for recognition and measurement of derivatives and hedging activities. The
transition adjustments resulting from the adoption of this Statement will be
immaterial to the Company's results and financial position for fiscal 2001.
Effective July 1, 2000, the Company adopted Financial Accounting Standards
Board Interpretation No. 44 (FIN 44), "Accounting for Certain Transactions
Involving Stock Compensation". FIN 44 clarifies the accounting for modifications
to stock option plans.
42
<PAGE>
3. BUSINESS COMBINATIONS
On August 7, 2000, the Company and Ralcorp Holdings, Inc. ("Ralcorp")
announced that they had entered into an Agreement and Plan of Reorganization,
dated as of August 7, 2000 (the "Agreement"), which sets forth the terms and
conditions of the proposed merger of equals of Agribrands and Ralcorp. Pursuant
to the Agreement, Agribrands and Ralcorp will form a holding company ("Holding
Company") which will acquire all of the common stock of Agribrands and Ralcorp
through mergers of separate subsidiaries of the holding company with and into
each of Agribrands and Ralcorp (the "Reorganization"). Upon consummation of the
Reorganization, the shareholders of Agribrands will receive three shares of
Holding Company stock for each share of Agribrands stock exchanged. The
shareholders of Ralcorp will receive one share of Holding Company stock for each
share of Ralcorp stock exchanged. Alternatively, shareholders may elect to
receive $39 in cash per Agribrands share or $15 in cash per Ralcorp share. At
least 80% of each company's shares will be converted into stock of Holding
Company. Any excess cash elections will be reduced on a pro rata basis.
The proposed merger with Ralcorp is subject to two-thirds approval by both
companies' shareholders, receipt of a ruling from the Internal Revenue Service
that the merger will not affect the tax-free status of Agribrands' spin-off from
Ralston, and customary regulatory approvals. The transaction is expected to be
tax-free to shareholders to the extent that they receive common stock of Holding
Company. The combination is expected to be accounted for using the purchase
method of accounting. Because Agribrands and Ralcorp shareholders may elect to
receive cash in lieu of shares of the Holding Company common stock, the portion
of the voting rights in the Holding Company that will be held by former
Agribrands and Ralcorp shareholders, and thus the identity of the acquiring
corporation, cannot be determined at this time. Completion of the proposed
merger is expected to occur during the second quarter of fiscal 2001. In the
event that the Agreement is terminated, including but not limited due to a party
accepting a superior offer, one of the parties may be required to pay
termination fees of $5 million to the other party.
In July 2000, Agribrands purchased all of the outstanding common stock of
Metrovet, Inc. from Metro Pacific Corporation for $1.7 million. Metrovet, inc.
is an animal health products distribution company in the Philippines. This
acquisition was 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. If the acquisition of Metrovet, Inc. had
occurred as of September 1, 1998, it would not have had a material impact on net
sales, net earnings or earnings per share for fiscal 1999 or fiscal 2000.
43
<PAGE>
4. BUSINESS SEGMENT AND GEOGRAPHIC AREA INFORMATION
The Company and its subsidiaries are principally engaged in the production
and sale of agricultural animal feed. The Company's chief operating decision
maker evaluates segment performance based on operating profit, exclusive of
provisions for restructuring and gains on sale of property. Financial items,
such as interest income and expense are managed on a global basis at the
corporate level. The Company's businesses are organized by geographic area:
o The Americas segment consists of the Company's businesses in Brazil,
Canada, Colombia, El Salvador, 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 primarily in the United
States. This segment includes certain corporate items that were not
allocated to the other segments. It also includes Tradico, which
sources and resells ingredients, equipment, and products primarily to
foreign affiliates. Tradico's margins on intersegment sales have been
allocated to the segment that purchased the goods from Tradico.
Summarized below is Agribrands' business segment information for the years
ended August 31, 2000, 1999 and 1998.
2000 1999 1998
-------- -------- --------
Net Sales - External
Americas $ 548.6 $ 572.5 $ 625.6
Europe 284.7 341.8 397.2
Asia 358.7 344.6 387.3
Corporate and Tradico (U.S.) 1.1 2.6 -
-------- -------- --------
Total $1,193.1 $1,261.5 $1,410.1
======== ======== ========
Net Sales - Intersegment
Americas $ - $ - $ -
Europe - - -
Asia - - -
Corporate and Tradico (U.S.) 121.0 102.0 92.9
-------- -------- --------
Total $ 121.0 $ 102.0 $ 92.9
======== ======== ========
Depreciation & Amortization
Americas $ 7.4 $ 7.9 $ 6.8
Europe 7.2 8.0 8.3
Asia 9.8 8.1 5.9
Corporate and Tradico (U.S.) 0.8 0.8 0.2
-------- -------- --------
Total $ 25.2 $ 24.8 $ 21.2
======== ======== ========
44
<PAGE>
2000 1999 1998
-------- -------- --------
Segment Profitability
Americas $ 23.3 $ 33.4 $ 33.5
Europe 13.7 15.6 11.9
Asia 40.2 33.0 28.2
Corporate and Tradico (U.S.) (15.1) (14.6) (14.3)
-------- -------- --------
Total 62.1 67.4 59.3
Provisions for restructuring (1.4) - (3.0)
Gain on sale of property - 2.3 -
Interest expense (3.0) (8.0) (12.0)
Other income/(expense), net 9.2 8.7 (10.1)
-------- -------- --------
Earnings before Income Taxes $ 66.9 $ 70.4 $ 34.2
======== ======== ========
Capital Expenditures
Americas $ 11.9 $ 11.1 $ 16.7
Europe 4.6 5.6 7.7
Asia 4.4 9.1 19.5
Corporate and Tradico (U.S.) 1.4 0.1 0.7
-------- -------- --------
Total $ 22.3 $ 25.9 $ 44.6
======== ======== ========
Total Assets
Americas $ 175.5 $ 169.3 $ 188.7
Europe 93.5 116.0 139.7
Asia 162.2 144.5 132.5
Corporate and Tradico (U.S.) 150.4 143.7 117.5
-------- -------- --------
Total $ 581.6 $ 573.5 $ 578.4
======== ======== ========
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
operations are predominantly located outsidethe United States with subsidiaries
located in 17 foreign countries on four continents. No single customer accounted
for more than 10% of sales. Net sales attributed to South Korea were $288.2,
$238.8 and $281.4 in the years ended August 31, 2000, 1999 and 1998,
respectively. Net sales attributed to Mexico were $145.5, $154.3 and $162.0 in
the years ended August 31, 2000, 1999 and 1998, 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 $42.8 and $43.4 in the years ended August 31, 2000 and 1999,
respectively. Net property, plant and equipment attributable to an individual
country, other than South Korea, were not material for disclosure.
45
<PAGE>
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.
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>
2000 1999
---------------------------- -----------------------------
Notional Carrying Fair Notional Carrying Fair
Amount Amount Value Amount Amount Value
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Foreign Currency:
Forwards $ 6.3 $ (0.1) $ (0.2) $ 7.3 $ - $ (0.1)
Options - - - - - -
-------- -------- -------- -------- -------- --------
6.3 (0.1) (0.2) 7.3 - (0.1)
-------- -------- -------- -------- -------- --------
Commodity Price:
Futures 1.2 - 0.1 4.1 - (0.2)
Options 0.1 - - 0.5 - -
-------- -------- -------- -------- -------- --------
1.3 - 0.1 4.6 - (0.2)
-------- -------- -------- -------- -------- --------
Total of outstanding derivatives $ 7.6 $ (0.1) $ (0.1) $ 11.9 $ - $ (0.3)
======== ======== ======== ======== ======== ========
</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 and cash equivalents, short-term investments, and short-term and
long-term debt. Due to the nature of cash equivalents, short-term investments
and short-term debt, carrying amounts on the balance sheet approximate fair
value. At August 31, 2000 and 1999, the fair value of long-term debt was $10.8
and $13.5, respectively, compared to its carrying value of $11.1 and $13.9,
respectively. Agribrands has long-term debt in numerous countries under a
variety of terms and arrangements. The fair value of the Company's long-term
debt has been estimated using quoted market prices for borrowing arrangements
that are the same or similar to the major components of its long-term debt.
46
<PAGE>
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. A total of 0.8 million shares were
available for future awards under the plan at August 31, 2000.
There were 165,250 and 161,750 SARs outstanding at August 31, 2000 and
1999, 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. The Company recognized compensation
(income)/expense for SARs of $(0.1) and $0.7 in the years ended August 31, 2000
and 1999, respectively. 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.
2000 1999 1998
-------- -------- --------
Reported net earnings $ 45.0 $ 44.0 $ 13.8
Pro forma net earnings 41.4 40.5 12.8
Reported diluted earnings per share $ 4.33 $ 4.11 $ 1.29
Pro forma diluted earnings per share 3.99 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:
2000 1999 1998
-------- ------- --------
Risk-free interest rate 6.7% 4.6% 5.7%
Expected life of option 7 years 8 years 9 years
Expected volatility of Agribrands stock 30.0% 35.0% 30.0%
Expected dividend yield on Agribrands stock 0.0% 0.0% 0.0%
The weighted average fair value of options granted during 2000, 1999 and
1998 is as follows:
2000 1999 1998
--------- ------- ---------
Fair value of each option granted $ 20.04 $ 10.85 $ 18.62
Total number of options granted 23,500 646,250 1,122,500
--------- ------- ---------
Total fair value of options granted (in millions) $ 0.5 $ 7.0 $ 20.9
========= ======= =========
47
<PAGE>
The following summarizes stock option plan activity during the year ended
August 31:
<TABLE>
<CAPTION>
2000 1999 1998
-------------------- ---------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
---------- -------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Outstanding at beginning of year 1,749,750 $ 31.14 1,115,000 $ 36.43 - $ -
Granted 23,500 41.94 646,250 22.00 1,122,500 36.41
Exercised (750) 30.06 (1,500) 30.06 - -
Cancelled (10,000) 31.25 (10,000) 29.85 (7,500) 34.25
---------- ---------- ----------
Outstanding at end of year 1,762,500 $ 31.29 1,749,750 $ 31.14 1,115,000 $ 36.43
========== ========== ==========
Options exercisable at year end 1,500 $ 30.06 - - - -
========== ========== ==========
</TABLE>
A summary of stock options currently outstanding and exercisable at August
31, 2000 is presented below:
Options Outstanding Options Exercisable
----------------------------------------- -------------------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Range of Remaining Exercise Exercise
Prices Number Life Price Number Price
--------- --------- ------------------- --------- ------ ---------
$20 - $29 624,000 8 years $ 21.69 500 $ 21.69
$30 - $39 1,116,000 8 years $ 36.44 1,000 $ 34.25
$40 - $49 22,500 9 years $ 41.94 - $ -
--------- ------
$20 - $49 1,762,500 8 years $ 31.29 1,500 $ 30.06
48
<PAGE>
7. PENSION PLANS
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.
The Company does not provide other postretirement defined benefits.
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:
<TABLE>
<CAPTION>
2000 1999 1998
------ ------ ------
<S> <C> <C> <C>
Defined benefit plans
Service cost for benefits earned during the year $ 2.0 $ 1.6 $ 1.6
Interest cost on projected benefit obligation 2.1 2.0 2.3
Assumed return on plan assets (1.9) (1.6) (2.6)
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)
Other 0.8 - -
------ ------ ------
Total costs for defined benefit plans 3.2 2.1 1.0
Defined contribution plans 0.2 0.3 0.1
------ ------ ------
Total $ 3.4 $ 2.4 $ 1.1
====== ====== ======
</TABLE>
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:
2000 1999 1998
------ ------ ------
Discount rate 9.1% 9.2% 9.2%
Rate of increase of future compensation levels 7.3% 7.4% 7.4%
Long-term rate of return on assets 9.9% 9.9% 9.4%
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:
49
<PAGE>
2000 1999
------ -------
Change in Projected Benefit Obligation (PBO):
PBO, beginning of year $ 24.3 $ 20.5
Service cost 2.0 1.6
Interest cost 2.1 2.1
Employee contributions 0.2 0.2
Plan amendments - 0.3
Actuarial gain/(loss) 2.5 1.3
Benefits paid (5.2 (3.5)
Translation adjustment 0.4 1.8
------ -------
PBO, end of year $ 26.3 $ 24.3
====== =======
Change in Plan Assets:
Fair market value, beginning of year $ 18.5 $ 14.6
Actual return on plan assets 3.0 1.6
Employer contributions 2.8 4.0
Employee contributions 0.2 0.2
Benefits paid (5.1 (3.4)
Translation adjustment 0.5 1.5
------ -------
Fair market value, end of year $ 19.9 $ 18.5
====== =======
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:
2000 1999
------- -------
Funded status - plan assets (under)/over benefit obligation $ (6.4) $ (5.8)
Unrecognized net loss 4.0 3.6
Unrecognized prior service cost 0.9 1.0
Unrecognized net asset at transition, net of amortization (0.2) (0.4)
------- -------
Net pension liability $ (1.7) $ (1.6)
======= =======
The net pension liability disclosed above does not include balance sheet
accruals for unfunded defined benefit plans of $9.0 and $12.3 as of August 31,
2000 and 1999, 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.
8. PROVISIONS FOR RESTRUCTURING
In 2000, Agribrands recorded provisions for restructuring which reduced
earnings before income taxes and net earnings by $1.4. These charges provided
for the termination of 37 production and administrative employees in connection
with the downsizing of Agribrands' operations in France and Colombia. As of
August 31, 2000, 22 employees have been terminated in connection with these
charges.
In 1998, Agribrands recorded provisions for restructuring, associated with
the streamlining of Agribrands' operations in Europe, which reduced earnings
before income taxes by $3.0 and net earnings by $1.7. The restructuring included
50
<PAGE>
a $2.2 million pre-tax charge to provide for the severance of approximately 40
employees, all of whom were released by August 31, 1999. The remaining pre-tax
restructuring provisions for 1998 were primarily related to impairment charges
incurred in connection with the closing of a plant in Italy.
Components of the provisions for the years ended August 31 are as follows:
2000 1999 1998
----- ---- -----
Severance $ 1.4 $ - $ 2.2
Other cash costs - - 0.1
Fixed asset writedown - - 0.7
----- ---- -----
$ 1.4 $ - $ 3.0
===== ==== =====
The following summarizes activity within the restructuring reserves:
2000 1999 1998
------- ------ ------
Balance at beginning of year $ - $ 1.3 $ 1.4
Provision during year 1.4 - 3.0
Spending/fixed asset writedown during year (0.9) (1.3) (3.1)
------- ------ ------
Balance at end of year $ 0.5 $ - $ 1.3
======= ====== ======
9. OTHER (INCOME)/EXPENSE, NET
2000 1999 1998
-------- -------- -------
Foreign exchange (gain)/loss $ (0.1) $ 1.5 $ 12.8
Investment income (9.1) (10.2) (5.2)
Financing fees - - 2.5
-------- -------- -------
$ (9.2) $ (8.7) $ 10.1
======== ======== =======
In 1998, the Company incurred a $2.5 charge for fees associated with a
three-year committed credit facility the Company elected to cancel before any
funds were borrowed.
51
<PAGE>
10. INCOME TAXES
The provisions for income taxes consisted of the following for the years
ended August 31:
<TABLE>
<CAPTION>
2000 1999 1998
-------- --------- ---------
<S> <C> <C> <C>
Currently payable:
United States $ 3.1 $ 2.1 $ 1.7
Foreign 12.3 16.7 19.1
Taxes on repatriation of foreign earnings 4.1 5.7 4.7
-------- --------- ---------
Total current 19.5 24.5 25.5
-------- --------- ---------
Deferred:
United States (2.9) 0.3 (0.2)
Foreign 5.3 1.6 (4.9)
-------- --------- ---------
Total deferred 2.4 1.9 (5.1)
-------- --------- ---------
$ 21.9 $ 26.4 $ 20.4
======== ========= =========
The source of pre-tax earnings was:
2000 1999 1998
-------- --------- ---------
United States $ 26.2 $ 6.2 $ 1.2
Foreign 40.7 64.2 33.0
-------- --------- ---------
Total $ 66.9 $ 70.4 $ 34.2
======== ========= =========
</TABLE>
A reconciliation of income taxes with the amounts computed at the statutory
federal rate follows:
<TABLE>
<CAPTION>
2000 1999 1998
-------- --------- ---------
<S> <C> <C> <C>
Computed tax at federal statutory rate $ 23.4 $ 24.6 $ 12.0
Increases (decreases) in taxes resulting from:
Foreign tax rates other than domestic rate (2.0) (3.1) (2.7)
Taxes on repatriation of foreign earnings 4.1 5.7 4.7
U.S. foreign tax credits (3.0) (4.0) (2.0)
Provision for valuation allowance* (3.7) 0.2 3.0
Incremental taxes allocated by Ralston - - 1.1
Other, net 3.1 3.0 4.3
-------- --------- ---------
$ 21.9 $ 26.4 $ 20.4
======== ========= =========
</TABLE>
* The provision for valuation allowance will not necessarily equal the change
in valuation allowance due to the effect of changes in exchange rates.
52
<PAGE>
At August 31, deferred tax assets and deferred tax liabilities recorded on
the balance sheet are as follows:
2000 1999
-------- --------
Deferred Tax Liabilities:
Depreciation and property differences $ 6.3 $ 7.1
Inventory differences 5.4 4.5
Retirement plans 0.9 3.4
Other tax liabilities, current 0.2 0.6
Other tax liabilities, non-current 12.4 10.1
-------- --------
Gross deferred tax liabilities $ 25.2 $ 25.7
-------- --------
Deferred Tax Assets:
Tax loss carryforwards $ (12.1) $ (11.2)
Accrued expenses (5.8) (7.2)
Depreciation and property differences (4.6) (6.3)
Tax credits (2.5) (6.1)
Other tax assets, current (3.4) (7.3)
Other tax assets, non-current (3.1) (3.6)
-------- --------
Gross deferred tax (assets) $ (31.5) $ (41.7)
-------- --------
Valuation allowance 13.3 19.7
-------- --------
Net deferred tax liabilities $ 7.0 $ 3.7
======== ========
Approximately $0.1 of tax loss carryforwards and tax credits expired in
2000. Future expiration of tax loss carryforwards and tax credits, if not
utilized, are as follows: 2001 - $0.2, 2002 - $1.0, 2003 - $2.6, 2004 - $3.5,
2005 - $2.9 and beyond - $4.4. The valuation allowance at August 31, 2000 is
primarily attributed to certain tax loss carryforwards generated outside the
United States. 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.
In 2000, the Company reversed a $6.8 valuation allowance that was carried
against foreign tax credit carryforwards and other deferred tax assets in the
United States at August 31, 1999. Due to recently implemented tax planning
initiatives, the Company now believes it will generate sufficient foreign source
taxable income in the United States to realize a tax benefit for those deferred
tax assets.
At August 31, 2000, approximately $100 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.
53
<PAGE>
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.
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>
2000 1999 1998
------------ ------------ -----------
<S> <C> <C> <C>
Numerator:
Net earnings $ 45.0 $ 44.0 $ 13.8
============ ============ ===========
Denominator:
Weighted average shares outstanding-basic 10,083,706 10,570,405 10,668,571
Assumed conversion of stock options 299,461 135,657 -
------------ ------------ -----------
Weighted average shares outstanding-diluted 10,383,167 10,706,062 10,668,571
============ ============ ===========
Basic earnings per share $ 4.46 $ 4.16 $ 1.29
============ ============ ===========
Diluted earnings per share $ 4.33 $ 4.11 $ 1.29
============ ============ ===========
</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 22,500 and 1,107,500 shares of common stock were outstanding during
2000 and 1999, 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.
54
<PAGE>
12. PREFERRED AND COMMON STOCK
At August 31, 2000, 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, 2000. Activity for the Company's common
stock for the years ended August 31 is summarized below:
<TABLE>
<CAPTION>
2000 1999 1998
----------- ----------- ----------
<S> <C> <C> <C>
Common Stock Issued
Common stock issued at beginning of year 10,667,911 10,668,571 -
Distribution to Ralston's shareholders - - 10,668,571
Shares cancelled - (660) -
----------- ----------- ----------
Common stock issued at end of year 10,667,911 10,667,911 10,668,571
----------- ----------- ----------
Common Stock in Treasury
Treasury stock at beginning of year (288,606) - -
Treasury stock purchased (566,204) (288,848) -
Shares issued under stock plans 750 242 -
----------- ----------- ----------
Treasury stock at end of year (854,060) (288,606) -
----------- ----------- ----------
Common Stock Outstanding 9,813,851 10,379,305 10,668,571
=========== =========== ==========
</TABLE>
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, 2000,
there were 1,144,948 shares available for repurchase under this authorization.
On March 19, 1998, the Board of Directors declared a dividend of one share
purchase right ("Right") for each outstanding share of common stock. Each Right
entitles a shareholder of Agribrands stock to purchase an additional share of
Agribrands common stock at an exercise price of $125.00, subject to antidilution
adjustments. Rights, however, may only be exercised if a person or group has
acquired, or commenced a public tender for, 20% or more of the outstanding
Agribrands common stock, unless the acquisition is pursuant to a tender or
exchange offer for all outstanding shares of Agribrands common stock and a
majority of the Board of Directors determines that the price and terms of the
offer are adequate and in the best interests of shareholders (a "Permitted
Offer"). At the time that 20% or more of the outstanding Agribrands common stock
is actually acquired (other than in connection with a Permitted Offer), the
exercise price of each Right will be adjusted so that the holder (other than the
person or member of the group that made the acquisition) may then purchase a
share of Agribrands common stock at one-third of its then current market price.
If the Company merges with any other person or group after the Rights become
exercisable, a holder of a Right may purchase, at the exercise price, common
stock of the surviving entity having a value equal to twice the exercise price.
If the Company transfers 50% or more of its assets or earnings power to any
other person or group after the Rights become exercisable, a holder of a Right
55
<PAGE>
may purchase, at the exercise price, common stock of the acquiring entity having
a value equal to twice the exercise price.
The Company can redeem the Rights at a price of $.01 per Right at any time
prior to the time a person or group actually acquires 20% or more of the
outstanding Agribrands common stock (other than in connection with a Permitted
Offer). In addition, following the acquisition by a person or group of at least
20%, but not more than 50%, of the outstanding Agribrands common stock (other
than in connection with a Permitted Offer), the Company may exchange each Right
for one share of Agribrands common stock. The Company's Board of Directors may
amend the terms of the Rights at any time prior to the time a person or group
acquires 20% or more of the outstanding Agribrands common stock (other than in
connection with a Permitted Offer), and may amend the terms to lower the
threshold for exercise of the Rights. If the threshold is reduced, it cannot be
lowered to a percentage which is less than 10%, or, if any shareholder holds 10%
or more of the outstanding Agribrands common stock at that time, the reduced
threshold must be greater than the percentage held by that shareholder. The
Rights will expire on March 31, 2008.
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. Of such costs, allocations to Agribrands
were $19.1.
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 September of 2000, a shareholder suit was filed in the Circuit Court of
St. Louis County, Missouri against the Company and the individual members of the
Board of Directors alleging that the Directors failed to carry out their
fiduciary duties in recommending the merger with Ralcorp Holdings, Inc. The suit
requests: (i) the certification of a class consisting of all of the
shareholders, (ii) injunctive relief, (iii) attorneys fees and expenses, and
(iv) such other relief that the Court deems appropriate. Agribrands has
responded by denying the allegations. The Company believes it has adequate
insurance coverage for damages in excess of $2,500,000. The Company is
responsible for the costs of defense up to the deductible.
In August, 1999, Agribrands (together with Cargill, Incorporated, The Iams
Company and by subsequent amended pleading Carl S. Akey, Inc., Ralston Purina
Company and Ralcorp Holding, Inc.) have joined the case by further subsequent
amended pleading) 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
56
<PAGE>
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. When the Company will
prevail and the amount of recoverable damages is 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, 2000, the Company has not recognized any gain in its financial statements
for this matter.
In October of 1997, Agribrands' wholly owned subsidiary, Agribrands
Philippines, Inc. (formerly Purina Philippines, Inc) ("API"), applied for
renewal of a warehouse license to store corn and rice and by-products therefrom
at its Pulilan facility. The Philippine National Food Authority ("NFA"), the
governmental agency that administers the Philippines laws and regulations
governing the corn and rice industry, advised API by letter dated October 31,
1997, that its license renewal application was denied. The letter cites
Philippines' legislation and regulations that indicates that businesses
operating in the corn and rice industry cannot have more than 40% foreign
ownership. Since the NFA believes that API is in the corn and rice industry,
they have requested API to file a divestment plan in order to comply with the
40% maximum foreign ownership requirement. API has appealed the denial of its
license renewal, and on January 23, 1998, API received notification that it may
operate its warehouse under a "provisional permit" pending the resolution of the
appeal.
57
<PAGE>
In March of 2000, the Philippines adopted an act which repealed the law
restricting foreign participation in the corn and rice milling industry. The
effect of this act should moot the NFA action against API. API through its
counsel has filed a letter requesting confirmation from the NFA that it would
drop its proceedings against API as a result of this change in the law. To date,
API has not received a response from the NFA to its request. If the NFA were to
pursue its requirement for divestment, API would pursue its rights through the
Philippine legal system.
Even if the API was 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 substantial period of time.
Various tax, record keeping 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 and other statutory filing
requirements.
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.
15. OTHER CONTINGENCIES AND COMMITMENTS
Guarantees - At August 31, 2000, Agribrands had third party guarantees
outstanding in the aggregate amount of approximately $7.3. These guarantees
relate to financial arrangements with customers, suppliers and other business
relations.
Other Commitments - Future minimum rental commitments under noncancellable
operating leases in effect as of August 31, 2000 were: 2001 - $2.1, 2002 - $1.8,
2003 - $1.5, 2004 - $1.0, 2005 - $0.4 and thereafter - $0.5. Total rental
expense for all operating leases was $6.8 in 2000, $6.2 in 1999 and $7.1 in
1998.
16. NOTES PAYABLE
Notes payable of $27.8 and $18.5 at August 31, 2000 and 1999, respectively,
had a weighted average interest rate of 9.0% and 10.3%, respectively. At August
31, 2000, 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 compensating bank balances of $3.9 and $5.3
at August 31, 2000 and 1999, respectively.
58
<PAGE>
On August 31, 2000, total unused uncommitted lines of credit to affiliates
of Agribrands were approximately $190.
17. LONG-TERM DEBT
The detail of long-term debt as of August 31 follows:
<TABLE>
<CAPTION>
2000 1999
-------- -------
<S> <C> <C>
Korean subsidiary, interest rate of 8.9%; due 2002 $ 7.1 $ 6.7
Italian subsidiary, interest rate of 4.1% and 3.2% at August 31, 2000
and 1999, respectively; due in annual installments through 2004 2.1 2.5
Italian subsidiary, interest rate of 3.35% at August 31, 1999 - 1.6
Other long-term debt with interest rates ranging from 1.0% to 19.5%
1.9 3.1
-------- -------
11.1 13.9
Less: Current Maturities (0.4) (2.4)
-------- -------
$ 10.7 $ 11.5
======== =======
</TABLE>
Aggregate maturities of long-term debt are $8.3, $1.1, $0.8 and $0.1
for each of the years ending August 31, 2002 through 2005, respectively.
59
<PAGE>
18. SUPPLEMENTAL BALANCE SHEET INFORMATION
August 31
-------------------
2000 1999
-------- --------
Receivables (current)
Trade $ 71.8 $ 69.1
Value added tax 5.3 5.1
Other 10.4 14.2
Allowance for doubtful accounts (12.1) (11.4)
-------- --------
$ 75.4 $ 77.0
======== ========
Inventories
Raw materials and supplies $ 77.0 $ 61.1
Finished products 19.6 20.2
-------- --------
$ 96.6 $ 81.3
======== ========
Investments and Other Assets
Goodwill (net of accumulated amortization of $ 27.1 $ 29.1
$8.6 in 2000 and $6.5 in 1999)
Investments in affiliated companies 7.0 6.3
Cash surrender value of key man life insurance 10.0 5.0
Long-term receivable for value added tax 4.3 4.6
Deferred charges and other assets 11.1 6.3
-------- --------
$ 59.5 $ 51.3
======== ========
Property, Plant and Equipment - net
Land $ 11.9 11.8
Buildings 79.4 81.9
Machinery and equipment 250.8 249.1
Construction in progress 9.6 3.5
-------- --------
351.7 346.3
Accumulated depreciation (183.3) (172.3)
-------- --------
$ 168.4 $174.0
======== ========
Accounts Payable and Accrued Liabilities
Trade accounts payable $ 72.2 $ 75.2
Incentive compensation, salaries and vacations 14.2 15.4
Restructuring reserves 0.5 -
Other items 29.1 34.5
-------- --------
$ 116.0 $125.1
======== ========
60
<PAGE>
August 31
-------------------
2000 1999
-------- --------
Other Liabilities
Retirement and other employee benefits $ 14.6 $ 18.1
Minority interests 2.0 2.1
Other 2.7 3.0
-------- --------
$ 19.3 $ 23.2
======== ========
19. ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- ---------
<S> <C> <C> <C>
Balance, beginning of year $ 11.4 $ 10.4 $ 9.8
Provision charged to expense 1.3 3.6 6.4
Write-offs, less recoveries (0.5) (2.4) (4.0)
Translation adjustment (0.1) (0.2) (1.8)
-------- -------- ---------
Balance, end of year $ 12.1 $ 11.4 $ 10.4
======== ======== =========
</TABLE>
20. SUPPLEMENTAL CASH FLOW STATEMENT INFORMATION
2000 1999 1998
-------- -------- ---------
Interest paid $ 2.9 $ 8.6 $ 11.8
======== ======== =========
Income taxes paid $ 23.3 $ 24.8 $ 22.6
======== ======== =========
61
<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.
Fiscal 2000
<TABLE>
<CAPTION>
First Second Third Fourth Full
Quarter Quarter Quarter Quarter Year
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Net sales $ 300.9 $ 288.1 $ 301.2 $ 302.9 $ 1,193.1
Gross profit 53.7 46.4 48.7 48.3 197.1
Net earnings 13.9 11.0 9.4 10.7 45.0
Diluted earnings per share 1.29 1.04 .92 1.06 4.33
</TABLE>
Third quarter 2000 net earnings were reduced by $1.2 ($.12 per share) due
to provisions for restructuring. Fourth quarter 2000 net earnings were reduced
by $0.2 ($.02 per share) due to provisions for restructuring.
Fiscal 1999
<TABLE>
<CAPTION>
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).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
62
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Pursuant to the Company's Articles of Incorporation and Bylaws, the Board
of Directors consists of from three to twelve individuals, divided into three
classes of approximately equal size, each class to be elected for a term of
three years. The Company's Board has set the number of directors as seven. The
following table sets forth information as to each member of the Company's Board.
The director's ages are as of August 31, 2000. Mr. Stiritz serves as Chairman of
the Board.
<TABLE>
<CAPTION>
Term
Name Age Expires Information
<S> <C> <C> <C>
David R. Banks 63 2002 Mr. Banks has been a director of Agribrands since April 1998. He has served as
Chairman of the Board and Chief Executive Officer, Beverly Enterprises, Inc. (health
care services) since 1990. Mr. Banks is also a director of Nationwide Health
Properties, Inc. and Ralston Purina Company.
Jay W. Brown 55 2002 Mr. Brown has been a director of Agribrands since April 1998. He has served as
Principal in Westgate Group, LLC (private equity investment firm), responsible for
operational management of portfolio companies since 1998. Mr. Brown was President and
Chief Executive Officer, Protein Technologies International, Inc. (soy protein
products) from 1995 to 1998 (acquired from Ralston by E. I. DuPont de Nemours and
Company in 1997) and Vice President, Ralston Purina Company and Chairman and Chief
Executive Officer, Continental Baking Company (fresh bakery products) from 1984 to
1995. Mr. Brown is also a director of Jack In The Box Inc.
M. Darrell Ingram 67 2002 Mr. Ingram has been a director of Agribrands since April 1998. He currently serves
as Non-Executive Chairman of First Financial Planners, Inc. (privately held financial
services company). Mr. Ingram formerly served as Chairman of the Board, Red Fox
Environmental Services, Inc. (pollution control services). Mr. Ingram is also a
director of Ralston Purina Company.
H. Davis McCarty 60 2003 Mr. McCarty has been a director of Agribrands since April 1998. He has been a
private consultant for agri business marketing and strategic planning since January
1997. Mr. McCarty served as President, Consolidated Nutrition, a subsidiary of
Archer Daniels Midland and AGP, Inc. from May 1993 to December 1996.
63
<PAGE>
Joe R. Micheletto 63 2003 Mr. Micheletto has been a director of Agribrands since April 1998. He has been Chief
Executive Officer and President, Ralcorp Holdings, Inc. (food company) since 1994.
Mr. Micheletto is also a director of Energizer Holdings, Inc., Ralcorp Holdings, Inc.
and Vail Resorts, Inc.
Martin K. Sneider 57 2001 Mr. Sneider has been a director of Agribrands since April 1998. He is an Adjunct
Professor of Retailing at Washington University in St. Louis, Missouri. Mr. Sneider
was President of Edison Brothers Stores, Inc. (specialty retail) from 1987 to 1995.
Mr. Sneider is also a director of CPI Corporation. Edison Brothers filed for
protection under Chapter 11 of the Federal Bankruptcy Code in November, 1995 and
emerged from those proceedings in September 1997. Mr. Sneider had been President
until April, 1995.
William P. Stiritz 66 2001 Mr. Stiritz has served as Chairman of the Board, Chief Executive Officer and
President of Agribrands since April 1998. He has served as Chairman of the Board and
Chairman, Management Strategy and Finance Committee of Energizer Holdings, Inc. since
April 2000. Mr. Stiritz served as Chief Executive Officer and President, Ralston
Purina Company, from 1982 to 1997. Mr. Stiritz is Chairman of the Board of Ralcorp
Holdings, Inc. and Ralston Purina Company, and serves as a director of Ball
Corporation, The May Department Stores Company, Reinsurance Group of America,
Incorporated, Vail Resorts, Inc. and American Freightways Corporation.
</TABLE>
EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a list of all the executive officers (9) of Agribrands as
of August 31, 2000. All of these officers were elected by the Board and shall
serve in such positions until their successors have been duly elected and
qualified. There are no family relationships between any of the executive
officers.
<TABLE>
<CAPTION>
Name Age Positions
<S> <C> <C>
William P. Stiritz 66 Chairman of the Board, Chief Executive Officer and President of Agribrands since
April 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 37 Chief Financial Officer of Agribrands since April 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.
64
<PAGE>
Bill G. Armstrong 52 Chief Operating Officer of Agribrands since April 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 55 Chief Operating Officer - North Asia Region of Agribrands since April 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 55 Executive Vice President, Operations and Manufacturing since April 2000. Mr. Poole
served as Chief Operating Officer - Europe Region of Agribrands from April 1998 to
April 2000. He served as Vice President - Americas Region 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 48 Secretary and General Counsel of Agribrands since April 1998. Mr. Costello served as
International Counsel of Ralston's international animal and human foods businesses
from 1989 to 1998.
Robert W. Rickert, Jr. 49 Treasurer of Agribrands since April 1998. Mr. Rickert served as Director of
International Financial Services of Ralston's international agricultural products
business from 1990 to 1998; and Director of International Finance - Latin America,
Middle East, and Africa of Ralston's international agricultural products business
from 1988 to 1992.
Douglas W. Faust 39 Vice President and Controller of Agribrands since March 2000. Mr. Faust had served
as Controller of Agribrands since April 1998. He served as Controller of the
international agricultural products business of Ralston Purina from April 1997 to
April 1998. Mr. Faust was Manager of Corporate Accounting with the Kellwood Company
from 1992 to April 1997.
65
<PAGE>
John H. Ritzen 45 Vice President, Market Operations and Business Development of Agribrands since March
2000. Mr. Ritzen had served as Vice President and Director of Strategic Alliances of
Agribrands since April 1998. He served as Vice President and Director of Strategic
Alliances for the international agricultural products business of Ralston Purina from
September 1997 to April 1998. Prior to that he held the position of Vice President
and Managing Director, Asia/Pacific for Protein Technologies International, a
subsidiary of E. I. DuPont de Nemours and Company, from August 1995 to September 1997.
</TABLE>
BOARD OF DIRECTORS - COMMITTEES
Nominating &
Board Member Board Audit Compensation
--------------------------------------------------------------------------------
David R. Banks X X* X
Jay W. Brown X X X
M. Darrell Ingram X X X*
H. Davis McCarty X X X
Joe R. Micheletto X X
Martin K. Sneider X X X
William P. Stiritz X*
Meetings held in fiscal year 2000 6 2 1
*Chairperson
AUDIT COMMITTEE REPORT
The Audit Committee of the Board of Directors of Agribrands is comprised of
six non-employee directors. Under newly adopted rules of the New York Stock
Exchange, a director is prohibited from serving on the Audit Committee, who is
employed as an executive of another corporation where any of the Company's
executives serves on that corporation's Compensation Committee. Mr. Stiritz
currently serves on the Compensation Committee of Ralcorp and Mr. Micheletto is
an executive officer of that company. Mr. Stiritz is a principal in Westgate
Group, LLC and may have influence over the compensation of Mr. Brown, also a
principal of Westgate Group, LLC. The new rules provide that a serving Board
member may continue to serve until their current term on the Board expires. The
Audit Committee resolved that Messrs. Brown and Micheletto could continue to
serve on the Audit Committee until the expiration of their current terms ending
in January, 2002 and in January, 2003, respectively. The remaining four Audit
Committee members are independent.
The Audit Committee has a written charter which was amended this fiscal
year. The charter is included as an appendix to this document.
During meetings of the Audit Committee, the Committee reviewed and
discussed the audited financial statements with management and
PricewaterhouseCoopers. The Audit Committee believes that management maintains
an effective system of internal controls which results in fairly presented
financial statements. Based on these discussions, the Audit Committee
recommended to the Board of Directors that the audited financial statements for
fiscal year 2000 be included in Agribrands Annual Report on Form 10-K.
66
<PAGE>
The discussions with PricewaterhouseCoopers also included the matters
required by Statement on Accounting Standards No. 61. The Audit Committee
received from PricewaterhouseCoopers written disclosures and the letter
regarding its independence as required by Independence Standards Board Standard
No. 1. This information was discussed with PricewaterhouseCoopers.
The Audit Committee of Agribrands International, Inc.:
David R. Banks H. Davis McCarty
Jay W. Brown Joe R. Micheletto
M. Darrell Ingram Martin K. Sneider
Nominating & Compensation Committee: Recommends to the Board nominees for
election as directors and executive officers. Makes recommendations to the Board
regarding election of directors to positions on committees of the Board and
compensation and benefits for directors. Sets the compensation of all corporate
officers and administers the Agribrands Non-Qualified Deferred Compensation Plan
and the Incentive Stock Plan, including the granting of awards under the latter
plan. Reviews the competitiveness of management compensation and benefit
programs, and principal employee relations policies and procedures. All members
are non-employee directors.
Director Compensation & Attendance
Employee directors receive no compensation other than their normal salary
for serving on the Board or its Committees. Non-employee directors receive the
following fees for their service on the Board:
o Annual Retainer: $20,000
o Fee for Each Board Meeting: $1,000
o Fee for Each Committee Meeting: $1,000
Directors can elect to have these amounts paid in cash, or defer payment
until their retirement under the terms of the Deferred Compensation Plan. Under
that Plan, any non-management director may elect to defer, with certain
limitations, all retainers and fees until retirement or other termination of his
directorship. Deferrals may be made in various investment options which mirror
the performance of the investment funds offered by the Company's Savings
Investment Plan.
The Company also pay the premiums on directors' and officers' liability and
travel accident insurance policies insuring directors.
During fiscal year 2000, all directors attended 75% or more of the Board
and Committee meetings on which they served.
67
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
INTRODUCTION AND SUMMARY
The following tables and narrative text discuss the compensation paid in
fiscal year 2000 to the Named Executive Officers, i.e., the Company's Chief
Executive Officer and President, and the Company's four other most highly
compensated officers (collectively, the "Named Executive Officers").
The Summary Compensation Table set forth below also summarizes compensation
received by the Named Executive Officers from the date of the spin-off of the
Company by Ralston Purina Company on April 1, 1998 through the end of the fiscal
year 1998, that is, for five months rather than for a full fiscal year.
Annualized salaries, i.e., the salary amounts which would have been paid to the
Named Executive Officers had they been paid for a full year at the rates in
effect from the spin-off date through the end of the fiscal year, are reflected
in the "Salary" column.
The full amount of bonuses the Company paid at the end of fiscal year 2000
is reflected in the "Bonus" column. Management has not attempted to pro rate
bonuses based on the relationship between the period before the spin-off and the
period after the spin-off.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term
Compensation
Annual Compensation (Awards)
--------------------------------------------------------------------------------------------------------------------------------
Securities
Other Annual Underlying All Other
Name and Compensation Options Compensation
Principal Position Year Salary ($) Bonus ($) ($) (#) ($)(1)
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
William P. Stiritz 2000 $ - $ - $ 72,082 (2) 0 $291,580
Chairman of the Board, 1999 $ - $ - $ 67,220 500,000 $309,186
Chief Executive Officer 1998 $ - $ - $ 30,593 1,000,000 $ -
and President
Bill G. Armstrong 2000 $238,333 $157,300 $ - 0 $ 19,188
Chief Operating Officer 1999 $220,000 $143,000 $ - 25,000 $ 16,292
1998 $200,000 $150,000 $ - 10,000 $ 2,423
Ki Yong Kim 2000 $188,917 (3) $116,020 $ 60,925 (3)(4) 5,000 $148,238 (3)
Chief Operating Officer 1999 $150,299 $ 99,968 $ 53,532 5,000 $239,976
North Asia Region 1998 $117,036 $100,000 $ 28,468 10,000 $ 38,568
Eric M. Poole 2000 $195,227 (5) $ 83,200 $ 42,433 (6) 0 $ 17,200
Executive Vice President 1999 $239,828 $100,000 $161,227 2,500 $ 12,238
Operations and 1998 $211,753 $ 70,000 $133,364 5,000 $ 2,696
Manufacturing
David R. Wenzel 2000 $178,750 $ 99,825 $ - 0 $ 15,711
Chief Financial Officer 1999 $165,000 $ 82,500 $ - 25,000 $ 11,586
1998 $150,000 $ 90,000 $ - 10,000 $ 1,650
<FN>
(1) The amounts shown in this column consist of the following:
68
<PAGE>
(i) Matching contributions under the Company's Savings Investment Plan:
o Mr. Armstrong, $3,320
o Mr. Poole, $5,160
o Mr. Wenzel, $2,316
(ii) Matching contributions under the Company's Non-Qualified Deferred
Compensation Plan:
o Mr. Armstrong, $7,868
o Mr. Poole, $4,040
o Mr. Wenzel, $5,395
(iii)Profit sharing contributions under the Company's Savings Investment
Plan:
o Mr. Armstrong, $8,000
o Mr. Poole, $8,000
o Mr. Wenzel, $8,000
(iv) Severance accrual for Mr. Kim for 2000 pursuant to certain severance
arrangements described in detail on page 72 under the heading
"Severance Plan."
(v) Key Man Life Insurance premiums in the amount of $5,000,000 paid on
the life of Mr. Stiritz having a potential value under certain funding
and actuarial assumptions of $285,622. This $102 million insurance
policy was entered into to provide Agribrands with flexibility to
respond to any crises or perceived crises that might arise upon the
unexpected death of the Company's Chief Executive Officer, especially
given the attention placed on the significance of his role at the time
of the Spin-off. The split-dollar program allows additional funding
within the program to accrue without tax and may provide a cash-value
benefit to Mr. Stiritz at the end of the program. The potential value
to Mr. Stiritz was computed using a formula required for disclosure
purposes, but, without additional funding by us, it is not certain
whether any benefit will actually accrue. Any potential future benefit
for Mr. Stiritz (in the form of cash value at the end of year seven of
the program), will be dependent on investment earnings within the
program and additional funding by Agribrands, if any. The amount shown
for 1999 has been revised from the amount originally presented, to
reflect changes in management's assumptions as to its future funding
under the insurance policy. In addition, a separate life insurance
premium in the amount of $5,958 was paid for Mr. Stiritz.
(2) The amount shown in this item includes $32,150 for a company automobile for
Mr. Stiritz.
(3) The amounts shown were converted to U. S. Dollars from South Korean Won
using the August 31, 2000 exchange rate of 1108.75 South Korean Won to 1
U.S. Dollar.
(4) The amount shown in this item includes $33,281 of interest foregone on key
money deposit on residence for Mr. Kim.
(5) The amount shown includes: (i) salary of $204,027, (ii) $9,025 for the
differential in the cost of living between the United States and Spain, and
(iii) a U.S. paid premium of $13,908 for his undertaking an assignment in a
foreign country; and excludes $31,733 tax equalization payment by Mr. Poole
for the prior year.
(6) The amount shown in this item (converted to U.S. Dollars from Spanish
Pesetas using the August 31, 2000 exchange rate of 187.36 Spanish Pesetas
69
<PAGE>
to 1 U.S. Dollar) includes expenses the Company incurred of: (1) $20,919 in
connection with personal housing, and (ii) $10,775 in connection expenses
related to a company automobile.
</FN>
</TABLE>
STOCK AWARDS
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Potential Realizable Value at
Number of % of Total Assumed Annual Rates of
Securities Options/SARs Stock Price Appreciation
Underlying Granted to Exercise or for Option/SAR Term (2)
Options/SARs Employees in Base Price Expiration -----------------------------
Name Granted (#) Fiscal Year ($/Sh)(1) Date 5% 10%
---- ------------ ------------ ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
B. G. Armstrong 0 N/A N/A N/A N/A N/A
K. Y. Kim 5,000 (3) 12.27% $41.9375 1/27/10 $131,871 $334,188
E. M. Poole 0 N/A N/A N/A N/A N/A
W. P. Stiritz 0 N/A N/A N/A N/A N/A
D. R. Wenzel 0 N/A N/A N/A N/A N/A
<FN>
(1) Market price on date of grant.
(2) Potential realizable value is calculated based on an assumption that the
price of the Common Stock appreciates at the annual rates shown (5%, 10%),
compounded annually, from the date of grant of option until the end of the
option term. The value is net of the exercise price but is not adjusted for
the taxes that would be due upon exercise. The Company has elected to
illustrate the potential realizable value using 5% and 10% assumed rates of
appreciation pursuant to the rules of the SEC. This does not represent
management's estimate or projection of future stock prices; actual gains,
if any, upon future exercise of any of these options will depend on the
actual performance of the Common Stock.
(3) Stock Appreciation Right granted is 100% exercisable on January 28, 2005.
</FN>
</TABLE>
70
<PAGE>
FISCAL YEAR END OPTION/SAR VALUES
The following table sets forth fiscal year-end option/SAR values. None of
the options reflected in the table were exercisable on August 31, 2000, the end
of Agribrands fiscal year. No options/SARs were exercised by any of the Named
Executive Officers listed below during fiscal year 2000.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options/SARs
Options/SARs at Year-End (#) Exercise or at Year-End ($)
Grant ------------------------------- Base Price ------------------------------
Name Date Exercisable Unexercisable ($/Sh) Exercisable Unexercisable
---- ------- ----------- ------------- ------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
B. G. Armstrong 5/29/98 0 10,000 $ 34.250 $ - $ 55,000
9/25/98 0 25,000 21.690 - 451,500
K. Y. Kim 5/29/98 0 10,000 34.250 - 55,000
9/25/98 0 5,000 21.690 - 90,300
1/28/00 0 5,000 41.9375 - 0
E. M. Poole 5/29/98 0 5,000 34.250 - 27,500
9/25/98 0 2,500 21.690 - 45,150
W. P. Stiritz 5/12/98 0 1,000,000 36.680 - 3,070,000
9/25/98 0 500,000 21.690 - 9,030,000
D. R. Wenzel 5/29/98 0 10,000 34.250 - 55,000
9/25/98 0 25,000 21.690 - 451,500
</TABLE>
GRANTOR TRUST
The Company has established and funded an irrevocable grantor trust to
provide a source of funds to assist it in meeting its obligations under certain
employee benefit plans and programs in which the Named Executive Officers, as
well as other employees, participate. At the present time, assets of the trust
consist primarily of funds deposited with the trustee for investment in
investment options which mirror the performance of the investment funds offered
by the Company's Savings Investment Plan. If the Company defaults in its funding
obligations under the trust, payment of obligations under such plans and
programs will immediately accelerate unless the employee elects to defer
payment.
CHANGE-IN-CONTROL AND TERMINATION OF EMPLOYMENT ARRANGEMENTS
The Company has entered into Management Continuity Agreements with the
Named Executive Officers. The agreements provide that the officers will receive
severance compensation in the event of their voluntary or involuntary
termination after a change in control of Agribrands. The compensation provided
would be in the form of (i) a lump sum payment equal to the present value of
continuing their respective salaries and bonuses for a specified period
following termination of employment, and (ii) the continuation of other employee
benefits for the same period. Due to the uncertainty of the merger with Ralcorp,
the Board of Directors reviewed the existing arrangements and approved the
enhancement of the severance compensation due upon a change in control. The
amended Management Continuity Agreements provide that the compensation payment
period for the Named Executive Officers shall be increased from two years to
three years in the event of an involuntary termination of employment (including
a constructive termination), but remain one year in the event of a voluntary
termination of employment, which periods are subject to reduction for periods
the relevant individual remains employed following a change in control. The
71
<PAGE>
amended Management Continuity Agreements also indemnify the Named Executive
Officers from any taxes which may become due under Section 280 G of the United
States Internal Revenue Code as a result of a termination following a change in
control. No payments would be made if the Officer terminates employment because
of death, disability or normal retirement, or for cause. Payments would not
continue beyond the Officer's normal retirement date.
In connection with the proposed merger of Agribrands with Ralcorp which is
described above under "Management's Discussion And Analysis Of Financial
Condition And Results Of Operations--Proposed Merger", Messrs. Armstrong and
Wenzel were granted three-year employment agreements. The agreements provide
that upon the completion of the merger the executive will hold specified
positions with the new Holding Company and will be entitled to the following
compensation:
o a salary equal to the greater of the executive's current salary or a salary
granted by the Holding Company Board of Directors after completion of the
merger;
o an annual bonus in an amount that is the greater of their current minimum
bonus or a bonus granted by the Holding Company Board of Directors after
completion of the merger;
o an executive level benefits program including stock based awards as
determined by the Holding Company Board of Directors; and
o participation under such pension plan, health insurance, 401(k) plan,
vacation, holiday and other programs in effect from time to time for
salaried executives of the Holding Company.
The employment agreements also provide that the executive may be terminated
at any time without "cause" but if such termination occurs prior to the end of
the term, the executive will be entitled to receive his base salary, minimum
bonuses and employee benefits through the end of the term. Notwithstanding these
provisions, the Holding Company will be entitled to terminate any employment
agreement immediately and without notice if the executive engages in certain
specified conduct, including the refusal, without cause, to perform his assigned
duties, the open criticism in the media of the company and the participation in
any conduct that the Holding Company Board of Directors determines to be
inimical to or contrary to the best interest of the Holding Company. Upon such
termination, the Holding Company will be obligated to pay the executive his base
salary prorated to the date of the termination event.
Agribrands existing agreements with its executive officers governing stock
options and stock appreciation rights provide that upon a change in control of
Agribrands all terms, conditions, restrictions and limitations in effect with
respect to any unexercised awards lapse and no other terms and conditions will
be applied, and any unexercised, unvested, unearned or unpaid shares become 100%
vested. The Company intends to secure the consent of its executive officers to
the waiver of the acceleration of these rights in respect of the proposed merger
with Ralcorp. Mr. Stiritz has already agreed in writing to waive the
acceleration of his stock options in connection with the proposed merger with
Ralcorp.
SEVERANCE PLAN
Agribrands Korean affiliate, in accordance with Korean Labor Law, provides
lump sum severance payments to employees upon termination of employment. The
Korean affiliate offers an enhanced severance plan for its executive officers in
lieu of the Korean-mandated obligation. This severance plan is partially funded.
Mr. Kim, as the chief executive officer of the Korean affiliate, participates in
this severance plan. His severance accrual is calculated based upon his current
salary (consisting of salary, bonus and certain benefits), years of service and
a multiplier based on position within the Korean affiliate. For the purpose of
calculating this severance benefit, Mr. Kim had, as of August 31, 2000, 27 years
of credited service, calculated to the nearest year. Credited service is based
upon employment by the Company's Korean affiliate and includes the period the
affiliate was owned by Ralston, its former parent corporation. Earnings used in
calculating benefits under the severance plan previously described are
72
<PAGE>
approximately equal to amounts included in the Salary and Bonus columns in the
Summary Compensation Table on page 68. If Mr. Kim's employment with us had been
terminated as of the end of fiscal year 2000, his lump-sum severance payment
would have been $1,121,173 pursuant to this severance plan.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
OWNERSHIP OF AGRIBRANDS SECURITIES
The table below lists the persons known by us to beneficially own 5% or
more of the Company's Common Stock as of November 1, 2000.
<TABLE>
<CAPTION>
Name and Address of Number of Shares % of Shares Explanatory
Beneficial Owner Beneficially Owned Outstanding Notes
------------------- ------------------ ----------- -----------
<S> <C> <C> <C>
Southeastern Asset Management, Inc. 1,137,384 11.59% (A)
6410 Poplar Ave., Suite 900
Memphis, TN 38119
Highbridge Capital Management, LLC 775,000 7.90% (B)
767 Fifth Avenue
New York, NY 10153
Greenlight Capital LLC 608,400 6.20% (C)
420 Lexington Ave., Suite 875
New York, NY 10170
Third Point Management Company
277 Park Avenue, 27th Floor 505,400 5.15% (D)
New York, NY 10019
<FN>
(A) Based on information contained in Amendment No. 2 to Schedule 13G filed by
Southeastern Asset Management, Inc. ("Southeastern"), an investment adviser
registered under Section 203 of the Investment Advisors Act of 1940, O.
Mason Hawkins, Chairman of the Board and Chief Executive Officer of
Southeastern and Longleaf Partners Small-Cap Fund, a series of Longleaf
Partners Funds Trust ("Longleaf"), an investment company registered under
Section 8 of the Investment Company Act of 1940 on February 9, 2000. The
reporting persons have reported that, they owned in the aggregate 1,137,384
shares. Southeastern has sole voting power with respect to 101,384 of the
shares and shared voting power with Longleaf with respect to 1,015,400 of
such shares and no voting power with respect to 20,600 of such shares. In
addition, Southeastern has sole dispositive power with respect to 121,984
of such shares and shared dispositive power with Longleaf with respect to
1,015,400 of such shares. Mr. Hawkins has disclaimed beneficial ownership
of all 1,137,384 of such shares.
(B) Based on information contained in Schedule 13D filed by Highbridge Capital
Management, LLC ("Highbridge Management") and Highbridge Capital
Corporation (Highbridge Capital") on August 18, 2000. Each of Highbridge
Capital and Highbridge Management has shared voting power over all 775,000
shares and shared dispositive power over all 775,000 shares.
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<PAGE>
(C) Based on information contained in Schedule 13G which was filed with the SEC
on April 14, 2000 by (i) Greenlight Capital LLC ("Greenlight"); (ii) David
Einhorn; and (iii) Jeffrey A. Keswin. Messrs. Einhorn and Keswin are
principals of Greenlight, which company provides investment management
services to private individuals and institutions. Each of Greenlight, Mr.
Einhorn and Mr. Keswin have reported that they have sole voting power and
sole dispositive power with respect to all 608,400 shares.
(D) Based on information contained in Schedule 13D which was filed with the SEC
on September 15, 2000 by Daniel S. Loeb and Third Point Management Company
L.L.C ("Third Point"). Each of Mr. Loeb and Third Point has shared voting
power over all 505,400 shares and shared dispositive power over all 505,400
shares.
</FN>
</TABLE>
COMMON STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
Options
Directors Shares Exercisable % of
and Beneficially Within Shares
Executive Officers Owned 60 Days Total Outstanding(A)
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
David R. Banks 470 0 470 *
Jay W. Brown 2,976 0 2,976 *
M. Darrell Ingram 1,366 (B) 0 1,366 *
H. Davis McCarty 921 (C) 0 921 *
Joe R. Micheletto 100 0 100 *
Martin K. Sneider 1,000 0 1,000 *
William P. Stiritz 41,155 (D) 0 41,155 *
Bill G. Armstrong 1,003 (E) 0 1,003 *
Ki Yong Kim 2,000 0 2,000 *
Eric M. Poole 750 0 750 *
David R. Wenzel 725 0 725 *
All Officers and Directors 52,836 0 52,836 *
</TABLE>
"Beneficial Ownership" includes those shares a director or executive
officer has the power to vote or transfer, as well as shares owned by immediate
family members that reside with the director or officer. The table above also
indicates shares that may be obtained within 60 days upon the exercise of
options. An asterisk in the column listing the percentage of shares beneficially
owned indicates the person owns less than 1% of the Common Stock as of November
1, 2000.
(A) The number of shares outstanding is the sum of (1) the number actually
outstanding on November 1, 2000, and (2) the number of shares of Common
Stock which would be issued if all options listed in the Options
Exercisable Within 60 Days column were exercised.
(B) Includes 26 shares of Common Stock held by Mr. Ingram's wife.
(C) Includes 492 shares of Common Stock held in Mr. McCarty's wife's trust of
which he serves as co-trustee.
(D) Includes 4,615 shares of Common Stock owned by Mr. Stiritz's wife and 934
shares of Common Stock owned by Mr. Stiritz's son. Mr. Stiritz disclaims
beneficial ownership of shares of Common Stock owned by his wife and son.
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<PAGE>
(E) Includes 3 shares of Common Stock owned by Mr. Armstrong's wife.
Section 16(a) BENEFICIAL OWNERSHIP COMPLIANCE Reporting
The Company's executive officers and directors are required under the
Securities Exchange Act of 1934 to file reports of ownership and changes in
ownership of common stock of the Company with the Securities and Exchange
Commission and the New York Stock Exchange. Copies of those reports must also be
furnished to the Company.
Based solely on a review of the copies of reports furnished to the Company
and written representations that no other reports were required, the Company
believes that during the preceding year all filing requirements applicable to
executive officers and directors have been complied with, except that one
transaction by Mr. Micheletto was reported late and the initial Form 3 filed on
behalf of Mr. Ritzen omitted shares held by him when he was elected a corporate
officer.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On August 7, 2000, the Company and Ralcorp Holdings, Inc. ("Ralcorp")
announced that they had entered into an Agreement and Plan of Reorganization,
dated as of August 7, 2000 (the "Agreement"), which sets forth the terms and
conditions of the proposed merger of equals of Agribrands and Ralcorp. Pursuant
to the Agreement, Agribrands and Ralcorp will form a holding company ("Holding
Company") which will acquire all of the common stock of Agribrands and Ralcorp
through mergers of separate subsidiaries of the holding company with and into
each of Agribrands and Ralcorp (the "Reorganization"). Upon consummation of the
Reorganization, the shareholders of Agribrands will receive three shares of
Holding Company stock for each share of Agribrands stock exchanged. The
shareholders of Ralcorp will receive one share of Holding Company stock for each
share of Ralcorp stock exchanged. Alternatively, shareholders may elect to
receive $39 in cash per Agribrands share or $15 in cash per Ralcorp share. At
least 80% of each company's shares will be converted into stock of Holding
Company. Any excess cash elections will be reduced on a pro rata basis. See
Proposed Merger on page 19 for additional information.
Ralcorp was formed in 1994 through a spin-off from Ralston Purina Company
("Ralston"), and Agribrands was spun off from Ralston in 1998. William P.
Stiritz, the Company's Chairman, Chief Executive Officer and President, is
Chairman of the Board of Ralcorp and Chairman of the Board of Ralston. Joe R.
Micheletto, Chief Executive Officer, President and a director of Ralcorp, is a
member of Agribrands Board of Directors. The Board of Directors of the Holding
Company is to consist of the current directors of Ralcorp and Agribrands.
75
<PAGE>
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, 2000,
1999 and 1998
Consolidated Balance Sheet - for years ended August 31, 2000 and 1999
Consolidated Statement of Cash Flows - for years ended August 31, 2000,
1999 and 1998
Consolidated Statement of Shareholders' Equity - for years ended August
31, 2000, 1999, 1998, 1997 and 1996
Consolidated Statement of Comprehensive Income (loss)- for years ended
August 31, 2000, 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)
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<PAGE>
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)
*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)
77
<PAGE>
10.19 Agreement and Plan of Reorganization, dated as of August 7, 2000,
between the Registrant and Ralcorp Holdings, Inc. (incorporated by
reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K
filed August 8, 2000)
*10.20 Form of Non-Qualified Stock Option Agreements dated September 25, 1998
with Directors of the Registrant
*10.21 Form of Employment Agreement with Bill G. Armstrong dated August 7,
2000
*10.22 Form of Employment Agreement with David R. Wenzel dated August 7, 2000
10.23 Letter Waiving Vesting of Company Options from William P. Stiritz dated
August 7, 2000
*10.24 Form of Amended Management Continuity Agreement and Tax Indemnification
Agreement dated November 15, 2000
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.
On August 8, 2000 Agribrands filed a Current Report on Form 8-K.
78
<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: November 28, 2000
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, November 28, 2000
William P. Stiritz Chief Executive Officer,
and President
/s/ David R. Wenzel
------------------------- Chief Financial Officer November 28, 2000
David R. Wenzel
/s/ Douglas W. Faust
------------------------- Controller November 28, 2000
Douglas W. Faust
/s/ David R. Banks
------------------------- Director November 28, 2000
David R. Banks
79
<PAGE>
/s/ Jay W. Brown
------------------------- Director November 28, 2000
Jay W. Brown
/s/ M. Darrell Ingram
------------------------- Director November 28, 2000
M. Darrell Ingram
/s/ H. Davis McCarty
------------------------- Director November 28, 2000
H. Davis McCarty
/s/ Joe R. Micheletto
------------------------- Director November 28, 2000
Joe R. Micheletto
/s/ Martin K. Sneider
------------------------- Director November 28, 2000
Martin K. Sneider
80
<PAGE>
Appendix A
Audit Committee Charter
Purpose:
-------
The Audit Committee of the Board of Directors shall assist the Board in
fulfilling its responsibilities with respect to:
1. the integrity of the financial statements of the Company;
2. compliance by the Company with legal and regulatory requirements; and
3. the independence and performance of the Company's internal and external
auditors.
Composition of Audit Committee:
------------------------------
1. The Audit Committee shall consist of at least three (3) members, including
a chairman, all of whom shall be members of the Board. Except that the
Committee may appoint as Secretary, an individual who is not a member of
the Board.
2. Each member of the Audit Committee shall:
a. be financially literate or willing to become financially literate
within a reasonable period following appointment to the Committee. At
least one (1) member of the Audit Committee shall possess accounting
or related financial management expertise;
b. be independent from management and the Company. A former employee may
not serve until three (3) years following termination of employment
with the Company;
c. be free of business relationships with the Company, unless the Board
determines in its exercise of independent judgment that the
relationship does not interfere with the individual's exercise of
independent judgment (subject to transitional rules);
d. not be employed as an executive of another corporation where any
Company executive serves on that corporation's compensation committee;
and
e. not be an immediate family member of an executive officer of the
Company.
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<PAGE>
Quorum:
------
A majority of the members of the Audit Committee shall constitute a quorum for
all purposes and the act of a majority of the members present at any meeting at
which a quorum is present shall be the act of the Committee.
Responsibilities:
----------------
The responsibilities of the Committee shall be as follows:
1. To recommend annually to the Board of Directors the appointment of
independent public accountants to examine the financial statements of the
Company and its subsidiaries;
2. To meet with representatives of the independent public accountants and
internal auditor to review the annual audit risk assessment, proposed audit
plans (internal and external), the scope of audits, fees therefor, and the
results of audits made;
3. To review any matters and recommendations communicated to it from time to
time by the independent public accountants and the internal auditor;
4. To review all audit related and non-audit services rendered to the Company
or its subsidiaries by the independent public accountants and the costs
therefor;
5. Review with management and the independent public accountants, the annual
financial statements and results of the independent accountant's audit,
including the independent accountants' judgment on the quality and
consistent application of accounting principles, disclosures and underlying
estimates in the annual financial statements prior to filing with the SEC.
Based upon this review, recommend to the full Board that the company's
financial statement be included in the Form 10-K;
6. To review the adequacy of Company policies and principles followed on
financial and accounting practices, internal controls, internal audits,
financial risks, legal compliance, ethical and responsible business
conduct, and review the results and the adequacy of programs and procedures
for compliance with such policies.
7. To meet with management, the internal auditor and the independent
accountants, either telephonically or in person, to review the interim
financial statements and results of the independent accountants' review,
including the independent accountant's judgment on the quality and
consistent application of accounting principles, disclosures and underlying
estimates in the interim financial statements prior to filing with the SEC,
if any member of the Committee, management, the internal auditor or the
independent public accountants have identified any material accounting or
reporting issues which should be considered by the Committee so as to
reduce the likelihood of restatements or other year-end adjustments or
which would enhance the reliability of the financial information therein.
8. To consider for approval any material change in accounting principles by
the Company and its subsidiaries and report and make recommendations to the
Board of Directors with respect to any such change;
9. To periodically meet with or receive reports from principal corporate
officers and/or the internal auditor and/or independent public
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<PAGE>
accountants and to take appropriate action with respect to legal,
regulatory, environmental, new or proposed auditing, accounting or
reporting standards;
10. To review the independence of the public accountants, by receiving not less
frequently than annually a formal written statement of the relationships or
services supplied by the independent public accountants that may impact the
objectivity and independence of the independent public accountants, and to
recommend appropriate acti7on for the Board of Directors to take to satisfy
itself of the outside auditor's independence; and
11. Prepare the report required to be included in the Company's annual proxy
statement.
Annual Review:
-------------
This Charter shall be reviewed by the Audit Committee not less frequently than
annually and when the composition of Audit Committee changes. Submit this
Charter for approval of the full Board at least every three years. Following
each review but not less frequently than annually, the Secretary shall file with
the New York Stock Exchange the Written Affirmation.
83
