As filed with the Securities and Exchange Commission
on July 24, 1998
Registration No. 333-53865
=================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
Purina Mills, Inc.
(Exact name of registrant as specified in its charter)
Delaware 2048 43-1359249
(State or other (Primary standard (I.R.S. employer
jurisdiction of industrial identification
incorporation classification number)
or organization) code number)
1401 S. Hanley Road
St. Louis, Missouri 63144
(314) 768-4100
(Address, including zip code, and telephone number,
including area code, of registrant's
principal executive offices)
----------------
Arthur D. Jordan, Esq.
Purina Mills, Inc.
1401 S. Hanley Road
St. Louis, Missouri 63144
(314) 768-4100
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies of correspondence to:
Paul J. Shim, Esq.
Cleary, Gottlieb, Steen & Hamilton
One Liberty Plaza
New York, New York 10006
----------------
Approximate date of commencement of proposed sale to the
public: As soon as practicable after the Registration Statement
becomes effective.
If the securities being registered on this Form are being
offered in connection with the formation of a holding company and
there is compliance with General Instruction G, check the
following box: |_|
If this form is filed to register additional securities for
an offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities act registration
statement number of the earlier effective registration statement
for the same offering. |_| ___________
If this form is a post-effective amendment filed pursuant
to Rule 462(d) under the Securities Act, check the following box
and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering.
|_| ___________
----------------
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
<PAGE>
*********************************************************************
* Information contained herein is subject to completion or *
* amendment. A registration statement relating to these securities *
* has been filed with the Securities and Exchange Commission. These *
* securities may not be sold nor may offers to buy be accepted *
* prior to the time the registration statement becomes effective. *
* This prospectus shall not constitute an offer to sell or the *
* solicitation of an offer to buy nor shall there be any sale of *
* these securities in any State in which such offer, solicitation *
* or sale would be unlawful prior to registration or qualification *
* under the securities laws of any such State. *
*********************************************************************
SUBJECT TO COMPLETION-DATED JULY 24, 1998
PROSPECTUS
Purina Mills, Inc.
Offer to Exchange 9% Senior Subordinated Notes due 2010,
which have been registered under the
Securities Act of 1933, as amended,
for any and all outstanding
9% Senior Subordinated Notes due 2010
The Exchange Offer will expire
at 5:00 p.m., New York City time,
on , 1998, unless extended.
Purina Mills, Inc., a Delaware corporation ("PMI" or the
"Company"), hereby offers, upon the terms and subject to the
conditions set forth in this Prospectus and the accompanying
letter of transmittal (the "Letter of Transmittal" and such offer
being the "Exchange Offer"), to exchange 9% Senior Subordinated
Notes due 2010 (the "New Notes"), which have been registered
under the Securities Act of 1933, as amended (the "Securities
Act"), pursuant to a registration statement on Form S-4 (together
with all amendments and exhibits, the "Registration Statement")
of which this Prospectus is a part, for an equal principal amount
of outstanding 9% Senior Subordinated Notes due 2010 (the "Old
Notes"), of which $350,000,000 aggregate principal amount is
outstanding as of the date hereof. The New Notes and the Old
Notes are collectively referred to herein as the "Notes."
Any and all Old Notes that are validly tendered and not
withdrawn on or prior to 5:00 p.m., New York City time, on the
date the Exchange Offer expires, which will be , 1998 (30
calendar days following the commencement of the Exchange Offer,
which will occur on the date of effectiveness of the Registration
Statement) unless the Exchange Offer is extended (such date,
including as extended, the "Expiration Date"), will be accepted
for exchange. Tenders of Old Notes may be withdrawn at any time
prior to 5:00 p.m., New York City time, on the Expiration Date.
The Exchange Offer is not conditioned upon any minimum principal
amount of Old Notes being tendered for exchange. However, the
Exchange Offer is subject to certain customary conditions, which
may be waived by PMI, and to the terms of the Registration Rights
Agreement, dated as of March 12, 1998, by and among PMI, Credit
Suisse First Boston Corporation and Chase Securities Inc. (the
"Initial Purchasers") (the "Registration Rights Agreement"). Old
Notes may be tendered only in integral multiples of $1,000. See
"The Exchange Offer."
The New Notes will be entitled to the benefits of the same
indenture by and between PMI (as issuer) and The First National
Bank of Chicago (as trustee), dated as of March 12, 1998 (the
"Indenture") that governs the Old Notes and that will govern the
New Notes. The form and terms of the New Notes are the same in
all material respects as the form and terms of the Old Notes,
except that the New Notes have been registered under the
Securities Act and therefore will not bear legends restricting
the transfer thereof. The New Notes, like the Old Notes, may be
redeemed at the option of PMI under certain circumstances. See
"The Exchange Offer" and "Description of the New Notes."
The New Notes will rank equal to any future senior
subordinated indebtedness of the Company and will rank senior to
all other subordinated indebtedness of the Company. As of March
31, 1998, the Company had approximately $206.9 million of
indebtedness which will rank senior to the New Notes and the
Company had no indebtedness which will rank equal to the New
Notes. The Indenture governing the New Notes will permit the
Company to incur additional indebtedness, subject to certain
limitations, and such indebtedness may be senior indebtedness or
indebtedness of subsidiaries. See "Description of the New
Notes--Ranking" and "Unaudited Pro Forma Financial Data."
The New Notes will be represented by permanent global notes
in fully registered form and will be deposited with, or on behalf
of, The Depository Trust Company ("DTC") and registered in the
name of a nominee of DTC. Beneficial interests in the permanent
global notes will be shown on, and transfers thereof will be
effected through, records maintained by DTC and its participants.
Based on interpretations by the staff of the Securities and
Exchange Commission (the "Commission"), as set forth in no-action
letters issued to third parties, including Exxon Capital Holdings
Corporation, SEC No-Action Letter (available May 13, 1988),
Morgan Stanley & Co. Incorporated, SEC No-Action Letter
(available June 5, 1991) and Shearman & Sterling, SEC No-Action
Letter (available July 2, 1993) (collectively, the "Exchange
Offer No-Action Letters"), PMI believes that the New Notes issued
pursuant to the Exchange Offer may be offered for resale, resold
or otherwise transferred by each holder (other than a
broker-dealer who acquires such New Notes directly from PMI for
resale pursuant to Rule 144A under the Securities Act or any
other available exemption under the Securities Act and other than
any holder that is an "affiliate" (as defined in Rule 405 under
the Securities Act) of PMI) without compliance with the
registration and prospectus delivery provisions of the Securities
Act, provided that such New Notes are acquired in the ordinary
course of such holder's business and such holder is not engaged
in, and does not intend to engage in, a distribution of such New
Notes and has no arrangement with any person to participate in a
distribution of such New Notes. By tendering Old Notes in
exchange for New Notes, each holder, other than a broker-dealer,
will represent to PMI that: (i) it is not an affiliate (as
defined in Rule 405 under the Securities Act) of PMI; (ii) it is
not a broker-dealer tendering Old Notes acquired for its own
account directly from PMI; (iii) any New Notes to be received by
it will be acquired in the ordinary course of its business; and
(iv) it is not engaged in, and does not intend to engage in, a
distribution of such New Notes and has no arrangement or
understanding to participate in a distribution of New Notes. If a
holder of Old Notes is engaged in or intends to engage in a
distribution of New Notes or has any arrangement or understanding
with respect to the distribution of New Notes to be acquired
pursuant to the Exchange Offer, such holder may not rely on the
applicable interpretations of the staff of the Commission and
must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any
secondary resale transaction.
(continued on next page)
-------------
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY PARTICIPANTS IN THE EXCHANGE OFFER, SEE "RISK
FACTORS" BEGINNING ON PAGE 14 OF THIS PROSPECTUS.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-------------
The date of this Prospectus is , 1998
<PAGE>
(continued from cover page)
Based on interpretations by the staff of the Securities and
Exchange Commission (the "Commission"), as set forth in no-action
letters issued to third parties, including Exxon Capital Holdings
Corporation, SEC No-Action Letter (available May 13, 1988),
Morgan Stanley & Co. Incorporated, SEC No-Action Letter
(available June 5, 1991) and Shearman & Sterling, SEC No-Action
Letter (available July 2, 1993) (collectively, the "Exchange
Offer No-Action Letters"), PMI believes that the New Notes issued
pursuant to the Exchange Offer may be offered for resale, resold
or otherwise transferred by each holder (other than a
broker-dealer who acquires such New Notes directly from PMI for
resale pursuant to Rule 144A under the Securities Act or any
other available exemption under the Securities Act and other than
any holder that is an "affiliate" (as defined in Rule 405 under
the Securities Act) of PMI) without compliance with the
registration and prospectus delivery provisions of the Securities
Act, provided that such New Notes are acquired in the ordinary
course of such holder's business and such holder is not engaged
in, and does not intend to engage in, a distribution of such New
Notes and has no arrangement with any person to participate in a
distribution of such New Notes. By tendering Old Notes in
exchange for New Notes, each holder, other than a broker-dealer,
will represent to PMI that: (i) it is not an affiliate (as
defined in Rule 405 under the Securities Act) of PMI; (ii) it is
not a broker-dealer tendering Old Notes acquired for its own
account directly from PMI; (iii) any New Notes to be received by
it will be acquired in the ordinary course of its business; and
(iv) it is not engaged in, and does not intend to engage in, a
distribution of such New Notes and has no arrangement or
understanding to participate in a distribution of New Notes. If a
holder of Old Notes is engaged in or intends to engage in a
distribution of New Notes or has any arrangement or understanding
with respect to the distribution of New Notes to be acquired
pursuant to the Exchange Offer, such holder may not rely on the
applicable interpretations of the staff of the Commission and
must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any
secondary resale transaction.
Each broker-dealer that receives New Notes for its own
account pursuant to the Exchange Offer (a "Participating
Broker-Dealer") must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. The
Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a Participating Broker-Dealer will not
be deemed to admit that it is an "underwriter" within the meaning
of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a Participating
Broker-Dealer in connection with resales of New Notes received in
exchange for Old Notes where such Old Notes were acquired by such
Participating Broker-Dealer as a result of market-making
activities or other trading activities. Pursuant to the
Registration Rights Agreement, the Company has agreed that, for a
period of time not to exceed 180 days after the Expiration Date,
or such shorter period which will terminate when such
Participating Broker-Dealers have completed all resales subject
to applicable prospectus delivery requirements, it will make this
Prospectus available to any Participating Broker-Dealer for use
in connection with any such resale. See "Plan of Distribution."
PMI will not receive any proceeds from this offering. PMI
has agreed to pay the expenses of the Exchange Offer. No
underwriter is being utilized in connection with the Exchange
Offer.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL PMI
ACCEPT SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY
JURISDICTION IN WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE
THEREOF WOULD NOT BE IN COMPLIANCE WITH THE SECURITIES AND BLUE
SKY LAWS OF SUCH JURISDICTION.
The Old Notes have been designated as eligible for trading
in The Portal Market sm ("PORTAL"), a subsidiary of The Nasdaq
Stock Market, Inc. ("The Nasdaq Stock Market"). Prior to this
Exchange Offer, there has been no public market for the New
Notes. If such a market were to develop, the New Notes could
trade at prices that may be higher or lower than their principal
amount. PMI does not intend to apply for listing of the New Notes
on any securities exchange or for quotation of the New Notes on
The Nasdaq Stock Market's National Market or otherwise. The
Initial Purchasers have previously made a market in the Old
Notes, and PMI has been advised that the Initial Purchasers
currently intend to make a market in the New Notes, as permitted
by applicable laws and regulations, after consummation of the
Exchange Offer. The Initial Purchasers are not obligated,
however, to make a market in the Old Notes or the New Notes and
any such market-making activity may be discontinued at any time
without notice at the sole discretion of the Initial Purchasers.
There can be no assurance as to the liquidity of the public
market for the New Notes or that any active public market for the
New Notes will develop or continue. If an active public market
does not develop or continue, the market price and liquidity of
the New Notes may be adversely affected. See "Risk Factors-Risk
Factors Relating to the Notes-Absence of a Public Market for the
New Notes."
<PAGE>
AVAILABLE INFORMATION
PMI is not currently subject to the periodic reporting and
other informational requirements of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). PMI will become subject
to such requirements upon the effectiveness of the Registration
Statement. Pursuant to the Indenture, PMI has agreed to file with
the Commission and provide to the holders of the New Notes annual
reports and the information, documents and other reports which
are required to be delivered pursuant to Sections 13 and 15(d) of
the Exchange Act.
This Prospectus constitutes a part of the Registration
Statement on Form S-4 filed by PMI with the Commission,
through the Electronic Data Gathering, Analysis and Retrieval
System ("EDGAR"), under the Securities Act, with respect to the
New Notes offered hereby. This Prospectus omits certain of the
information contained in the Registration Statement, and
reference is hereby made to the Registration Statement for
further information with respect to PMI and the securities
offered hereby. Although statements concerning and summaries of
certain documents are included herein, reference is made to the
copy of such document filed as an exhibit to the Registration
Statement or otherwise filed with the Commission. These documents
may be inspected without charge at the office of the Commission
at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the public reference facilities in the Commission's
regional offices located at Seven World Trade Center, 13th Floor,
New York, New York 10048, and Citicorp Center, 500 WFC Madison
Street, Suite 1400, Chicago, IL 60661. Copies of such material
may be obtained at fees and charges prescribed by the Commission.
Copies of such materials may also be obtained from the Web site
that the Commission maintains at http://www.sec.gov.
i
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and
should be read in conjunction with, the more detailed information
and historical and unaudited pro forma financial statements
appearing elsewhere in this Prospectus. Unless the context
requires otherwise, references to (i) the "Company" or "PMI"
refer to Purina Mills, Inc., a Delaware corporation, (ii)
"Holdings" refer to PM Holdings Corporation, a Delaware
corporation and the parent of PMI, (iii) "Koch Agriculture" refer
to Koch Agriculture Company, a Nebraska corporation and the
parent of Holdings, (iv) "Koch Industries" refer to Koch
Industries, Inc., a Kansas corporation and the parent of Koch
Agriculture and (v) "Merger Sub" refer to Arch Acquisition
Corporation, a Delaware corporation and former wholly owned
subsidiary of Koch Agriculture, which was merged with and into
Holdings, with Holdings being the surviving corporation, on March
12, 1998 (the "Merger"). Except as otherwise set forth herein,
references herein to "pro forma" financial data of PMI are to
financial data of PMI which gives effect to the Transactions (as
defined herein), including the issuance of the Old Notes (the
"Offering"), the consummation of the Merger, the consummation of
tender offers to purchase for cash the outstanding indebtedness
of each of PMI and Holdings, the incurrence of indebtedness by
PMI under a new revolving credit facility and two new term loan
facilities and the cash equity investment of Koch Agriculture of
$109.7 million in the common stock of Merger Sub. See "The
Transactions." References to the Company's fiscal year refer to a
December 31 fiscal year end.
The Company
The Company is the market leader in the United States in
developing, manufacturing and marketing differentiated animal
nutrition products and programs for dairy cattle, beef cattle,
hogs and horses. The Company also develops, manufactures and
sells poultry feeds as well as specialty feeds for rabbits, zoo
animals, laboratory animals, birds, fish and pets. In the United
States, the Company's products are generally marketed under the
widely recognized brand names Purina(R) and Chow(R), and the
"Checkerboard" Nine Square Logo(R) except with regard to dog and
cat food, which is marketed domestically under the PMI Nutrition
brand name. The Company also markets products under the Golden
Sun brand and its related trademarks. The Company's products are
sold as complete feeds or as concentrated nutritional additives
that customers mix with their own commodity ingredients. Over the
past 100 years, the Company believes that it has built and
maintained its industry leadership through innovative research
and development and by consistently providing high quality
products, programs and services that create value for its
customers. For the year ended December 31, 1997 and the
three-month period ended March 31, 1998, the Company generated
sales of approximately $1,128.4 million and $267.1 million,
respectively, and EBITDA of approximately $99.2 million and $23.5
million, respectively.
Because commercial animal feed represents 50% to 70% of the
total cost of producing milk, meat or eggs at the farm level, the
effective management of feed costs and the resulting yields are
among the most important economic components of animal raising.
The Company's products are designed to provide nutrients that
meet the needs of a particular species of animal at each phase of
its life cycle. In the commercial production of milk, meat and
eggs, the Company believes that its continued market leadership
reflects the attractive, cost-effective balance between weight
gain, feed efficiency, animal health and price which its products
and programs provide.
The Company also maintains a leadership position in the
horse and other retail specialty feed markets. As the U.S.
population has migrated to suburban and rural areas, the
incidence of hobby farmers, "ranchettes" and companion animal
ownership has increased. Consumers in this market segment are
typically less price sensitive than those in the commercial feed
market and buying decisions are driven more by brand awareness,
product quality, convenience and the retail environment. The
Company believes that its strong growth in this market segment
can be attributed to its brand recognition, broad product
offering and extensive retail distribution network. The Company
sees significant growth opportunities in these high margin market
segments as the "ruralpolitan" population continues to grow.
Industry Overview
According to the 1997 Feedstuffs Reference Issue, in 1996,
the U.S. animal feed industry produced approximately 117 million
tons of primary feed, and animal producers utilized approximately
$27 billion of animal nutrition products. Of this total amount,
the Company estimates that in 1996 the U.S. feed industry
produced for the available potential market (total volume of feed
produced, except that used by producers who have integrated feed
operations or alignments with other feed manufacturers) (the
"Available Market") approximately 63 million tons of primary
feed, and animal producers purchased approximately $13 billion of
animal nutrition products. The industry is highly fragmented and
although it includes several large producers, it is comprised
primarily of regional competitors
1
<PAGE>
with several manufacturing facilities as well as a largenumber of
small, local manufacturers, many of whom operate only one feed
mill. In 1996, the Company estimates that the top ten animal feed
companies produced approximately 30% of the total Available
Market for animal feed in the United States.
The Company competes in both the commercial feed business
and the retail specialty feed business. The Company defines the
commercial feed business as including nutrition products and
programs for dairy cattle, beef cattle, hogs and poultry and
believes the business is characterized by continued industry
consolidation and vertical integration of animal producers,
product price sensitivities and increasing customer
sophistication. In contrast, the Company believes that the retail
specialty feed business, which includes feed products for horses,
rabbits, zoo animals, birds, fish and pets, requires aggressive
marketing, customer brand awareness and strong national
distribution capabilities.
The feed industry generally prices its products on the
basis of Income Over Ingredient Cost ("IOIC"), a dollar based
margin which is added to aggregate ingredient cost. The Company
believes that total IOIC and gross profit dollars, rather than
sales dollars, are the key indicators of performance because of
distortions in sales dollars caused by changes in commodity
prices. Total IOIC less manufacturing costs equals gross profit.
Although feed producers are subject to fluctuations in ingredient
commodity prices, they are generally able to pass on price
increases in raw materials to customers through weekly
adjustments in product prices. See "Business--Competition."
The Transactions
The Merger
Pursuant to the Agreement and Plan of Merger among Holdings,
Koch Agriculture and Merger Sub, dated as of January 9, 1998 (the
"Merger Agreement"), Merger Sub was merged with and into
Holdings, with Holdings being the surviving corporation. As a
result of the Merger, all of the shares of the common stock of
Holdings, par value $.01 per share (the "Holdings Common Stock")
outstanding immediately prior to March 12, 1998, the effective
date specified in the Certificate of Merger filed with the
Secretary of State of the State of Delaware on March 11, 1998
(the "Effective Time") were canceled and converted into the right
to receive cash consideration of $540 per share (the "Merger
Consideration"), all as set forth in the Merger Agreement. In
addition, pursuant to the Merger Agreement, each outstanding
option to purchase shares of Holdings Common Stock (each an
"Option" and collectively the "Options") and each stock rights
unit entitling the holder thereof to acquire Holdings Common
Stock (each a "Stock Unit" and collectively the "Stock Units")
became 100% vested. Option holders received the Merger
Consideration for each share of Holdings Common Stock into which
such Options were exercisable immediately prior to the Effective
Time, less the exercise price of such Options. Stock Unit holders
received the Merger Consideration for each share of Holdings
Common Stock into which such Stock Units were exercisable
immediately prior to the Effective Time. Such Options and Stock
Units issued and outstanding immediately prior to the Effective
Time were canceled and extinguished immediately prior to the
Effective Time. As a result of the Merger, Koch Agriculture owns
100% of Holdings, which owns 100% of the Company.
The Merger Agreement was approved and adopted by the
holders of a majority of the outstanding shares of Holdings
Common Stock at a stockholders meeting on March 2, 1998. In
connection with the Merger Agreement, holders of approximately
20% of the outstanding shares of Holdings Common Stock had prior
to such stockholders meeting executed a voting agreement agreeing
to vote in favor of the Merger (the "Voting Agreement"). For
further information concerning the Merger Agreement, see "The
Transactions-The Merger."
The Tender Offers
In connection with the Merger, (i) PMI offered to purchase
for cash any and all of PMI's outstanding 10 1/4% Senior
Subordinated Notes due September 1, 2003, guaranteed by Holdings
(the "Existing PMI Senior Subordinated Notes"), of which $190.0
million in aggregate principal amount was outstanding as of the
date of the Offering, and (ii) Holdings offered to purchase for
cash any and all of Holdings' outstanding 11 1/2% Series B
Subordinated Discount Debentures due September 1, 2005 (the
"Existing Holdings Discount Debentures" and, together with
Existing PMI Senior Subordinated Notes, the "Existing Debt
Securities"), of which $109.4 million in aggregate principal
amount at maturity was outstanding as of the date of the
Offering. In conjunction with these offers (together, the "Tender
Offers"), PMI and Holdings solicited consents of registered
holders of the applicable series of Existing Debt Securities
2
<PAGE>
(the "Consent Solicitations") to certain proposed amendments (the
"Proposed Amendments") to the indentures under which the
applicable series of Existing Debt Securities were issued. The
Proposed Amendments became operative immediately following the
consummation of the Merger when all of the Existing Holdings
Discount Debentures and all except $15,000 of the Existing PMI
Senior Subordinated Notes were accepted for payment. The Tender
Offers were conditioned upon the receipt by the applicable issuer
of tenders from at least a majority in aggregate principal amount
outstanding of each of the series of Existing Debt Securities and
delivery of the related consents, the execution of supplemental
indentures with respect to the Proposed Amendments, the receipt
of necessary financing to close the Tender Offers (including
pursuant to the Offering) and the consummation of the Merger. For
further information concerning the Tender Offers, see "The
Transactions-The Tender Offers."
The Financing
In addition to the sale of the Notes, PMI satisfied the
cash funding requirements of the Merger and the Tender Offers,
additional working capital and other capital requirements through
the following: (i) a cash equity investment by Koch Agriculture
of $109.7 million (the "Equity Contribution") in the common stock
of Merger Sub and (ii) $9.9 million of senior secured borrowings
under a new revolving credit facility (the "New Revolving Credit
Facility") providing for up to $100.0 million in revolving loans,
up to $40.0 million of which may be used for letters of credit,
$100.0 million of borrowings under a new seven-year term loan
facility (the "Tranche A Term Loan") and $100.0 million of
borrowings under a new nine-year term loan facility (the "Tranche
B Term Loan" and, collectively with the Tranche A Term Loan, the
"Term Loans"; the New Revolving Credit Facility together with the
Term Loans are referred to collectively as the "New Credit
Facilities"). For a description of the New Credit Facilities, see
"The Transactions-The Financing" and "Description of Certain
Indebtedness."
The following table sets forth the estimated sources and
uses of funds in connection with the Transactions as they
occurred on March 12, 1998:
Amount
(In millions)
-------------
Sources of Funds:
New Credit Facilities:
New Revolving Credit Facility(a)............. $ 9.9
Term Loans(b)................................ 200.0
Notes offered hereby........................... 350.0
Equity Contribution to Holdings(c)............. 109.7
------
Total sources............................. $669.6
======
Amount
(In millions)
-------------
Uses of Funds:
Purchase price for equity of Holdings(d)..... $258.7
Repayment of existing indebtedness(e)........ 385.5
Other payments, fees and expenses(f)......... 25.4
------
Total sources............................. $669.6
======
- -----------------
(a) The Company had $90.1 million of additional availability
under the New Revolving Credit Facility. See "Description of
Certain Indebtedness."
(b) Represents borrowing in full of the $100.0 million Tranche A
Term Loan and the $100.0 million Tranche B Term Loan. See
"Description of Certain Indebtedness."
(c) Reflects a contribution to the equity capital of Holdings by
Koch Agriculture.
(d) Includes $245.2 million of cash proceeds paid to holders of
Holdings Common Stock and $13.5 million of cash proceeds paid
to holders of Options to purchase Holdings Common Stock and
Stock Units exercisable for Holdings Common Stock.
(e) Includes approximately $90.5 million and approximately $203.0
million, respectively, required to fund the consummation of
the Tender Offers and the Consent Solicitations for the
Existing Holdings Discount Debentures and the Existing PMI
Senior Subordinated Notes, respectively. In addition,
includes approximately $92.0 million used to repay other
outstanding debt, consisting of approximately $17.4 million
of outstanding Industrial Revenue Bonds which were repaid
following the consummation of the Merger and approximately
$74.6 million used to repay an existing senior term loan. At
3
<PAGE>
March 12, 1998, the Industrial Revenue Bonds had a weighted
average interest rate of 3.8% and were scheduled to mature in
part in 2020 and in full by 2022; the existing senior term
loan, with a 7.5% average interest rate, was scheduled to
mature in 2000.
(f) Fees and expenses include (i) the Initial Purchasers'
discount and other fees and expenses of the Offering, (ii)
financial consulting service fees to The Sterling Group, Inc.
("TSG") of $6.5 million, and reimbursement of expenses to TSG
and (iii) fees and expenses incurred in connection with the
Transactions, including bank fees, legal fees and accounting
fees. See "Certain Relationships and Related Transactions."
The Merger, the Offering, the New Credit Facilities, the
Tender Offers, the Equity Contribution and the application of the
net proceeds therefrom are hereinafter referred to as the
"Transactions." See "The Transactions."
Koch Agriculture
In connection with the Merger, Koch Agriculture made a cash
equity investment of $109.7 million in the common stock of Merger
Sub. As a result of the Merger, Koch Agriculture owns 100% of
Holdings, which owns 100% of the Company. Koch Agriculture is a
wholly owned subsidiary of Koch Industries, which is one of the
largest privately held corporations in the United States. Koch
Industries, based in Wichita, Kansas, has annual revenues in
excess of $35 billion and, together with its subsidiaries,
employs over 13,000 people worldwide. Koch Agriculture and its
affiliates are involved in many aspects of the agriculture
industry including cattle feeding and meat production, the
production and distribution of fertilizers, agricultural
commodity risk management and wheat production and flour milling.
In addition to its agricultural operations, Koch Industries,
together with its subsidiaries, is involved in virtually all
phases of the oil and gas industry, as well as in chemicals,
chemical technology products, energy services, asphalt products,
metals and mineral services, real estate and financial
investments.
None of Koch Agriculture, Koch Industries, Holdings or any
of their Affiliates (other than the Company) are parties to the
Indenture or responsible for, or guarantors of, any payments or
other claims in respect of the Notes or the Indenture.
4
<PAGE>
Organizational Chart
The following chart depicts the summary organizational
structure of Koch Agriculture, Holdings and the Company after the
Transactions.
The chart shows that Koch Industries, Inc. ("Koch
Industries") is the 100% owner of Koch Agriculture
Company ("Koch Agriculture"), that Koch
Agriculture is the 100% owner of PM Holdings
Corporation ("Holdings"), the survivor of the
Merger of Holdings and Merger Sub (Guarantor under
the New Credit Facilities), and that Holdings is
the 100% owner of Purina Mills, Inc. ("PMI")
(Issuer of the Notes and borrower under the New
Credit Facilities).
The principal executive offices of the Company are located
at 1401 S. Hanley Road, St. Louis, Missouri 63144, and its
telephone number is (314) 768-4100.
5
<PAGE>
The Exchange Offer
Registration Rights The Old Notes were issued on March 12,
Agreement............. 1998 to the Initial Purchasers. The
Initial Purchasers placed the Old Notes
with institutional investors. In
connection therewith, the Company and
the Initial Purchasers entered into the
Registration Rights Agreement,
providing, among other things, for the
Exchange Offer. See "The Exchange
Offer."
The Exchange Offer...... New Notes are being offered in exchange
for an equal principal amount of Old
Notes. As of the date hereof,
$350,000,000 aggregate principal amount
of Old Notes is outstanding. Old Notes
may be tendered only in integral
multiples of $1,000.
Resale of New Notes..... Based on interpretations by the staff of
the Commission, as set forth in no-
action letters issued to third parties,
including the Exchange Offer No-Action
Letters, the Company believes that the
New Notes issued pursuant to the
Exchange Offer may be offered for
resale, resold or otherwise transferred
by each holder thereof (other than a
broker-dealer who acquires such New
Notes directly from the Company for
resale pursuant to Rule 144A under the
Securities Act or any other available
exemption under the Securities Act and
other than any holder that is an
"affiliate" (as defined under Rule 405
of the Securities Act) of the Company)
without compliance with the registration
and prospectus delivery provisions of
the Securities Act, provided that such
New Notes are acquired in the ordinary
course of such holder's business and
such holder is not engaged in, and does
not intend to engage in, a distribution
of such New Notes and has no arrangement
with any person to participate in a
distribution of such New Notes. By
tendering the Old Notes in exchange for
New Notes, each holder, other than a
broker-dealer, will represent to the
Company that: (i) it is not an affiliate
(as defined in Rule 405 under the
Securities Act) of the Issuer; (ii) it
is not a broker-dealer tendering Old
Notes acquired for its own account
directly from the Company; (iii) any New
Notes to be received by it were acquired
in the ordinary course of its business;
and (iv) it is not engaged in, and does
not intend to engage in, a distribution
of such New Notes and has no arrangement
or understanding to participate in a
distribution of the New Notes. If a
holder of Old Notes is engaged in or
intends to engage in a distribution of
the New Notes or has any arrangement or
understanding with respect to the
distribution of the New Notes to be
acquired pursuant to the Exchange Offer,
such holder may not rely on the
applicable interpretations of the staff
of the Commission and must comply with
the registration and prospectus delivery
requirements of the Securities Act in
connection with any secondary resale
transaction. Each Participating
Broker-Dealer that receives New Notes
for its own account pursuant to the
Exchange Offer must acknowledge that it
will deliver a prospectus meeting the
requirements of the Securities Act in
connection with any resale of such New
Notes. The Letter of Transmittal states
that by so acknowledging and by
delivering a prospectus, a Participating
Broker-Dealer will not be deemed to
admit that it is an "underwriter" within
the meaning of the Securities Act. This
Prospectus, as it may be amended or
supplemented from time to time, may be
used by a Participating Broker-Dealer in
connection with resales of New Notes
received in exchange for Old Notes where
such Old Notes were acquired by such
Participating Broker-Dealer as a result
of market-making activities or other
trading activities. The Company has
agreed
6
<PAGE>
that for a period of 180 days after the
Expiration Date, or such shorter period
which will terminate when such
Participating Broker-Dealers have
completed all resales subject to
applicable prospectus delivery
requirements, it will make this
Prospectus available to any
Participating Broker-Dealer for use in
connection with any such resale. See
"Plan of Distribution." To comply with
the securities laws of certain
jurisdictions, it may be necessary to
qualify for sale or register the New
Notes prior to offering or selling such
New Notes. The Company has agreed,
pursuant to the Registration Rights
Agreement and subject to certain
specified limitations therein, to
register or qualify the New Notes for
offer or sale under the securities or
"blue sky" laws of such jurisdictions as
may be necessary to permit consummation
of the Exchange Offer.
Consequences of
Failure to Exchange Upon consummation of the Exchange Offer,
Old Notes............. subject to certain exceptions, holders
of Old Notes who do not exchange their
Old Notes for New Notes in the Exchange
Offer will no longer be entitled to
registration rights and will not be able
to offer or sell their Old Notes, unless
such Old Notes are subsequently
registered under the Securities Act
(which, subject to certain limited
exceptions, the Company will have no
obligation to do), except pursuant to an
exemption from, or in a transaction not
subject to, the Securities Act and
applicable state securities laws. See
"Risk Factors-Risk Factors Relating to
the Notes-Consequences of Failure to
Exchange" and "The Exchange Offer-Terms
of the Exchange Offer."
Expiration Date........ 5:00 p.m., New York City time, on ,
1998, (30 calendar days following the
commencement of the Exchange Offer,
which will occur on the date of
effectiveness of the Registration
Statement), unless the Exchange Offer is
extended, in which case the term
"Expiration Date" means the latest date
and time to which the Exchange Offer is
extended.
Interest on the New The New Notes will accrue interest at
Notes................ the applicable per annum rate set forth
on the cover page of this Prospectus,
from (i) the later of (A) the last
interest payment date on which interest
was paid on the Old Notes surrendered in
exchange therefor or (B) if the Old
Notes are surrendered for exchange on a
date subsequent to the record date for
an interest payment date to occur on or
after the date of such exchange and as
to which interest will be paid, the date
of such interest payment or (ii) if no
interest has been paid on the Old Notes,
from March 12, 1998 (the date the Old
Notes were issued (the "Issue Date")).
Interest on the New Notes is payable on
March 15 and September 15 of each year,
commencing September 15, 1998.
Conditions to the The Exchange Offer is not conditioned
Exchange Offer........ upon any minimum principal amount of Old
Notes being tendered for exchange.
However, the Exchange Offer is subject
to certain customary conditions, which
may, under certain circumstances, be
waived by the Company. See "The Exchange
Offer-Conditions." Except for the
requirements of applicable federal and
state securities laws, there are no
federal or state regulatory requirements
to be complied with or obtained by the
Company in connection with the Exchange
Offer.
7
<PAGE>
Procedures for Each holder of Old Notes wishing to
Tendering Old Notes... accept the Exchange Offer must complete,
sign and date the Letter of Transmittal,
or a facsimile thereof, in accordance
with the instructions contained herein
and therein, and mail or otherwise
deliver such Letter of Transmittal, or
such facsimile, together with the Old
Notes to be exchanged and any other
required documentation to the The First
National Bank of Chicago at the address
set forth herein or effect a tender of
Old Notes pursuant to the procedures for
book-entry transfer as provided for
herein. See "The Exchange Offer-
Procedures for Tendering" and "-Book
Entry Transfer."
Guaranteed Delivery Holders of Old Notes who wish to tender
Procedures............ their Old Notes and whose Old Notes are
not immediately available or who cannot
deliver their Old Notes and a properly
completed Letter of Transmittal or any
other documents required by the Letter
of Transmittal to the Exchange Agent
prior to the Expiration Date may tender
their Old Notes according to the
guaranteed delivery procedures set forth
in "The Exchange Offer-Guaranteed
Delivery Procedures."
Withdrawal Rights....... Tenders of Old Notes may be withdrawn at
any time prior to 5:00 p.m., New York
City time, on the Expiration Date. To
withdraw a tender of Old Notes, a
written or facsimile transmission notice
of withdrawal must be received by the
Exchange Agent at its address set forth
herein under "The Exchange
Offer-Exchange Agent" prior to 5:00
p.m., New York City time, on the
Expiration Date.
Acceptance of Old
Notes and Delivery Subject to certain conditions, any and
of New Notes.......... all Old Notes that are properly tendered
in the Exchange Offer prior to 5:00
p.m., New York City time, on the
Expiration Date will be accepted for
exchange. The New Notes issued pursuant
to the Exchange Offer will be delivered
promptly following the Expiration Date.
See "The Exchange Offer-Terms of the
Exchange Offer."
Certain Tax The exchange of New Notes for Old Notes
Considerations........ will not be considered a sale or
exchange or otherwise a taxable event
for Federal income tax purposes. See
"Certain U.S. Federal Income Tax
Considerations."
Exchange Agent.......... The First National Bank of Chicago is
serving as exchange agent (the "Exchange
Agent") in connection with the Exchange
Offer.
Fees and Expenses....... All expenses incident to consummation of
the Exchange Offer and compliance with
the Registration Rights Agreement will
be borne by the Company. See "The
Exchange Offer-Fees and Expenses."
Use of Proceeds......... There will be no cash proceeds payable
to the Company from the issuance of the
New Notes pursuant to the Exchange
Offer. See "Use of Proceeds."
8
<PAGE>
Summary of Terms of New Notes
The Exchange Offer relates to the exchange of up to
$350,000,000 aggregate principal amount of Old Notes for up to an
equal aggregate principal amount of New Notes. The New Notes will
be entitled to the benefits of the same Indenture that governs
the Old Notes and that will govern the New Notes. The form and
terms of the New Notes are the same in all material respects as
the form and terms of the Old Notes, except that the New Notes
have been registered under the Securities Act and therefore will
not bear legends restricting the transfer thereof. See
"Description of the New Notes."
Maturity Date........... March 15, 2010.
Interest Payment Dates.. March 15 and September 15 of each year,
commencing September 15, 1998.
Optional Redemption..... The New Notes will be redeemable at the
option of the Company, in whole or in
part, at any time on or after March 15,
2003 at the redemption prices set forth
herein, plus accrued and unpaid
interest, if any, to the date of
redemption. In addition, up to 35.0% of
the original aggregate amount of the New
Notes may be redeemed from time to time
prior to March 15, 2001 at the
redemption price set forth herein, plus
accrued and unpaid interest, if any, to
the date of redemption, with the net
proceeds of one or more underwritten
primary public offerings of common stock
of Holdings or the Company, provided
that at least $227.5 million aggregate
principal amount of the New Notes
remains outstanding after each such
redemption. See "Description of the New
Notes-Optional Redemption."
Change of Control....... Upon a change of control (as defined),
each holder of New Notes may require the
Company to repurchase such holder's
outstanding Notes at 101% of the
principal amount thereof, plus accrued
and unpaid interest, if any, to the date
of repurchase. See "Description of the
New Notes-Change of Control."
Ranking................. The New Notes will be unsecured, will be
subordinated to all existing and future
senior indebtedness (as defined) of the
Company and will be structurally
subordinated to all obligations of the
subsidiaries of the Company. The New
Notes will rank equal to any future
senior subordinated indebtedness of the
Company and will rank senior to all
other subordinated indebtedness of the
Company. As of March 31, 1998, the
Company had approximately $206.9 million
of Senior Indebtedness, the Company's
subsidiaries had liabilities (including
trade payables but excluding guarantees
of the New Credit Facilities) of $0.3
million, and the Company had no other
senior subordinated indebtedness. The
Indenture governing the New Notes will
permit the Company to incur additional
indebtedness, subject to certain
limitations, and such indebtedness may
be senior indebtedness or indebtedness
of subsidiaries. See "Description of the
New Notes-Ranking" and "Unaudited Pro
Forma Financial Data."
9
<PAGE>
Restrictive Covenants... The Indenture under which the New Notes
will be issued will contain certain
covenants that limit (i) the issuance of
additional indebtedness by the Company,
(ii) the issuance of indebtedness and
preferred stock by the Company's
subsidiaries, (iii) the payment of
dividends on the capital stock of the
Company and its subsidiaries and the
purchase, redemption or retirement of
capital stock and certain indebtedness,
(iv) investments, (v) certain
transactions with affiliates, (vi) sales
of assets, including capital stock of
subsidiaries and (vii) certain
consolidations, mergers and transfers of
assets. The Indenture will also prohibit
certain restrictions on distributions
from subsidiaries. However, all of these
limitations are subject to a number of
important qualifications. See
"Description of the New Notes-Certain
Covenants."
Use of Proceeds
There will be no cash proceeds payable to the Company from
the issuance of the New Notes pursuant to the Exchange Offer. The
proceeds from the sale of the Old Notes were used to fund the
Transactions. See "Use of Proceeds" and "The Transactions."
Risk Factors
See "Risk Factors" for a discussion of certain factors that
should be considered in evaluating an investment in the Notes.
10
<PAGE>
Summary Historical Financial Data
The following table presents summary historical
consolidated financial data of the Company. The historical
unaudited financial data presented below for the three-month
period ended March 31, 1997, the seventy-one-day period ended
March 12, 1998 and the nineteen-day period ended March 31, 1998
were derived from interim consolidated financial statements of
the Company as of such dates which, in the opinion of management,
reflect all adjustments, consisting of only normal, recurring
adjustments, necessary for a fair presentation of such data and
which have been prepared in accordance with the same accounting
principles followed in the presentation of the Company's audited
financial statements for the fiscal year ended December 31, 1997.
Operating results for the three months ended March 31, 1998 are
not necessarily indicative of results to be expected for the full
fiscal year. The summary historical consolidated financial data
set forth below for the years ended December 31, 1995, 1996 and
1997 have been derived from the historical audited consolidated
financial statements of the Company for those years included
elsewhere herein (the "Consolidated Financial Statements"), which
have been audited by Deloitte & Touche LLP, independent auditors.
The summary historical consolidated financial data set forth
below for the year ended December 31, 1994 have been derived from
historical audited consolidated financial statements of the
Company not included in this Prospectus. Financial statements of
the Company for the year ended December 31, 1994 have been
audited by Deloitte & Touche LLP, independent auditors. The table
should be read in conjunction with, and is qualified by reference
to, the information set forth under "Selected Historical
Consolidated Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements of the Company and the
related notes thereto, in each case included elsewhere in this
Prospectus.
On March 15, 1995, the Company acquired all of the
operations of Golden Sun Feeds, Inc. The Company's statement of
operations data includes the operating results of these
operations since such date. See Note 1 of Notes to Consolidated
Financial Statements for the year ended December 31, 1997 for a
further discussion of the acquisition.
The summary unaudited pro forma operating data of the
Company for the year ended December 31, 1997 and the three months
ended March 31, 1998 have been derived from the unaudited pro
forma financial statements included elsewhere herein, and give
effect to the Transactions as if they had occurred on January 1,
1997 and January 1, 1998, respectively.
The summary unaudited pro forma financial data do not
purport to represent what would actually have been included in
the Company's financial statements at such dates had the
Transactions occurred as of the dates assumed or to project the
Company's financial position or results of operations at any
future date or for any future period. The pro forma financial
data in this table should be read in conjunction with "Unaudited
Pro Forma Financial Data," "Selected Historical Consolidated
Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the
Consolidated Financial Statements of the Company and the notes
thereto, in each case appearing elsewhere in this Prospectus.
11
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Actual Pro Forma
Three Actual Three
Months --------------------- Months
Actual Ended Jan. 1 to March 13 to Ended
-------------------------------------------- Pro Forma March 31, March 12, March 31, March 31,
1994 1995 1996 1997 1997(a) 1997 1998 1998 1998(a)
------------------------------------------------------------------------------------------------------------
Year Ended December 31,
------------------------------------------------------------------------------------------------------------
(Dollars in millions except per ton data)
Operating
Data(b):
Net sales .......... $1,016.4 $1,047.2 $1,212.2 $1,128.4 $1,128.4 $284.5 $214.3 $52.8 $267.1
Cost of
products
sold ............... 843.9 863.2 1,035.9 938.5 939.7 238.0 176.7 42.8 219.8
------------------------------------------------------------------------------------------------------------
Gross profit ....... 172.5 184.0 176.3 189.9 188.7 46.5 37.6 10.0 47.3
Other costs
and expenses:
Marketing,
distribution ....... 74.2 83.8 84.7 87.3 86.5 20.2 17.5 4.8 22.3
General and
administrative ..... 29.2 30.2 31.4 30.2 45.1 6.9 22.1 0.9 23.1
Research and
development ........ 6.3 6.7 7.0 7.2 7.3 1.6 1.4 0.3 1.7
------------------------------------------------------------------------------------------------------------
109.7 120.7 123.1 124.7 138.9 28.7 41.0 6.0 47.1
Provision for
asset write-
offs(c) ............ -- -- 14.0 4.4 4.4 -- -- -- --
Other expense
(income) -net(d) ... 0.7 0.1 (10.6) (4.5) (4.5) (1.6) -- 0.1 0.1
Amortization
of intangibles ..... 17.1 18.6 19.5 20.6 20.5 4.7 4.0 0.9 5.1
------------------------------------------------------------------------------------------------------------
127.5 139.4 146.0 145.2 159.3 31.8 45.0 7.0 52.3
------------------------------------------------------------------------------------------------------------
Operating
income (loss) ...... 45.0 44.6 30.3 44.7 29.4 14.7 (7.4) 3.0 (5.0)
Interest
expense ............ 34.0 37.5 35.7 32.6 48.7 8.4 6.1 2.8 12.1
------------------------------------------------------------------------------------------------------------
Income (loss)
before income
taxes .............. 11.0 7.1 (5.4) 12.1 (19.3) 6.3 (13.5) 0.2 (17.1)
Provision
(benefit) for
income taxes ....... 4.9 4.0 (0.6) 5.2 (5.1) 3.2 (5.0) 0.1 (5.9)
------------------------------------------------------------------------------------------------------------
Net income
(loss) ............. $6.1 $3.1 $(4.8) $6.9 $(14.2) $3.1 $(8.5) $0.1 $(11.2)
=============================================================================================================
Other Data:
Adjusted
EBITDA(e) .......... $88.8 $95.0 $93.5 $99.2 $100.8 $26.2 $18.2 $5.3 $23.6
Adjusted
EBITDA/
Interest
Expense ........... 2.6x 2.5x 2.6x 3.0x 2.1x 3.1x 3.0x 1.9x 2.0x
Total deprec-
iation and
amortization(f) .... $44.4 $48.1 $50.4 $49.6 $50.8 $12.1 $10.1 $2.3 $12.8
Capital
expenditures(g) .... 21.7 25.5 23.9 29.7 29.7 3.6 3.7 0.6 4.3
Cash provided
(used)-opera-
tions .............. 39.2 50.1 57.6 70.8 6.9 (37.4) 5.8
Cash provided
(used)-invest-
ing ................ (22.1) (82.9) (22.1) (29.3) (3.4) (4.3) (1.0)
Cash provided
(used)-finan-
cing ............... (28.6) 31.6 (31.5) (39.3) (3.9) 298.6 (287.3)
Total feed
shipments
(thousands of
tons) .............. 5,024 5,080 4,984 4,706 4,706 1,186 959 238 1,197
Average feed
IOIC ($ per
ton)(h) ............ $56.29 $60.29 $60.23 $65.08 $65.08 $64.09 $63.28 $63.28 $63.28
------------------------------------------------------------------------------------------------------------
Total feed
IOIC
$ millions)(h) ..... $282.8 $306.3 $300.2 $306.3 $306.3 $76.0 $60.7 $15.1 $75.8
Selected Ratios:
Ratio of
earnings to
fixed charges(i) ... 1.31x 1.18x 1.36x 1.72x 1.07x
Deficiency of
earnings to
cover fixed
charges(i) ......... 5.4 19.3 13.5 17.1
Balance Sheet
Data (at end of
period):
Working capital .... $9.6 $4.0 $21.1 $28.8 $31.6 $37.8
Property, plant
and equipment,
net ................ 256.4 266.8 250.6 243.7 244.3 267.5
Total assets ....... 563.9 632.2 606.1 581.9 582.1 791.9
Total long-term
debt ............... 306.2 338.3 319.1 282.3 315.2 550.3
Stockholder's
equity ............. 86.6 79.2 68.7 50.4 72.0 109.4
</TABLE>
(a) See "Unaudited Pro Forma Financial Data."
(b) The Company's statement of operations data include the
operating results of Golden Sun Feeds, Inc. since March 15,
1995.
(c) Provision for asset write-offs represents the noncash
write-down of net book value of closed facilities and the
write-down of other assets to net realizable value. During
1996, the Company closed seven feed plants and recorded a
corresponding loss of $14.0 million. The 1997 charges relate
to the write-down of the value of a feed supply agreement.
(d) Other expense (income)-net includes profit or loss on
marketing agreements and the production of eggs, hogs and
turkeys, interest
12
<PAGE>
income on customer accounts, fee income
for various agricultural services, equity income of less
than 50% owned subsidiaries and other costs or revenues. The
marketing agreements and the production of eggs, hogs and
turkeys resulted in losses of $4.1 million, $2.6million,
$0.5 million and $1.1 million in the years 1994, 1995, 1996
and 1997, respectively, and $0.4 million profit, $0.7
million lossand $0.5 million loss in the three-month period ended
March 31, 1997, the seventy-one-day period ended March 12, 1998
and the nineteen-day period ended March 31, 1998,
respectively. The 1996 amount also includes the proceeds
received in settlement of a claim for excess charges on raw
material purchases in prior years and the profit on the sale
of the Company's bromethaline inventory and related
trademark and other rights.
(e) Adjusted EBITDA as used in this Prospectus consists of
earnings before interest, income taxes, depreciation,
amortization, gains or losses on fixed asset dispositions or
write-downs, noncash compensation expense related to Stock
Units and the increase in value over cost of Holdings Common
Stock allocated to participants in the ESOP and
extraordinary gains, losses or expenses. Adjusted EBITDA
approximates EBITDA as defined in the Indenture, which is
used to calculate various ratios and financial covenants in
the Indenture. See "Description of the New Notes." Adjusted
EBITDA is presented because it may be used by investors as a
financial indicator of the Company's ability to service or
incur indebtedness. Detail regarding calculation of Adjusted
EBITDA is presented in the following table:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Janu- Janu- March
ary 1 ary 1 13 Pro
to to to Forma
Pro March March March March
Forma 31, 12, 31, 31,
1994 1995 1996 1997 1997 1997 1998 1998 1998
---- ---- ---- ---- ---- ---- ---- ---- ----
Operating
income ............ $45.0 $44.6 $30.3 $44.7 $29.4 $14.7 $(7.4) $3.0 $(5.0)
Depreciation
and
amortization ...... 44.4 48.1 50.4 49.6 50.8 12.1 10.1 2.3 12.8
Amortization
related to
deferred
financing
costs ............. (4.2) (3.7) (3.3) (2.9) (1.2) (0.8) (0.6) -- (0.3)
Losses
related to
asset
dispositions ...... 1.4 2.0 15.0 5.9 5.9 -- 0.2 -- 0.2
Noncash ESOP
valuation
charge and
Stock Units
expense ........... 2.2 4.0 1.1 1.9 -- 0.2 -- -- --
Nonrecurring
charge-
management
bonuse ............ 0.0 0.0 0.0 0.0 15.9 -- 15.9 -- 15.9
------ ------ ------ ------ ------ ------ ------ ------ ------
Adjusted
EBITDA ............ $88.8 $95.0 $93.5 $99.2 $100.8 $26.2 $18.2 $5.3 $23.6
</TABLE>
Adjusted EBITDA is not a measure of financial performance
determined in accordance with generally accepted accounting
principles, should not be considered as an alternative to
net income as a measure of performance or to cash flow as a
measure of liquidity, and is not necessarily comparable to
similarly titled measures of other companies.
(f) Total depreciation and amortization includes $4.2 million,
$3.7 million, $3.3 million, $2.9 million and $1.2 million in
amortization related to deferred financing costs and is
included in interest expense for the years 1994, 1995, 1996,
1997 and 1997 on a pro forma basis, respectively, and $0.8
million, $0.6 million and $0.3 million for the three-month
period ended March 31, 1997, the seventy-one-day period
ended March 12, 1998 and the three-month period ended March
31, 1998 on a pro forma basis, respectively.
(g) Capital expenditures include expenditures for capital asset
replacement, cost reductions, regulatory compliance, and
quality and service projects and capital spending projects
designed to increase manufacturing, warehousing,
transportation or other capacity or otherwise increase sales
volume and excludes $0.7 million allocated to goodwill in
1997.
(h) IOIC, or total income over ingredient cost, is equal to net
sales minus cost of ingredients. Although IOIC is not a
measure of financial performance determined in accordance
with generally accepted accounting principles, and should
not be considered as an alternative to gross profit as a
measure of performance, IOIC is an important indicator of
the Company's performance because of distortions in sales
dollars caused by changes in commodity prices and the
product mix purchased by the Company's customers. See
"Management's Discussion and Analysis of Financial Condition
and Results of Operations--Overview."
(i) For purposes of computing these ratios and amounts, earnings
consisted of income from continuing operations before income
taxes and fixed charges. Fixed charges consist of interest
expense on debt, amortization of financing costs and the
portion (approximately one-third) of rental expense that
management believes is representative of the interest
component of rental expenses.
13
<PAGE>
RISK FACTORS
Prospective purchasers of the New Notes should carefully
review the information contained and incorporated by reference in
this Prospectus and should particularly consider the following
matters:
Risk Factors Relating to the Company
Substantial Leverage
The Company is highly leveraged. In connection with the
Transactions, PMI incurred a significant amount of additional
indebtedness. As of March 31, 1998, PMI 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 Transactions, $559.9 million (83.6%)
was supplied by indebtedness and $109.7 million (16.4%) was
supplied by equity contributions. In addition, subject to the
restrictions in the New Credit Facilities and the Indenture, PMI
may incur additional indebtedness from time to time to finance
acquisitions or capital expenditures or for other general
corporate purposes. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Liquidity and
Capital Resources."
The degree to which PMI is leveraged could have important
consequences to the holders of the New Notes, including, but not
limited to, the following: (i) PMI's ability to obtain additional
financing in the future for working capital, capital
expenditures, acquisitions, general corporate purposes or other
purposes may be impaired; (ii) a significant portion of PMI's
cash flow from operations must be dedicated to the payment of
principal and interest on its indebtedness, thereby reducing the
funds available to PMI for its operations; (iii) certain of PMI's
borrowings will be at variable rates of interest, which could
result in higher interest expense in the event of increases in
interest rates; (iv) the Indenture and the New Credit Facilities
contain financial and restrictive covenants, the failure to
comply with which may result in an event of default which, if not
cured or waived, could have a material adverse effect on PMI; (v)
the indebtedness outstanding under the New Credit Facilities will
mature prior to the maturity of the New Notes; (vi) PMI may be
substantially more leveraged than certain of its competitors,
which may place PMI at a competitive disadvantage; and (vii)
PMI's substantial degree of leverage may limit its flexibility to
adjust to changing market conditions, reduce its ability to
withstand competitive pressures and make it more vulnerable to a
downturn in general economic conditions or its business. See
"Description of Certain Indebtedness" and "Description of the New
Notes."
Ability to Service Indebtedness
PMI's ability to make scheduled payments on or to refinance
its debt obligations will depend upon its future financial and
operating performance, which will be affected by prevailing
economic conditions and financial, business and other factors,
certain of which are beyond its control. There can be no
assurance that PMI's operating results, cash flow and capital
resources will be sufficient for payment of its indebtedness in
the future. In the absence of such operating results and
resources, PMI could face substantial liquidity problems and
might be required to dispose of material assets or operations to
meet its debt service and other obligations, and there can be no
assurance as to the timing of such sales or the proceeds that PMI
could realize therefrom. In addition, because certain of PMI's
obligations bear interest at floating rates, an increase in
interest rates could adversely affect, among other things, PMI's
ability to meet its debt service obligations. As of March 31,
1998, PMI had approximately $557.2 million of consolidated
indebtedness, of which approximately $206.9 million bears
interest at floating rates. PMI is required to make scheduled
principal payments under the New Credit Facilities commencing on
June 30, 1998. If PMI is unable to service its indebtedness, it
will be forced to adopt an alternative strategy that may include
actions such as reducing or delaying planned expansion and
capital expenditures, selling assets, restructuring or
refinancing its indebtedness or seeking additional equity
capital. There can be no assurance that any of these strategies
could be effected on satisfactory terms, if at all.
Competitive Industry Conditions
The commercial feed industry is highly competitive, and
there has been substantial excess capacity in the industry for
over 10 years. The excess capacity in the industry has led to
pressure on margins, particularly when the end-product prices of
animal producers and processors decline. The Company regularly
reevaluates its
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manufacturing facilities in light of changes in market conditions
and may incur restructuring charges if it needs to rationalize
and consolidate its manufacturing capacity further in light of
changes in industry demand.
Both the feed production and animal production industries
are consolidating, and this trend is expected to continue. To
date, the Company has been successful at generating business
directly from several large producers of animals. However, as
producers of animals increase in size, they historically have
tended to integrate their business by acquiring or constructing
their own feed production facilities to meet some or all of their
requirements and, consequently, have relied less on outside
suppliers of feed. As the consolidation of animal producers
continues, the available market for commercial feeds may shrink
if producers integrate their operations, which could lead to
increased competition among feed producers.
Most of the Company's competitors compete principally on
the basis of price. Certain animal producers purchase feed on
that basis without regard to the performance qualities of the
products. Although many of the Company's products tend to be
priced higher than alternative feed for the same animal species,
the Company believes that its products are cost-effective to use.
In addition, the 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 costs.
The competition in the industry also has led the Company
and some of its competitors to develop various market price risk
arrangements to promote sales. In some areas of the United
States, feed companies have increased the use of contracting for
livestock production to generate and control feed volume.
Although the Company does not enter into these arrangements as a
primary strategy, it enters into limited scale joint ventures for
animal production and marketing arrangements with animal
producers, which do expose the Company to limited risks
associated with the prices of those end products. In addition,
the Company offers various financing programs to its dealers and
direct customers. As of December 31, 1997, the Company's
promissory notes from and guaranties for the benefit of its
customers totaled approximately $22.1 million. There can be no
assurance that the Company will not be required to increase its
use of these or similar arrangements in response to competitive
pressures or that losses from these arrangements will not be
material. See "Business--Competition" and Note 12 of Notes to
Consolidated Financial Statements.
Seasonality
The Company's results of operations are seasonal, with a
higher percentage of its 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 cattle product lines. If the weather is particularly
warm during the winter, then sales of feed for cattle may
decrease as compared with normal seasonal patterns because the
cattle may be better able to graze under the 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.
Consumer Trends
The demand for the Company's primary products is influenced
by the strength of the animal production and processing
industries. Although consumer health concerns about meat, milk
and eggs could adversely affect those industries, the Company
believes that it is well positioned to capitalize on the
opportunity to meet changing consumer demands. Through its
research programs, the Company has successfully developed
products and programs that assist in the production of leaner,
healthier food products. There can be no assurance, however, that
the Company will not be adversely affected by increasing consumer
health concerns or changes in consumer preferences. See
"Business--Product Lines" and "Business--Regulation."
Regulatory Compliance
The Company's operations are subject to regulation by
federal and state agencies that administer laws governing health,
safety and the protection of the environment, including the U.S.
Food and Drug Administration (the "FDA") and the United States
Department of Agriculture (the "USDA"). The Company believes the
procedures currently in effect at its facilities are consistent
with industry practice and are in general compliance with
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such laws and regulations; however, future violations of such
laws, the enactment of stricter laws or regulations, or the
implementation of more aggressive enforcement policies could
adversely affect the Company's operations or financial condition.
See "Business--Regulation."
In particular, the Company is subject to federal, state and
local environmental laws and regulations involving the management
and disposal of solid animal waste material resulting from the
production, processing and preparation of foods. The Company
cannot guarantee that it will not incur liability for the
investigation and remediation of spills and other releases of
hazardous substances or that it will not in the future incur
significant costs in connection with compliance with
environmental laws and regulations at its facilities. See
"Business--Environmental."
Business Strategy Risks
The Company's business strategy includes diversifying its
production and distribution capabilities and expanding its
geographic reach, both domestically and internationally. The
Company intends to implement this strategy in part by making
acquisitions and/or developing strategic alliances. There can be
no assurance that the Company will be successful in identifying
appropriate acquisition candidates or joint venture partners or
in consummating such transactions, or that any newly acquired
companies or partners will be successfully integrated into the
Company's existing business. The Company may incur additional
indebtedness (which may be long-term), expend cash or use a
combination thereof for all or part of the consideration to be
paid in future acquisitions or joint ventures. While the Company
regularly evaluates potential acquisition opportunities, it has
no present commitments or agreements with respect to any material
acquisition or joint venture. There can also be no assurance that
the Company's other business strategies, such as its America's
Country Stores initiative to broaden its distribution network,
will result in the expected benefits or any benefits at all. See
"Business."
Control of the Company; Related Party Transactions
As a result of the Transactions, Koch Agriculture, through
its ownership of 100% of the voting stock of Holdings, controls
the Company and has the power, subject to the conditions and
limitations in the New Credit Facilities and the Indenture, to
elect all directors of the Company, approve all amendments to the
Company's charter documents and effect fundamental corporate
transactions such as mergers and asset sales. Since the date of
the Offering, the Board of Directors has not included any
independent directors and there can be no assurance that the
interests of Koch Agriculture will not conflict with the
interests of the holders of the New Notes. In addition, the
Company expects to enter into arrangements from time to time with
Koch Agriculture and its affiliates, including those relating to
commodity supply agreements and Koch Agriculture's Jet-Pro(R)
dewatering technology, among others. See "Ownership of Capital
Stock" and "Certain Relationships and Related Transactions."
Risk Factors Relating to the Notes and the Old Note Offering
Ranking of the Notes
The New Notes will be subordinated in right of payment to
all existing and future Senior Indebtedness (as defined in
"Description of the New Notes--Certain Definitions") of PMI,
including the New Credit Facilities. In the event of bankruptcy,
liquidation or reorganization of PMI, the assets of PMI will be
available to pay obligations on the New Notes only after all
Senior Indebtedness has been paid in full in cash, and there may
not be sufficient assets remaining to pay amounts due on any or
all of the New Notes then outstanding. In addition, under certain
circumstances, no payments may be made with respect to principal
of or interest on the New Notes if certain defaults exist with
respect to Senior Indebtedness. In addition, indebtedness
outstanding under the New Credit Facilities is secured by
substantially all of the assets of PMI. As of March 31, 1998, PMI
had approximately $206.9 million of Senior Indebtedness
(exclusive of unused commitments of $81.5 million). Additional
Senior Indebtedness may be incurred by PMI from time to time
subject to certain restrictions contained in the New Credit
Facilities and the Indenture. See "--Restrictive Debt Covenants,"
"Description of Certain Indebtedness" and "Description of the New
Notes."
The Notes will be also structurally subordinated to all
obligations of the subsidiaries of the Company. As of March 31,
1998, the Company's subsidiaries had liabilities (including trade
payables but excluding guarantees of the New Credit Facilities)
of $0.3 million. Each such subsidiary has agreed to guarantee
amounts borrowed by the
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Company under the New Credit Facilities ($206.9 million as of
March 31, 1998, exclusive of unused commitments of $81.5 million)
and such guarantee obligations are structurally senior to the
obligations of the Company represented by the Notes. The
Indenture governing the New Notes will permit the incurrence of
additional indebtedness, subject to certain limitations, and such
indebtedness may be indebtedness of subsidiaries.
Restrictive Debt Covenants
The Indenture and the New Credit Facilities contain a
number of significant covenants that, among other things,
restrict the ability of PMI and its subsidiaries to dispose of
assets, incur additional indebtedness, incur guarantee
obligations, repay other indebtedness or amend other debt
instruments, pay dividends, create liens on assets, enter into
leases, make investments, loans or advances, make acquisitions,
engage in mergers or consolidations, make capital expenditures,
engage in certain transactions with subsidiaries and affiliates
and otherwise restrict corporate activities. In addition, under
the New Credit Facilities, PMI is required to comply with
specified financial ratios and tests, including minimum EBITDA,
minimum net worth, minimum fixed charge coverage ratio and
maximum leverage ratio. See "Description of Certain Indebtedness"
and "Description of the New Notes."
PMI's ability to comply with such agreements may be
affected by events beyond its control, including prevailing
economic, financial and industry conditions. The breach of any of
such covenants or restrictions could result in a default under
the New Credit Facilities and/or the Indenture, which would
permit the senior lenders, or the holders of the New Notes, or
both, as the case may be, to declare all amounts borrowed
thereunder to be due and payable, together with accrued and
unpaid interest, and the commitments of the senior lenders to
make further extensions of credit under the New Credit Facilities
could be terminated. If PMI were unable to repay its indebtedness
to its senior lenders, such lenders could proceed against the
collateral securing such indebtedness as described under
"Description of Certain Indebtedness." See "--Ranking of the
Notes."
Fraudulent Conveyance Risks; Insolvency
The proceeds from the Offering were used, in part, to fund
the purchase of Holdings Common Stock, and Options and Stock
Units to purchase Holdings Common Stock, from Holdings' existing
shareholders. If a court of competent jurisdiction, in a lawsuit
brought by an unpaid creditor or representative of creditors,
such as a trustee in bankruptcy or PMI as a debtor in possession,
were to find that, at the time PMI issued the Old Notes, either
(a) PMI incurred such indebtedness with the intent of hindering,
delaying or defrauding creditors or (b) PMI received less than a
reasonably equivalent value or fair consideration for incurring
such indebtedness, and PMI (i) was insolvent at the time of
incurrence or rendered insolvent by reason of such incurrence
(and the application of the proceeds thereof), (ii) was engaged,
or about to engage, in a business or transactions for which its
assets constituted unreasonably small capital or (iii) intended
to incur, or believed that it would incur, debts beyond its
ability to pay as they matured (as the foregoing terms are
defined in or interpreted under the applicable fraudulent
conveyance statutes), such court could, subject to applicable
statutes of limitation, subordinate the Old Notes to presently
existing and future indebtedness of PMI or take other action
detrimental to the holders of the Old Notes, including, in
certain circumstances, invalidating the Old Notes.
The measure of insolvency for purposes of the foregoing
considerations will vary depending upon the federal or state law
that is being applied in any such proceeding. Generally, however,
PMI would be considered insolvent if, at the time PMI incurred or
incurs the indebtedness constituting the Old Notes, either (i)
the fair market value (or fair saleable value) of the assets of
PMI was or is less than the amount required to pay the probable
liability on its total existing liabilities (including contingent
liabilities) as they become absolute and matured or (ii) PMI was
or is incurring obligations beyond its ability to pay as such
obligations mature.
PMI believes that the indebtedness evidenced by the Old
Notes was incurred for proper purposes and in good faith, that it
received reasonably equivalent value or fair consideration for
the Old Notes and that at the time of the incurrence of such
indebtedness, PMI was solvent, had sufficient capital to carry on
its business and did not intend to incur or believe that it would
incur debts beyond its ability to pay as they mature or become
due. In reaching the foregoing conclusions, PMI has relied upon
its analyses of internal cash flow projections and estimated
value of assets and liabilities of PMI. No assurance can be
given, however, that a court would concur with such beliefs.
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A holder of the Old Notes cannot eliminate or reduce the
exposure to the fraudulent conveyance risks set forth above by
participating in the Exchange Offer. If a holder of Old Notes
participates in the Exchange Offer and receives New Notes in
exchange for Old Notes, a court could take action detrimental to
such holder of New Notes, based on the fraudulent conveyance
considerations set forth above, to the same extent that a court
could take action detrimental to any holder of Old Notes.
Limitation on Change of Control
Upon a Change of Control (as defined in "Desciption of the
New Notes--Change of Control")), each holder of the New Notes
will have the right to require PMI to repurchase such holder's
New Notes at a price equal to 101% of the principal amount
thereof to the date of repurchase plus accrued and unpaid
interest, if any, to the date of repurchase. The Change of
Control purchase feature of the New Notes may in certain
circumstances discourage or make more difficult a sale or
takeover of PMI or Holdings. In addition, a Change of Control may
cause an acceleration of, or require an offer to repurchase
under, the New Credit Facilities and other indebtedness, if any,
of PMI and its subsidiaries, in which case such indebtedness
would be required to be repaid in full before repurchase of the
New Notes. See "Description of Certain Indebtedness" and
"Description of the New Notes--Change of Control." The inability
to repay such indebtedness, if accelerated, and to purchase all
of the tendered New Notes would constitute an event of default
under the Indenture. There can be no assurance that PMI will have
funds available to repurchase the New Notes upon the occurrence
of a Change of Control.
Consequences of Failure to Exchange
Holders of Old Notes who do not exchange their Old Notes
for New Notes pursuant to the Exchange Offer will continue to be
subject to the restrictions on transfer of such Old Notes as set
forth in the legend thereon as a consequence of the issuance of
the Old Notes pursuant to exemptions from, or in transactions not
subject to, the registration requirements of the Securities Act
and applicable state securities laws. In general, the Old Notes
may not be offered or sold, unless registered under the
Securities Act and applicable state securities laws. The Company
does not currently anticipate that it will register the Old Notes
under the Securities Act. To the extent that the Old Notes are
tendered and accepted in the Exchange Offer, the trading market
for untendered and tendered but unaccepted Old Notes could be
adversely affected.
Absence of a Public Market for the New Notes
There is no existing market for the New Notes and, although
the Old Notes have been designated as eligible for trading in
PORTAL by "qualified institutional buyers" as defined in Rule
144A under the Securities Act, there can be no assurance as to
the liquidity of any markets that may develop for the New Notes,
the ability of holders of the New Notes to sell their New Notes,
or the price at which holders would be able to sell their New
Notes. Future trading prices of the New Notes will depend on many
factors, including, among other things, prevailing interest
rates, PMI's operating results and the market for similar
securities. The Initial Purchasers have previously made a market
in the Old Notes, and PMI has been advised that the Initial
Purchasers currently intend to make a market in the New Notes, as
permitted by applicable laws and regulations, after consummation
of the Exchange Offer. However, the Initial Purchasers are not
obligated to make a market in the Old Notes or the New Notes and
any market-making may be discontinued at any time without notice.
PMI does not intend to apply for listing of the New Notes on any
securities exchange. If an active public market does not develop
or continue, the market price and liquidity of the New Notes may
be adversely affected.
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THE TRANSACTIONS
The Merger
Pursuant to the Merger Agreement, and subject to the terms
and conditions thereof, immediately prior to the consummation of
the Offering and the New Credit Facilities, Merger Sub was merged
with and into Holdings, with Holdings being the surviving
corporation. As a result of the Merger, each share of Holdings
Common Stock outstanding immediately prior to the Effective Time
was canceled and converted into the right to receive an amount in
cash equal to $540 per share (the Merger Consideration), plus
interest calculated for a ten-day period for each Holdings Common
Stock certificate delivered less than two days prior to, but not
more than six months after, the consummation of the Merger. In
addition, pursuant to the Merger Agreement each outstanding
Option to purchase shares of Holdings Common Stock and each
outstanding Stock Unit (which entitled the holder thereof to
acquire Holdings Common Stock) became 100% vested. Option holders
received the Merger Consideration for each share of Holdings
Common Stock into which such Options were exercisable immediately
prior to the Effective Time, less the exercise price of such
Options. Stock Unit holders received the Merger Consideration for
each share of Holdings Common Stock into which such Stock Units
were exercisable immediately prior to the Effective Time. Such
Options and Stock Units issued and outstanding immediately prior
to the Effective Time were canceled and extinguished immediately
prior to the Effective Time. As a result of the Merger, Koch
Agriculture owns 100% of Holdings, which owns 100% of the
Company.
The total amount paid on consummation of the Merger was
approximately $258.7 million, consisting of approximately $245.2
million for the payment of the Merger Consideration to the
current holders of all shares of Holdings Common Stock and
approximately $13.5 million for the payment of the Merger
Consideration to the holders of Options and Stock Units.
Approximately $109.7 million of the total Merger Consideration
was funded by the Equity Contribution, with the remainder
(approximately $149.0 million) being funded from the proceeds of
the Offering and borrowings under the New Credit Facilities. See
"Use of Proceeds" and "--The Financing."
The Merger Agreement was approved and adopted by the
holders of a majority of the outstanding shares of Holdings
Common Stock at a stockholders meeting on March 2, 1998. In
connection with the Merger Agreement, holders of approximately
20% of the outstanding shares of Holdings Common Stock had prior
to such stockholders meeting executed the Voting Agreement
agreeing to vote in favor of the Merger.
The closing of the Offering was contingent upon the
consummation of the Merger and the New Credit Facilities. The
Existing Debt Securities tendered in the Tender Offers were
accepted for payment immediately after the consummation of the
Merger.
The Tender Offers
In connection with the Merger, (i) PMI offered to purchase
for cash any and all of the outstanding Existing PMI Senior
Subordinated Notes, guaranteed by Holdings, of which $190.0
million in aggregate principal amount was outstanding as of the
date of the Offering, and (ii) Holdings offered to purchase for
cash any and all of the outstanding Existing Holdings Discount
Debentures, of which $109.4 million in aggregate principal amount
at maturity was outstanding as of the date of the Offering.
Pursuant to an Offer to Purchase and Consent Solicitation
Statement (the "Statement"), the Tender Offers were commenced on
February 9, 1998 and expired on March 12, 1998, the date of the
consummation of the Merger.
In conjunction with the Tender Offers for the Existing Debt
Securities, PMI and Holdings solicited consents of registered
holders of the applicable series of Existing Debt Securities to
certain Proposed Amendments to eliminate substantially all of the
restrictive covenants in the indentures under which the
applicable series of Existing Debt Securities were issued, in
order to increase the financial flexibility of PMI and Holdings
after consummation of the Transactions. The Proposed Amendments
became operative immediately following the consummation of the
Merger when all of the Existing Holdings Discount Debentures and
all except $15,000 of the Existing PMI Senior Subordinated Notes
were accepted for payment.
The total consideration paid in connection with the Tender
Offers was approximately $293.5 million.
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The Tender Offers were conditioned upon the receipt by the
applicable issuer of tenders from at least a majority in
aggregate principal amount outstanding of each of the series of
Existing Debt Securities and delivery of the related consents,
the execution of supplemental indentures with respect to the
Proposed Amendments, the receipt of necessary financing to close
the Tender Offers (including pursuant to the Offering), the
consummation of the Merger and the satisfaction of certain
general conditions.
The Financing
In addition to the sale of the Notes, PMI satisfied the
cash funding requirements of the Merger and the Tender Offers,
additional working capital and other capital requirements through
the following: (i) the Equity Contribution by Koch Agriculture of
$109.7 million to Merger Sub and (ii) the New Credit Facilities,
consisting of $9.9 million of senior secured borrowings under the
New Revolving Credit Facility providing for up to $100.0 million
in revolving loans, $40.0 million of which may be used for
letters of credit, and borrowings of $200.0 million under the
Tranche A Term Loan and Tranche B Term Loan, each providing for
$100.0 million for a seven-year and nine-year period,
respectively. For a description of the New Revolving Credit
Facility and the Term Loans, see "Description of Certain
Indebtedness."
The following table sets forth the sources and uses of
funds in connection with the Transactions as they occurred on
March 12, 1998:
Amount
(In millions)
-------------
Sources of Funds:
New Credit Facilities:
New Revolving Credit Facility(a).............. $ 9.9
Term Loans(b)................................. 200.0
Notes offered hereby............................ 350.0
Equity Contribution to Holdings(c).............. 109.7
-------
Total sources.............................. $ 669.6
=======
Uses of Funds:
Purchase price for equity of Holdings(d)........ $258.7
Repayment of existing indebtedness(e)........... 385.5
Other payments, fees and expenses(f)............ 25.4
------
Total uses................................. $669.6
======
- -------------------
(a) The Company had $90.1 million of additional availability
under the New Revolving Credit Facility. See "Description of
Certain Indebtedness."
(b) Represents borrowing in full of the $100.0 million Tranche A
Term Loan and the $100.0 million Tranche B Term Loan. See
"Description of Certain Indebtedness."
(c) Reflects a contribution to the equity capital of Holdings by
Koch Agriculture.
(d) Includes $245.2 million of cash proceeds paid to holders of
Holdings Common Stock and $13.5 million of cash proceeds paid
to holders of Options to purchase Holdings Common Stock and
Stock Units exercisable for Holdings Common Stock.
(e) Includes approximately $90.5 million and approximately $203.0
million, respectively, required to fund the consummation of
the Tender Offers and the Consent Solicitations for the
Existing Holdings Discount Debentures and the Existing PMI
Senior Subordinated Notes, respectively. In addition,
includes approximately $92.0 million used to repay other
outstanding debt, consisting of approximately $17.4 million
of outstanding Industrial Revenue Bonds which were repaid
following the consummation of the Merger and approximately
$74.6 million used to repay an existing senior term loan. At
March 12, 1998, the Industrial Revenue Bonds had a weighted
average interest rate of 3.8% and were scheduled to mature in
part in 2020 and in full by 2022; the existing senior term
loan, with a 7.5% average interest rate, was scheduled to
mature in 2000.
(f) Fees and expenses include (i) the Initial Purchasers'
discount and other fees and expenses of the Offering, (ii)
financial consulting service fees to TSG of $6.5 million, and
reimbursement of expenses to TSG and (iii) fees and expenses
incurred in connection with the Transactions, including bank
fees, legal fees and accounting fees. See "Certain
Relationships and Related Transactions."
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USE OF PROCEEDS
There will be no cash proceeds payable to the Company from
the issuance of the New Notes pursuant to the Exchange Offer. In
consideration for issuing the New Notes as contemplated in this
Prospectus, the Company will receive in exchange Old Notes in
like principal amount, the terms of which are identical in all
material respects to the New Notes. The Old Notes surrendered in
exchange for the New Notes will be retired and canceled and
cannot be reissued. Accordingly, the issuance of the New Notes
will not result in any increase in the indebtedness of the
Company.
KOCH AGRICULTURE
In connection with the Merger, Koch Agriculture, the equity
sponsor, made a cash equity investment of $109.7 million in the
common stock of Merger Sub. As a result of the Merger, Koch
Agriculture owns 100% of Holdings, which owns 100% of the
Company. Koch Agriculture is a wholly owned subsidiary of Koch
Industries, which is one of the largest privately held
corporations in the United States. Koch Industries, based in
Wichita, Kansas, has annual revenues in excess of $35 billion
and, together with its subsidiaries, employs over 13,000 people
worldwide. Koch Agriculture and its affiliates are involved in
many aspects of the agriculture industry including cattle feeding
and meat production, the production and distribution of
fertilizers, agricultural commodity risk management and wheat
production and flour milling.
Koch Beef Company, a division of Koch Agriculture, engages
in beef production on ranches and in feedyards. Encompassing over
450,000 acres, Koch Beef Company is one of the top ten calf
producers in the United States. In addition, Koch Beef Company is
the tenth largest cattle feeding operator in the United States,
with a one-time feeding capacity of 160,000 head.
Koch Nitrogen Company, an affiliate of Koch Agriculture,
participates in the production, trading and distribution of
fertilizer and other agriculture chemicals. Koch Nitrogen Company
produces over one million metric tons of ammonia per year (which
accounts for approximately 6.5% of total U.S. production) at its
production facility in Sterlington, Louisiana. Another subsidiary
of Koch Industries owns and operates the largest ammonia pipeline
in the United States, consisting of approximately 2,000 miles of
pipeline stretching from the Gulf Coast to the upper Midwest.
In addition to its agricultural operations, Koch
Industries, together with its subsidiaries, is involved in
virtually all phases of the oil and gas industry, as well as in
chemicals, chemical technology products, energy services, asphalt
products, metals and mineral services, real estate and financial
investments.
None of Koch Agriculture, Koch Industries, Holdings or any
of their Affiliates (other than the Company) are parties to the
Indenture or responsible for, or guarantors of, any payments or
other claims in respect of the Notes or the Indenture.
The principal executive offices of Koch Agriculture and
Koch Industries are located at 4111 E. 37th Street North,
Wichita, Kansas 67220, and its telephone number is (316)
828-5500.
21
<PAGE>
CAPITALIZATION
The following table sets forth as of March 31, 1998 the
actual unaudited consolidated capitalization of the Company. See
"The Transactions," "Use of Proceeds," "Description of the New
Notes" and "Description of Certain Indebtedness." This table
should be read in conjunction with the "Unaudited Pro Forma
Financial Data," "Selected Historical Consolidated Financial
Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this
Prospectus.
As of
March 31, 1998
--------------
Actual
--------------
(In millions)
Total debt (including current portion):
New Revolving Credit Facility(a) ............... $ 6.9
Term Loans ..................................... 200.0
Existing PMI Senior Subordinated Notes(b) ...... --
The Notes ...................................... 350.0
Other debt ..................................... 0.3
------
Total debt ................................ 557.2
Stockholder's equity:
Common stock and paid-in capital ............... 109.3
Retained earnings .............................. 0.1
------
Total stockholder's equity ................ 109.4
------
Total capitalization ................... $ 666.6
======
- ---------------
(a) The Company has $81.5 million of additional availability
under the New Revolving Credit Facility. See "Selected
Historical Consolidated Financial Data" and "Description of
Certain Indebtedness."
(b) $15,000 of the Existing PMI Subordinated Notes were not
tendered for payment and remain outstanding.
22
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
As a result of the Merger, each share of Holdings Common
Stock outstanding immediately prior to the Effective Time was
canceled and converted into the right to receive an amount in
cash equal to $540 per share (the Merger Consideration). In
addition, Option holders received the Merger Consideration for
each share of Holdings Common Stock into which such Options were
exercisable immediately prior to the Effective Time, less the
exercise price of such Options, and Stock Unit holders received
the Merger Consideration for each share of Holdings Common Stock
into which such Stock Units were exercisable immediately prior to
the Effective Time. Such Options and Stock Units issued and
outstanding immediately prior to the Effective Time were canceled
and extinguished immediately prior to the Effective Time. The
total amount paid on consummation of the Merger was approximately
$258.7 million, consisting of approximately $245.2 million for
the payment of the Merger Consideration to the current holders of
all shares of Holdings Common Stock and approximately $13.5
million for the payment of the Merger Consideration to the
holders of Options and Stock Units. Approximately $109.7 million
of the total Merger Consideration was funded by the Equity
Contribution from Koch Agriculture, with the remainder
(approximately $149.0 million) of the Merger Consideration and
the Tender Offers being funded from the proceeds of the Offering
and borrowings under the New Credit Facilities. See "Use of
Proceeds" and "The Transactions--The Financing." As a result
of the Merger, Koch Agriculture owns 100% of Holdings, which owns
100% of the Company. The March 31, 1998 historical balance sheet
included in this Prospectus reflects the consummation of the
Transactions. See Note 1 of Notes to Consolidated Financial
Statements for the period ended March 31, 1998 for a discussion
of the Transactions
The following unaudited pro forma financial data (the "Pro
Forma Financial Data") present the pro forma consolidated
statement of operations of the Company for the year ended
December 31, 1997 and the three-month period ended March 31, 1998
as if the Transactions had been consummated on January 1, 1997
and January 1, 1998, respectively.
The Pro Forma Financial Data are based on the historical
financial statements of the Company and the assumptions and
adjustments described in the accompanying notes. The Company
believes that such assumptions are reasonable. The Pro Forma
Financial Data do not purport to represent what would actually
have been included in the Company's financial statements at such
dates had the Transactions occurred as of the dates assumed or to
project the Company's results of operations at any future date or
for any future period. The Pro Forma Financial Data should be
read in conjunction with "Capitalization," "Selected Historical
Consolidated Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements of the Company and the
accompanying notes thereto appearing elsewhere in this
Prospectus.
23
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
Pro Forma
Historical Adjustments Pro Forma
---------- ----------- ---------
(Dollars in millions)
Net sales............................. $1,128.4 $1,128.4
Cost of products sold................. 938.5 $2.5 (a) 939.7
(0.5)(b)
(0.8)(c)
---------- ------------ ----------
Gross Profit............... 189.9 (1.2) 188.7
Other costs and expenses:
Marketing, distribution and
advertising.................. 87.3 0.2 (a) 86.5
(0.4)(b)
(0.6)(c)
General and administrative...... 30.2 0.2 (a) 45.1
(0.1)(b)
(0.2)(c)
15.0 (d)
Amortization of intangibles..... 20.6 (0.1)(e) 20.5
Research and development........ 7.2 0.1 (a) 7.3
Provision for plant closings
and asset impairments........ 4.4 4.4
Other (income) expenses-net..... (4.5) (4.5)
---------- ------------ ----------
Operating income........... 44.7 (15.3) 29.4
Interest expense...................... 32.6 16.1 (f) 48.7
---------- ------------ ----------
Income (loss) before
income taxes............ 12.1 (31.4) (19.3)
Provision (benefit) for income taxes.. 5.2 (10.3)(g) (5.1)
---------- ------------ ----------
Net income (loss).......... $ 6.9 $(21.1) $ (14.2)
========== ============ ==========
Other Data:
EBITDA................................ $ 99.2 $ 100.8
EBITDA/Interest expense............... 3.0x 2.1x
Total depreciation and amortization... $ 49.6 $50.8(h)
Capital expenditures.................. 29.7 29.7
Total feed shipments (thousands of
tons).............................. 4,706 4,706
Average feed IOIC ($ per ton)......... $ 65.08 $ 65.08
---------- ------------ ----------
Total feed IOIC ($ millions).......... $ 306.3 $ 306.3
Selected Ratios:
Ratio of earnings to fixed charges.... 1.36x
Deficiency of earnings to
cover fixed charges................ 19.3
See accompanying notes.
24
<PAGE>
<TABLE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Three Months Ended March 31, 1998
Historical
----------------------------------
<CAPTION>
Three
January 1 March 13 Months Pro
to to Ended Forma
March 12, March 31, March Adjust- Pro
1998 1998 31, 1998 ments Forma
--------- ---------- --------- ------- -----
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
Net sales......................... $ 214.3 $ 52.8 $ 267.1 $ 267.1
Cost of products sold............. 176.7 42.9 219.6 $ 0.3 (a) 219.8
(0.1)(c)
--------- ------- --------- ---------- ----------
Gross Profit................. 37.6 9.9 47.5 (0.2) 47.3
Other costs and expenses:
Marketing, distribution and
advertising............... 17.5 4.8 22.3 22.3
General and administrative... 22.1 0.9 23.0 0.1 (a) 23.1
Amortization of intangibles.. 4.0 0.8 4.8 0.3 (e) 5.1
Research and development..... 1.4 0.3 1.7 1.7
Other (income) expenses-net.. -- 0.1 0.1 0.1
--------- ------- --------- ---------- ----------
Operating income (loss)...... (7.4) 3.0 (4.4) (0.6) (5.0)
Interest expense.................. 6.1 2.8 8.9 3.2 (f) 12.1
--------- ------- --------- ---------- ----------
Income (loss) before income
taxes..................... (13.5) 0.2 (13.3) (3.8) (17.1)
Provision (benefit) for income
taxes.......................... (5.0) 0.1 (4.9) (1.0)(g) (5.9)
--------- ------- --------- ---------- ----------
Net income (loss)............ $ (8.5) $ 0.1 $ (8.4) $(2.8) $ (11.2)
========= ======= ========= ========== ==========
Other Data:
EBITDA............................ $ 23.5 $ 23.6
EBITDA/Interest expense........... 2.6x 2.0x
Total depreciation and
amortization................... $ 12.4 $ 12.8 (h)
Capital expenditures.............. 4.3 4.3
Total feed shipments
(thousands of tons)............ 1,197 1,197
Average feed IOIC ($ per ton)..... $ 63.28 $ 63.28
--------- ------- --------- ---------- ----------
Total feed IOIC ($ millions) $ 75.8 $ 75.8
Selected Ratios:
Deficiency of earnings to
cover fixed charges............ 13.3 17.1
</TABLE>
See accompanying notes.
25
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in millions)
(a) Reflects the adjustment to depreciation resulting from
the preliminary purchase price allocation and the change in the
estimated useful lives of the corresponding property. Pro forma
depreciation is calculated based on estimated useful lives which
range from 3 to 30 years.
(b) Reflects the termination of the ESOP to satisfy a
condition to closing of the Merger Agreement and the resulting
decrease in compensation expense for the increase in value over
cost of Holdings Common Stock allocated to participants in the
ESOP.
(c) Reflects the reduction in post-retirement health care
costs to satisfy a condition to closing of the Merger Agreement.
(d) Reflects the payment of management bonuses, payments to
holders of Options and Stock Units plus related payroll taxes in
connection with the Merger.
(e) Reflects the adjustment to intangible asset
amortization resulting from the preliminary purchase price
allocation based on the estimated useful lives of the related
assets. Pro forma amortization of identifiable intangible assets
is calculated based on estimated useful lives which range from 5
to 15 years and is $13.9 and $3.4 for the year ended December 31,
1997 and the three-month period ended March 31, 1998,
respectively. Amortization of goodwill is calculated based on an
estimated useful life of 40 years and is $6.6 and $1.7 for the
year ended December 31, 1997 and the three-month period ended
March 31, 1998, respectively.
(f) Reflects interest expense related to the borrowings
under the New Revolving Credit Facility, the Term Loans and the
issuance of the Notes.
The following table summarizes the pro forma adjustment to
interest expense.
Three Months
Year Ended Ended
December 31, March 31,
1997 1998
------------ ------------
Pro forma interest expense:
New Revolving Credit Facility ......... $ 0.7 $ 0.2
Term Loans ............................ 15.3 3.8
The Notes ............................. 31.5 7.9
Amortization of debt issuance costs 1.2 0.3
-------- --------
Pro forma interest expense ................... 48.7 12.2
Historical interest expense .................. 32.6 9.0
-------- --------
Net interest expense adjustment .............. $ 16.1 $ 3.2
-------- --------
For purposes of the pro forma statements of operations, the
effective annual interest rate on the New Revolving Credit
Facility is assumed to equal 7.5%.
For purposes of the pro forma statements of operations, the
effective annual interest rate on the Term Loans is assumed to
equal 7.625%.
For purposes of the pro forma statements of operations, the
effective annual interest rate on the Notes is 9.0%.
A 0.125% change in the interest rates payable on the
outstanding balance under the New Revolving Credit Facility and
the Term Loans would change annual interest expense by $0.3
before the effect of income taxes.
(g) Income tax adjustments have been calculated using a
combined state and federal statutory income tax rate of
approximately 39.2%.
(h) Reflects the decrease in amortization of deferred
financing costs from $2.9 to $1.2 for the year ended December 31,
1997 and the decrease from $0.6 to $0.3 for the three-month
period ended March 31, 1998.
26
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forth selected historical
consolidated financial data of the Company. The historical
unaudited financial data presented below as of and for the
three-month period ended March 31, 1997, the seventy-one-day
period ended March 12, 1998 and as of and for the nineteen-day
period ended March 31, 1998 were derived from interim
consolidated financial statements of the Company as of such dates
which, in the opinion of management, reflect all adjustments,
consisting of only normal, recurring adjustments, necessary for a
fair presentation of such data and which have been prepared in
accordance with the same accounting principles followed in the
presentation of the Company's audited financial statements for
the fiscal year ended December 31, 1997. Operating results for
the three months ended March 31, 1998 are not necessarily
indicative of results to be expected for the full fiscal year.
The selected historical consolidated financial data set forth
below for the years ended December 31, 1995, 1996 and 1997 have
been derived from the Consolidated Financial Statements of the
Company included elsewhere herein, which have been audited by
Deloitte & Touche LLP, independent auditors. The historical
consolidated financial data set forth below for the periods ended
August 31, 1993 and December 31, 1993 and for the year ended
December 31, 1994 have been derived from historical audited
consolidated financial statements of the Company not included in
this Prospectus. Financial statements of the Company for the four
months ended December 31, 1993 and for the year ended December
31, 1994 have been audited by Deloitte & Touche LLP, independent
auditors, and financial statements for the eight months ended
August 31, 1993 have been audited by other independent auditors.
The table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the
Company and related notes and other financial information
included elsewhere in this Prospectus.
27
<PAGE>
<TABLE>
<CAPTION>
Eight Four
Months Months
Ended Ended
August December
31, 31, Year Ended December 31,
1993 1993 1994 1995 1996 1997
-------- -------- ---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Operating Data(a):
Net sales ........................... $594.9 $368.7 $1,016.4 $1,047.2 $1,212.2 $1,128.4
Cost of products sold ............... 496.0 302.6 843.9 863.2 1,035.9 938.5
------ ------ -------- -------- --------- --------
Gross profit ............. 98.9 66.1 172.5 184.0 176.3 189.9
Other costs and expenses:
Marketing, distribution ............. 38.1 21.9 74.2 83.8 84.7 87.3
General and administrative .......... 25.9 13.9 29.2 30.2 31.4 30.2
Research and development ............ 3.8 2.4 6.3 6.7 7.0 7.2
------ ------ -------- -------- --------- --------
67.8 38.2 109.7 120.7 123.1 124.7
Provision for asset write-offs(b) ... -- -- -- -- 14.0 4.4
Other expense (income)-net(c) ....... (1.5) 0.3 0.7 0.1 (10.6) (4.5)
Amortization of intangibles ......... 4.4 7.1 17.1 18.6 19.5 20.6
------ ------ -------- -------- --------- --------
70.7 45.6 127.5 139.4 146.0 145.2
------ ------ -------- -------- --------- --------
Operating income (loss) ............. 28.2 20.5 45.0 44.6 30.3 44.7
Interest expense .................... 3.4 10.3 34.0 37.5 35.7 32.6
------ ------ -------- -------- --------- --------
Income (loss) before income taxes ... 24.8 10.2 11.0 7.1 (5.4) 12.1
Provision (benefit) for income taxes 10.0 4.0 4.9 4.0 (0.6) 5.2
------ ------ -------- -------- --------- --------
Net income (loss) ................... $14.8 $6.2 $6.1 $3.1 $(4.8) $6.9
====== ====== ======== ======== ========= ========
Other Data:
Adjusted EBITDA(d) .................. $51.4 $35.0 $88.8 $95.0 $93.5 $99.2
Adjusted EBITDA/Interest expense(d) 15.1x 3.4x 2.6x 2.5x 2.6x 3.0x
Total depreciation and
amortization(e) .................. $24.1 $15.1 $44.4 $48.1 $50.4 $49.6
Capital expenditures(f) ............. 14.7 5.8 21.7 25.5 23.9 29.7
Cash provided (used)-operations ..... 46.6 63.1 39.2 50.1 57.6 70.8
Cash provided (used)-investing ...... (6.0) (419.6) (22.1) (82.9) (22.1) (29.3)
Cash provided (used)-financing ...... (50.0) 390.5 (28.6) 31.6 (31.5) (39.3)
Selected Ratios:
Ratio of earnings to fixed
charges(g)........................ 6.90x 1.96x 1.31x 1.18x 1.36x
Deficiency of earnings to cover
fixed charges(g) ................. 5.4
Balance Sheet Data (at end of
period):
Working capital ..................... $53.5 $11.1 $9.6 $4.0 $21.1 $28.8
Property, plants and equipment,
net............................... 261.6 261.3 256.4 266.8 250.6 243.7
Total assets ........................ 494.6 591.3 563.9 632.2 606.1 581.9
Total long-term debt ................ 117.6 334.3 306.2 338.3 319.1 282.3
Stockholder's equity ................ 235.2 85.5 86.6 79.2 68.7 50.4
Three
Months January
Ended 1 to March 13
March 31, March 12, to March
1997 1998 31, 1998
-------- -------- --------
(Dollars in millions)
Operating Data(a):
Net sales ........................... $284.5 $214.3 $52.8
Cost of products sold ............... 238.0 176.7 42.8
------ ------- --------
Gross profit ............. 46.5 37.6 10.0
Other costs and expenses:
Marketing, distribution ............. 20.2 17.5 4.8
General and administrative .......... 6.9 22.1 0.9
Research and development ............ 1.6 1.4 0.3
------ ------- --------
28.7 41.0 6.0
Provision for asset write-offs(b) ... -- -- --
Other expense (income)-net(c) ....... (1.6) -- 0.1
Amortization of intangibles ......... 4.7 4.0 0.9
------ ------- --------
31.8 45.0 7.0
Operating income (loss) ............. 14.7 (7.4) 3.0
Interest expense .................... 8.4 6.1 2.8
------ ------- --------
Income (loss) before income taxes ... 6.3 (13.5) 0.2
Provision (benefit) for income taxes 3.2 (5.0) 0.1
------ ------- --------
Net income (loss) ................... $3.1 $(8.5) $0.1
------ ------- --------
Other Data:
EBITDA(d) ........................... $26.2 $18.2 $5.3
EBITDA/Interest expense(d) .......... 3.1x 3.0x 1.9x
Total depreciation and
amortization(e) .................. $12.1 $10.1 $2.3
Capital expenditures(f) ............. 3.6 3.7 0.6
Cash provided (used)-operations ..... 6.9 (37.4) 5.8
Cash provided (used)-investing ...... (3.4) (4.3) (1.0)
Cash provided (used)-financing ...... (3.9) 298.6 (287.3)
Selected Ratios:
Ratio of earnings to fixed
charges(g)........................ 1.72x 1.07
Deficiency of earnings to cover
fixed charges(g) ................. 13.5
Balance Sheet Data (at end of
period):
Working capital ..................... $31.6 $37.8
Property, plants and equipment,
net............................... 244.3 267.5
Total assets ........................ 582.1 791.9
Total long-term debt ................ 315.2 550.3
Stockholder's equity ................ 72.0 109.4
</TABLE>
- -----------------
(a) The Company's statement of operations data include the
operating results of Golden Sun Feeds, Inc. since
March 15, 1995.
(b) Provision for asset write-offs represents the noncash
write-down of net book value of closed facilities and the
write-down of other assets to net realizable value. During
1996, the Company closed seven feed plants and recorded a
corresponding loss of $14.0 million. The
28
<PAGE>
1997 charges relate to the write-down of the value of a feed
supply agreement.
(c) Other expense (income)-net includes profit or loss on
marketing agreements and the production of eggs, hogs and
turkeys, interest income on customer accounts, fee income for
various agricultural services, equity income of less than 50%
owned subsidiaries and other costs or revenues. The marketing
agreements and the production of eggs, hogs and turkeys
resulted in income of $0.8 million for the eight months ended
August 31, 1993 and losses of $1.1 million, $4.1 million,
$2.6 million, $0.5 million and $1.1 million in the four
months ended December 31, 1993 and the years, 1994, 1995,
1996 and 1997, respectively, and $0.4 million profit, $0.7
million loss and $0.5 million loss in the three-month period
ended March 31, 1997, the seventy-one-day period ended March
12, 1998 and the nineteen-day period ended March 31, 1998,
respectively. The 1996 amount also includes the proceeds
received in settlement of a claim for excess charges on raw
material purchases in prior years and the profit on the sale
of the Company's bromethaline inventory and related trademark
and other rights.
(d) Adjusted EBITDA as used in this Prospectus consists of
earnings before interest, income taxes, depreciation,
amortization, gains or losses on fixed asset dispositions or
write-downs, noncash compensation expense related to Stock
Units and the increase in value over cost of Holdings Stock
allocated to participants in the ESOP and extraordinary
gains, losses or expenses. Adjusted EBITDA approximates
EBITDA as defined in the Indenture, which is used to
calculate various ratios and financial covenants in the
Indenture. See "Description of the New Notes." Adjusted
EBITDA is presented because it may be used by investors as a
financial indicator of the Company's ability to service or
incur indebtedness. Detail regarding calculation of Adjusted
EBITDA is presented in the following table:
<TABLE>
<CAPTION>
January January
1 to 1 to March 13 to
March 31, March 12, March 31,
1994 1995 1996 1997 1997 1998 1998
---- ---- ---- ---- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating income .................................... $45.0 $44.6 $30.3 $44.7 $14.7 $(7.4) $3.0
Depreciation and amortization ....................... 44.4 48.1 50.4 49.6 12.1 10.1 2.3
Amortization related to deferred
financing costs ..................................... (4.2) (3.7) (3.3) (2.9) (0.8) (0.6) --
Losses related to asset dispositions ................ 1.4 2.0 15.0 5.9 -- 0.2 --
Noncash ESOP valuation charge and
Stock Units expense.................................. 2.2 4.0 1.1 1.9 0.2 -- --
Nonrecurring charge-management bonuses .............. 0.0 0.0 0.0 0.0 -- 15.9 --
----- ----- ----- ----- ----- ----- -----
Adjusted
EBITDA .............................................. $88.8 $95.0 $93.5 $99.2 $26.2 $18.2 $5.3
</TABLE>
Adjusted EBITDA is not a measure of financial performance
determined in accordance with generally accepted accounting
principles, should not be considered as an alternative to
net income as a measure of performance or to cash flow as a
measure of liquidity, and is not necessarily comparable to
similarly titled measures of other companies.
(e) Total depreciation and amortization includes $0.7
million, $4.2 million, $3.7 million, $3.3 million, $2.9
million and $1.2 million in amortization related to deferred
financing costs and is included in interest expense for the
four months ended December 31, 1993 and the years 1994,
1995, 1996 and 1997, respectively, and $0.8 million and $0.6
million for the three-month period ended March 31, 1997 and
the seventy-one-day period ended March 12, 1998,
respectively. No amortization related to deferred financing
costs existed for the eight months ended August 31, 1993 or
the nineteen-day period ended March 31, 1998.
(f) Capital expenditures includes expenditures for capital
asset replacement, cost reductions, regulatory compliance,
and quality and service projects and capital spending
projects designed to increase manufacturing, warehousing,
transportation or other capacity or otherwise increase sales
volume and excludes $0.7 million allocated to goodwill in
1997.
(g) For purposes of computing these ratios and amounts,
earnings consisted of income from continuing operations
before income taxes and fixed charges. Fixed charges consist
of interest expense on debt, amortization of financing costs
and the portion (approximately one-third) of rental expense
that management believes is representative of the interest
component of rental expenses.
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion summarizes the significant factors
affecting the consolidated operating results, financial condition
and liquidity of the Company during the three-month periods ended
March 31, 1997 and 1998, and the three-year period ended December
31, 1997. This discussion should be read in conjunction with the
unaudited consolidated financial statements of the Company for
the three-month periods ended March 31, 1997 and 1998 and the
audited consolidated financial statements of the Company for the
three-year period ended December 31, 1997 and notes thereto
included elsewhere in this Prospectus.
Overview
The feed industry generally prices products on the basis of
aggregate ingredient cost plus a dollar based margin, rather than
a gross margin percentage. As ingredient prices fluctuate, the
changes are generally passed on to customers through weekly
changes in the Company's price lists. Feed tonnage, total income
over ingredient cost ("IOIC") (which is equal to net sales minus
cost of ingredients) and gross profit dollars (IOIC less
manufacturing costs), rather than sales dollars, are the key
indicators of performance because of the distortions in sales
dollars caused by changes in commodity prices, as well as changes
in product mix between complete feed and concentrate products, to
which customers add their own base ingredients such as corn and
other grains.
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. 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 concentrate products, resulting in lower sales tonnage
volume but higher overall unit margins. While the mix of complete
and concentrate product sales varies from period to period
depending on grain prices, the offsetting effects of volume and
unit margins have tended to stabilize total IOIC and gross profit
dollars. Consequently, the Company's total IOIC and gross profit
dollars have remained relatively stable over the past decade. The
Company's diversification across a broad range of different
animal species and geographic regions has also contributed to
this stability. When market prices for live animals and animal
products are low, animal producers may reduce production and
search for lower-cost feed alternatives. The Company maintains a
line of economy products while emphasizing the relative value of
its high-performance, value-added products.
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. In
addition, the Company believes that its strong leadership
position in research and technology will enable it to grow its
total IOIC from the commercial market segment more effectively
than others in 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
does not enter into these types of arrangements as a primary
strategy, but has entered into several production and marketing
joint venture arrangements with its animal production customers.
At December 31, 1997 and March 31, 1998, the Company's investment
in such joint ventures was approximately $2.3 million and $1.9
million, respectively. In addition, the Company offers various
financing programs to its dealers and customers. See "--Loan
Guarantees."
The outlook for the horse and retail specialty market is
positive. The Company believes that owners of horses, pets and
other companion animals make buying decisions based on different
criteria than commercial producers. Typically, brand awareness,
quality and convenience are important. As more people migrate to
"ruralpolitan" areas and disposable incomes increase, the Company
believes that its high margin horse and retail specialty product
lines will continue to grow. The Company believes that its brand
recognition, coupled with the most extensive retail dealer
network in the country, position the Company well to capitalize
on the anticipated growth in this market segment.
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The Company regularly reviews the performance of its
facilities to attempt to optimize overall capacity and maximize
profits. As a result, in 1996 the Company made a decision to
discontinue all manufacturing operations at seven facilities and
recorded a loss provision for plant closings of $14.0 million.
Except for an estimated $0.8 million of demolition costs, the
loss represents a noncash cost that is estimated to reduce
overall cash operating costs by approximately $2.0 million
annually. See Note 4 of Notes to Consolidated Financial
Statements for a further discussion of the plant closings.
On March 15, 1995, the Company acquired all of the
outstanding capital stock of Golden Sun Acquisition Company
("Golden Sun"). Golden Sun is the parent company of Golden Sun
Feeds, Inc. and its wholly owned
subsidiaries. The consideration for the acquisition, including
applicable fees, consisted of $62.0 million in cash; 15,000
shares of Holdings Common Stock; and additional payments to be
made to the Golden Sun shareholders during the five years
following closing. The additional payments are based on the
volume of sales, up to a specified cumulative maximum amount,
made pursuant to a supply agreement with a customer during the
five-year period. See Note 5 of Notes to Consolidated Financial
Statements for a further discussion of this feed supply
agreement. No additional payments were made in 1997 and none are
expected to be made in the future. All funds required to
consummate the acquisition were borrowed under the Company's
existing credit arrangements (the "Existing Credit Agreement").
The Company's statement of operations data reflect the operating
results of Golden Sun since March 15, 1995.
As a result of the March 12, 1998 acquisition by Koch
Agriculture, a wholly owned subsidiary of Koch Industries, the
Company expects to realize certain benefits in areas of commodity
purchasing, technology and operations. The Company has entered
into an exclusive commodity purchasing agreement with a division
of Koch Agriculture in connection with which it has transferred
all of its commodity purchasing operations to Koch Agriculture.
The Company believes it will benefit from lower overall commodity
prices as a result of this arrangement. See "Business--Business
Strategy." In addition, the Company has entered into an agreement
with a subsidiary of Koch Agriculture permitting the Company to
use its patented Jet-Pro(R) dewatering technology at selected
facilities of the Company. The Jet-Pro(R) technology is expected
to enable the Company to identify and create potential new
substitute or complementary feed ingredients and thereby help to
decrease total ingredient costs for the Company. See
"Business--Business Strategy."
Results of Operations
Three Months Ended March 31, 1998 Compared to Three Months
Ended March 31, 1997
Due to overall lower commodity prices, net sales decreased
6.1% from the 1997 period. However, gross profit remained fairly
constant totaling $47.5 million for the three-month period ended
March 31, 1998, versus $46.5 million for the comparable 1997
period. Overall volume was 1.20 million tons during the first
quarter of 1998, a 1.0% increase from the 1997 period. Average
IOIC per ton was $63.28, a 1.2% decrease from the three-month
period ended March 31, 1997, primarily as a result of a decrease
in beef cattle IOIC.
Beef cattle tons increased 3.6% over the 1997 period due to
increased sales in the feedlot business. However, IOIC decreased
4.0% due to lower ingredient profits and intense competition for
the cattle feed business. Dairy cattle tons decreased 4.3% due to
some product mix switch to concentrates and excellent pasture
conditions. Dairy IOIC decreased 3.9% due primarily to the
decrease in volume. Hog volume was consistent with the 1997
period, however, IOIC increased 3.5% due to a product mix switch
to concentrates.
Horse volume and IOIC increased 9.0% and 8.3%, respectively
over the 1997 period. The success in growing this business was
the result of aggressive promotion of products. Laying chicken
and meatbird volume increased 4.5% over 1997 but IOIC decreased
4.6% due to increased sales of lower margin duck feed. Specialty
and other volume and IOIC decreased 1.1% and 0.3%, respectively,
from 1997.
Cost of products sold decreased $18.4 million, or 7.7% from
1997, due primarily to the $18.2 million decrease in ingredient
costs. Manufacturing expenses remained consistent with the 1997
period as overall volume remained constant. Marketing,
distribution and advertising costs increased $2.2 million from
1997 due primarily to an increase in the sales force and costs
associated with the roll out of the America's Country Stores.
General and administrative expenses increased $16.1 million due
primarily to the $15.9 million of compensation paid to
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management and holders of Options and Stock Units as a part of
the Merger. Amortization of intangibles and research and
development costs remained consistent with the 1997 period.
Other income, net for the three-months ended March 31, 1998
related to service fees for swine and dairy management and
marketing arrangements and profit or loss on the production of
eggs, hogs and turkeys. The decrease in other income of $1.7
million was primarily attributed to a decrease of $1.6 million on
the production of eggs, hogs and turkeys. This decrease is due to
the decline in the market price for hogs and eggs.
Interest expense for 1998 increased $0.6 million as a
result of the increase in the outstanding debt due to the New
Credit Facility and the Senior Subordinated Notes due 2010. The
Company's effective income tax rate exceeded the statutory rate
in 1997 due to amortization of goodwill not being allowed as a
tax deduction. The deferred tax assets are fully realizable and
no allowance is deemed necessary based on the Company's analysis
and its history of significant operating profits.
Year Ended December 31, 1997 Compared to Year Ended
December 31, 1996
Due to overall lower commodity prices, net sales decreased
6.9% in 1997. However, gross profit increased $13.6 million in
1997, or 7.7% over 1996. Overall volume was 4.71 million tons for
the year ended December 31, 1997, a 5.6% decrease from 1996. The
decrease in volume was attributable to a decrease in animal
numbers, a switch to more concentrates and consolidation in the hog
industry. Average feed IOIC per ton was $65.08 for 1997,
an 8.1% increase over the year ended December 31, 1996. The
increase in average feed IOIC per ton was attributable to a shift
to the purchase of concentrates and improved higher value
products.
For 1997, beef cattle tons decreased 6.7% from 1996 due
primarily to reduced animal numbers and excellent pasture
conditions. However, IOIC increased 2.7% as customers switched to
improved higher value products with higher margins. Dairy cattle
tons decreased 8.9% from 1996 to 1997, though IOIC actually
increased as a result of some product mix switch to concentrates.
Hog volume decreased 10.4% with IOIC also decreasing 4.3%. This
decrease in hog volume and IOIC was primarily attributable to a
former customer discontinuing its purchase of feed under a feed
supply agreement and continued consolidation in the hog industry.
Horse volume and IOIC increased 10.6% and 16.3%,
respectively, over 1996. The Company's success in continuing to
grow this business was the result of the aggressive promotion of
these products resulting in an increase in market share. Laying
chicken and meatbird volume increased 1.9% over 1996 but IOIC
decreased 6.4% due to increased sales of lower margin duck feed.
Specialty and other volume decreased 1.8% from 1996, but IOIC
increased 2.1% due to a shift in product mix.
Cost of products sold decreased $97.4 million in 1997, or
9.4% from 1996, due primarily to the $95.1 million decrease in
ingredient costs. Manufacturing expenses also decreased $2.3
million due to reduced volume and the cost savings realized as a
result of closing seven plants in late 1996. Marketing,
distribution and advertising costs increased $2.6 million from
1996 due primarily to an increase in field selling costs. General
and administrative expenses decreased $1.2 million due primarily
to reduced severance costs and continued emphasis on cost
control.
The increase in amortization of intangibles for 1997
reflected additional amortization related to a decrease in the
estimated value of a feed supply contract with a former customer,
for which the Company recorded a $4.4 million loss provision in
1997. See Note 5 of Notes to Consolidated Financial Statements
for a further discussion of the write-down of the feed supply
contract in 1997.
Research and development costs increased $0.2 million in
1997, or 2.6% from 1996, as the Company continued its emphasis on
research and enhancement of products.
Other income, net for 1997 related to service fees for
swine and dairy management and marketing arrangements and the
profit or loss on the production of eggs, hogs and turkeys. These
service fees, profits and losses for 1997 were comparable to the
1996 amounts except that other income for 1996 also reflected the
proceeds received in settlement of claims for excess charges on
raw material purchases in prior years and profit on the sale of
the Company's bromethaline inventory and related trademark and
other rights.
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Interest expense for 1997 decreased as a result of the
decrease in outstanding debt, offset partially by the premium
paid on the extinguishment of $10.0 million of the Existing PMI
Senior Subordinated Notes.
The Company's effective income tax rate exceeded the
statutory rate in both 1996 and 1997 due to amortization of
goodwill not being allowed as a tax deduction. The deferred tax
assets are fully realizable and no valuation allowance is deemed
necessary based on the Company's analysis and its history of
significant operating profits.
Year Ended December 31, 1996 Compared to Year Ended
December 31, 1995
During 1996, the Company experienced extreme volatility in
commodity prices with some prices breaking all time record highs
before declining again later in the year. As a result, 1996 net
sales increased 15.8% even though volume decreased 1.9% from the
1995 level to just under 5.0 million tons. Gross profit equaled
$176.3 million in 1996, a decrease of 4.1% from the 1995 amount
of $183.9 million. Overall average IOIC per ton was $60.23, a
modest 0.4% increase over the 1995 amount. The high commodity
prices combined with the low market price of cattle resulted in
reduced animal numbers, margin pressures and declines in feeding
rates in 1996 as compared to 1995.
Beef cattle tons decreased 7.1% from the 1995 amount due
primarily to the reduced animal numbers, which severely impacted
third and fourth quarter 1996 volume. Hog volume increased 1.2%
over 1995 due primarily to the product mix shift toward complete
products. Dairy cattle and poultry tons remained constant as
reduced feeding rates were offset by the switch to more complete
products. Horse volume continued its recent growth trend with a
6.9% increase, the fifth consecutive year of increase and a new
record high in volume. Specialty and other volume decreased 5.7%
from 1995 due to reduced animal numbers and feeding rates.
Cost of products sold increased 20.0% in 1996 from the 1995
amount, reflecting the unusually large increase in commodity
prices in 1996. Manufacturing costs decreased 2.1% from the 1995
amount primarily due to the decreased volume. Marketing costs
increased $0.9 million due to the inclusion of the Golden Sun
sales force for the entire twelve months in 1996. General and
administrative expenses increased $1.2 million for 1996, as a
$2.8 million increase in bad debt and severance expense more than
offset the other overall reduction in administrative costs.
The increase in amortization of intangibles for 1996
reflected a full year of expense attributable to the intangible
assets recorded in the allocation of the purchase price
associated with the Golden Sun acquisition, versus only nine and
one-half months in 1995. Research and development costs increased
$0.2 million in 1996, or 3.5% from 1995, as the Company continued
its emphasis in this area for development or enhancement of
products.
Other income, net for 1996 reflected the $3.2 million
increase in income over 1995 related to service fees for swine
and dairy management, marketing arrangements and the profit or
loss on the production of eggs, hogs and turkeys. The increase
was attributable to higher prices for the livestock and eggs plus
expansion of the Company's service business. Other income, net
for 1996 also reflected the 35.1% increase in profitability in
the Company's equity in earnings of two joint venture feed
manufacturing operations. Finally, the 1996 amount reflected the
profit on the sale of the Company's inventory, trademark and
other rights associated with a discontinued product line,
bromethaline, and the proceeds received in settlement of a claim
for excess charges on raw material purchases in prior years.
Interest expense for 1996 decreased as the Company repaid
$27.0 million in term loans. Additionally, the average interest
rate on the Company's outstanding debt decreased 0.6% in 1996 as
compared to 1995. The Company's effective income tax rate
exceeded the statutory rate in both 1996 and 1995 due to the
amortization of goodwill not being deductible for tax purposes.
The deferred tax assets are fully realizable and no valuation
allowance is deemed necessary based on the Company's analysis and
its history of significant operating profits.
Seasonality
The Company's business is seasonal, with a higher
percentage of the feed volume sold and earnings generated during
the first and fourth quarters of the year. This seasonality is
driven largely by weather conditions affecting the Company's
cattle product lines. If the weather is particularly cold and wet
during the winter, sales of
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feed for cattle increase as compared with normal seasonal
patterns because the cattle are unable to graze under those
conditions and have higher nutritional requirements. If the
weather is relatively warm during the winter, sales of feed for
cattle may decrease as compared with normal seasonal patterns
because the cattle may be better able to graze under such
conditions. Other product lines are affected marginally by
seasonal conditions but these conditions do not materially affect
the Company's quarter-by-quarter results of operations.
Liquidity and Capital Resources
Historical
For the year ended December 31, 1997, net cash provided by
operations before the effects of changes in operating assets and
liabilities was $67.4 million, compared to $60.5 million in 1996
and $61.0 million in 1995.
Net cash used in investing activities, excluding cash paid
for acquired businesses, was $29.3 million in 1997, $22.1 million
in 1996 and $25.8 million in 1995. These amounts consisted
primarily of purchases of property, plant and equipment, which
totaled $29.7 million in 1997, $23.9 million in 1996 and $25.5
million in 1995. In 1997, capital expenditures included
approximately $14.5 million for construction of new plants in
Lubbock, Texas and Hagerstown, Maryland. The 1997 increase in net
cash used in investing activities over the 1996 amount was also
attributable to costs incurred to date to purchase and implement
an enhanced accounting and information reporting system. The
Company makes expenditures that it believes are necessary to
fulfill its environmental compliance practices. See
"Business--Environmental." Capital expenditures for environmental
control facilities to maintain compliance with environmental
regulations are included in the Company's overall capital budget
and, together with other environmental related costs, were less
than $1 million in 1997, 1996 and 1995. The 1996 decrease from
the 1995 net cash used in investing activities amount reflected
the decision to close seven facilities, thereby reducing
replacement capital.
Net cash used by financing activities in 1997 included the
repayment under the Existing Credit Agreement of $26.4 million in
term loans and the extinguishment of $10.0 million of the
Existing PMI Senior Subordinated Notes. Additionally, in 1997 the
Company loaned $1.2 million to the ESOP for the purchase of
shares of Holdings Common Stock from existing shareholders. In
1996, net cash used in financing included the repayment under the
Existing Credit Agreement of $27.0 million in term loans and $6.0
million under the revolving credit facility. Additionally, in
1996, the Company loaned $6.3 million to the ESOP for the
purchase of Holdings Common Stock and received proceeds of $8.3
million from the sale of industrial revenue bonds to finance the
construction of a new manufacturing facility in Hagerstown,
Maryland.
At December 31, 1997, the Company had $27.6 million in cash
and cash equivalents on hand, and approximately $27.9 million
(after giving effect to borrowing base limitations) was available
for borrowing under the Company's revolving credit facility under
the Existing Credit Agreement. 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
(where approximately 62.8% of the Company's sales are made by
such arrangement), and raw ingredients are normally purchased
shortly prior to manufacturing and shipment.
The Company's cash flow generally increases at year end due
to seasonally higher volume and programs whereby certain
customers prepay feed purchases for the following year. The total
of these prepayments was $16.5 million and $17.5 million at
December 31, 1997 and 1996, respectively.
In 1995, net cash provided by financing activities included
additional borrowings under the Existing Credit Agreement of
$45.0 million in term loans and $15.0 million under the revolving
credit facility to finance a portion of the Golden Sun
acquisition. Additionally, the Company received proceeds of $9.1
million from the sale of industrial revenue bonds to finance
construction of the new manufacturing facility in Statesville,
North Carolina. In 1995, the Company also loaned the ESOP $4.0
million to purchase Holdings Common Stock and repaid $9.0 million
of the additional borrowings under the revolving credit facility.
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After the Transactions
For the three months ended March 31, 1998, net cash
provided by operations before the effects of changes in operating
assets and liabilities was $13.1 million, compared to $13.7
million in the 1997 period. Net cash used in investing activities
for purchases of property, plant and equipment and intangible
assets was approximately $5.4 million and $3.5 million for the
three-month periods ended March 31, 1998 and 1997, respectively.
The increase was primarily attributed to an increase in costs
associated with the implementation of a new information system
and the construction of a new plant in Lubbock, Texas.
Net cash provided by financing activities in 1998 includes
the proceeds from the New Credit Facility of $200.0 million and
the proceeds from the Senior Subordinated Notes due 2010 of
$350.0 million less the repayment of the Old Senior Term Loan,
Senior Subordinated Notes due 2003 and the IRB Loans totaling
$294.2 million and the dividend paid to Holdings of $237.2
million. In 1997, net cash used in financing activities included
the repayment under the Old Credit Agreement of $3.8 million.
At March 31, 1998, the Company had $2.1 million in cash and
cash equivalents on hand, and approximately $81.5 million was
available for borrowing under the Company's New 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.
As part of the consummation of the Transactions, the
Company entered into the New Credit Facilities. The New Credit
Facilities provide for term loans in the aggregate amount of
$200.0 million, consisting of a Tranche A Term Loan of $100.0
million and a Tranche B Term Loan of $100.0 million. The New
Revolving Credit Facility provides for revolving loans in an
aggregate amount of up to $100.0 million, with a $40.0 million
sub-limit for letters of credit. The New Revolving Credit
Facility will expire in fiscal 2005, the Tranche A Term Loan will
mature in fiscal 2005 and the Tranche B Term Loan will mature in
fiscal 2007. The Tranche A Term Loan is subject to amortization
payments on a quarterly basis of $1.25 million per quarter during
the first year, $2.0 million per quarter during the second year,
$2.75 million per quarter during the third year, $3.5 million per
quarter during the fourth year, $4.25 million per quarter during
the fifth year, $5.00 million per quarter during the sixth year
and $6.25 million per quarter during the seventh year following
the first such payment, which will be due on June 30, 1998. The
last payment will be made on the seventh anniversary of the date
of the consummation of the Offering. The Tranche B Term Loan will
be subject to amortization payments on a quarterly basis of
$75,000 for each of the eight successive one-year periods
following the first such payment, which will be made on June 30,
1998. The remaining $97.6 million aggregate principal amount of
the Tranche B Term Loan is subject to four equal quarterly
amortization payments, with the first such payment to be made
eight years after June 30, 1998 and the last payment to be made
on the ninth anniversary of the date of the consummation of the
Offering.
The Company expects that capital expenditures during fiscal
1998 will be approximately $33.1 million, which includes $6.8
million related to the new accounting and information reporting
system. The Company may from time to time be required to make
additional capital expenditures in connection with the execution
of its business strategies, including expenditures related to its
swine integration strategy. The Company plans to fund capital
expenditures by using internally generated funds and, if
necessary, borrowing capacity under the New Revolving Credit
Facility.
The Company will incur substantially higher interest
expense in the future as a result of the issuance of the Notes
and borrowings under the New Credit Facilities. As set forth
under "Unaudited Pro Forma Financial Data", assuming consummation
of the Transactions on January 1, 1997, pro forma interest
expense would have been $48.7 million for the year ended December
31, 1997, representing an increase of $16.1 million over the
historical amount for the year ended December 31, 1997. Pro forma
amortization would have been $20.5 million for the year ended
December 31, 1997, representing a decrease of $0.1 million over
the historical amount for the year ended December 31, 1997. See
"Risk Factors--Substantial Leverage" and "Unaudited Pro Forma
Financial Data." The Company's ability to obtain additional
financing in the future for working capital, capital
expenditures, acquisitions, and general corporate purposes,
should the Company need to do so, may be affected by cash
requirements for debt service.
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The agreements with respect to the Term Loans contain
restrictive covenants with respect to the operation of the
Company's business. See "Description of Certain Indebtedness."
Management believes that cash flow from operations and
availability under the Term Loans and the New 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.
Loan Guarantees
The Company has agreed to provide a guarantee of up to $7.5
million to Purina Ag Capital Corp. ("Purina Ag Capital"), a
non-stock membership corporation formed in 1995 to provide
funding for the growth, consolidation and expansion of the
Company's network of independently owned dealers and producers.
All dealers or producers who are members of Purina Ag Capital
must have arrangements with the Company for some purchase of the
Company's products. At December 31, 1996 and 1997, respectively,
the amount subject to such guarantee was $5.8 million and $5.9
million, respectively. The guarantee is expected to remain
outstanding for over five years. The Company is not a member of
Purina Ag Capital and thus does not have an equity interest in
the entity; however, the Company did make a loan of $2.0 million
to Purina Ag Capital in 1995 to provide funding for its growth.
The Company also provides loan guarantees to banks to assist the
Company's customers in obtaining bank financing. At December 31,
1997, the Company had $11.3 million of total guarantees
outstanding. See Note 12 of Notes to Consolidated Financial
Statements for a further discussion of the loan guarantees.
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<PAGE>
BUSINESS
The Company is the market leader in the United States in
developing, manufacturing and marketing differentiated animal
nutrition products for dairy cattle, beef cattle, hogs and
horses. The Company also develops, manufactures and sells poultry
feeds as well as specialty feeds for rabbits, zoo animals,
laboratory animals, birds, fish and pets. In the United States,
the Company's products are and programs generally marketed under
the widely recognized brand names Purina(R) and Chow(R), and the
"Checkerboard" Nine Square Logo(R) except with regard to dog and
cat food, which is marketed domestically under the PMI Nutrition
brand name. The Company also markets products under the Golden
Sun brand and its related trademarks. The Company's products are
sold as complete feeds or as concentrated nutritional additives
that customers mix with their own commodity ingredients. Over the
past 100 years, the Company believes that it has built and
maintained its industry leadership through innovative research
and development and by consistently providing high quality
products, programs and services that create value for its
customers.
Because commercial animal feed represents 50% to 70% of the
total cost of producing milk, meat or eggs at the farm level, the
effective management of feed costs and the resulting yields are
among the most important economic components of animal raising.
The Company's products are designed to provide nutrients that
meet the needs of a particular species of animal at each phase of
its life cycle. In the commercial production of milk, meat and
eggs, the Company believes that its continued market leadership
reflects the attractive, cost-effective balance between weight
gain, feed efficiency, animal health and price which its products
and programs provide.
The Company also maintains a leadership position in the
horse and other retail specialty feed markets. As the U.S.
population has migrated to suburban and rural areas, the
incidence of hobby farmers, "ranchettes" and companion animal
ownership has increased. Consumers in this market are typically
less price sensitive than those in the commercial feed market and
buying decisions are driven more by brand awareness, product
quality, convenience and the retail environment. The Company
believes that its strong growth in this market segment can be
attributed to its brand recognition, broad product offering and
extensive retail distribution network. The Company sees
significant growth opportunities in these high margin market
segments as the "ruralpolitan" population continues to grow.
Industry Overview
According to the 1997 Feedstuffs Reference Issue, in 1996
the U.S. animal feed industry produced approximately 117 million
tons of primary feed and animal producers utilized approximately
$27 billion of animal nutrition products. Of this total amount,
the Company estimates that in 1996 the U.S. feed industry
produced for the Available Market approximately 63 million tons
of primary feed, and animal producers purchased approximately $13
billion of animal nutrition products. The industry is highly
fragmented and although it includes several large producers, it
is comprised primarily of regional competitors with several
manufacturing facilities as well as a large number of small,
local manufacturers, many of whom operate only one feed mill. In
1996, the Company estimates that the top ten animal feed
companies produced approximately 30% of the total Available
Market for animal feed in the United States.
The Company competes in both the commercial feed business
and the retail specialty feed business. The Company defines the
commercial feed business as including nutrition products and
programs for dairy cattle, beef cattle, hogs and poultry and
believes the business is characterized by continued industry
consolidation and vertical integration of animal producers,
product price sensitivities and increasing customer
sophistication. In contrast, the Company believes that the retail
specialty feed business, which includes feed products for horses,
rabbits, zoo animals, birds, fish and pets, requires aggressive
marketing, customer brand awareness and strong national
distribution capabilities.
The feed industry generally prices its products on the
basis of Income Over Ingredient Cost ("IOIC"), a dollar based
margin which is added to aggregate ingredient cost. The Company
believes that total IOIC and gross profit dollars, rather than
sales dollars, are the key indicators of performance because of
distortions in sales dollars caused by changes in commodity
prices. Total IOIC less manufacturing costs equals gross profit.
Although feed producers are subject to fluctuations in ingredient
commodity prices, they are generally able to pass on price
increases in raw materials to customers through weekly
adjustments in product prices.
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The following chart sets forth information with respect to
the top ten producers of the seventy U.S. producers profiled,
based upon production capacity measured in tons for the year
ended December 31, 1997, as reported in the January 1998 edition
of Feed Management.
Mills Production Capacity
-------------------- ----------------------
Number % of Total Tons (000s) % of Total
------ ---------- ----------- ----------
Top 10 Producers:
Purina Mills, Inc. ...... 59(a) 11.3% 7,500(a) 16.7%
Cargill, Inc. ........... 73 14.0 7,000 15.6
PM Ag Products, Inc.(b).. 35 6.7 3,500 7.8
Consolidated Nutrition
LC................... 37 7.1 3,000 6.7
Land O'Lakes, Inc. ...... 23 4.4 2,500 5.6
Kent Feeds, Inc. ........ 23 4.4 2,000 4.5
Farmland Industries ..... 24 4.6 1,820 4.1
Continental Grain Co. ... 15 2.9 1,500 3.3
Southern States Co-op ... 10 1.9 1,290 2.9
Cactus Feeders, Inc. .... 5 1.0 1,200 2.7
--- ----- ------ ------
Total Top 10: ................. 304 58.3% 31,310 69.9%
Others: ....................... 219 41.7 13,488 30.1
Grand Total: .................. 523 100.0% 44,798 100.0%
______________________
(a) The Company's actual number of mills and production
capacity was 56 and 7,358 million tons, respectively, as of
December 31, 1997.
(b) PM Ag Products, Inc. is not affiliated with the Company.
Business Strategy
The Company plans to further strengthen its position in the
animal nutrition industry by pursuing the following primary
strategies:
Continued Development of New and Differentiated Products,
Programs and Services. The Company will continue to develop its
differentiated feed products, programs and services by leveraging
its own extensive research and development efforts. Over the last
few years, the Company has introduced several patented products
and programs that have been demonstrated to enhance feed
efficiency and utilization by animals. These products, among
others, include the Proteus(R), Ultimate EXT(R), Impact(TM) and
Lean Generation(R) products and programs. Over 40% of sales in
1997 were from products and programs internally developed and
launched within the last five years.
Expand and Upgrade Dealer Distribution Network. The Company
has recently introduced its America's Country Stores initiative
designed to significantly upgrade its existing dealer network and
to recruit new dealers in priority retail markets. America's
Country Stores combines a new exterior and interior design
featuring an upscale atmosphere, merchandising programs, training
programs for in-store employees, a purchasing and support
relationship with a national hardware supplier and new
advertising and promotion programs. The initiative features a
"turn-key" package that provides dealers a standardized approach
that the Company believes will offer consumers a unique and
positive shopping experience. The Company presently plans that
more than 400 America's Country Stores will be constructed over
the next four years, strengthening its position in the profitable
"ruralpolitan" market. It is anticipated that all America's
Country Stores, with the exception of a few company-owned model
stores, will be privately owned and will require no capital
investment by the Company.
Capitalize on Koch Agriculture Ownership. As a result of
the acquisition by Koch Agriculture, a subsidiary of Koch
Industries, the Company expects to realize certain benefits in
areas of commodity purchasing, technology and operations. These
opportunities include:
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- Leveraging of Koch Agriculture's Commodity Trading
Expertise: Following the Merger the Company entered into
an exclusive commodity purchasing agreement with a
division of Koch Agriculture. Under the terms of the
agreement, Koch Agriculture's Nutrition Supply and
Trading division supplies the Company with all of its
requirements for feed ingredients, feed additives and
feed packaging materials. The contract provides that the
Company will purchase feed ingredients and feed additives
at a price equal to the spot market price less a discount
to be agreed upon between the Company and Koch
Agriculture. For the first year of the agreement, this
discount is $3.50 per ton. Koch Industries and its
subsidiaries have significant commodities trading
operations and the Company believes it will benefit from
lower overall commodity prices as a result of this
arrangement. In addition, the Company transferred all of
its commodity purchasing operations to Koch Agriculture.
- Application of Dewatering Technology: Koch Feed
Technologies Company ("Koch Feed"), a subsidiary of Koch
Agriculture, has agreed to make available to selected
facilities of the Company its patented Jet-Pro(R)
dewatering technology. This processing system converts
high moisture nutrient streams that are by-products from
food processing, such as potato peels, cheese whey and
apple pumice, into feed ingredients. This technology is
expected to enable the Company to identify and create
potential new substitute or complementary feed
ingredients and thereby help to decrease total ingredient
costs for the Company. Koch Feed has also agreed, subject
to certain terms and conditions, that it will not license
the Jet-Pro(R) dewatering technology in the future to any
commercial feed producer in the United States that
competes directly with the Company.
Swine Integration. To capitalize on the consolidation of
the hog industry, the Company is implementing a strategy that is
expected to result in control over the feeding of approximately
six million market hogs over the next four years. The strategy
takes a systems approach to pork production, and will leverage
the strengths of the Company's knowledge base, its commercial
dealer network and its relationship with many midwestern hog
producers and corn growers. The program is expected to provide a
source of high quality feeder pigs to independent hog producers
and to gain the related feed business for the Company. The
strategy also is expected to offer a marketing program linked
with leading pork processors, minimizing market risk to the
producer. The Company's direct ownership will be minimal and it
believes that the business generated through this initiative will
more than offset recent and future declines in traditional hog
feed business due to consolidation.
Actively Participate in Domestic Industry Consolidation.
The Company views the continuing consolidation of the domestic
animal nutrition industry as an important strategic growth
opportunity. The Company will look to acquire products and
technologies that complement its existing capabilities. The
Company will also attempt to add production and distribution
capabilities, particularly in the Northeast and West, to fill out
its geographic presence within the United States. In addition,
the Company believes that it is well positioned to provide the
growing number of integrated and increasingly sophisticated
commercial animal producers with customized nutritional programs
and feed ingredients, given the Company's technically superior
products, programs and services.
Selectively Expand Internationally. The Company intends to
leverage its extensive knowledge of animal nutrition products and
programs to pursue international expansion opportunities through
strategic affiliations, alliances, joint ventures or
acquisitions. The Company intends to build a material market
presence in targeted regions. An example of this strategy is the
Company's recent joint venture arrangement with Tyson Foods and
Aboitz Equity Ventures to construct a feed mill and develop a
large-scale hog operation in the Philippines. The feed mill is
expected to manufacture products for sale through a dealer
organization and also feed the hog operation. The Company owns
25% of the stock of the venture, with Tyson Foods and Aboitz
Equity Ventures, the local partner, owning 25% and 50%,
respectively.
Products
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, laboratory animals, birds, fish and
pets. The Company's product lines range from economy feeds to
high-performance, value-added products, and are sold in complete
rations or as concentrates to be mixed with grains. The Company
maintains a total of over 20,000 active feed formulas, which
encompass a wide range of animal species.
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Although products are the principal point of
differentiation, the Company develops and sells its products as
part of nutrition and management programs that address all
critical areas in the production of meat, milk and eggs. The
Company's nutrition programs include information and services
regarding the care of the animals and their facilities, as well
as nutritional, genetic and breeding counseling.
The demand for particular products is affected by a number
of factors, including the price of grains and the price of the
end-products of animal producers. 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 tonnage has been
correspondingly higher. During periods when commodity prices
(particularly for corn) have been relatively low, animal
producers have tended to purchase the Company's products as
concentrated nutritional additives with which the customers mix
their own commodity ingredients. This results in decreased sales
tonnage for the Company, because the commodity portion of the
product is provided by the customer. The Company's concentrates,
however, generally provide higher per-unit IOIC to the Company
than do complete feeds. In addition, the Company is diversified
across a broad range of different animal species and regions.
Consequently, the Company's total IOIC and gross profit have
historically been stable. Because the cost of feed typically
represents more than half of the cost of producing animals at the
farm level, higher ingredient prices over time can result in a
decline in animal production and a decline in the demand for the
Company's products. In addition, when market prices for live
animals and animal products are low, animal producers will also
cut back on production and search for lower-cost feed
alternatives. The Company maintains a line of economy products
while emphasizing the relative value of its high-performance,
value-added products.
Although ingredient prices influence producers' decisions
to use concentrate or complete feed products, producers tend to
continue with one of these alternatives until prices change
significantly or replacement investments in feed handling
equipment must be made. Using concentrates requires equipment on
the farm to grind commodity ingredients and mix them with the
concentrate components to produce finished feed. Once this
investment is in place, it may influence these producers'
decisions on feeding programs. Producers are generally unlikely
to alternate between complete feed and concentrates on a
short-term basis.
Although competitors may be able to determine the
ingredient components of a particular formulation of a feed
product, the Company believes that several factors prevent
competitors from effectively duplicating the performance of its
product lines. Management believes that competitors generally do
not have the extensive nutritional knowledge required to
understand the purpose of individual ingredients in a specific
feed product, or the ability to use substitute ingredients on a
cost-effective basis as prices change, particularly if those
substitutes are not available locally. In addition, the Company
markets its feeds as part of comprehensive feeding programs,
which include management and animal health, as well as the
specific feed products. Management believes that the effective
coordination of all of these related elements is critical to
achieving optimal feed performance. Finally, many of the
Company's products are manufactured using proprietary process
technology that provides cost or product attribute advantages
that the Company believes cannot be readily duplicated.
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Product Lines
The following table sets forth, by major product line, the
sales volume and gross sales for each year during the five-year
period ended December 31, 1997:
Year Ended December 31,
--------------------------------------------------
1993 1994 1995 1996 1997
------ ------- ------- ------- --------
(In thousands)
Product Lines:
Dairy Cattle
Tons sold............. 1,273 1,321 1,265 1,267 1,154
Gross sales........... $252,726 $256,934 $246,542 $301,260 $270,170
Beef Cattle
Tons sold............. 1,423 1,377 1,467 1,363 1,271
Gross sales........... $229,244 $224,851 $241,253 $261,693 $245,151
Hog
Tons sold............. 987 1,010 1,058 1,071 960
Gross sales........... $247,308 $241,899 $250,316 $306,441 $273,264
Horse
Tons sold............. 274 308 346 370 409
Gross sales........... $60,628 $69,216 $81,257 $103,513 $109,824
Poultry
Tons sold............. 511 548 418 417 425
Gross sales........... $106,862 $94,981 $74,296 $90,265 $88,797
Specialty and Other
Tons sold............. 374 460 526 496 487
Gross sales........... $96,088 $142,879 $164,792 $186,012 $202,657
------- -------- -------- -------- --------
Total tons sold.......... 4,842 5,024 5,080 4,984 4,706
Total gross sales........ $992,856 $1,030,76 $1,058,45 $1,249,184 $1,189,863
Set forth below is a description of each major product
line. The Company's estimates of its market share referred to
herein are based on the Company's estimates of its Available
Market (total volume of feed produced, except that used by
producers who have integrated feed operations or alignments with
other feed manufacturers).
Dairy Cattle. The Company markets dairy cattle products
ranging from economy to high performance. The Company estimates
that its 1997 volume of 1.2 million tons, or approximately 25% of
the Company's total feed tons, represented approximately a 9%
share of the Available Market. The Company regards dairy cattle
products as an attractive growth market.
Milk production per cow has increased by an aggregate of
approximately 31% from 1983 to 1997, largely driven by improved
genetics and feeding programs based on enhanced knowledge of
cows' nutritional requirements. Further increases in production
per cow are expected to be achieved through improved genetics,
biotechnology and feeding programs, which include
high-performance products such as the Company's Ultimate EXT(R)
product line. According to Company data, these products have
produced average increases of approximately five pounds of milk
per cow per day in high producing herds, a 5% to 7.5% increase,
due primarily to a proprietary extruded component in the product
that delivers nutrients more effectively than traditional
products. Extrusion is a relatively high cost process not
normally used in commercial animal feed production. In addition,
improvements in the efficiency of milk production are critical to
the profitability of dairy operations. The Company believes that
its patented Proteus(R) product line enhances the efficiency of
feed protein utilization by lactating dairy cows. The result is a
lowering of feed costs while maintaining the level of milk
production and milk component yield. An additional benefit of
Proteus(R) technology is reduced urinary nitrogen excretion by
dairy cows resulting in an environmentally favorable nutritional
program.
The dairy industry is continuing to experience gradual
consolidation. According to a February 1996 report by the United
States Department of Agriculture, the number of dairy operations
decreased by approximately 30% from 1991 to 1996; average dairy
herd size increased from approximately 55 head in 1991 to
approximately 74 head in 1996, while the average number of dairy
cows was approximately 6% lower in 1996 than in 1991. Many large
dairies require specialized products, programs and services from
their suppliers. The Company believes the
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success of its dairy cattle product line is largely due to its
value-added products and the development of a field staff of
Ph.D. nutritionists who work with dealers and directly with
customers to develop specialized products, programs and services
to meet their individual needs.
Beef Cattle. The Company offers a complete line of feed
products for beef cattle, ranging from economy to high
performance. The Company estimates that its 1997 volume of
approximately 1.3 million tons, or approximately 27% of the
Company's total feed tons, represented approximately a 13% share
of the Available Market.
Beef cattle operations can be broadly viewed as consisting
of cow-calf, farmer-feeder and feedlot operations. The feedlot
market is highly concentrated. In 1997, over 720 feedlots
accounted for 89% of U.S. beef production and the 45 largest
feedlots accounted for almost 26% of U.S. beef production. Such
consolidation has not occurred in cow-calf operations, which
produce calves for growing and finishing, and is not expected to
occur in that part of the market.
Historically, dry feedlot products have not been as
profitable as hog and dairy cattle products because there has
been less product differentiation. However, the Company does
offer proprietary, premium performance products in liquid form
primarily for feedlots and the farmer-feeder and in block form
for cow-calf operations. In addition, the Company's research
efforts have resulted in an innovative feeding management
program, Impact(TM), which is designed to significantly improve
feed efficiency and cost-per-pound gain, while maintaining
average daily gain. This feeding program is being used in major
feedlot markets and has recently been introduced for
farmer-feeder operations. Sales volume of this high performance,
value added product and program has grown rapidly.
Hogs. The Company offers a complete line of feed products
for hogs, ranging from economy to high performance. The Company
estimates that its 1997 volume of 1.0 million tons, or 20% of the
Company's total feed tons, represented approximately an 8% share
of the Available Market.
In early 1991, the Company introduced its Lean
Generation(R) line of products and feeding programs, which match
a hog's genetic potential and life stage with nutrient
requirements designed to increase its daily lean weight gain.
Lean Generation(R) programs have been demonstrated to lower feed
costs by improving feed efficiency and reducing the average
number of days to market, in addition to providing a higher
composition of lean meat. As consumers demand lower-fat meat
products and the hog packing industry moves further toward
establishing prices for live animals based on lean content rather
than weight, hog producers can improve both their product and
their profitability under these programs. The Company believes
that the Lean Generation(R) line of products offers clear
differentiation from competitive products. As a result, the line
became the Company's largest volume product within eight months
of its introduction.
The Company has historically been successful in selling to
medium-size producers in the hog industry through its traditional
dealer distribution channel. The Company has also been successful
in generating business directly with hog producers. As
consolidation in the hog production industry continues, the
Company expects to have opportunities for strategic business
alliances with producers, or to provide technology sharing or
consulting services. Nevertheless, consolidation and integration
in hog production over the last 20 years has been significant,
with a continuing trend toward fewer but larger operations.
According to the December 29, 1997 USDA Hogs and Pigs Report,
there were approximately 139,000 hog production operations in
November 1997, compared with approximately 870,000 in 1970. Based
on recent trends, the Company anticipates that this number may
drop to approximately 100,000 by the year 2000. Management
anticipates a gradual decline in volumes and margins in its
traditional hog business. However, the Company believes that
larger hog producers are better able to measure animal
performance and, as a result, better appreciate the Company's
premium products and more sophisticated feeding and management
programs.
To capitalize on the consolidation of the hog industry, the
Company is implementing a strategy that is expected to result in
control over the feeding of approximately six million market hogs
over the next four years. The initiative is expected to provide a
source of high quality feeder pigs to independent hog producers
and offers a marketing program linked with leading pork
processors, thereby minimizing market risk to the producer. The
Company believes that the contributions from this initiative will
more than offset the declines in traditional hog business in the
near term.
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Horse. The Company estimates that its 1997 volume of
409,000 tons, or approximately 9% of the Company's total feed
tons, represented approximately a 24% share of the Available
Market.
Volume in this product line has increased each of the past
six years. Following changes in distribution strategy, sales
focus and pricing policies, volume increased in 1992 for the
first time since 1982. Unlike cattle and hogs, most horses are
kept for pleasure or work. Horse owners, therefore, do not
generally have a commercial or economic measure of the value of
the Company's products. Since 1992, the Company has restricted
its efforts in the price-driven commodity portion of the business
and has instead focused on the quality-oriented end of the market
for horse feed, where the Company believes the value of its
Omolene(R) and other premium brands are more likely to be
recognized. The Company also introduced a series of pelleted and
extruded products that it believes will appeal to a wide range of
feeders, including its Equine Senior(TM), Equine Adult(TM) and
Equine Junior(TM) feeds, which are designed to meet the
nutritional needs of older, adult and younger horses,
respectively, and Strategy(TM), a performance product designed
for stables and more commercially oriented horse operations.
Aggressive marketing programs have been implemented to continue
the growth in this market. A traveling exhibit known as Horse
Country was launched in 1997 and proved to be so successful that
an additional version thereof was approved for 1998 to travel to
smaller local events.
Poultry (Laying Chickens and Meatbird). The Company's 1997
volume of 425,000 tons represented approximately 9% of the
Company's total feed volume. The egg production industry is
highly concentrated. Because the nutritional requirements of
poultry are relatively simple and widely known compared to those
of beef cattle, dairy cattle or hogs (and thus comparatively
little value can be added through feed) and significant numbers
of birds can be located in concentrated areas, these producers
generally have sufficient scale and nutritional knowledge to
manufacture their own feed. Accordingly, the available market for
feed sales is small relative to the amount of feed consumed in
the poultry industry.
The meatbird (broiler chickens, turkeys, ducks, etc.)
production industry is also highly concentrated with a relatively
small number of very large producers that generally manufacture
their own feed, again due to the relative simplicity of the diet
and large scale of operations in this market. Because there is no
significant opportunity for product differentiation in either
part of the poultry market, the Company is pursuing this market
less aggressively.
Specialty and Other. In addition to its core commercial
feed lines, the Company develops, manufactures and markets
mineral supplements for livestock and a wide variety of feed
products for other animals ranging from rabbits, birds,
commercial fish, dogs and cats to zoo and other exotic animals.
This group includes the expanding Mazuri(R) brand line of feeds,
which is widely recognized in the domestic and international
zoological community, as well as PMI Nutrition(TM) line of dog
and cat foods, which was introduced during 1992 and expanded in
1993 and 1994.
Many products within this group can be manufactured at most
of the Company's feed mills. Others are highly specialized and
incorporate unique ingredients designed to address particular
nutritional needs, or otherwise require manufacturing process
technology, including extrusion, not available at standard feed
plants. Those specialty items are manufactured at the Company's
Richmond, Indiana specialty plant.
The specialty and other product group has the highest
overall unit margins of all the Company's product groups. The
Company's 1997 volume of specialty feeds aggregated 487,000 tons,
representing approximately 10% of the Company's total feed
volume. The Company believes that these products have significant
potential for continued growth in volume and profit
contributions.
Research and Development
The Company's research efforts are focused on the
development of proprietary product forms and process technologies
designed to support new product development and increase
manufacturing efficiency while lowering processing costs. At its
research center in Gray Summit, Missouri, the Company conducts
extensive animal research to develop value-added products and
programs designed to optimize the genetic performance potential
of animals. Basic research is conducted by Ph.D. scientists and
technical staff who are dedicated to each specie served by the
Company's products. Each specie of animal is closely studied from
birth to maturity to enable scientists to understand the complex
nutritional needs and genetic capabilities at each stage in its
life cycle. By understanding the metabolic process of each
specie, the Company's scientists have identified which nutrients
are required by an
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animal at various stages in its development to maximize its
genetic potential. Further, researchers have gained extensive
knowledge of the nutritional composition and values of the
primary ingredients used in feed and a wide range of acceptable
substitute ingredients. In addition to the development of
high-performance feeds through its research efforts, the Company
is able to recommend specific feeding and management programs
that enhance the effectiveness of its feeding products.
Management believes that its research and development
capabilities enable the Company to develop high-performance,
value-added products that can be differentiated from other feed
alternatives. The Company believes that the continued market
leadership of its various products and programs will depend, in
part, upon maintaining an attractive, cost-effective balance
between weight gain, feed efficiency, yield, animal health and
price.
Over 40% of the Company's sales volume in 1997 was derived
from products introduced within the past five years. The
Company's research and development expense (net of revenues
realized at the Company's research facilities and manufacturing
expenses associated with the production of feed for the animals
at the research facilities) was $7.2 million, $7.0 million, $6.7
million and $6.3 million in 1997, 1996, 1995 and 1994,
respectively.
Source and Availability of Raw Materials
The basic feed manufacturing process consists of grinding
various grains and protein sources into a meal form that is then
mixed with certain nutritional additives, such as vitamins,
minerals, synthetic amino acids, and, in some cases, medications.
The resulting products are sold in a variety of forms, including
meal, pellets, blocks and liquids. The Company's feed formulas
are based upon the nutrient content as determined through
proprietary scientific research. When the price of certain raw
ingredients increases, the Company can generally adjust its feed
formulas by substituting lower-cost, alternative ingredients to
produce feeds with comparable nutritional value. By using its
sophisticated, least-cost product formulation system, the Company
can determine optimal formulations that meet its nutritional
standards and maintain product quality.
The raw materials used by the Company are generally
available from a number of different sources and the Company has
not experienced any significant interruption in the availability
of raw materials. The Company does not typically enter into
long-term contracts for the purchase of ingredients. However, the
prices of many of the Company's raw materials can be volatile.
Although the Company generally passes on these price changes to
its customers, the Company uses the futures markets, options and
other risk management tools in an attempt to protect its margins
on firm purchase contracts with customers and to lock in prices
to support promotions on various products. Management has
extensive experience in purchasing ingredients in the commodities
markets. Historically, from time to time, the Company has taken
positions in various ingredients to ensure supply and to protect
profits on anticipated sales volume. Although the Company has
used these risk management tools to hedge its risks, it does not
speculate in the commodities market and the Company has
maintained a relatively low dollar level of risk related to open
positions in the market. In connection with the Merger, the
Company has entered into an exclusive commodity purchasing
agreement with Koch Agriculture. After the consummation of the
Transactions, the Company will transfer all of its commodity
purchasing operations to Koch Agriculture's Nutrition Supply and
Trading division, which will supply the Company with all of its
requirements for feed ingredients going forward, charging the
Company a price equal to the spot market price less a margin to
be agreed upon between the Company and Koch Agriculture on an
annual basis. The Company believes it will benefit from lower
overall commodity prices and other cost savings as a result of
this arrangement.
Manufacturing Process
The Company currently operates 56 feed manufacturing plants
located in 26 states. The Company's total feed manufacturing
capacity is approximately 7.4 million tons per year based on a
two shift per day, five-day week, and individual plant capacity
ranges from 30,000 tons to 300,000 tons. Capacity utilization
varies by plant and by season, with higher utilization during the
first and fourth fiscal quarters.
Potential manufacturing economies of scale are generally
not sufficient in the feed industry to offset the cost of
shipping products over significant distances, as raw ingredients
make up a large percentage of the cost of finished products and
are often available locally. As a result, the Company operates
nationally with a network of manufacturing facilities with
sufficient capacity to meet the demands of the local markets in
which the facilities are located. The Company regularly reviews
its plant capacity and factors such as trends in animal
production in
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specific markets and changes in transportation costs. Based on
these factors, from time to time manufacturing capacity in
particular markets may be expanded, consolidated or eliminated.
In this regard, based on its evaluation of areas where its
operations could be consolidated or rationalized, the Company
closed seven feed manufacturing plants in late 1996. It has
recently built or is building new or replacement plants in
Hagerstown, Maryland, Statesville, North Carolina, and Lubbock,
Texas.
The Company has invested in highly sophisticated
computerized systems for mixing, pelleting, micro-ingredient
blending and packing. In addition, the Company has developed and
implemented a sophisticated computer program for feed formulation
that incorporates the nutritional value of substitute
ingredients, which is run on the Company's mainframe computer.
The Company believes that this program provides it with a
competitive advantage. Investments have also been made to
maintain the operating capability of the Company's manufacturing
facilities.
Sales and Marketing
The Company distributes its products through two primary
distribution channels: through dealers and directly to end-users.
During 1997, approximately 61% of the Company's sales were made
through its dealer network and 39% of sales were made directly to
animal producers. To support increasingly sophisticated
customers, the Company's mix of salespeople includes
approximately 85% "specialists" who focus on individual species
or distribution channels. Although sales volume through the
Company's dealer network has always been substantially higher
than the Company's direct sales volume, direct sales to customers
have accounted for an increasing proportion of the Company's
sales volume over the past 10 years and the Company expects this
trend to continue. This trend results from increasing
consolidation in the animal production and processing industries.
The Company believes that consolidation among its customers
generally results in a more sophisticated market for its products
and that these purchasers better appreciate the advantages of
high-performance nutrition products and nutritional programs.
As of December 31, 1997, the Company's dealer network
consisted of over 4,700 independent dealers located in 48 states,
with approximately 600 dealers representing 65% of total dealer
volume and 40% of total Company volume in 1997. The number of
direct customers in 1997 was in excess of 4,700.
During 1997, the Company's top 50 customers represented
approximately 18% of its total sales volume and its largest
customer accounted for approximately 1.0% of the Company's total
sales volume.
Seasonality
The Company's business is seasonal, with a higher
percentage of the feed volume sold and earnings being generated
during the first and fourth quarters of the year. This
seasonality is driven largely by weather conditions affecting the
Company's cattle product lines. If the weather is particularly
cold and wet during the winter, sales of feed for cattle increase
as compared with normal seasonal patterns because the cattle are
unable to graze under those conditions and have higher
nutritional requirements. If the weather is relatively warm
during the winter, sales of feed for cattle may decrease as
compared with normal seasonal patterns because the cattle may be
better able to graze under the warmer conditions. Other product
lines are affected marginally by seasonal conditions but these
conditions do not materially affect the Company's
quarter-by-quarter results of operations.
Patents and Trademarks
The Company markets its products under the highly
recognized brand names Purina(R) and Chow(R) and the
"Checkerboard" Nine Square Logo(R) pursuant to an exclusive,
perpetual, royalty-free license from Ralston (the "Ralston
License"). Under the Ralston License, the Company may not use
those trademarks outside the United States or in connection with
any dog, cat or human food within the United States, and Ralston
uses those trademarks in those markets. The Ralston License may
not be assigned to a major competitor of Ralston or otherwise
without the consent of Ralston. The Company has developed
trademarks for use in international and domestic markets and has
applied for a trademark for the "America's Country Stores" name.
The Company's operations do not depend to any significant extent
upon any single or related group of patents.
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Competition
The Company believes that its market share is approximately
4% to 5% of the total primary feed produced in the United States,
and approximately 9% of the estimated Available Market.
The feed industry, which has substantial excess capacity in
certain areas of the country, is highly competitive. Both the
feed production and animal production industries are
consolidating, and this trend is expected to continue. To date,
the Company has been successful at generating business directly
with some large producers of animals. However, as producers of
animals get larger, they historically have tended to integrate
their business by acquiring or constructing feed production
facilities to meet some or all of their requirements and,
consequently, have relied less on outside suppliers of feed. As
the consolidation of animal producers continues, the available
market for commercial feeds may shrink if producers integrate
into feed production and, if so, competition may increase.
Management expects consolidation in the commercial feed industry
itself, and acquisitions and other business combinations in
recent years indicate that this consolidation is occurring.
The industry is highly fragmented, with the bulk of the
industry consisting of regional competitors (including
cooperatives) with several manufacturing facilities and a large
number of small, local manufacturers, many of which operate only
one feed mill. Only one competitor's commercial business
approaches the scope of the Company's national distribution
network. The Company believes that it distinguishes itself from
its competitors through a competitive strategy of differentiation
using its high-performance, value-added products, which it
develops and sells on a national basis. Although the strength of
competitors varies by geographic area and product line, the
Company believes that no other competitor produces and markets
the breadth of products that the Company provides.
Much of the competition in the industry centers around
price due to the commodity-like aspects of the basic product
lines. However, the Company focuses its efforts on
high-performance, value-added products that are designed to be
cost effective on the basis of weight gain, feed efficiency,
animal health and price. The Company believes that its extensive
expertise in animal nutrition requirements and the nutritional
content of various ingredients, developed through research and
combined with its manufacturing expertise and ingredient
purchasing capabilities, allow the Company to use lower-cost
ingredients, as well as alternative ingredients, to a greater
extent than many of its competitors.
The Company also competes on the basis of service by
providing training programs for dealers, using species
specialists with advance technical qualifications to consult with
customers, developing and manufacturing customized products for
customers, and offering various financing assistance programs to
attract and retain dealers and direct customers. In some areas of
the United States, feed companies have increased the use of
contracting for livestock production to generate and control feed
volume. The Company does not offer these arrangements but does
enter into joint ventures for animal production and marketing
arrangements (such as market price risk sharing arrangements) on
a limited basis.
Regulation
The Company is subject to regulation by the FDA and the
USDA. The FDA regulates all ingredients that are part of animal
feed (feed additives) or that contact animal feed (feed contact
additives). It also regulates animal drugs that come in dosage
form for administration to animals, or that are added through
water or feed. The Company's production facilities are subject to
inspection at least once every two years by the FDA.
The USDA is responsible for assuring that products derived
from animals are wholesome, which includes inspection for any
drug residues that the animal might contain. The USDA monitors
residues and when violations occur, the USDA works in conjunction
with FDA to investigate and assign responsibility. Similar to
this federal regime, each state's Department of Agriculture also
regulates feed production facilities and feed products.
Environmental
The Company has an environmental policy designed to ensure
that it operates in material compliance with applicable
environmental regulations. The Company also has undertaken a
compliance audit program that addresses environmental and other
regulatory compliance. The Company makes expenditures that it
believes are
46
<PAGE>
necessary to fulfill its environmental compliance practices.
Capital expenditures for environmental control facilities to
maintain compliance with environmental regulations are included
in the Company's overall capital budget and, together with other
environmental related costs, and were less than $1 million in
1997.
Legal Proceedings
From time to time the Company is involved in litigation
relating to claims arising out of its operations in the normal
course of business, including product liability claims. The
Company believes that it is not at present a party to any
litigation, the outcome of which would have a material adverse
effect on its business or operations.
Employees
The Company had approximately 2,600 full-time employees as
of December 31, 1997, approximately 12.3% of whom were union
members. Historically, the Company has had a satisfactory
relationship with its unionized workers. Eight of the Company's
19 collective bargaining agreements will expire in 1998. Although
the Company has not historically encountered problems in the
renegotiation of the various collective bargaining agreements to
which it is a party, nor does the Company anticipate such
problems in the future, there can be no assurance that such will
be the case.
Properties
The Company owns its corporate headquarters in St. Louis
and its 1,188 acre Research Center in Gray Summit, Missouri. The
Company operates 56 feed manufacturing plants located in 26
states, two of which are leased. In addition to on-site storage
at each of its manufacturing plants, the Company also stores its
products in 18 warehouses in 15 states. Thirteen of those
warehouses are leased. Following the Transactions, substantially
all of the Company's assets will be pledged to secure
indebtedness under the New Credit Facilities, as they are now
pledged under the Existing Credit Agreement. See "Description of
Certain Indebtedness."
Year 2000
Many computer systems and software applications, including
most of those used by the Company, identify dates using only the
last two digits of the year. These systems are unable to
distinguish between dates in the year 2000 and dates in the year
1900. That inability (referred to as the "Year 2000 issue"), if
not addressed, could cause certain systems or applications to
fail or provide incorrect information after December 31, 1999 or
when using dates after December 31, 1999. This in turn could have
an adverse effect on PMI, due to PMI's direct dependence on its
own systems and applications and indirect dependence on those of
other entities with whom PMI must interact.
The Company has implemented a process to either replace or
modify all of the Company's current computer systems and software
applications which will be year 2000 compliant. New software has
been configured and implemented at four feed mills and the
Company's corporate headquarters, and the Company expects to
complete the entire project by mid-1999.
The Company currently estimates that its costs incurred in
1997 and through the year 2000 to enhance its information systems
will cost approximately $16 million. These costs include
estimates for employee compensation on the project team,
consultants, hardware and software. The Company does not
anticipate incurring any additional expenses in connection with
the Year 2000 issue.
As a result of the implementation of the new information
system, PMI is not likely to initiate other major systems
projects in connection with the Year 2000 issue. There can be no
assurance that PMI will not experience cost overruns or delays in
connection with its plan for replacing or modifying systems.
47
<PAGE>
MANAGEMENT
Directors and Executive Officers
The following table sets forth the name, age and position
of individuals who are serving as directors and executive
officers of PMI. Each director will hold office until the next
annual meeting of shareholders or until his successor has been
elected and qualified. Officers of PMI are elected by its Board
of Directors and serve at the discretion of such Board.
Years
with
Purina
Name Age Position Mills
------ --- -------- ------
David L. Abbott......... 46 Director, President 24
and Chief Execu-
tive Officer
Darrell D. Swank........ 34 Chief Financial --
Officer
Rick L. Bowen........... 45 Vice President and 13
General Manager,
Western Region
Duncan M. Highmark...... 49 Vice President, 27
Research and
Marketing
David R. Hoogmoed....... 40 Assistant Vice Presi- 18
dent and General
Manager, Central
Region
Arthur D. Jordan........ 36 Assistant Secretary --
Perry L. Mooneyham...... 55 Vice President and 34
General Manager,
Southern Region
Nile D. Ramsbottom...... 53 Vice President, 31
Purchasing,
Transportation
and Formulation
Jeff A. Speer........... 31 Vice President, --
Operations
Arnie E. Sumner......... 49 Vice President and 26
Chief Operating
Officer
John T. Zerbe........... 58 Vice President and 31
General Manager,
Eastern Region
Scott E. Deeter......... 34 Director --
Dean E. Watson.......... 39 Director --
Paul R. Wheeler......... 39 Director --
Christopher M. Wilkins.. 40 Director --
Mr. Abbott has been President and Chief Executive Officer
of the Company since March 1996. He joined the Company in 1973
and has served in various positions, including Executive Vice
President and Chief Operating Officer from 1990 to 1996, Vice
President, Central Region from 1989 to 1990, and Vice President
and General Sales Manager from 1988 to 1989.
Mr. Swank has been Chief Financial Officer of the Company
since April 3, 1998. Prior to his appointment, Mr. Swank was
Chief Financial Officer of Koch Agriculture, a position he held
since January 1997. Before joining Koch Agriculture, he was a
management consultant with Deloitte & Touche Consulting.
Mr. Bowen has been Vice President and General Manager,
Western Region of the Company since October 1995. He joined the
Company in 1984 and has served in various positions including
Manager Financial Services, District Manager, Division Sales
Manager, Region Director of Pricing and Area General Manager.
Prior to joining the Company, he was employed in various
capacities by the Farm Credit System.
48
<PAGE>
Mr. Highmark has been Vice President, Research and
Marketing of the Company since March 1993. He joined the Company
in 1970 and has served in various management positions, including
Business Group Director, Dairy and Beef, Regional Sales Manager,
Regional Pricing Director and Division Sales Manager.
Mr. Hoogmoed has been Assistant Vice President and General
Manager, Central Region of the Company since January 1, 1998. He
joined the Company in 1979 and has served in various positions
including District Manager, Division Sales Manager, Regional
Director of Sales and Marketing and Area General Manager.
Mr. Jordan has been Assistant Secretary of the Company
and the head of its Legal Department since March 1998. Prior to
joining the Company, he was employed as Assistant General Counsel
and Assistant Secretary of The Boeing Company.
Mr. Mooneyham has been Vice President and General Manager,
Southern Region of the Company since October 1995. He joined the
Company in 1964 and has served in various positions including
Director of Operations at three locations and Area General
Manager.
Mr. Ramsbottom has been Vice President, Purchasing,
Transportation and Formulation of the Company since 1986. He
joined the Company in 1966 and has served in various positions,
including Region Purchasing Manager, Director of Soybean
Operations, Director of Chow Operations, and Region Vice
President. After the consummation of the Transactions, he joined
Koch's Nutrition Supply & Trading division.
Mr. Speer has been Vice President, Operations since
April 1998. Prior to his appointment, Mr. Speer held various
positions within Koch Industries including Vice President
Operations for its Canadian operations.
Mr. Sumner has been Executive Vice President and Chief
Operating Officer since January 1, 1998. He joined the Company in
1971 and has served in various positions, including Area
Controller, Regional Pricing Manager, Director of Operations,
Eastern Regional Vice President, Western Regional Vice President,
Vice President, Control, Vice President, National Region and Vice
President and General Manager, Central Region.
Mr. Zerbe has been Vice President and General Manager,
Eastern Region of the Company since October 1995. He joined the
Company in 1966 and has served in various positions including
District Manager, Division Sales Manager, Vice President Central
Region and Vice President and General Sales Manager.
Mr. Deeter has been Vice President of Koch Agriculture
since March 1996. Before joining Koch Agriculture, he was
employed in various positions by Cargill, Incorporated.
Mr. Watson has been Vice President-Agriculture of Koch
Industries since March 1997 and President of Koch Agriculture
since April 1995. He joined Koch Industries in 1982 and has
served in various management positions including President of
Koch Nitrogen Company.
Mr. Wheeler has been Vice President-Human Resources of Koch
Industries since March 1997, before which he was Director of
Human Resources since 1995. He joined Koch Industries in 1980 and
has served in various management positions including President
of Koch Oil Company and President of Koch Minerals Company.
Mr. Wilkins has been Vice President-Operations of Koch
Agriculture since September 1996. He joined Koch Industries in
1984 and has served in various management positions including
Director of Safety and Manager of Koch Industries' Pipeline
Control Center.
There are no family relationships between any of the above
named executive officers and directors.
Executive Compensation
The following table summarizes the compensation paid for
the years ended December 31, 1997, 1996 and 1995 to the Chief
Executive Officer and the four most highly compensated executive
officers of the Company (the "Named Executive Officers") for the
services rendered to the Company.
49
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Summary Compensation Table(a)
Long-Term
Compen-
sation
Annual Compensation Awards
----------------------------------- ----------
Number
of
Securi-
ties
Other Under- All
Annual lying Other
Compen- Options/ Compensa-
Name and Principal Position Year Salary Bonus sation SARs(#) tion(b)
- ---------------------------- ---- ------ ----- ------- ------- ---------
D. L. Abbott................ 1997 $303,750 $115,785 -- 470 $ 8,622
President and 1996 285,000 71,700 -- 485 9,124
Chief Executive 1995 214,225 69,219 -- 500 9,743
Officer
I. R. Alexander(c).......... 1997 $198,400 $42,455 -- 170 $ 8,622
Former Executive 1996 196,900 27,500 -- 175 9,124
Vice President and 1995 187,475 52,041 -- 275 9,743
Chief Financial
Officer
A. E. Sumner................ 1997 $162,400 $37,944 -- 155 $ 8,622
Executive Vice 1996 158,800 39,520 -- 160 9,124
President and Chief 1995 148,950 48,545 -- 250 9,743
Operating Officer
N. D. Ramsbottom............ 1997 $139,675 $32,736 -- 125 $ 8,622
Vice President, 1996 138,700 20,000 -- 130 9,124
Purchasing, 1995 133,725 40,242 -- 200 9,743
Transportation
and Formulation
D. M. Highmark.............. 1997 $134,325 $38,595 -- 155 $ 8,622
Vice President 1996 132,300 28,981 -- 160 9,124
Research and Marketing 1995 126,000 45,914 -- 250 8,955
</TABLE>
(a) Although the Named Executive Officers received limited
perquisites, such as reimbursement of deductible and
co-payment amounts under the Company's health plans and
costs of annual physical examinations, the value of such
perquisites received by any of the Named Executive Officers
does not exceed the lesser of $50,000 or 10% of the salary
and bonus reported.
(b) All Other Compensation represents matching payments made by
the Company under the Company's 401(k) Savings Investment
Plan plus discretionary contributions to the ESOP that were
allocated to the participants during the year.
(c) Ian R. Alexander, the former Chief Financial Officer of the
Company, resigned April 3, 1998.
PM Holdings Corporation Omnibus Stock and Incentive Plan.
In January 1995, the PM Holdings Corporation Omnibus Stock and
Incentive Plan was adopted. The plan provides for the issuance of
stock options or other incentive awards with a maximum of 39,500
shares of Holdings Common Stock available for grant. The
following table summarizes the options granted during the year
ended December 31, 1997 to the Named Executive Officers for the
services rendered to Holdings and the Company.
50
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Options/SAR Grants in Last Fiscal Year
Individual Grants
------------------------------------------------
Number of
Shares of % of Potential Realized
Holdings Total Value at
Common Options/ Assumed Annual
Stock SARs Rates of
Underlying Granted to Exercise Stock Price
Options/ Employees or Base Appreciation
SARs in Fiscal Price Per Expiration for Option Term
------ -------
Name Granted Year Share Date 5% 10%
------ ------- --------- --------- ---------- ------ -------
D. L. Abbott.......... 470 7.6% $320 3/13/07 $94,588 $239,700
I. R. Alexander....... 170 2.8 320 3/13/07 34,213 86,700
A. E. Sumner.......... 155 2.5 320 3/13/07 31,194 79,050
N. D. Ramsbottom...... 125 2.0 320 3/13/07 25,156 63,750
D. M. Highmark........ 155 2.5 320 3/13/07 31,194 79,050
</TABLE>
The above options were granted on March 14, 1997 in tandem
with an equal number of Stock Units. Both the Options and Stock
Units were scheduled to vest over a three-year period. Upon the
exercise of a Stock Unit, the participant was to receive the
number of shares or cash equal to such value, or a combination
thereof, with respect to which such Stock Unit was exercised as
outlined in the plan. As a result of the consummation of the
Merger, no holder of an Option or Stock Unit has any right
thereunder to acquire equity securities of Holdings, or Koch
Agriculture or its parent corporation or any of their
subsidiaries.
Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Values
The following table summarizes the value of the outstanding
options held by the Named Executive Officers as of December 31,
1997.
Number of Value of
Shares Unexercised
Number of Underlying In-the-
Shares of Unexercised Money
Holdings Options/ Options/
Common SARs at SARs at
Stock December December
Acquired 31, 1997 31, 1997
on Value Exercisable/ Exercisable/
Name Exercise Realized Unexercisable Unexercisable
----- -------- -------- ------------- -------------
D. L. Abbott....... -- -- 495/960 $150,480/234,470
I. R. Alexander.... -- -- 242/378 75,900/92,250
A. E. Sumner....... -- -- 220/345 68,970/86,930
N. D. Ramsbottom... -- -- 177/278 55,450/69,950
D. M. Highmark..... -- -- 220/345 68,970/86,930
The value of in-the-money options at December 31, 1997 was
computed assuming a per share value of $540, the purchase price
provided for in the Merger Agreement.
As of the Effective Time, (x) each employee or director
Option to purchase shares of Holdings Common Stock granted under
any stock option or stock purchase plan, program or arrangement
of Holdings (collectively, the "Stock Plans") outstanding
immediately prior to the Effective Time has been canceled,
whether or not then exercisable, and (y) each Option having an
exercise price of less than the Merger Consideration (which
constitutes all outstanding Options) has been exchanged for a
payment from Holdings after the Merger (subject to any applicable
withholding taxes) equal to the product of (l) the total number
of shares of Holdings Common Stock subject to such Option and (2)
the excess of the Merger Consideration over the exercise price
per share of Holdings Common Stock subject to such Option,
payable in cash immediately following the Effective Time.
As of the Effective Time, (x) each Stock Unit to purchase
shares of Holdings Common Stock granted under any Stock Plan
outstanding immediately prior to the Effective Time has been
canceled, whether or not then exercisable, and (y) each Stock
Unit has been exchanged for a payment from Holdings after the
Merger (subject to any applicable
51
<PAGE>
withholding taxes) equal to the product of (1) the total number
of shares of Holdings Common Stock subject to such Stock Unit and
(2) the Merger Consideration payable in cash immediately
following the Effective Time.
The Stock Plans terminated as of the Effective Time, and
since the Effective Time no holder of an Option or a Stock Unit
nor any participant in any Stock Plan has had any right
thereunder to acquire equity securities of Holdings, or Koch
Agriculture or its parent corporation or any of their
subsidiaries following the Merger.
Board of Directors Compensation and Committees
The directors of Company, who are also employees of the
Company, do not receive any compensation for Board or Board
committee service. For 1997, directors of Company who were not
employees of the Company received a total annual retainer of
$20,000, plus $1,000 for each meeting of the Board attended and
$500 for each committee meeting attended. The Company's former
compensation committee, audit committee and executive committee,
ceased to exist upon consummation of the Transactions.
Employment Arrangements and Deferred Compensation Agreements
Koch Agriculture Employee Benefit Plans. Those employees of
PMI, Holdings, and their subsidiaries who as of the date of
consummation of the Merger were employed by Holdings, PMI or any
of their subsidiaries in positions that were not covered by a
collective bargaining agreement (the "Current Employees") are
participating in the employee benefit plans and programs of Koch
Agriculture and its subsidiaries available to similarly situated
employees of Koch Agriculture and its subsidiaries, have been
credited for their service with PMI, Holdings and their
subsidiaries and their predecessors, for purposes of eligibility
and vesting under the employee benefit plans maintained by Koch
Agriculture and its subsidiaries and that Koch Agriculture and
its subsidiaries have caused the health plans maintained by them
which cover Current Employees who immediately prior to the
Effective Time were covered under any health plan of PMI,
Holdings or their subsidiaries to waive any limitations regarding
pre-existing conditions of the Current Employees and their
eligible dependents (except to the extent such limitations would
have applied to any such individual under the group health plans
of PMI, Holdings or their subsidiaries).
Retiree Medical and Life Insurance. As of the Effective
Time, the employee benefit plans of PMI, Holdings or their
subsidiaries that provide to any person health and/or death
benefits after termination of employment (other than benefits
mandated by Section 4980 of the Internal Revenue Code of 1986, as
amended, death benefits for six employees or former employees who
are entitled to such death benefits under existing contracts and
death benefits payable under PMI's Capital Accumulation Plan (the
"CAP")), have been terminated as to such benefits payable after
termination of the employment.
Persons, who as of the Effective Time, were not Current
Employees and who were receiving health benefits under the health
plans of PMI, Holdings or their subsidiaries and Current
Employees who, if their employment were terminated as of the
Effective Time, would have been eligible to receive health
benefits under the health plans of PMI, Holdings or their
subsidiaries (the "Grandfathered Group"), beginning as of the
Effective Time, have been provided medical benefits under Koch
Agriculture's and its subsidiaries' medical plans. If certain
specified coverages are selected by such persons, such persons
will be entitled to a 25% reduction in the premiums otherwise
payable by retirees under the Koch Agriculture medical plans for
a period of three years. Koch Agriculture and its subsidiaries
reserve the right to amend or terminate any such plan or
arrangement at any time; provided, however, that during the
three-year period following the Effective Time, no such amendment
or termination will increase the percentage of premiums payable
by members of the Grandfathered Group or shall apply to members
of the Grandfathered Group and not to other similarly situated
retirees or employees of Koch Agriculture and its subsidiaries.
SIP Fund. As of the Effective Time, the "PM Holdings Common
Stock Fund" as an investment option under the Savings Investment
Plan (the "SIP") has been removed and the right of Participants
to receive Holdings Common Stock thereunder has been terminated.
ESOP. PMI terminated the ESOP a few days prior to the
Effective Time of the Merger. Each ESOP Participant received a
package of information regarding elections to be made under the
ESOP for distribution of that ESOP Participant's account. If an
ESOP Participant elected to receive a cash distribution, all
shares of Holdings Common Stock were exchanged for the Merger
Consideration of $540 in cash. The cash account in the ESOP was
available for distribution to the ESOP Participants or for
rollover to the SIP, another qualified plan or an individual
52
<PAGE>
retirement account. If the ESOP Participant elected to receive a
stock distribution, all shares of PM Holdings Common Stock held
in the ESOP account of that Participant were transferred to a
paying agent (the "Paying Agent"). The Paying Agent held the
shares of PM Holdings Common Stock in a custodial capacity on
behalf of the ESOP Participants who elected to receive a stock
distribution. The Paying Agent exchanged such shares for the
Merger Consideration of $540 in cash per share. The Paying Agent
then distributed the cash consideration to the ESOP Participants.
In the event an ESOP Participant failed to elect a method of
distribution, such Participant's account balances were
automatically transferred to the SIP.
Executive Severance Plan. Holdings and PMI have adopted a
Severance Program for Key Executives. See "Certain Relationships
and Related Transactions."
Abbott Employment Agreement. In November 1997, PMI and Mr.
Abbott entered into a three-year employment agreement (the
"Employment Agreement") pursuant to which Mr. Abbott was employed
as President and Chief Executive Officer of Holdings and PMI,
which automatically renews for successive additional two-year
terms unless either party gives written notice of termination at
least 90 days prior to the end of the primary term or any renewal
term then in effect.
Under the Employment Agreement, Mr. Abbott is entitled to
receive direct salary of $310,000 per annum, subject to such
increases as may be from time to time approved by the Board of
Directors of PMI, and to participate in certain employee benefit
and incentive plans, including the Annual Incentive Plan with a
target bonus of $150,000 per annum. Mr. Abbott's base salary and
target annual bonus is to be reviewed at least annually and may
be increased prospectively by the Board of Directors of PMI on
the basis of performance evaluation.
The Board of Directors of PMI has the right under the
Employment Agreement to terminate the employment of Mr. Abbott
prior to the expiration of the term without cause. Upon any such
termination of the employment of Mr. Abbott, PMI is obligated to
pay to Mr. Abbott his regular monthly salary until the date of
termination, vacation pay due and not taken and to pay an amount
equal to two full years of the annual base salary then being paid
to Mr. Abbott under the Employment Agreement, plus the target
bonus amount awarded for the year in which termination takes
place. In addition, PMI has certain obligations to Mr. Abbott
under certain medical, life insurance, disability and post
retirement death benefit programs.
As of the Effective Time, Mr. Abbott's Employment Agreement
was amended to (i) delete the references therein to certain
benefit plans of Holdings and PMI and substitute benefit plans of
Koch Agriculture and its subsidiaries, except that Mr. Abbott
continues to participate in the CAP; (ii) provide that Mr. Abbott
is eligible to receive certain benefits (other than the lump-sum
amounts based on annual salary) under the Severance Program if
his employment is terminated and such benefits are payable
thereunder; and (iii) to provide for the payment to Mr. Abbott of
additional amounts on termination of employment if certain excise
taxes are payable by Mr. Abbott as a result of payments to him
under the Employment Agreement.
Long Term Incentive Program. No Option or Stock Unit awards
under the Company's Long Term Incentive Program were made for
1997. In lieu thereof, Holdings paid cash bonuses which did not
exceed $1,000,000 in the aggregate.
Pension Plans
PMI Pension Plans. Prior to its acquisition from a
subsidiary of The British Petroleum Company p.l.c. by Holdings in
1993, the Company maintained a noncontributory, qualified Defined
Benefit Pension Plan in which generally all salaried employees of
the Company participated. The Company also maintains a
nonqualified, unfunded supplemental executive retirement plan
that provides highly paid employees with the portion of their
retirement benefits not permitted to be paid from the Defined
Benefit Pension Plan due to limitations imposed by the Internal
Revenue Code of 1986, as amended, and compensation deferral
elections. The following table sets forth the estimated annual
retirement benefits payable under the Defined Benefit Pension
Plan and the related supplemental executive retirement plan
(collectively, the "PMI Pension Plans") in the specified final
average pay and years of service classifications.
53
<PAGE>
Pension Plan Table
Years of Service
----------------------------------------------------
Final
Average
Pay 15 20 25 30 35
- -------- ------- ------- ------- ------- -------
$100,000 $19,728 $26,305 $32,881 $39,457 $46,033
150,000 30,228 40,305 50,381 60,457 70,533
200,000 40,728 54,305 67,881 81,457 95,033
250,000 51,228 68,305 85,381 102,457 119,533
300,000 61,728 82,305 102,881 123,457 144,033
350,000 72,228 96,305 120,381 144,457 168,533
400,000 82,728 110,305 137,881 165,457 193,033
Final average pay is an average of a participant's highest
five consecutive years of compensation earned during the last 10
years covered by the PMI Pension Plans. Compensation covered by
the PMI Pension Plans consists of base salary and bonuses.
Covered compensation for the Named Executive Officers is
generally the same as that shown in the "annual compensation"
columns of the Summary Compensation Table. The estimated credited
years of service for each of the Named Executive Officers under
the PMI Pension Plans is as follows: Mr. Abbott, 20 years; Mr.
Alexander, 3 years; Mr. Ramsbottom, 26 years; Mr. Sumner, 21
years; and Mr. Highmark, 23 years.
Benefits are computed on the basis of a five-year certain
and life annuity and reflect deductions for social security and
other offset amounts.
All benefit accruals under the PMI Pension Plans described
above ceased upon completion of the acquisition of the Company by
Holdings in 1993. The Company has no further liability in
connection with the funding of the Defined Benefit Pension Plan.
The previous owner has retained sponsorship of the Defined
Benefit Pension Plan and the responsibility to pay all benefits
that become due thereunder. The Company sponsors the supplemental
executive retirement plan and the responsibility to pay all
benefits that become due thereunder.
Koch Pension Plans. As of June 1, 1998, employees not
covered by a collective bargaining agreement are eligible to
participate in the Koch Industries Employees' Pension Plan, a
defined benefit pension plan. Koch Industries also maintains an
unfunded, supplemental executive retirement plan that provides
highly paid employees with the portion of their retirement
benefits not permitted to be paid from the Koch Industries
Employees' Pension Plan due to limitations imposed by the
Internal Revenue Code of 1986, as amended. Benefits under these
plans will accrue only with respect to service after March 1998.
However, eligible employees with five or more years of service
with PMI and Koch Industries will be vested in the benefits
accrued under the plan. The following table sets forth the
estimated annual retirement benefits payable under the Koch
Industries Employees' Pension Plan and the related supplemental
executive retirement plan (collectively, the "Koch Pension
Plans") in the specified final average pay and years of service
classifications.
Pension Plan Table
Years of Service
----------------------------------------------------
Final
Average
Pay 15 20 25 30 35
- ------- ------- ------- ------ ------- -------
$100,000 $18,750 $25,000 $31,250 $37,500 $43,750
150,000 28,125 37,500 46,875 56,250 65,625
200,000 37,500 50,000 62,500 75,000 87,500
250,000 46,875 62,500 78,125 93,750 109,375
300,000 56,250 75,000 93,750 112,500 131,250
350,000 65,625 87,500 109,375 131,250 153,125
400,000 75,000 100,000 125,000 150,000 175,000
Final average pay is an average of a participant's highest
three years of compensation earned during the last 10 years
covered by the Koch Pension Plans. Compensation covered by the
Koch Pension Plans consists of base salary. Covered compensation
for the Named Executive Officers is generally the same as that
shown in the "salary" column of
54
<PAGE>
the Summary Compensation Table. Years of service includes service
after March 1998. At this time the Named Executive Officers have
no credited years of service under the Koch Pension Plans.
Capital Accumulation Plan. The Company has maintained the
CAP for its key employees. Whether the CAP was offered in any
given year was decided annually. If it was determined to offer
the CAP, an employee relations committee chose those employees
eligible to participate in the CAP. Each selected key employee
could elect to defer all or a portion of the annual bonus that
participant was entitled to receive. The minimum amount of a
participant's deferral was $2,000, and the maximum amount was the
participant's annual bonus. The benefits payable under the CAP
are comprised of termination, death and retirement benefits. All
benefits are unfunded and the Company has purchased life
insurance on the lives of the participants. See Note 9 of Notes
to Consolidated Financial Statements.
The deferral option under the CAP has not been offered
since the acquisition of the Company by Holdings in 1993.
However, the Company has retained the CAP and the responsibility
to pay all benefits due thereunder. The amount of a participant's
"Annual Retirement Income Benefit" under the CAP is dependent
upon the amount of the participant's deferral, the participant's
age on the effective date of the deferral and the participant's
age at the time of termination of employment. The estimated
annual benefits payable under the CAP to the Named Executive
Officers upon retirement at the normal retirement age of 65 are
as follows: Mr. Abbott, $211,047; Mr. Alexander, $16,082; Mr.
Ramsbottom, $111,092; Mr. Sumner, $124,247 and Mr. Highmark,
$72,772.
Koch Agriculture and its subsidiaries are continuing to
maintain the CAP for the benefit of certain Current Employees and
former employees (subject to any rights of amendment and
termination with the consent of the Participants therein if
consent is required under any deferral agreement executed under
the CAP).
55
<PAGE>
OWNERSHIP OF CAPITAL STOCK
PMI is a wholly owned subsidiary of Holdings, which as a
result of the Transactions is a wholly owned subsidiary of Koch
Agriculture. Holdings does not have any material assets other
than the stock of PMI. Koch Agriculture is a wholly owned
subsidiary of Koch Industries. In addition, pursuant to rules
adopted by the Commission under the Exchange Act, each of Messrs.
Charles Koch and David Koch may be deemed to beneficially own the
shares of capital stock of PMI and Holdings beneficially owned by
Koch Industries.
56
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Voting Agreement. Pursuant to the Voting Agreement, the
directors and executive officers of PMI and Holdings who own
Holdings Common Stock and certain other stockholders of Holdings,
including certain principals and employees of TSG, agreed to vote
their shares in favor of the Merger and not to solicit third
party acquisition proposals.
Executive Severance Program. Under the Purina Mills,
Inc./PM Holdings Corporation Severance Program for Executives, as
amended (the "Severance Program") Mr. Abbott (for certain
purposes only, see discussion of Mr. Abbott's Employment
Agreement in "-Employment Arrangements and Deferred Compensation
Agreements"), Ian R. Alexander, Duncan H. Highmark, Nile D.
Ramsbottom, Rick L. Bowen, Perry L. Mooneyham, Arnold E. Sumner,
Jr., John T. Zerbe and August F. Ottinger (the "Covered
Employees") are entitled to certain benefits as a result of the
Merger if the Covered Employee's employment with PMI, Holdings or
their subsidiaries is terminated under certain circumstances
within two years after the Effective Time of the Merger.
Effective April 3, 1998, Mr. Alexander resigned from the Company
and subsequently has received benefits under the Severance
Program.
For purposes of the Severance Program, the term
"Constructive Termination" means the occurrence after the Merger
of any one or more of the following events: (i) the assignment by
Holdings of the Covered Employee to a position that requires
skills that are substantially different than the skills required
for the position held by the Covered Employee at the time of the
Merger, without the Covered Employee's prior written consent; or
(ii) a reduction by Holdings or PMI in the amount of a Covered
Employee's total cash compensation compared to 1997; or (iii) the
relocation of the Covered Employee's office, without the Covered
Employee's prior written consent; or (iv) the requirement of the
Covered Employee to perform his duties outside the principal
executive offices of Holdings or PMI for a period of more than
sixty (60) consecutive days or more than 60% of his time during
the first and second year after the Effective Time, without the
prior written consent of the Covered Employee; or (v) the failure
of Holdings or PMI to offer the Covered Employee the opportunity
to participate in, or the removal of the Covered Employee from,
compensation programs and benefit plans generally offered and
available to similar level executives in Holdings or PMI who
perform at similar levels.
For purposes of the Severance Program, the term
"Non-Voluntary Termination" means the termination of employment,
other than by reason of death or disability, of a Covered
Employee by Holdings, PMI or any successor thereto without cause.
Under the Severance Program, a Covered Employee whose
employment was terminated on account of a Constructive
Termination or Non-Voluntary Termination within three months
prior to the Effective Time and such termination was in
anticipation of the Merger or whose employment is terminated on
account of a Constructive Termination or Non-Voluntary
Termination within one year after the Effective Time shall (i)
receive, within thirty (30) days after the latest to occur of the
date of the Effective Time, Constructive Termination or
Non-Voluntary Termination, cash from Holdings or PMI in one lump
sum in an amount equal to the sum of (a) two times the Covered
Employee's annual base salary effective immediately prior to the
Effective Time; and (b) two times the bonus payments made by
Holdings or PMI to the Covered Employee in 1997; and (ii) be paid
in one single lump sum payment, the net present value of the
premiums that would be charged for medical benefits coverage
during the forty-two month period commencing on the date of the
Constructive Termination or Non-Voluntary Termination under the
medical program of Holdings and PMI and be covered thereunder,
provided the Covered Employee pays for such coverage; and (iii)
during the period commencing on the latest of the date of the
Effective Time, Constructive Termination, or Non-Voluntary
Termination and ending on the second anniversary thereafter,
receive the use of office space and secretarial assistance for
the purpose of finding new employment, and such other
outplacement services as Holdings or PMI may provide.
Under the Severance Program, a Covered Employee whose
employment is terminated on account of a Constructive Termination
or Non-Voluntary Termination after one year has elapsed since the
Effective Time but before two years have elapsed since the
Effective Time shall: (i) receive, within thirty (30) days after
such Constructive Termination or Non-Voluntary Termination, cash
from Holdings, PMI or their subsidiaries in one lump sum in an
amount equal to the sum of (a) one times the Covered Employee's
annual base salary calculated based upon the annual base salary
effective immediately prior to the Effective Time; and (b) one
times the bonus payments made by Holdings or PMI to the Covered
Employee in 1997; and (ii) be paid in one single lump sum
payment, the net present value of the premiums that would be
charged for medical benefits coverage during the thirty month
period commencing on the date of the Constructive Termination or
Non-Voluntary Termination under the medical program of Holdings
and PMI and
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be covered thereunder, provided the Covered Employee pays for
such coverage and (iii) during the period commencing on the date
of the Constructive Termination of Non-Voluntary Termination and
ending on the first anniversary thereafter, receive the use of
office space and secretarial assistance for the purpose of
finding new employment, and such other outplacement services as
Holdings or PMI may provide.
The amounts payable to a Covered Employee as described
above shall be payable whether or not the Covered Employee
secures new employment, and shall not be reduced or offset in any
manner except by the amount of any severance or termination of
employment payments made by Holdings, PMI or their subsidiaries
to the Covered Employee otherwise than pursuant to the Severance
Program, but unemployment compensation benefits shall not be
considered to be payments made by Holdings, PMI or their
subsidiaries.
Certain Payments and Agreements. Certain members of PMI's
and Holdings' management shared a $3.2 million fee in recognition
of their past contributions to PMI and Holdings and their
contributions in connection with the consummation of the
Transactions and their agreement not to voluntarily terminate
their employment with PMI or Holdings for a specified period of
time. The fee was allocated by Holdings' Compensation Committee
and the allocation was approved by Holdings' Board of Directors.
For information concerning additional amounts payable to Mr.
Abbott in connection with the consummation of the Transactions,
see "--Employment Arrangements and Deferred Compensation
Agreements."
Shares of Holdings Common Stock held by all officers and
directors of PMI and Holdings have been converted into the right
to receive the same consideration as shares of Holdings Common
Stock held by other stockholders. Options and Stock Units held by
the officers and directors of PMI and Holdings were treated in
the same manner as Options and Stock Units held by others.
Pursuant to the Merger Agreement, Koch Agriculture has
agreed that Holdings and PMI will, for six years after the
Effective Time, indemnify all present directors and officers of
Holdings, PMI and their subsidiaries and will, subject to certain
limitations, maintain for six years directors' and officers'
insurance and indemnification policy.
Upon completion of the Merger, TSG received a fee for
financial consulting services of $6.5 million, plus reimbursement
of out-of-pocket expenses. Messrs. Oehmig and Hevrdejs, directors
of PMI and Holdings prior to the consummation of the
Transactions, are principals of TSG.
Holdings paid cash bonuses in the aggregate amount of $1.0
million to employees of PMI and Holdings including officers, who
were eligible for awards under Holdings' long-term incentive plan
based on 1997 performance in lieu of awards of Options or Stock
Units. The employees eligible for such bonuses and the amounts
payable to each were approved by Holdings' Board of Directors.
Tax Sharing Agreements. Koch Industries, Holdings and
Holdings' subsidiaries (including the Company) (together being
the "Holdings Sub-Group") entered into tax sharing agreements
(the "Tax Sharing Agreements") as of the effective date of the
Merger which set forth certain obligations for each entity with
respect to federal, state, foreign and local taxes. In general,
the Tax Sharing Agreements provide for (i) the payment of taxes
for periods during which Holdings and any of Holdings'
subsidiaries are included in the Koch Industries consolidated
group for federal income tax purposes, or a Koch Industries
combined return for state income tax purposes (the "Affiliated
Period"), (ii) the allocation of responsibility for the filing of
tax returns, (iii) the conduct of tax audits and the handling of
tax controversies and (iv) various related matters. During the
Affiliated Period, the Tax Sharing Agreements provide that (a)
each of Holdings' subsidiaries will be obligated to reimburse
Holdings for its share of federal, state, local and foreign
income taxes for all periods commencing with the taxable year
ending on December 31, 1998 determined as if such subsidiary
filed its tax returns separately from the Koch Industries
consolidated group and the Holdings Sub-Group and (b) Holdings
will be obligated to reimburse Koch Industries for the Holdings
Sub-Group's share of federal, state, local and foreign income
taxes for all periods commencing with the taxable year ending on
December 31, 1998 determined as if the Holdings Sub-Group were a
single entity which filed its tax returns separately from the
Koch Industries consolidated group.
Koch Agriculture Supply Agreement. Pursuant to a master
procurement agreement, dated as of the effective date of the
Merger (the "Supply Agreement"), between Nutrition Supply and
Trading, a division of Koch Agriculture ("S&T"), and the Company,
S&T supplies the Company with all of its requirements for feed
ingredients and feed additives ("Feed Ingredients") and feed
packaging materials ("Packaging") to be used at the Company's
feed milling
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facilities. The price of Feed Ingredients purchased by the
Company under the Supply Agreement is equal to "Market Value"
(for the particular Feed Ingredient less the "Discount". "Market
Value," for purposes of the Supply Agreement, means the price at
which parties dealing at arm's-length would purchase and sell the
particular Feed Ingredient in the spot market. For three specific
Feed Ingredients (corn, wheat middlings and soybean meal), which
the Company expects will comprise approximately half of the Feed
Ingredients it will purchase under the Supply Agreement, Market
Value cannot exceed an amount tied to a formula based on price
quotations prevailing in the market and reported in an industry
publication. The "Discount" applicable to the first year of the
Supply Agreement is $3.50 per ton and, hereafter, will be
negotiated in good faith by S&T and the Company. The price of
Packaging purchased by the Company under the Supply Agreement
will be equal to S&T's cost. The Supply Agreement commenced on
May 1, 1998 and will have an initial term of five years, after
which it will renew automatically for additional one-year terms
until canceled by either party. The Supply Agreement can be
terminated by either party (i) under certain circumstances
relating to Koch Industries and its affiliates no longer
controlling a majority of the Company's common stock, (ii) if the
parties are unable to negotiate the Discount or (iii) if the
other party breaches its obligations under the Supply Agreement.
Jet-Pro(R) License Agreement. Koch Feed, a wholly owned
subsidiary of Koch Agriculture, agreed to license its patented
Jet-Pro(R) dewatering technology to the Company pursuant to a
license agreement dated the effective date of the Merger (the
"License Agreement"). Pursuant to the terms of the License
Agreement, and in consideration of a one-time licensing fee of
$100 payable by the Company, Koch Feed granted to the Company a
nonexclusive and nonassignable perpetual license to use the
Jet-Pro(R) dewatering technology without any geographic
restriction, on any equipment, and to process any product,
subject only to a preexisting exclusive license granted to
another licensee relating to the processing of inedible eggs in
the United States. Notwithstanding the nonexclusive nature of the
license granted to the Company, Koch Feed agreed that, for so
long as Koch Industries and its affiliates own greater than 50%
of the Company's common stock, Koch Feed will not license the
Jet-Pro(R)dewatering technology to any commercial feed producer
in the United States which is a direct competitor of the Company.
The License Agreement is terminable only upon the Company's
bankruptcy or breach of the License Agreement. In addition to the
License Agreement, which covers a process patent relating to the
Jet-Pro(R)dewatering technology, Koch Feed agreed, subject to
certain terms and conditions, to sell its patented
Jet-Pro(R)dewatering equipment to the Company on terms no less
favorable to the Company than those offered to other unaffiliated
customers of Koch Feed.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
The following is a summary of the New Credit Facilities
which became effective upon consummation of the Transactions. To
the extent this summary contains descriptions of the New Credit
Facilities, such descriptions do not purport to be complete and
are qualified in their entirety by reference to such documents,
which are available upon request from the Company.
New Credit Facilities
In connection with the Transactions, PMI entered into the
New Credit Facilities with a syndicate of financial institutions
(the "Lenders") for which Chase Bank of Texas, National
Association ("Chase Bank"), acted as administrative agent (the
"Administrative Agent") and Chase Securities Inc. acted as the
exclusive advisor and syndicate arranger. Although no firm
commitment was provided by the Lenders, the New Credit Facilities
provided the maximum aggregate principal amount of $300.0 million
of financing. The following is a summary of the material terms
and conditions of the New Credit Facilities and is subject to the
detailed provisions of the credit agreement (the "Credit
Agreement") and various related documents entered into in
connection with the New Credit Facilities.
General. The New Credit Facilities consist of (i) Term
Loans in an aggregate principal amount of $200.0 million,
comprised of two tranches: a $100.0 million Tranche A Term Loan
and a $100.0 million Tranche B Term Loan and (ii) a $100.0
million New Revolving Credit Facility, with a $40.0 million
sub-limit for letters of credit.
The proceeds of the Term Loans were borrowed in full on the
date of the consummation of the Offering, in addition to $10.5
million under the New Revolving Credit Facilities, and used to
finance the Transactions and related fees and expenses. Proceeds
of the New Revolving Credit Facility have also been used to
redeem the Company's Industrial Revenue Bonds and will be used to
finance the Company's ongoing general working capital
requirements. The New Revolving Credit Facility also may be used
in part for the issuance of letters of credit to be used solely
for ordinary course of business purposes of the Company and its
subsidiaries.
Interest Rates; Fees. The initial interest rates per annum
applicable to the amounts outstanding under the Tranche A Term
Loan and the New Revolving Credit Facility are, at the Company's
option, either (i) the base rate as defined in the Credit
Agreement (the "Base Rate") plus 1.00% per annum (the "Applicable
Base Rate Margin") or (ii) the eurodollar rate as defined in the
Credit Agreement (the "Eurodollar Rate") plus 2.00% per annum
(the "Applicable Eurodollar Rate Margin"). Upon attainment of
certain leverage ratios, as set forth in the Credit Agreement,
such Applicable Base Rate Margin and Applicable Eurodollar Rate
Margin, as well as the Commitment Fee (as defined), will be
adjusted.
Interest Rates on the Tranche B Term Loan are, at the
Company's option, (i) the Base Rate plus 1.25% per annum or (ii)
the Eurodollar Rate plus 2.25% per annum.
In addition, the Company is required to pay the Lenders
under the New Revolving Credit Facility an initial commitment fee
(the "Commitment Fee") of 0.50%, computed at a per annum rate for
each day and payable quarterly in arrears, on the unused portion
of such facility. The Company is also required to pay under the
New Revolving Credit Facility an additional fee in the amount of
0.25% per annum on the daily average amount available for drawing
under any letter of credit to the bank that has issued such
letter of credit.
Amortization; Prepayments. The Tranche A Term Loan is
scheduled to mature on the seventh anniversary of the date of
consummation of the Offering and is subject to amortization
payments on a quarterly basis of $1.25 million per quarter during
the first year, $2.0 million per quarter during the second year,
$2.75 million per quarter during the third year, $3.5 million per
quarter during the fourth year, $4.25 million per quarter during
the fifth year, $5.00 million per quarter during the sixth year
and $6.25 million per quarter during the seventh year following
the first such payment, which will be made on June 30, 1998. The
Tranche B Term Loan is scheduled to mature on the ninth
anniversary of the date of consummation of the Offering and is
subject to amortization payments on a quarterly basis of $75,000
for each of the eight successive one-year periods following the
first such payment, which will be made on June 30, 1998. The
remaining $97.6 million aggregate principal amount of the Tranche
B Term Loan shall be subject to four equal quarterly amortization
payments, with the first such payment to be made eight years
after June 30, 1998. The New Revolving Credit Facility will
mature seven years after the date of the consummation of the
Offering.
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Voluntary prepayments may be made in whole or in part
without premium or penalty (other than the payment of all
breakage costs and funding losses), in minimum principal amounts
to be agreed upon. Such payments will be applied to reduce the
scheduled amortization of all then-outstanding Term Loans on a
pro rata basis across the respective maturities thereof unless,
while the Tranche A Term Loan is outstanding, the Lenders of the
Tranche B Term Loan choose to decline certain prepayments, with
the result that the prepayment of the Tranche A Term Loan will be
increased in the amount of any such prepayment declined.
The Company is required to make mandatory repayments of the
Term Loans from (i) 50% of Excess Cash Flow (as defined in the
Credit Agreement); (ii) 100% of the net cash proceeds of all
non-ordinary-course permitted asset sales or other dispositions
of property by the Company and its subsidiaries (including
insurance and condemnation proceedings), except in certain
circumstances where such proceeds are used to replace property in
amounts to be agreed upon, subject to certain limited exceptions;
(iii) 100% of the net proceeds of any issuance of debt
obligations of Holdings, the Company and its subsidiaries; and
(iv) 50% of the net proceeds from the issuance of equity by
Holdings, the Company or its subsidiaries, subject to certain
exceptions. Applications of payments to the Term Loans will apply
to reduce the scheduled amortization of the then outstanding
Tranche A Term Loan and Tranche B Term Loan on a pro rata basis
across the respective maturities thereof unless, while the
Tranche A Term Loan is outstanding, the Lenders of the Tranche B
Term Loan choose to decline certain prepayments, with the result
that the prepayment of the Tranche A Term Loan will be increased
in the amount of any such prepayment declined.
Guarantees and Collateral. Holdings and all subsidiaries of
the Company, whether existing at the time of the consummation of
the Offering or thereafter, guaranteed the Company's obligations
under the Credit Agreement. All amounts owing under the New
Credit Facilities are secured by a first lien or first priority
security interest in (i) substantially all the tangible and
intangible personal property of the Company and its subsidiaries,
(ii) certain of the material real property of the Company and its
subsidiaries, (iii) all the common stock of the Company (to be
pledged by Holdings), (iv) all of the common stock of the
Company's subsidiaries and (v) the Company's equity interest in
certain nonsubsidiaries. The Company also provided a negative
pledge with respect to all of the other assets of the Company and
its subsidiaries.
Covenants. The obligations of the lenders under the New
Credit Facilities are subject to the satisfaction of certain
customary conditions precedent. The Company and its subsidiaries
are subject to certain affirmative and negative covenants
contained in the New Credit Facilities, including without
limitation covenants that limit (i) the incurrence of additional
indebtedness and other obligations and the granting of additional
liens; (ii) mergers, acquisitions, investments and acquisitions
and dispositions of assets; (iii) the incurrence of capitalized
lease obligations; (iv) payment of dividends; (v) prepayment or
repurchase of indebtedness, including the Notes; (vi) the sale or
discount of receivables; (vii) engaging in transactions with
affiliates (with the exception of certain feedstock arrangements)
and formation of subsidiaries; (viii) capital expenditures; and
(ix) changes of lines of business. There are also covenants
relating to compliance with ERISA and other laws, payment of
taxes, maintenance of corporate existence and rights, maintenance
of insurance and financial reporting. In addition, the New Credit
Facilities require the Company to maintain compliance with
certain specified financial covenants, including covenants
related to minimum interest coverage, minimum fixed charge
coverage and maximum leverage.
Events of Default. The New Credit Facilities contain
customary events of default, including without limitation,
payment defaults, breach of representations and warranties,
covenant defaults, cross-defaults, certain events of bankruptcy
and insolvency, certain ERISA events, judgment defaults, change
of control and failure of any guaranty or security agreement
supporting the Company's obligations under the Credit Agreement
to be in full force and effect.
Industrial Revenue Bonds
In July 1995 and October 1996, the Company entered into two
loan agreements to finance the construction of two new
manufacturing facilities in conjunction with the sale of $17.4
million in Industrial Revenue Bonds by local government units.
The Industrial Revenue Bonds were scheduled to mature in 2020 and
2022 and could be retired in whole or in part at any time. The
Industrial Revenue Bonds carried variable interest rates with a
maximum of 15% per annum. The weighted average rate at March 31,
1998 was 3.8%. The Company called the Industrial Revenue Bonds
for redemption and redeemed the Industrial Revenue Bonds within
thirty days after the consummation of the Merger.
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THE EXCHANGE OFFER
The summary herein of certain provisions of the
Registration Rights Agreement does not purport to be complete and
reference is made to the provisions of the Registration Rights
Agreement, which has been filed as an exhibit to the Registration
Statement and a copy of which is available as set forth under the
heading "Available Information."
Terms of the Exchange Offer
General
In connection with the issuance of the Old Notes pursuant
to a Purchase Agreement dated as of March 12, 1998, by and
between the Company and the Initial Purchasers, the Initial
Purchasers and their respective assignees became entitled to the
benefits of the Registration Rights Agreement.
Under the Registration Rights Agreement, the Company is
required to file within 90 days after March 12, 1998 (the date
the Old Notes were issued (the "Issue Date")) the Registration
Statement of which this Prospectus is a part for a registered
exchange offer with respect to an issue of New Notes identical in
all material respects to the Old Notes except that the New Notes
shall contain no restrictive legend thereon. Under the
Registration Rights Agreement, the Company is required to use its
best efforts to (i) cause the Registration Statement to become
effective within 150 days after the Issue Date, (ii) keep the
Exchange Offer open for at least 30 days (or longer if required
by applicable law) after the date that notice of the Exchange
Offer is mailed to holders of the Old Notes and (iii) consummate
the Exchange Offer on or prior to the 30th day following the date
on which the Registration Statement is declared effective by the
Commission. The Exchange Offer being made hereby, if commenced
and consummated within the time periods described in this
paragraph, will satisfy those requirements under the Registration
Rights Agreement.
Upon the terms and subject to the conditions set forth in
this Prospectus and in the Letter of Transmittal, all Old Notes
validly tendered and not withdrawn prior to 5:00 p.m., New York
City time, on the Expiration Date will be accepted for exchange.
New Notes of the same class will be issued in exchange for an
equal principal amount of outstanding Old Notes accepted in the
Exchange Offer. Old Notes may be tendered only in integral
multiples of $1,000. This Prospectus, together with the Letter of
Transmittal, is being sent to all registered holders as of _____,
1998. The Exchange Offer is not conditioned upon any minimum
principal amount of Old Notes being tendered in exchange.
However, the obligation to accept Old Notes for exchange pursuant
to the Exchange Offer is subject to certain conditions as set
forth herein under "--Conditions."
Old Notes shall be deemed to have been accepted as validly
tendered when, as and if the Trustee has given oral or written
notice thereof to the Exchange Agent. The Exchange Agent will act
as agent for the tendering holders of Old Notes for the purposes
of receiving the New Notes and delivering New Notes to such
holders.
Based on interpretations by the staff of the Commission, as
set forth in no-action letters issued to third parties, including
the Exchange Offer No-Action Letters, the Company believes that
the New Notes issued pursuant to the Exchange Offer may be
offered for resale, resold or otherwise transferred by each
holder thereof (other than a broker-dealer who acquires such New
Notes directly from the Company for resale pursuant to Rule 144A
under the Securities Act or any other available exemption under
the Securities Act and other than any holder that is an
"affiliate" (as defined in Rule 405 under the Securities Act) of
the Company) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided
that such New Notes are acquired in the ordinary course of such
holder's business and such holder is not engaged in, and does not
intend to engage in, a distribution of such New Notes and has no
arrangement with any person to participate in a distribution of
such New Notes. By tendering the Old Notes in exchange for New
Notes, each holder, other than a broker-dealer, will represent to
the Company that: (i) it is not an affiliate (as defined in Rule
405 under the Securities Act) of the Company; (ii) it is not a
broker-dealer tendering Old Notes acquired for its own account
directly from the Company; (iii) any New Notes to be received by
it will be acquired in the ordinary course of its business; and
(iv) it is not engaged in, and does not intend to engage in, a
distribution of such New Notes and has no arrangement or
understanding to participate in a distribution of the New Notes.
If a holder of Old Notes is engaged in or intends to engage in a
distribution of the New Notes or has any arrangement or
understanding with respect to the distribution of the New Notes
to be acquired pursuant to the Exchange Offer, such holder may
not rely on the applicable
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interpretations of the staff of the Commission and must comply
with the registration and prospectus delivery requirements of the
Securities Act in connection with any secondary resale
transaction. Each Participating Broker-Dealer that receives New
Notes for its own account in exchange for Old Notes, where such
Old Notes were acquired by such Participating Broker-Dealer as a
result of market-making activities or other trading activities,
must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. See "Plan of Distribution."
The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a Participating Broker-Dealer will not
be deemed to admit that it is an "underwriter" within the meaning
of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a Participating
Broker-Dealer in connection with resales of New Notes received in
exchange for Old Notes where such Old Notes were acquired by such
Participating Broker-Dealer as a result of market-making
activities or other trading activities. The Company has agreed
that, for a period of time not to exceed 180 days after the
Expiration Date, or such shorter period which will terminate when
such Participating Broker-Dealers have completed all resales
subject to applicable prospectus delivery requirements, it will
make this Prospectus available to any Participating Broker-Dealer
for use in connection with any such resale. See "Plan of
Distribution."
In the event that applicable interpretations of the staff
of the Commission do not permit the Company to effect the
Exchange Offer, or if for any other reason the Exchange Offer is
not consummated within 180 days of the Issue Date, or if the
Initial Purchasers so request with respect to Old Notes not
eligible to be exchanged for New Notes in the registered Exchange
Offer, or if any holder of Old Notes (other than affiliates of
the Company) is not eligible to participate in the Exchange Offer
or does not receive freely tradeable New Notes in the Exchange
Offer, the Company, will, at its cost, (a) as promptly as
practicable, file a shelf registration statement (the "Shelf
Registration Statement") with the Commission covering resales of
the Old Notes or the New Notes, as the case may be, (b) use its
best efforts to cause the Shelf Registration Statement to be
declared effective under the Securities Act and (c) keep the
Shelf Registration Statement effective (except as the result of a
Suspension Period (as defined below)) until the earlier of (i)
the time when the Old Notes covered by the Shelf Registration
Statement can be sold (by persons other than affiliates of the
Company) pursuant to Rule 144 without any limitations under
clauses (c), (e), (f) and (h) of Rule 144 and (ii) two years from
the Issue Date. The Company will, in the event a Shelf
Registration Statement is filed, among other things, provide to
each holder for whom such Shelf Registration Statement was filed
copies of the prospectus which is a part of the Shelf
Registration Statement, notify each such holder when the Shelf
Registration Statement has become effective and take certain
other actions as are required to permit unrestricted resales of
the Old Notes or the New Notes, as the case may be. A holder
selling such Old Notes or New Notes pursuant to the Shelf
Registration Statement generally would be required to be named as
a selling security holder in the related prospectus and to
deliver a prospectus to purchasers, will be subject to certain of
the civil liability provisions under the Securities Act in
connection with such sales and will be bound by the provisions of
the Registration Rights Agreement which are applicable to such
holder (including certain indemnification obligations).
If (i) by June 10, 1998, neither the Exchange Offer
Registration Statement nor the Shelf Registration Statement has
been filed with the Commission; (ii) by September 8, 1998,
neither the Exchange Offer is consummated nor the Shelf
Registration Statement is declared effective; or (iii) after
either the Exchange Offer Registration Statement or the Shelf
Registration Statement is declared effective, such Registration
Statement thereafter ceases to be effective or usable (subject to
certain exceptions, including an exception for a period not to
exceed 60 days in any twelve-month period during which the
Company effects a material corporate transaction (a "Suspension
Period" as further defined in the Registration Rights Agreement))
in connection with resales of Old Notes or New Notes in
accordance with and during the periods specified in the
Registration Rights Agreement (each such event referred to in
clause (i) through (iii) being herein called a "Registration
Default"), additional cash interest will accrue on the Old Notes
and the New Notes at the rate of 0.50% per annum (increasing by
0.50% per annum at the end of each 90-day period thereafter) from
and including the date on which any such Registration Default
shall occur to but excluding the date on which all Registration
Defaults have been cured, calculated on the principal amount of
the Old Notes as of the date on which such interest is payable;
provided, however, that in no event shall the aggregate amount of
such additional interest exceed 1.00% per annum. Such interest is
payable in addition to any other interest payable from time to
time with respect to the Old Notes.
Upon consummation of the Exchange Offer, subject to certain
exceptions, holders of Old Notes who do not exchange their Old
Notes for New Notes in the Exchange Offer will no longer be
entitled to registration rights and will not be able to offer or
sell their Old Notes, unless such Old Notes are subsequently
registered under the Securities Act (which, subject to certain
limited exceptions, the Company will have no obligation to do),
except
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pursuant to an exemption from, or in a transaction not subject
to, the Securities Act and applicable state securities laws. See
"Risk Factors-Risk Factors Relating to the Notes-Consequences of
Failure to Exchange."
Expiration Date; Extensions; Amendments; Termination
The term "Expiration Date" shall mean ______________, 1998
(30 calendar days following the commencement of the Exchange
Offer, which will occur on the date of effectiveness of the
Registration Statement), unless the Exchange Offer is extended if
and as required by applicable law, in which case the term
"Expiration Date" shall mean the latest date to which the
Exchange Offer is extended.
In order to extend the Expiration Date, the Company will
notify the Exchange Agent of any extension by oral or written
notice and will notify the holders of the Old Notes by means of a
press release or other public announcement prior to 9:00 a.m.,
New York City time, on the next business day after the previously
scheduled Expiration Date.
The Company reserves the right (i) to delay acceptance of
any Old Notes, to extend the Exchange Offer or to terminate the
Exchange Offer and not permit acceptance of Old Notes not
previously accepted if any of the conditions set forth herein
under "--Conditions" shall have occurred and shall not have been
waived by the Company, by giving oral or written notice of such
delay, extension or termination to the Exchange Agent, or (ii) to
amend the terms of the Exchange Offer in any manner deemed by it
to be advantageous to the holders of the Old Notes. Any such
delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice
thereof to the Exchange Agent. If the Exchange Offer is amended
in a manner determined by the Company to constitute a material
change, the Company will promptly disclose such amendment in a
manner reasonably calculated to inform the holders of the Old
Notes of such amendment.
Without limiting the manner in which the Company may choose
to make public announcement of any delay, extension, amendment or
termination of the Exchange Offer, the Company shall have no
obligation to publish, advertise, or otherwise communicate any
such public announcement.
Interest on the New Notes
The New Notes will accrue interest at the applicable per
annum rate set forth on the cover page of this Prospectus, from
(A) the later of (i) the last interest payment date on which
interest was paid on the Old Notes surrendered in exchange
therefor or (ii) if the Old Notes are surrendered for exchange on
a date subsequent to the record date for an interest payment date
to occur on or after the date of such exchange and as to which
interest will be paid, the date of such interest payment or (B)
if no interest has been paid on the Old Notes, from the Issue
Date of such Old Notes. Interest on the New Notes is payable on
March 15 and September 15 of each year.
Procedures for Tendering
To tender in the Exchange Offer, a holder must complete,
sign and date the Letter of Transmittal, or a facsimile thereof,
have the signatures thereon guaranteed if required by the Letter
of Transmittal, and mail or otherwise deliver such Letter of
Transmittal or such facsimile, together with any other required
documents, to the Exchange Agent prior to 5:00 p.m., New York
City time, on the Expiration Date. In addition, either (i)
certificates for such Old Notes must be received by the Exchange
Agent along with the Letter of Transmittal, (ii) a timely
confirmation of a book-entry transfer (a "Book-Entry
Confirmation") of such Old Notes, if such procedure is available,
into the Exchange Agent's account at The Depository Trust Company
(the "Book-Entry Transfer Facility") pursuant to the procedure
for book-entry transfer described below, must be received by the
Exchange Agent prior to the Expiration Date or (iii) the holder
must comply with the guaranteed delivery procedures described
below. THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF
TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION
AND RISK OF THE HOLDERS. IF SUCH DELIVERY IS BY MAIL, IT IS
RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN
RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD
BE ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL
OR OLD NOTES SHOULD BE SENT TO THE COMPANY. Delivery of all
documents must be made to the Exchange Agent at its address set
forth below. Holders may also request their respective brokers,
dealers, commercial banks, trust companies or nominees to effect
such tender for such holders.
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The tender by a holder of Old Notes will constitute an
agreement between such holder and the Company in accordance with
the terms and subject to the conditions set forth herein and in
the Letter of Transmittal.
Only a holder of Old Notes may tender such Old Notes in the
Exchange Offer. The term "holder" with respect to the Exchange
Offer means any person in whose name Old Notes are registered on
the books of the Company or any other person who has obtained a
properly completed bond power from the registered holder.
Any beneficial owner whose Old Notes are registered in the
name of a broker, dealer, commercial bank, trust company or other
nominee and who wishes to tender should contact such registered
holder promptly and instruct such registered holder to tender on
his behalf. If such beneficial owner wishes to tender on his own
behalf, such beneficial owner must, prior to completing and
executing the Letter of Transmittal and delivering his Old Notes,
either make appropriate arrangements to register ownership of the
Old Notes in such owner's name or obtain a properly completed
bond power from the registered holder. The transfer of registered
ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of
withdrawal, as the case may be, must be guaranteed by any member
firm of a registered national securities exchange or of the
National Association of Securities Dealers, Inc., a commercial
bank or trust company having an office or correspondent in the
United States or an "eligible guarantor" institution within the
meaning of Rule 17Ad-15 under the Exchange Act (each an "Eligible
Institution") unless the Old Notes tendered pursuant thereto are
tendered (i) by a registered holder who has not completed the box
entitled "Special Issuance Instructions" or "Special Delivery
Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution.
If the Letter of Transmittal is signed by a person other
than the registered holder of any Old Notes listed therein, such
Old Notes must be endorsed or accompanied by bond powers and a
proxy which authorizes such person to tender the Old Notes on
behalf of the registered holder, in each case as the name of the
registered holder or holders appears on the Old Notes.
If the Letter of Transmittal or any Old Notes or bond
powers are signed by trustees, executors, administrators,
guardians, attorneys-in-fact, officers of corporations or others
acting in a fiduciary or representative capacity, such persons
should so indicate when signing, and unless waived by the
Company, evidence satisfactory to the Company of their authority
to so act must be submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility
(including time of receipt) and withdrawal of the tendered Old
Notes will be determined by the Company in its sole discretion,
which determination will be final and binding. The Company
reserves the absolute right to reject any and all Old Notes not
properly tendered or any Old Notes which, if accepted, would, in
the opinion of counsel for the Company, be unlawful. The Company
also reserves the absolute right to waive any irregularities or
conditions of tender as to particular Old Notes. The Company's
interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be
final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Old Notes must be
cured within such time as the Company shall determine. Neither
the Company, the Exchange Agent nor any other person shall be
under any duty to give notification of defects or irregularities
with respect to tenders of Old Notes, nor shall any of them incur
any liability for failure to give such notification. Tenders of
Old Notes will not be deemed to have been made until such
irregularities have been cured or waived. Any Old Notes received
by the Exchange Agent that are not properly tendered and as to
which the defects or irregularities have not been cured or waived
will be returned without cost to such holder by the Exchange
Agent to the tendering holders of Old Notes, unless otherwise
provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
In addition, the Company reserves the right in its sole
discretion, subject to the provisions of the Indenture, to (i)
purchase or make offers for any Old Notes that remain outstanding
subsequent to the Expiration Date or, as set forth under
"--Conditions", to terminate the Exchange Offer in accordance with
the terms of the Registration Rights Agreement and (ii) to the
extent permitted by applicable law, purchase Old Notes in the
open market, in privately negotiated transactions or otherwise.
The terms of any such purchases or offers could differ from the
terms of the Exchange Offer.
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Acceptance of Old Notes for Exchange; Delivery of New Notes
Upon satisfaction or waiver of all of the conditions to the
Exchange Offer, all Old Notes properly tendered will be accepted,
promptly after the Expiration Date, and the New Notes will be
issued promptly after acceptance of the Old Notes. See
"--Conditions" below. For purposes of the Exchange Offer, Old
Notes shall be deemed to have been accepted as validly tendered
for exchange when, as and if the Company has given oral or
written notice thereof to the Exchange Agent.
In all cases, issuance of New Notes for Old Notes that are
accepted for exchange pursuant to the Exchange Offer will be made
only after timely receipt by the Exchange Agent of certificates
for such Old Notes or a timely Book-Entry Confirmation of such
Old Notes into the Exchange Agent's account at the Book-Entry
Transfer Facility, a properly completed and duly executed Letter
of Transmittal and all other required documents. If any tendered
Old Notes are not accepted for any reason set forth in the terms
and conditions of the Exchange Offer or if Old Notes are
submitted for a greater principal amount than the holder desires
to exchange, such unaccepted or nonexchanged Old Notes will be
returned without expense to the tendering holder thereof (or, in
the case of Old Notes tendered by book-entry transfer procedures
described below, such nonexchanged Old Notes will be credited to
an account maintained with such Book-Entry Transfer Facility) as
promptly as practicable after the expiration or termination of
the Exchange Offer.
Book-Entry Transfer
The Exchange Agent will make a request to establish an
account with respect to the Old Notes at the Book-Entry Transfer
Facility for purposes of the Exchange Offer within two business
days after the date of this Prospectus. Any financial institution
that is a participant in the Book-Entry Transfer Facility's
systems may make book-entry delivery of Old Notes by causing the
Book-Entry Transfer Facility to transfer such Old Notes into the
Exchange Agent's account at the Book-Entry Transfer Facility in
accordance with such Book-Entry Transfer Facility's procedures
for transfer. However, although delivery of Old Notes may be
effected through book-entry transfer at the Book-Entry Transfer
Facility, the Letter of Transmittal or facsimile thereof with any
required signature guarantees and any other required documents
must, in any case, be transmitted to and received by the Exchange
Agent at one of the addresses set forth below under "--Exchange
Agent" on or prior to the Expiration Date or the guaranteed
delivery procedures described below must be complied with.
Guaranteed Delivery Procedures
If a registered holder of the Old Notes desires to tender
such Old Notes, and the Old Notes are not immediately available,
or time will not permit such holder's Old Notes or other required
documents to reach the Exchange Agent before the Expiration Date,
or the procedures for book-entry transfer cannot be completed on
a timely basis, a tender may be effected if (i) the tender is
made through an Eligible Institution, (ii) prior to the
Expiration Date, the Exchange Agent receives from such Eligible
Institution a properly completed and duly executed Letter of
Transmittal (or a facsimile thereof) and Notice of Guaranteed
Delivery, substantially in the form provided by the Company (by
facsimile transmission, mail or hand delivery), setting forth the
name and address of the holder of Old Notes and the amount of Old
Notes tendered, stating that the tender is being made thereby and
guaranteeing that within three New York Stock Exchange ("NYSE")
trading days after the date of execution of the Notice of
Guaranteed Delivery, the certificates for all physically tendered
Old Notes, in proper form for transfer, or a Book-Entry
Confirmation, as the case may be, and any other documents
required by the Letter of Transmittal will be deposited by the
Eligible Institution with the Exchange Agent and (iii) the
certificates for all physically tendered Old Notes, in proper
form for transfer, or a Book-Entry Confirmation, as the case may
be, and all other documents required by the Letter of Transmittal
are received by the Exchange Agent within three NYSE trading days
after the date of execution of the Notice of Guaranteed Delivery.
Withdrawal of Tenders
Tenders of Old Notes may be withdrawn at any time prior to
5:00 p.m., New York City time, on the Expiration Date.
For a withdrawal to be effective, a written notice of
withdrawal must be received by the Exchange Agent prior to 5:00
p.m., New York City time, on the Expiration Date at one of the
addresses set forth below under "--
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Exchange Agent." Any such notice of withdrawal must specify the
name of the person having tendered the Old Notes to be withdrawn,
identify the Old Notes to be withdrawn (including the principal
amount of such Old Notes) and (where certificates for Old Notes
have been transmitted) specify the name in which such Old Notes
are registered, if different from that of the withdrawing holder.
If certificates for Old Notes have been delivered or otherwise
identified to the Exchange Agent, then, prior to the release of
such certificates, the withdrawing holder must also submit the
serial numbers of the particular certificates to be withdrawn and
a signed notice of withdrawal with signatures guaranteed by an
Eligible Institution unless such holder is an Eligible
Institution. If Old Notes have been tendered pursuant to the
procedure for book-entry transfer described above, any notice of
withdrawal must specify the name and number of the account at the
Book-Entry Transfer Facility to be credited with the withdrawn
Old Notes and otherwise comply with the procedures of such
facility. All questions as to the validity, form and eligibility
(including time of receipt) of such notices will be determined by
the Company, whose determination shall be final and binding on
all parties. Any Old Notes so withdrawn will be deemed not to
have been validly tendered for exchange for purposes of the
Exchange Offer. Any Old Notes which have been tendered for
exchange but which are not exchanged for any reason will be
returned to the holder thereof without cost to such holder (or,
in the case of Old Notes tendered by book-entry transfer into the
Exchange Agent's account at the Book-Entry Transfer Facility
pursuant to the book-entry transfer procedures described above,
such Old Notes will be credited to an account maintained with
such Book-Entry Transfer Facility for the Old Notes) as soon as
practicable after withdrawal, rejection of tender or termination
of the Exchange Offer. Properly withdrawn Old Notes may be
retendered by following one of the procedures described under
"--Procedures for Tendering" and "--Book-Entry Transfer" above at
any time on or prior to the Expiration Date.
Conditions
Notwithstanding any other term of the Exchange Offer, Old
Notes will not be required to be accepted for exchange, nor will
New Notes be issued in exchange for any Old Notes, and the
Company may terminate or amend the Exchange Offer as provided
herein before the acceptance of such Old Notes, if because of any
change in law, or applicable interpretations thereof by the
Commission, the Company determines that it is not permitted to
effect the Exchange Offer. The Company has no obligation to, and
will not knowingly, permit acceptance of tenders of Old Notes
from affiliates of the Company (within the meaning of Rule 405
under the Securities Act) or from any other holder or holders who
are not eligible to participate in the Exchange Offer under
applicable law or interpretations thereof by the Commission, or
if the New Notes to be received by such holder or holders of Old
Notes in the Exchange Offer, upon receipt, will not be tradable
by such holder without restriction under the Securities Act and
the Exchange Act and without material restrictions under the
"blue sky" or securities laws of substantially all of the states
of the United States.
Exchange Agent
The First National Bank of Chicago has been appointed as
Exchange Agent for the Exchange Offer. Questions and requests for
assistance and requests for additional copies of this Prospectus
or of the Letter of Transmittal should be directed to the
Exchange Agent addressed as follows:
By Mail: Facsimile By Hand or
Transmissions: Overnight
(Registered or Delivery:
Certified Mail (Eligible
Recommended) Institutions
The First National Only) The First National
Bank of Chicago (212) 240-8938 Bank of Chicago
c/o First Chicago c/o First Chicago
Trust Company Trust Company
of New York of New York
14 Wall Street To Confirm by 14 Wall Street
8th Floor, Telephone 8th Floor,
Window 2 or for Infor- Window 2
New York, mation Call: New York,
New York 10005 (212) 240-8801 New York 10005
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Fees and Expenses
The expenses of soliciting tenders pursuant to the Exchange
Offer will be borne by the Company. The principal solicitation
for tenders pursuant to the Exchange Offer is being made by mail;
however, additional solicitations may be made by telegraph,
telephone, telecopy or in person by officers and regular
employees of the Company.
The Company will not make any payments to brokers, dealers
or other persons soliciting acceptances of the Exchange Offer.
The Company, however, will pay the Exchange Agent reasonable and
customary fees for its services and will reimburse the Exchange
Agent for its reasonable out-of-pocket expenses in connection
therewith. The Company may also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket
expenses incurred by them in forwarding copies of the Prospectus
and related documents to the beneficial owners of the Old Notes,
and in handling or forwarding tenders for exchange.
The expenses to be incurred in connection with the Exchange
Offer will be paid by the Company, including fees and expenses of
the Exchange Agent and Trustee and accounting, legal, printing
and related fees and expenses.
The Company will pay all transfer taxes, if any, applicable
to the exchange of Old Notes pursuant to the Exchange Offer. If,
however, certificates representing New Notes or Old Notes for
principal amounts not tendered or accepted for exchange are to be
delivered to, or are to be registered or issued in the name of,
any person other than the registered holder of the Old Notes
tendered, or if tendered Old Notes are registered in the name of
any person other than the person signing the Letter of
Transmittal, or if a transfer tax is imposed for any reason other
than the exchange of Old Notes pursuant to the Exchange Offer,
then the amount of any such transfer taxes (whether imposed on
the registered holder or any other persons) will be payable by
the tendering holder. If satisfactory evidence of payment of such
taxes or exemption therefrom is not submitted with the Letter of
Transmittal, the amount of such transfer taxes will be billed
directly to such tendering holder.
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DESCRIPTION OF THE NEW NOTES
General
The Old Notes were issued, and the New Notes offered hereby
will be issued, under an Indenture, dated as of March 12, 1998
(the "Indenture"), between the Company and The First National
Bank of Chicago, as Trustee (the "Trustee"). The terms of the New
Notes will include those stated in the Indenture and those made
part of the Indenture by reference to the TIA. The New Notes will
be subject to all such terms, and prospective holders of New
Notes are referred to the Indenture and the TIA for a statement
thereof.
The following is a summary of certain provisions of the
Indenture, a copy of which Indenture and Registration Rights
Agreement is available upon request to the Company at the address
set forth under "Available Information." The following summary of
certain provisions of the Indenture does not purport to be
complete and is subject to, and is qualified in its entirety by
reference to, all the provisions of the Indenture, including the
definitions of certain terms therein and those terms made a part
thereof by the TIA. Capitalized terms used herein and not
otherwise defined have the meanings set forth under "--Certain
Definitions." For purposes of this summary, the term "Company"
refers only to Purina Mills, Inc. and not to Holdings or any
Subsidiary of the Company. None of Koch Agriculture, Koch
Industries, Holdings or any of their Affiliates (other than the
Company) are parties to the Indenture or responsible for, or
guarantors of, any payments or other claims in respect of the New
Notes or the Indenture.
Principal of, premium, if any, and interest on the New
Notes will be payable, and the New Notes may be exchanged or
transferred, at the office or agency of the Company in the
Borough of Manhattan, The City of New York (which initially shall
be the corporate trust office of the Trustee, at 14 Wall Street,
New York, New York 10005), except that, at the option of the
Company, payment of interest may be made by check mailed to the
registered holders of the New Notes at their registered
addresses.
The New Notes will be issued only in fully registered form,
without coupons, in denominations of $1,000 and any integral
multiple of $1,000. No service charge will be made for any
registration of transfer or exchange of New Notes, but the
Company may require payment of a sum sufficient to cover any
transfer tax or other similar governmental charge payable in
connection therewith.
Terms of the New Notes
The New Notes will be unsecured, senior subordinated
obligations of the Company, limited to $500.0 million aggregate
principal amount, of which $350.0 million aggregate principal
amount will be issued in the Exchange Offer. The New Notes will
mature on March 15, 2010.
Each New Note will bear interest at a rate per annum shown
on the front cover of this Prospectus from March 12, 1998 or from
the most recent date to which interest has been paid or provided
for, payable semiannually to Holders of record at the close of
business on the March 1 or September 1 immediately preceding the
interest payment date on March 15 and September 15 of each year,
commencing September 15, 1998. Interest on the New Notes will be
computed on the basis of a 360-day year of twelve 30-day months.
The interest rate on the Old Notes is subject to increase
in certain circumstances if the Company does not file an Exchange
Offer Registration Statement or if the Exchange Offer
Registration Statement is not declared effective on a timely
basis or if certain other conditions are not satisfied, all as
further described under "--Registered Exchange Offer; Registration
Rights."
Optional Redemption
Except as set forth in the following paragraph, the New
Notes will not be redeemable at the option of the Company prior
to March 15, 2003. Thereafter, the New Notes will be redeemable,
at the Company's option, in whole or in part, at any time or from
time to time, upon not less than 30 nor more than 60 days' prior
notice mailed by first-class mail to each Holder's registered
address, at the following redemption prices (expressed as a
percentage of principal amount), plus accrued interest, if any,
to the redemption date (subject to the right of Holders of record
on the relevant record date to receive interest due on the
relevant interest payment date), if redeemed during the 12-month
period commencing on March 15 of the years set forth below:
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Redemption
Period Price
- ------ ----------
2003............................................. 104.500%
2004............................................. 103.000%
2005............................................. 101.500%
2006 and thereafter.............................. 100.000%
In addition, at any time and from time to time prior to
March 15, 2001, the Company may redeem in the aggregate up to 35%
of the original aggregate principal amount of the New Notes with
the net cash proceeds of one or more Public Equity Offerings of
the Company following which there is a Public Market or, in the
case of a Public Equity Offering of Holdings following which
there is a Public Market, with the net cash proceeds thereof that
are contributed to the equity capital of the Company, at a
redemption price (expressed as a percentage of principal amount
thereof) of 109.000% plus accrued interest, if any, to the
redemption date (subject to the right of Holders of record on the
relevant record date to receive interest due on the relevant
interest payment date); provided, however, that at least $227.5
million principal amount of the New Notes must remain outstanding
after each such redemption.
In the case of any partial redemption, selection of the New
Notes for redemption will be made by the Trustee on a pro rata
basis, by lot or by such other method as the Trustee in its sole
discretion shall deem to be fair and appropriate, although no
Note of $1,000 in original principal amount or less will be
redeemed in part. If any Note is to be redeemed in part only, the
notice of redemption relating to such Note shall state the
portion of the principal amount thereof to be redeemed. A New
Note in principal amount equal to the unredeemed portion thereof
will be issued in the name of the Holder thereof upon
cancellation of the original Note.
Ranking
The indebtedness evidenced by the New Notes will be
unsecured senior subordinated obligations of the Company. The
payment of the principal of, premium (if any) and interest on,
the New Notes is subordinate in right of payment, as set forth in
the Indenture, to the prior payment in full in cash or cash
equivalents of all Senior Indebtedness, whether outstanding on
the Issue Date or thereafter incurred, including the Company's
obligations under the Credit Agreement. The New Notes will also
be structurally subordinated to all existing and future
Indebtedness of any Subsidiary of the Company.
As of March 31, 1998, the Company's Senior Indebtedness was
approximately $206.9 million. Although the Indenture contains
limitations on the amount of additional Indebtedness which the
Company may Incur, under certain circumstances the amount of such
Indebtedness could be substantial and, in any case, such
Indebtedness may be Senior Indebtedness. See "--Certain
Covenants-Limitation on Indebtedness."
Only Indebtedness of the Company that is Senior
Indebtedness will rank senior to the New Notes in accordance with
the provisions of the Indenture. The New Notes will in all
respects rank equal to all other Senior Subordinated Indebtedness
of the Company. The Company has agreed in the Indenture that it
will not Incur, directly or indirectly, any Indebtedness that is
subordinate or junior in ranking in right of payment to its
Senior Indebtedness unless such Indebtedness is Senior
Subordinated Indebtedness or is expressly subordinated in right
of payment to the Senior Subordinated Indebtedness. Unsecured
Indebtedness is not deemed to be subordinated or junior to
Secured Indebtedness merely because it is unsecured.
The Company may not pay principal of, premium (if any) or
interest on, the New Notes or make any deposit pursuant to the
provisions described under "Defeasance" below and may not
repurchase, redeem or otherwise retire any New Notes
(collectively, "pay the New Notes") if (i) any Designated Senior
Indebtedness is not paid in full in cash or cash equivalents when
due or (ii) any other default on Designated Senior Indebtedness
occurs and the maturity of such Designated Senior Indebtedness is
accelerated in accordance with its terms unless, in either case,
the default has been cured or waived and any such acceleration
has been rescinded or such Designated Senior Indebtedness has
been paid in full in cash or cash equivalents. However, the
Company may pay the New Notes without regard to the foregoing if
the Company and the Trustee receive written notice approving such
payment from the Representative of the Designated Senior
Indebtedness with respect to which either of the events set forth
in clause (i) or (ii) of the immediately preceding sentence has
occurred and is continuing. During the continuance of any default
(other than a default described in clause (i) or (ii) of the
second preceding sentence) with respect to any Designated Senior
Indebtedness pursuant to which the
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maturity thereof may be accelerated immediately without further
notice (except such notice as may be required to effect such
acceleration) or the expiration of any applicable grace periods,
the Company may not pay the New Notes for a period (a "Payment
Blockage Period") commencing upon the receipt by the Trustee
(with a copy to the Company) of written notice (a "Blockage
Notice") of such default from the Representative of the holders
of such Designated Senior Indebtedness specifying an election to
effect a Payment Blockage Period and ending 179 days thereafter
(or earlier if such Payment Blockage Period is terminated (i) by
written notice to the Trustee and the Company from the Person or
Persons who gave such Blockage Notice, (ii) because the default
giving rise to such Blockage Notice is no longer continuing or
(iii) because such Designated Senior Indebtedness has been repaid
in full). Notwithstanding the provisions described in the
immediately preceding sentence (but subject to the provisions
described in the first sentence of this paragraph), unless the
holders of such Designated Senior Indebtedness or the
Representative of such holders have accelerated the maturity of
such Designated Senior Indebtedness, the Company may resume
payments on the New Notes after the end of such Payment Blockage
Period. Subject to the provisions described in the first sentence
of this paragraph, the New Notes shall not be subject to more
than one Payment Blockage Period in any consecutive 360-day
period, irrespective of the number of defaults with respect to
Designated Senior Indebtedness during such period.
Upon any payment or distribution of the assets of the
Company upon a total or partial liquidation or dissolution or
reorganization of or similar proceeding relating to the Company
or its property, the holders of Senior Indebtedness will be
entitled to receive payment in full in cash or cash equivalents
of such Senior Indebtedness before the Noteholders are entitled
to receive any payment, and until the Senior Indebtedness is paid
in full in cash or cash equivalents, any payment or distribution
to which Noteholders would be entitled but for the subordination
provisions of the Indenture will be made to holders of such
Senior Indebtedness as their interests may appear. If a
distribution is made to Noteholders that, due to the
subordination provisions, should not have been made to them, such
Noteholders are required to hold it in trust for the holders of
Senior Indebtedness and pay it over to them as their interests
may appear.
If payment of the New Notes is accelerated because of an
Event of Default, the Company or the Trustee shall promptly
notify the holders of Designated Senior Indebtedness or the
Representative of such holders of such acceleration.
By reason of the subordination provisions contained in the
Indenture, in the event of insolvency, creditors of the Company
who are holders of Senior Indebtedness may recover more, ratably,
than the Noteholders, and creditors of the Company who are not
holders of Senior Indebtedness may recover less, ratably, than
holders of Senior Indebtedness and may recover more, ratably,
than the Noteholders.
The terms of the subordination provisions described above
will not apply to payments from money or the proceeds of U.S.
Government Obligations held in trust by the Trustee for the
payment of principal of and interest on the New Notes pursuant to
the provisions described under "--Defeasance."
Book-Entry; Delivery and Form
The New Notes will be issued in the form of a Global Note.
The Global Note will be deposited with, or on behalf of, the
Depository and registered in the name of the Depository or its
nominee. Except as set forth below, the Global Note may be
transferred, in whole and not in part, only to the Depository or
another nominee of the Depository. Investors may hold their
beneficial interests in the Global Note directly through the
Depository if they have an account with the Depository or
indirectly through organizations which have accounts with the
Depository.
New Notes that are issued as described below under
"--Certificated New Notes" will be issued in definitive form. Upon
the transfer of a Note in definitive form, such Note will, unless
the Global Note has previously been exchanged for New Notes in
definitive form, be exchanged for an interest in the Global Note
representing the principal amount of New Notes being transferred.
The Depository has advised the Company as follows: The
Depository is a limited-purpose trust company organized under the
laws of the State of New York, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the New
York Uniform Commercial Code, and a "clearing agency" registered
pursuant to the provisions of Section 17A of the Exchange Act.
The Depository was created to hold securities of institutions
that have accounts with the Depository ("participants") and to
facilitate the clearance and settlement of securities
transactions among its participants in such securities through
electronic book-entry changes in accounts of the participants,
thereby
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eliminating the need for physical movement of securities
certificates. The Depository's participants include securities
brokers and dealers (which may include the Initial Purchasers),
banks, trust companies, clearing corporations and certain other
organizations. Access to the Depository's book-entry system is
also available to others such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial
relationship with a participant, whether directly or indirectly.
Upon the issuance of the Global Note, the Depository will
credit, on its book-entry registration and transfer system, the
principal amount of the New Notes represented by such Global Note
to the accounts of participants. The accounts to be credited
shall be designated by the Initial Purchasers of the New Notes.
Ownership of beneficial interests in the Global Note will be
limited to participants or persons that may hold interests
through participants. Ownership of beneficial interests in the
Global Note will be shown on, and the transfer of those ownership
interests will be effected only through, records maintained by
the Depository (with respect to participants' interest) and such
participants (with respect to the owners of beneficial interests
in the Global Note other than participants). The laws of some
jurisdictions may require that certain purchasers of securities
take physical delivery of such securities in definitive form.
Such limits and laws may impair the ability to transfer or pledge
beneficial interests in the Global Note.
So long as the Depository, or its nominee, is the
registered holder and owner of the Global Note, the Depository or
such nominee, as the case may be, will be considered the sole
legal owner and holder of the related New Notes for all purposes
of such New Notes and the Indenture. Except as set forth below,
owners of beneficial interests in the Global Note will not be
entitled to have the New Notes represented by the Global Note
registered in their names, will not receive or be entitled to
receive physical delivery of certificated New Notes in definitive
form and will not be considered to be the owners or holders of
any New Notes under the Global Note. The Company understands that
under existing industry practice, in the event an owner of a
beneficial interest in the Global Note desires to take any action
that the Depository, as the holder of the Global Note, is
entitled to take, the Depository would authorize the participants
to take such action, and that the participants would authorize
beneficial owners owning through such participants to take such
action or would otherwise act upon the instructions of beneficial
owners owning through them.
Payment of principal of and interest on New Notes
represented by the Global Note registered in the name of and held
by the Depository or its nominee will be made to the Depository
or its nominee, as the case may be, as the registered owner and
holder of the Global Note.
The Company expects that the Depository or its nominee,
upon receipt of any payment of principal of or interest on the
Global Note, will credit participants' accounts with payments in
amounts proportionate to their respective beneficial interests in
the principal amount of the Global Note as shown on the records
of the Depository or its nominee. The Company also expects that
payments by participants to owners of beneficial interests in the
Global Note held through such participants will be governed by
standing instructions and customary practices and will be the
responsibility of such participants. The Company will not have
any responsibility or liability for any aspect of the records
relating to, or payments made on account of, beneficial ownership
interests in the Global Note for any Note or for maintaining,
supervising or reviewing any records relating to such beneficial
ownership interests or for any other aspect of the relationship
between the Depository and its participants or the relationship
between such participants and the owners of beneficial interests
in the Global Note owning through such participants.
Unless and until it is exchanged in whole or in part for
certificated New Notes in definitive form, the Global Note may
not be transferred except as a whole by the Depository to a
nominee of such Depository or by a nominee of such Depository to
such Depository or another nominee of such Depository.
Although the Depository has agreed to the foregoing
procedures in order to facilitate transfers of interests in the
Global Note among participants of the Depository, it is under no
obligation to perform or continue to perform such procedures, and
such procedures may be discontinued at any time. Neither the
Trustee nor the Company will have any responsibility for the
performance by the Depository or its participants or indirect
participants of their respective obligations under the rules and
procedures governing their operations.
Certificated New Notes
The New Notes represented by the Global Note are
exchangeable for certificated New Notes in definitive form of
like tenor as such New Notes in denominations of U.S. $1,000 and
integral multiples thereof if (i) the Depository notifies the
Company that it is unwilling or unable to continue as Depository
of the Global Note or if at any time the
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Depository ceases to be a clearing agency registered under the
Exchange Act and a successor Depository is not appointed by the
Company within 90 days, (ii) the Company in its discretion at any
time determines not to have all of the New Notes represented by
the Global Note or (iii) an Event of Default has occurred and is
continuing. Any Note that is exchangeable pursuant to the
preceding sentence is exchangeable for certificated New Notes
issuable in authorized denominations and registered in such names
as the Depository shall direct. Subject to the foregoing, the
Global Note is not exchangeable, except for a Global Note of the
same aggregate denomination to be registered in the name of the
Depository or its nominee. In addition, such certificates will
bear the legend referred to under "--Transfer Restrictions"
(unless the Company determines otherwise in accordance with
applicable law) subject, with respect to such New Notes, to the
provisions of such legend.
Registered Exchange Offer; Registration Rights
The Company agreed pursuant to the Registration Rights
Agreement with the Initial Purchasers, for the benefit of the
holders of the New Notes, to, at its cost, (i) within 90 days
after the Issue Date, file the Exchange Offer Registration
Statement with the SEC with respect to the Exchange Offer to
exchange the Old Notes for New Notes, with terms substantially
identical in all material respects to the Old Notes except that
such New Notes will not contain terms with respect to transfer
restrictions and (ii) use its best efforts to cause the Exchange
Offer Registration Statement to be declared effective under the
Securities Act within 150 days after the Issue Date. Upon the
effectiveness of the Exchange Offer Registration Statement, the
Company will offer the New Notes in exchange for surrender of the
Old Notes. The Company will keep the Exchange Offer open for not
less than 30 days (or longer if required by applicable law) after
the date notice of the Exchange Offer is mailed to the holders of
the Old Notes. For each Old Note surrendered to the Company
pursuant to the Exchange Offer, the holder of such Old Note will
receive a New Note having a principal amount at maturity equal to
that of the surrendered Note at maturity. Interest on each New
Note will accrue from the last interest payment date on which
interest was paid on the Note surrendered in exchange thereof or,
if no interest has been paid on such Note, from the date interest
began to accrue on such Note. Under existing SEC interpretations,
the New Notes will be freely transferable by holders other than
affiliates of the Company after the Exchange Offer without
further registration under the Securities Act if the holder of
the New Notes represents that it is acquiring the New Notes in
the ordinary course of its business, that it has no arrangement
or understanding with any person to participate in the
distribution of the New Notes and that it is not an affiliate of
the Company, as such terms are interpreted by the SEC; provided,
however, that Participating Broker-Dealers receiving New Notes in
the Exchange Offer will have a prospectus delivery requirement
with respect to resales of such New Notes. The SEC has taken the
position that Participating Broker-Dealers may fulfill their
prospectus delivery requirements with respect to New Notes (other
than a resale of an unsold allotment from the original sale of
the Notes) with the prospectus contained in the Exchange Offer
Registration Statement. Under the Registration Rights Agreement,
the Company is required to allow Participating Broker-Dealers and
other persons, if any, with similar prospectus delivery
requirements to use the prospectus contained in the Exchange
Offer Registration Statement in connection with the resale of
such New Notes.
A holder of Old Notes (other than certain specified
holders) who wishes to exchange such Old Notes for New Notes in
the Exchange Offer will be required to represent that any New
Notes to be received by it will be acquired in the ordinary
course of its business and that at the time of the commencement
of the Exchange Offer it has no arrangement or understanding with
any person to participate in the distribution (within the meaning
of the Securities Act) of the New Notes and that it is not an
"affiliate" of the Company, as defined in Rule 405 of the
Securities Act, or if it is an affiliate, it will comply with the
registration and prospectus delivery requirements of the
Securities Act to the extent applicable.
In the event that applicable interpretations of the staff
of the SEC do not permit the Company to effect the Exchange
Offer, or if for any other reason the Exchange Offer is not
consummated within 180 days of the Issue Date, or if the Initial
Purchasers so request with respect to Old Notes not eligible to
be exchanged for New Notes in the registered Exchange Offer, or
if any holder of Old Notes (other than affiliates of the Company)
is not eligible to participate in the Exchange Offer or does not
receive freely tradeable New Notes in the Exchange Offer, the
Company, will, at its cost, (a) as promptly as practicable, file
a Shelf Registration Statement with the SEC covering resales of
the Old Notes or the New Notes, as the case may be, (b) use its
best efforts to cause the Shelf Registration Statement to be
declared effective under the Securities Act and (c) keep the
Shelf Registration Statement effective (except as the result of a
Suspension Period (as defined below)) until the earlier of (i)
the time when the Old Notes covered by the Shelf Registration
Statement can be sold (by persons other than affiliates of the
Company) pursuant to Rule 144 without any limitations under
clauses (c), (e), (f) and (h) of Rule 144 and (ii) two years from
the Issue Date. The Company will, in the event a Shelf
Registration Statement is filed, among other things, provide to
each holder for whom such Shelf
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Registration Statement was filed copies of the prospectus which
is a part of the Shelf Registration Statement, notify each such
holder when the Shelf Registration Statement has become effective
and take certain other actions as are required to permit
unrestricted resales of the Old Notes or the New Notes, as the
case may be. A holder selling such Old Notes or New Notes
pursuant to the Shelf Registration Statement generally would be
required to be named as a selling security holder in the related
prospectus and to deliver a prospectus to purchasers, will be
subject to certain of the civil liability provisions under the
Securities Act in connection with such sales and will be bound by
the provisions of the Registration Rights Agreement which are
applicable to such holder (including certain indemnification
obligations).
If (i) by June 10, 1998, neither the Exchange Offer
Registration Statement nor the Shelf Registration Statement has
been filed with the SEC; (ii) by September 8, 1998, neither the
Exchange Offer is consummated nor the Shelf Registration
Statement is declared effective; or (iii) after either the
Exchange Offer Registration Statement or the Shelf Registration
Statement is declared effective, such Registration Statement
thereafter ceases to be effective or usable (subject to certain
exceptions, including an exception for a period not to exceed 60
days in any twelve-month period during which the Company effects
a material corporate transaction (a Suspension Period as further
defined in the Registration Rights Agreement)) in connection with
resales of Old Notes or New Notes in accordance with and during
the periods specified in the Registration Rights Agreement (each
such event referred to in clause (i) through (iii) being herein
called a Registration Default), additional cash interest will
accrue on the Old Notes and the New Notes at the rate of 0.50%
per annum (increasing by 0.50% per annum at the end of each
90-day period thereafter) from and including the date on which
any such Registration Default shall occur to but excluding the
date on which all Registration Defaults have been cured,
calculated on the principal amount of the Old Notes as of the
date on which such interest is payable; provided, however, that
in no event shall the aggregate amount of such additional
interest exceed 1.00% per annum. Such interest is payable in
addition to any other interest payable from time to time with
respect to the Old Notes.
If the Company effects the Exchange Offer, it will be
entitled to close the Exchange Offer 30 business days after the
commencement thereof provided that it has accepted all Old Notes
theretofore validly tendered in accordance with the terms of the
Exchange Offer.
The summary herein of certain provisions of the
Registration Rights Agreement does not purport to be complete and
is subject to, and is qualified in its entirety by reference to,
all the provisions of the Registration Rights Agreement, a copy
of which is available upon request to the Company.
Change of Control
Upon the occurrence of any of the following events (each a
"Change of Control"), each Holder will have the right to require
the Company to repurchase all or any part of such Holder's New
Notes at a purchase price in cash equal to 101% of the principal
amount thereof, plus accrued and unpaid interest, if any, to the
date of repurchase (subject to the right of Holders of record on
the relevant record date to receive interest due on the related
interest payment date):
(i) Prior to the earlier to occur of (A) the first
public offering of common stock of the Company or (B) the
first public offering of common stock of Holdings, the
Permitted Holders cease to be the "beneficial owner" (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act),
directly or indirectly, of a majority in the aggregate of
the total voting power of the Voting Stock of the Company,
whether as a result of issuance of securities of Holdings
or the Company, any merger, consolidation, liquidation or
dissolution of Holdings or the Company, any direct or
indirect transfer of securities by Holdings or the Company
or otherwise (for purposes of this clause (i) and clause
(ii) below, the Permitted Holders shall be deemed to
beneficially own any Voting Stock of a corporation (the
"specified corporation") held by any other corporation (the
"parent corporation") so long as the Permitted Holders
beneficially own (as so defined), directly or indirectly,
in the aggregate a majority of the voting power of the
Voting Stock of the parent corporation);
(ii) subsequent to the first public offering of common
stock of the Company or Holdings, (A) any "person" (as such
term is used in Sections 13(d) and 14(d) of the Exchange
Act), other than one or more Permitted Holders, is or
becomes the beneficial owner (as defined in clause (i)
above, except that for purposes of this clause (ii) such
person shall be deemed to have "beneficial ownership" of
all shares that any such person has the right to acquire,
whether such right is exercisable immediately or only after
the passage of time), directly or indirectly, of more than
40% of the total voting power of the Voting Stock of
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the Company and (B) the Permitted Holders "beneficially
own" (as defined in clause (i) above), directly or
indirectly, in the aggregate a lesser percentage of the
total voting power of the Voting Stock of the Company than
such other person and do not have the right or ability by
voting power, contract or otherwise to elect or designate
for election a majority of the Board of Directors (for the
purposes of this clause (ii), such other person shall be
deemed to beneficially own any Voting Stock of a specified
corporation held by a parent corporation, if such other
person is the beneficial owner (as defined in this clause
(ii)), directly or indirectly, of more than 40% of the
voting power of the Voting Stock of such parent corporation
and the Permitted Holders "beneficially own" (as defined in
clause (i) above), directly or indirectly, in the aggregate
a lesser percentage of the voting power of the Voting Stock
of such parent corporation and do not have the right or
ability by voting power, contract or otherwise to elect or
designate for election a majority of the board of directors
of such parent corporation);
(iii) during any period of two consecutive years (or,
in the case this event occurs within the first two years
after the Issue Date, such shorter period as shall have
begun on the Issue Date), individuals who at the beginning
of such period constituted the Board of Directors of
Holdings or the Company (together with any new directors
whose election by such Board of Directors or whose
nomination for election by the shareholders of Holdings or
the Company was approved by a vote of a majority of the
directors of Holdings or the Company then still in office
who were either directors at the beginning of such period
or whose election or nomination for election was previously
so approved) cease for any reason to constitute a majority
of the Board of Directors of Holdings or the Company then
in office; or
(iv) the merger or consolidation of Holdings or the
Company with or into another Person or the merger of
another Person with or into Holdings or the Company, or the
sale of all or substantially all the assets of Holdings or
the Company to another Person (in each case other than a
Person that is controlled by the Permitted Holders), and,
in the case of any such merger or consolidation, the
securities of Holdings or the Company that are outstanding
immediately prior to such transaction and which represent
100% of the aggregate voting power of the Voting Stock of
Holdings or the Company are changed into or exchanged for
cash, securities or property, unless pursuant to such
transaction such securities are changed into or exchanged
for, in addition to any other consideration, securities of
the surviving corporation that represent immediately after
such transaction, at least a majority of the aggregate
voting power of the Voting Stock of the surviving
corporation.
Within 30 days following any Change of Control, the Company
shall mail a notice to each Holder at its registered address with
a copy to the Trustee stating: (1) that a Change of Control has
occurred and that such Holder has the right to require the
Company to purchase such Holder's New Notes at a purchase price
in cash equal to 101% of the principal amount thereof, plus
accrued and unpaid interest, if any, to the date of repurchase
(subject to the right of Holders of record on the relevant record
date to receive interest on the relevant interest payment date);
(2) the circumstances and relevant facts regarding such Change of
Control (including information with respect to pro forma
historical income, cash flow and capitalization after giving
effect to such Change of Control); (3) the repurchase date (which
shall be no earlier than 30 days nor later than 60 days from the
date such notice is mailed); and (4) the instructions determined
by the Company, consistent with this covenant, that a Holder must
follow in order to have its New Notes purchased.
The phrase "all or substantially all," as used with respect
to a sale of assets in the definition in the Indenture of "Change
of Control," varies according to the facts and circumstances of
the subject transaction, has no clearly established meaning under
New York law (the law governing the Indenture) and is subject to
judicial interpretation. Accordingly, in certain circumstances,
there may be a degree of uncertainty in ascertaining whether a
particular transaction would involve a disposition of "all or
substantially all" of the assets of a Person and therefore it may
be unclear whether a Change of Control has occurred.
The Company will not be required to make a Change of
Control Offer upon a Change of Control Offer if a third party
makes the Change of Control Offer in the manner, at the times and
otherwise in compliance with the requirements set forth in the
Indenture applicable to a Change of Control Offer made by the
Company and purchases all New Notes validly tendered and not
withdrawn under such Change of Control Offer.
The Company will comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other
securities laws or regulations in connection with the repurchase
of New Notes pursuant to this
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covenant. To the extent that the provisions of any securities
laws or regulations conflict with provisions of this covenant,
the Company will comply with the applicable securities laws and
regulations and will not be deemed to have breached its
obligations under this paragraph by virtue thereof.
The Change of Control purchase feature is a result of
negotiations between the Company and the Initial Purchasers.
Management has no present intention to engage in a transaction
involving a Change of Control, although it is possible that the
Company would decide to do so in the future. Subject to the
limitations discussed below, the Company could, in the future,
enter into certain transactions, including acquisitions,
refinancings or other recapitalizations, that would not
constitute a Change of Control under the Indenture, but that
could increase the amount of indebtedness outstanding at such
time or otherwise affect the Company's capital structure or
credit rating. Restrictions on the ability of the Company to
incur additional Indebtedness are contained in the covenants
described under "--Certain Covenants-Limitation on Indebtedness"
and "--Limitation on Indebtedness and Preferred Stock of
Restricted Subsidiaries." Such restrictions can only be waived
with the consent of the holders of a majority in principal amount
of the New Notes then outstanding. Except for the limitations
contained in such covenants, however, the Indenture will not
contain any covenants or provisions that may afford holders of
the New Notes protection in the event of a highly leveraged
transaction.
The Credit Agreement generally prohibits the Company from
purchasing any New Notes and also provides that the occurrence of
certain change of control events (as defined therein) with
respect to Holdings or the Company would constitute a default
thereunder. In the event a Change of Control occurs at a time
when the Company is prohibited from purchasing New Notes, the
Company could seek the consent of its lenders to the purchase of
New Notes or could attempt to refinance the borrowings that
contain such prohibition. If the Company does not obtain such a
consent or repay such borrowings, the Company will remain
prohibited from purchasing New Notes. In such case, the Company's
failure to purchase tendered New Notes would constitute an Event
of Default under the Indenture which would, in turn, constitute a
default under the Credit Agreement.
Future Indebtedness of the Company may contain prohibitions
on the occurrence of certain events which would constitute a
Change of Control or require such Indebtedness to be repurchased
upon a change of control (as defined in the instruments governing
such Indebtedness). Moreover, the exercise by the Holders of
their right to require the Company to repurchase the New Notes
could cause a default under such indebtedness, even if the Change
of Control itself does not, due to the financial effect of such
repurchase on the Company. Finally, the Company's ability to pay
cash to the Holders following the occurrence of a Change of
Control may be limited by the Company's then existing financial
resources. There can be no assurance that sufficient funds will
be available when necessary to make any required repurchases. The
provisions under the Indenture relative to the Company's
obligation to make an offer to repurchase the New Notes as a
result of a Change of Control may be waived or modified with the
written consent of the holders of a majority in principal amount
of the New Notes.
Certain Covenants
The Indenture contains covenants including, among others,
the following:
Limitation on Indebtedness. (a) The Company will not Incur,
directly or indirectly, any Indebtedness unless, on the date of
such Incurrence and after giving effect to such Incurrence and
the application of the net proceeds therefrom, the Consolidated
Coverage Ratio would exceed 2.00:1.
(b) Notwithstanding the foregoing paragraph (a), the
Company may Incur any or all of the following Indebtedness: (i)
Indebtedness of the Company Incurred under the revolving credit
provisions of the Credit Agreement in an aggregate principal
amount outstanding at any time not to exceed the greater of (A)
$100.0 million and (B) the sum of (1) 85% of the gross book value
of the accounts receivable of the Company and its Restricted
Subsidiaries and (2) 50% of the gross book value of the inventory
of the Company and its Restricted Subsidiaries; provided that the
amount in clause (A) shall be reduced by the aggregate amount of
all proceeds from all Asset Dispositions that have been applied
since the Issue Date to permanently reduce the outstanding amount
of such Indebtedness pursuant to "--Certain Covenants-Limitation
on Sale of Assets and Subsidiary Stock"; (ii) Indebtedness of the
Company Incurred under the term loan provisions of the Credit
Agreement in an aggregate principal amount outstanding at any
time not to exceed $200.0 million, less the aggregate amount of
all proceeds from all Asset Dispositions that have been applied
since the Issue Date to permanently reduce the outstanding amount
of such Indebtedness pursuant to "--Certain Covenants--Limitation
on Sale of Assets and Subsidiary Stock" and less the aggregate
amount of any mandatory
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prepayments of principal of term loans thereunder that have been
made since the Issue Date; (iii) Indebtedness of the Company
owing to and held by any Restricted Subsidiary; provided,
however, that (A) any subsequent issuance or transfer of any
Capital Stock or any other event which results in any such
Restricted Subsidiary ceasing to be a Restricted Subsidiary or
any subsequent transfer of any such Indebtedness (except to
another Restricted Subsidiary) will be deemed, in each case, to
constitute the Incurrence of such Indebtedness by the Company and
(B) such Indebtedness (if held other than by a Wholly Owned
Subsidiary) is expressly subordinated to the prior payment in
full in cash of all obligations with respect to the New Notes;
(iv) Indebtedness represented by the New Notes and the New Notes
in an aggregate principal amount not to exceed $350.0 million;
(v) Indebtedness of the Company (other than the Indebtedness
described in clauses (i), (ii), (iii) or (iv) above) outstanding
on the Issue Date; provided that any Existing PMI Senior
Subordinated Notes accepted for payment in the Tender Offers
shall be deemed to be Indebtedness outstanding on the Issue Date
except to the extent they remain outstanding at the close of
business on the second Business Day following the Issue Date (in
which event the existence of such Existing PMI Senior
Subordinated Notes shall be deemed to constitute an Incurrence of
Indebtedness by the Company under the Indenture); (vi)
Indebtedness (including Capitalized Lease Obligations) of the
Company Incurred to finance the acquisition, construction or
improvement of fixed or capital assets in an aggregate principal
amount at any one time outstanding not to exceed $50.0 million,
provided that such Indebtedness is Incurred within 180 days after
the date of such acquisition, construction or improvement and
does not exceed the fair market value of such acquired,
constructed or improved assets, as determined in good faith by
the Board of Directors of the Company; (vii) Refinancing
Indebtedness Incurred in respect of any Indebtedness Incurred
pursuant to paragraph (a) or pursuant to clauses (ii), (iv), (v)
(other than any Existing PMI Senior Subordinated Notes described
in such clause (v)) or this clause (vii); (viii) Indebtedness (A)
in respect of performance bonds, bankers' acceptances, letters of
credit and surety or appeal bonds provided by the Company in the
ordinary course of its business and which do not secure
Indebtedness other than the Indebtedness and the obligations with
respect to which such instruments were issued and (B) under
Currency Agreements and Interest Rate Agreements Incurred which,
at the time of Incurrence, is in the ordinary course of business;
provided, however, that, in the case of Currency Agreements which
relate to Indebtedness and Interest Rate Agreements, such
Currency Agreements and Interest Rate Agreements are directly
related to Indebtedness permitted to be Incurred by the Company
pursuant to the Indenture; (ix) Indebtedness represented by
Guarantees by the Company of Indebtedness otherwise permitted to
be Incurred pursuant to this covenant or "Certain
Covenants-Limitation on Indebtedness and Preferred Stock of
Restricted Subsidiaries"; (x) (A) Permitted Customer Financing
and (B) Guarantees permitted to be Incurred pursuant to clause
(xii)(B) of the definition of "Permitted Investment"; (xi)
Indebtedness of the Company arising from the honoring by a bank
or other financial institution of a check, draft or similar
instrument inadvertently (except in the case of daylight
overdrafts) drawn against insufficient funds in the ordinary
course of business; provided that such Indebtedness is
extinguished within five business days of Incurrence; (xii)
Indebtedness of the Company arising from agreements providing for
indemnification, adjustment of purchase price or similar
obligations Incurred in connection with the acquisition or
disposition of any assets of the Company or a Restricted
Subsidiary (whether evidenced by a note, backed by a letter of
credit or otherwise) in a principal amount not to exceed (in the
case of a disposition) the gross proceeds actually received by
the Company or any Restricted Subsidiary in connection with such
disposition; (xiii) Indebtedness of the Company representing
obligations in respect of self-insured retention amounts, amounts
required in connection with workers' compensation and other
insurance coverage Incurred in the ordinary course of business or
reimbursement obligations in respect of amounts Incurred or paid
by an insurance company under any insurance program in the
ordinary course of business; (xiv) Standard Securitization
Undertakings; and (xv) other Indebtedness in an aggregate
principal amount outstanding at any time not to exceed $25.0
million.
(c) Notwithstanding the foregoing, the Company shall not
Incur any Indebtedness pursuant to the foregoing paragraph (b) if
the proceeds thereof are used, directly or indirectly, to
Refinance any Subordinated Obligations unless such new
Indebtedness shall be subordinated to the New Notes to at least
the same extent as such Subordinated Obligations being
Refinanced.
(d) For purposes of determining compliance with the
foregoing covenant, (i) in the event that an item of Indebtedness
meets the criteria of more than one of the types of Indebtedness
described above, the Company, in its sole discretion, will
classify such item of Indebtedness and only be required to
include the amount and type of such Indebtedness in one of the
above clauses and (ii) an item of Indebtedness may be divided and
classified in more than one of the types of Indebtedness
described above.
(e) Notwithstanding paragraphs (a) and (b) above, the
Company shall not Incur (i) any Indebtedness if such Indebtedness
is subordinate or junior in ranking in any respect to any Senior
Indebtedness, unless such Indebtedness is Senior Subordinated
Indebtedness or is expressly subordinated in right of payment to
the Senior
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Subordinated Indebtedness or (ii) any Secured Indebtedness that
is not Senior Indebtedness (other than Secured Indebtedness
secured by a Permitted Lien) unless contemporaneously therewith
effective provision is made to secure the New Notes equally and
ratably with such Secured Indebtedness for so long as such
Secured Indebtedness is secured by a Lien.
Limitation on Indebtedness and Preferred Stock of
Restricted Subsidiaries. The Company shall not permit any
Restricted Subsidiary to Incur, directly or indirectly, any
Indebtedness or Preferred Stock except: (a) Indebtedness or
Preferred Stock of a Restricted Subsidiary issued to and held by
the Company or a Restricted Subsidiary; provided, however, that
any subsequent issuance or transfer of any Capital Stock which
results in any such Restricted Subsidiary ceasing to be a
Restricted Subsidiary or any subsequent transfer of such
Indebtedness or Preferred Stock (other than to the Company or a
Restricted Subsidiary) shall be deemed, in each case, to
constitute the issuance of such Indebtedness or Preferred Stock
by the issuer thereof; (b) Indebtedness or Preferred Stock of a
Restricted Subsidiary Incurred and outstanding on or prior to the
date on which such Restricted Subsidiary was acquired by the
Company (other than Indebtedness or Preferred Stock Incurred in
connection with, or to provide all or any portion of the funds or
credit support utilized to consummate, the transaction or series
of related transactions pursuant to which such Restricted
Subsidiary became a Restricted Subsidiary or was acquired by the
Company); provided, however, that on the date of such acquisition
and after giving effect thereto, the Company would have been able
to Incur at least $1.00 of additional Indebtedness pursuant to
clause (a) of the covenant described under "Certain
Covenants--Limitation on Indebtedness"; (c) Indebtedness or
Preferred Stock outstanding on the Issue Date (other than
Indebtedness or Preferred Stock described in clauses (a) and (b)
of this paragraph); (d) Refinancing Indebtedness Incurred in
respect of Indebtedness or Preferred Stock referred to in clauses
(b) or (c) of this paragraph or this clause (d); provided,
however, that to the extent such Refinancing Indebtedness
directly or indirectly Refinances Indebtedness or Preferred Stock
of a Subsidiary described in clause (c), such Refinancing
Indebtedness shall be Incurred only by such Subsidiary; (e)
Indebtedness of Restricted Subsidiaries organized under laws
other than the United States of America or any state thereof in
amount not to exceed $25.0 million in the aggregate at any one
time; (f) Indebtedness in respect of performance bonds, bankers'
acceptances, letters of credit and surety or appeal bonds
provided by a Restricted Subsidiary in the ordinary course of its
business and which do not secure Indebtedness other than the
Indebtedness and the obligations with respect to which such
instruments were issued; (g) Indebtedness of a Restricted
Subsidiary arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument inadvertently
(except in the case of daylight overdrafts) drawn against
insufficient funds in the ordinary course of business; provided
that such Indebtedness is extinguished within five business days
of Incurrence; (h) Guarantees of the Indebtedness specified in
clause (i) and (ii) of the "Limitation on Indebtedness" covenant;
and (i) Indebtedness of a Special Purpose Vehicle which is
Non-Recourse Debt (other than Standard Securitization
Undertakings), including Indebtedness represented by the issuance
of participations of interest in such Special Purpose Vehicle in
connection with a Permitted Securitization.
The Company will not permit any Unrestricted Subsidiary to
Incur any Indebtedness other than Non-Recourse Debt (except that
an Unrestricted Subsidiary may Incur Indebtedness Guaranteed by
the Company to the extent an Investment represented by such
Guarantee is permitted to be made in accordance with the
"Limitation on Restricted Payments" covenant), provided, however,
that if any such Indebtedness ceases to be Non-Recourse Debt,
such event shall be deemed to constitute an Incurrence of
Indebtedness by the Company or such Restricted Subsidiary.
Limitation on Restricted Payments. (a) The Company will
not, and will not permit any Restricted Subsidiary, directly or
indirectly, to make any Restricted Payment if at the time of such
Restricted Payment: (1) a Default or Event of Default will have
occurred and be continuing (or would result therefrom); (2) the
Company could not Incur at least $1.00 of additional Indebtedness
under paragraph (a) of the covenant described under "--Limitation
on Indebtedness;" or (3) the aggregate amount of such Restricted
Payment and all other Restricted Payments (the amount so
expended, if other than in cash, to be determined in good faith
by the Board of Directors of the Company, whose determination (in
the case of amounts in excess of $5.0 million) will be evidenced
by a resolution of such Board of Directors) declared or made
subsequent to the Issue Date would exceed the sum of: (A) 15% of
the Consolidated NIDA accrued during the period (treated as one
accounting period) from the beginning of the fiscal quarter
immediately following the fiscal quarter during which the Issue
Date occurs to the end of the most recent fiscal quarter ending
at least 45 days prior to the date of such Restricted Payment
(or, in case such Consolidated NIDA will be a deficit, minus 100%
of such deficit) (except that if the New Notes have been rated
Investment Grade as of the end of any fiscal quarter, then the
amount to be calculated pursuant to this clause (A) for the
succeeding fiscal quarter and for any other succeeding quarter
where the New Notes have been rated Investment Grade on the first
day of such fiscal quarter shall be 25% of Consolidated NIDA,
provided that the New Notes are also rated Investment Grade at
the time such Restricted Payment is declared or made, as the case
may be); (B) the aggregate Net Cash Proceeds received by the
Company from the issue or sale of
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Capital Stock (other than Disqualified Stock) or other cash
contributions from Holdings to the Company's capital subsequent
to the Issue Date (other than an issuance or sale to a Subsidiary
of the Company and other than an issuance or sale to an employee
stock ownership plan or to a trust established by the Company, or
any of its Subsidiaries for the benefit of their employees to the
extent that such plan or trust Incurs any Indebtedness Guaranteed
by the Company or its Restricted Subsidiaries to finance the
acquisition of such Capital Stock); (C) the amount by which
Indebtedness of the Company is reduced on the Company's balance
sheet upon the conversion or exchange (other than by a
Subsidiary) subsequent to the Issue Date of any Indebtedness of
the Company convertible or exchangeable for Capital Stock (other
than Disqualified Stock) of the Company (less the amount of any
cash, or the fair market value of any other property, distributed
by the Company upon such conversion or exchange); (D) an amount
equal to the sum of (i) the net reduction in Investments
resulting from repayments of loans or advances or other transfers
of assets, terminations of Guarantees or proceeds received by the
Company or the relevant Restricted Subsidiary from the sale of
all or part of such Investment, in each case to the Company or
any Restricted Subsidiary and (ii) the portion (proportionate to
the Company's equity interest in such Subsidiary) of the fair
market value of the net assets of an Unrestricted Subsidiary at
the time such Unrestricted Subsidiary is designated a Restricted
Subsidiary (or is merged into the Company or a Restricted
Subsidiary); provided, that the foregoing sum shall not exceed
the amount of such Investments previously made by the Company or
any Restricted Subsidiary in such Unrestricted Subsidiary or in
such other Person, which amount was included in the calculation
of the amount of Restricted Payments; and (E) $5.0 million.
(b) The provisions of the foregoing paragraph (a) will not
prohibit: (i) any purchase, redemption, defeasance or other
acquisition of Capital Stock of the Company or Subordinated
Obligations made by exchange for, or out of the net proceeds of
the substantially concurrent sale of, Capital Stock of the
Company (other than Disqualified Stock and other than Capital
Stock issued or sold to a Subsidiary of the Company or an
employee stock ownership plan or to a trust established by the
Company or any of its Subsidiaries for the benefit of their
employees to the extent that such plan or trust Incurs any
Indebtedness Guaranteed by the Company or its Restricted
Subsidiaries to finance the acquisition of such Capital Stock);
provided, however, that (A) such purchase, redemption, defeasance
or other acquisition will be excluded in the calculation of the
amount of Restricted Payments and (B) the Net Cash Proceeds from
such sale will be excluded from the calculation of amounts under
clause (3)(B) of paragraph (a) above; (ii) any purchase,
redemption, defeasance or other acquisition of Subordinated
Obligations made by exchange for, or out of the net proceeds of
the substantially concurrent sale of, Subordinated Obligations of
the Company which are permitted to be Incurred pursuant to the
covenant described under "--Limitation on Indebtedness";
provided, however, that (A) the principal amount of such new
Indebtedness does not exceed the principal amount of the
Subordinated Obligations being so redeemed, repurchased, acquired
or retired for value (plus the amount of any premium required to
be paid under the terms of the instrument governing the
Subordinated Obligations being so redeemed, repurchased, acquired
or retired), (B) such new Indebtedness is subordinated to the New
Notes at least to the same extent as such Subordinated
Obligations so purchased, exchanged, redeemed, repurchased,
acquired or retired for value, (C) such new Indebtedness has a
final scheduled maturity date later than the earlier of the final
scheduled maturity date of the Subordinated Obligations being so
redeemed and the final scheduled maturity date of the New Notes
and (D) such new Indebtedness has an Average Life equal to or
greater than the Average Life of the New Notes; provided further,
however, that such purchase, redemption, defeasance or other
acquisition will be excluded in the calculation of the amount of
Restricted Payments; (iii) the repurchase or other acquisition of
shares of, or options to purchase shares of, common stock of the
Company or Holdings from employees, former employees, directors
or former directors of the Company or Holdings (or permitted
transferees of such employees, former employees, directors or
former directors), pursuant to the terms of the agreements
(including employment agreements) or plans (or amendments
thereto) approved by the Board of Directors under which such
individuals purchase or sell or are granted the option to
purchase or sell, shares of such common stock; provided, however,
that the aggregate amount of such repurchases and other
acquisitions shall not exceed $2.0 million in any calendar year;
provided further, however, that such repurchases and other
acquisitions shall be included in the calculation of the amount
of Restricted Payments; (iv) any dividend paid to Holdings (or
any successor parent corporation with which the Company is part
of a consolidated tax group) in respect of overhead expenses, tax
liabilities and legal, accounting and other professional fees and
expenses that are directly attributable to the operations of the
Company and its Restricted Subsidiaries, provided that the amount
of any such dividends will be excluded in the calculation of the
amount of Restricted Payments; (v) dividends paid within 60 days
after the date of declaration thereof if at such date of
declaration such dividend would have complied with this covenant;
provided, however, that the amount of such dividend will be
included (without duplication for the declaration thereof) in the
calculation of the amount of Restricted Payments; and (vi) the
Merger and Tender Offer Payments; provided, however, that such
payments will be excluded in the calculation of the amount of
Restricted Payments; and provided further that, at the time of,
and after giving effect to, any Restricted Payment permitted by
clauses (i), (ii), (iii) and (v) no Default or Event of Default
shall have occurred and be continuing.
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Limitation on Restrictions on Distributions from Restricted
Subsidiaries. The Company will not, and will not permit any
Restricted Subsidiary to, create or otherwise cause or permit to
exist or become effective any consensual encumbrance or
restriction on the ability of any Restricted Subsidiary to (i)
pay dividends or make any other distributions on its Capital
Stock to the Company or a Restricted Subsidiary or pay any
Indebtedness or other obligation owed to the Company, (ii) make
any loans or advances to the Company or (iii) transfer any of its
property or assets to the Company or any Restricted Subsidiary,
except: (1) any encumbrance or restriction pursuant to an
agreement in effect at or entered into on the Issue Date
(including the Credit Agreement); (2) any encumbrance or
restriction with respect to a Restricted Subsidiary pursuant to
an agreement relating to any Indebtedness Incurred by such
Restricted Subsidiary on or prior to the date on which such
Restricted Subsidiary was acquired by the Company or a Restricted
Subsidiary (other than Indebtedness Incurred as consideration in,
or to provide all or any portion of the funds or credit support
utilized to consummate, the transaction or series of related
transactions pursuant to which such Restricted Subsidiary became
a Subsidiary or was acquired by the Company or a Restricted
Subsidiary) and outstanding on such date; (3) any encumbrance or
restriction pursuant to an agreement effecting a Refinancing of
Indebtedness Incurred pursuant to an agreement referred to in
clause (1) or (2) of this covenant or contained in any amendment
to an agreement referred to in clause (1) or (2) of this
covenant; provided, however, that the encumbrances and
restrictions with respect to such Restricted Subsidiary contained
in any such refinancing agreement or amendment are no less
favorable (taken as a whole) to the Noteholders than the
encumbrances and restrictions with respect to such Restricted
Subsidiary contained in such predecessor agreement, as determined
in good faith by the Company and evidenced by an Officers'
Certificate; (4) any encumbrance or restriction in any agreement
entered into pursuant to clause (e) of the "Limitation on
Indebtedness and Preferred Stock of Restricted Subsidiaries"
covenant; (5) in the case of clause (iii), any encumbrance or
restriction that restricts in a customary manner the subletting,
assignment or transfer of any property or asset that is subject
to a lease, license or similar contract; (6) in the case of
clause (iii), restrictions contained in security agreements or
mortgages securing Indebtedness of a Restricted Subsidiary to the
extent such encumbrance or restrictions restrict the transfer of
the property subject to such security agreements or mortgages;
(7) any restriction with respect to a Restricted Subsidiary
imposed pursuant to an agreement entered into for the sale or
disposition of all or substantially all the Capital Stock or
assets of such Restricted Subsidiary pending the closing of such
sale or disposition; (8) any such restriction imposed by
applicable law; and (9) customary encumbrances or restrictions
contained in agreements of a Special Purpose Vehicle created in
connection with a Permitted Securitization that in the good faith
of the Board of Directors of the Company are necessary to effect
such Permitted Securitization.
Limitation on Sales of Assets and Subsidiary Stock. (a) The
Company will not, and will not permit any Restricted Subsidiary
to, directly or indirectly, consummate any Asset Disposition
unless (i) the Company or such Restricted Subsidiary receives
consideration at the time of such Asset Disposition at least
equal to the fair market value of the shares and assets subject
to such Asset Disposition (including as to the value of all non
cash consideration), as determined in good faith by the Board of
Directors of the Company in the case of values in excess of $2.5
million or by the Company otherwise, (ii) at least 75% of the
consideration thereof received by the Company or such Restricted
Subsidiary is in the form of cash or cash equivalents (except in
the case of Asset Dispositions of a Closed Facility) and (iii) an
amount equal to 100% of the Net Available Cash from such Asset
Disposition is applied by the Company or such Restricted
Subsidiary, as the case may be, (A) first, to the extent the
Company or any Restricted Subsidiary, as the case may be, elects
(or is required by the terms of any Senior Indebtedness), to
prepay, repay, redeem or purchase Senior Indebtedness of the
Company or Indebtedness (other than Disqualified Stock) of a
Wholly Owned Subsidiary (in each case other than Indebtedness
owed to the Company or an Affiliate of the Company) within 360
days from the later of the date of such Asset Disposition or the
receipt of such Net Available Cash; (B) second, to the extent of
the balance of Net Available Cash after application in accordance
with clause (A), to the extent the Company or such Restricted
Subsidiary, as the case may be, elects, to the investment by the
Company or any Wholly Owned Subsidiary in Additional Assets
within 360 days from the later of the date of such Asset
Disposition or the receipt of such Net Available Cash; (C) third,
to the extent of the balance of such Net Available Cash after
application in accordance with clauses (A) and (B), to make an
Offer (as defined below) to Holders of the New Notes (and to
holders of other Senior Subordinated Indebtedness designated by
the Company) to purchase New Notes and such other Senior
Subordinated Indebtedness pursuant to and subject to the
conditions set forth in paragraph (b) of this covenant; and (D)
fourth, to the extent of the balance of such Net Available Cash
after application in accordance with clauses (A), (B) and (C) to
any other application or use not prohibited by the Indenture;
provided, however that in connection with any prepayment,
repayment or purchase of Indebtedness pursuant to clause (A) or
(C) above, the Company or such Restricted Subsidiary will
permanently retire such Indebtedness and will cause the related
loan commitment or availability (if any) to be permanently
reduced in an amount equal to the principal amount so prepaid,
repaid or purchased.
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Notwithstanding the foregoing provisions, the Company and
its Restricted Subsidiaries shall not be required to apply any
Net Available Cash in accordance herewith except to the extent
that the aggregate Net Available Cash from all Asset Dispositions
which are not applied in accordance with this covenant exceeds
$10.0 million. Pending application of Net Available Cash pursuant
to this covenant, such Net Available Cash shall be invested in
Permitted Investments or to reduce outstanding loans under any
working capital facility.
For the purposes of this covenant, the following are deemed
to be cash: (x) the assumption by the transferee of Indebtedness
of the Company (other than Disqualified Stock of the Company and
other than Indebtedness that is subordinated to the New Notes) or
Indebtedness of any Restricted Subsidiary and the release of the
Company or such Restricted Subsidiary from all liability on such
Indebtedness in connection with such Asset Disposition and (y)
securities received by the Company or any Restricted Subsidiary
from the transferee that are promptly converted by the Company or
such Restricted Subsidiary into cash.
(b) In the event of an Asset Disposition that requires the
purchase of New Notes (and other Senior Subordinated
Indebtedness) pursuant to clause (a)(iii)(C) of this covenant,
the Company will be required to purchase New Notes tendered
pursuant to an offer by the Company for the New Notes (and other
Senior Subordinated Indebtedness) (the "Offer") at a purchase
price of 100% of their principal amount (without premium) plus
accrued interest to the date of purchase (or, in respect of such
other Senior Subordinated Indebtedness, such lesser price, if
any, as may be provided for by the terms of such Senior
Subordinated Indebtedness) in accordance with the procedures
(including prorating in the event of oversubscription) set forth
in the Indenture. If the aggregate purchase price of New Notes
tendered pursuant to the Offer is less than the Net Available
Cash allotted to the purchase thereof, the Company will apply the
remaining Net Available Cash in accordance with clause
(a)(iii)(D) above. The Company shall not be required to make an
Offer for New Notes (and other Senior Subordinated Indebtedness)
pursuant to this covenant if the Net Available Cash available
therefor (after application of the proceeds as provided in
clauses (A) and (B)) are less than $10.0 million for all Asset
Dispositions (which lesser amount shall be carried forward for
purposes of determining whether an Offer is required with respect
to the Net Available Cash from any subsequent Asset Disposition).
(c) The Company will comply, to the extent applicable, with
the requirements of Section 14(e) of the Exchange Act and any
other securities laws or regulations in connection with the
repurchase of New Notes pursuant to this covenant. To the extent
that the provisions of any securities laws or regulations
conflict with provisions of this covenant, the Company will
comply with the applicable securities laws and regulations and
will not be deemed to have breached its obligations under this
covenant by virtue thereof.
Limitation on Transactions with Affiliates. (a) The Company
will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, enter into or conduct any transaction or
series of related transactions (including the purchase, sale,
lease or exchange of any property, employee compensation
arrangements or the rendering of any service) with any Affiliate
of the Company (an "Affiliate Transaction") unless (i) the terms
of such transaction are no less favorable to the Company or such
Restricted Subsidiary, as the case may be, than those that could
be obtained at the time of such transaction in arm's-length
dealings with a Person who is not such an Affiliate; (ii) in the
event such Affiliate Transaction involves an aggregate amount in
excess of $2.5 million, the terms of such transaction are set
forth in writing and shall have been approved by a majority of
those members of the Board of Directors having no personal stake
in such Affiliate Transaction (and such majority determines that
such Affiliate Transaction satisfies the criteria in clause (i)
above) and (iii) in the event such Affiliate Transaction involves
an aggregate amount in excess of $10.0 million, the Company has
received a written opinion from a nationally recognized
independent investment banking firm that such Affiliate
Transaction is fair to the Company and its Restricted
Subsidiaries from a financial point of view.
(b) The provisions of the foregoing paragraph (a) shall not
apply to (i) any Restricted Payment or Permitted Investment
permitted to be made pursuant to "Certain Covenants-Limitation on
Restricted Payments," (ii) any issuance of securities, or other
payments, awards or grants in cash, securities or otherwise
pursuant to, or the funding of, employment arrangements, stock
options and stock ownership plans approved by the Board of
Directors, (iii) the grant of stock options or similar rights to
employees and directors of the Company pursuant to plans approved
by the Board of Directors, (iv) loans or advances to employees in
the ordinary course of business in accordance with the past
practices of the Company or its Restricted Subsidiaries, but in
any event not to exceed $5.0 million in the aggregate outstanding
at any one time, (v) the payment of reasonable fees and
indemnities to directors of the Company and its Restricted
Subsidiaries who are not employees of the Company or its
Restricted Subsidiaries, (vi) any transaction between the Company
and a Wholly Owned Subsidiary or between Wholly Owned
Subsidiaries, (vii) the issuance or sale of any Capital Stock
(other than Disqualified Stock) of the Company, (viii) (A) sales
or other transfers or
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dispositions of customer loans and related assets customarily
transferred to a Special Purpose Vehicle in connection with a
Permitted Securitization and (B) Investments in a Special Purpose
Vehicle customarily made in connection with a Permitted
Securitization which are permitted by the "Limitation on
Restricted Payments" covenant; (ix) the Tax Sharing Agreement and
the Commodity Supply Agreement; and (x) any Jet Pro Sales
Transactions with Koch Agriculture or its affiliates which are on
terms no less favorable to the Company or such Restricted
Subsidiary, as the case may be, than those that could be obtained
at the time of any such transaction in arm's-length dealings with
a Person who is not an Affiliate.
Limitation on Sale or Issuance of Capital Stock of
Restricted Subsidiaries. The Company shall not sell or otherwise
dispose of any Capital Stock of a Restricted Subsidiary, and
shall not permit any Restricted Subsidiary, directly or
indirectly, to issue or sell or otherwise dispose of any of its
Capital Stock except (i) to the Company or a Wholly Owned
Subsidiary, (ii) if, immediately after giving effect to such
issuance, sale or other disposition, neither the Company nor any
of its Restricted Subsidiaries own any Capital Stock of such
Restricted Subsidiary, (iii) if, immediately after giving effect
to such issuance, sale or other disposition, such Restricted
Subsidiary continues to constitute a Restricted Subsidiary or
(iv) if, immediately after giving effect to such issuance, sale
or other disposition, such Restricted Subsidiary would no longer
constitute a Restricted Subsidiary and any Investment in such
Person remaining after giving effect thereto would have been
permitted to be made under the covenant described under
"--Limitation on Restricted Payments" if made on the date of such
issuance, sale or other disposition.
SEC Reports. Notwithstanding that the Company may not be
required to remain subject to the reporting requirements of
Section 13 or 15(d) of the Exchange Act, the Company will file
with the SEC and provide the Trustee and Noteholders with the
annual reports and such information, documents and other reports
which are specified in Sections 13 and 15(d) of the Exchange Act
and applicable to a U.S. corporation subject to such Sections,
such information, documents and other reports to be so filed and
provided at the times specified for the filing of such
information, documents and reports under such Sections, except
that prior to the 150th day after the Issue Date, such
requirements shall be deemed satisfied by the filing with the SEC
and delivering to the Holders on or prior to such date a
registration statement under the Securities Act that contains the
information that would be required in a Form 10-K for the year
ended December 31, 1997 and a Form 10-Q for the quarter ended
March 31, 1998. The Company also will comply with the other
applicable provisions of TIA ss. 314(a).
Merger and Consolidation
The Company will not consolidate with or merge with or
into, or convey, transfer or lease, in one transaction or a
series of transactions, all or substantially all its assets to,
any Person, unless: (i) the resulting, surviving or transferee
Person (the "Successor Company") will be a Person organized and
existing under the laws of the United States of America, any
State thereof or the District of Columbia and the Successor
Company (if not the Company) will expressly assume, by
supplemental indenture, executed and delivered to the Trustee, in
form satisfactory to the Trustee, all the obligations of the
Company under the New Notes and the Indenture; (ii) immediately
after giving effect to such transaction (and treating any
Indebtedness which becomes an obligation of the Successor Company
or any Subsidiary as a result of such transaction as having been
Incurred by the Successor Company or such Subsidiary at the time
of such transaction), no Default or Event of Default will have
occurred and be continuing; (iii) immediately after giving effect
to such transaction, the Successor Company would be able to Incur
an additional $1.00 of Indebtedness under paragraph (a) of the
covenant described under "Certain Covenants--Limitation on
Indebtedness;" and (iv) the Company will have delivered to the
Trustee an Officers' Certificate and an Opinion of Counsel, each
stating that such consolidation, merger or transfer and such
supplemental indenture (if any) comply with the Indenture, as set
forth in the Indenture.
The Successor Company will succeed to, and be substituted
for, and may exercise every right and power of, the Company under
the Indenture, but the predecessor Company in the case of a
conveyance, transfer or lease of all or substantially all its
assets will not be released from the obligation to pay the
principal of and interest on the New Notes.
Defaults
An Event of Default is defined in the Indenture as (i) a
default in any payment of interest on any Note when due,
continued for 30 days, (ii) a default in the payment of principal
of any Note when due at its Stated Maturity, upon optional
redemption, upon required repurchase, upon declaration or
otherwise, (iii) the failure by the Company to comply with its
obligations under "-Merger and Consolidation," (iv) the failure
by the Company to comply for 30 days
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after notice with any of its obligations under the covenants
described under "--Change of Control" or "--Certain Covenants"
(in each case, other than a failure to purchase New Notes), (v)
the failure by the Company to comply for 60 days after notice
with its other agreements contained in the Indenture, (vi) the
failure by the Company or any Restricted Subsidiary of the
Company to pay any Indebtedness within any applicable grace
period after final maturity or the acceleration of any such
Indebtedness by the holders thereof because of a default if the
total amount of such Indebtedness unpaid or accelerated exceeds
$10.0 million or its foreign currency equivalent (the "cross
acceleration provision"), (vii) certain events of bankruptcy,
insolvency or reorganization of Holdings, the Company or any
Significant Subsidiary of the Company (the "bankruptcy
provisions") or (viii) any final, non-appealable judgment or
decree for the payment of money in excess of $10.0 million (net
of any amounts with respect to which a creditworthy insurance
company has acknowledged full liability in writing) is rendered
against the Company or any Restricted Subsidiary of the Company
remains outstanding for a period of 60 days after such judgment
and is not discharged, waived or stayed within 10 days after
notice (the "judgment default provision").
The foregoing will constitute Events of Default whatever
the reason for any such Event of Default and whether it is
voluntary or involuntary or is effected by operation of law or
pursuant to any judgment, decree or order of any court or any
order, rule or regulation of any administrative or governmental
body.
However, a default under clauses (iv), (v) and (viii) will
not constitute an Event of Default until the Trustee or the
Holders of 25% in aggregate principal amount of the outstanding
New Notes notify the Company as provided in the Indenture of the
default and the Company does not cure such default within the
time specified after receipt of such notice.
If an Event of Default occurs and is continuing, the
Trustee shall, at the request of Holders of at least 25% in
aggregate principal amount of the outstanding New Notes by notice
to the Company declare the principal of and accrued but unpaid
interest on all the New Notes to be due and payable. Upon such a
declaration, such principal and interest will be due and payable
immediately; provided, however, that if upon such declaration
there are any amounts outstanding under the Credit Agreement and
the amounts thereunder have not been accelerated, such principal
and interest shall be due and payable upon the earlier of the
time such amounts under the Credit Agreement are accelerated or
five Business Days after receipt by the Company and the
Representative under the Credit Agreement of such declaration. If
an Event of Default relating to certain events of bankruptcy,
insolvency or reorganization of the Company occurs and is
continuing, the principal of and accrued interest on all the New
Notes will ipso facto become immediately due and payable without
any declaration or other act on the part of the Trustee or any
Holders. Under certain circumstances, the Holders of a majority
in aggregate principal amount of the outstanding New Notes may
rescind any such acceleration with respect to the New Notes and
its consequences.
Subject to the provisions of the Indenture relating to the
duties of the Trustee, in case an Event of Default occurs and is
continuing, the Trustee will be under no obligation to exercise
any of the rights or powers under the Indenture at the request or
direction of any of the Holders unless such Holders shall have
offered to the Trustee reasonable indemnity or security against
any loss, liability or expense. Except to enforce the right to
receive payment of principal, premium (if any) or interest when
due, no Holder may pursue any remedy with respect to the
Indenture or the New Notes unless (i) such Holder shall have
previously given the Trustee notice that an Event of Default is
continuing, (ii) Holders of at least 25% in aggregate principal
amount of the outstanding New Notes shall have requested the
Trustee to pursue the remedy, (iii) such Holders shall have
offered the Trustee reasonable security or indemnity against any
loss, liability or expense, (iv) the Trustee shall not have
complied with such request within 60 days after the receipt of
the request and the offer of security or indemnity and (v) the
Holders of a majority in principal amount of the outstanding New
Notes shall not have given the Trustee a direction inconsistent
with such request within such 60-day period. Subject to certain
restrictions, the Holders of a majority in principal amount of
the outstanding New Notes are given the right to direct the time,
method and place of conducting any proceeding for any remedy
available to the Trustee or of exercising any trust or power
conferred on the Trustee. The Trustee, however, may refuse to
follow any direction that conflicts with law or the Indenture or
that the Trustee determines is unduly prejudicial to the rights
of any other Holder or that would involve the Trustee in personal
liability.
The Indenture provides that if a Default occurs and is
continuing and is known to the Trustee, the Trustee must mail to
each Holder notice of the Default within 30 days after it is
known to a Trust Officer or written notice of it is received by
the Trustee. Except in the case of a Default in the payment of
principal of, premium (if any) or interest on any Note, the
Trustee may withhold notice if and so long as a committee of its
Trust Officers in good faith determines that withholding notice
is not opposed to the interests of the Noteholders. In addition,
the Company is required to
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deliver to the Trustee, within 120 days after the end of each
fiscal year, a certificate indicating whether the signers thereof
know of any Default that occurred during the previous year. The
Company also is required to deliver to the Trustee, within 30
days after the occurrence thereof, written notice of any event
which would constitute certain Defaults, their status and what
action the Company is taking or proposes to take in respect
thereof.
Amendments and Waivers
Subject to certain exceptions, the Indenture may be amended
with the consent of the Holders of a majority in principal amount
of the New Notes then outstanding (including consents obtained in
connection with a tender offer or exchange for the New Notes) and
any past default or compliance with any provisions may be waived
with the consent of the Holders of a majority in principal amount
of the New Notes then outstanding. However, without the consent
of each Holder of an outstanding Note affected, no amendment may
(i) reduce the amount of New Notes whose Holders must consent to
an amendment, (ii) reduce the rate of or extend the time for
payment of interest on any Note, (iii) reduce the principal of or
extend the Stated Maturity of any Note, (iv) reduce the premium
payable upon the redemption of any Note or change the time at
which any Note may be redeemed as described under "--Optional
Redemption," (v) make any Note payable in money other than that
stated in the Note, (vi) impair the right of any Holder to
receive payment of principal of and interest on such Holder's New
Notes on or after the due dates therefor or to institute suit for
the enforcement of any payment on or with respect to such
Holder's New Notes, (vii) make any change in the amendment
provisions which require each Holder's consent or in the waiver
provisions or (viii) make any change to the subordination
provisions of the Indenture that would adversely affect the
Noteholders.
Without the consent of any Holder, the Company and the
Trustee may amend the Indenture to cure any ambiguity, omission,
defect or inconsistency, to provide for the assumption by a
successor corporation of the obligations the Company under the
Indenture, to provide for uncertificated New Notes in addition to
or in place of certificated New Notes (provided that the
uncertificated New Notes are issued in registered form for
purposes of Section 163(f) of the Code, or in a manner such that
the uncertificated New Notes are as described in Section
163(f)(2)(B) of the Code), to add Guarantees with respect to the
New Notes, to secure the New Notes, to add to the covenants of
the Company for the benefit of the Noteholders or to surrender
any right or power conferred upon the Company, to make any change
that does not adversely affect the rights of any Holder and to
comply with any requirement of the SEC in connection with the
qualification of the Indenture under the TIA. However, no
amendment may be made to the subordination provisions of the
Indenture that adversely affects the rights of any holder of
Senior Indebtedness then outstanding unless the holders of such
Senior Indebtedness (or their Representative) consent to such
change.
The consent of the Noteholders is not necessary under the
Indenture to approve the particular form of any proposed
amendment. It is sufficient if such consent approves the
substance of the proposed amendment.
After an amendment under the Indenture becomes effective,
the Company is required to mail to Noteholders a notice briefly
describing such amendment. However, the failure to give such
notice to all Noteholders, or any defect therein, will not impair
or affect the validity of the amendment.
Transfer and Exchange
A Noteholder may transfer or exchange New Notes in
accordance with the Indenture. Upon any transfer or exchange, the
registrar and the Trustee may require a Noteholder, among other
things, to furnish appropriate endorsements and transfer
documents and the Company may require a Noteholder to pay any
taxes required by law or permitted by the Indenture, including
any transfer tax or other similar governmental charge payable in
connection therewith. The Company is not required to transfer or
exchange any New Note selected for redemption or to transfer or
exchange any New Note for a period of 15 days prior to a
selection of New Notes to be redeemed. The New Notes will be
issued in registered form and the registered holder of a New Note
will be treated as the owner of such New Note for all purposes.
Defeasance
The Company at any time may terminate all its obligations
under the New Notes and the Indenture ("legal defeasance"),
except for certain obligations, including those respecting the
defeasance trust and obligations to register the transfer or
exchange of the New Notes, to replace mutilated, destroyed, lost
or stolen New Notes and to maintain a
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registrar and paying agent in respect of the New Notes. The
Company at any time may terminate its obligations under the
covenants described under "Certain Covenants (other than the
covenant described under "-Merger and Consolidation")," the
operation of the cross acceleration provision, the bankruptcy
provisions with respect to Significant Subsidiaries and the
judgment default provision described under "--Defaults" and the
limitations contained in clause (iii) under "--Merger and
Consolidation" ("covenant defeasance").
The Company may exercise its legal defeasance option
notwithstanding its prior exercise of its covenant defeasance
option. If the Company exercises its legal defeasance option,
payment of the New Notes may not be accelerated because of an
Event of Default with respect thereto. If the Company exercises
its covenant defeasance option, payment of the New Notes may not
be accelerated because of an Event of Default specified in clause
(iv), (v), (vi), (vii) (with respect only to Significant
Subsidiaries) or (viii) under "--Defaults" above or because of
the failure of the Company to comply with clause (iii) under
"--Merger and Consolidation."
In order to exercise either defeasance option, the Company
must irrevocably deposit or cause to be deposited in trust (the
"defeasance trust") with the Trustee money or U.S. Government
Obligations which through the scheduled payment of principal and
interest in respect thereof in accordance with their terms will
provide cash at such times and in such amounts as will be
sufficient to pay principal and interest when due on all the New
Notes (except lost, stolen or destroyed New Notes which have been
replaced or repaid) to maturity or redemption, as the case may
be, and must comply with certain other conditions, including
delivery to the Trustee of an Opinion of Counsel to the effect
that holders of the New Notes will not recognize income, gain or
loss for federal income tax purposes as a result of such deposit
and defeasance and will be subject to federal income tax on the
same amounts and in the same manner and at the same times as
would have been the case if such deposit and defeasance had not
occurred (and, in the case of legal defeasance only, such Opinion
of Counsel must be based on a ruling of the Internal Revenue
Service or other change in applicable federal income tax law).
Concerning the Trustee
The First National Bank of Chicago is the Trustee under the
Indenture and has been appointed by the Company as Registrar and
Paying Agent with regard to the Notes.
The Indenture contains certain limitations on the rights of
the Trustee, should it become a creditor of the Company, to
obtain payment of claims in certain cases, or to realize on
certain property received in respect of any such claim as
security or otherwise. The Trustee will be permitted to engage in
other transactions; provided, however, if it acquires any
conflicting interest it must eliminate such conflict within 90
days, apply to the SEC for permission to continue or resign.
The Holders of a majority in principal amount of the
outstanding New Notes will have the right to direct the time,
method and place of conducting any proceeding for exercising any
remedy available to the Trustee, subject to certain exceptions.
The Indenture provides that if an Event of Default occurs (and is
not cured), the Trustee will be required, in the exercise of its
power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Trustee will
be under no obligation to exercise any of its rights or powers
under the Indenture at the request of any Holder of New Notes,
unless such Holder shall have offered to the Trustee security and
indemnity satisfactory to it against any loss, liability or
expense and then only to the extent required by the terms of the
Indenture.
Governing Law
The Indenture provides that it and the New Notes will be
governed by, and construed in accordance with, the laws of the
State of New York without giving effect to applicable principles
of conflicts of law to the extent that the application of the law
of another jurisdiction would be required thereby.
Certain Definitions
"Additional Assets" means (i) any property or assets (other
than Indebtedness and Capital Stock) in a Related Business; (ii)
the Capital Stock of a Person that becomes a Restricted
Subsidiary as a result of the acquisition of such Capital Stock
by the Company or another Restricted Subsidiary (or, in the case
of an Asset Disposition of the Capital Stock of a Wholly Owned
Subsidiary or tangible assets of a Wholly Owned Subsidiary, the
Capital Stock of a Person
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that becomes a Wholly Owned Subsidiary); or (iii) Capital Stock
constituting a minority interest in any Person that at such time
is a Restricted Subsidiary; provided, however, that, in the case
of clauses (ii) or (iii), such Restricted Subsidiary is primarily
engaged in a Related Business.
"Affiliate" of any specified Person means any other Person,
directly or indirectly, controlling or controlled by or under
direct or indirect common control with such specified Person. For
the purposes of this definition, "control" when used with respect
to any Person means the power to direct the management and
policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and
the terms "controlling" and "controlled" have meanings
correlative to the foregoing. For purposes of the provisions
described under "--Certain Covenants--Limitation on Restricted
Payments", "--Certain Covenants-Limitation on Affiliate
Transactions" and "Certain Covenants--Limitation on Sales of
Assets and Subsidiary Stock" only, "Affiliate" shall also mean
any beneficial owner of Capital Stock representing 10% or more of
the total voting power of the Voting Stock (on a fully diluted
basis) of the Company or of rights or warrants to purchase such
Voting Stock (whether or not currently exercisable) and any
Person who would be an Affiliate of any such beneficial owner
pursuant to the first sentence hereof.
"Asset Disposition" means any sale, lease, transfer or
other disposition (or series of related sales, leases, transfers
or dispositions) by the Company or any Restricted Subsidiary,
including any disposition by means of a merger, consolidation or
similar transaction (each referred to for the purposes of this
definition as a "disposition"), of (i) any shares of Capital
Stock of a Restricted Subsidiary (other than directors'
qualifying shares or shares required by applicable law to be held
by a Person other than the Company or a Restricted Subsidiary),
(ii) all or substantially all the assets of any division or line
of business of the Company or any Restricted Subsidiary or (iii)
any other assets not constituting Capital Stock of the Company or
any Restricted Subsidiary outside of the ordinary course of
business of the Company or such Restricted Subsidiary (other
than, in the case of (i), (ii) and (iii) above, (w) a disposition
of obsolete or worn-out assets, (x) a disposition by a Restricted
Subsidiary to the Company or by the Company or a Restricted
Subsidiary to another Restricted Subsidiary, (y) for purposes of
the covenant described under "--Certain Covenants--Limitation on
Sales of Assets and Subsidiary Stock" only, a disposition that
constitutes a Restricted Payment or Permitted Investment
permitted by the covenant described under "-Certain
Covenants-Limitation on Restricted Payments" and (z) disposition
of assets with a fair market value of less than $1.0 million).
"Attributable Indebtedness" in respect of a Sale/Leaseback
Transaction means, as at the time of determination, the present
value (discounted at the interest rate borne by the Notes,
compounded annually) of the total obligations of the lessee for
rental payments during the remaining term of the lease included
in such Sale/Leaseback Transaction (including any period for
which such lease has been extended).
"Average Life" means, as of the date of determination, with
respect to any Indebtedness or Preferred Stock, the quotient
obtained by dividing (i) the sum of the product of the numbers of
years from the date of determination to the dates of each
successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred
Stock multiplied by the amount of such payment by (ii) the sum of
all such payments.
"Bank Indebtedness" means all Obligations pursuant to the
Credit Agreement.
"Board of Directors" means the Board of Directors of the
Company or any committee thereof duly authorized to act on behalf
of such Board.
"Business Day" means a day other than a Saturday, Sunday or
other day on which banking institutions in New York City are
authorized or required by law to close.
"Capitalized Lease Obligation" means an obligation that is
required to be classified and accounted for as a capitalized
lease for financial reporting purposes in accordance with GAAP,
and the amount of Indebtedness represented by such obligation
shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be
the date of the last payment of rent or any other amount due
under such lease prior to the first date upon which such lease
may be terminated by the lessee without payment of a penalty.
"Capital Stock" of any Person means any and all shares,
interests, rights to purchase, warrants, options, participation
or other equivalents of or interests in (however designated)
equity of such Person, including any Preferred Stock, but
excluding any debt securities convertible into such equity.
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"Closed Facility" means (a) a plant, mill or other facility
of the Company or any of its Restricted Subsidiaries no longer
operating on the Issue Date or (b) any plant, mill or other
facility (provided that the aggregate book value of all such
plants, mills or other facilities covered by this clause (b)
shall not exceed $10.0 million) at which the Board of Directors
of the Company elects to cease operations after the Issue Date.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commodity Supply Agreement" means the Master Procurement
Agreement, to be dated as of the effective date of the Merger,
between Nutrition Supply and Trading, a division of Koch
Agriculture, and the Company.
"Consolidated Coverage Ratio" as of any date of
determination means the ratio of (i) the aggregate amount of
EBITDA for the period of the most recent four consecutive fiscal
quarters ending at least 45 days prior to the date of such
determination to (ii) Consolidated Interest Expense for such four
fiscal quarters; provided, however, that (1) if the Company or
any Restricted Subsidiary has Incurred any Indebtedness (other
than for working capital under the Credit Agreement) since the
beginning of such period that remains outstanding or if the
transaction giving rise to the need to calculate the Consolidated
Coverage Ratio is an Incurrence of Indebtedness, or both, EBITDA
and Consolidated Interest Expense for such period shall be
calculated after giving effect on a pro forma basis to such
Indebtedness as if such Indebtedness had been Incurred on the
first day of such period, (2) if the Company or any Restricted
Subsidiary has repaid, repurchased, defeased or otherwise
discharged any Indebtedness since the beginning of such period or
if any Indebtedness is to be repaid, repurchased, defeased or
otherwise discharged (in each case other than Indebtedness
Incurred under any revolving credit facility unless such
Indebtedness has been permanently repaid and has not been
replaced) on the date of the transaction giving rise to the need
to calculate the Consolidated Coverage Ratio, EBITDA and
Consolidated Interest Expense for such period shall be calculated
on a pro forma basis as if such discharge had occurred on the
first day of such period and as if the Company or such Restricted
Subsidiary has not earned the interest income actually earned
during such period in respect of cash or Temporary Cash
Investments used to repay, repurchase, defease or otherwise
discharge such Indebtedness, (3) if since the beginning of such
period the Company or any Restricted Subsidiary shall have made
any Asset Disposition or if the transaction giving rise to the
need to calculate the Consolidated Coverage Ratio is an Asset
Disposition, the EBITDA for such period shall be reduced by an
amount equal to the EBITDA (if positive) directly attributable to
the assets which are the subject of such Asset Disposition for
such period, or increased by an amount equal to the EBITDA (if
negative) directly attributable thereto for such period and
Consolidated Interest Expense for such period shall be reduced by
an amount equal to the Consolidated Interest Expense directly
attributable to any Indebtedness of the Company or any Restricted
Subsidiary repaid, repurchased, defeased or otherwise discharged
with respect to the Company and its continuing Restricted
Subsidiaries in connection with such Asset Disposition for such
period (or, if the Capital Stock of any Restricted Subsidiary is
sold, the Consolidated Interest Expense for such period directly
attributable to the Indebtedness of such Restricted Subsidiary to
the extent the Company and its continuing Restricted Subsidiaries
are no longer liable for such Indebtedness after such sale), (4)
if since the beginning of such period the Company or any
Restricted Subsidiary (by merger or otherwise) shall have made an
Investment in any Restricted Subsidiary (or any Person which
becomes a Restricted Subsidiary) or an acquisition of assets,
including any acquisition of assets occurring in connection with
a transaction requiring a calculation to be made hereunder, which
constitutes all or substantially all of an operating unit of a
business, EBITDA and Consolidated Interest Expense for such
period shall be calculated after giving pro forma effect thereto
(including the Incurrence of any Indebtedness) as if such
Investment or acquisition occurred on the first day of such
period and (5) if since the beginning of such period any Person
(that subsequently became a Restricted Subsidiary or was merged
with or into the Company or any Restricted Subsidiary since the
beginning of such period) shall have made any Asset Disposition,
any Investment or acquisition of assets that would have required
an adjustment pursuant to clause (3) or (4) above if made by the
Company or a Restricted Subsidiary during such period, EBITDA and
Consolidated Interest Expense for such period shall be calculated
after giving pro forma effect thereto as if such Asset
Disposition, Investment or acquisition of assets occurred on the
first day of such period. For purposes of this definition,
whenever pro forma effect is to be given to an acquisition of
assets, the amount of income or earnings relating thereto and the
amount of Consolidated Interest Expense associated with any
Indebtedness Incurred in connection therewith, the pro forma
calculations shall be determined in good faith by a responsible
financial or accounting officer of the Company. If any
Indebtedness bears a floating rate of interest and is being given
pro forma effect, the interest expense on such Indebtedness shall
be calculated as if the rate in effect on the date of
determination had been the applicable rate for the entire period
(taking into account any Interest Rate Agreement applicable to
such Indebtedness if such Interest Rate Agreement has a remaining
term in excess of 12 months).
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"Consolidated Interest Expense" means, for any period, the
total interest expense of the Company and its consolidated
Restricted Subsidiaries, plus, to the extent not included in such
total interest expense, and to the extent Incurred by the Company
or its Restricted Subsidiaries, without duplication, (i) interest
expense attributable to Capitalized Lease Obligations and
one-third of the rental expense attributable to leases
constituting part of a Sale/Leaseback Transaction, (ii)
amortization of debt discount and debt issuance cost (other than
the amortization of debt issuance cost in respect of the Notes
and the Credit Agreement entered into on the Issue Date), (iii)
capitalized interest, (iv) non-cash interest expense, (v)
commissions and discounts owed with respect to letters of credit
and bankers' acceptance financing, (vi) net costs associated with
Interest Rate Agreements or Currency Agreements entered into with
respect to Indebtedness of the Company or its Restricted
Subsidiaries (including amortization of fees), (vii) Preferred
Stock dividends in respect of all Preferred Stock of the Company
and its Restricted Subsidiaries held by Persons other than the
Company or a Wholly Owned Subsidiary, (viii) interest incurred in
connection with Investments in discontinued operations (but only
if the relevant obligations remain as of the relevant calculation
date), (ix) interest accruing on any Indebtedness of any other
Person to the extent such Indebtedness is Guaranteed by (or
secured by the assets of) the Company or any Restricted
Subsidiary and to the extent that such interest has not been paid
when due (after giving effect to any grace period) and (x) the
cash contributions to any employee stock ownership plan or
similar trust to the extent such contributions are used by such
plan or trust to pay interest or fees to any Person (other than
the Company) in connection with Indebtedness Incurred by such
plan or trust.
"Consolidated Net Income" means, for any period, the net
income (loss) of the Company and its consolidated Subsidiaries;
provided, however, (i) any net income (or loss) of any Person
(other than the Company) if such Person is not a Restricted
Subsidiary, except that (A) subject to the exclusion contained in
(iv) below, the Company's equity in the net income of any such
Person for such period shall be included in such Consolidated Net
Income up to the aggregate amount of cash actually distributed by
such Person during such period to the Company or a Restricted
Subsidiary as a dividend or other distribution (subject, in the
case of a dividend or other distribution paid to a Restricted
Subsidiary, to the limitations contained in clause (iii) below)
and (B) the Company's equity in a net loss of any such Person for
such period shall be included in determining such Consolidated
Net Income to the extent of any cash actually contributed by the
Company or a Restricted Subsidiary to such Person during such
period, (ii) any net income of any Person acquired by the Company
or a Subsidiary in a pooling of interests transaction for any
period prior to the date of such acquisition, (iii) any net
income of any Restricted Subsidiary if such Restricted Subsidiary
is subject to restrictions, directly or indirectly, on the
payment of dividends or the making of distributions by such
Restricted Subsidiary, directly or indirectly, to the Company,
except that (A) subject to the exclusion contained in (iv) below,
the Company's equity in the net income of any such Restricted
Subsidiary for such period shall be included in such Consolidated
Net Income up to the aggregate amount of cash actually
distributed by such Restricted Subsidiary during such period to
the Company or another Restricted Subsidiary as a dividend or
other distribution (subject, in the case of a dividend or other
distribution paid to another Restricted Subsidiary, to the
limitation contained in this clause) and (B) the Company's equity
in a net loss of any such Restricted Subsidiary for such period
shall be included in determining such Consolidated Net Income,
(iv) any gain (or loss) realized upon the sale or other
disposition of any assets of the Company, its consolidated
Subsidiaries or any other Person (including pursuant to any
Sale/Leaseback Transaction) which is not sold or otherwise
disposed of in the ordinary course of business and any gain or
loss realized upon the sale or other disposition of any Capital
Stock of any Person, (v) any extraordinary gain or loss, (vi) the
amortization of debt issuance cost in respect of the Notes and
the Credit Agreement entered into on the Issue Date and (vii) the
cumulative effect of a change in accounting principles.
Notwithstanding the foregoing, for the purposes of the covenant
described under "Certain Covenants-Limitation on Restricted
Payments" only, there shall be excluded from Consolidated Net
Income any dividends, repayments of loans or advances or other
transfers of assets from Unrestricted Subsidiaries to the Company
or a Restricted Subsidiary to the extent such dividends,
repayments or transfers increase the amount of Restricted
Payments permitted under such covenant pursuant to clause
(a)(3)(D) thereof.
"Consolidated Net Worth" means the total of the amounts
shown on the balance sheet of the Company and its consolidated
Subsidiaries, determined on a consolidated basis in accordance
with GAAP, as of the end of the most recent fiscal quarter of the
Company ending prior to the taking of any action for the purpose
of which the determination is being made for which financial
statements are available, as (i) the par or stated value of all
outstanding Capital Stock of the Company plus (ii) paid-in
capital or capital surplus relating to such Capital Stock plus
(iii) any retained earnings or earned surplus less (A) any
accumulated deficit and (B) any amounts attributable to
Disqualified Stock.
"Consolidated NIDA" means, for any period, the Consolidated
Net Income for such period plus (to the extent deducted in
calculating Consolidated Net Income) (a) depreciation expense of
the Company and its consolidated Restricted Subsidiaries, (b)
amortization expense of the Company and its consolidated
Restricted Subsidiaries
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(excluding amortization expense attributable to a prepaid cash
item that was paid in a prior period) and (c) all other non-cash
charges of the Company and its consolidated Restricted
Subsidiaries (excluding any such non-cash charge to the extent
that it represents an accrual of or reserve for cash expenditures
in any future period), in each case for such period.
"Credit Agreement" means that certain credit facility among
the Company, Chase Bank of Texas, National Association, and the
lenders from time to time party thereto, including any collateral
documents, instruments and agreements executed in connection
therewith, and the term Credit Agreement shall also include any
amendments, supplements, modifications, extensions, renewals,
restatements or refundings thereof and any credit facilities that
replace, refund or refinance any part of the loans, other credit
facilities or commitments thereunder, including any such
replacement, refunding or refinancing facility that increases the
amount borrowable thereunder or alters the maturity thereof.
"Currency Agreement" means in respect of a Person any
foreign exchange contract, currency swap agreement or other
similar agreement designed to protect such Person against
fluctuations in currency values as to which such Person is a
party or a beneficiary.
"Default" means any event which is, or after notice or
passage of time or both would be, an Event of Default.
"Designated Senior Indebtedness" means (i) the Bank
Indebtedness and (ii) any other Senior Indebtedness of the
Company which, at the date of determination, has an aggregate
principal amount outstanding of, or under which, at the date of
determination, the holders thereof are committed to lend up to,
at least $25.0 million and is specifically designated by the
Company in the instrument evidencing or governing such Senior
Indebtedness as "Designated Senior Indebtedness" for purposes of
the Indenture.
"Disqualified Stock" means, with respect to any Person, any
Capital Stock which by its terms (or by the terms of any security
into which it is convertible or for which it is exchangeable) or
upon the happening of any event (i) matures or is mandatorily
redeemable pursuant to a sinking fund obligation or otherwise,
(ii) is convertible or exchangeable for Indebtedness or
Disqualified Stock or (iii) is redeemable (other than for Capital
Stock of the Company (other than Disqualified Stock)) at the
option of the holder thereof, in whole or in part, in each case
on or prior to the first anniversary of the Stated Maturity of
the Notes; provided, however, that any Capital Stock that would
not constitute Disqualified Stock but for provisions thereof
giving holders thereof the right to require such Person to
repurchase or redeem such Capital Stock upon the occurrence of an
"asset sale" or "change of control" occurring prior to the first
anniversary of the Stated Maturity of the Notes shall not
constitute Disqualified Stock if (x) the "asset sale" or "change
of control" provisions applicable to such Capital Stock are not
more favorable to the holders of such Capital Stock than the
provisions described under "-Change of Control" and "-Certain
Covenants-Limitation on Sales of Assets and Subsidiary Stock" and
(y) any such requirement only becomes operative after compliance
with such terms applicable to the Notes, including the purchase
of any Notes tendered pursuant thereto.
"EBITDA" for any period means the sum of Consolidated Net
Income, plus the following to the extent deducted in calculating
such Consolidated Net Income: (a) Consolidated Interest Expense,
(b) all income tax expense of the Company and its consolidated
Restricted Subsidiaries, (c) depreciation expense of the Company
and its consolidated Restricted Subsidiaries, (d) amortization
expense of the Company and its consolidated Restricted
Subsidiaries (excluding amortization expense attributable to a
prepaid cash item that was paid in a prior period), (e) all other
non-cash charges of the Company and its consolidated Restricted
Subsidiaries (excluding any such non-cash charge to the extent
that it represents an accrual of or reserve for cash expenditures
in any future period), in each case for such period and (f) $3.2
million of management bonuses payable in connection with the
Merger. Notwithstanding the foregoing, the provision for taxes
based on the income or profits of, and the depreciation and
amortization and non-cash charges of, a Restricted Subsidiary
shall be added to Consolidated Net Income to compute EBITDA only
to the extent (and in the same proportion) that the net income of
such Restricted Subsidiary was included in calculating
Consolidated Net Income and only if a corresponding amount would
be permitted at the date of determination to be dividended to the
Company by such Restricted Subsidiary without prior approval
(that has not been obtained), pursuant to the terms of its
charter and all agreements, instruments, judgments, decrees,
orders, statutes, rules and governmental regulations applicable
to such Restricted Subsidiary or its stockholders.
"Exchange Act" means the Securities Exchange Act of 1934,
as amended.
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"GAAP" means generally accepted accounting principles in
the United States of America as in effect as of the Issue Date,
including those set forth in (i) the opinions and pronouncements
of the Accounting Principles Board of the American Institute of
Certified Public Accountants, (ii) statements and pronouncements
of the Financial Accounting Standards Board, (iii) such other
statements by such other entity as approved by a significant
segment of the accounting profession and (iv) the rules and
regulations of the SEC governing the inclusion of financial
statements (including pro forma financial statements) in periodic
reports required to be filed pursuant to Section 13 of the
Exchange Act, including opinions and pronouncements in staff
accounting bulletins and similar written statements from the
accounting staff of the SEC.
"Guarantee" means any obligation, contingent or otherwise,
of any Person directly or indirectly guaranteeing any
Indebtedness of any Person and any obligation, direct or
indirect, contingent or otherwise, of such Person (i) to purchase
or pay (or advance or supply funds for the purchase or payment
of) such Indebtedness or other obligation of such Person (whether
arising by virtue of partnership arrangements, or by agreements
to keep-well, to purchase assets, goods, securities or services,
to take-or-pay or to maintain financial statement conditions or
otherwise) or (ii) entered into for the purpose of assuring in
any other manner the obligee of such Indebtedness of the payment
thereof or to protect such obligee against loss in respect
thereof (in whole or in part); provided, however, that the term
"Guarantee" shall not include endorsements for collection or
deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.
"Hedging Obligations" of any Person means the obligations
of such Person pursuant to any Interest Rate Agreement or
Currency Agreement.
"Holder" or "Noteholder" means the Person in whose name a
Note is registered on the Registrar's books.
"Holdings" means PM Holdings Corporation, the Company's
parent corporation.
"Incur" means issue, assume, Guarantee, incur or otherwise
become liable for; provided, however, that any Indebtedness or
Capital Stock of a Person existing at the time such Person
becomes a Subsidiary (whether by merger, consolidation,
acquisition or otherwise) shall be deemed to be Incurred by such
Subsidiary at the time it becomes a Subsidiary. The term
"Incurrence" when used as a noun shall have a correlative
meaning.
"Indebtedness" means, with respect to any Person on any
date of determination (without duplication):
(i) the principal in respect of (A) indebtedness of
such Person for money borrowed and (B) indebtedness
evidenced by notes, debentures, bonds or other similar
instruments for the payment of which such Person is
responsible or liable, including, in each case, any premium
on such indebtedness to the extent such premium has become
due and payable;
(ii) all Capitalized Lease Obligations of such Person
and all Attributable Indebtedness in respect of
Sale/Leaseback Transactions entered into by such Person;
(iii) all obligations of such Person issued or assumed
as the deferred purchase price of property, all conditional
sale obligations of such Person and all obligations of such
Person under any title retention agreement (but excluding
Trade Payables arising in the ordinary course of business);
(iv) all obligations of such Person for the
reimbursement of any obligor on any letter of credit,
banker's acceptance or similar credit transaction (other
than obligations with respect to letters of credit securing
obligations (other than obligations described in clauses
(i) through (iii) above) entered into in the ordinary
course of business of such Person to the extent such
letters of credit are not drawn upon or, if and to the
extent drawn upon, such drawing is reimbursed no later than
the tenth Business Day following receipt by such Person of
a demand for reimbursement following a payment on the
letter of credit);
(v) the amount of all obligations of such Person with
respect to the redemption, repayment or other repurchase of
any Disqualified Stock or, with respect to any Subsidiary
of such Person, the liquidation preference with respect to,
any Preferred Stock (but excluding, in each case, any
accrued dividends);
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(vi) all obligations of the type referred to in
clauses (i) through (v) of other Persons and all dividends
of other Persons for the payment of which, in either case,
such Person is responsible or liable, directly or
indirectly, as obligor, guarantor or otherwise, including
by means of any Guarantee;
(vii) all obligations of the type referred to in
clauses (i) through (vi) of other Persons secured by any
Lien on any property or asset of such Person (whether or
not such obligation is assumed by such Person), the amount
of such obligation being deemed to be the lesser of the
value of such property or assets or the amount of the
obligation so secured; and
(viii) to the extent not otherwise included in this
definition, Hedging Obligations of such Person.
The amount of Indebtedness of any Person at any date shall
be the outstanding balance at such date of all unconditional
obligations as described above and the maximum liability, upon
the occurrence of the contingency giving rise to the obligation,
of any contingent obligations at such date.
"Interest Rate Agreement" means with respect to any Person
any interest rate protection agreement, interest rate future
agreement, interest rate option agreement, interest rate swap
agreement, interest rate cap agreement, interest rate collar
agreement, interest rate hedge agreement or other similar
agreement or arrangement designed to protect such Person against
fluctuations in interest rates as to which such Person is party
or a beneficiary.
"Investment" in any Person means any direct or indirect
advance, loan (other than advances to customers in the ordinary
course of business that are recorded as accounts receivable on
the balance sheet of such Person) or other extension of credit
(including by way of Guarantee or similar arrangement) or capital
contribution to (by means of any transfer of cash or other
property to others or any payment for property or services for
the account or use of others), or any purchase or acquisition of
Capital Stock, Indebtedness or other similar instruments issued
by such Person. For purposes of the definitions of "Unrestricted
Subsidiary" and "Restricted Payment" and "Certain
Covenants-Limitation on Restricted Payments", (i) "Investment"
shall include the portion (proportionate to the Company's equity
interest in such Subsidiary) of the fair market value of the net
assets of any Subsidiary of the Company at the time that such
Subsidiary is designated an Unrestricted Subsidiary; provided,
however, that upon a redesignation of such Subsidiary as a
Restricted Subsidiary, the Company shall be deemed to continue to
have a permanent "Investment" in an Unrestricted Subsidiary equal
to an amount (if positive) equal to (x) the Company's
"Investment" in such Subsidiary at the time of such redesignation
less (y) the portion (proportionate to the Company's equity
interest in such Subsidiary) of the fair market value of the net
assets of such Subsidiary at the time that such Subsidiary is so
re-designated a Restricted Subsidiary; and (ii) any property
transferred to or from an Unrestricted Subsidiary shall be valued
at its fair market value at the time of such transfer, in each
case as determined in good faith by the Board of Directors and
evidenced by a resolution of such Board of Directors.
"Investment Grade" means a rating of BBB- (or its
equivalent) or higher by Standard & Poor's Ratings Group (or its
successor) and Baa3 (or its equivalent) or higher by Moody's
Investors Service, Inc. (or its successor).
"Issue Date" means the date on which the Notes are
originally issued.
"Jet Pro Sales Transactions" means sales of Jet-Pro(R)
dewatering equipment to the Company by Koch Feed Technology
Company.
"Lien" means any mortgage, pledge, security interest,
encumbrance, lien or charge of any kind (including any
conditional sale or other title retention agreement or lease in
the nature thereof).
"Merger and Tender Offer Payments" means (i) all payments
made by the Company in connection with the Tender Offer with
respect to the Existing PMI Senior Subordinated Notes, (ii) all
payments made by the Company to Holdings of amounts required to
be paid by Holdings in connection with the Tender Offer with
respect to the Existing Holdings Discount Debentures and (iii)
payments made by the Company to Holdings from the net proceeds of
the Offering and borrowings under the Credit Agreement remaining
subsequent to the payments made under (i) and (ii) above to be
paid by Holdings in connection with the Merger.
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"Net Available Cash" from an Asset Disposition means cash
payments received (including any cash payments received by way of
deferred payment of principal pursuant to a note or installment
receivable or otherwise and proceeds from the sale or other
disposition of any securities received as consideration, but only
as and when received, but excluding any other consideration
received in the form of assumption by the acquiring Person of
Indebtedness or other obligations relating to such properties or
assets or received in any other non cash form) therefrom, in each
case net of (i) all legal, title and recording tax expenses,
commissions and other fees and expenses incurred, and all
Federal, state, provincial, foreign and local taxes required to
be paid or accrued as a liability under GAAP, as a consequence of
such Asset Disposition, (ii) all payments made on any
Indebtedness which is secured by any assets subject to such Asset
Disposition, in accordance with the terms of any Lien upon or
other security arrangement of any kind with respect to such
assets, or which must by its terms, or in order to obtain a
necessary consent to such Asset Disposition, or by applicable
law, be repaid out of the proceeds from such Asset Disposition,
(iii) all distributions and other payments required to be made to
minority interest holders in Restricted Subsidiaries or joint
ventures as a result of such Asset Disposition and (iv) the
deduction of appropriate amounts to be provided by the seller as
a reserve, in accordance with GAAP, against any liabilities
associated with the assets disposed of in such Asset Disposition
and retained by the Company or any Restricted Subsidiary after
such Asset Disposition.
"Net Cash Proceeds", with respect to any issuance or sale
of Capital Stock, means the cash proceeds of such issuance or
sale net of attorneys' fees, accountants' fees, underwriters' or
placement agents' fees, discounts or commissions and brokerage,
consultant and other fees actually incurred in connection with
such issuance or sale and net of taxes paid or payable as a
result thereof.
"Non-Recourse Debt" means Indebtedness as to which neither
the Company nor any Restricted Subsidiary (other than Standard
Securitization Undertakings in respect of Indebtedness permitted
pursuant to clause (i) of the "Limitation on Indebtedness and
Preferred Stock of Restricted Subsidiaries" covenant) (a)
provides any Guarantee or credit support of any kind (including
any undertaking, Guarantee, indemnity, agreement or instrument
that would constitute Indebtedness) or (b) is directly or
indirectly liable (as a guarantor or otherwise).
"Obligations" means with respect to any Indebtedness all
obligations for principal, premium, interest, penalties, fees,
indemnifications, reimbursements, and other amounts payable
pursuant to the documentation governing such Indebtedness.
"Permitted Customer Financing" means the Incurrence by the
Company of obligations (including Guarantees of indebtedness,
standby letters of credit (and reimbursement obligations in
respect thereof) for the repayment of indebtedness, product
repurchase agreements and other obligations) owed to any lender
of a customer of the Company or any of its Restricted
Subsidiaries Incurred in the ordinary course of business;
provided that (A) any such lender's loans are used to finance the
purchase price to be paid to the Company for animal feed products
and programs sold by the Company to such customer and (B) the
amount of any such obligation of the Company shall not exceed the
purchase price to be paid to the Company for such animal feed
products and programs sold by the Company to such customer which
are financed by such lender.
"Permitted Holders" means Koch Agriculture Company and its
Affiliates.
"Permitted Investment" means an Investment by the Company
or any Restricted Subsidiary in (i) the Company, a Restricted
Subsidiary or a Person which will, upon the making of such
Investment, become a Restricted Subsidiary; provided, however,
that the primary business of such Restricted Subsidiary is a
Related Business; (ii) another Person if as a result of such
Investment such other Person is merged or consolidated with or
into, or transfers or conveys all or substantially all its assets
to, the Company or a Restricted Subsidiary; provided, however,
that such Person's primary business is a Related Business; (iii)
Temporary Cash Investments; (iv) receivables owing to the Company
or any Restricted Subsidiary, if created or acquired in the
ordinary course of business and payable or dischargeable in
accordance with customary trade terms; provided, however, that
such trade terms may include such concessionary trade terms as
the Company or any such Restricted Subsidiary deems reasonable
under the circumstances; (v) payroll, travel and similar advances
to cover matters that are expected at the time of such advances
ultimately to be treated as expenses for accounting purposes and
that are made in the ordinary course of business; (vi) loans or
advances to employees made in the ordinary course of business
consistent with past practice of the Company or such Restricted
Subsidiary; (vii) stock, obligations or securities received in
settlement of debts created in the ordinary course of business
and owing to the Company or any Restricted Subsidiary or in
satisfaction of judgments; (viii) any Person to the extent such
investment represents the non-cash portion of the consideration
received in
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connection with the sale or other disposition of an asset to the
extent not prohibited pursuant to the covenant described under
"--Certain Covenants--Limitation on Sales of Assets and
Subsidiary Stock"; (ix) joint ventures and Unrestricted
Subsidiaries in an aggregate amount at any one time outstanding
not to exceed $10.0 million, provided that such joint ventures
and Unrestricted Subsidiaries are engaged in a Related Business;
(x) Investments received in exchange for Capital Stock (other
than Disqualified Stock) of the Company; (xi) Investments
existing on the Issue Date in an amount not to exceed the amount
of such Investments on the Issue Date; (xii) (A) Permitted
Customer Financing and (B) loans and/or Guarantees made by the
Company in the ordinary course of its business to or on behalf of
any customer of the Company or its Restricted Subsidiaries to
assist such customer to increase its operations, provided that
the aggregate amount of all obligations and loans outstanding
pursuant to this clause (B) (other than Investments represented
by any such loans and/or Guarantees existing on the Issue Date
pursuant to clause (xi) hereof) shall not exceed $25.0 million at
any one time; (xiii) Investments in connection with Hedging
Obligations or agreements designed to protect the Company and its
Restricted Subsidiaries against fluctuations in commodity prices
entered into in the ordinary course of business; (xiv) prepaid
expenses, negotiable instruments held for collection and lease,
performance deposits and similar deposits, in each case entered
into in the ordinary course of business of the Company and its
Restricted Subsidiaries; and (xv) Investments customarily made in
a Special Purpose Vehicle in connection with a Permitted
Securitization in an amount not to exceed $10.0 million.
"Permitted Liens" means (i) statutory Liens of landlords
and Liens of carriers, warehousemen, mechanics, suppliers,
materialmen, repairmen and other Liens incurred in the ordinary
course of business for sums not yet delinquent for a period of
more than 60 days or being contested in good faith, if any
reserve or other appropriate provision (if any) has been made in
accordance with GAAP, (ii) Liens incurred or deposits made in the
ordinary course of business in connection with workers'
compensation, unemployment insurance and other types of social
security or similar obligations, including any Lien securing
letters of credit issued in the ordinary course of business, or
to secure the performance of tenders, statutory obligations,
surety and appeal bonds, bids, leases, government contracts,
performance and return-of-money bonds and other similar
obligations (exclusive of obligations for the repayment of
borrowed money), (iii) any interest or title of a lessor under
any lease; provided that such Liens do not extend to any property
or assets which is not leased property subject to such lease,
(iv) Liens securing Capitalized Lease Obligations and purchase
money Indebtedness Incurred in accordance with the covenant
"Limitation on Indebtedness"; provided that such Capitalized
Lease Obligations and purchase money Indebtedness are not
subordinated to any other Indebtedness, (v) Liens upon specified
items of inventory or other goods and proceeds of any Person
securing such Person's obligations in respect of bankers'
acceptances issued or created for the account of such Person to
facilitate the purchase, shipment or storage of such inventory or
goods, (vi) Liens securing reimbursement obligations with respect
to letters of credit which encumber documents and other property
relating to such letters of credit and products and proceeds
thereof, (vii) Liens encumbering deposits made to secure
obligations arising from statutory, regulatory, contractual or
warranty requirements of the Company and its Restricted
Subsidiaries, (viii) customary Liens securing Hedging Obligations
Incurred in accordance with the Indenture or agreements designed
to protect the Company and its Restricted Subsidiaries against
fluctuations in commodity prices entered into in the ordinary
course of business, (ix) Liens securing Acquired Indebtedness
Incurred pursuant to the "Limitation on Indebtedness" covenant of
a Person merged with or consolidated into the Company; provided
that (a) such Liens secured such Acquired Indebtedness prior to
such merger or consolidation, (b) were not granted in connection
with, or in anticipation of, such merger or consolidation and (c)
do not extend to or cover any property or assets of the Company
other than the property or assets that secured the Acquired
Indebtedness prior to the merger or consolidation; and (x)
customary Liens on the customer loans and related assets
transferred to a Special Purpose Vehicle in connection with a
Permitted Securitization.
"Permitted Securitization" means a securitization in
accordance with customary terms of customer loans described in
clause (xii)(B) of the definition of "Permitted Investment."
"Person" means any individual, corporation, partnership
joint venture, limited liability company, association,
joint-stock company, trust, unincorporated organization,
government or any agency or political subdivision thereof or any
other entity.
"Preferred Stock", as applied to the Capital Stock of any
Person, means Capital Stock of any class or classes (however
designated) which is preferred as to the payment of dividends or
distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such
Person, over shares of Capital Stock of any other class of such
Person.
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"Principal" of a Note means the principal of the Note plus
the premium, if any, payable on the Note which is due or overdue
or is to become due at the relevant time; provided, however, that
for purposes of calculating any such premium, the term
"principal" shall not include the premium with respect to which
such calculation is being made.
"Public Equity Offering" means an underwritten primary
public offering of common stock of Holdings or the Company
pursuant to an effective registration statement under the
Securities Act.
"Public Market" means any time after (x) a Public Equity
Offering has been consummated and (y) at least 15% of the total
issued and outstanding common stock of the Company or Holdings
has been distributed by means of an effective registration
statement under the Securities Act or sales pursuant to Rule 144
under the Securities Act.
"Refinance" means, in respect of any Indebtedness, to
refinance, extend, renew, refund, repay, prepay, redeem, defease
or retire, or to issue other Indebtedness in exchange or
replacement for, such Indebtedness, and shall include the
Refinancing of multiple facilities with a single facility and the
Refinancing of a single facility with multiple facilities.
"Refinanced" and "Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that
Refinances any Indebtedness of the Company or any Restricted
Subsidiary existing on the Issue Date or Incurred in compliance
with the Indenture (including Indebtedness of the Company that
Refinances Indebtedness of any Restricted Subsidiary and
Indebtedness of any Restricted Subsidiary that Refinances
Indebtedness of another Restricted Subsidiary) including
Indebtedness that Refinances Refinancing Indebtedness; provided,
however, that (i) the Refinancing Indebtedness has a Stated
Maturity no earlier than the Stated Maturity of the Indebtedness
being Refinanced, (ii) the Refinancing Indebtedness has an
Average Life at the time such Refinancing Indebtedness is
Incurred that is equal to or greater than the Average Life of the
Indebtedness being Refinanced and (iii) such Refinancing
Indebtedness is Incurred in an aggregate principal amount (or if
issued with original issue discount, an aggregate issue price)
that is equal to or less than the sum of the aggregate principal
amount (or if issued with original issue discount, the aggregate
accreted value) then outstanding or committed (plus fees and
expenses, including any premium and defeasance costs) under the
Indebtedness being Refinanced; provided further, however, that
Refinancing Indebtedness shall not include (x) Indebtedness of a
Subsidiary that Refinances Indebtedness of the Company or (y)
Indebtedness of the Company or a Subsidiary that refinances
Indebtedness of an Unrestricted Subsidiary.
"Related Business" means the businesses of the Company or
any Restricted Subsidiary on the date of the Indenture and any
business related, ancillary or complementary thereto.
"Representative" means (i) with respect to the Bank
Indebtedness, Chase Bank of Texas, National Association, as
Administrative Agent, or any successor or replacement thereof or
any agent acting in a similar capacity in connection with the
Credit Agreement and (ii) any trustee, agent or representative
(if any) for an issue of Senior Indebtedness (other than the Bank
Indebtedness) of the Company.
"Restricted Payment" with respect to any Person means (i)
the declaration or payment of any dividends or any other
distributions of any sort in respect of its Capital Stock
(including any payment by the Company or its Restricted
Subsidiaries in respect of such Person's Capital Stock in
connection with any merger or consolidation involving such
Person) or similar payment to the direct or indirect holders of
its Capital Stock (other than dividends or distributions payable
solely in its Capital Stock (other than Disqualified Stock) and
dividends or distributions payable solely to the Company or a
Restricted Subsidiary, and other than pro rata dividends or other
distributions made by a Subsidiary that is not a Wholly Owned
Subsidiary to minority stockholders (or owners of an equivalent
interest in the case of a Subsidiary that is an entity other than
a corporation)), (ii) the purchase, redemption or other
acquisition or retirement for value of any Capital Stock of the
Company held by any Person or of any Capital Stock of a
Restricted Subsidiary held by any Person (other than Capital
Stock of the Company held by a Restricted Subsidiary or Capital
Stock of a Restricted Subsidiary held by the Company or by
another Restricted Subsidiary), including the exercise of any
option to exchange any Capital Stock (other than into Capital
Stock of the Company that is not Disqualified Stock), (iii) the
purchase, repurchase, redemption, defeasance or other acquisition
or retirement for value, prior to scheduled maturity, scheduled
repayment or scheduled sinking fund payment of any Subordinated
Obligations (other than the purchase, repurchase or other
acquisition of Subordinated Obligations purchased in anticipation
of satisfying a sinking fund obligation, principal installment or
final maturity, in each case due within one year of the date of
acquisition) or (iv) the making of any Investment in any Person
(other than a Permitted Investment).
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"Restricted Subsidiary" means any Subsidiary of the Company
other than an Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating
to property now owned or hereafter acquired whereby the Company
or a Restricted Subsidiary transfers such property to a Person
and the Company or a Restricted Subsidiary leases such property
from such Person.
"SEC" means the U.S. Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of the
Company secured by a Lien.
"Senior Indebtedness" means (i) Bank Indebtedness of, or
guaranteed by, the Company, whether outstanding on the Issue Date
or thereafter Incurred and (ii) Indebtedness of the Company,
whether outstanding on the Issue Date or thereafter Incurred,
including accrued and unpaid interest in respect of (A)
indebtedness of the Company for money borrowed and (B)
indebtedness evidenced by notes, debentures, bonds or other
similar instruments for the payment of which the Company is
responsible or liable unless, in the case of clauses (i) and
(ii), in the instrument creating or evidencing the same or
pursuant to which the same is outstanding, it is provided that
such obligations are subordinate in right of payment to the
Notes; provided, however, that Senior Indebtedness shall not
include (1) any obligation of the Company to any Subsidiary, (2)
any liability for Federal, state, local or other taxes owed or
owing by the Company, (3) any Trade Payables arising in the
ordinary course of business (including guarantees thereof or
instruments evidencing such liabilities), (4) any Indebtedness of
the Company (and any accrued and unpaid interest respect thereof)
which by the express terms of the agreement or instrument
creating, evidencing or governing such Indebtedness is
subordinate or junior in any respect to any other Indebtedness or
other obligation of the Company, (5) that portion of any
Indebtedness which at the time of Incurrence is Incurred in
violation of the Indenture.
"Senior Subordinated Indebtedness" means the Notes and any
other Indebtedness of the Company that specifically provides that
such Indebtedness is to rank equal to the Notes in right of
payment and is not subordinated by its terms in right of payment
to any Indebtedness or other obligation of the Company which is
not Senior Indebtedness.
"Significant Subsidiary" means any Restricted Subsidiary
that would be a "Significant Subsidiary" of the Company within
the meaning of Rule 1-02 under Regulation S-X promulgated by the
SEC.
"Special Purpose Vehicle" means a trust, partnership or
other special purpose Person established by the Company and/or
any of its Subsidiaries to implement a Permitted Securitization,
which incurs no liabilities and engages in no operations other
than one or Permitted Securitizations and whose assets are
limited to the customer loans described in clause (xii)(B) of the
definition of "Permitted Investment" and related assets necessary
to carry out a Permitted Securitization.
"Standard Securitization Undertakings" means
representations, warranties, covenants and indemnities entered
into by the Company or any Restricted Subsidiary which are
customary in a securitization transaction similar to a Permitted
Securitization.
"Stated Maturity" means, with respect to any security, the
date specified in such security as the fixed date on which the
payment of principal of such security is due and payable,
including pursuant to any mandatory redemption provision (but
excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening
of any contingency beyond the control of the issuer unless such
contingency has occurred).
"Subordinated Obligation" means any Indebtedness of the
Company (whether outstanding on the Issue Date or thereafter
Incurred) which is expressly subordinate or junior in right of
payment to the Notes pursuant to a written agreement.
"Subsidiary" of any Person means any corporation,
association, partnership, limited liability company or other
business entity of which more than 50% of the total voting power
of shares of Capital Stock or other interests (including
partnership interests) entitled (without regard to the occurrence
of any contingency) to vote in the election of directors,
managers or trustees thereof is at the time owned or controlled,
directly or indirectly, by (i) such Person, (ii) such Person and
one or more Subsidiaries of such Person or (iii) one or more
Subsidiaries of such Person, but excluding, in the case of the
Company, Oceanview Farms L.P.
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"Tax Sharing Agreement" means the tax sharing agreements to
be entered into among Koch Industries, Holdings and Holdings'
subsidiaries (including the Company).
"Temporary Cash Investments" means any of the following:
(i) any investment in direct obligations of the United States of
America or any agency thereof or obligations Guaranteed by the
United States of America or any agency thereof, (ii) investments
in time deposit accounts, certificates of deposit and money
market deposits maturing within 180 days of the date of
acquisition thereof issued by a bank or trust company which is
organized under the laws of the United States of America, any
state thereof or any foreign country recognized by the United
States of America having capital, surplus and undivided profits
aggregating in excess of $250 million (or the foreign currency
equivalent thereof) and whose long-term debt is rated "A" (or
such similar equivalent rating) or higher by at least one
nationally recognized statistical rating organization (as defined
in Rule 436 under the Securities Act) or any money market fund
sponsored by a registered broker dealer or mutual fund
distribution, (iii) repurchase obligations with a term of not
more than 30 days for underlying securities of the types
described in clause (i) above entered into with a bank meeting
the qualifications described in clause (ii) above, (iv)
investments in commercial paper, maturing not more than 90 days
after the date of acquisition, issued by a corporation (other
than an Affiliate of an Company) organized and in existence under
the laws of the United States of America or any foreign country
recognized by the United States of America with a rating at the
time as of which any investment therein is made of "P-1" (or
higher) according to Moody's Investors Service, Inc. or "A-1" (or
higher) according to Standard & Poor's Ratings Group, (v)
investments in securities with maturities of six months or less
from the date of acquisition issued or fully guaranteed by any
state, commonwealth or territory of the United States of America,
or by any political subdivision or taxing authority thereof, and
rated at least "A" by Standard & Poor's Ratings Group or "A" by
Moody's Investors Service, Inc.; and (vi) investments in mutual
funds, whose investment guidelines restrict such funds'
investments to investments which are substantially similar to
those described in clauses (i)-(v).
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C.
ss.ss. 77aaa-77bbbb) as in effect on the date of the Indenture.
"Trade Payables" means, with respect to any Person, any
accounts payable or any indebtedness or monetary obligation to
trade creditors created, assumed or Guaranteed by such Person
arising in the ordinary course of business in connection with the
acquisition of goods or services.
"Unrestricted Subsidiary" means (i) any Subsidiary of the
Company that at the time of determination shall be designated an
Unrestricted Subsidiary by the Board of Directors in the manner
provided below and (ii) any Subsidiary of an Unrestricted
Subsidiary. In addition, Bio Kingdom, L.L.C. has been designated
as an Unrestricted Subsidiary on the Issue Date. The amount of
the Company's investments in Bio Kingdom, L.L.C., which are
principally in the form of loans, is approximately $3.5 million
and the Company's results of operations do not reflect any EBITDA
attributable to the operations of Bio Kingdom, L.L.C. The Board
of Directors may designate any Subsidiary of the Company
(including any newly acquired or newly formed Subsidiary of the
Company) to be an Unrestricted Subsidiary unless such Subsidiary
or any of its Subsidiaries owns any Capital Stock or Indebtedness
of, or owns or holds any Lien on any property of, the Company or
any other Subsidiary of the Company that is not a Subsidiary of
the Subsidiary to be so designated; provided, however, that
either (A) the Subsidiary to be so designated has total
consolidated assets of $1,000 or less or (B) if such Subsidiary
has consolidated assets greater than $1,000, then such
designation would be permitted under "Certain
Covenants-Limitation on Restricted Payments." The Board of
Directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; provided, however, that immediately after
giving effect to such designation (x) the Company could Incur
$1.00 of additional Indebtedness under clause (a) of "Certain
Covenants--Limitation on Indebtedness" and (y) no Default shall
have occurred and be continuing. Any such designation by the
Board of Directors shall be evidenced to the Trustee by promptly
filing with the Trustee a copy of the Board Resolution giving
effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing
provisions.
"U.S. Government Obligations" means direct obligations (or
certificates representing an ownership interest in such
obligations) of the United States of America (including any
agency or instrumentality thereof) for the payment of which the
full faith and credit of the United States of America is pledged
and which are not callable or redeemable at the issuer's option.
96
<PAGE>
"Voting Stock" of a Person means all classes of Capital
Stock or other interests (including partnership interests) of
such Person then outstanding and normally entitled (without
regard to the occurrence of any contingency) to vote in the
election of directors, managers, or trustee thereof.
"Wholly Owned Subsidiary" means a Restricted Subsidiary of
the Company all the Capital Stock of which (other than directors'
qualifying shares or similar shares) is owned by the Company or
one or more other Wholly Owned Subsidiaries.
97
<PAGE>
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
Exchange of Old Notes for New Notes
The following summary describes the principal U.S. federal
income tax consequences of the exchange of the Old Notes for New
Notes (the "Exchange") that may be relevant to a beneficial owner
of Notes that is a citizen or resident of the United States, or
that is a corporation, partnership or other entity created or
organized in or under the laws of the United States or any
political subdivision thereof, an estate the income of which is
subject to U.S. federal income taxation regardless of its source
or a trust if (i) a U.S. court is able to exercise primary
supervision over the trust's administration and (ii) one or more
U.S. fiduciaries have the authority to control all of the trust's
substantial decisions (a "U.S. holder"). This summary is based on
laws, regulations, rulings and decisions now in effect, all of
which are subject to change. This summary deals only with U.S.
holders that hold the Old Notes as capital assets, and does not
address tax considerations applicable to investors that may be
subject to special tax rules, such as, but not limited to, banks,
tax-exempt entities, insurance companies or dealers in securities
or currencies, persons that hold the Old Notes as a position in a
"straddle" or conversion transaction, or as part of a "synthetic
security" or other integrated financial transaction or persons
that have a "functional currency" other than the U.S. dollar.
The Exchange pursuant to the Exchange Offer will not be a
taxable event for U.S. federal income tax purposes. As a result,
a U.S. holder of an Old Note whose Old Note is accepted in an
Exchange Offer will not recognize gain on the Exchange. A
tendering U.S. holder's tax basis in the New Notes will be the
same as such U.S. holder's tax basis in its Old Notes. A
tendering U.S. holder's holding period for the New Notes received
pursuant to the Exchange Offer will include its holding period
for the Old Notes surrendered therefor.
Investors should consult their own tax advisors in
determining the tax consequences to them of the exchange of the
Old Notes for the New Notes and of the ownership and disposition
of New Notes received in the Exchange Offer, including the
application to their particular situation of the U.S. federal
income tax considerations discussed above, as well as the
application of state, local, foreign or other tax laws.
98
<PAGE>
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own
account pursuant to the Exchange Offer must acknowledge that it
will deliver a prospectus in connection with any resale of such
New Notes. This Prospectus, as it may be amended or supplemented
from time to time, may be used by a broker-dealer in connection
with resales of New Notes received in exchange for Old Notes
where such Old Notes were acquired as a result of market-making
activities or other trading activities. The Company has agreed
that, for a period of time not to exceed 180 days after the
Expiration Date, or such shorter period which will terminate when
such Participating Broker-Dealers have completed all resales
subject to applicable prospectus delivery requirements, it will
make this Prospectus, as amended or supplemented, available to
any Participating Broker-Dealer for use in connection with any
such resale. In addition, until ______, 1998, all broker-dealers
effecting transactions in the New Notes may be required to
deliver a prospectus.
The Company will not receive any proceeds from any sale of
New Notes by broker-dealers. New Notes received by broker-dealers
for their own account pursuant to the Exchange Offer may be sold
from time to time in one or more transactions in the
over-the-counter market, in negotiated transactions, through the
writing of options on the New Notes or a combination of such
methods of resale, at market prices prevailing at the time of
resale, at prices related to such prevailing market prices or
negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any
such broker-dealer or the purchasers of any such New Notes. Any
broker-dealer that resells New Notes that were received by it for
its own account pursuant to the Exchange Offer and any broker or
dealer that participates in a distribution of such New Notes may
be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of New Notes and
any commissions or concessions received by any such persons may
be deemed to be underwriting compensation under the Securities
Act. The Letter of Transmittal states that by acknowledging that
it will deliver and by delivering a prospectus, a broker-dealer
will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act.
For a period of 180 days after the Expiration Date, or such
shorter period which will terminate when such broker-dealers have
completed all resales subject to applicable prospectus delivery
requirements, the Company will promptly send additional copies of
this Prospectus and any amendment or supplement to this
Prospectus to any broker-dealer that requests such documents in
the Letter of Transmittal. The Company has agreed to pay all
expenses incident to the Exchange Offer (including the expenses
of one counsel for the holders of the Notes) other than
commissions or concessions of any brokers or dealers and will
indemnify the holders of the New Notes (including any
broker-dealers) against certain liabilities, including
liabilities under the Securities Act.
99
<PAGE>
LEGAL MATTERS
The validity of the New Notes has been passed upon for the
Company by Cleary, Gottlieb, Steen & Hamilton, New York, New
York.
EXPERTS
The financial statements as of December 31, 1996 and 1997
and for the three years ended December 31, 1997 included in this
Prospectus and the financial statements from which the Summary
Historical Financial Data and Selected Historical Consolidated
Financial Data (except for the eight months ended August 31,
1993) included in this Prospectus have been derived, have been
audited by Deloitte & Touche LLP, independent auditors, as stated
in their report appearing herein. Such financial statements,
Summary Historical Financial Data and Selected Historical
Consolidated Financial Data have been included herein in reliance
upon the report of such firm given upon their authority as
experts in accounting and auditing.
100
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Audited Financial Statements
INDEPENDENT AUDITORS' REPORT.................................... F-2
Consolidated Balance Sheets as of
December 31, 1996 and 1997...................................... F-3
Consolidated Statements of Operations for the years
ended December 31, 1995, 1996 and 1997.......................... F-4
Consolidated Statements of Stockholder's Equity
for the years ended December 31, 1995, 1996 and 1997............ F-5
Consolidated Statements of Cash Flows for the
years ended December 31, 1995, 1996 and 1997.................... F-6
Notes to Consolidated Financial Statements...................... F-7
Unaudited Financial Statements
Consolidated Balance Sheets as of March 31, 1998
and December 31, 1997............................................ F-19
Consolidated Statements of Operations for the nineteen
days ended March 31, 1998, seventy-one days ended
March 12, 1998 and the three months ended March 31, 1997......... F-20
Consolidated Statements of Cash Flows for the nineteen
days ended March 31, 1998, seventy-one days ended March 12,
1998 and the three months ended March 31, 1997................... F-21
Notes to Consolidated Financial Statements....................... F-22
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholder
Purina Mills, Inc.
We have audited the accompanying consolidated balance
sheets of Purina Mills, Inc. and Subsidiaries as of December 31,
1996 and 1997, and the related consolidated statements of
operations, stockholder's equity, and cash flows for each of the
three years in the period ended December 31, 1997. 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 in accordance with generally
accepted auditing standards. Those standards require that we plan
and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements
present fairly, in all material respects, the financial position
of Purina Mills, Inc. and Subsidiaries at December 31, 1996 and
1997, and the results of their operations and their cash flows
for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting
principles.
/s/ DELOITTE & TOUCHE LLP
Saint Louis, Missouri
February 9, 1998 (March 16, 1998 as to Note 14)
F-2
<PAGE>
PURINA MILLS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------
1996 1997
------- -------
(Dollars in Thousands,
Except Share Amounts)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ....................... $ 25,462 $ 27,620
Accounts receivable-trade, net of allowances
for doubtful accounts of $7,871 and
$6,539 at December 31, 1996 and 1997,
respectively ................................ 55,816 51,208
Inventories ..................................... 61,364 66,800
Prepaid expenses, deferred and other assets ..... 12,859 13,037
Deferred income taxes ........................... 8,563 8,746
--------- ---------
TOTAL CURRENT ASSETS ............................ 164,064 167,411
Property, plant and equipment, net .............. 250,600 243,718
Intangible assets, net .......................... 138,129 122,403
Deferred income taxes ........................... 7,340 7,881
Notes receivable ................................ 10,957 10,775
Deferred financing costs, net ................... 12,693 9,813
Other assets .................................... 22,292 19,942
TOTAL ASSETS .................................... $ 606,075 $ 581,943
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ................................ $ 70,913 $ 76,078
Customer advance payments ....................... 17,474 16,503
Accrued expenses ................................ 23,400 20,101
Interest payable ................................ 8,038 6,771
Current portion of long-term debt ............... 23,136 19,170
--------- ---------
TOTAL CURRENT LIABILITIES ....................... 142,961 138,623
Retirement obligations .......................... 26,457 28,768
Accrued post retirement benefit costs ........... 36,643 37,470
Long-term debt .................................. 295,956 263,119
Other liabilities ............................... 641 831
Commitments and contingencies (Notes 12 and 13)
Common stock held by ESOP ....................... 36,895 62,736
Less unearned ESOP compensation ............... (2,141) --
STOCKHOLDER'S EQUITY:
Common stock, $0.01 par value; ................ -- --
1,000 shares authorized, issued and outstanding
Additional paid-in capital .................... 79,439 79,687
Retained deficit .............................. (9,535) (27,192)
Accumulated other comprehensive income......... (1,241) (2,099)
--------- ---------
Total Stockholder's Equity ............... 68,663 50,396
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY ...... $ 606,075 $ 581,943
--------- ---------
See accompanying notes.
F-3
<PAGE>
PURINA MILLS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
---------------------------------------
1995 1996 1997
---------- ---------- ----------
(Dollars in Thousands)
NET SALES .................. $ 1,047,169 $ 1,212,197 $ 1,128,390
COSTS AND EXPENSES:
Cost of products sold ...... 863,223 1,035,855 938,480
Marketing, distribution and
advertising .............. 83,840 84,751 87,333
General and administrative . 30,151 31,391 30,201
Amortization of intangibles 18,551 19,487 20,572
Research and development ... 6,744 6,982 7,166
Provision for plant closings
and asset impairments .... -- 14,042 4,402
Other (income) expense-net . 129 (10,575) (4,523)
----------- ----------- -----------
1,002,638 1,181,933 1,083,631
----------- ----------- -----------
OPERATING INCOME ........... 44,531 30,264 44,759
Interest expense ........... 37,514 35,703 32,632
----------- ----------- -----------
Income (loss) before income
taxes .................... 7,017 (5,439) 12,127
Provision (benefit) for
income taxes ............. 3,955 (646) 5,193
----------- ----------- -----------
NET INCOME (LOSS) .......... $ 3,062 $ (4,793) $ 6,934
See accompanying notes.
F-4
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
PURINA MILLS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholder's Equity
Accumulated
Additional Retained Other
Common Paid-In Earnings Comprehensive
Stock Capital (Deficit) Income Total
----- ------- --------- ------------- -----
(Dollars in Thousands)
Balance, January 1, 1995 ........... $ -- $ 80,490 $ 6,080 $ -- $ 86,570
Additional capital contribution for
acquisition ...................... -- 3,750 -- -- 3,750
Released ESOP shares ............... -- 2,100 -- -- 2,100
Appreciation in value of earned
ESOP shares ...................... -- -- (12,271) -- (12,271)
Purchase of shares by the ESOP ..... -- (4,000) -- -- (4,000)
Net income ......................... -- -- 3,062 -- 3,062
-------- -------- -------- -------- --------
Balance, December 31, 1995 ......... -- 82,340 (3,129) -- 79,211
Released ESOP shares ............... -- 320 -- -- 320
Appreciation in value of earned
ESOP shares ...................... -- -- (1,613) -- (1,613)
Purchase of shares for the ESOP, net -- (4,587) -- -- (4,587)
Activity under stock plans ......... -- 1,366 -- -- 1,366
Adjustment for minimum supplemental
retirement liabilities (net of
$802 tax benefit) ................ -- -- -- (1,241) (1,241)
Net loss ........................... -- -- (4,793) -- (4,793)
-------- -------- -------- -------- --------
Balance, December 31, 1996 ......... -- 79,439 (9,535) (1,241) 68,663
Released ESOP shares ............... -- 616 -- -- 616
Appreciation in value of earned
ESOP shares ...................... -- -- (24,591) -- (24,591)
Purchase of shares for the ESOP, net -- (1,316) -- -- (1,316)
Activity under stock plans ......... -- 948 -- -- 948
Adjustment for minimum supplemental
retirement liabilities (net of
$552 tax benefit) ................ -- -- -- (858) (858)
Net income ......................... -- -- 6,934 -- 6,934
-------- -------- -------- -------- --------
Balance, December 31, 1997 ......... $ -- $ 79,687 $(27,192) $ (2,099) $ 50,396
-------- -------- -------- -------- --------
See accompanying notes.
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
PURINA MILLS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
1995 1996 1997
------ ------ ------
Year Ended December 31,
-------------------------------
(Dollars in Thousands)
OPERATING ACTIVITIES
Net income (loss) ........................... $ 3,062 $ (4,793) $ 6,934
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization .......... 48,128 50,350 49,569
Compensation under ESOP ................ 8,156 5,726 5,625
Provision for deferred income taxes .... (386) (5,855) (171)
Loss on disposal of property, plant
and equipment .......................... 1,992 999 1,028
Provision for loss on plant closings
and asset impairments .................. -- 14,042 4,402
Net changes in continuing operating assets
and liabilities:
Accounts receivable-trade ................. (6,068) (317) 4,608
Inventories ............................... (2,792) 73 (5,436)
Prepaid expenses and other assets ......... (12,440) (5,288) 2,172
Accounts payable and other liabilities .... 10,478 2,712 2,049
-------- -------- --------
Net cash provided by operating activities ... 50,130 57,649 70,780
INVESTING ACTIVITIES
Cash paid for Golden Sun Acquisition Company (57,049) -- --
Purchase of property, plant, equipment and
other assets ................................ (25,463) (23,915) (30,429)
Proceeds from sale of property, plant and
equipment ................................... 547 1,097 941
Net change in notes receivable .............. (892) 673 182
-------- -------- --------
Net cash used in investing activities ....... (82,857) (22,145) (29,306)
FINANCING ACTIVITIES
Proceeds from Term Loans .................... 45,000 -- --
Proceeds (repayment) of Revolving Credit
Facility, net ............................... 6,000 (6,000) --
Proceeds from Industrial Revenue Bonds ...... 9,100 8,300 --
Loan to ESOP ................................ (4,000) (6,318) (1,208)
Payment of financing costs .................. (1,280) (105) (23)
Repayment of Term Loans and Senior
Subordinated Notes .......................... (23,208) (26,962) (36,409)
Other ....................................... (3) (436) (1,676)
-------- -------- --------
Net cash provided by (used in) financing
activities .................................. 31,609 (31,521) (39,316)
-------- -------- --------
Increase (decrease) in cash and cash
equivalents ................................. (1,118) 3,983 2,158
Cash and cash equivalents at beginning
of period ................................... 22,597 21,479 25,462
-------- -------- --------
Cash and cash equivalents at end of
period ...................................... $ 21,479 $ 25,462 $ 27,620
-------- -------- --------
SUPPLEMENTAL CASH FLOW STATEMENT
INFORMATION
Interest paid ............................... $ 33,650 $ 32,417 $ 30,942
Income taxes paid ........................... 6,047 5,565 7,892
See accompanying notes.
</TABLE>
F-6
<PAGE>
PURINA MILLS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
In September, 1993, Purina Mills, Inc. ("Purina Mills" or
the "Company") was acquired by PM Holdings Corporation
("Holdings"), a corporation formed in July 1993 by an investor
group led by The Sterling Group, Inc., a private financial
organization. PMI Acquisition Corporation ("PMI"), a wholly owned
subsidiary of Holdings, acquired all of the outstanding capital
stock of the Company (the "Acquisition") and was merged into the
Company. As used herein the term "Company" refers to Purina
Mills, Inc. and its subsidiaries and the term "Holdings" refers
to PM Holdings Corporation and its subsidiaries.
Purina Mills develops, manufactures and markets animal
nutrition products for dairy cattle, beef cattle, hogs and
horses. The Company also develops, manufactures and sells poultry
feeds and specialty feeds for rabbits, zoo animals, birds, fish
and pets. The Company's products are sold as complete feeds or as
concentrates that are mixed with the customer's base ingredients.
The Company distributes its products through two primary
distribution channels, dealers and directly to end-users. The
Company's 4,700 independent dealers are located in 48 states. The
number of direct customers is in excess of 4,700. The Company
operates 56 feed manufacturing plants located in 26 states.
On March 15, 1995 the Company acquired all of the
outstanding capital stock of Golden Sun Acquisition Company
("Golden Sun"). Golden Sun is the parent company of Golden Sun
Feeds, Inc. and its wholly owned subsidiaries. Consideration,
including applicable fees, consisted of $62.0 million in cash;
15,000 shares of Holdings common stock; and additional payments
to be made to the Golden Sun shareholders during the five years
following closing. The additional payments will be recorded as
goodwill and are based on the volume of sales, up to a specified
cumulative maximum amount, made pursuant to a supply agreement
with a customer and per-unit amounts that decline during the
five-year period. No additional payments were made in 1997 and
none are anticipated in the future (see Note 5). All funds
required to consummate the transaction were borrowed under the
Company's existing credit arrangements.
The Golden Sun acquisition has been accounted for as a
purchase transaction in accordance with Accounting Principles
Board Opinion No. 16. The purchase price was allocated to
tangible and intangible assets acquired and liabilities assumed
based on their estimated fair values as of March 15, 1995. The
accompanying consolidated statements of operations reflect the
operating results of Golden Sun since March 15, 1995.
2. SIGNIFICANT ACCOUNTING POLICIES
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.
Use of Estimates: The preparation of financial statements
in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosures 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.
Revenue Recognition: Net sales are generally recognized
when products are shipped. Accruals for customer discounts are
recorded when revenues are recognized.
Inventories: Inventories are valued at the lower of average
cost or market. The Company hedges certain of its grain and
commodity purchases as considered necessary to reduce the risk
associated with market price fluctuation. Gains and losses on
futures contracts used to hedge grain and commodity purchases are
recognized in the same period as the related inventory is sold.
Open futures contracts for purchases and sales of grains and
commodities are stated at market value, with gains or losses on
the hedging transaction being deferred.
F-7
<PAGE>
Property, Plant and Equipment: Property, plant and
equipment are stated at cost. Expenditures for new facilities and
those which substantially increase the useful lives of property
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 upon the following estimated useful lives:
Buildings and improvements.............. 15 to 30 years
Machinery and equipment................. 5 to 15 years
Office furniture and equipment.......... 3 to 15 years
Intangible Assets (including Goodwill): Intangible assets
represent the excess of cost over the net tangible assets of the
business at the time of acquisition and are amortized over their
estimated period of related benefit. Intangible assets other than
goodwill are amortized over 1 to 20 years. Goodwill is amortized
on a straight-line basis over 40 years.
Management periodically reviews 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.
Based on this review, management does not believe that any such
impairment has occurred, except as noted in Note 4 and Note 5.
Deferred Financing Costs: Deferred financing costs are
stated at cost and amortized over the life of the related debt
using the effective interest method. Amortization of deferred
financing costs is included in interest expense.
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 at enacted
tax rates expected to be in effect when such amounts are realized
or settled. The results of operations of the Company are included
in the U.S. consolidated income tax return of Holdings.
Cash Equivalents: For purposes of the consolidated
statements of cash flows, the Company considers all highly liquid
investments with a maturity of three months or less to be cash
equivalents. Cash includes currency on hand and demand deposits
with financial institutions. The carrying amount reported in the
consolidated balance sheets for cash and cash equivalents
approximates their fair value.
Fair Value of Financial Instruments: The carrying amounts
of cash and cash equivalents and short-term borrowings
approximate fair value because of the short-term maturity of
these instruments. Notes receivable carry current market interest
rates, so that discounted future cash flows approximate their
carrying value. As of December 31, 1996 and 1997, the fair value
of debt, including current maturities, was $323.2 million and
$295.1 million, respectively, compared to its carrying value of
$319.1 million and $282.3 million, respectively. The fair value
of debt instruments as of December 31, 1996 and 1997 was
determined based on quoted market prices and management's
estimate for instruments without quoted market prices.
Internal Use Software. The Company has implemented a
process to either replace or modify all of the Company's current
computer systems and software applications so that they will be
year 2000 compliant. In connection with this process, the Company
has purchased and is implementing an enhanced accounting and
information reporting system. The Company capitalizes all
software and consultant costs and the direct costs of those
employees involved in the configuration and implementation of the
information system. Such costs are capitalized as incurred. All
other related costs are expensed as incurred. Total capitalized
software costs were $8.3 million as of December 31, 1997.
F-9
<PAGE>
3. INVENTORIES
Inventories consist of the following (in thousands):
December 31,
------------------
1996 1997
---- ----
Finished goods ...... $19,969 $17,739
Raw materials ....... 41,395 49,061
------- -------
$61,364 $66,800
------- -------
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in
thousands):
December 31,
-------------------
1996 1997
------ ------
Land ........................ $ 12,931 $ 13,327
Buildings ................... 68,865 73,965
Machinery and equipment ..... 235,792 245,145
Construction in progress .... 12,677 13,674
--------- ---------
330,265 346,111
Accumulated depreciation .... (79,665) (102,393)
--------- ---------
$ 250,600 $ 243,718
--------- ---------
Total depreciation expense was $25.9 million, $27.6 million
and $26.6 million for the years ended December 31, 1995, 1996 and
1997, respectively.
During 1996 the Company made the decision to discontinue
all manufacturing operations at seven 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 $9.3
million in 1996 on manufacturing assets, representing the amount
by which the book value exceeded the estimated net realizable
value. The value of the assets awaiting disposition was based on
estimates of Company management. Demolition costs of $.8 million
and a write-off of $3.9 million for related goodwill was also
recorded.
5. INTANGIBLE ASSETS
Intangible assets consist of the following (in thousands):
December 31,
-------------------
1996 1997
------ ------
Distribution network ........ $ 45,300 $ 45,300
Product specifications ...... 23,600 23,600
Technology .................. 19,110 19,110
Covenant not to compete ..... 25,000 25,000
Feed supply agreement ....... 15,000 10,598
Goodwill .................... 56,844 57,662
Other intangibles ........... 15,597 24,027
--------- ---------
200,451 205,297
Accumulated amortization .... (62,322) (82,894)
--------- ---------
$ 138,129 $ 122,403
--------- ---------
F-9
<PAGE>
During 1996 the Company filed a breach of contract suit
against a former customer for lack of performance under a feed
supply agreement executed by the customer for future feed
purchases. The feed supply agreement was entered into in
conjunction with the Golden Sun acquisition. In 1997 the Company
recorded a loss of $4.4 million to reduce the net book value to
management's estimate of the net realizable value of the
contract.
6. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
December 31,
-------------------
1996 1997
------ ------
The Company:
Senior Term Loan . $ 100,996 $ 74,622
Notes ............ 200,000 189,965
IRB Loan ......... 17,400 17,400
Other ............ 696 302
--------- ---------
319,092 282,289
Less current portion (23,136) (19,170)
--------- ---------
Consolidated total . $ 295,956 $ 263,119
--------- ---------
The annual amortization of the Senior Term Loan (defined
below), including the 1998 estimated $3.3 million supplemental
repayment (described below) is $18.9 million in 1998, $20.3
million in 1999, and $35.4 million in 2000. The Notes (defined
below) are due in their entirety in 2003. The Discount Debentures
(defined below) are due in 2005 at their then-principal balance
of $109.4 million.
Credit Facility: In September 1993, the Company entered
into a Credit Agreement (the "Credit Agreement"), which provides
for secured borrowings from a syndicate of lenders consisting of
(i) a seven-year revolving credit facility providing for up to
$65.0 million in revolving loans (subject to borrowing base
limitations), $25.0 million of which may be used for letters of
credit (the "Revolving Credit Facility"), and (ii) a term loan
facility providing for up to $138.0 million in term loans,
consisting of a $130.0 million seven-year term loan (the "Senior
Term Loan") and a $8.0 million three-year term loan to the ESOP
(the "ESOP Term Loan") (collectively, the "Term Loans"). On March
15, 1995 the Company borrowed an additional $45.0 million under
its Senior Term Loan and $15.0 million under its Revolving Credit
Facility to finance the purchase of Golden Sun. At December 31,
1997, no balance was outstanding under the Revolving Credit
Facility and approximately $27.9 million was available for future
borrowings after giving effect to borrowing base limitations. The
Company is charged an annual fee of .5% for amounts available but
unused under the Revolving Credit Facility. Loans under the
Credit Agreement bear interest at floating rates, which are, at
the Company's option, based either upon bank prime or Eurodollar
rates. Rates on outstanding borrowings averaged 7.5% at December
31, 1996 and 1997.
The Company is required to make annual supplemental
repayments under its $130.0 million seven-year term loan (the
"Senior Term Loan") in amounts equal to 50% of Excess Cash Flow,
as defined in the Credit Agreement between the Company and the
group of lending banks (the "Credit Agreement"). Based on Excess
Cash Flow for 1995, a supplemental repayment of $9.8 million was
made in April 1996. Another supplemental repayment of $10.5
million for the year 1996 was originally due on April 30, 1997;
however, the Company received a waiver from making this payment
from the participants in the Credit Agreement and instead used
these funds to extinguish $10 million of its Senior Subordinated
Notes due 2003 during the third quarter of 1997. Based on Excess
Cash Flow for 1997, a supplemental repayment of $14.5 million is
required. In December 1997, the Company made a prepayment of the
annual supplemental repayment in the amount of $11.2 million.
Notes: The Company sold $200.0 million aggregate principal
amount of its 10 1/4% Senior Subordinated Notes due 2003 (the
"Notes") generating gross proceeds of $200.0 million. The Notes
are senior subordinated, unsecured obligations of the Company.
F-10
<PAGE>
The Notes are not redeemable at the Company's option prior
to September 1, 1998; however, the Company received a consent
from the participants in the Credit Agreement and redeemed $10.0
million of the Notes during the third quarter. The Company may
also be obligated to purchase, at the holders' option, all or a
portion of the Notes upon a change of control or asset sale, as
defined in the Notes Indenture. From and after September 1, 1998,
the Notes will be subject to redemption at the option of the
Company, in whole or in part, at various redemption prices,
declining from 104.556% of the principal amount to par on and
after September 1, 2002.
IRBs: In July 1995 and October 1996, the Company entered
into two loan agreements to finance the construction of two new
manufacturing facilities in conjunction with the sale of $17.4
million in industrial revenue bonds (IRBs) by local government
units. Proceeds of the IRBs were deposited in construction funds
and released as the Company incurs the costs to construct and
equip the facilities. At December 31, 1996 and 1997, $13.3
million and $16.9 million, respectively, had been released.
Unreleased funds of $4.1 million and $.5 million are shown as an
other asset on the December 31, 1996 and 1997, respectively,
consolidated balance sheets. The IRBs mature in 2020 and 2022 and
may be retired in whole or in part at any time. The IRBs carry
variable interest rates with a maximum of 15% per annum. The
weighted average rate at December 31, 1996 and 1997 was 4.3% and
3.8%, respectively.
Covenants: The Credit Agreement and the Indenture related
to the Notes (the "Notes Indenture") contain restrictive
covenants that, among other things and under certain conditions,
limit the ability of the Company to incur additional indebtedness
or issue preferred stock, to acquire (including a limitation on
capital expenditures) or dispose of assets or operations and to
pay dividends. The Term Loans and Revolving Credit Facility also
require the Company to satisfy certain financial covenants and
tests. The Credit Agreement and the Notes Indenture contain cross
default provisions.
Holdings has guaranteed the Notes and the Term Loans.
Borrowings under the Credit Agreement are also secured by a first
priority lien on the capital stock of the Company and its
subsidiaries and substantially all assets of the Company and its
subsidiaries.
The Credit Agreement and the Notes Indenture contain
provisions which restrict the payment of advances, loans and
dividends from the Company to Holdings. As of December 31, 1997,
the Company was allowed to pay a dividend to Holdings of an
amount not to exceed $6.0 million. Restricted net assets of the
Company were approximately $50.4 million at December 31, 1997.
7. STOCKHOLDERS' EQUITY
Common stock held by the ESOP (115,296 shares at December
31, 1996 and 119,497 shares at December 31, 1997) and valued at
its fair market value has been classified outside of permanent
equity as, under certain conditions, participants may require the
Company to purchase for cash common stock distributed to them by
the ESOP. The Company engages an independent valuation firm to
value the Holdings stock held by the ESOP each year end. Such
valuation was $320 and $525 per share at December 31, 1996 and
1997, respectively. The unearned compensation, being the fair
market value of Unreleased Shares of approximately $2.1 million
at December 31, 1996 is presented in the consolidated balance
sheet as a reduction to common stock held by the ESOP.
8. STOCK OPTION PLANS
The Company currently has three stock option plans: the
1993 Stock Option Plan ("1993 Plan"), the PM Holdings Corporation
Omnibus Stock and Incentive Plan ("1995 Plan"), and the PM
Holdings Corporation Non-Employee Directors Stock Option Plan
("Directors Plan"). The 1993 Plan provides for the issuance of
both incentive stock options and non-qualified options. Under the
plan, a maximum of 20,000 shares may be granted at prices not
less than 100% and 85% of the fair market value of a share of
common stock on the date the option is granted, for incentive
stock options and non-qualified options, respectively. The terms
of all options granted may not exceed ten years from the date of
grant. This plan was replaced by the 1995 Plan and no additional
awards will be granted under the 1993 Plan which will continue in
existence until granted awards are exercised or terminated. The
1995 Plan provides for the issuance of stock options, stock
rights units, stock appreciation rights, restricted stock and
common stock to key employees of the Company. Under the plan the
13,500 shares not previously granted under the 1993 Plan plus an
additional 26,000 shares may be granted. Upon the exercise of a
stock rights unit, a participant receives the equivalent number
of shares of common stock. The Directors Plan provides for each
non-employee director to receive an option
F-11
<PAGE>
to purchase 500 shares at fair market value on the date of grant.
Under the plan a maximum of 15,000 shares may be granted. All
options and rights granted under the three plans vest over a
three-year period and have a term of ten years.
In October 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 123 ("SFAS
123"), "Accounting for Stock-Based Compensation." The new
standard establishes a fair value based method of accounting for
the issuance of stock options and similar equity instruments to
employees. Under the fair value based method, compensation cost
is measured at the grant date based on the fair value of the
award and is recognized over the service period, which is usually
the vesting period. SFAS 123 allows companies to elect fair value
based accounting for stock compensation or continue using the
intrinsic value method of accounting as required by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25). The Company has elected to continue to apply
APB 25 in its consolidated financial statements. Under APB 25, no
compensation cost has been recognized for stock options granted
under the Company's three plans. Compensation expense is
recognized over the three-year vesting period for the fair market
value of the stock rights units at the date of grant.
Pro forma information regarding net income and earnings per
share is required by SFAS 123, and has been determined as if the
Company had accounted for its employee stock options and stock
rights under the fair value based method. The estimated fair
value of options and rights granted during 1995, 1996 and 1997 is
as follows (per share):
Year Ended December 31,
--------------------------
1995 1996 1997
------ ------ ------
Stock Options .... $102.05 $143.30 $152.70
Stock Rights Units $200.00 $310.00 $320.00
The fair value for the options and rights was estimated at
the date of grant under the minimum value method. The minimum
value was estimated to be the excess of the fair market value of
the stock at the date of grant over the present value of the
exercise price, discounted at the risk-free rate, over the
expected exercise life of the options, with the following
weighted-average assumptions for 1995, 1996 and 1997,
respectively; risk-free interest rates of 7.4%, 6.4% and 6.7%, no
dividend yield, and a weighted-average expected life of ten
years.
For purposes of pro forma disclosures, the estimated fair
value of the options and rights is amortized to expense over the
options vesting period. The Company's pro forma information
follows:
Year Ended December 31,
----------------------------
1995 1996 1997
------ ------ ------
(Dollars in Thousands
Except Per Share Amounts)
Net income (loss)
per Consolidated
Statements of
Operations:
As reported........ $3,062 $(4,793) $6,934
Pro forma.......... $2,881 $(5,139) $6,412
F-12
<PAGE>
A summary of the status of stock options as of December 31,
1995, 1996 and 1997 and activity during the years then ended is
as follows:
1995 1996 1997
--------------- --------------- ---------------
Wtd. Wtd. Wgt.
Avg. Avg. Avg.
Exer. Exer. Exer.
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding at
beginning of year .... 6,500 $113 15,250 $163 20,935 $208
Granted ................ 9,000 200 6,385 310 6,155 320
Exercised .............. -- -- 100 108 434 139
Forfeited .............. 250 200 600 186 531 247
------ ---- ------ ---- ------ ----
Outstanding at end of
year ................. 15,250 $163 20,935 $208 26,125 $235
------ ---- ------ ---- ------ ----
Options exercisable
at year end........... 4,485 $136 9,758 $153 13,523 $179
------ ---- ------ ---- ------ ----
Exercise prices for options outstanding at December 31,
1997 ranged from $100 to $320 per share. The weighted-average
remaining contractual life of those options is 7.7 years.
As of December 31, 1996 and 1997, there were 7,385 and
10,257 stock rights units outstanding, respectively, under the
1995 Plan. Such stock rights units are exercisable over a
three-year period and 3,635 units were exercisable at December
31, 1997.
9. EMPLOYEE BENEFIT PLANS
The Company has established an ESOP covering substantially
all employees exclusive of those covered by a collective
bargaining agreement. Since the Acquisition the Company has made
contributions to the ESOP in an amount equal to 50% of employee
contributions to the Company's 401(k) plan, up to a maximum of 4%
of an individual employee's compensation. These contributions to
the ESOP are allocated to each participant based on their
contributions to the 401(k) plan. The Company may make additional
discretionary contributions to the ESOP as determined by the
Board of Directors. Participants vest in matching contributions
at the time they are made while they vest in discretionary
contributions at the rate of 20 percent per year. Contributions
received by the ESOP are used to pay principal and interest on
the loan from the Company.
Shares held by the ESOP are released and allocated to
specific accounts as the principal on the loan to the ESOP is
repaid. Based on the estimated fair market value per share at the
date of release, compensation expense is recognized. As of
December 31, 1996 and 1997, approximately 108,700 shares and
119,500 shares, respectively, have been released. The remaining
6,600 shares held by the ESOP at December 31, 1996 were
unallocated. All shares held by the ESOP at December 31, 1997
were allocated.
Contributions to the ESOP and compensation expense
attributable to released shares for the years ended December 31,
1995, 1996 and 1997 are as follows (in thousands):
Year Ended December 31,
----------------------
1995 1996 1997
---- ---- ----
Matching contributions ....... $2,385 $2,546 $2,652
Discretionary contributions .. 2,454 2,654 2,631
------ ------ ------
Total ...................... $4,839 $5,200 $5,283
------ ------ ------
Compensation expense ......... $8,156 $5,726 $6,305
------ ------ ------
In the event of retirement, death or disability, the entire
balance of a participant's ESOP account will become distributable
without regard to the ordinary vesting schedule. In the event of
termination of employment for any other
F-13
<PAGE>
reason, the vested portion of a participant's ESOP account will
become distributable. If Holdings common stock is distributed to
a participant, the participant may, within two, sixty-day
periods, require the Company to purchase all or a portion of such
common stock at the fair market value of the common stock as
determined under the ESOP as of the immediate preceding December
31.
During 1997 the Company maintained two defined benefit
plans which covered those employees whose employment is governed
by the terms of a collective bargaining agreement. Benefits for
all other employees previously covered under the plans have been
frozen. The Company made annual contributions to the plans which
at least equal the amounts required by law. Contribution amounts
are determined by independent actuaries using an actuarial cost
method that has an objective of providing an adequate fund to
meet pension obligations as they mature over the long-term
future. Effective December 31, 1997 the two plans were merged. At
December 31, 1996 and 1997, the assets were held in equity and
fixed securities.
The following table sets forth the funded status of these
plans at December 31, 1996 and 1997, and the amounts recognized
in the Company's consolidated balance sheets at those dates (in
thousands):
December 31,
----------------
1996 1997
------ ------
Actuarial present value
of vested benefit obligation ....... $20,441 $21,276
Actuarial present value of
accumulated benefit obligation ..... 21,978 22,805
------- -------
Plan assets at fair value ............ 20,652 22,050
Actuarial present value of
projected benefit obligation ....... 22,075 23,856
------- -------
Projected benefit obligation
in excess of plan assets ........... 1,423 1,806
Unrecognized net gain from past
experience different from that
assumed and effects of changes
in assumptions ..................... 3,513 3,411
------- -------
Accrued pension cost ................. $ 4,936 $ 5,217
------- -------
The projected benefit obligation is based on a weighted
average discount rate of 7.0 percent in 1995, 1996 and 1997, and
a projected long-term compensation growth rate of 4.0 percent in
all years. The expected long-term rate of return on plan assets
is 8.0 percent in 1995, 1996 and 1997.
The components of net periodic pension costs related to the
above plans for the years ended December 31, 1995, 1996 and 1997
are as follows (in thousands):
Year Ended December 31,
----------------------------
1995 1996 1997
------ ------ ------
Service cost-benefits
earned during the year ..... $ 280 $ 308 $ 293
Interest cost on projected
benefit obligation ......... 1,417 1,455 1,508
Actual return on plan
assets ..................... (1,482) (1,441) (1,500)
Net amortization and
deferral ................... (120) -- --
------- ------- -------
$ 95 $ 322 $ 301
------- ------- -------
The Company sponsors a voluntary defined contribution
401(k) plan which is available to substantially all employees.
After the Acquisition, Company contributions to the 401(k) plan
have ceased and are now being contributed to the ESOP as
discussed above.
The Company has a nonqualified, unfunded supplemental
executive retirement plan for executives whose benefits under a
prior salaried retirement plan sponsored by the former owner were
reduced because of compensation
F-14
<PAGE>
under deferral elections or limitations under federal tax laws.
In conjunction with the Acquisition, all benefit accruals under
the supplemental employee retirement plan ceased subsequent to
August 31, 1993. The Company has retained sponsorship of this
plan, as well as the responsibility for all benefit payments
thereunder.
The Company also has a nonqualified, unfunded capital
accumulation plan for which it has purchased life insurance on
the lives of the participants. A grantor trust is the sole owner
and beneficiary of such policies. The amount of coverage is
designed to provide sufficient revenues to recover all costs of
the plan if assumptions made as to mortality experience, policy
earnings and other factors are realized.
The following table sets forth the status of the
non-qualified plans at December 31, 1996 and 1997, and the
amounts recognized in the Company's consolidated balance sheets
at those dates (in thousands):
December 31,
------------------
1996 1997
------ ------
Actuarial present value of
vested benefit obligation ........... $ 15,133 $ 18,203
-------- --------
Actuarial present value of
accumulated benefit obligation ...... 21,521 23,551
-------- --------
Plan assets at fair value ............. -- --
Actuarial present value of
projected benefit obligation ........ 21,521 23,551
-------- --------
Projected benefit obligation
in excess of plan assets ............ 21,521 23,551
Unrecognized net loss from past
experience different from that
assumed and effects of changes
in assumptions ...................... (2,043) (3,453)
Minimum liability adjustment .......... 2,043 3,453
-------- --------
Accrued pension cost .................. $ 21,521 $ 23,551
-------- --------
The projected benefit obligation is based on a weighted
average discount rate of 7.0 percent in 1995, 1996 and 1997.
Expenses related to the non-qualified plans for the years ended
December 31, 1995, 1996 and 1997 were $1.3 million, $1.4 million
and $1.5 million, respectively. The minimum liability adjustment,
net of tax benefit, is reflected as a reduction of stockholders'
equity.
10. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS/POSTEMPLOYMENT
BENEFITS
The Company provides certain health care and life insurance
benefits to retired employees who meet specified age and years of
service requirements. The life insurance plan provides a $5,000
benefit and is available on a noncontributory basis. The health
care plans pay a stated percentage of most medical expenses
reduced for any deductible and co-payment, payments made by
government programs and other group coverage. The cost of
providing these health care benefits is shared with retirees. All
plans are unfunded.
The following table sets forth the accrued postretirement
benefit cost recognized in the Company's balance sheet at
December 31, 1996 and 1997 (in thousands):
December 31,
----------------
1996 1997
------ ------
Retirees ................................. $ 6,927 $ 4,170
Fully eligible active plan
participants ........................... 8,239 5,874
Other active plan participants ........... 13,131 8,666
------- -------
Projected benefit obligation ............. 28,297 18,710
Unrecognized net gain from past
experience different from that
assumed and effects of changes
in assumptions .......................... 7,469 15,246
Unrecognized prior service credit ........ 877 3,514
------- -------
Accrued postretirement benefit cost ...... $36,643 $37,470
------- -------
F-15
<PAGE>
Net periodic postretirement benefit cost for the years
ended December 31, 1995, 1996, and 1997 are as follows (in
thousands):
Year Ended December 31,
----------------------------
1995 1996 1997
------ ------ ------
Service cost of benefits
earned ........................ $ 1,050 $ 1,182 $ 837
Interest cost on accumulated
postretirement benefit
obligation .................... 2,227 2,353 1,809
Net amortization and deferral ... (111) (111) (542)
------- ------- -------
$ 3,166 $ 3,424 $ 2,104
------- ------- -------
F-15
<PAGE>
Actuarial assumptions used for the Company's retiree health
care and life insurance plans were as follows (dollars in
thousands):
Year Ended December 31,
--------------------------
1995 1996 1997
---- ---- ----
Projected health care cost
trend rate .................... 10.0% 9.0% 8.0%
Ultimate trend rate ............. 4.50% 4.50% 4.25%
Year ultimate trend rate
is achieved ................... 2002 2001 2002
Effect of a 1% increase in
the health care cost trend
rate on the APBO .............. $5,803 $3,202 $1,949
Effect of a 1% increase in
the health care cost trend
rate on the aggregate of
service and interest cost ..... $ 669 $ 398 $ 236
Discount rate ................... 7.0% 7.0% 7.0%
11. INCOME TAXES
The components of the provision for income taxes are as
follows (in thousands):
Year Ended December 31,
--------------------------
1995 1996 1997
---- ---- ----
Current:
Federal ....... $ 3,105 $ 5,154 $ 4,159
State ......... 1,236 54 1,205
Deferred:
Federal ....... (714) (4,967) 129
State ......... 328 (887) (300)
------- ------- -------
$ 3,955 $ (646) $ 5,193
------- ------- -------
The provision for income taxes is different from the
amounts computed by applying the U.S. federal statutory income
tax rate. The reasons for these differences are as follows (in
thousands):
Year Ended December 31,
--------------------------
1995 1996 1997
---- ---- ----
Income taxes at
statutory rate ........ $ 2,456 $(1,903) $ 4,245
State income taxes,
net of federal
benefit ............... 1,017 (541) 587
Amortization of
intangible assets ..... 502 1,917 548
Meals and entertainment
disallowance .......... 310 303 148
Life insurance expense,
net ................... (80) (54) (463)
Research tax credit ..... (249) (81) (64)
Other, net .............. (1) (287) 192
------- ------- -------
$ 3,955 $ (646) $ 5,193
------- ------- -------
F-16
<PAGE>
Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used
for income tax purposes. Temporary differences which gave rise to
deferred tax assets and liabilities at December 31, 1996 and 1997
are as follows (in thousands):
December 31,
---------------
1996 1997
---- ----
Deferred Tax Assets:
Accrued postretirement
benefits ...................... $14,373 $14,698
Accrued supplemental
retirement benefits ........... 11,247 12,230
Reserve for loss on
asset disposals ............... 5,244 5,188
Accrued vacation expense ........ 2,575 2,470
Other accruals not
currently deductible
for tax ....................... 4,166 4,796
Alternative minimum
tax credit .................... 7,818 6,736
Bad debt reserve ................ 2,185 2,560
Tax over book basis
of inventory .................. 534 273
------- -------
Total deferred tax
assets ........................ 48,142 48,951
Deferred Tax Liabilities:
Book over tax basis
of assets acquired ............ 3,327 3,882
Tax over book
depreciation .................. 18,640 19,497
Book over tax basis
of intangible assets .......... 10,184 8,945
Other ........................... 88 --
------- -------
Total deferred tax
liabilities ................... 32,239 32,324
------- -------
Net Deferred Tax
Assets ........................ $15,903 $16,627
------- -------
Management has reviewed the realization of the deferred tax
assets and believes it is more likely than not that they will be
realized through future taxable earnings.
12. LOAN GUARANTEES AND CONCENTRATION OF CREDIT RISK
Loan Guarantees: The Company has agreed to provide a
guarantee of up to $7.5 million to a new entity formed in 1995 to
provide funding for the growth, consolidation and expansion of
the Company's network of independently-owned dealers and
producers. All dealers or producers who are members of the entity
must have arrangements with the Company for some purchase of its
products. At December 31, 1996 and 1997, the amount subject to
such guarantee was $5.8 million and $5.9 million, respectively.
The guarantee is expected to remain outstanding for over five
years. The Company is not a member of this non-stock membership
corporation and thus does not have an equity interest in the new
entity; however, the Company did make a loan of $2.0 million to
the entity to provide funding for its growth.
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 $12.8 million
and $11.3 million at December 31, 1996 and 1997, respectively,
under these type of arrangements. The maturities of these
guarantees extend through December 2006 with most significant
maturities, excluding the $5.9 million discussed above, occurring
prior to 2003.
Concentration of Credit Risk: Financial instruments which
potentially subject the Company to concentration of credit risk
consist principally of trade receivables. Substantially all of
the Company's accounts receivable are due from companies in
agriculture-related businesses located throughout the United
States.
F-17
<PAGE>
13. COMMITMENTS AND CONTINGENCIES
Operating Leases: The Company rents certain transportation
vehicles, warehouses and operating facilities under various
operating leases, many of which contain renewal or purchase
options. Rent expense for all operating leases was $3.1 million,
$3.3 million and $4.0 million for the years ended December 31,
1995, 1996 and 1997, respectively.
Future minimum lease payments for all noncancelable
operating leases having a remaining term in excess of one year
consist of the following at December 31, 1997 (in thousands):
Operating
Leases
---------
1998.......................................... $3,672
1999.......................................... 3,479
2000.......................................... 2,812
2001.......................................... 2,258
2002.......................................... 1,840
Thereafter.................................... 5,242
Total minimum lease payments................ $19,303
Litigation: The Company, in the ordinary course of
business, is engaged in various litigation and other proceedings
principally relating to product claims. The ultimate liability
with respect to such litigation and proceedings cannot be
determined at this time. The Company is of the opinion that the
aggregate amount of any such liabilities will not have a material
impact on its financial position or results of operations.
14. SUBSEQUENT EVENTS
Pursuant to the Agreement and Plan of Merger among
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, with Holdings being the surviving corporation. As
a result of the Merger, all of the shares of the common stock of
Holdings, par value $.01 per share outstanding immediately prior
to March 12, 1998, were canceled and converted into the right to
receive cash consideration of $540 per share (the "Merger
Consideration.") In addition, pursuant to the Merger Agreement,
each outstanding stock option and stock rights unit became 100%
vested. Option holders and stock rights unit holders received the
Merger Consideration, less the exercise price of the stock
options, for each share of Holdings Common Stock into which such
stock options and stock rights units were exercisable immediately
prior to March 12, 1998. As a result of the Merger, Koch
Agriculture owns 100% of Holdings, which owns 100% of the
Company.
In connection with the Merger, the Company made a tender
offer to redeem the outstanding existing Purina Mills Senior
Subordinated Notes of which $190.0 million in aggregate principal
was outstanding. The Company also entered into a new Credit
Agreement which provided for secured borrowings from a syndicate
of lenders. The credit facility consists of a term loan in the
amount of $200.0 million and a $100.0 million revolving credit
facility. The proceeds of the term loan were borrowed in full on
the date of the consummation of the Merger, in addition to $9.9
million under the revolving credit facility.
On March 12, 1998, the Company sold $350.0 million
aggregate principal amount of 9% Senior Subordinated Notes due
2010 generating proceeds of $350.0 million. On March 16, 1998,
the Company used the proceeds of the new indebtedness to redeem
the existing Purina Mills Senior Subordinated Notes as well as
Industrial Revenue Bonds.
----------
F-18
<PAGE>
PURINA MILLS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
March 31, 1998 and December 31, 1997
(Dollars in thousands except per share data)
December 31,
1997
(Derived
from Audited
March 31, Financial
1998 Statements)
-------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 2,145 $ 27,620
Accounts receivable, net 41,568 51,208
Inventories 64,571 66,800
Income tax refund receivable 4,030 --
Deferred income taxes 9,901 8,746
Prepaid expenses and other current assets 11,148 13,037
--------------------
Total Current Assets 133,363 167,411
Property, plant and equipment, net 267,468 243,718
Intangible assets, net 346,041 122,403
Other assets 45,047 48,411
--------------------
Total Assets $ 791,919 $ 581,943
--------------------
LIABILITIES & STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts payable $ 46,112 $ 76,078
Current portion of long-term debt 5,576 19,170
Customer advance payments 9,930 16,503
Other current liabilities 33,901 26,872
--------------------
Total Current Liabilities 95,519 138,623
Retirement obligations 25,614 28,768
Accrued post-retirement benefit costs 5,302 37,470
Deferred income taxes 10,475 --
Other liabilities 900 831
Long-term debt 544,695 263,119
Common stock held by ESOP -- 62,736
Stockholder's Equity:
Common stock, $0.01 par value: 1,000 shares
authorized, issued and outstanding -- --
Additional paid-in capital 109,290 79,687
Retained earnings (deficit) 124 (27,192)
Adjustment for minimum supplemental retirement
liabilities -- (2,099)
--------------------
Total Stockholder's Equity 109,414 50,396
--------------------
Total Liabilities & Stockholder's Equity $ 791,919 $ 581,943
--------------------
(See accompanying notes)
F-19
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
PURINA MILLS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Dollars in thousands)
POST-MERGER PRE-MERGER
------------------ ---------------------------------
Period Period Three Months
March 13, 1998 January 1, 1998 Ended
to March 31, 1998 to March 12, 1998 March 31, 1997
------------------ ----------------- --------------
NET SALES $ 52,807 $ 214,272 $ 284,450
COSTS AND EXPENSES:
Cost of products sold 42,848 176,682 237,966
Marketing, distribution and advertising 4,809 17,543 20,185
General and administrative (Note 11) 908 22,124 6,944
Amortization of intangibles 841 3,956 4,730
Research and development 300 1,376 1,636
Other (income) expense, net 57 (9) (1,662)
-------------------------------------------------
49,763 221,672 269,799
-------------------------------------------------
OPERATING INCOME (LOSS) 3,044 (7,400) 14,651
Interest expense 2,836 6,144 8,399
-------------------------------------------------
Income (loss) before income taxes 208 (13,544) 6,252
Provision (benefit) for income taxes 84 (5,050) 3,159
-------------------------------------------------
NET INCOME (LOSS) $ 124 $ (8,494) $ 3,093
-------------------------------------------------
(See accompanying notes)
</TABLE>
F-20
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
PURINA MILLS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
POST-MERGER PRE-MERGER
-------------- -------------------------
Period Period Three
March 13, January 1, Months
1998 to 1998 to Ended
March 31, March 12, March 31,
1998 1998 1997
------------------------------------------
Operating Activities:
Net income (loss) $ 124 $ (8,494) $ 3,093
Adjustment to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation & amortization 2,342 9,908 11,977
Provision for loss on asset disposition -- 169 60
Compensation under ESOP -- -- 1,386
Provision for deferred taxes 84 (108) (2,826)
Other 3,259 (38,826) (6,762)
------------------------------------------
Net cash provided by (used in) operating activities $ 5,809 $ (37,351) $ 6,928
Investing Activities:
Purchase of property, plant and equipment (913) (4,486) (3,553)
Other (72) 156 122
------------------------------------------
Net cash used in investing activities $ (985) $ (4,330) $ (3,431)
Financing Activities:
Proceeds from Senior Subordinated Notes -- 350,000 --
Proceeds from Term Loans -- 200,000 --
Proceeds of Revolving Credit Facility, net 6,909 -- --
Repayment of Term Loans, Senior Sub. Notes and IRBs (294,161) -- (3,791)
Payment of dividends to PM Holdings Corporation -- (237,172) --
Payment of Financing Costs -- (11,894) --
Other -- (2,300) (78)
------------------------------------------
Net cash provided by (used in) financing activities $(287,252) $ 298,634 $ (3,869)
Increase (decrease) in cash and cash equivalents (282,428) 256,953 (372)
Cash and cash equivalents at beginning of period 284,573 27,620 25,462
------------------------------------------
Cash and cash equivalents at end of period $ 2,145 $ 284,573 $ 25,090
------------------------------------------
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 1,632 $ 11,267 $ 12,581
Income taxes -- 43 344
(See accompanying notes)
F-21
<PAGE>
PURINA MILLS, INC. 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, with Holdings
being the surviving corporation. As a result of the Merger, all
of the shares of the common stock of Holdings ("Holdings Common
Stock"), par value $.01 per share outstanding immediately prior
to March 12, 1998, were canceled and converted into the right to
receive cash consideration of $540 per share (the "Merger
Consideration.") In addition, pursuant to the Merger Agreement,
each outstanding stock option and stock rights unit became 100%
vested. Option holders and stock rights unit holders received the
Merger Consideration, less the exercise price of the stock
options, for each share of Holdings Common Stock into which such
stock options and stock rights units were exercisable immediately
prior to March 12, 1998. As a result of the Merger, Koch
Agriculture owns 100% of Holdings, which owns 100% of Purina
Mills, Inc. ("PMI" or the "Company.")
The estimated sources and uses of funds required to consummate
the Merger and related financings are summarized below. See Notes
7 and 8 for a description of long-term indebtedness and capital
stock.
Amount
(In millions)
Sources of Funds:
New Credit Facilities:
New Revolving Credit Facility........ $ 9.9
Term Loans........................... 200.0
Notes ................................. 350.0
Equity Contribution to Holdings......... 109.7
Total sources.................... $ 669.6
========
Uses of Funds:
Purchase price for equity of Holdings... $ 258.7
Repayment of existing indebtedness...... 385.5
Other payments, fees and expenses....... 25.4
Total uses....................... $ 669.6
========
The Acquisition closed on March 12, 1998. The Acquisition has
been accounted for as a purchase transaction in accordance with
Accounting Principles Board Opinion No. 16 ("APB 16") and,
accordingly, the consolidated financial statements for periods
subsequent to March 12, 1998 reflect the purchase price,
including transaction costs, allocated to tangible and intangible
assets acquired and liabilities assumed, based on their estimated
fair values as of March 12, 1998. The allocation of the purchase
price is preliminary, as valuation and other studies have not
been finalized. It is not expected that the final allocation of
purchase price will not produce materially different results from
those presented herein. The consolidated financial statements for
periods prior to March 12, 1998 have been prepared on the
historical
F-22
<PAGE>
cost basis. The consolidated balance sheet at March
31, 1998 is not comparable with the historical balance sheets
presented. Operating results subsequent to the Acquisition are
comparable to the operating results prior to the Acquisition
except for depreciation expense, amortization of intangible
assets, interest expense and post-retirement health care costs.
The preliminary allocation of $109.3 million purchase price for
the Company is summarized as follows (in millions):
Current assets $ 130.8
Property, plant and equipment 268.2
Intangible assets 346.7
Other noncurrent assets 45.1
Liabilities assumed (681.5)
-------------
Total $ 109.3
-------------
The consolidated balance sheet at March 31, 1998 and the
consolidated statements of operations and cash flows for all
periods presented are unaudited and reflect all adjustments,
consisting of normal recurring items, which management considers
necessary for a fair presentation. Operating results for fiscal
1998 interim periods are not necessarily indicative of results to
be expected for the fiscal year ending December 31, 1998. The
consolidated balance sheet at
F-22
<PAGE>
December 31, 1997 was derived from the Company's December 31,
1997 audited financial statements, but does not include all
disclosures required by generally accepted accounting principles.
The following unaudited pro forma financial data for the three
months ended March 31, 1997 and March 31, 1998 has been prepared
assuming that the Transactions and related financings were
consummated on January 1, 1997 and January 1, 1998 (in millions):
Three Months Ended
March 31,
-----------------------------------
1997 1998
-------- -------
Net sales $ 284.5 $ 267.1
Net income (loss) $ 0.2 $ (11.2)
These pro forma results have been prepared for comparative
purposes only and include certain adjustments such as additional
amortization on intangible assets and increased interest expense
on the related acquisition debt. They do not purport to be
indicative of the results had the combination been in effect on
January 1, 1997 and January 1, 1998, or of future results of
operation of the consolidated entities.
In connection with the Merger, the Company has entered into an
exclusive commodity purchasing agreement with Koch Agriculture.
Koch Agriculture's Nutrition Supply & Trading division will
supply the Company with all of its requirements for feed
ingredients commencing May 1, 1998 for a five-year term,
renewable annually thereafter, charging the Company a price equal
to the spot market less a discount to be agreed upon between the
Company and Koch Agriculture on an annual basis.
F-23
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
Comprehensive Income
The Financial Accounting Standards Board recently issued
Statement of Financial Accounting Standards No, 130, Reporting of
Comprehensive Income ("SFAS 130"), which is effective for periods
ended after December 15, 1997. SFAS 130 establishes standards for
reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. The
Company adopted the standard effective January 1, 1998. The
adoption of the standard did not effect the Financial Statements.
Revenue Recognition
Net sales are generally recognized when products are shipped.
Accruals for customer discounts are recorded when revenues are
recognized.
Income Taxes
The Company has entered into a tax sharing agreement with
Holdings effective as of the date of the Merger. The agreement
provides that the Company is liable to Holdings for all taxes as
if the Company filed its annual tax returns on a separate Company
basis. The Company's tax provision for the period March 13 to
March 31, 1998 is computed on this basis. The results of
operations of the Company after March 12, 1998 will be included
in the consolidated U.S. corporation income tax return of Koch
Industries, Inc. The results of operations of the Company for the
period January 1 to March 12, 1998 will be included in the
consolidated U.S. corporation income tax return of Holdings.
Internal Use Software
The Company has implemented a process to either replace or modify
all of the Company's current computer systems and software
applications so that they will be year 2000 compliant. In
connection with this process, the Company has purchased and is
implementing an enhanced accounting and information reporting
system. The Company capitalizes all software and consultant costs
and the direct costs of those employees involved in the
configuration and implementation of the information system. Such
costs are capitalized as incurred. All other related costs are
expensed as incurred. Total capitalized software costs were $9.3
million and $8.3 million as of March 31, 1998 and December 31,
1997, respectively. The Company is amortizing the costs
associated with the project using the straight line method over
10 years, the expected useful life of the system.
F-24
<PAGE>
3. INVENTORIES
Inventories consist of the following (in thousands):
March 31, December 31,
1998 1997
--------- -----------
Finished goods $ 16,831 $ 17,739
Raw materials 47,740 49,061
----------------------------
Total $ 64,571 $ 66,800
----------------------------
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (in
thousands):
March 31, December 31,
1998 1997
--------- -----------
Land $ 12,546 $ 13,327
Buildings 68,136 73,965
Machinery and equipment 170,524 245,145
Construction in progress 17,597 13,674
--------------------------
268,803 346,111
Accumulated depreciation (1,335) (102,393)
--------------------------
Total $ 267,468 $ 243,718
--------------------------
5. INTANGIBLE ASSETS
Intangible assets consist of the following (in thousands):
March 31, December 31,
1998 1997
--------- -----------
Distribution network $ 40,000 $ 45,300
Product specifications 10,000 23,600
Technology 15,000 19,110
Covenant not to compete 2,083 25,000
Feed supply agreement -- 10,598
Goodwill 265,880 57,662
Other intangibles 14,037 24,027
--------------------------
347,000 205,297
Accumulated amortization (959) (82,894)
--------------------------
Total $ 346,041 $ 122,403
--------------------------
6. OTHER ASSETS
Other assets consist of the following (in thousands):
March 31, December 31,
1998 1997
--------- -----------
Deferred financing $11,847 $ 9,813
costs, net
Deferred income taxes -- 7,881
Other 33,200 30,717
-------------------------
Total $45,047 $48,411
-------------------------
F-25
<PAGE>
7. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
March 31, December 31,
1998 1997
---------- ----------
Term Loan $ 200,000 $ --
Senior Term Loan -- 74,622
Senior Subordinated Notes due 2010 350,000 --
Senior Subordinated Notes due 2003 -- 189,965
IRB Loans -- 17,400
Other 271 302
------------------------
550,271 282,289
Less current portion (5,576) (19,170)
------------------------
Total $ 544,695 $ 263,119
------------------------
The annual amortization schedule of the Term Loan (defined below)
is $4.0 million in 1998, $7.6 million in 1999, $10.6 million in
2000, $13.6 million 2001, $16.6 million in 2002 and $147.6
million thereafter. The Company is required to make mandatory
repayments of the Term Loan in amounts equal to 50% of Excess
Cash Flow (as defined in the Credit Agreement). The Notes
(defined below) are due in their entirety in 2010.
Tender Offer: In connection with the Merger, the Company offered
to purchase for cash any and all of the outstanding existing
Purina Mills, Inc. Senior Subordinated Notes of which $190.0
million in aggregate principal amount was outstanding as of the
date of the Offering. The Tender Offer was commenced on February
9, 1998 and expired on March 12, 1998. In conjunction with the
Tender Offers for the existing Debt Securities, the Company
solicited consents of registered holders of the applicable series
of existing Debt Securities to certain Proposed Amendments to
eliminate substantially all of the restrictive covenants in the
indentures under which the applicable series of existing Debt
Securities were issued, in order to increase the financial
flexibility of the Company after the consummation of the
Transaction. The Proposed Amendments became operative immediately
following the consummation of the Merger when all except $15,000
of the existing Senior Subordinated Notes were accepted for
payment.
Credit Facility: In connection with the Transaction, the Company
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
amount of $200.0 million (the "Term Loan") and (ii) a $100.0
million Revolving Credit Facility, with a $40.0 million sub-limit
for letters of credit. The proceeds of the Term Loan were
borrowed in full on the date of the consummation of the Offering,
in addition to $9.9 million under the Revolving Credit Facility,
and used to finance the Transaction and related fees and
expenses. Proceeds of the Revolving Credit Facility have also
been used to redeem the Company's Industrial Revenue Bonds and
are available to finance the Company's ongoing working capital
requirements. At March 31, 1998, $6.9 million was outstanding
under the Revolving Credit Facility and is classified as a
current liability on the consolidated balance sheet. The
Revolving Credit Facility also may be used in part for the
issuance of letters of credit to be used solely for ordinary
course of business purposes of the Company and its subsidiaries.
The Company is charged an annual fee of .50% for amounts
available but unused under the Revolving Credit Facility. In
addition, the Company is charged a fee of .25% per annum on the
daily average amount available for
F-26
<PAGE>
drawing under any letter of credit to the bank that has issued
such letter of credit. Loans under the Credit Agreement bear
interest at floating rates, which are, at the Company's option
based either upon bank prime or Eurodollar rates. Rates on
outstanding borrowings averaged 7.8% at March 31, 1998.
Notes: The Company sold $350.0 million aggregate principal amount
of its 9% Senior Subordinated Notes due 2010 (the "Notes")
generating gross proceeds of $350.0 million. The Notes are senior
subordinated, unsecured obligations of the Company.
The Notes will not be redeemable at the option of the Company
prior to March 15, 2003. The Company may be obligated, however,
to purchase at the holders' option all or a portion of the Notes
upon a change of control or asset sale, as defined in the Notes
Indenture. From and after March 15, 2003, the Notes will be
subject to redemption at the option of the Company, in whole or
in part, at various redemption prices, declining from 104.5% of
the principal amount to par on and after March 15, 2006. Also, at
any time prior to March 15, 2001, under certain conditions the
Company may redeem up to 35% of the initial principal amount of
the Notes originally issued with the net proceeds of a public
offering of the Common Stock of Holdings, at a redemption price
equal to 109% of the principal amount.
Covenants: The Credit Agreement and the Indenture related to the
Notes (the "Notes Indenture") contain restrictive covenants that,
among other things and under certain conditions, limit the
ability of the Company to incur additional indebtedness or issue
preferred stock, to acquire (including a limitation on capital
expenditures) or dispose of assets or operations and to pay
dividends. The most restrictive of the covenants precludes
(except for $1.0 million annually for operating and
administrative expenses and amounts to cover income tax expenses)
any payment of dividends prior to 1999. As of March 31, 1998,
restricted net assets of the Company were approximately $109.4
million. The Term Loan and Revolving Credit Facility also require
the Company to satisfy certain financial covenants and tests. The
Credit Agreement and Notes Indenture contain cross default
provisions.
Holdings and all subsidiaries of the Company guarantee the
Company's obligations under the Credit Agreement. Borrowings
under the Credit Agreement are also secured by a first priority
lien on the capital stock of the Company (pledged by Holdings)
and its subsidiaries and substantially all assets of the Company
and its subsidiaries.
8. STOCKHOLDER'S EQUITY
The Company's authorized capital consists of 1,000 shares of
common stock. All common stock of the Company is owned by
Holdings. As a result of the Merger, the Company terminated the
ESOP. Upon termination each ESOP participant had the right to
receive a distribution of Holdings Common Stock or exchange all
their shares of Holdings stock for the Merger Consideration.
F-27
<PAGE>
9. POST-RETIREMENT BENEFITS OTHER THAN
PENSIONS/POST-EMPLOYMENT BENEFITS
As a result of the Merger, the employee benefit plans of the
Company that provide health care and life insurance benefits to
retired employees were terminated. Retirees currently receiving
health benefits under the health plans of the Company have been
provided medical benefits under Koch Agriculture's medical plans.
For any current employees or retirees who were 100% vested at the
time of the Merger, the Company will share a portion of their
post-retirement health care cost for the three years following
the date of Merger. The accrued post-retirement benefit
obligations decreased significantly as a result of the
termination of the plans.
10. DEFERRED INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities far financial reporting purposes and the amounts used
for income tax purposes. Temporary differences which gave rise to
deferred tax assets and liabilities are as follows (in
thousands).
March 31, December 31,
1998 1997
-----------------------
Deferred tax assets:
Accrued postretirement benefits 2,078 14,373
Accrued supplemental retirement benefits 10,293 11,247
Reserve for loss on asset disposals 5,987 5,244
Accrued vacation expense 1,490 2,575
Other accruals not currently deductible for tax 5,412 4,166
Alternative minimum tax credit 8,916 7,818
Bad debt reserve 2,576 2,185
Tax over book basis of inventory 534
Net operating loss carryforward 9,037
-----------------------
Total deferred tax assets 45,789 48,142
-----------------------
Deferred tax liabilities:
Book over tax basis of assets acquired 1,271 3,327
Tax over book depreciation 32,042 18,640
Book over tax basis of intangible assets 13,050 10,184
Other 88
-----------------------
Total deferred tax liabilities 46,383 32,239
-----------------------
Net deferred tax assets (liabilities) (574) 15,903
-----------------------
As a result of the Merger and the allocation of the purchase
price under APB 16, the deferred tax assets and deferred tax
liabilities were adjusted.
11. ACQUISITION EXPENSES
Included in general and administrative expenses are $15.9 million
in non-recurring expenses related to the Merger. These costs
relate to compensation paid to management of the Company and the
$13.5 million in Merger consideration paid to holders of Options
and Stock Units.
F-28
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
====================================================== ===========================================================
No person has been authorized to give any
information or to make any representations
other than those contained or incorporated by
reference in this Prospectus and the
accompanying Letter of Transmittal and, if
given or made, such information or
representations must not be relied upon as
having been authorized by the Company or the
Exchange Agent. Neither this Prospectus nor
the accompanying Letter of Transmittal, or
both together, constitute an offer to sell or Purina Mills, Inc.
the solicitation of an offer to buy
securities in any jurisdiciton to any person Offer to Exchange
to whom it is unlawful to make such offer of
solicitation. Neither the delivery of this 9% Senior Subordinated Notes due 2010,
Prospectus, nor the accompanying Letter of
Transmittal, or both together, nor any sale which have been registered under the
made hereunder shall, under any Securities Act of 1933, as amended,
circumstances, create an implication that
there has been no change in the affairs of for any and all outstanding
the Company since the date hereof or thereof 9% Senior Subordinated Notes due 2010
or that the information contained herein is
correct at any time subsequent to the date
hereof or thereof.
Until ________, 1998 (90 days after the date
of this Prospectus), all dealers effecting
transactions in the New Notes, whether or not
participating in this distribution, may be
required to deliver a Prospectus. This is in
addition to the obligation of the dealers to
deliver a Prospectus when acting as
underwriters and with respect to their unsold
allotments or subscriptions.
TABLE OF CONTENTS
Page
Available Information............................i
Prospectus Summary...............................1
Risk Factors....................................14 PROSPECTUS
The Transactions................................19
Use of Proceeds.................................21
Koch Agriculture................................21 , 1998
Capitalization..................................22
Unaudited Pro Forma Financial Data..............23
Selected Historical Consolidated
Financial Data.............................27
Management's Discussion and Analysis of
Financial Condition and Results
of Operations..............................30
Business........................................37
Management......................................48
Ownership of Capital Stock......................56
Certain Relationships and Related
Transactions...............................57
Description of Certain Indebtedness.............60
The Exchange Offer..............................62
Description of the New Notes....................69
Certain U.S. Federal Income Tax
Considerations.............................98
Plan of Distribution............................99
Legal Matters..................................100
Experts........................................100
====================================================== ===========================================================
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
The Company's Certificate of Incorporation provides that
the Company shall indemnify its directors and officers, and may
indemnify its employees and agents, to the fullest extent
permitted by the Delaware General Corporation Law (the "DGCL");
provided, however, that, pursuant to the Bylaws, the Company may
not indemnify any person in connection with any proceeding
initiated by such person, unless such proceeding is authorized by
a majority of the Company's directors.
Section 145 of the DGCL provides:
145 INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND
AGENTS; INSURANCE.--(a) A corporation shall have power to
indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit
or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the
corporation) by reason of the fact that the person is or was a
director, officer, employee or agent of the corporation, or is or
was serving at the request of the corporation as a director,
officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by the person in
connection with such action, suit or proceeding if the person
acted in good faith and in a manner the person reasonably
believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe the person's
conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, shall not, of itself,
create a presumption that the person did not act in good faith
and in a manner which the person reasonably believed to be in or
not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, had reasonable
cause to believe that the person's conduct was unlawful.
(b) A corporation shall have power to indemnify any person
who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the
right of the corporation to procure a judgment in its favor by
reason of the fact that the person is or was a director, officer,
employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust
or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by the person in connection with
the defense or settlement of such action or suit if the person
acted in good faith and in a manner the person reasonably
believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person
shall have been adjudged to be liable to the corporation unless
and only to the extent that the court of Chancery or the court in
which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly
and reasonably entitled to indemnity for such expenses which the
Court of Chancery or such other court shall deem proper.
(c) To the extent that a present or former director or
officer of a corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred
to in subsections (a) and (b) of this section, or in defense of
any claim, issue or matter therein, such person shall be
indemnified against expenses (including attorneys' fees) actually
and reasonably incurred by such person in connection therewith.
(d) Any indemnification under subsections (a) and (b) of
this section (unless ordered by a court) shall be made by the
corporation only as authorized in the specific case upon a
determination that indemnification of the present or former
director, officer, employee or agent is proper in the
circumstances because the person has met the applicable standard
of conduct set forth in subsections (a) and (b) of this section.
Such determination shall be made, with respect to a person who is
a director or officer at the time of such determination, (1) by a
majority vote of the
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directors who are not parties to such action, suit or proceeding,
even though less than a quorum, or (2) by a committee of such
directors designated by majority vote of such directors, even
though less than a quorum, or (3) if there are no such directors,
or if such directors so direct, by independent legal counsel in a
written opinion, or (4) by the stockholders.
(e) Expenses (including attorneys' fees) incurred by an
officer or director in defending any civil, criminal,
administrative or investigative action, suit or proceeding may be
paid by the corporation in advance of the final disposition of
such action, suit or proceeding upon receipt of an undertaking by
or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that such person is not
entitled to be indemnified by the corporation as authorized in
this section. Such expenses (including attorneys' fees) incurred
by former directors and officers or other employees and agents
may be so paid upon such terms and conditions, if any, as the
corporation deems appropriate.
(f) The indemnification and advancement of expenses
provided by, or granted pursuant to, the other subsections of
this section shall not be deemed exclusive of any other rights to
which those seeking indemnification or advancement of expenses
may be entitled under any bylaw, agreement, vote of stockholders
or disinterested directors or otherwise, both as to action in
such person's official capacity and as to action in another
capacity while holding such office.
(g) A corporation shall have power to purchase and maintain
insurance on behalf of any person who is or was a director,
officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted
against such person in any such capacity or arising out of such
person's status as such whether or not the corporation would have
the power to indemnify such person against such liability under
this section.
(h) For purposes of this section, references to "the
corporation" shall include, in addition to the resulting
corporation, any constituent corporation (including any
constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have
had power and authority to indemnify its directors, officers, and
employees or agents, so that any person who is or was a director,
officer, employee or agent of such constituent corporation, or is
or was serving at the request of such constituent corporation as
a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, shall
stand in the same position under this section with respect to the
resulting or surviving corporation as such person would have with
respect to such constituent corporation if its separate existence
had continued.
(i) For purposes of this section, references to "other
enterprises" shall include employee benefit plans; references to
"fines" shall include any excise taxes assessed on a person with
respect to any employee benefit plan; and references to "serving
at the request of the corporation" shall include any service as a
director, officer, employee or agent of the corporation which
imposes duties on, or involves services by, such director,
officer, employee, or agent with respect to an employee benefit
plan, its participants or beneficiaries; and a person who acted
in good faith and in a manner such person reasonably believed to
be in the interest of the participants and beneficiaries of an
employee benefit plan shall be deemed to have acted in a manner
"not opposed to the best interests of the corporation" as
referred to in this section.
(j) The indemnification and advancement of expenses
provided by, or granted pursuant to, this section shall, unless
otherwise provided when authorized or ratified, continue as to a
person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.
(k) The Court of Chancery is hereby vested with exclusive
jurisdiction to hear and determine all actions for advancement of
expenses or indemnification brought under this section or under
any bylaw, agreement, vote of stockholders or disinterested
directors, or otherwise. The Court of Chancery may summarily
determine a corporation's obligation to advance expenses
(including attorneys' fees).
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<PAGE>
The Company maintains directors' and officers' liability
insurance.
Item 21. Exhibits and Financial Statement Schedules.
(a) Exhibits. A list of exhibits included as part of this
Registration Statement is set forth in the Exhibit Index which
immediately precedes such exhibits and is hereby incorporated by
reference herein.
(b) Financial Statement Schedules. Schedules have been
omitted since the required information is not applicable, or not
applicable in amounts sufficient to require submission of the
schedule, or because the information is included in the financial
statements or notes thereto.
Item 22. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers
or sales are being made, a post-effective amendment to
this registration statement:
(i) To include any prospectus required by
Section 10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any
facts or events arising after the effective
date of the registration statement (or the most
recent post-effective amendment thereof) which,
individually or in the aggregate, represent a
fundamental change in the information set forth
in the registration statement. Notwithstanding
the foregoing, any increase or decrease in
volume of securities offered (if the total
dollar value of securities offered would not
exceed that which was registered) and any
deviation from the low or high end of the
estimated maximum offering range may be
reflected in the form of prospectus filed with
the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price
represent no more than 20 percent change in the
maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in
the effective registration statement;
(iii) To include any material
information with respect to the plan of
distribution not previously disclosed in the
registration statement or any material change
to such information in the registration
statement.
(2) That, for the purpose of determining any
liability under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new
registration statement relating to the securities
offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide
offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being
registered which remain unsold at the termination of the
offering.
The undersigned registrant hereby undertakes that, for
purposes of determining any liability under the Securities Act of
1933, each filing of the registrant's annual report pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934
(and, where applicable, each filing of an employee benefit plans
annual report pursuant to Section 15(d) of the Securities
Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the registrant, pursuant to
the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is
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<PAGE>
against public policy as expressed in the Securities Act of 1933
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by any
such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question of whether or not such indemnification
is against public policy as expressed in the Securities Act of
1933 and will be governed by the final adjudication of such
issue.
The undersigned registrant hereby undertakes to respond to
requests for information that is incorporated by reference into
the prospectus pursuant to Item 4, 10(b), 11, or 13 of this form,
within one business day of receipt of such request, and to send
the incorporated documents by first class mail or other equally
prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration
statement through the date of responding to the request.
The undersigned registrant hereby undertakes to supply by
means of a post-effective amendment all information concerning a
transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration
statement when it became effective.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
the registrant has duly caused this Amendment No. 2 to the
registration statement to be signed on its behalf, thereunto duly
authorized, in the City of St. Louis, State of Missouri, on July
24, 1998.
PURINA MILLS, INC.
By: /s/ Scott E. Deeter
----------------------------
Title: Director
POWER OF ATTORNEY
Each person whose signature appears below on this
Registration Statement appointed David L. Abbott, Darrell D.
Swank and Scott E. Deeter and each of them, with full power to
act without the other, his true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for
him and in his name, place and stead, in any and all capacities
(unless revoked in writing) to sign any and all amendments
(including post-effective amendments thereto) to this
Registration Statement to which this power of attorney is
attached, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and
Exchange Commission, granting to such attorneys-in-fact and
agents, and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to
be done in connection therewith, as full to all intents and
purposes as he might or could do in person, hereby ratifying and
confirming all that such attorneys-in-fact and agents or any of
them, or their or his substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933,
this registration statement was signed by the following persons
in the capacities indicated, on May 28, 1998.
Signature Title
--------- -----
/s/ David L. Abbott Chief Executive Officer (Principal
- -------------------------- Executive Officer), President
David L. Abbott and Director
/s/ Darrell D. Swank Chief Financial Officer (Principal
- -------------------------- Financial Officer)
Darrell D. Swank
/s/ Del G. Meinz Chief Accounting Officer
- --------------------------
Del G. Meinz
/s/ Scott E. Deeter Director
- --------------------------
Scott E. Deeter
/s/ Dean E. Watson Director
- --------------------------
Dean E. Watson
/s/ Paul R. Wheeler Director
- --------------------------
Paul R. Wheeler
/s/ Christopher M. Wilkins Director
- --------------------------
Christopher M. Wilkins
S-1
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
-- -----------
3.1 Certificate of Incorporation of Purina Mills, Inc.+
3.2 Bylaws of Purina Mills, Inc.+
4.1 Indenture, dated as of March 12, 1998, between
Purina Mills, Inc., as issuer, and The First
National Bank of Chicago, as trustee, relating
to the Notes (the "Indenture")+
4.2 Form of 9% Senior Subordinated Note due 2010 of
Purina Mills, Inc. (the "New Notes") (included as
Exhibit A of the Indenture filed as Exhibit 4.1)+
4.3 Credit Agreement, dated as of March 12, 1998,
among Purina Mills, Inc., Chase Bank of Texas,
National Association, as Administrative Agent,
and the other financial institutions parties
thereto+
4.4 Form of Guarantee and Collateral Agreement,
dated March 12, 1998, among Purina Mills, Inc.,
the subsidiary guarantors of Purina Mills, Inc.
that are signatories thereto and Chase Bank of
Texas, National Association+
4.5 PM Holdings Security Agreement, dated March 12,
1998, between PM Holdings Corporation and Chase Bank
of Texas, National Association+
4.6 PM Holdings Guaranty, dated March 12, 1998, between
PM Holdings Corporation and Chase Bank of Texas,
National Association+
4.7 Registration Rights Agreement, dated as of March
12, 1998, by and among Purina Mills, Inc. and
the Initial Purchasers listed therein, relating
to the Notes+
NOTE: Pursuant to the provisions of paragraph
(b)(4)(iii) of Item 601 of Regulation S-K, the
Registrant hereby undertakes to furnish to the
Commission upon request copies of the instruments
pursuant to which various entities hold long-term
debt of the Company or its parent or subsidiaries,
none of which instruments govern indebtedness
exceeding 10 percent of the total assets of the
Company and its parent or subsidiaries on a
consolidated basis.
5.1 Opinion of Cleary, Gottlieb, Steen & Hamilton
regarding legality of the New Notes+
10.1 Employment Agreement, dated as of November 18, 1997,
between Purina Mills, Inc. and David L. Abbott, and
amendment thereto, dated as of March 11, 1998+
10.2 Form of Purina Mills, Inc. Discretionary Capital
Accumulation Plan for Key Employees+
10.3 Purina Mills, Inc./PM Holdings Corporation Severance
Program for Key Employees, as amended and restated
effective January 9, 1998+
10.4 Purina Mills, Inc. Supplemental Executive Retirement
Plan, effective as of January 1, 1988+
10.5 Koch Industries, Inc. Supplemental Executive
Retirement Plan, effective as of May 9, 1994+
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<PAGE>
10.6 Sub-Group Tax Sharing Agreement, dated March 12,
1998, between PM Holdings Corporation and each of
its subsidiaries listed therein+
10.7 Parent Tax Sharing Agreement, dated March 12, 1998,
between Koch Industries, Inc. and PM Holdings
Corporation+
10.8 Jet-Pro License Agreement between Purina Mills, Inc.
and Koch Feed Company, dated March 12, 1998+
10.9 Koch Agriculture Supply Agreement between Purina
Mills, Inc. and Nutrition Supply and Trading, a
division of Koch Agriculture Company, dated March
12, 1998+
10.10 License Agreement dated October 1, 1986 between
Ralston Purina Company and Purina Mills, Inc.+
12.1 Computation of ratio of earnings to fixed charges+
21.1 Subsidiaries of Purina Mills, Inc.+
23.1 Consent of Deloitte & Touche LLP, Independent
Auditors
23.2 Consent of Cleary, Gottlieb, Steen & Hamilton
(included in its opinion filed as Exhibit 5.1)+
25.1 Form T-1 with respect to the eligibility of The
First National Bank of Chicago with respect to
the Indenture+
27.1 Financial Data Schedule+
99.1 Form of Letter of Transmittal+
99.2 Form of Notice of Guaranteed Delivery+
99.3 Form of Letter to Brokers, Dealers, Commercial
Banks, Trust Companies and Other Nominees+
99.4 Form of Letter to Clients+
- --------------
+ previously filed
X-2
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to
Registration Statement No. 333-53865 of Purina Mills, Inc. of our
report dated February 9, 1998 (March 16, 1998, as to Note 14)
appearing in the Prospectus, which is a part of such Registration
Statement, and to the reference to us under the headings "Summary
Historical Financial Data", "Selected Historical Consolidated
Financial Data" and Experts" in such Prospectus.
/s/ DELOITTE & TOUCHE LLP
St. Louis, Missouri
July 24, 1998
