<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 33-66606
PURINA MILLS, INC
(Exact name of registrant as specified in its charter)
DELAWARE 43-1359249
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification Number)
1401 S. HANLEY ROAD
ST. LOUIS, MISSOURI 63144
(Address of principal executive offices) (Zip Code)
(314) 768-4100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
------- -------
Page 1 of 27 pages
<PAGE> 2
PURINA MILLS, INC. CORPORATION
<TABLE>
Table of Contents
Form 10-Q for the Quarterly Period
Ended September 30, 1998
<CAPTION>
Page
----
<S> <C>
PART I FINANCIAL INFORMATION
- ------ ---------------------
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at September 30,
1998 and December 31, 1997 3
Consolidated Statements of Operations for
the three months ended September 30, 1998 and
1997, the six month and nineteen day period
ended September 30, 1998, the seventy-one day
period ended March 12, 1998 and the nine
months ended September 30, 1997. 4
Consolidated Statements of Cash Flows for
the six month and nineteen day period ended
September 30, 1998, the seventy-one day
period ended March 12, 1998 and the nine
months ended September 30, 1997. 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
PART II OTHER INFORMATION
- ------- -----------------
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURE 25
</TABLE>
2
<PAGE> 3
<TABLE>
PURINA MILLS, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<CAPTION>
PRE-MERGER
DECEMBER 31, 1997
(DERIVED FROM
AUDITED FINANCIAL
SEPTEMBER 30, 1998 STATEMENTS)
------------------ -----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 28,539 $ 27,620
Accounts receivable, net 40,502 51,208
Inventories 69,687 66,800
Deferred income taxes 8,746 8,746
Prepaid expenses and other current assets 13,586 13,037
.......................................
TOTAL CURRENT ASSETS 161,060 167,411
Property, plant and equipment, net 264,096 243,718
Intangible assets, net 336,769 122,403
Other assets 47,249 48,411
.......................................
TOTAL ASSETS $809,174 $581,943
---------------------------------------
LIABILITIES & STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable--other $ 42,681 $ 76,078
Accounts payable--affiliate 61,896 --
Current portion of long-term debt 6,800 19,170
Customer advance payments 2,575 16,503
Other current liabilities 21,200 26,872
.......................................
TOTAL CURRENT LIABILITIES 135,152 138,623
Retirement obligations 26,196 28,768
Accrued post-retirement benefit costs 2,012 37,470
Deferred income taxes 5,043 --
Other liabilities 848 831
Long-term debt 540,693 263,119
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 deficit (10,060) (27,192)
Adjustment for minimum supplemental retirement
liabilities -- (2,099)
.......................................
TOTAL STOCKHOLDER'S EQUITY 99,230 50,396
---------------------------------------
TOTAL LIABILITIES & STOCKHOLDER'S EQUITY $809,174 $581,943
---------------------------------------
(SEE ACCOMPANYING NOTES)
</TABLE>
3
<PAGE> 4
<TABLE>
PURINA MILLS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<CAPTION>
POST-MERGER PRE-MERGER POST-MERGER PRE-MERGER
------------- ------------- ------------- ----------------------------
THREE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED MARCH 13 TO JANUARY 1 ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, TO MARCH 12, SEPTEMBER 30,
1998 1997 1998 1998 1997
------------- ------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
NET SALES $233,677 $263,830 $521,749 $214,272 $818,024
COSTS AND EXPENSES:
Cost of products sold 186,015 214,716 414,659 171,233 667,045
Marketing, distribution and
advertising 21,132 21,046 47,703 17,543 62,138
General and administrative 13,473 13,715 31,445 27,573 41,348
Amortization of intangibles 4,568 5,127 10,683 3,838 15,467
Research and development 1,319 1,855 3,247 1,376 5,109
Other income, net 1,703 (705) 1,646 109 (3,416)
.........................................................................
228,210 255,754 509,383 221,672 787,691
.........................................................................
OPERATING INCOME (LOSS) 5,467 8,076 12,366 (7,400) 30,333
Interest expense 10,999 8,698 26,457 6,144 25,763
.........................................................................
Income (loss) before income
taxes (5,532) (622) (14,091) (13,544) 4,570
Provision (benefit) for income
taxes (1,472) (401) (4,031) (5,050) 2,097
.........................................................................
NET INCOME (LOSS) $ (4,060) $ (221) $(10,060) $ (8,494) $ 2,473
-------------------------------------------------------------------------
(SEE ACCOMPANYING NOTES)
</TABLE>
4
<PAGE> 5
<TABLE>
PURINA MILLS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<CAPTION>
POST-MERGER PRE-MERGER
----------- -------------------------------------
MARCH 13 TO JANUARY 1 TO NINE MONTHS ENDED
SEPTEMBER 30, 1998 MARCH 12, 1998 SEPTEMBER 30, 1997
------------------ -------------- ------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (10,060) $ (8,494) $ 2,473
Adjustment to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation & amortization 27,746 9,908 36,959
Provision for loss on asset disposition 223 169 239
Compensation under ESOP -- -- 3,349
Provision for deferred taxes (3,476) (108) (83)
Other 43,292 (38,826) (21,657)
.........................................................
Net cash provided by (used in) operating activities $ 57,725 $(37,351) $ 21,280
INVESTING ACTIVITIES:
Purchase of property, plant and equipment (16,185) (4,486) (19,090)
Other (265) 156 567
.........................................................
Net cash used in investing activities $ (16,450) $ (4,330) $(18,523)
FINANCING ACTIVITIES:
Proceeds from Senior Subordinated Notes -- 350,000 --
Proceeds from Term Loans -- 200,000 --
Proceeds of revolving credit facility, net -- 3,694
Repayment of Term Loans, Senior Sub. Notes & IRBs (296,826) -- (21,410)
Payment of dividends to PM Holdings Corporation -- (237,172) --
Payment of Financing Costs (371) (11,894) --
Loan to ESOP (1,208)
Other (112) (2,300) (260)
.........................................................
Net cash provided by (used in) financing activities $(297,309) $298,634 $(19,184)
Increase (decrease) in cash and cash equivalents (256,034) 256,953 (16,427)
Cash and cash equivalents at beginning of period 284,573 27,620 25,462
.........................................................
Cash and cash equivalents at end of period $ 28,539 $284,573 $ 9,035
---------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 24,318 $ 11,267 $ 29,049
Income taxes 351 43 5,389
(SEE ACCOMPANYING NOTES)
</TABLE>
5
<PAGE> 6
PURINA MILLS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
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 use of funds required to consummate the Merger and
related financings are summarized below. See Notes 6 and 7 for a description
of long-term indebtedness and capital stock.
<TABLE>
<S> <C>
Sources of funds (in millions):
New Credit Facilities
Term Loans $200.0
Revolving Credit Facility 9.9
Notes 350.0
Equity Contribution to Holdings 109.7
..........
Total $669.6
----------
Use of funds (in millions):
Purchase price for equity of Holdings $258.7
Repayment of existing indebtedness 385.5
Fees and expenses 25.4
..........
Total $669.6
----------
</TABLE>
6
<PAGE> 7
The Merger closed on March 12, 1998. The Merger has been accounted for as a
purchase transaction in accordance with Accounting Principles Board Opinion
No. 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. The consolidated financial statements
for periods prior to March 12, 1998 have been prepared on the predecessor
basis of the Company. The consolidated balance sheet at September 30, 1998 is
not comparable with the December 31, 1997 balance sheet presented. Operating
results subsequent to the Merger are comparable to the operating results prior
to the Merger except for depreciation expense, amortization of intangible
assets, interest expense and post-retirement health care costs.
The preliminary allocation of the $109.3 million purchase price for the
Company is summarized as follows (in millions):
<TABLE>
<S> <C>
Current assets $ 130.8
Property, plant and equipment 268.1
Intangible assets 344.2
Other noncurrent assets 47.7
Liabilities assumed (681.5)
............
Total $ 109.3
------------
</TABLE>
The consolidated balance sheet at September 30, 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 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.
Although the Company believes the disclosures are adequate, certain
information and disclosures normally included in the notes to the financial
statements have been condensed or omitted as permitted by the rules and
regulations of the Securities and Exchange Commission. The accompanying
unaudited financial statements should be read in conjunction with the
financial statements for the year ended December 31, 1997 and the quarter
ended March 31, 1998 contained in the Financial Statements on Form S-4.
7
<PAGE> 8
The following unaudited pro forma financial data for the nine months ended
September 30, 1997 and September 30, 1998 has been prepared assuming that the
Merger and related financings were consummated on January 1, 1997
(in millions):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1997 1998
---- ----
<S> <C> <C>
Net sales $818.0 $736.0
Net income (loss) $(12.5) $(22.4)
</TABLE>
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 debt. They do not
purport to be indicative of the results had the Merger been in effect on
January 1, 1997, or of future results of operations.
In connection with the Merger, the Company has entered into an exclusive
commodity purchasing agreement with Koch Agriculture, whereby its Nutrient
Services 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. The cost of the ingredients to the Company is equal to
the spot market price less a discount to be agreed upon between the Company
and Koch Agriculture on an annual basis.
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 affect the Financial Statements.
8
<PAGE> 9
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 tax liability
of the group shall be allocated to the members of this group on the basis of
the percentage of the member's total tax, if computed on a separate return,
would bear to the total amount of the taxes of all members of the group so
computed. If the Company's tax attributes are utilized by another member of
the group, such member will reimburse the Company when the Company would have
been able to utilize such attributes in computing the Company's separate
taxable income. The Company's tax provision for the period March 13 to
September 30, 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 and certain consolidated state income tax
returns 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 in accordance with Statement of
Position No. 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use ("SOP 98-1"). The provisions of SOP 98-1 are
effective for financial statements issued for fiscal years beginning after
December 15, 1998, although early adoption is allowed. The Company's current
policies are in accordance with the provisions of SOP 98-1. All other related
costs are expensed as incurred. Total capitalized software costs were $12.0
million and $8.3 million as of September 30, 1998 and December 31, 1997,
respectively. The Company is amortizing the costs associated with the project
using the straight line method over 5 years, the expected life of the system.
Reclassifications
Certain reclassifications have been made to prior period consolidated
statements to conform to the consolidated financial statement presentation at
September 30, 1998 and the periods then ended.
9
<PAGE> 10
3. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
<S> <C> <C>
Finished goods $17,370 $17,739
Raw materials 52,317 49,061
................................
Total inventories $69,687 $66,800
--------------------------------
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
<S> <C> <C>
Land $ 13,312 $ 13,327
Buildings 70,583 73,965
Machinery and equipment 169,825 245,145
Construction in progress 26,851 13,674
..................................
280,571 346,111
Accumulated depreciation (16,475) (102,393)
..................................
Total $264,096 $ 243,718
----------------------------------
</TABLE>
5. INTANGIBLE ASSETS
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
<S> <C> <C>
Distribution network $ 40,000 $ 45,300
Product specifications 10,000 23,600
Patents 15,000 19,110
Covenant not to compete 2,083 25,000
Feed supply agreement -- 10,598
Goodwill 263,632 57,662
Other intangibles 16,736 24,027
..................................
347,451 205,297
Accumulated amortization (10,682) (82,894)
..................................
Total $336,769 $122,403
----------------------------------
</TABLE>
10
<PAGE> 11
6. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
<S> <C> <C>
Term Loan $197,350 $ --
Senior Term Loan -- 74,622
Senior Subordinated Notes due 2010 350,000 --
Senior Subordinated Notes due 2003 -- 189,965
IRB Loans -- 17,400
Other 143 302
...................................
547,493 282,289
Less current portion (6,800) (19,170)
...................................
Total $540,693 $263,119
-----------------------------------
</TABLE>
The annual amortization schedule of the Term Loan (defined below) is $1.4
million for the remainder of 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 first such payment is due in April, 1999. 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 (the "Offering") of which $190.0 million in aggregate
principal amount was outstanding as of the date of the Offering. The
Offering commenced on February 9, 1998 and expired on March 12, 1998. In
conjunction with the Offering, 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 Merger. 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. The remaining $15,000 of Senior Subordinated Notes were
redeemed during the third quarter of 1998.
CREDIT FACILITY: In connection with the Merger, 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 were used to finance the Merger and
related fees and expenses. Proceeds of the Revolving Credit Facility have
also been
11
<PAGE> 12
used to redeem the Company's Industrial Revenue Bonds and are available to
finance the Company's ongoing working capital requirements. No balance was
outstanding under the Revolving Credit Facility as of September 30, 1998.
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 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 September 30, 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 (defined below). 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 or the
Company, 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
September 30, 1998, restricted net assets of the Company were approximately
$99.2 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 (to be pledged by Holdings) and its subsidiaries and
substantially all assets of the Company and its subsidiaries.
12
<PAGE> 13
7. 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.
8. POST-RETIREMENT BENEFITS OTHER THAN
PENSIONS/POST-EMPLOYMENT BENEFITS
As a result of the Merger, the employee benefit plans of the Company that
provided health care and life insurance benefits to retired employees were
terminated. Retirees previously receiving health benefits under the former
health plans of the Company have been offered medical benefits under Koch
Agriculture's medical plans. For any current employees or retirees who were
100% vested in the former medical plan at the time of the Merger, the Company
will share a portion of their post-retirement health care cost, if any, for
the three years following the date of Merger.
9. DEFERRED INCOME TAXES
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. As a result
of the Merger and the allocation of the purchase price under APB 16, the
deferred tax assets and deferred liabilities were adjusted.
10. ACQUISITION COSTS
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 rights units.
11. TRANSACTIONS WITH AFFILIATES
In the ordinary course of business, the Company contracts with Koch
Industries for various administrative and support services. For the period
ended September 30, 1998 the total fees incurred in connection with such
services amounted to $0.6 million. In the opinion of management, such fees
were reasonable. The Company also entered into an exclusive commodity
purchasing agreement with Koch Agriculture's Nutrient Services division
commencing May 1, 1998. For the period ended September 30, 1998, the Company
purchased $248.7 million in commodities from Koch Agriculture's Nutrient
Services division.
13
<PAGE> 14
At September 30, 1998, accounts payable - affiliate consists of
noninterest-bearing current accounts payable to Koch Industries for
administrative and support services, monthly payroll costs and accounts
payable to Koch Agriculture for commodity purchases. The total amount due
for administrative and support services including payroll and related costs
amounted to $44.4 million. The total amount due for purchases of commodities
amounted to $17.5 million.
14
<PAGE> 15
ITEM 2 - MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Overview
The Company develops, manufactures and markets a comprehensive line of animal
nutrition products for dairy cattle, beef cattle, hogs, horses and poultry,
as well as specialty feeds for rabbits, zoo animals, birds, fish and pets.
For the year ended December 31, 1997 the product mix by volume was
approximately 25% for dairy, 27% for beef cattle, 20% for hogs, 9% for
horses, 9% for poultry and 10% for all others.
The consolidated financial statements for periods prior to March 13, 1998
have been prepared on the predecessor basis of the Company. The consolidated
balance sheet at September 30, 1998 is not comparable with the December 31,
1997 balance sheet presented. Operating results subsequent to the Merger are
comparable to the operating results prior to the Merger except for
depreciation expense, amortization of intangible assets, interest expense and
post-retirement health care costs. Depreciation and amortization included in
operating income for the three months and nine months ended September 30, 1998
was $12.1 million and $37.0 million, respectively, as compared to $11.7
million and $35.1 million for the three months and nine months ended September
30, 1997, respectively. The following discussion is based on comparison of
(i) the three months ended September 30, 1998 to the three months ended
September 30, 1997 and (ii) the seventy-one day period ended March 12, 1998
plus the six month and nineteen day period ended September 30, 1998, to the
nine month period ended September 30, 1997.
The feed industry generally prices products on the basis of aggregate
ingredient cost plus a dollar amount 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 and total income over ingredient cost ("IOIC"), which is net sales
minus cost of ingredients, and gross profit (IOIC less manufacturing costs),
rather than sales dollars, are the key indicators of performance because of
the distortions in sales dollars caused by changes in commodity prices and
product-mix between complete feed and concentrate products, to which
customers add their own base ingredients, such as corn and other grains.
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 higher-margin concentrates, resulting in lower sales
volume but relatively 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.
15
<PAGE> 16
Substantially all of the Company's sales are to companies or individuals in
agriculture-related businesses, with approximately 20% of its sales volume
being feed for hogs. Hog producers are currently experiencing severely
depressed market prices for their end products as prices have fallen over 40%
from one year ago. The Company has outstanding trade receivables, loans and
loan guarantees relating to customers in the hog industry. The Company also
has a guarantee of up to $10 million to an entity that provides funding to
the Company's network of independently-owned dealers and producers, some of
which or whose customers are in the hog industry. Additionally, the Company
has direct ownership in certain hog producing operations and has purchase
commitments for hogs over the next several years. During the nine months
ended September 30, 1998, the Company has not yet incurred significant losses
due to the depressed market prices for hogs, however, there is no assurance
that the Company will not incur significant losses in the future. The Company
expects such losses to continue until hog prices significantly improve.
Three Months Ended September 30, 1998 Compared to Three Months Ended
September 30, 1997
Due to overall lower commodity prices, net sales decreased 11.4% from the
1997 period. However, gross profit remained fairly constant totaling $47.7
million for the three months ended September 30, 1998, versus $49.1 million
for the comparable 1997 period. Overall volume was 1.08 million tons during
the third quarter of 1998, a 1.5% decrease from the 1997 period. Average
IOIC per ton was $65.04, a 1.0% decrease from the three month period ended
September 30, 1997.
Beef cattle tons increased 5.6% over the 1997 period as the drought
conditions in the Southwest and Plains states have dried up pastures and
stimulated the range business. However, IOIC increased only 1.1% due to
lower ingredient profits caused by intense competition for the cattle feed
business. Dairy cattle tons decreased 3.9% due to some product mix switch to
concentrates. Dairy IOIC decreased 5.0% due primarily to the decrease in
volume. Hog volume and IOIC decreased 4.4% and 11.0%, respectively, due to
the decline in the market price of hogs and the resulting pressure on hog
feed margins.
Horse volume and IOIC increased 8.9% and 7.9%, respectively over the 1997
period. The continued success in the business is the result of aggressive
promotion of products. Laying chicken and meatbird volume and IOIC decreased
19.2% and 12.5%, respectively, due to the loss of sales of turkey and broiler
feed to two large customers. Specialty and other volume and IOIC increased
1.1% and 3.5%, respectively, over the 1997 period.
Cost of products sold decreased $28.7 million, or 13.4% from the comparable
1997 period due primarily to the $28.4 million decrease in ingredient costs.
Manufacturing expenses remained consistent with the 1997 period as overall
volume remained constant. Marketing, distribution and advertising costs
remained consistent with the 1997 period. General and administrative
expenses increased slightly over the 1997
16
<PAGE> 17
period due primarily to increased information system costs. Intangible
amortization expense decreased due to the revaluation of intangible assets in
allocating the purchase price. Research and development costs decreased $0.5
million from the 1997 period due to planned cost savings.
Other income, net for the three months ended September 30, 1998 related to
service fees for swine and dairy management and marketing arrangements and
profit and loss on the production of eggs, hogs and turkeys. The decrease in
other income of $2.4 million was primarily attributed to the $3.2 million loss
incurred on the production of eggs, hogs and turkeys. This loss is due to
the decline in the market price of eggs and hogs.
Interest expense for 1998 increased $2.3 million as a result of the increase
in the outstanding debt due to the Credit Agreement and the Notes due 2010.
The Company's effective income tax rate differed from the statutory rate in
both 1998 and 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.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended
September 30, 1997
Due to overall lower commodity prices, net sales decreased 10.0% from the
1997 period. However, gross profit remained fairly constant totaling $150.1
million for the nine months ended September 30, 1998, versus $151.0 million
for the comparable 1997 period. Overall volume for the nine months ended
September 30, 1998 was 3.3 million tons compared to 3.4 million tons for the
1997 period. Average IOIC per ton was $64.86, a 0.1% increase from the nine
month period ended September 30, 1997.
Beef cattle tons increased 5.6% over the 1997 period as the drought
conditions in the Southwest and Plains states have dried up pastures and
stimulated the range business. However, IOIC decreased 0.6% due to lower
ingredient profits caused by intense competition for the cattle feed
business. Dairy cattle tons decreased 5.0% due to some product mix switch to
concentrates. Dairy IOIC decreased 4.1% due primarily to the decrease in
volume and continued low feeding rates. Hog volume and IOIC decreased 2.4%
and 1.4%, respectively, due to decline in the market price of hogs and the
resulting pressure on hog feed margins.
Horse volume and IOIC increased 8.2% and 7.1%, respectively over the 1997
period. The continued success in the business was the result of aggressive
promotion of products. Laying chicken and meatbird volume decreased 10.1%
from 1997 with a corresponding decrease in IOIC of 8.0%. The decreases can
be attributed to the loss of sales of lower margin turkey and broiler feed to
two large customers. The decrease in tons sold was partially offset by
increased sales of lower margin duck feed. Specialty and other volume and
IOIC increased 2.1% and 2.7%, respectively, from 1997.
17
<PAGE> 18
Cost of products sold decreased $81.2 million, or 12.2% from the comparable
1997 period due primarily to the $83.4 million decrease in ingredient costs.
Manufacturing expenses increased $2.2 million over the 1997 period due
primarily to increased depreciation expense and the opening of the new
Hagerstown mill in the second quarter of 1997. Marketing, distribution and
advertising costs increased $3.1 million from 1997 due primarily to an
increase in the sales force, costs associated with the roll out of the
America's Country Stores and increased costs related to swine and dairy
management services. General and administrative expenses increased $17.7
million due primarily to the $15.9 million of compensation paid to management
and holders of options and stock rights units as part of the Merger. The
remaining $1.8 million increase is attributed to increased information system
costs. Intangible amortization expense decreased due to the revaluation of
intangible assets in allocating the purchase price. Research and development
costs decreased $0.5 million from the 1997 period due to planned cost
savings.
Other income, net for the nine months ended September 30, 1998 related to
service fees for swine and dairy management and marketing arrangements and
profit and loss on the production of eggs, hogs and turkeys. This decrease
in other income of $5.2 million was primarily attributed to a $5.4 million
loss on the production of eggs, hogs and turkeys. This decrease is due to
the decline in the market price of eggs and hogs.
Interest expense for 1998 increased $6.8 million as a result of the increase
in the outstanding debt due to the Credit Agreement and the Notes due 2010.
The Company's effective income tax rate differed from the statutory rate in
both 1998 and 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.
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 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 to 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.
18
<PAGE> 19
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.
Without corrective action, programs with time-sensitive software could
potentially recognize a date ending in "00" as the year 1900 rather than the
year 2000, causing many computer applications to fail or create erroneous
results. Year 2000 problems could affect many of the Company's processes,
including production, distribution, research and development, financial and
administrative operations.
The Company has reviewed its computer systems and hardware to locate
potential operational problems associated with the year 2000. The Company
has implemented a process to either replace or modify all of the Company's
current computer systems and software applications. New software has been
configured and implemented at seventeen feed mills and the Company's
corporate headquarters; the Company expects to complete the entire project by
mid-1999. The Company currently estimates that its costs incurred to enhance
its information systems beginning in 1997 and through the year 2000 will
approximate $25 million.
The Company believes that all year 2000 problems in its computer systems have
been or will be resolved in a timely manner and have not caused and will not
cause disruption of its operations or have a material adverse effect on its
financial condition or results of operations. However, failure to correct a
material Year 2000 problem could result in an interruption in, or failure of,
certain normal business activities or operations. Such failures could
materially and adversely affect the Company's results of operations,
liquidity and financial condition. Due to the general uncertainty inherent
in the Year 2000 problem resulting in part from the uncertainty of the Year
2000 readiness of third-party suppliers, customers and financial
institutions, the Company is unable to determine at this time whether the
consequences of Year 2000 failures will have a material impact on the
Company's results of operations, liquidity or financial condition.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 1998, funds provided by operations
before the effects of changes in operating assets and liabilities was $15.9
million, compared to $42.9 million in the 1997 period. The decrease is
attributable to the decrease in income due primarily to the $15.9 million of
compensation paid to management and holders of options and stock rights units
as part of the Merger, the decrease in other income of $5.2 million due to
the decline in the market price of eggs and hogs and the additional interest
expense of $6.8 million resulting from the increase in outstanding debt due
to the Credit Agreement and the Notes due 2010.
Funds used in investing activities for purchases of property, plant and
equipment and intangible assets was approximately $20.8 million and $18.5
million for the nine months ended September 30, 1998 and 1997, respectively.
The increase was primarily
19
<PAGE> 20
attributed to an increase in costs associated with the construction of a new
plant in Lubbock, Texas.
Net cash provided by financing activities in 1998 includes the proceeds from
the Credit Agreement of $200.0 million and the proceeds from the 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 addition, net cash used in
financing activities includes payments of $12.3 million for financing costs
and repayments of $2.7 million made under the Credit Agreement. No balance
was outstanding under the Revolving Credit Facility as of September 30, 1998.
In 1997, net cash used in financing activities included the repayment of debt
under the Old Credit Agreement of $21.4 million.
At September 30, 1998, the Company had $28.5 million in cash and cash
equivalents on hand, and approximately $88.4 million was available for
borrowing under the Company's Revolving Credit Facility. The Company
operates with a relatively low working capital level because a majority of
its sales are made on terms whereby customers receive a 3% discount if
payment is received immediately upon shipment of feed products, and raw
ingredients are normally purchased just prior to manufacturing and shipment.
Liquidity needs have been and will continue to be met through internally
generated funds and, to the extent necessary, borrowings under the Revolving
Credit Facility. The Company's ability to obtain additional financing in the
future for working capital, capital expenditures, acquisitions and general
corporate purposes, should it need to do so, may be affected by cash
requirements for debt service. The Credit Agreement and 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. While the Company was in
compliance with its debt covenants at September 30, 1998, there is no assurance
that the Company will be in compliance with such covenants in future periods.
The Credit Agreement requires the Company to make mandatory repayments of the
Term Loan in amounts equal to 50% of Excess Cash Flow (as defined). The first
such payment is due in April, 1999.
The Company expects that capital expenditures during fiscal year 1998 will be
approximately $27.3 million, which includes $8.6 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. The Company plans to fund capital
expenditures by using internally generated funds and, if necessary, borrowing
capacity under the Revolving Credit Facility.
20
<PAGE> 21
The Company will incur substantially higher interest expense in the future as
a result of the issuance of the Notes and borrowings under the Credit
Agreement. Management believes that cash flow from operations and
availability under the Term Loans and the Revolving Credit Facility will
provide adequate funds for the Company's foreseeable working capital needs,
planned capital expenditures and debt service obligations. The Company's
ability to fund its operations and make planned capital expenditures, to make
scheduled debt payments, to refinance its indebtedness and to remain in
compliance with all of the financial covenants under its debt agreements
depends on its future operating performance and cash flow, which, in turn,
are subject to prevailing economic conditions and to financial, business and
other factors, some of which are beyond its control.
FORWARD-LOOKING STATEMENTS
Certain statements made in this Management's Discussion and Analysis of
Financial Conditions and Results of Operations reflect management's estimates
and beliefs and are intended to be, and are hereby identified as,
"forward-looking statements" for purposes of the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. These include
statements in the sections entitled Results of Operations and Year 2000.
21
<PAGE> 22
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT PAGE NUMBER OR
NUMBER DESCRIPTION INCORPORATION BY REFERENCE TO
- ---------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
3.1 Certificate of Incorporation of Purina Mills, Inc. Filed as Exhibit 3.1 to the Registration
Statement on Form S-4 of Purina Mills,
Inc., Registration No. 333-53865 and
incorporated herein by reference
3.2 Bylaws of Purina Mills, Inc. Filed as Exhibit 3.2 to the Registration
Statement on Form S-4 of Purina Mills,
Inc., Registration No. 333-53865 and
incorporated herein by reference
4.1 Indenture, dated as of March 12, 1998, between Purina Filed as Exhibit 4.1 to the Registration
Mills, Inc., as issuer, and The First National Bank of Statement on Form S-4 of Purina Mills,
Chicago, as trustee, relating to the Notes (the Inc., Registration No. 333-53865 and
"Indenture") incorporated herein by reference
4.2 Form of 9% Senior Subordinated Note due 2010 of Filed as Exhibit 4.2 to the Registration
Purina Mills, Inc. (the "New Notes") (included as Statement on Form S-4 of Purina Mills,
Exhibit A of the Indenture filed as Exhibit 4.1) Inc., Registration No. 333-53865 and
incorporated herein by reference
4.3 Credit Agreement, dated as of March 12, 1998, among Filed as Exhibit 4.3 to the Registration
Purina Mills, Inc., Chase Bank of Texas, National Statement on Form S-4 of Purina Mills,
Association, as Administrative Agent, and the other Inc., Registration No. 333-53865 and
financial institutions parties thereto incorporated herein by reference
4.4 Form of Guarantee and Collateral Agreement, dated Filed as Exhibit 4.4 to the Registration
March 12, 1998, among Purina Mills, Inc., the Statement on Form S-4 of Purina Mills,
subsidiary guarantors of Purina Mills, Inc. that are Inc., Registration No. 333-53865 and
signatories thereto and Chase Bank of Texas, National incorporated herein by reference
Association
4.5 PM Holdings Security Agreement, dated March 12, Filed as Exhibit 4.5 to the Registration
1998, between PM Holdings Corporation and Chase Statement on Form S-4 of Purina Mills,
Bank of Texas, National Association Inc., Registration No. 333-53865 and
incorporated herein by reference
22
<PAGE> 23
<CAPTION>
EXHIBIT PAGE NUMBER OR
NUMBER DESCRIPTION INCORPORATION BY REFERENCE TO
- ---------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
4.6 PM Holdings Guaranty, dated March 12, 1998, between Filed as Exhibit 4.6 to the Registration
PM Holdings Corporation and Chase Bank of Texas, Statement on Form S-4 of Purina Mills,
National Association Inc., Registration No. 333-53865 and
incorporated herein by reference
4.7 Registration Rights Agreement, dated as of March 12, Filed as Exhibit 4.7 to the Registration
1998, by and among Purina Mills, Inc. and the Initial Statement on Form S-4 of Purina Mills,
Purchasers listed therein, relating to the Notes Inc., Registration No. 333-53865 and
incorporated herein by reference
10.1 Employment Agreement, dated as of November 18, Filed as Exhibit 10.1 to the Registration
1997, between Purina Mills, Inc. and David L. Abbott, Statement on Form S-4 of Purina Mills,
and amendment thereto, dated as of March 11, 1998 Inc., Registration No. 333-53865 and
incorporated herein by reference
10.2 Form of Purina Mills, Inc. Discretionary Capital Filed as Exhibit 10.2 to the Registration
Accumulation Plan for Key Employees Statement on Form S-4 of Purina Mills,
Inc., Registration No. 333-53865 and
incorporated herein by reference
10.3 Purina Mills, Inc./PM Holdings Corporation Severance Filed as Exhibit 10.3 to the Registration
Program for Key Employees, as amended and restated Statement on Form S-4 of Purina Mills,
effective January 9, 1998 Inc., Registration No. 333-53865 and
incorporated herein by reference
10.4 Purina Mills, Inc. Supplemental Executive Retirement Filed as Exhibit 10.4 to the Registration
Plan, effective as of January 1, 1998 Statement on Form S-4 of Purina Mills, Inc.,
Registration No. 333-53865 and
incorporated herein by reference
10.5 Koch Industries, Inc. Supplemental Executive Filed as Exhibit 10.5 to the Registration
Retirement Plan, effective as of May 9, 1994 Statement on Form S-4 of Purina Mills,
Inc., Registration No. 333-53865 and
incorporated herein by reference
10.6 Sub-Group Tax Sharing Agreement, dated March 12, Filed as Exhibit 10.6 to the Registration
1998, between PM Holdings Corporation and each of Statement on Form S-4 of Purina Mills,
its subsidiaries listed therein Inc., Registration No. 333-53865 and
incorporated herein by reference
23
<PAGE> 24
<CAPTION>
EXHIBIT PAGE NUMBER OR
NUMBER DESCRIPTION INCORPORATION BY REFERENCE TO
- ---------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
10.7 Parent Tax Sharing Agreement, dated March 12, 1998, Filed as Exhibit 10.7 to the Registration
between Koch Industries, Inc. and PM Holdings Corporation Statement on Form S-4 of Purina Mills,
Inc., Registration No. 333-53865 and
incorporated herein by reference
10.8 Jet-Pro License Agreement between Purina Mills, Inc. Filed as Exhibit 10.8 to the Registration
and Koch Feed Company, dated March 12, 1998 Statement on Form S-4 of Purina Mills,
Inc., Registration No. 333-53865 and
incorporated herein by reference
10.9 Koch Agriculture Supply Agreement between Purina Filed as Exhibit 10.9 to the Registration
Mills, Inc. and Nutrition Supply and Trading, a division Statement on Form S-4 of Purina Mills,
of Koch Agriculture Company, dated March 12, 1998 Inc., Registration No. 333-53865 and
incorporated herein by reference
10.10 License Agreement dated October 1, 1986 between Filed as Exhibit 10.10 to the Registration
Ralston Purina Company and Purina Mills, Inc. Statement on Form S-4 of Purina Mills,
Inc., Registration No. 333-53865 and
incorporated herein by reference
10.11<F*> Employment Agreement dated as of September 18,
1998, between Purina Mills, Inc. and David L. Abbott.
23.1 Consent of Deloitte & Touche LLP, Independent Auditors Filed as Exhibit 23.1 to the Registration
Statement on Form S-4 of Purina Mills,
Inc., Registration No. 333-53865 and
incorporated herein by reference
23.2 Consent of Cleary, Gottlieb, Steen & Hamilton Filed as Exhibit 23.2 to the Registration
(included in its opinion filed as Exhibit 5.1) Statement on Form S-4 of Purina Mills,
Inc., Registration No. 333-53865 and
incorporated herein by reference
27.1<F*> Financial Data Schedule
<FN>
- --------------------
<F*> Filed herewith
</TABLE>
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended September
30, 1998.
24
<PAGE> 25
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PURINA MILLS, INC.
Date: November 12, 1998 /s/Del G. Meinz
---------------
Del G. Meinz
Chief Accounting Officer
25
<PAGE> 26
<TABLE>
EXHIBIT INDEX
<CAPTION>
EXHIBIT PAGE NUMBER OR
NUMBER DESCRIPTION INCORPORATION BY REFERENCE TO
- ---------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
3.1 Certificate of Incorporation of Purina Mills, Inc. Filed as Exhibit 3.1 to the Registration
Statement on Form S-4 of Purina Mills,
Inc., Registration No. 333-53865 and
incorporated herein by reference
3.2 Bylaws of Purina Mills, Inc. Filed as Exhibit 3.2 to the Registration
Statement on Form S-4 of Purina Mills,
Inc., Registration No. 333-53865 and
incorporated herein by reference
4.1 Indenture, dated as of March 12, 1998, between Purina Filed as Exhibit 4.1 to the Registration
Mills, Inc., as issuer, and The First National Bank of Statement on Form S-4 of Purina Mills,
Chicago, as trustee, relating to the Notes Inc., Registration No. 333-53865 and
(the "Indenture") incorporated herein by reference
4.2 Form of 9% Senior Subordinated Note due 2010 of Filed as Exhibit 4.2 to the Registration
Purina Mills, Inc. (the "New Notes") (included as Statement on Form S-4 of Purina Mills,
Exhibit A of the Indenture filed as Exhibit 4.1) Inc., Registration No. 333-53865 and
incorporated herein by reference
4.3 Credit Agreement, dated as of March 12, 1998, among Filed as Exhibit 4.3 to the Registration
Purina Mills, Inc., Chase Bank of Texas, National Statement on Form S-4 of Purina Mills,
Association, as Administrative Agent, and the other Inc., Registration No. 333-53865 and
financial institutions parties thereto incorporated herein by reference
4.4 Form of Guarantee and Collateral Agreement, dated Filed as Exhibit 4.4 to the Registration
March 12, 1998, among Purina Mills, Inc., the subsidiary Statement on Form S-4 of Purina Mills,
guarantors of Purina Mills, Inc. that are signatories Inc., Registration No. 333-53865 and
thereto and Chase Bank of Texas, National Association incorporated herein by reference
4.5 PM Holdings Security Agreement, dated March 12, Filed as Exhibit 4.5 to the Registration
1998, between PM Holdings Corporation and Chase Statement on Form S-4 of Purina Mills,
Bank of Texas, National Association Inc., Registration No. 333-53865 and
incorporated herein by reference
26
<PAGE> 27
<CAPTION>
EXHIBIT PAGE NUMBER OR
NUMBER DESCRIPTION INCORPORATION BY REFERENCE TO
- ---------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
4.6 PM Holdings Guaranty, dated March 12, 1998, between Filed as Exhibit 4.6 to the Registration
PM Holdings Corporation and Chase Bank of Texas, Statement on Form S-4 of Purina Mills,
National Association Inc., Registration No. 333-53865 and
incorporated herein by reference
4.7 Registration Rights Agreement, dated as of March 12, Filed as Exhibit 4.7 to the Registration
1998, by and among Purina Mills, Inc. and the Initial Statement on Form S-4 of Purina Mills,
Purchasers listed therein, relating to the Notes Inc., Registration No. 333-53865 and
incorporated herein by reference
10.1 Employment Agreement, dated as of November 18, Filed as Exhibit 10.1 to the Registration
1997, between Purina Mills, Inc. and David L. Abbott, Statement on Form S-4 of Purina Mills,
and amendment thereto, dated as of March 11, 1998 Inc., Registration No. 333-53865 and
incorporated herein by reference
10.2 Form of Purina Mills, Inc. Discretionary Capital Filed as Exhibit 10.2 to the Registration
Accumulation Plan for Key Employees Statement on Form S-4 of Purina Mills,
Inc., Registration No. 333-53865 and
incorporated herein by reference
10.3 Purina Mills, Inc./PM Holdings Corporation Severance Filed as Exhibit 10.3 to the Registration
Program for Key Employees, as amended and restated Statement on Form S-4 of Purina Mills,
effective January 9, 1998 Inc., Registration No. 333-53865 and
incorporated herein by reference
10.4 Purina Mills, Inc. Supplemental Executive Retirement Filed as Exhibit 10.4 to the Registration
Plan, effective as of January 1, 1998 Statement on Form S-4 of Purina Mills,
Inc., Registration No. 333-53865 and
incorporated herein by reference
10.5 Koch Industries, Inc. Supplemental Executive Retirement Filed as Exhibit 10.5 to the Registration
Plan, effective as of May 9, 1994 Statement on Form S-4 of Purina Mills,
Inc., Registration No. 333-53865 and
incorporated herein by reference
10.6 Sub-Group Tax Sharing Agreement, dated March 12, Filed as Exhibit 10.6 to the Registration
1998, between PM Holdings Corporation and each of Statement on Form S-4 of Purina Mills,
its subsidiaries listed therein Inc., Registration No. 333-53865 and
incorporated herein by reference
27
<PAGE> 28
<CAPTION>
EXHIBIT PAGE NUMBER OR
NUMBER DESCRIPTION INCORPORATION BY REFERENCE TO
- ---------------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
10.7 Parent Tax Sharing Agreement, dated March 12, 1998, Filed as Exhibit 10.7 to the Registration
between Koch Industries, Inc. and PM Holdings Statement on Form S-4 of Purina Mills,
Corporation Inc., Registration No. 333-53865 and
incorporated herein by reference
10.8 Jet-Pro License Agreement between Purina Mills, Inc. Filed as Exhibit 10.8 to the Registration
and Koch Feed Company, dated March 12, 1998 Statement on Form S-4 of Purina Mills,
Inc., Registration No. 333-53865 and
incorporated herein by reference
10.9 Koch Agriculture Supply Agreement between Purina Filed as Exhibit 10.9 to the Registration
Mills, Inc. and Nutrition Supply and Trading, a division Statement on Form S-4 of Purina Mills,
of Koch Agriculture Company, dated March 12, 1998 Inc., Registration No. 333-53865 and
incorporated herein by reference
10.10 License Agreement dated October 1, 1986 between Filed as Exhibit 10.10 to the Registration
Ralston Purina Company and Purina Mills, Inc. Statement on Form S-4 of Purina Mills,
Inc., Registration No. 333-53865 and
incorporated herein by reference
10.11<F*> Employment Agreement dated as of September 18,
1998, between Purina Mills, Inc. and David L. Abbott.
23.1 Consent of Deloitte & Touche LLP, Independent Auditors Filed as Exhibit 23.1 to the Registration
Statement on Form S-4 of Purina Mills,
Inc., Registration No. 333-53865 and
incorporated herein by reference
23.2 Consent of Cleary, Gottlieb, Steen & Hamilton Filed as Exhibit 23.2 to the Registration
(included in its opinion filed as Exhibit 5.1) Statement on Form S-4 of Purina Mills,
Inc., Registration No. 333-53865 and
incorporated herein by reference
27.1<F*> Financial Data Schedule
<FN>
<F*> Filed herewith
</TABLE>
28
<PAGE> 1
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into by Purina
Mills, Inc., a Delaware corporation ("Company") and David L. Abbott
("Executive").
1. Term. Company agrees to employ Executive in the capacity described in
----
Section 2. below, and Executive agrees to accept such employment for a term
of eighteen (18) months commencing on September 1, 1998 (the "Effective
Date"). The term of this Agreement may be extended by mutual, written
agreement of the parties.
2. Duties and Responsibilities. As of the Effective Date, Executive will
---------------------------
be employed as President and Chief Executive Officer of the Company and will
generally be responsible for the strategic development of the Company's
business (including its international business), for building the Company's
external business relationships with suppliers, customers, and industry
associates in a manner that leads to profitable new business for the Company,
oversight of its technology development group, and for such other
responsibilities and duties as the Company may reasonably assign to him from
time to time. Executive agrees and acknowledges that he will, at all times,
use his reasonable best efforts, and will faithfully and industriously
perform those duties and responsibilities designated by the Company,
provided, however, that such duties and responsibilities shall be reasonably
related to the positions to be held by Executive pursuant hereto.
3. Compensation and Benefits.
-------------------------
3.1. In exchange for the services rendered by Executive under this
Agreement, the Company will pay Executive a salary at the rate of two
hundred thousand dollars ($200,000) per year, subject to adjustment as
provided in Section 3.3 ("Base Compensation"). The salary will be
subject to all appropriate withholding and will be payable in equal,
periodic installments according to the Company's customary payroll
practices, but no less frequently than twice each month.
3.2. As an employee of the Company, Executive is eligible to
participate in the various employee group benefit plans, and other
employee benefits (including, but not limited to, paid vacation
benefits, holiday pay and sick leave) that are made available to other
employees of the Company. Executive will continue to be eligible to
participate in those plans and receive those other employee benefits to
the same extent and under the same terms and conditions as are other
similarly-situated employees of the Company.
3.3. Executive's Base Compensation and other benefits May be increased
prospectively at any time by the Company solely at its discretion on
the basis of the Company's evaluation of Executive's performance. Such
evaluations shall take place no less frequently than annually. In
addition, not later than March 31, 1999, Executive will receive a
guaranteed minimum bonus ("Bonus Compensation") for calendar year 1998
of one hundred, twenty two thousand, and eighty three dollars
29
<PAGE> 2
($122,083). In addition, not later than March 31, 2000, Executive will
receive minimum Bonus Compensation in an amount equal to the difference
between four hundred thousand dollars ($400,000) and the Base
Compensation earned by Executive during 1999. In addition, Executive
will be eligible for additional forms of incentive compensation as
determined by the Company in its sole discretion. All bonuses and
other incentive compensation are subject to appropriate withholding.
3.4. Solely for purposes of Executive's participation in the Purina
Mills, Inc. Capital Accumulation Plans (as itemized below), the parties
acknowledge that Executive will be treated as though he were
involuntarily terminated by the Company on September 1, 1998. Given
the fact that Executive will be considered to have been involuntarily
terminated on September 1, 1998, the parties acknowledge that, under
the Capital Accumulation Plans as they currently exist, the Executive's
annual Retirement Income Benefit (as defined under the Capital
Accumulation Plans) would be one hundred five thousand, five hundred
and twenty three dollars ($105,523). For purposes of this Agreement,
the Capital Accumulation Plans are:
Purina Mills, Inc. 1987 Capital Accumulation Plan For Key
Employees, (a copy of which is attached hereto as Exhibit One);
Purina Mills, Inc. 1988 Capital Accumulation Plan For Key
Employees, (a copy of which is attached hereto as Exhibit Two);
Purina Mills, Inc. 1989 Capital Accumulation Plan For Key
Employees, (a copy of which is attached hereto as Exhibit Three);
Purina Mills, Inc. 1990 Capital Accumulation Plan For Key
Employees, (a copy of which is attached hereto as Exhibit Four);
and
Purina Mills, Inc. Discretionary [1992] Capital
Accumulation Plan For Key Employees, (a copy of which is attached
hereto as Exhibit Five).
3.5. Upon execution of this Agreement, the Company will pay Executive
the sum of two hundred thirty thousand dollars ($230,000) in a single,
lump-sum payment. Thereafter, the Company will make three additional
payments to Executive of two hundred thirty thousand dollars ($230,000)
each. The first such payment will be made on or about March 1, 1999.
The second and third such payments will be made on or about September
1, 1999 and March 1, 2000, respectively. All payments hereunder are
subject to appropriate withholding. To the extent that (i) the
Internal Revenue Service or any similar state or local taxing authority
takes the position that the payments described in this Section 3.5 are
"golden parachute payments," "excess parachute payments" or any
similar, excess, parachute-like compensation, and (ii) to the extent
that such taxing authority also takes the position that the payments
described in this Section 3.5 result in Executive being responsible for
payment of any excise tax described in Internal Revenue Code Sections
4999 or 280G, or any similar federal, state or local statute, rule or
regulation, and (iii) to the extent that Executive ultimately pays such
excise tax, then the Company will pay Executive a "grossed up" sum
which, after
30
<PAGE> 3
reduction for any appropriate withholdings, will equal the amount of
such excise tax paid by Executive. Executive and the Company agree
that they will reasonably cooperate with each other and endeavor in
good faith to reduce or eliminate the amount of any such excise taxes
assessable upon either party as a result of the payments under this
Section 3.5.
4. Conflicts of Interest. During the term of this Agreement, Executive
---------------------
will devote his full time, attention, energies and business efforts to his
duties under this Agreement. He will not (without the written consent of the
Company) actively engage in any other business activity whatsoever, nor will
he contract or "self-deal" directly or indirectly with the customers,
clients, suppliers, partners, joint venturers or other business associates of
the Company or its parent corporations, subsidiaries, agents or affiliated
companies. The Company acknowledges and agrees that Executive's continuing
to serve as a member of the board of directors of Sterling Diagnostic Imaging
and his performance of his duties and responsibilities in connection
therewith shall not be considered a violation of this Section 4. or otherwise
be prohibited by the Company, provided that (i) such activities do not
materially conflict with Executive's duties and responsibilities under this
Agreement, (ii) Executive does not generally engage in such activities on
Company time, and (iii) such activities do not impede Executive's ability to
effectively perform his duties and responsibilities under this Agreement.
For the purposes of clarification of Subsection (ii) above, that Subsection
does not prohibit Executive from engaging in periodic telephone calls,
responding to occasional correspondence, or engaging in similar activities on
Company time, provided that such activities are brief and infrequent.
5. Non-Disclosure and Non-Competition.
----------------------------------
5.1. Executive recognizes and acknowledges that he has acquired, and
will continue to acquire and have access to, Proprietary Information of
the Company, its parent corporations, subsidiaries, agents or
affiliated companies, (hereafter collectively referred to as
"Affiliates"). Executive acknowledges and agrees that this Proprietary
Information constitutes valuable, special and unique property of the
Company, and he agrees that -- except in the furtherance of his
responsibilities under this Agreement -- he will not disclose any
Proprietary Information to any person, firm, corporation, association,
partnership, company, group, organization, trust or other entity for
any reason or purpose.
5.2. For purposes of this Agreement, the term "Proprietary
Information" means any information pertaining to the Company or its
Affiliates that has economic or competitive value. Proprietary
Information therefore includes, but is not limited to, all Company
trade secrets; production capabilities and processes; customer account
and credit data; referral sources; computer programs and software;
information relating to confidential or secret designs, processes,
formulae, plans, devices or materials; customer lists; information
regarding customer purchases; confidential information and trade
secrets relating to the manufacture, distribution and marketing of
products; patents pending; confidential characteristics of the
31
<PAGE> 4
products; customer comments; troubleshooting requirements; product
development; market development; manuals; management, accounting and
reporting systems, procedures and programs; sales employee compensation
information, plans and programs; marketing and financial analysis,
plans, research, programs and related information and data; forms,
agreements and legal documents; regulatory and supervisory reports;
correspondence; dealer and distribution matters; information regarding
raw materials and supplies; information regarding present and proposed
investments, joint ventures and acquisitions; financing and financial
matters; dealer financing information; financial statements; corporate
books and records; and other similar information. The term
"Proprietary Information" shall not be deemed to include information
that (i) is published in any recognized text book, trade journal, or
industry publication, (ii) is generally known throughout the industry,
or (iii) which is generally available to the industry without
restriction through no fault of Executive.
5.3. Any and all work product developed by Executive within the scope
of his employment with the Company and its Affiliates is the property
of the Company. This includes, but is not limited to, any
copyrightable or patentable product or service. Accordingly, Executive
will have no interest, proprietary or otherwise, in such work product.
Moreover, Executive will not avail himself of personal benefits to the
exclusion of the Company and its Affiliates of any duplication,
modification or extension of such a product or service. With respect
to this clause 5.3. and clauses 5.1. and 5.2. above, no territorial
boundaries or temporal limitations shall apply.
5.4. Executive further agrees that during the term of Executive's
employment and for a period of two (2) years immediately following the
expiration or termination of the Executive's employment by either party
for any reason, he will not, for himself or on behalf of any person,
firm, corporation, association, partnership, company, group,
organization, trust or other entity:
5.4.1. solicit, accept, divert, or take away from the
Company or its Affiliates the business of any suppliers,
customers or other individuals or entities with whom the Company
has a relationship;
5.4.2. directly or indirectly induce or attempt to influence
any employee of the Company or any of its Affiliates to terminate
his or her employment with the Company or any of its Affiliates;
or
5.4.3. engage in any commercial or technical activity in the
"Territory" (as defined below) involving the development,
formulation, manufacture, production, distribution, marketing or
sale of any product or service that the Company, or its
predecessors or successors (whether alone or in concert with any
other individual, corporation, company, partnership, joint
venture or other enterprise) has or will design, produce,
manufacture,
32
<PAGE> 5
distribute, market or sell during the entire term of Executive's
employment with the Company; provided however, that the foregoing
shall not prohibit Executive's ownership of up to five percent
(5%) of the outstanding shares of capital stock of any
corporation whose securities are publicly traded on a national or
regional stock exchange. The "Territory" shall consist of all of
the United States and all other countries in which the Company or
any of its Affiliates is conducting business (whether alone or in
concert with any other individual, corporation, company,
partnership, joint venture or other enterprise) at the time of
the termination of Executive's employment.
5.5. Executive understands and acknowledges that, due to the unique
nature of the products and services of the Company and its Affiliates,
the limitations as to time and geographic area contained in this
Section 5. are reasonable and are not unduly onerous to Executive.
Executive therefore agrees that the limitations as to time, geographic
area and scope of activity contained in the covenants of this Section
5. do not impose a greater restraint than is necessary to protect the
Proprietary Information, goodwill and other business interests of the
Company and its Affiliates. Executive also agrees that in light of the
facts acknowledged above and the substantial economic damages that the
Company and its Affiliates would suffer if Executive were to engage in
any of the activities described in this Section 5., the Company's need
for the protection afforded by this Section 5. is greater than any
hardship Executive might experience by complying with its terms.
6. Termination of Employment.
-------------------------
6.1. The Company or the Executive shall have the right to terminate
Executive's employment under this Agreement at any time for "due
cause," as defined below, upon giving written notice to the other party
setting out the reasons for the termination. Such termination will be
effective upon the date of delivery of the notice.
6.1.1. The Company will have the right to terminate
Executive's employment for "due cause" under any one or more of
the following circumstances:
i. If Executive commits any act of fraud or dishonesty
relating to the business, properties or assets of the
Company or its Affiliates.
ii. If Executive commits a willful act of misconduct which
adversely affects the business or affairs of the Company or
its Affiliates.
33
<PAGE> 6
iii. If Executive fails or refuses to comply with the
principles, policies or the lawful directions of the
Company, provided that Executive has previously been given
reasonable opportunity (not to exceed thirty days) to cure
his failure to comply with such principles, policies and
directions.
iv. If, by reason of illness, physical or mental
disability or incapacity, Executive fails to effectively
render the services to be provided by him under this
Agreement for a total of 120 days during the eighteen month
term of his employment hereunder.
v. If Executive commits any material breach of the
provisions of this Agreement.
6.1.2. Executive will have the right to terminate his
employment for "due cause" under any one or more of the following
circumstances:
i. If the Company assigns Executive to duties and
responsibilities that are substantially and materially
inconsistent with those outlined in Section 2. above,
without the prior written consent of Executive, which
consent may be withheld for any reason or no reason.
ii. If the Company changes Executive's title from
President and Chief Executive Officer without the prior
written consent of Executive, which consent may be withheld
for any reason or no reason.
iii. If the Company reduces Executive's Base Compensation
and/or Bonus Compensation in any manner that may result in
Executive receiving total compensation for 1998 or 1999 of
less than four hundred thousand dollars ($400,000), without
the prior written consent of Executive, which consent may
be withheld for any reason or no reason.
iv. If the Company discontinues or reduces Executive's
participation in any substantial, material employee benefit
plan in which Executive is a participant without either (a)
paying Executive a reasonable cash equivalent to the
benefit, or (b) providing Executive with a comparable,
alternative program, or (c) acquiring the prior written
consent of Executive.
v. If, without Executive's prior written consent, the
Company requires Executive to relocate his principal
residence.
vi. If the Company commits any material breach of the
provisions of this Agreement.
34
<PAGE> 7
6.1.3. To the extent that one party contends that due cause
exists for termination of Executive's employment and consequently
terminates the employment on that basis, and to the extent that a
final, non-appealable ruling is ultimately made by a judicial or
quasi-judicial body that due cause to terminate the employment
did not exist, then the party that terminated the employment
---
shall be deemed to have terminated the employment without due
cause.
6.2. This Agreement shall terminate automatically upon the death of
Executive.
6.3. The Company will have the right to terminate the employment of
Executive at any time without due cause by delivering to Executive
written notice of such termination.
7. Effect of Termination.
---------------------
7.1. Neither party has any obligation to renew or extend the original
eighteen month term of Executive's employment under this Agreement, and
the decision by either party to allow the term to lapse will not
constitute either a termination with or without "due cause." The
expiration or termination of Executive's employment by either party for
any reason will not impair, diminish, extinguish or affect, in any way,
the rights or obligations of Executive to render full performance of
the Covenants and Agreements set forth in Section 5. of this Agreement.
7.2. Upon expiration or termination of Executive's employment by
either party for any reason, Executive will retain all rights regarding
his employee benefits as are afforded all other, similarly-situated
participants in such plans.
7.3. Upon termination of Executive's employment by either party for
any reason, Executive's right to receive any remaining Base
Compensation (described in Section 3.1.) and any remaining Bonus
Compensation (described in Section 3.3.) will cease; provided however
that Executive will be entitled to receive any unpaid Base Compensation
earned through the date of such termination, and -- if Executive dies
or the Company terminates Executive without due cause or Executive
terminates his employment with due cause -- a pro rata share of Bonus
Compensation earned as of the date of termination. If Executive dies
or the Company terminates Executive without due cause or Executive
terminates his employment with due cause at any time during calendar
year 1998, then the pro rata share of Bonus Compensation shall be
determined by multiplying (a) $122,083 by (b) a fraction, the numerator
of which shall be the number of semi-monthly pay periods that Executive
was employed by the Company during 1998 and the denominator of which
shall be twenty-four (24). If Executive dies or the Company terminates
Executive without due cause or Executive terminates his employment with
due cause at any time during calendar year 1999 (or at any time during
2000
35
<PAGE> 8
prior to the time at which the Company pays bonus compensation for
1999), then the pro rata share of Bonus Compensation shall be
determined by multiplying (a) $200,000 by (b) a fraction, the numerator
of which shall be the number of semi-monthly pay periods that Executive
was employed by the Company during 1999 and the denominator of which
shall be twenty four (24).
7.4.1. To the extent that Executive's employment is
terminated by the Company without due cause or by Executive with
------- ----
due cause, then the Company will be obligated, at the option of
Executive, to either (i) complete the schedule of payments set
out in Section 3.5. above, or (ii) to make a single, lump sum
payment to Executive in an amount equal to the sum of the
payments set out in Section 3.5. above which have not yet been
paid to Executive. In addition, in such a case, the Company will
pay Executive a one-time, lump sum payment of nine thousand
dollars ($9,000) for transition assistance, which payment will be
subject to all appropriate withholdings.
7.4.2. To the extent that Executive's employment is
terminated by the Company with due cause or by the Executive
----
without due cause, then the obligation of the Company to make any
-------
remaining payments under Section 3.5. shall cease; provided,
however, if Executive's employment hereunder is terminated by the
Company pursuant to Section 6.1.1.iv. above, then the obligation
of the Company to make any remaining payments under Section 3.5.
shall continue.
7.5. To the extent that Company terminates Executive's employment
without due cause, Company shall provide reasonable outplacement
assistance to Executive as he seeks other employment. Such
outplacement assistance shall include providing Executive with
temporary office space, telephone services, preparation of resumes and
mailing services.
7.6. In the event of Executive's death, the obligation of the Company
to make any remaining payments under Section 3.5. shall continue. In
addition, the Company will also be obligated to pay any unpaid Base
Compensation earned by Executive through the date of his death. Such
Base Compensation, pro rata Bonus Compensation, together with all other
payments due Executive hereunder (if any) shall be made to Executive's
designated beneficiary.
8. Notices. Any notice, request, reply, instruction or other
-------
communication provided or permitted in this Agreement must be given in
writing and may be served by telex; or by depositing same in the mail,
country of origination, in certified or registered form, postage prepaid,
addressed to the party or parties to be notified with return receipt
requested; or by delivering the notice in person to such party or parties.
Notice given by telex shall be effective when sent and the appropriate
answerback is received. Notice given by mail shall
36
<PAGE> 9
be effective seventy-two (72) hours after its deposit in the mails as
provided herein. For purposes of notice, the address of Executive or any
administrator, executor or legal representative of Executive or his estate,
as the case may be, shall be as follows:
David L. Abbott
#2 Wheaton Point Court
Chesterfield, MO 63005
and the Company will send a copy to:
The Lowenbaum Partnership, L.L.C.
222 South Central, Suite 901
St. Louis, MO 63105
ATTN: R. Michael Lowenbaum
Telephone: 314-863-0092
Facsimile: 314-746-4848
The address of the Company shall be:
Purina Mills, Inc.
1401 S. Hanley Road
St. Louis, MO 63144
ATTN: Chief Financial Officer
Telephone: 314-768-4100
Facsimile: 314-768-4188
and Executive will send a copy to:
Koch Agriculture Company
4111 E. 37th St. N.
Wichita, KS 67220
ATTN: President
Telephone: 316-828-3017
Facsimile: 316-828-3892
The parties shall have the right, from time to time, to change their
respective addresses by written notice given ten (10) days prior to the
effective date of the change.
9. Controlling Law. The execution, validity, interpretation and
---------------
performance of this Agreement shall be determined and governed exclusively by
the laws of the State of Kansas, without reference to the principles of
conflict of laws.
37
<PAGE> 10
10. Entire Agreement. This Agreement is the entire agreement of the
----------------
parties respecting the subject matter hereof and supersedes any prior,
inconsistent, written or verbal agreements. MOREOVER, THE COMPANY AND
EXECUTIVE DO HEREBY ACKNOWLEDGE THAT THE EMPLOYMENT AGREEMENT BETWEEN THEM
DATED NOVEMBER 18, 1997 AND THE AMENDMENT TO THAT AGREEMENT DATED MARCH 11,
1998 ARE NULL AND VOID. FURTHERMORE, THE COMPANY AND EXECUTIVE WAIVE ANY AND
ALL RIGHTS TO BENEFITS, CLAIMS OR ACTIONS THAT THEY MAY HAVE AGAINST EACH
OTHER UNDER THOSE DOCUMENTS AND/OR THE PURINA MILLS, PM HOLDINGS CORPORATION
SEVERANCE PROGRAM FOR KEY EMPLOYEES. Finally, this Agreement may not be
modified or altered orally but only by an agreement in writing signed by the
party against whom enforcement of any waiver, change, modification, extension
or discharge is sought.
11. Remedies, Modification and Separability. The parties agree that
---------------------------------------
Executive's breach of Sections 4. and 5. of this Agreement will result in
irreparable harm to the Company and that no adequate remedy at law is
available. Executive agrees that upon a breach or violation of any of the
provisions of Sections 4. or 5., the Company shall be entitled to injunctive
relief in any court of competent jurisdiction. Nothing herein, however,
shall be construed as prohibiting the Company from pursuing any other
remedies at law or in equity available to the Company for the breach or
violation or threatened breach or violation. Should a court of competent
jurisdiction declare any of the covenants set forth in Section 4. or 5. to be
unenforceable due to an unreasonable restriction of duration or geographical
area, each of the parties hereto agrees that the court shall be empowered to
modify or reform such covenants so as to provide relief reasonably necessary
to protect the interests of the parties and to award injunctive relief, or
damages, or both to which the Company may be entitled. If any covenant,
condition or other provision of this Agreement is declared by a court to be
invalid and not binding on the parties, each of the parties agrees that such
declaration shall in no way affect the validity of the other and remaining
covenants, conditions and provisions of this Agreement. It is also the
intention of the parties that if any provision of this Agreement is capable
of two constructions, one of which would render the provision void and the
other of which would render the provision valid, then the provision shall
have the construction which renders it valid.
12. Assignments. The Company may assign its rights, duties and obligations
-----------
under this Agreement with the approval or consent of the Executive, which
consent will not be unreasonably withheld as long as it does not materially
change the nature of this Agreement, the obligations or benefits thereunder.
The rights, duties and obligations of the Executive under this Agreement are
personal and, therefore, shall not be assigned or transferred by the
Executive to another.
13. Effect of Agreement. This Agreement shall be binding upon the
-------------------
Executive and his heirs, executors, administrators, legal representatives,
successors and assigns and this Agreement shall be binding upon the Company
and its successors and assigns.
38
<PAGE> 11
14. Waiver of Breach. The waiver by either party of a breach of any
----------------
provision of this Agreement by the other shall not operate or be construed as
a waiver by such party of any subsequent breach by the breaching party.
The parties acknowledge that they have read this Agreement, consulted
with their respective attorneys and understand and agree to all of the
provisions of this Agreement.
David L. Abbott Purina Mills, Inc.
/s/ David L. Abbott By: Scott E. Deeter
- ---------------------- ---------------------
Name: /s/ Scott E. Deeter
-------------------
Title: Director
------------------
September 17, 1998 September 18, 1998
- ------------------ ------------------
Date Date
#50973v.3
39
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 28,539
<SECURITIES> 0
<RECEIVABLES> 40,502
<ALLOWANCES> 6,326
<INVENTORY> 69,687
<CURRENT-ASSETS> 161,060
<PP&E> 264,096
<DEPRECIATION> 16,475
<TOTAL-ASSETS> 809,174
<CURRENT-LIABILITIES> 135,152
<BONDS> 540,693
<COMMON> 0
0
0
<OTHER-SE> 109,290
<TOTAL-LIABILITY-AND-EQUITY> 809,174
<SALES> 736,021
<TOTAL-REVENUES> 736,021
<CGS> 585,292
<TOTAL-COSTS> 585,292
<OTHER-EXPENSES> 145,163
<LOSS-PROVISION> 460
<INTEREST-EXPENSE> 32,601
<INCOME-PRETAX> (27,635)
<INCOME-TAX> (9,081)
<INCOME-CONTINUING> (18,554)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,554)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
