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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 33-66606
PURINA MILLS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0407288
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification Number)
1401 S. HANLEY ROAD
ST. LOUIS, MISSOURI 63144
(Address of principal executive offices) (Zip Code)
(314) 768-4100
(Registrant's telephone number, including area code)
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 report(s)), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--- ---
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PURINA MILLS, INC.
Table of Contents
Form 10-Q for the Quarterly Period
Ended June 30, 2000
PAGE
----
PART I FINANCIAL INFORMATION
------ ---------------------
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at June 30, 2000
and December 31,1999. 3
Consolidated Statements of Operations for the three months
ended June 30, 2000 and 1999, and the six months ended June
30, 2000
and 1999. 5
Consolidated Statements of Cash Flows for
the six months ended June 30, 2000 and 1999 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosure about
Market Risk 25
PART II OTHER INFORMATION
------- -----------------
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURE 29
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PURINA MILLS, INC. (FORMERLY PM HOLDINGS CORPORATION) AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JUNE 30, 2000 AND DECEMBER 31, 1999
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, 1999
(DERIVED FROM AUDITED
JUNE 30, 2000 FINANCIAL STATEMENTS)
------------- ---------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 43,151 $ 48,094
Accounts receivable, net 26,191 38,817
Inventories 50,530 58,869
Prepaid expenses and other current assets 11,062 7,758
Deferred income taxes 14,219 --
------------------------------------------
TOTAL CURRENT ASSETS 145,153 153,538
Property, plant and equipment, net 206,753 235,378
Intangible assets, net 43,778 155,000
Reorganization value in excess of amounts allocable to
identifiable assets 103,967 --
Notes receivable 4,408 8,147
Deferred financing costs, net -- 10,107
Other assets 27,890 26,845
------------------------------------------
TOTAL ASSETS $531,949 $589,015
==========================================
</TABLE>
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<TABLE>
<CAPTION>
DECEMBER 31, 1999
(DERIVED FROM AUDITED
JUNE 30, 2000 FINANCIAL STATEMENTS)
------------- ---------------------
<S> <C> <C>
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable--other $ 32,700 $ 32,759
Customer advance payments 2,466 10,809
Accrued expenses 40,506 31,769
Interest payable 54 --
Current portion of long-term debt and bank borrowings under revolving
credit facility 4,000 278,031
------------------------------
TOTAL CURRENT LIABILITIES 79,726 353,368
Deferred income taxes 66,518 --
Retirement obligations 24,500 25,730
Accrued post-retirement benefit costs -- 150
Other liabilities 5,855 6,069
Liabilities subject to compromise -- 419,500
Long-term debt 171,150 --
Commitments and Contingencies (Note 9)
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $0.01 par value: 5,000,000 shares authorized, none
issued or outstanding -- --
Common stock, $0.01 par value: 20,000,000 shares authorized and
10,000,000 shares to be issued at June 30, 2000 and 1,000 shares
authorized, issued and outstanding at December 31, 1999 100 1
Additional paid-in capital 184,900 109,499
Retained deficit (800) (323,956)
Accumulated other comprehensive loss -- (1,346)
------------------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 184,200 (215,802)
------------------------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT) $ 531,949 $ 589,015
==============================
</TABLE>
(SEE ACCOMPANYING NOTES)
4
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PURINA MILLS, INC. (FORMERLY PM HOLDINGS CORPORATION) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET SALES $ 195,349 $ 208,187 $ 414,546 $ 437,442
COSTS AND EXPENSES:
Cost of products sold 156,405 165,576 329,164 352,879
Marketing, distribution and
advertising 20,690 22,808 43,196 46,223
General and administrative 12,307 18,426 26,494 32,975
Amortization of intangibles 6,783 3,787 13,575 7,586
Research and development 1,388 1,472 2,723 3,003
Provision for plant closings -- 19,665 -- 19,665
Restructuring expenses 16,388 553 24,924 553
Other (income) expense, net (28,131) 31 (28,449) (530)
------------------------ ------------------------
185,830 232,318 411,627 462,354
OPERATING INCOME (LOSS) 9,519 (24,131) 2,919 (24,912)
Interest expense - net 3,524 13,100 9,759 25,957
------------------------ ------------------------
Income (loss) before income taxes 5,995 (37,231) (6,840) (50,869)
Benefit for income taxes -- (11,837) -- (16,054)
------------------------ ------------------------
Income (loss) before extraordinary
item 5,995 (25,394) (6,840) (34,815)
Extraordinary item-gain on
extinguishment of debt, net of
tax 159,359 -- 159,359 --
Revaluation of assets and liabilities
pursuant to the adoption of
fresh-start reporting 2,483 -- 2,483 --
======================== ========================
NET INCOME (LOSS) $ 167,837 $ (25,394) $ 155,002 $ (34,815)
======================== ========================
</TABLE>
(SEE ACCOMPANYING NOTES)
5
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PURINA MILLS, INC. (FORMERLY PM HOLDINGS CORPORATION) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 155,002 $ (34,815)
Adjustment to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Gain on extinguishment of debt (159,359) --
Gain on revaluation pursuant to fresh-start reporting (2,483) --
Depreciation and amortization 28,612 23,238
Provision for loss on asset disposition (5,616) 73
Provision for asset write-off -- 19,665
Provision for deferred taxes -- (16,054)
Other 10,817 (41,408)
-------------------------
Net cash provided by (used in) operations $ 26,973 $ (49,301)
INVESTING ACTIVITIES:
Sale of property, plant and equipment 15,757 --
Purchase of property, plant and equipment (8,642) (10,127)
Other 3,739 (1,925)
-------------------------
Net cash provided by (used in) investing activities $ 10,854 $ (12,052)
FINANCING ACTIVITIES:
Proceeds from revolving credit facility (87,471) 35,000
Repayment of term loans (15,550) (3,400)
Capital contribution 60,000 --
Other 251 (59)
-------------------------
Net cash provided by (used in) financing activities $ (42,770) $ 31,541
Decrease in cash and cash equivalents (4,943) (29,812)
Cash and cash equivalents at beginning of period 48,094 41,446
-------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 43,151 $ 11,634
========================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 13,598 $ 26,165
Income taxes 173 450
</TABLE>
(SEE ACCOMPANYING NOTES)
6
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PURINA MILLS, INC. (FORMERLY PM HOLDINGS CORPORATION) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Pursuant to the Agreement and Plan of Merger among PM Holdings Corporation
("Holdings"), Koch Agriculture Company ("Koch Agriculture") and Arch Acquisition
Corporation, dated as of January 9, 1998 (the "Merger Agreement"), Arch
Acquisition Corporation was merged with and into Holdings (the "Merger"), with
Holdings being the surviving corporation. As a result of the Merger, Koch
Agriculture owned 100% of Holdings, which owned 100% of Purina Mills, Inc.
("Purina Mills" or "PMI"). Subsequently, on October 28, 1999 (the "Petition
Date"), Holdings and certain of its subsidiaries (the "Debtor") filed voluntary
petitions for reorganization under Chapter 11 of the United States Bankruptcy
Code, as amended, with the United States Bankruptcy Court for the District of
Delaware (the "Bankruptcy Court").
Purina Mills filed a Form 8-K on January 18, 2000 with the Securities and
Exchange Commission, which included a Plan of Reorganization (the "Plan") and a
disclosure statement. The Plan, as amended, was approved by the creditors,
confirmed on April 5, 2000 by the Bankruptcy Court and became effective on June
29, 2000 (the "Effective Date").
The Plan provided, among other things, the merger of Purina Mills with and into
Holdings prior to the effective date of the Plan. By operation of the merger,
Holdings succeeded to the business previously conducted by Purina Mills and
changed its name to Purina Mills, Inc. On May 19, 2000, Purina Mills merged with
and into Holdings with Holdings being the surviving corporation, renamed as
Purina Mills, Inc. (the "Company"). Subsequently, the Plan became effective and
the Company emerged from Chapter 11 as of the beginning of business on June 30,
2000.
Within 45 days after the Effective Date the Company will make distributions of
cash and a partial distribution of new common stock of the Company to holders of
claims that have been allowed. As of the Effective Date the Company was
authorized to issue 20,000,000 shares of its $0.01 par value common stock. The
Company will issue 9,910,000 shares to holders of allowed unsecured claims and
90,000 shares to certain employees under the Company's Key Employee Retention
Program. The Company's request to list its stock on the NASDAQ National Market
was granted on June 26, 2000.
The consolidated balance sheet at June 30, 2000 and the consolidated statements
of operations and cash flows for the period ended June 30, 2000 are unaudited
and reflect all adjustments, consisting of normal recurring items and the
adoption of "fresh-start" reporting (See Note 3), which management considers
necessary for a fair presentation. Operating results for fiscal 2000 interim
periods are not necessarily indicative of results to be expected for the fiscal
year ending December 31, 2000. The consolidated balance sheet at December 31,
1999 was derived from the Company's December 31, 1999 audited financial
statements, but does not include all disclosures required by generally accepted
accounting principles.
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Although the Company believes the disclosures are adequate, certain information
and disclosures normally included in the notes to the financial statements have
been condensed or omitted as permitted by the rules and regulations of the
Securities and Exchange Commission. The accompanying unaudited financial
statements should be read in conjunction with the financial statements for the
year ended December 31, 1999 and the quarter ended March 31, 2000 which are
included in the registration statement on Form 10/A, Amendment No. 1 filed on
May 18, 2000.
2. FINANCIAL RESTRUCTURING DEVELOPMENTS
The economic environment in the agricultural industry during 1998, 1999, and
early 2000 was a difficult one for many individual producers and companies that
participate in the sector. Livestock commodity prices have been depressed and
reached historic lows in many markets. In addition to the overall economic
environment, there is significant competition in all areas of agriculture,
including the feed industry.
In connection with the Merger, the Company incurred a significant amount of
indebtedness. As of March 31, 1998, the Company had approximately $557.2 million
of consolidated indebtedness, and its stockholders' equity was approximately
$109.4 million. Of the total $669.6 million required to consummate the 1998
Merger and related transactions, $559.9 million was supplied by indebtedness and
$109.7 million was supplied by equity contributions. The Company's indebtedness
was raised through the sale of $350.0 million aggregate principal amount of its
Senior Subordinated Notes Due 2010 (the "Notes") and borrowings under a $300.0
million secured credit facility, pursuant to a credit agreement (the
"Prepetition Credit Agreement"), from a syndicate of lenders (the "Prepetition
Credit Facility"). The Prepetition Credit Facility included: a $200.0 million
term loan facility (the "Prepetition Term Loan") and a $100.0 million revolving
credit facility (the "Prepetition Revolving Credit Facility"). Since the Merger,
a significant portion of the Company's cash flow from operations has been
dedicated to the payment of principal and interest on its indebtedness, thereby
reducing the funds available to the Company for its operations. The Company's
substantial degree of leverage limited its flexibility to adjust to the
depressed conditions in the agricultural industry and made it particularly
vulnerable to the downturn in the swine market.
As a result of its financial condition during 1999 and its substantial degree of
leverage, the Company's ability to finance its working capital requirements and
implement its business plan have been adversely affected by its cash
requirements for debt service. On September 15, 1999, the Company failed to make
a scheduled interest payment of $15.75 million due to holders of the Notes. On
October 21, 1999, the trustee under the indenture (the "Prepetition Notes
Indenture") for the Notes accelerated such Notes as a result of the failure to
make such interest payment. On September 30, 1999, the Company failed to pay
$2.1 million in principal payments due on the Term Loan. Such principal payment
was subsequently made on October 28, 1999.
Faced with these events and an inability to service future interest payments on
the Notes, the Debtor filed voluntary petitions for relief (the "Reorganization
Cases") under Chapter 11 of the U.S. Bankruptcy Code, as amended, with the
Bankruptcy Court on the Petition Date. As described in the disclosure statement,
a settlement was negotiated between Koch Industries, Inc.
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("Koch Industries") and a committee representing holders of Notes
("Noteholders") whereby Koch Industries agreed to make capital contribution of
$60 million to the Company. Such capital contribution was received by the
Company on the Effective Date.
Under Chapter 11, certain claims against the Debtor in existence prior to the
filing of the petitions for relief under the federal bankruptcy laws are stayed
while the Debtor continues business operations as Debtor-in-Possession. These
claims are reflected in the December 31, 1999 balance sheet as "liabilities
subject to compromise" and consist of the following:
Accounts payable - other $ 13,764
Accounts payable - affiliate 30,215
Accrued expenses 2,379
Interest payable on Senior Subordinated
Notes due 2010 19,600
Retirement obligations 3,212
Other liabilities 330
Senior Subordinated Notes due 2010 350,000
------------------
$ 419,500
==================
As of the Petition Date, the Company discontinued accruing interest on its
unsecured pre-petition debt obligations. Additional claims have arisen
subsequent to the filing date resulting from rejection of executory contracts
and unexpired leases, and from the determination by the court or as agreed to by
parties in interest of allowed claims for contingencies and other disputed
amounts. Claims secured against the Debtor's assets also are stayed, although
the holders of such claims have the right to move the court for relief from the
stay.
The Debtor received approval from the Bankruptcy Court to pay or otherwise honor
certain of its pre-petition obligations, including employee wages, dealer and
customer rebates, amounts owed certain critical vendors and amounts owed to
farmers, grain elevators, coops, brokers, dealers and other vendors and
suppliers pursuant to federal, state and local government regulations.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fresh-Start Reporting: As of June 30, 2000, in accordance with the AICPA
Statement of Position 90-7, "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code ("SOP 90-7"), the Company was required to adopt
"fresh-start" reporting and reflect the effects of such adoption in the
financial statements for the six months ended June 30, 2000. Accordingly, the
December 31, 1999 consolidated balance sheet is not comparable to the June 30,
2000 consolidated balance sheet.
In adopting fresh-start reporting, the Company with the assistance of its
financial advisors, was required to determine its reorganization value, which
represents the fair value of the entity before considering liabilities and
approximates the amount a willing buyer would pay for the assets of the Company
immediately after its emergence from Chapter 11 status. The reorganization value
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of the Company was determined by consideration of several factors, including the
Company's historical financial performance, its fiscal 2000 budget, publicly
available data of companies whose operations are generally comparable to the
operations of the Company and economics and industry data trends.
The adjustments to reflect the consummation of the Plan, including the gain on
extinguishment of debt related to pre-petition liabilities and the adjustment to
record assets and liabilities at their fair values (including the establishment
of reorganization value in excess of amounts allocable to identifiable assets),
have been reflected in the accompanying consolidated financial statements.
Principles of Consolidation: The consolidated financial statements include the
accounts of the Company and its majority owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated. Investments in
affiliated companies, 20% through 50% owned, are carried at equity.
Intangible Assets (including Goodwill): Intangible assets at June 30, 2000
represent the Company's estimate of the value of such assets at the Effective
Date, in accordance with the principles of SOP 90-7, and will be amortized over
their estimated period of related benefit of one to ten years. Intangible
assets, at December 31, 1999, represent the excess of cost over the net tangible
assets of the business at the time of acquisition and were amortized over the
estimated period of related benefit.
Management periodically has and will continue to review the value of its
intangible assets to determine if an impairment has occurred or whether changes
have occurred that would require a revision to the remaining useful life. In
making such determination, management evaluates the performance, on an
undiscounted basis, of the underlying operations or assets which give rise to
such amount.
Reorganization Value in Excess of Amounts Allocable to Identifiable Assets: As a
result of adopting "fresh-start" reporting, the Company recorded reorganization
value in excess of amounts allocable to identifiable assets of approximately
$104.0 million. This intangible asset will be amortized on a straight-line basis
over a ten-year period.
Income Taxes: Deferred income taxes are recognized for the effect of temporary
differences between the financial reporting basis and the tax basis of the
assets and liabilities plus operating loss carryforwards at enacted tax rates
expected to be in effect when such amounts are realized or settled. In
connection with "fresh-start" reporting the Company recorded a net $52.3 million
deferred tax liability for the effect of temporary differences between the
financial reporting and tax basis of its assets and liabilities. This is
reflected as a current asset of $14.2 million and a long-term liability of $66.5
million.
The Company was part of a tax sharing agreement with Koch Industries effective
as of the date of the Merger through June 29, 2000. The agreement provided that
the tax liability of the group shall be allocated to the members of this group
on the basis of the percentage of the member's total tax, if computed on a
separate return, would bear to the total amount of the taxes of all members of
the group so computed. If the Company's tax attributes were utilized by another
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member of the group, such member would reimburse the Company when the Company
would have been able to utilize such attributes in computing the Company's
separate taxable income. The Company's tax provisions for all periods after
March 12, 1998 through June 29, 2000 were computed on this basis. The results of
operations of the Company after March 12, 1998 through June 29, 2000 have been
or will be included in the consolidated U.S. corporation income tax return and
certain consolidated state income tax returns of Koch Industries. The result of
operations commencing June 30, 2000 will be included in the consolidated return
of the Company and its subsidiaries.
Revenue Recognition: Net sales are generally recognized when products are
shipped. Allowances for customer discounts are recorded when revenues are
recognized.
Reclassifications: Certain reclassifications have been made to the prior period
consolidated financial statements to conform to the consolidated financial
statement presentation at June 30, 2000 and the six month period then ended.
Internal Use Software: The Company has replaced or modified all of the Company's
computer systems and software applications so that they are Year 2000 compliant.
In connection with this process, the Company purchased and implemented an
enhanced accounting and information reporting system. The Company capitalized
all software and consultant costs and the direct costs of those employees
directly involved in the process, in accordance with Statement of Position No.
98-1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use ("SOP 98-1"). All other related costs were expensed as incurred.
The Company's policies are in accordance with the provisions of SOP 98-1. Total
capitalized software costs related to the enhanced accounting and information
reporting systems were $16.4 million as of December 31, 1999. The Company is
amortizing the costs associated with the project using the straight-line method
over five years, the expected life of the system.
4. RESTRUCTURING EXPENSES
During the three and six months ended June 30, 2000, the Company incurred
advisory fees and expenses of $9.6 million and $13.8 million, respectively, in
connection with the Reorganization Cases. Additionally, the Company has recorded
severance and moving costs of $3.0 million and $4.6 million, respectively, and
compensation expense of $3.8 million and $6.5 million, respectively, in
connection with the Company's Key Employee Retention Plan for the same three and
six month periods.
5. INVENTORIES
Inventories consist of the following (in thousands):
JUNE 30, 2000 DECEMBER 31, 1999
------------- -----------------
Raw materials $ 31,207 $ 37,577
Finished goods 10,883 11,411
Animals 8,440 9,881
---------------------------------
Total $ 50,530 $ 58,869
---------------------------------
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6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (in thousands):
JUNE 30, 2000 DECEMBER 31, 1999
------------- -----------------
Land $ 10,808 $ 13,362
Buildings 60,924 86,332
Machinery and equipment 122,780 180,769
Construction in progress 12,353 7,359
------------------------------
206,865 287,822
Accumulated depreciation (112) (52,444)
------------------------------
Total $ 206,753 $ 235,378
==============================
In connection with the adoption of "fresh-start" reporting for the period ended
June 30, 2000, the Company was required to adjust property, plant and equipment
to its fair value. Based on the Company's estimate of the fair value of such
assets at the Effective Date, an adjustment was made to decrease the value of
property, plant and equipment by approximately $ 11.9 million with no material
change in the remaining useful lives.
During the quarter ended June 30, 1999, the Company made the decision to
discontinue manufacturing operations at five of its facilities. Products for
distribution to customers of the closed facilities are being manufactured at the
Company's other facilities. In connection with these plant closures, the Company
recorded a loss of $13.1 million on manufacturing assets, representing the
amount by which the book value exceeds estimated fair value. Estimated
demolition costs of $1.2 million, severance costs of $0.4 million and a
write-off of $5.0 million for related goodwill were also recorded.
7. INTANGIBLE ASSETS
Intangible assets consist of the following (in thousands):
JUNE 30, 2000 DECEMBER 31, 1999
------------- -----------------
Distribution network $ 24,000 $ 40,000
Patents 6,298 15,000
Covenant not to compete -- 2,083
Goodwill -- 262,728
Other intangibles 13,480 31,539
--------- ---------
43,778 351,350
Accumulated amortization -- (196,350)
--------- ---------
Total $ 43,778 $ 155,000
===========================
Intangible assets at June 30, 2000 represent the Company's estimate of the value
of such assets at the Effective Date, in accordance with the principles of SOP
90-7, and will be amortized over their estimated period of related benefit of
one to ten years.
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During the fourth quarter of 1999, in connection with the Company's
Reorganization Cases, the Company recorded a provision for loss on impairment of
intangible assets of $161.6 million. The provision reduced the net value of
intangible assets to management's estimate of the fair value of intangible
assets at December 31, 1999. Management's estimate was based upon the expected
net realizable value of the Company on a going concern basis which contemplated
continuity of operations, realization of assets and liquidation of liabilities
in the ordinary course of business.
8. DEBT
Debt consists of the following (in thousands):
JUNE 30, 2000 DECEMBER 31, 1999
------------- -----------------
Term loan $175,000 $190,550
Senior subordinated notes due 2010 -- 350,000
Revolving credit facility -- 87,471
Other 150 10
-------------------------
175,150 628,031
Less current portion of long-term
debt 4,000 --
-------------------------
Total $171,150 $628,031
=========================
The foregoing debt is classified as follows in the December 31, 1999
consolidated balance sheet (in thousands):
Current portion of long-term debt and
bank borrowings under revolving credit facility $278,031
Liabilities subject to compromise 350,000
------------
Total $628,031
============
Credit Facility: In connection with the consummation of the Plan, Purina Mills
entered into a new credit agreement ("the Credit Agreement") which provides for
secured borrowings from a syndicate of lenders consisting of (i) a term loan
facility providing for an aggregate of $175.0 million Tranche A Term Loan with a
maturity date of December 31, 2003 ("the Term Loan") and (ii) a $50.0 million
Revolving Credit Facility with a maturity date of December 31, 2002, with a
$30.0 million sub-limit for letters of credit, which is available to finance the
Company's ongoing working capital requirements. The proceeds of the Term Loan
were borrowed in full on June 29, 2000, to repay the Prepetition Credit
Facility, and $14.4 million of the Revolving Credit Facility has been used for
the issuance of letters of credit for ordinary course business purposes of the
Company and it subsidiaries. No borrowings were made under the Revolving Credit
Facility. The Company is charged an annual fee of 0.5% for amounts available but
unused under the Revolving Credit Facility. In addition, the Company is charged
a fee of 2.75% per annum on the daily average amount available for drawing under
any letter of credit. Loans under the Credit Agreement bear interest at floating
rates, which are, at the
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Company's option based either upon bank prime or Eurodollar rates. Rates on
outstanding borrowings based on bank prime plus 1.75% were 11.25% at June 30,
2000.
The annual amortization schedule of the Term Loan outstanding on June 30, 2000
is $8.0 million in 2001, $17.0 million in 2002, and $150.0 million in 2003. The
2003 amount includes a payment of $135.0 million on the Term Loan maturity date
of December 31, 2003. The Company is required to make mandatory repayments of
the Term Loan in amounts equal to 80% of Excess Cash Flow (as defined in the
Credit Agreement). The first such payment is due March 2001. Additionally, the
Company is generally required to make mandatory repayments of amounts received
on the sale of assets unless reinvested within specific time periods. Any
repayments under the Term Loan are not available for future re-borrowings.
Covenants: The Credit Agreement contains restrictive covenants that, among other
things and under certain conditions, limit the ability of the Company to incur
additional indebtedness, to acquire (including a limitation on capital
expenditures) or dispose of assets or operations and to pay dividends. The Term
Loan and Revolving Credit Facility also require the Company to satisfy certain
financial convenants and tests. The Company was in compliance with its debt
covenants at June 30, 2000.
9. CONCENTRATION OF CREDIT RISK AND LOAN GUARANTEES
Concentration of Credit Risk: Financial instruments which potentially subject
the Company to concentration of credit risk consist principally of trade
receivables. A substantial portion of the Company's sales are to companies or
individuals in agriculture-related businesses, with approximately 15% of its
sales volume being feed for hogs. Hog producers experienced severely depressed
market prices in 1998 and 1999 and the Company has outstanding trade
receivables, loans and loan guarantees relating to customers in the hog
industry.
Loan Guarantees: The Company had provided a guarantee of up to $11.5 million to
an entity formed in 1995 to provide funding for the growth, consolidation and
expansion of the Company's network of independently-owned dealers and producers.
The Company recorded a loss reserve for the entire amount of the guarantee in
1998. At June 30, 2000 and December 31, 1999, the Company had funded $6.7
million on the guarantee. In August 1999 the Company issued a letter of credit
for $3.3 million to secure a portion of the unfunded guarantee. The Company is
not a member of this non-stock membership corporation and thus does not have an
equity interest in the entity.
Loan guarantees are also made to banks to assist the Company's customers in
obtaining bank loans for working capital, lines of credit, and additions to
property, plant and equipment. The guarantee arrangements essentially have the
same credit risk as that involved in extending loans to customers and are
subject to the Company's normal credit policies. Collateral (e.g., farm animals,
property, personal guarantees) is usually obtained based on management's
assessment of the specific customer's credit risk. The Company had guarantees of
approximately $4.7 million and $6.3 million at June 30, 2000 and December 31,
1999, respectively, under these types of arrangements. The maturity dates of
these guarantees extend through May 2008 with the majority of the guarantees
maturing prior to 2003.
14
<PAGE> 15
Swine Purchase Commitments and Swine Operations: To capitalize on the
consolidation of the hog industry, the Company implemented a strategy in 1997
that was expected to result in control over the feeding of approximately six
million market hogs over four years. The program provides a source of high
quality weanlings and feeder pigs ("feeders") to independent hog producers and
gains the related feed business for the Company. Under this program, at June 30,
2000, the Company has future net purchase commitments, subject to the
counterparties' ability to perform, to acquire 0.3 million feeders over the next
eight years. Approximately 8% of these commitments are at fixed prices whereas
the other 92% vary based on current or published futures prices. The net
purchase commitment of 0.3 million feeders represents gross commitments during
the period for the Company to purchase approximately 3.4 million feeders less
3.1 million feeders which are under contract to be sold to third parties.
Additionally, the Company has direct ownership of several hog operations which
are expected to produce an additional 1.5 million feeders over the next ten
years. As hog producers experience volatile market prices for their end
products, the Company has significant exposure relating to its feeder pig
program, direct hog ownership and joint venture interests in hog operations. At
June 30, 2000 and December 31, 1999, the Company had $7.8 million and $8.6
million, respectively, in hog inventory.
Based on published market prices at June 30, 2000, the Company's net commitment
to purchase the 0.3 million feeders totals approximately $10.9 million. This is
a decrease of $6.1 million from such amount at December 31, 1999. Upon receipt
of the feeders the Company can either sell them at current market prices, feed
the pigs at Company leased facilities, or contract with independent producers to
feed the pigs. Based on 1999 contractual commitments, estimated feed costs,
counterparty risks and current spot and futures prices, the Company estimates
that its 2000 loss associated with its swine exposure will range between $2.5
million and $5.0 million. The Company recorded a loss of $16.2 million during
1999 and a loss of $2.6 million for the six months ended June 30, 2000.
Depending on the future market price for both feeders and market hogs, any or
all of the options available to the Company could have adverse impacts on
operations, cash flows and liquidity.
15
<PAGE> 16
ITEM 2 MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
General
In connection with the 1998 Merger, The Company incurred a significant amount of
indebtedness. The Company's substantial degree of leverage limited its
flexibility to adjust to the depressed conditions in the agricultural industry
and made it particularly vulnerable to the downturn in the swine market. As a
result of its financial condition during 1999 and its substantial degree of
leverage, the Company's ability to finance its working capital requirements was
adversely affected by its cash requirements for debt service. On September 15,
1999, the Company failed to make a scheduled interest payment of $15.75 million
due to the holders of the Senior Subordinated Notes. On October 21, 1999, the
Indenture Trustee for the Senior Subordinated Notes accelerated such notes as a
result of the failure to make such interest payment. On September 30, 1999, the
Company failed to pay $2.1 million in principal payments under the Prepetition
Credit Facility. Such principal payment was subsequently made on October 27,
1999. The Company defaulted under both the Notes Indenture and the Prepetition
Credit Facility. Faced with these events and an inability to service future
interest payment on the Notes, the Company and certain of its subsidiaries
commenced reorganization cases under Chapter 11 of the U.S. Bankruptcy Code on
October 28, 1999.
Subsequently, on January 18, 2000, the Company filed a Form 8-K with the
Securities and Exchange Commission which included the Plan and a disclosure
statement. The Plan was approved by the creditors, confirmed by the Bankruptcy
Court on April 5, 2000 and became effective on June 29, 2000.
The consolidated financial statements for all the periods through June 29, 2000
have been prepared on the historical cost basis. The consolidated balance sheet
at June 30, 2000 is not comparable with the historical balance sheet presented
due to the adoption of "fresh-start" reporting.
Overview
The Company develops, manufactures and markets a comprehensive line of animal
nutrition products for dairy cattle, beef cattle, hogs, horses and poultry, as
well as specialty feeds for rabbits, zoo animals, birds, fish and pets. For the
year ended December 31, 1999, the product mix by volume was approximately 26%
for dairy, 29% for beef cattle, 14% for hogs, 12% for horses, 7% for poultry and
12% for all others. The feed industry generally prices products on the basis of
aggregate ingredient cost plus a dollar amount margin, rather than a gross
profit percentage. As ingredient prices fluctuate, the changes are generally
passed on to customers through weekly or monthly changes in the Company's price
lists. Feed tonnage and total income over ingredient cost ("IOIC"), which is net
sales minus cost of ingredients, and gross profit (IOIC less manufacturing
costs), rather than sales dollars, are the key indicators of performance
16
<PAGE> 17
because of the distortions in sales dollars caused by changes in commodity
prices and product mix between complete feed and concentrate products, to which
customers add their own base ingredients, such as corn and other grains.
Historically, when the price of grains has been relatively high, more of the
Company's customers have tended to purchase complete rations and the Company's
sales volume has been higher; alternatively, when the price of grains has been
relatively low, more of the Company's customers have tended to use their own
grains and mix them with the Company's higher-margin concentrates, resulting in
lower sales volume but relatively higher overall unit margins.
The Company expects the U.S. feed industry to further consolidate in the years
ahead. Although the total volume of processed feed sold into the commercial
market segment may decline, larger producers are tending to purchase products
with lower inclusion rates and higher margins. As they grow larger, these
producers are typically better able to measure performance differences and make
sound economic decisions regarding nutrition and management programs.
Competition in the industry occasionally limits the Company's ability to pass
ingredient price increases on to its customers; however, management believes
that the Company's knowledge of the nutritional value of ingredients and its
sophisticated least-cost formulation system enable the Company to provide
products that meet its nutritional standards and maintain product quality while
minimizing product cost.
The economic environment in the agricultural industry during 1998, 1999 and the
first six months of 2000 has been a difficult time for many individual producers
and companies that participate in the sector. Livestock commodity prices have
been depressed and reached historic lows in many markets. In addition to the
overall economic environment, there is significant continuing competition in all
areas of agriculture, including the feed industry.
Competition in the industry has caused the Company and some of its competitors
to develop market and production risk arrangements for their customers to
promote sales. The Company has entered into several production and marketing
joint venture arrangements with its animal production customers, especially in
the swine sector, in order to facilitate additional feed sales.
Additionally, to capitalize on the consolidation of the hog industry, the
Company implemented a strategy in 1997 that was expected to result in control
over the feeding of approximately six million market hogs over four years. The
program provides a source of high quality weanlings and feeder pigs ("feeders")
to independent hog producers and gains the related feed business for the
Company. Under this program, at June 30, 2000, the Company has future net
purchase commitments, subject to the counterparties' ability to perform, to
acquire over 0.3 million feeders over the next eight years. Approximately 8% of
these commitments are at fixed prices whereas the other 92% vary based on
current or published futures prices. The net purchase commitment of 0.3 million
feeders represents gross commitments during such period for approximately 3.4
million feeders less 3.1 million feeders which have contractually been sold.
These contractual sales are subject to the credit worthiness of the third
parties.
Additionally, the Company has direct ownership of several hog operations which
are expected to produce an additional 1.5 million feeders over the next ten
years. As hog producers have experienced severely depressed market prices for
their end products in the past two years, the
17
<PAGE> 18
Company has significant exposure relating to its feeder pig program, direct hog
ownership and joint venture interests in hog operations. At June 30, 2000, and
December 1999, the Company had $7.8 million and $8.6 million, respectively, in
hog inventory.
Based on published market prices at June 30, 2000, the Company's net commitment
to purchase the 0.3 million feeders totals approximately $10.9 million. This is
a decrease of $6.1 million from such amount at December 31, 1999. Upon receipt
of the feeders, the Company can either sell them at current market prices, feed
the pigs at its owned or leased facilities, or contract with independent
producers to feed the pigs. Based on 1999 contractual commitments, estimated
feed costs, counterparty risks and current spot and futures prices, the
Company's loss in 2000 associated with its swine exposure is estimated to be
approximately $2.5 - 5.0 million. Depending on the future market price for both
feeders and market hogs, any or all of the options available to the Company
could have an adverse impact on earnings, cash flows and liquidity.
During 1999 the Company focused on managing and mitigating the impact of the
significant decline in hog prices on its performance. With the price of hogs
having increased moderately from December 1998, which was the lowest price in
nearly forty years, and through the efforts of management, the Company mitigated
some of its swine exposure in an effort to reduce the negative implications on
future earnings, cash flow and liquidity. In April 1999, the Company locked in a
margin on market hogs to be marketed during the remainder of 1999 by entering
into futures contracts for market hogs and the major feed ingredients to grow
the hogs. This action resulted in limiting the risk of any market decline for
the remainder of the year on these hogs, but also limited the potential for gain
if market prices significantly increased. The Company has locked in a majority,
but not all, margin for hogs to be marketed in 2000 and, as such, the Company is
subject to risk of fluctuations in the price of market hogs, which could have an
impact on results of operations and liquidity.
During 1999, the Company made the decision to discontinue manufacturing
operations at five of its facilities. Products for distribution to customers of
the closed facilities are being manufactured at the Company's other facilities.
In connection with these plant closures, the Company recorded a loss of $13.1
million on manufacturing assets, representing the amount by which the book value
exceeds the estimated net realized value. Estimated demolition costs of $1.2
million, severance costs of $0.4 million and a write-off of $5.0 million for
related goodwill were also recorded. The Company will continue to review the
performance of its facilities in an attempt to optimize overall capacity and
maximize profits.
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<PAGE> 19
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999
Due to overall lower commodity prices and a decrease in tons sold, net sales
decreased 6.2% from the 1999 period. Gross profit was $38.9 million for the
three months ended June 30, 2000 compared to $42.6 million for the three months
ended June 30, 1999 due primarily to the decrease in volume. Overall volume was
.9 million tons during the second quarter of 2000, a 10.2% decrease from the
1999 period. Average IOIC per ton was $69.20, a 4.6% increase from the
three-month period ended June 30, 1999 due primarily to a shift in product mix
to higher margin products.
Beef cattle volume increased 5.0% over the 1999 period as sales volume in the
grass cattle business was favorably affected by weather as well as strong cattle
economics. Dairy cattle volume decreased 9.8% from the prior year due to low
milk prices and low commodity prices. Hog volume decreased 21.1% from the prior
year due to depressed market conditions and the loss of customers from market
consolidation. Horse volume increased slightly, 2.6% over the 1999 period.
Laying chicken and meatbird volume decreased 60.0% from 1999 reflecting the loss
of a major customer in the third quarter of 1999. Specialty and other volume
decreased 2.4% from the prior 1999 period.
Cost of products sold decreased $9.2 million, or 5.5% from the comparable 1999
period, due primarily to the $9.0 million decrease in ingredient costs. Net
losses from the hog program also decreased $2.0 million due to increases in hog
market prices. Manufacturing expenses increased $1.8 million over the 1999
period due primarily to increased labor costs associated with operational
quality initiatives and reintegrating the purchase of ingredients function
within the company.
Marketing, distribution and advertising costs decreased $2.1 million due
primarily to a decrease in sales volume and reduction of sales personnel.
General and administrative expenses decreased $6.1 million from the 1999 period
due primarily to a decrease of $1.2 million in relocation costs and reduced bad
debt expense of $4.3 million. Additionally, a decrease of $.6 million in
administrative costs was realized due to consolidation of various functions such
as credit and accounting.
Intangible amortization expense increased due to management's evaluation that an
impairment of the intangible assets had occurred in 1999. In addition to
recording a loss provision in 1999, effective January 1, 2000 goodwill is being
amortized over five years on a straight line basis. Through December 31, 1999
goodwill was being amortized over 40 years.
Research and development costs remained consistent with the 1999 period. Other
(income) expense, net for the three months ended June 30, 2000 relates to
service fees for swine and dairy management, finance income, the (income) loss
on the Company's equity investments and losses on marketing arrangements. Other
(income) expense, net for the three months ended June 30, 2000 also includes
proceeds in excess of $20.0 million received in settlement for claims for excess
charges of vitamin purchases in prior years. Additionally, the Company recorded
a gain of $3.3 million from the sale of its headquarters building in June 2000.
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<PAGE> 20
Restructuring expenses during the second quarter of 2000 includes $9.6 million
in advisory and financing fees incurred in connection with the Reorganized
Cases. Additionally, $3.0 million was incurred for severance and moving costs
and $3.8 million for compensation expense in connection with the Key Employee
Retention Plan.
Interest expense for the three months ended June 30, 2000 decreased $9.6 million
from the 1999 period primarily as a result of the discontinuance of recording
any interest expense on the Notes which had been classified as "liabilities
subject to compromise". The Company also terminated both its Prepetition debt
and its swap contract on $114.7 million of the Prepetition debt and realized a
gain of $2.5 million which is shown as a reduction of interest expense.
For the year 2000, management has determined that it is not likely to receive a
tax benefit or incur any tax cost under its tax sharing agreement with Koch
Industries and thus has recorded no tax benefit or expense. The Company's
effective income tax rate differed from the statutory rate in 1999 due to
amortization of goodwill not being allowed as a tax deduction.
The extraordinary gain on extinguishment of debt represents the amount of
unsecured liabilities of the Debtor, as reflected on its balance sheet as of the
Petition Date, whose holders of such claims will be issued common stock of the
Company in full satisfaction of such liability. The total of such liabilities
less the reduction in tax basis of the Company's assets as a result of the debt
extinguishment, at the applicable tax rate, less the value of new common stock
issued to claim holders resulted in a net gain of $159.4 million.
The income on the revaluation of the Company's assets and liabilities pursuant
to the adoption of "fresh-start" reporting totaled $2.5 million. It represents
the Company's best estimate of the reorganization value of the Company
immediately after the Effective Date in excess of the net value of the Company's
assets after the consummation of the Plan, including the extinguishment of debt.
Six months Ended June 30, 2000 Compared to Six months Ended June 30, 1999
Due to overall lower commodity prices and a decrease in tons sold, net sales
decreased 5.2% from the 1999 period. Gross profit was $85.4 million for the six
months ended June 30, 2000 compared to $84.6 million for the six months ended
June 30, 1999. Overall volume for the six months ended June 30, 2000 was 1.9
million tons compared to 2.1 million tons for the comparable 1999 period, a
decrease of 8.8%. Average IOIC per ton was $67.60, a 4.2% increase from the
six-month period ended June 30, 1999 due primarily to a shift in product mix to
higher margin products.
Beef cattle volume increased 3.5% over the 1999 period due to increased volume
in the gross cattle business resulting primarily from weather conditions. Dairy
cattle tons decreased 7.6% from the prior year due to low milk prices and lower
commodity prices. Hog volume decreased 23.3% from the prior year due to the
depressed market conditions and the resulting loss from market consolidation.
Horse volume increased 5.2% over the 1999 period. The Company has had continued
success in growing this business by aggressive marketing and promotion of
product lines. Laying chicken and meatbird volume decreased 56.3% from 1999
which can be
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<PAGE> 21
attributed to the loss of a major customer in the third quarter of 1999.
Specialty and other volume decreased 1.2% over the 1999 period.
Cost of products sold decreased $23.7 million, or 6.7% from the comparable 1999
period, due primarily to the $18.2 million decrease in ingredient costs. Net
losses from the hog program also decreased $5.4 million due to increases in hog
market prices. Manufacturing expenses remained consistent with the amount for
the comparable 1999 period.
Marketing, distribution and advertising costs decreased $3.0 million due
primarily to a decrease in sales volume and reduction of sales personnel.
General and administrative expenses decreased $6.5 million from the 1999 period
due to a decrease in relocation costs of $1.2 million and reduced bad debt
expense of approximately $4.6 million. Additionally, a decrease of $0.7 million
in administrative costs occurred due to consolidation of various functions such
as accounting and credit as a result of the implementation of the new accounting
system.
Intangible amortization expense increased due to management's evaluation that an
impairment of the intangible assets had occurred in 1999. In addition to
recording a loss provision in 1999, effective January 1, 2000 goodwill is being
amortized over five years on a straight line basis. Through December 31, 1999
goodwill was being amortized over 40 years.
Research and development costs decreased slightly compared with the 1999 period.
Other (income) expense, net for the six months ended June 30, 2000, relates to
service fees for swine and dairy management, the (income) loss on the Company's
equity investments and losses on marketing arrangements. Other (income) expense
for the six months ended June 30, 2000 includes proceeds in excess of $20.0
million received in settlement of claims for excess charges of vitamin purchases
in prior years. Additionally, the Company recorded a gain of $3.3 million from
the sale of its headquarters building.
Restructuring expenses for the six months ending June 30, 2000 include $13.8
million in advisory and financing fees incurred in connection with the
Reorganization Cases. Additionally, $4.6 million was incurred for severance and
moving costs and $6.5 million for compensation expense in connection with the
Key Employee Retention Plan.
Interest expense for the six months ended June 30, 2000 decreased $16.2 million
from the 1999 period primarily as a result of the discontinuance of recording
any interest expense on the Notes which had been classified as "liabilities
subject to compromise". The Company also terminated both its Prepetition debt
and its swap contract on $114.7 million of the Prepetition debt and realized a
gain of $2.5 million which is shown as a reduction of interest expense.
For the first six months of the year 2000, management has determined that it is
not likely to receive a tax benefit or incur any tax cost under its tax sharing
agreement with Koch Industries and thus has recorded no tax benefit or expense.
The Company's effective income tax rate differed from the statutory rate in 1999
due to amortization of goodwill not being allowed as a tax deduction.
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The extraordinary gain on extinguishment of debt represents the amount of
unsecured liabilities of the Debtor, as reflected on its balance sheet as of the
Petition Date, whose holders of such claims will be issued new common stock of
the Company in full satisfaction of such liabilities. The total of such
liabilities less the reduction in tax basis of the Company's assets as a result
of the debt extinguishment, at the applicable tax rate, less the value of the
new common stock issued to claim holders resulted in a net gain of $159.4
million.
The income on the revaluation of the Company's assets and liabilities pursuant
to the adoption of "fresh-start" reporting totaled $2.5 million. This represents
the Company's best estimate of the reorganization value of the Company
immediately after the Effective Date in excess of the net value of the Company's
assets after the consummation of the Plan, including the extinguishment of debt.
SEASONALITY
The Company's results of operations are seasonal, with a higher percentage of
volume and earnings being generated during the fourth and first quarters of the
year. This seasonality is driven largely by weather conditions affecting the
Company's beef cattle products. If the weather is particularly warm during the
winter, sales of feed for beef cattle may decrease as compared with normal
seasonal patterns because the cattle may be better able to graze under warmer
conditions. Other product lines are affected marginally by seasonal conditions,
but these conditions do not materially affect the Company's overall
quarter-by-quarter results of operations. The seasonality of the Company's
businesses may have a material adverse affect on the results of operations
achieved by the Company.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 2000, net cash provided by operating
activities was $27.0 million compared to net cash used in operating activities
of $49.3 million during the same period in 1999. The increase in net cash
provided from the prior period results primarily from the net change in working
capital and an increase in profitability of $28.0 million. As a result of the
Reorganization Cases, the Company's current liabilities, including trade
payables and payables to affiliates for ingredients, at December 31, 1999, were
substantially lower than such amounts at December 31, 1998. Accordingly, the
Company had a slight increase in working capital during the first six months of
2000 compared to the significant decrease which occurred during the comparable
1999 period.
Net cash provided by investing activities was $10.9 million for the first six
months of 2000 compared to net cash used of $12.1 million for the six month
period ended June 30, 1999. The increase is due to the proceeds received from
the headquarters building sale of approximately $14.9 million and a decrease in
capital expenditures of $1.5 million.
Net cash used in financing activities in 2000 includes repayment on the
Prepetition Revolving Credit Facility of $87.5 million and the repayment of
Prepetition Term Loans of $15.5 million, offset by the receipt of $60.0 million
from Koch Industries related to the negotiated settlement as provided in the
Plan. Net cash provided by financing activities in 1999 includes borrowings
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<PAGE> 23
under the Prepetition Revolving Credit Facility of $35.0 million less the
repayment of term loans of $3.4 million.
At June 30, 2000, the Company had $43.2 million in cash and cash equivalents on
hand with $35.6 million available for borrowing under the Company's Revolving
Credit Facility. The Company operates with a relatively low working capital
level because a majority of its sales are made on terms whereby customers
receive a 3% discount if payment is received immediately upon shipment of feed
products, and raw ingredients are normally purchased just prior to manufacturing
and shipment.
Liquidity needs have been and will continue to be met through internally
generated funds and, to the extent necessary, borrowings under the Revolving
Credit Facility. The Company's ability to obtain additional financing in the
future for working capital, capital expenditures, acquisitions and general
corporate purposes, should it need to do so, may be affected by cash
requirements for debt service. The Credit Agreement contains restrictive
covenants that, among other things and under certain conditions, limit the
ability of the Company to incur additional indebtedness, to acquire (including a
limitation on capital expenditures) or dispose of assets or operations and to
pay dividends. Additionally, the Company is required to provide to the banks
monthly financial reports as to the results of its operations. The Credit
Agreement also requires the Company to make mandatory repayments of the Term
Loan in amounts equal to 80% of Excess Cash Flow (as defined). The first such
payment is due March 2001.
The Company expects that capital expenditures during fiscal year 2000 will be
approximately $25.0 million to $30.0 million which includes $2.3 million related
to new or improved manufacturing systems at facilities where horse products are
manufactured, to maintain such systems as ionophore free. The Company's actual
capital expenditures for the six months ended June 30, 2000 were $8.6 million.
The Company may from time to time be required to make additional capital
expenditures in connection with the execution of its business strategies.
The Company will incur substantially lower interest expense in the future as a
result of the lower level of debt. Management believes that cash flow from
operations and availability under the Revolving Credit Facility will provide
adequate funds for the Company's foreseeable working capital needs, planned
capital expenditures and debt service obligations. The Company's ability to fund
its operations and make planned capital expenditures, to make scheduled debt
payments, to refinance its indebtedness and to remain in compliance with all of
the financial covenants under its debt agreements depends on its future
operating performance and cash flow, which, in turn, are subject to prevailing
economic conditions and to financial, business and other factors, some of which
are beyond its control.
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RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
In June 1998 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS No. 133), Accounting for Derivative
Instruments and Hedging Activities. This statement standardizes the accounting
for derivative instruments by requiring that an entity recognize these items as
assets and liabilities in the statement of financial position and measure them
at fair value. SFAS No. 133 becomes effective for fiscal years beginning after
June 15, 2000. The Company is currently evaluating the impact of SFAS No. 133 on
its financial statements.
FORWARD-LOOKING STATEMENTS
Information included in this Report on Form 10Q may constitute forward-looking
statements that involve a number of risks and uncertainties. From time to time,
information provided by the Company or statements made by its employees may
contain other forward-looking statements. These forward-looking statements are
based on our current expectations and include known and unknown risks,
uncertainties and other factors, many of which we are unable to predict or
control, that may cause our actual results or performance to materially differ
from any future results or performance expressed or implied in these statements.
Factors that could cause actual results to differ materially from the
forward-looking statements include but are not limited to: Bankruptcy Court
actions or proceedings related to the bankruptcy, general economic conditions
including inflation, consumer debt levels, trade restrictions and interest rate
fluctuations; competitive factors including pricing pressures, technological
developments and products offered by competitors; inventory risks due to changes
in market demand or the Company's business strategies; and changes in effective
tax rates.
Additional risk factors are described from time to time in our filings with the
SEC. Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date made. The Company undertakes no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK
Under the Company's Credit Agreement the Term Loan bears interest at floating
rates which are, at the Company's option, based either upon bank prime or
Eurodollar rates. The Company primarily pays interest based on the Eurodollar
rate. As a result, the Company is subject to interest rate risk. The following
table provides information about the Company's Term Loan that is subject to
interest rate risk. For the Term Loan, the table presents principal cash flows
and applicable interest rates by expected maturity dates.
(Dollars in millions)
FAIR MARKET
VALUE AT
2000(1) 2001 2002 2003 TOTAL JUNE 30, 2000
------- ---- ---- ---- ----- -------------
Variable rate
term debt
including current
portion:
Tranche A $ -- $ 8.0 $ 17.0 $150.0 $ 175.0 $ 175.0
Interest rate (2)
(1) No payments are due for the remainder of 2000
(2) Alternative base rate plus 1.75% (11.25% at June 30, 2000). On July 5, 2000
the Company converted the entire Term Loan to Eurodollar rates. Such
interest rate is Eurodollar plus 2.75%, or 9.39% at July 5, 2000.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT PAGE NUMBER OR
NUMBER DESCRIPTION INCORPORATION BY REFERENCE TO
---------------- -------------------------------------------------------- -----------------------------------
<S> <C> <C>
2(a) Second Amended Joint Plan of Reorganization of Purina Filed as Exhibit 2(a) to the
Mills, Inc., PM Holdings Corporation and its General Form for Registration on
Subsidiaries, dated February 22, 2000 Form 10 of Purina Mills, Inc.,
Registration No. 033-66606 and
incorporated herein by reference
2(b) Form of Agreement and Plan of Merger among Koch Filed as Exhibit 2(b) to the
Agriculture Company, PM Holdings Corporation and General Form for Registration on
Purina Mills, Inc. Form 10 of Purina Mills, Inc.,
Registration No. 033-66606 and
incorporated herein by reference
3(a) Amended and Restated Certificate of Incorporation of Filed as Exhibit 3(a) to the
Purina Mills, Inc. General Form for Registration on
Form 10 of Purina Mills, Inc.,
Registration No. 033-66606 and
incorporated herein by reference
3(b) Amended and Restated By-Laws of Purina Mills, Inc. Filed as Exhibit 3(b) to the
General Form for Registration on
Form 10 of Purina Mills, Inc.,
Registration No. 033-66606 and
incorporated herein by reference
4(a) Form of Stock Certificate for Common Stock Filed as Exhibit 4(a) to the
General Form for Registration on
Form 10/A, Amendment No. 1 of
Purina Mills, Inc., Registration
No. 033-66606 and incorporated
herein by reference
4(b) Form of Registration Rights Agreement among Purina Filed as Exhibit 4(b) to the
Mills, Inc. and certain holders of Common Stock General Form for Registration on
Form 10 of Purina Mills, Inc.,
Registration No. 033-66606 and
incorporated herein by reference
4(c) Form of Rights Agreement between Purina Mills, Inc. Filed as Exhibit 4(c) to the
and the Rights Agent thereunder. General Form for Registration on
Form 10 of Purina Mills, Inc.,
Registration No. 033-66606 and
incorporated herein by reference
</TABLE>
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<PAGE> 27
<TABLE>
<CAPTION>
EXHIBIT PAGE NUMBER OR
NUMBER DESCRIPTION INCORPORATION BY REFERENCE TO
---------------- -------------------------------------------------------- -----------------------------------
<S> <C> <C>
4(d) * Form of Convertible Promissory Note between Purina
Mills, Inc. and Houlihan Lokey Howard & Zukin Capital
4(e) * Form of Convertible Promissory Note between Purina
Mills, Inc. and Chanin Capital Partners
4(f) * Credit Agreement dated, as of June 28,2000 among
Purina Mills, Inc. and certain of its lenders
4(g) * Form of Term Note, dated as of June 28, 2000, made by
Purina Mills, Inc.
4(h) Form of Lockup Agreement in respect of Common Stock Filed as Exhibit 4(i) to the
issued under key employee retention program General Form for Registration on
Form 10 of Purina Mills, Inc.,
Registration No. 033-66606 and
incorporated herein by reference
10(a) Form of Tax Sharing Agreement by and among Koch Filed as Exhibit 10(a) to the
Industries, Inc. and PM Holdings Corporation et al. General Form for Registration on
Form 10 of Purina Mills, Inc.,
Registration No. 033-66606 and
incorporated herein by reference
10(b) Form of Koch Indemnity Agreement by and among Purina Filed as Exhibit 10(b) to the
Mills, Inc., Koch Industries, Inc. Koch Agriculture, General Form for Registration on
et al. Form 10 of Purina Mills, Inc.,
Registration No. 033-66606 and
incorporated herein by reference
10(c) Form of Director and Officer Indemnification Agreement Filed as Exhibit 10(c) to the
for Purina Mills, Inc. General Form for Registration on
Form 10 of Purina Mills, Inc.,
Registration No. 033-66606 and
incorporated herein by reference
10(d) Form of Senior Executive Officer Employment Agreement Filed as Exhibit 10(d) to the
for Purina Mills, Inc. General Form for Registration on
Form 10 of Purina Mills, Inc.,
Registration No. 033-66606 and
incorporated herein by reference
10(e) Equity Incentive Plan Filed as Exhibit 10(e) to the
General Form for Registration on
Form 10/A, Amendment No. 1 of
Purina Mills, Inc., Registration
No. 033-66606 and incorporated
herein by reference
</TABLE>
27
<PAGE> 28
<TABLE>
<CAPTION>
EXHIBIT PAGE NUMBER OR
NUMBER DESCRIPTION INCORPORATION BY REFERENCE TO
---------------- -------------------------------------------------------- -----------------------------------
<S> <C> <C>
10(f) License Agreement, dated as of October 1, 1986 between Filed as Exhibit 10(f) to the
Ralston Purina Company and Purina Mills, Inc. General Form for Registration on
Form 10 of Purina Mills, Inc.,
Registration No. 033-66606 and
incorporated herein by reference
10(g) Form of Merger Escrow Agreement by and among Koch Filed as Exhibit 10(g) to the
Agriculture, Purina Mills, Inc. and Escrow Agent General Form for Registration on
Form 10 of Purina Mills, Inc.,
Registration No. 033-66606 and
incorporated herein by reference
27.1 * Financial Data Schedule
</TABLE>
--------------------
* Filed herewith
(b) Reports on Form 8-K: During the three months ended June 30, 2000, the
Company filed a Report on Form 8-K dated June 30, 2000 in response to Item
5-Other Events. The Form 8-K included a press release reporting the
effectiveness of the Second Amended Joint Plan of Reorganization of Purina
Mills, Inc., its Parent Corporation and its Debtors Subsidiaries, dated
February 22, 2000.
28
<PAGE> 29
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PURINA MILLS, INC.
Date: August 14, 2000 /S/DEL G. MEINZ
---------------
Del G. Meinz
Chief Accounting Officer
29
<PAGE> 30
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE NUMBER OR
NUMBER DESCRIPTION INCORPORATION BY REFERENCE TO
---------------- -------------------------------------------------------- -----------------------------------
<S> <C> <C>
2(a) Second Amended Joint Plan of Reorganization of Purina Filed as Exhibit 2(a) to the
Mills, Inc. PM Holdings Corporation and its General Form for Registration on
Subsidiaries, dated February 22, 2000 Form 10 of Purina Mills, Inc.,
Registration No. 033-66606 and
incorporated herein by reference
2(b) Form of Agreement and Plan of Merger among Koch Filed as Exhibit 2(b) to the
Agriculture Company, PM Holdings Corporation and General Form for Registration on
Purina Mills, Inc. Form 10 of Purina Mills, Inc.,
Registration No. 033-66606 and
incorporated herein by reference
3(a) Amended and Restated Certificate of Incorporation of Filed as Exhibit 3(a) to the
Purina Mills, Inc. General Form for Registration on
Form 10 of Purina Mills, Inc.,
Registration No. 033-66606 and
incorporated herein by reference
3(b) Amended and Restated By-Laws of Purina Mills, Inc. Filed as Exhibit 3(b) to the
General Form for Registration on
Form 10 of Purina Mills, Inc.,
Registration No. 033-66606 and
incorporated herein by reference
4(a) Form of Stock Certificate for Common Stock Filed as Exhibit 4(a) to the
General Form for Registration on
Form 10/A, Amendment No. 1 of
Purina Mills, Inc., Registration
No. 033-66606 and incorporated
herein by reference
4(b) Form of Registration Rights Agreement among Purina Filed as Exhibit 4(b) to the
Mills, Inc. and certain holders of Common Stock General Form for Registration on
Form 10 of Purina Mills, Inc.,
Registration No. 033-66606 and
incorporated herein by reference
4(c) Form of Rights Agreement between Purina Mills, Inc. Filed as Exhibit 4(c) to the
and the Rights Agent thereunder. General Form for Registration on
Form 10 of Purina Mills, Inc.,
Registration No. 033-66606 and
incorporated herein by reference
4(d) * Form of Convertible Promissory Note between Purina
Mills, Inc. and Houlihan Lokey Howard & Zukin Capital
</TABLE>
30
<PAGE> 31
<TABLE>
<CAPTION>
EXHIBIT PAGE NUMBER OR
NUMBER DESCRIPTION INCORPORATION BY REFERENCE TO
---------------- -------------------------------------------------------- -----------------------------------
<S> <C> <C>
4(e) * Form of Convertible Promissory Note between Purina
Mills, Inc. and Chanin Capital Partners
4(f) * Credit Agreement, dated as of June 28, 2000 among
Purina Mills, Inc. and certain of its lenders
4(g) * Form of Term Note, dated as of June 28, 2000, made by
Purina Mills, Inc.
4(h) Form of Lockup Agreement in respect of Common Stock Filed as Exhibit 4(i) to the
issued under key employee retention program General Form for Registration on
Form 10 of Purina Mills, Inc.,
Registration No. 033-66606 and
incorporated herein by reference
10(a) Form of Tax Sharing Agreement by and among Koch Filed as Exhibit 10(a) to the
Industries, Inc. and PM Holdings Corporation et al. General Form for Registration on
Form 10 of Purina Mills, Inc.,
Registration No. 033-66606 and
incorporated herein by reference
10(b) Form of Koch Indemnity Agreement by and among Purina Filed as Exhibit 10(b) to the
Mills, Inc., Koch Industries, Inc. Koch Agriculture, General Form for Registration on
et al. Form 10 of Purina Mills, Inc.,
Registration No. 033-66606 and
incorporated herein by reference
10(c) Form of Director and Officer Indemnification Agreement Filed as Exhibit 10(c) to the
for Purina Mills, Inc. General Form for Registration on
Form 10 of Purina Mills, Inc.,
Registration No. 033-66606 and
incorporated herein by reference
10(d) Form of Senior Executive Officer Employment Agreement Filed as Exhibit 10(d) to the
for Purina Mills, Inc. General Form for Registration on
Form 10 of Purina Mills, Inc.,
Registration No. 033-66606 and
incorporated herein by reference
10(e) Equity Incentive Plan Filed as Exhibit 10(e) to the
General Form for Registration on
Form 10/A, Amendment No. 1 of
Purina Mills, Inc., Registration
No. 033-66606 and incorporated
herein by reference
10(f) License Agreement, dated as of October 1, 1986 between Filed as Exhibit 10(f) to the
Ralston Purina Company and Purina Mills, Inc. General Form for Registration on
Form 10 of Purina Mills, Inc.,
Registration No. 033-66606 and
incorporated herein by reference
</TABLE>
31
<PAGE> 32
<TABLE>
<CAPTION>
EXHIBIT PAGE NUMBER OR
NUMBER DESCRIPTION INCORPORATION BY REFERENCE TO
---------------- -------------------------------------------------------- -----------------------------------
<S> <C> <C>
10(g) Form of Merger Escrow Agreement by and among Koch Filed as Exhibit 10(g) to the
Agriculture Purina Mills, Inc. and Escrow Agent General Form for Registration on
Form 10 of Purina Mills, Inc.,
Registration No. 033-66606 and
incorporated herein by reference
27.1 * Financial Data Schedule
</TABLE>
-------------
* Filed herewith
32
