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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
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
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Page 1 of 31 pages
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PURINA MILLS, INC.
Table of Contents
Form 10-Q for the Quarterly Period
Ended June 30, 1999
Page
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PART I FINANCIAL INFORMATION
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Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at June 30, 1999
and December 31,1998 3
Consolidated Statements of Operations for
the three months ended June 30, 1999 and
1998, the six months ended June 30, 1999,
the three month and nineteen day period ended
June 30, 1998 and the seventy-one day period
ended March 12, 1998. 4
Consolidated Statements of Cash Flows for
the six months ended June 30, 1999, the
three month and nineteen day period ended
June 30, 1998 and the seventy-one day period
ended March 12, 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosure about
Market Risk 24
PART II OTHER INFORMATION
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Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURE 28
2
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<TABLE>
PURINA MILLS, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JUNE 30, 1999 AND DECEMBER 31, 1998
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<CAPTION>
DECEMBER 31, 1998
(DERIVED FROM
AUDITED FINANCIAL
JUNE 30, 1999 STATEMENTS)
------------- -----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 11,634 $ 41,446
Accounts receivable, net 25,215 44,105
Inventories 59,355 61,862
Prepaid expenses and other current assets 1,722 3,785
Deferred income taxes 17,209 16,428
----------------------------------
TOTAL CURRENT ASSETS 115,135 167,626
Property, plant and equipment, net 241,721 262,791
Intangible assets, net 323,359 333,633
Other assets 71,246 51,658
----------------------------------
TOTAL ASSETS $751,461 $815,708
==================================
LIABILITIES & STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable--other $ 25,824 $ 50,559
Accounts payable--affiliate 26,293 42,321
Customer advance payments 3,602 16,870
Current portion of long-term debt 9,050 7,550
Other current liabilities 33,338 34,742
----------------------------------
TOTAL CURRENT LIABILITIES 98,107 152,042
Retirement obligations 26,442 26,061
Accrued post-retirement benefit costs 504 458
Other liabilities 6,684 12,461
Long-term debt 588,588 558,547
STOCKHOLDER'S EQUITY:
Common stock, $0.01 par value: 1,000 shares
authorized, issued and outstanding -- --
Additional paid-in capital 109,290 109,290
Retained deficit (78,154) (43,151)
----------------------------------
TOTAL STOCKHOLDER'S EQUITY 31,136 66,139
----------------------------------
TOTAL LIABILITIES & STOCKHOLDER'S EQUITY $751,461 $815,708
==================================
(SEE ACCOMPANYING NOTES)
</TABLE>
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<TABLE>
PURINA MILLS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<CAPTION>
POST-MERGER POST-MERGER PRE-MERGER
---------------------------------- --------------------------------- ----------------
THREE MONTHS THREE MONTHS SIX MONTHS PERIOD PERIOD
ENDED ENDED ENDED MARCH 13 JANUARY 1
JUNE 30, JUNE 30, JUNE 30, TO JUNE 30, TO MARCH 12,
1999 1998 1999 1998 1998
------------ ------------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
NET SALES $208,187 $235,265 $437,442 $288,071 $214,272
COSTS AND EXPENSES:
Cost of products sold 165,576 186,891 352,879 228,281 171,233
Marketing, distribution and
advertising 22,808 21,762 46,223 26,571 17,543
General and administrative 18,967 16,120 33,504 18,335 27,573
Amortization of intangibles 3,787 5,156 7,586 6,115 3,838
Research and development 1,472 1,628 3,003 1,928 1,376
Provision for plant closings 19,665 -- 19,665 -- --
Other (income) expense, net 31 (147) (530) (58) 109
---------------------------------- --------------------------------- ----------------
232,306 231,410 462,330 281,172 221,672
OPERATING INCOME (LOSS) (24,119) 3,855 (24,888) 6,899 (7,400)
Interest expense 13,100 12,622 26,169 15,458 6,144
---------------------------------- --------------------------------- ----------------
Loss before income taxes (37,219) (8,767) (51,057) (8,559) (13,544)
Benefit for income taxes (11,837) (2,643) (16,054) (2,559) (5,050)
---------------------------------- --------------------------------- ----------------
NET LOSS $(25,382) $ (6,124) $(35,003) $ (6,000) $ (8,494)
================================== ================================= ================
(SEE ACCOMPANYING NOTES)
</TABLE>
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<TABLE>
PURINA MILLS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<CAPTION>
POST-MERGER PRE-MERGER
----------------------------------- ------------------
SIX MONTHS PERIOD PERIOD
ENDED MARCH 13 TO JANUARY 1 TO
JUNE 30, 1999 JUNE 30, 1998 MARCH 12, 1998
------------- ------------- --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(35,003) $ (6,000) $ (8,494)
Adjustment to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 23,238 15,519 9,908
Provision for loss on asset disposition 73 163 169
Provision for plant closings 19,665 -- --
Provision for deferred taxes (16,054) (2,005) (108)
Other (41,220) 19,296 (38,826)
------------------------------------------------------
Net cash provided by (used in) operating activities $(49,301) $ 26,973 $ (37,351)
INVESTING ACTIVITIES:
Purchase of property, plant and equipment (10,127) (7,923) (4,486)
Other (1,925) (941) 156
------------------------------------------------------
Net cash used in investing activities $(12,052) $ (8,864) $ (4,330)
FINANCING ACTIVITIES:
Proceeds from Senior Subordinated Notes -- -- 350,000
Proceeds from Term Loans -- -- 200,000
Proceeds of Revolving Credit Facility, net 35,000 5,214 --
Repayment of Term Loans, Senior Sub. Notes & IRBs (3,400) (295,486) --
Payment of dividends to PM Holdings Corporation -- -- (237,172)
Payment of financing costs -- (111) (11,894)
Other (59) (84) (2,300)
------------------------------------------------------
Net cash provided by (used in) financing activities $ 31,541 $(290,467) $ 298,634
Increase (decrease) in cash and cash equivalents (29,812) (272,358) 256,953
Cash and cash equivalents at beginning of period 41,446 284,573 27,620
------------------------------------------------------
Cash and cash equivalents at end of period $ 11,634 $ 12,215 $ 284,573
======================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 26,165 $ 6,319 $ 11,267
Income taxes 450 290 43
(SEE ACCOMPANYING NOTES)
</TABLE>
5
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PURINA MILLS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
1. BASIS OF PRESENTATION
Pursuant to the January 9, 1998 Agreement and Plan of Merger (the
"Merger Agreement") among PM Holdings Corporation ("Holdings"), Koch
Agriculture Company ("Koch Agriculture") and Arch Acquisition
Corporation, a wholly owned subsidiary of Koch Agriculture, Arch
Acquisition Corporation was merged with and into Holdings (the
"Merger"), 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.
The sources and use of funds required to consummate the Merger and
related financings are summarized below. See Note 5 for a description
of long-term indebtedness.
Sources of funds (in millions):
<TABLE>
<S> <C>
New Credit Facilities
Term Loans $200.0
Revolving Credit Facility 9.9
Notes 350.0
Equity Contribution to Holdings 109.7
----------
Total $669.6
==========
</TABLE>
Use of funds (in millions):
<TABLE>
<S> <C>
Purchase price for equity of Holdings $258.7
Repayment of existing indebtedness 385.5
Fees and expenses 25.4
----------
Total $669.6
==========
</TABLE>
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
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and liabilities assumed, based on their estimated fair values as of
March 12, 1998. The consolidated financial statements for periods prior
to March 12, 1998 have been prepared on the predecessor cost basis of
the Company. 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 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 268.0
Intangible assets 343.1
Other noncurrent assets 47.6
Liabilities assumed (680.2)
-----------
Total $ 109.3
===========
</TABLE>
The consolidated balance sheet at June 30, 1999 and the consolidated
statements of operations and cash flows for the periods ended June 30,
1999 and 1998 are unaudited and reflect all adjustments, consisting of
normal recurring items, which management considers necessary for a fair
presentation. Operating results for fiscal 1999 interim periods are not
necessarily indicative of results to be expected for the year ending
December 31, 1999. The consolidated balance sheet at December 31, 1998
was derived from the Company's December 31, 1998 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, 1998 contained in the Financial Statements in the Company's Annual
Report on Form 10-K.
In connection with the Merger, the Company entered into an exclusive
commodity purchasing agreement with Koch Agriculture, whereby its
Nutrient Services division supplies 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. The
Company and Koch Agriculture have amended the purchasing agreement to
extend the time to renegotiate the annual discount until September 1,
1999.
7
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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.
Revenue Recognition
Net sales are generally recognized when products are shipped. Accruals
for customer discounts are recorded when revenues are recognized.
Income Taxes
Deferred income taxes are recognized for the effect of temporary
differences between the financial reporting basis and the tax basis of
the assets and liabilities plus operating loss carryforwards at enacted
tax rates expected to be in effect when such amounts are realized or
settled.
The Company and Holdings are part of tax sharing agreements with Koch
Industries, Inc. ("Koch Industries") 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 all
periods after March 12, 1998 are 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. The results of operations
of the Company for the period January 1 to March 12, 1998 were 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 adopted Statement of Position
No. 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use ("SOP 98-1") in 1998. Since the Company's
existing policies were materially in accordance with the provisions of
SOP 98-1, adoption of the provisions of SOP 98-1 were immaterial. All
other related costs of implementing the Company's new computer systems
are expensed as incurred. Total capitalized software costs were $15.6
million and $13.4 million as of June 30, 1999 and December 31, 1998,
respectively. The Company is amortizing the costs associated with the
project using the straight-line method over five years, the expected
life of the system.
8
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Reclassifications
Certain reclassifications have been made to prior period consolidated
financial statements to conform to the consolidated financial statement
presentation at June 30, 1999 and the periods then ended.
3. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
------------- -----------------
<S> <C> <C>
Raw materials $32,894 $34,619
Finished goods 11,957 12,391
Animals 14,504 14,852
------------------------------------
Total inventories $59,355 $61,862
====================================
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
------------- -----------------
<S> <C> <C>
Land $ 12,907 $ 13,312
Buildings 83,700 77,192
Machinery and equipment 171,156 188,512
Construction in progress 12,574 7,547
------------------------------------
280,337 286,563
Accumulated depreciation (38,616) (23,772)
------------------------------------
Total $241,721 $262,791
====================================
</TABLE>
During the quarter ended June 30, 1999, the Company made the decision to
discontinue manufacturing operations at five of its facilities.
Products for distribution to customers of the closed facilities are
being manufactured at the Company's other facilities. In connection
with these plant closures, the Company recorded a loss of $13.1 million
on manufacturing assets, representing the amount by which the book value
exceeds estimated fair value. Estimated demolition costs of $1.2
million, severance costs of $0.4 million and a write-off of $5.0 million
for related goodwill were also recorded.
The Company will continue to review the performance of its facilities to
attempt to optimize overall capacity and maximize profits. This review
may result in the decision to discontinue operations at additional
facilities which could result in an additional loss provision being
recorded.
9
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5 LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
------------- -----------------
<S> <C> <C>
Term Loan $192,625 $196,025
Senior Subordinated Notes due 2010 350,000 350,000
Revolving Credit Facility 55,000 20,000
Other 13 72
------------------------------------
597,638 566,097
Less current portion (9,050) (7,550)
------------------------------------
Total $588,588 $558,547
====================================
</TABLE>
The annual amortization schedule of the Term Loan (defined below) is
$4.2 million for the remainder of 1999, $10.6 million in 2000, $13.6
million in 2001, $16.6 million in 2002, $19.6 million in 2003 and $128.0
million thereafter. The 9% Senior Subordinated Notes due 2010 (the
"Notes") are due in their entirety in 2010.
Tender Offer: In connection with the Merger, the Company offered to
purchase for cash the outstanding Purina Mills, Inc. Senior Subordinated
Notes due 2003 (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 and all of the Senior Subordinated Notes
due 2003 were redeemed during 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 sublimit for letters of credit. The Term Loan consists of
a $100.0 million Tranche A Term Loan with a maturity date of March 12,
2005 and a $100.0 million Tranche B Term Loan with a maturity date of
March 12, 2007. The Revolving Credit Facility has a maturity date of
March 12, 2005.
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
were also used to redeem the Company's outstanding Industrial Revenue
Bonds and are available to finance the Company's ongoing working capital
requirements. At June 30, 1999, a balance of
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$55.0 million was outstanding under the Revolving Credit Facility. 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. At June 30, 1999, the
Company had $8.1 million in outstanding letters of credit under the
Revolving Credit Facility. Accordingly, at June 30, 1999, $36.9 million
was available for future borrowings. The Company is charged an annual
fee of 0.5% for amounts available but unused under the Revolving Credit
Facility. In addition, the Company is charged a fee of 2.0% 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 8.1% at June 30, 1999.
On February 26, 1999 the Company entered into a fixed rate swap contract
effective March 31, 1999, on $114.7 million of amortizing debt under the
Credit Agreement. The swap contract provides that the Company will pay
interest on the notional amount based on a fixed rate of 5.6% and will
receive the three month Eurodollar rate. The Company also has an option
contract on $75.0 million of debt under the Credit Agreement. The
option contract provides that the Company will pay interest on the
notional amount if the three month Eurodollar rate falls below 5.2% and
will receive interest if the three month Eurodollar rate is above 7.0%.
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 are not 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
related to dividends precludes the Company from paying annual dividends
in excess of 25% of Excess Cash Flow, as defined in the Credit
Agreement, for the prior fiscal year. As of June 30, 1999, restricted
net assets of the Company were approximately $31.1 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. The Company was in
compliance with its debt covenants at June 30, 1999.
11
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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.
6. LOAN GUARANTEES AND CONCENTRATION OF CREDIT RISK
Loan Guarantees: The Company has agreed to provide a guarantee of up to
$11.5 million related to an entity formed in 1995 to provide funding for
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
June 30, 1999, the Company had funded $6.7 million on the guarantee. At
December 31, 1998, the amount funded on the guarantee was $2.0 million.
The Company recorded a loss reserve for the entire guarantee amount in
1998. Additionally, in August 1999 the Company issued a letter of
credit for $3.3 million to secure an additional portion of the
guarantee. 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 establishment and initial operation.
The Company recorded a loss reserve for the $2.0 million loan in 1998.
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 $5.6 million and $8.7 million at June 30, 1999 and
December 31, 1998, respectively, under these types of arrangements. A
loss reserve of $1.2 million, recorded in 1998, has been established for
the above guarantees. The maturity dates of these guarantees extend
through January 2009 with the majority of the guarantees maturing 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 sales are to
companies or individuals in agriculture-related businesses, with
approximately 15% of its 1999 sales volume being feed for hogs. Hog
producers continue to experience severely depressed market prices and
the Company has outstanding trade receivables, loans and loan guarantees
relating to customers in the hog industry.
Swine Purchase Commitments and Swine Operations: To capitalize on the
consolidation of the hog industry, the Company implemented a strategy in
1997 that was expected to result in control over the feeding of
approximately six million market hogs over four years. The program
provides a source of high quality weanlings and feeder pigs ("feeders")
to independent hog producers and gains the related feed business for the
Company. Under this program, at June 30, 1999, the Company has future
net purchase commitments, subject to the counterparties'
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ability to perform, to acquire over 6.4 million feeders over the next
eight years. Approximately 18% of these commitments are at fixed prices
whereas the other 82% vary based on current or published futures prices.
The net purchase commitment of 6.4 million feeders represents gross
commitments during such period for the Company to purchase approximately
9.8 million feeders less 3.4 million feeders which are under contract to
be sold to third parties.
Additionally, the Company has direct ownership of several hog operations
which are expected to produce an additional 2.0 million feeders over the
next ten years. As hog producers are experiencing severely depressed
market prices for their end products, the Company has significant
exposure relating to its feeder pig program, direct hog ownership and
joint venture interests in hog operations. At June 30, 1999 and
December 31, 1998, the Company had $13.1 million and $10.3 million,
respectively, in hog inventory.
Based on published market prices at June 30, 1999, the Company's net
commitment to purchase the 6.4 million feeders totals approximately
$236.0 million. This is a decrease of $14.0 million from such amount at
December 31, 1998 due to feeder purchases during the past six months,
additional contracts for the sale of feeders in the future and the
decrease in hog market prices which decreased the Company's obligation
on non-fixed price contracts. Upon receipt of the feeders the Company
can either sell them at current market prices, feed the pigs at Company-
owned or leased facilities, or contract with independent producers to
feed the pigs. Based on 1999 contractual commitments, estimated feed
costs, counterparty risks and current spot and futures prices, the
Company estimates that its 1999 loss associated with its swine exposure
will range between $15.0 million and $20.0 million. The Company
recorded a loss of $2.9 million in the second quarter of 1999 and has a
year to date loss of $8.9 million. Depending on the future market price
for both feeders and market hogs, any or all of the options available to
the Company could have significant adverse impact on earnings, cash
flows and liquidity.
6. ACQUISITION COSTS
Included in general and administrative expenses in 1998 are $15.9
million in non-recurring expenses related to the Merger. These costs
relate to compensation paid to management of the Company and $13.5
million in Merger consideration paid to holders of options and stock
rights units.
7. TRANSACTIONS WITH AFFILIATES
In the ordinary course of business, the Company contracts with Koch
Industries for various administrative and support services. For the six
months ended June 30, 1999 the total fees incurred in connection with
such services amounted to $1.3 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 six months ended June 30,
1999, the Company purchased $272.7 million in commodities from Koch
Agriculture's Nutrient Services division.
At June 30, 1999, accounts payable - affiliate consists of noninterest-
bearing current accounts payable to Koch Industries for administrative
and support services, 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 $2.5 million. The total amount due for purchases of
commodities amounted to $23.8 million.
13
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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 31,1998 the product mix by
volume was approximately 24% for dairy, 28% for beef cattle, 20% for
hogs, 10% for horses, 8% for poultry and 10% for all others.
The feed industry generally prices products on the basis of aggregate
ingredient cost plus a dollar amount margin, rather than a gross profit
percentage. As ingredient prices fluctuate, the changes are generally
passed on to customers through weekly changes in the Company's price
lists. Feed tonnage and total margin, which is net sales minus cost of
ingredients and direct manufacturing costs, and gross profit (margin
less indirect 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. Historically, when the
price of grains has been relatively high, more of the Company's
customers have tended to purchase complete rations and the Company's
sales volume has been higher; alternatively, when the price of grains
has been relatively low, more of the Company's customers have tended to
use their own grains and mix them with the Company's higher-margin
concentrates, resulting in lower sales volume but relatively higher
overall unit margins.
In prior years the Company has also used total income over ingredient
cost ("IOIC"), which is net sales minus cost of ingredients as a key
indicator of performance. However, due to variances in direct
manufacturing costs for its extensive line of products, the Company has
determined that margin rather than IOIC is the key indicator of
performance.
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.
Competition in the industry has caused the Company and some of its
competitors to develop market and production risk arrangements for their
customers to promote sales. The Company has
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entered into several production and marketing joint venture arrangements
with its animal production customers, especially in the swine sector, in
order to facilitate additional feed sales.
Additionally, to capitalize on the consolidation of the hog industry,
the Company implemented a strategy in 1997 that was expected to result
in control over the feeding of approximately six million market hogs
over four years. The program provides a source of high quality
weanlings and feeder pigs ("feeders") to independent hog producers and
gains the related feed business for the Company. Under this program, at
June 30, 1999, the Company has future net purchase commitments, subject
to the counterparties' ability to perform, to acquire over 6.4 million
feeders over the next nine years through 2007. Approximately 18% of
these commitments are at fixed prices whereas the other 82% vary based
on current or published futures prices. The net purchase commitment of
6.4 million feeders represents gross commitments during such period for
approximately 9.8 million feeders less 3.4 million feeders which have
contractually been sold. These contractual sales are subject to the
credit worthiness of the third parties which may have deteriorated due
to the prolonged decline in the hog market.
Additionally, the Company has direct ownership of several hog operations
which are expected to produce an additional 2.0 million feeders over the
next ten years. As hog producers are experiencing severely depressed
market prices for their end products, the Company has significant
exposure relating to its feeder pig program, direct hog ownership and
joint venture interests in hog operations. At June 30, 1999 and
December 31, 1998, the Company had $13.1 million and $10.3 million,
respectively, in hog inventory.
Based on published market prices at June 30, 1999, the Company's net
commitment to purchase the 6.4 million feeders totals approximately
$236.0 million. This is a decrease of $14.0 million from such amount at
December 31, 1998 due to feeder purchases during the past six months,
additional contracts for the sale of feeders in the future and the
decrease in hog market prices which decreased the Company's obligation
on non-fixed price contracts. Upon receipt of the feeders the Company
can either sell them at current market prices, feed the pigs at Company-
owned or leased facilities, or contract with independent producers to
feed the pigs. Based on 1999 contractual commitments, estimated feed
costs, counterparty risks and current spot and futures prices, the
Company estimates that its 1999 loss associated with its swine exposure
will range between $15.0 million and $20.0 million. The Company
recorded a loss of $2.9 million in the second quarter of 1999 and has a
year to date loss of $8.9 million. Depending on the future market price
for both feeders and market hogs, any or all of the options available to
the Company could have significant adverse impact on earnings, cash
flows and liquidity.
The Company has focused on managing and mitigating the impact of the
significant decline in hog prices on the Company's performance. The
Company obtained covenant relief in December 1998 from its bank group
for the next two years so that it can work to resolve its swine
exposure. With the price of hogs having increased moderately from
December 1998, which was the lowest price in nearly forty years, and
through the efforts of management, the Company expects to mitigate some
of its swine exposure in an effort to reduce the negative implications
on future earnings, cashflow and liquidity. The Company has locked in a
margin on market hogs to be marketed during the remainder of 1999. This
was accomplished during April of 1999 by entering
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into futures contracts for market hogs and the major feed ingredients to
grow the hogs. This action will result in limiting the risk of any
market decline for the remainder of the year on these hogs, but will
also limit the potential for gain if market prices significantly
increase. The Company has not locked in any margin for hogs to be
marketed after 1999 and, as such, the Company is subject to the risk of
further fluctuations in the price of market hogs. At current prices for
hogs, the Company's swine exposure could have a material adverse impact
on results of operations and liquidity.
During the quarter ended June 30, 1999, the Company made the decision to
discontinue manufacturing operations at five of its facilities.
Products for distribution to customers of the closed facilities are
being manufactured at the Company's other facilities. In connection
with these plant closures, the Company recorded a loss of $13.1 million
on manufacturing assets, representing the amount by which the book value
exceeds the estimated fair value. Estimated demolition costs of $1.2
million, severance costs of $0.4 million and a write-off of $5.0 million
for related goodwill were also recorded.
The Company will continue to review the performance of its facilities to
attempt to optimize overall capacity and maximize profits. This review
may result in the decision to discontinue operations at additional
facilities which would result in an additional loss provision being
recorded.
The Company's overall financial performance during the first six months
of 1999 has been severely impacted by the overall depressed conditions
in the agriculture industry. This is particularly evident in the swine
industry where prices for market hogs remain depressed. These depressed
conditions have resulted in a decrease of 29.5% in volume of swine feed
sales for the six months ended June 30, 1999. As the Company
anticipates these conditions to continue through 1999, it has retained
external advisors (financial, operational and legal) to assist in
evaluating potential opportunities to improve its overall financial
performance and identify and implement strategic opportunities in its
swine and other businesses. In connection with this evaluation, the
Company incurred restructuring charges of $0.5 million during the
quarter ended June 30, 1999. The Company believes that the evaluation
will result in additional restructuring charges in the third quarter of
1999. Also, depending on the overall condition of the agricultural
market, the charge could include a loss provision for additional plant
closures. The evaluation is planned to be completed by the end of the
third quarter of 1999.
The consolidated financial statements for the period prior to March 13,
1998 have been prepared on the predecessor basis of the Company.
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 following discussion is based on comparison of
the three months ended June 30, 1999 to the three months ended June 30,
1998 and the six months ended June 30, 1999 to the sum of the three
month and nineteen day period ended June 30, 1998 plus the seventy-one
day period ended March 12, 1998.
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Three Months Ended June 30, 1999 Compared to Three Months Ended June 30,
1998
Due to overall lower commodity prices and a decrease in tons sold, net
sales decreased 11.5% from the 1998 period. Gross profit was $42.6
million for the three months ended June 30, 1999 compared to $48.4
million for the three months ended June 30, 1998. Overall volume was
1.0 million tons during the second quarter of 1999, a 6.1% decrease from
the 1998 period. Average margin per ton was $40.71, a 7.1% decrease
from the three month period ended June 30, 1998.
Both beef cattle and dairy cattle tons remained fairly consistent with
the 1998 period as the 1.7% increase in dairy cattle tons was partially
offset by a 0.6% decrease in beef cattle volume. Hog volume decreased
33.8% from the prior year due to the prevailing depressed market
conditions and the resulting loss of one large customer in early 1999.
Horse volume increased 10.6% over the 1998 period. The Company's horse
volume has set all-time records during each month of the quarter with
the continued success in growing this business attributable to continued
aggressive marketing and promotion of product and the recognition by
customers of the quality of the Company's products. Laying chicken and
meatbird volume decreased 6.6% from 1998 which can be attributed to the
loss of sales of turkey and broiler feed to two large customers during
the second quarter of 1998. Specialty and other volume was fairly
consistent with the 1998 period increasing approximately 2.7%.
Cost of products sold decreased $21.3 million, or 11.4% from the
comparable 1998 period, due primarily to $22.2 million decrease in
ingredient costs. This decrease was partially offset by second quarter
1999 net losses of $3.1 million from the Company's hog program due to
the depressed hog market. Manufacturing expenses increased $2.2 million
over the 1998 period due primarily to increased depreciation expense and
increased labor costs associated with operational quality initiatives
and integration costs incurred at the manufacturing facilities in
connection with the Company's enhancement of its information system.
Marketing, distribution and advertising costs increased $1.0 million due
primarily to costs associated with the continued rollout of the
America's Country Stores ("ACS Stores"). As of June 30, 1999, 33 ACS
Stores are operational with another 25 under construction and expected
to become operational during the remainder of 1999. Two ACS Stores are
company-owned with the others being owned and operated by independent
dealers.
General and administrative expenses increased $2.8 million from the 1998
period due to restructuring costs of $0.5 million and bad debt expense
of $3.8 million that were recorded in the second quarter of 1999. The
bad debt expense relates primarily to outstanding receivables from
customers in the hog business and one large poultry customer. These
increases were partially offset by a reduction in other costs due to an
emphasis on cost control.
Intangible amortization expense decreased due to the revaluation of
intangible assets in allocating the original purchase price in March
1998. Research and development costs remained consistent with the 1998
period. Other income, net for the
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<PAGE>
three months ended June 30, 1999 relates to service fees for swine and
dairy management, finance income, the (income) loss on the Company's
equity investments and losses on marketing arrangements. Other income,
net for the three months ended June 30, 1999 includes the $0.5 million
loss on the Company's equity investments and losses on marketing
arrangements offset by service fee and finance income.
Interest expense for the three months ended June 30, 1999 increased
slightly over the 1998 period due to an increase in outstanding
indebtedness. The Company's effective income tax rate differed from the
statutory rate in both 1998 and 1999 due to amortization of goodwill not
being allowed as a tax deduction. 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.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30,
1998
Due to overall lower commodity prices and a decrease in tons sold, net
sales decreased 12.9% from the 1998 period. Gross profit was $84.6
million for the six months ended June 30, 1999 compared to $102.8
million for the six months ended June 30, 1998. Overall volume for the
six months ended June 30, 1999 was 2.1 million tons compared to 2.3
million tons for the comparable 1998 period, a decrease of 5.2%.
Average margin per ton was $39.36, a 10.2% decrease from the six month
period ended June 30, 1998.
Both beef cattle and dairy cattle tons remained consistent with the 1998
period. Hog volume decreased 29.5% from the prior year due to the
prevailing depressed market conditions and the resulting loss of one
large customer in early 1999. Horse volume increased 11.0% over the
1998 period. The Company has had continued success in growing this
business by aggressive marketing and promotion of product which has
resulted in record volume sales in 1999. Laying chicken and meatbird
volume decreased 10.4% from 1998 which can be attributed to the loss of
sales of turkey and broiler feed to two large customers during the
second quarter of 1998. Specialty and other volume was consistent with
the 1998 period.
Cost of products sold decreased $46.6 million, or 11.7% from the
comparable 1998 period, due primarily to $55.4 million decrease in
ingredient costs. This decrease was partially offset by 1999 net losses
of $7.6 million from the Company's hog program due to the depressed hog
market. Manufacturing expenses increased $1.2 million over the 1998
period due primarily to increased depreciation expense and increased
labor costs associated with operational quality initiatives and
integration costs incurred at the manufacturing facilities in connection
with the Company's enhancement of its information system. Marketing,
distribution and advertising costs increased $2.1 million due primarily
to costs associated with the continued rollout of the ACS Stores.
General and administrative expenses decreased $12.4 million from the
1998 period which included the $15.9 million of compensation paid to
management and holders of options and stock rights units as part of the
Merger. The decrease was partially offset by restructuring costs of
$0.5 million and bad debt expense of $3.8 million that was recorded in
the second quarter of 1999. The bad debt expense relates primarily to
outstanding receivables from customers in the hog business and one large
poultry customer. These increases were partially offset by a reduction
in costs due to an emphasis on cost control.
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Intangible amortization expense decreased due to the revaluation of
intangible assets in allocating the original purchase price in March
1998. Research and development costs remained consistent with the 1998
period. Other income, net for the six months ended June 30, 1999,
relates to service fees for swine and dairy management, the (income)
loss on the Company's equity investments and losses on marketing
arrangements. Other income for the six months ended June 30, 1999
includes the $1.8 million in service fee and finance income offset by
the $1.5 million loss on the Company's equity investments and marketing
arrangements.
Interest expense for the six months ended June 30, 1999 increased $4.6
million over the 1998 period as a result of the increase in the
outstanding debt under the Credit Agreement and the Notes due 2010. The
Company's effective income tax rate differed from the statutory rate in
both 1998 and 1999 due to amortization of goodwill not being allowed as
a tax deduction. 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.
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.
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 49 feed mills and the
Company's corporate headquarters; the Company expects to complete the
entire project by September 1999. The Company currently estimates that
its costs to enhance its information systems beginning in 1997 and
through the year 2000 will approximate $27 million, of which $2 to $3
million is yet to
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be incurred. The Company is also working with its key suppliers,
customers and financial institutions to obtain assurances that their
systems are year 2000 compliant.
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
impact 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 impact 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 six months ended June 30, 1999, net cash used in operating
activities was $49.3 million compared to net cash used in operating
activities of $10.4 million during the same period in 1998. The
increase from the prior year can primarily be attributed to the overall
decrease in gross profit of $10.7 million before losses associated with
the Company's hog program and payments to Koch Industries and Koch
Agriculture of $16.0 million for operating payables. Additionally,
interest and litigation payments increased $8.6 million and $2.8
million, respectively, over the 1998 period and the Company incurred
cash hog losses of $8.2 million, an increase of $6.3 million over the
prior year, and made $4.7 million in payments to fund guarantees. These
increases are partially offset by the $15.9 million in compensation paid
to management and holders of options and stock rights units as a part of
the Merger in 1998.
Net cash used in investing activities was $12.1 million and $13.2
million for the six-month periods ended June 30, 1999 and 1998,
respectively. The decrease is due to a decrease in capital expenditures
of $2.0 million as construction of the Lubbock, Texas plant was
completed in the last quarter of 1998. This decrease was partially
offset by an increase in capital loans over the comparable 1998 period.
Net cash provided by financing activities in 1999 includes borrowings on
the Revolving Credit Facility of $35.0 million less the repayment of
Term Loans of $3.4 million. Net cash provided by financing activities
in 1998 includes the proceeds from the Credit Agreement of $205.2
million and the proceeds from the Notes due 2010 of $350.0 million less
the repayment of the Term Loans, Senior Subordinated Notes due 2003, and
IRB Loans totaling $295.5 million and the dividend paid to Holdings of
$237.2 million. In addition, net cash used in financing activities in
1998 includes payments of $12.0 million for financing costs. At June
30, 1999, $55.0 million was outstanding under the Revolving Credit
Facility.
At June 30, 1999, the Company had $11.6 million in cash and cash
equivalents on hand, and approximately $36.9 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
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immediately upon shipment of feed products, and raw ingredients are
normally purchased just prior to manufacturing and shipment.
The Company expects that capital expenditures during fiscal year 1999
will be approximately $25.0 million, which includes $6.0 million related
to the new accounting and information reporting system. The Company's
actual capital expenditures for the six months ended June 30, 1999 were
$10.1 million. The Company may from time to time be required to make
additional capital expenditures in connection with the execution of its
business strategies. The Company plans to fund capital expenditures by
using internally generated funds and, if necessary, borrowing capacity
under the Revolving Credit Facility.
Liquidity needs have historically been met through internally generated
funds and, to the extent necessary, borrowings under the Revolving
Credit Facility. Based on the current depressed agricultural industry,
market conditions and current Company performance there is a possibility
that funds generated by current levels of operations and the funds
available under the Revolving Credit Facility may not be sufficient to
meet working capital and short term liquidity requirements, capital
expenditures and debt service. If additional liquidity requirements
cannot be satisfied out of internally generated funds, the Company will
be required to take certain actions, including reducing capital
expenditures, selling assets, seeking additional equity or restructuring
its debt to avoid defaults under its indebtedness. There can be no
assurance that such actions could be effected or would be effective in
allowing the Company to meet such liquidity needs. The inability to
fund future capital expenditures could also have a material adverse
effect on the Company's operations. Thus, 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 and could have a
material adverse impact on the Company.
The Company's ability to obtain 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. In that regard, the Company has incurred substantially
higher interest expense as a result of the issuance of the Notes and
borrowings under the Credit Agreement. 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 Credit Agreement requires the Company to make
mandatory repayments of the Term Loan in amounts equal to 50% of Excess
Cash Flow, as defined in the Credit Agreement. Based on Excess Cash
Flow for 1998, a supplemental repayment was not required in 1999. Based
on current management projections for Excess Cash Flow for 1999, the
Company currently expects that a supplemental repayment will not be
required in 2000. The Company was in compliance with its debt covenants
at June 30, 1999.
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RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
In June 1998 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 (SFAS No. 133), Accounting for
Derivative Instruments and Hedging Activities. This statement
standardizes the accounting for derivative instruments by requiring that
an entity recognize these items as assets and liabilities in the
statement of financial position and measure them at fair value. SFAS
No. 133 becomes effective for fiscal years beginning after June 15,
2000. The Company is currently evaluating the impact of SFAS No. 133 on
its financial statements.
FORWARD-LOOKING STATEMENTS
Certain statements made in this Management's Discussion and Analysis of
Financial Condition 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 Overview, Results of
Operations, Year 2000 and Liquidity and Capital Resources.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK
Loans under the Company's Credit Agreement bear interest at floating
rates which are, at the Company's option, based either upon bank prime
or Eurodollar rates. The Company primarily pays interest based on
three month Eurodollar. As a result, the Company is subject to interest
rate risk. To mitigate the impact of fluctuations in interest rates,
the Company utilizes interest rate swaps and collars to fix the rate on
its floating rate debt. The following table provides information about
the Company's notes and term loans that are subject to interest rate
risk. For notes and term loans, the table presents principal cash flows
and applicable interest rates by expected maturity dates.
<TABLE>
<CAPTION>
(Dollars in millions)
FAIR MARKET
VALUE AT
JUNE 30,
1999<F1> 2000 2001 2002 2003 THEREAFTER TOTAL 1999
-------- ---- ---- ---- ---- ---------- ----- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Notes $ -- $ -- $ -- $ -- $ -- $350.0 $350.0 $272.7
Interest rate 9.0%
Variable rate
term debt
including current
portion:
Tranche A $ 4.0 $10.3 $13.3 $16.3 $19.3 $ 29.8 $ 93.0 $ 93.0
Interest rate <F2>
Tranche B $ 0.2 $ 0.3 $ 0.3 $ 0.3 $ 0.3 $ 98.2 $ 99.6 $ 99.6
Interest rate <F3>
<FN>
<F1>Represents payments for the remainder of 1999
<F2>Eurodollar plus 2.75% (7.94% at June 30, 1999)
<F3>Eurodollar plus 3.25% (8.44% at June 30, 1999)
</TABLE>
In 1998 the Company entered into an option contract to mitigate interest
rate fluctuations on a notional amount of $75.0 million of debt under
the Credit Agreement. The option contract provides that the Company
will pay interest on the notional amount if the three month Eurodollar
rate in the Credit Agreement falls below 5.2% and will receive interest
if the three month Eurodollar rate is above 7.0. The Company entered
into a swap contract on $114.7 million of amortizing debt under the
Credit Agreement in February 1999. The swap contract provides that the
Company will pay interest on the notional amount based on a fixed rate
of 5.6% and will receive the three month Eurodollar rate. No material
payments or receipts of interest have been made on the option contract
in 1999. Based on interest rates at June 30, 1999, an increase in
interest rates of 1.0% would result in an increase in interest expense
of $1.5 million over the next year after considering the option contract
and the swap contract.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT PAGE NUMBER OR
NUMBER DESCRIPTION INCORPORATION BY REFERENCE TO
- ----------------------------------------------------------------------------------------------------------------------
<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 Mills, Filed as Exhibit 4.1 to the
Inc., as issuer, and The First National Bank of Chicago, as Registration Statement on Form S-4
trustee, relating to the Notes (the "Indenture") of Purina Mills, Inc., Registration
No. 333-53865 and incorporated herein
by reference
4.2 Form of 9% Senior Subordinated Note due 2010 of Purina Filed as Exhibit 4.2 to the
Mills, Inc. (the "New Notes") (included as Exhibit A of the Registration Statement on Form S-4
Indenture filed as Exhibit 4.1) of Purina Mills, Inc., Registration
No. 333-53865 and incorporated herein
by reference
4.3 Credit Agreement, dated as of March 12, 1998, among Purina Filed as Exhibit 4.3 to the
Mills, Inc., Chase Bank of Texas, National Association, as Registration Statement on Form S-4
Administrative Agent, and the other financial institutions of Purina Mills, Inc., Registration
parties thereto No. 333-53865 and incorporated herein
by reference
4.4 Form of Guarantee and Collateral Agreement, dated March 12, Filed as Exhibit 4.4 to the
1998, among Purina Mills, Inc., the subsidiary guarantors Registration Statement on Form S-4
of Purina Mills, Inc. that are signatories thereto and Chase of Purina Mills, Inc., Registration
Bank of Texas, National Association No. 333-53865 and incorporated herein
by reference
4.5 PM Holdings Security Agreement, dated March 12, 1998, Filed as Exhibit 4.5 to the
between PM Holdings Corporation and Chase Bank of Texas, Registration Statement on Form S-4
National Association of Purina Mills, Inc., Registration
No. 333-53865 and incorporated herein
by reference
4.6 PM Holdings Guaranty, dated March 12, 1998, between PM Filed as Exhibit 4.6 to the
Holdings Corporation and Chase Bank of Texas, National Registration Statement on Form S-4
Association of Purina Mills, Inc., Registration
No. 333-53865 and incorporated herein
by reference
24
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<PAGE>
<CAPTION>
EXHIBIT PAGE NUMBER OR
NUMBER DESCRIPTION INCORPORATION BY REFERENCE TO
- ----------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
4.7 Registration Rights Agreement, dated as of March 12, 1998, Filed as Exhibit 4.7 to the
by and among Purina Mills, Inc. and the Initial Purchasers Registration Statement on Form S-4
listed therein, relating to the Notes of Purina Mills, Inc., Registration
No. 333-53865 and incorporated herein
by reference
4.8 First Amendment dated as of December 31, 1998, to Credit Filed as Exhibit 4.8 to the
Agreement, dated March 12, 1998, among Purina Mills, Inc., Registration Statement on Form 10-K
Chase Bank of Texas, National Association, as of Purina Mills, Inc., Registration
Administrative Agent, and the other financial institutions No. 333-53865 and incorporated herein
parties thereto by reference
10.1 Form of Purina Mills, Inc. Discretionary Capital Filed as Exhibit 10.2 to the
Accumulation Plan for Key Employees Registration Statement on Form S-4
of Purina Mills, Inc., Registration
No. 333-53865 and incorporated herein
by reference
10.2 Purina Mills, Inc./PM Holdings Corporation Severance Filed as Exhibit 10.3 to the
Program for Key Employees, as amended and restated Registration Statement on Form S-4
effective January 9, 1998 of Purina Mills, Inc., Registration
No. 333-53865 and incorporated herein
by reference
10.3 Purina Mills, Inc. Supplemental Executive Retirement Plan, Filed as Exhibit 10.4 to the
effective as of January 1, 1998 Registration Statement on Form S-4
of Purina Mills, Inc., Registration
No. 333-53865 and incorporated herein
by reference
10.4 Koch Industries, Inc. Supplemental Executive Retirement Filed as Exhibit 10.5 to the
Plan, effective as of May 9, 1994 Registration Statement on Form S-4
of Purina Mills, Inc., Registration
No. 333-53865 and incorporated herein
by reference
10.5 Sub-Group Tax Sharing Agreement, dated March 12, 1998, Filed as Exhibit 10.6 to the
between PM Holdings Corporation and each of its Registration Statement on Form S-4
subsidiaries listed therein of Purina Mills, Inc., Registration
No. 333-53865 and incorporated herein
by reference
10.6 Parent Tax Sharing Agreement, dated March 12, 1998, Filed as Exhibit 10.7 to the
between Koch Industries, Inc. and PM Holdings Corporation Registration Statement on Form S-4
of Purina Mills, Inc., Registration
No. 333-53865 and incorporated herein
by reference
10.7 Jet-Pro License Agreement between Purina Mills, Inc. and Filed as Exhibit 10.8 to the
Koch Feed Company, dated March 12, 1998 Registration Statement on Form S-4
of Purina Mills, Inc., Registration
No. 333-53865 and incorporated herein
by reference
25
<PAGE>
<PAGE>
<CAPTION>
EXHIBIT PAGE NUMBER OR
NUMBER DESCRIPTION INCORPORATION BY REFERENCE TO
- ----------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
10.8 Koch Agriculture Supply Agreement between Purina Mills, Filed as Exhibit 10.9 to the
Inc. and Nutrition Supply and Trading, a division of Koch Registration Statement on Form S-4
Agriculture Company, dated March 12, 1998 of Purina Mills, Inc., Registration
No. 333-53865 and incorporated herein
by reference
10.9 License Agreement dated October 1, 1986 between Ralston Filed as Exhibit 10.10 to the
Purina Company and Purina Mills, Inc. Registration Statement on Form S-4
of Purina Mills, Inc., Registration
No. 333-53865 and incorporated herein
by reference
10.10<F*> First Amendment dated June 30, 1999 to Koch Agriculture Filed as Exhibit 10.10 to the Quarterly
Supply Agreement between Purina Mills, Inc. and Nutrition Report for the quarterly period ended
Supply and Trading, a division of Koch Agriculture September 30, 1998 on Form 10-Q of Purina
Company, dated March 12, 1998 Mills, Inc. Registration No. 333-53865 and
incorporated herein by reference
10.11<F*> First Amendment dated June 24, 1999 to Jet-Pro License Filed as Exhibit 10.11 to the Quarterly
Agreement between Purina Mills, Inc. and Koch Feed Report for the quarterly period ended
Company, dated March 12, 1998 September 30, 1998 on Form 10-Q 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 June
30, 1999.
26
<PAGE>
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PURINA MILLS, INC.
Date: August 13, 1999 /s/ Del G. Meinz
---------------------------------
Del G. Meinz
Chief Accounting Officer
27
<PAGE>
<PAGE>
<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 Mills, Filed as Exhibit 4.1 to the
Inc., as issuer, and The First National Bank of Chicago, as Registration Statement on Form S-4
trustee, relating to the Notes (the "Indenture") of Purina Mills, Inc., Registration
No. 333-53865 and incorporated herein
by reference
4.2 Form of 9% Senior Subordinated Note due 2010 of Purina Filed as Exhibit 4.2 to the
Mills, Inc. (the "New Notes") (included as Exhibit A of the Registration Statement on Form S-4
Indenture filed as Exhibit 4.1) of Purina Mills, Inc., Registration
No. 333-53865 and incorporated herein
by reference
4.3 Credit Agreement, dated as of March 12, 1998, among Purina Filed as Exhibit 4.3 to the
Mills, Inc., Chase Bank of Texas, National Association, as Registration Statement on Form S-4
Administrative Agent, and the other financial institutions of Purina Mills, Inc., Registration
parties thereto No. 333-53865 and incorporated herein
by reference
4.4 Form of Guarantee and Collateral Agreement, dated March 12, Filed as Exhibit 4.4 to the
1998, among Purina Mills, Inc., the subsidiary guarantors Registration Statement on Form S-4
of Purina Mills, Inc. that are signatories thereto and Chase of Purina Mills, Inc., Registration
Bank of Texas, National Association No. 333-53865 and incorporated herein
by reference
4.5 PM Holdings Security Agreement, dated March 12, 1998, Filed as Exhibit 4.5 to the
between PM Holdings Corporation and Chase Bank of Texas, Registration Statement on Form S-4
National Association of Purina Mills, Inc., Registration
No. 333-53865 and incorporated herein
by reference
4.6 PM Holdings Guaranty, dated March 12, 1998, between PM Filed as Exhibit 4.6 to the
Holdings Corporation and Chase Bank of Texas, National Registration Statement on Form S-4
Association of Purina Mills, Inc., Registration
No. 333-53865 and incorporated herein
by reference
28
<PAGE>
<PAGE>
<CAPTION>
EXHIBIT PAGE NUMBER OR
NUMBER DESCRIPTION INCORPORATION BY REFERENCE TO
- ----------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
4.7 Registration Rights Agreement, dated as of March 12, 1998, Filed as Exhibit 4.7 to the
by and among Purina Mills, Inc. and the Initial Purchasers Registration Statement on Form S-4
listed therein, relating to the Notes of Purina Mills, Inc., Registration
No. 333-53865 and incorporated herein
by reference
4.8 First Amendment dated as of December 31, 1998, to Credit Filed as Exhibit 4.8 to the
Agreement, dated March 12, 1998, among Purina Mills, Inc., Registration Statement on Form 10-K
Chase Bank of Texas, National Association, as of Purina Mills, Inc., Registration
Administrative Agent, and the other financial institutions No. 333-53865 and incorporated herein
parties thereto by reference
10.1 Form of Purina Mills, Inc. Discretionary Capital Filed as Exhibit 10.2 to the
Accumulation Plan for Key Employees Registration Statement on Form S-4
of Purina Mills, Inc., Registration
No. 333-53865 and incorporated herein
by reference
10.2 Purina Mills, Inc./PM Holdings Corporation Severance Filed as Exhibit 10.3 to the
Program for Key Employees, as amended and restated Registration Statement on Form S-4
effective January 9, 1998 of Purina Mills, Inc., Registration
No. 333-53865 and incorporated herein
by reference
10.3 Purina Mills, Inc. Supplemental Executive Retirement Plan, Filed as Exhibit 10.4 to the
effective as of January 1, 1998 Registration Statement on Form S-4
of Purina Mills, Inc., Registration
No. 333-53865 and incorporated herein
by reference
10.4 Koch Industries, Inc. Supplemental Executive Retirement Filed as Exhibit 10.5 to the
Plan, effective as of May 9, 1994 Registration Statement on Form S-4
of Purina Mills, Inc., Registration
No. 333-53865 and incorporated herein
by reference
10.5 Sub-Group Tax Sharing Agreement, dated March 12, 1998, Filed as Exhibit 10.6 to the
between PM Holdings Corporation and each of its Registration Statement on Form S-4
subsidiaries listed therein of Purina Mills, Inc., Registration
No. 333-53865 and incorporated herein
by reference
10.6 Parent Tax Sharing Agreement, dated March 12, 1998, Filed as Exhibit 10.7 to the
between Koch Industries, Inc. and PM Holdings Corporation Registration Statement on Form S-4
of Purina Mills, Inc., Registration
No. 333-53865 and incorporated herein
by reference
10.7 Jet-Pro License Agreement between Purina Mills, Inc. and Filed as Exhibit 10.8 to the
Koch Feed Company, dated March 12, 1998 Registration Statement on Form S-4
of Purina Mills, Inc., Registration
No. 333-53865 and incorporated herein
by reference
29
<PAGE>
<PAGE>
<CAPTION>
EXHIBIT PAGE NUMBER OR
NUMBER DESCRIPTION INCORPORATION BY REFERENCE TO
- ----------------------------------------------------------------------------------------------------------------------
<C> <S> <C>
10.8 Koch Agriculture Supply Agreement between Purina Mills, Filed as Exhibit 10.9 to the
Inc. and Nutrition Supply and Trading, a division of Koch Registration Statement on Form S-4
Agriculture Company, dated March 12, 1998 of Purina Mills, Inc., Registration
No. 333-53865 and incorporated herein
by reference
10.9 License Agreement dated October 1, 1986 between Ralston Filed as Exhibit 10.10 to the
Purina Company and Purina Mills, Inc. Registration Statement on Form S-4
of Purina Mills, Inc., Registration
No. 333-53865 and incorporated herein
by reference
10.10<F*> First Amendment dated June 30, 1999 to Koch Agriculture Filed as Exhibit 10.10 to the Quarterly
Supply Agreement between Purina Mills, Inc. and Nutrition Report for the quarterly period ended
Supply and Trading, a division of Koch Agriculture September 30, 1998 on Form 10-Q of Purina
Company, dated March 12, 1998 Mills, Inc. Registration No. 333-53865 and
incorporated herein by reference
10.11<F*> First Amendment dated June 24, 1999 to Jet-Pro License Filed as Exhibit 10.11 to the Quarterly
Agreement between Purina Mills, Inc. and Koch Feed Report for the quarterly period ended
Company, dated March 12, 1998 September 30, 1998 on Form 10-Q 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 June
30, 1999.
30
<PAGE>
June 28, 1999
Purina Mills, Inc.
1401 South Hanley Road
St. Louis, Missouri 63144
Re: Master Procurement Agreement
Gentlemen:
As you are aware, Purina Mills, Inc. ("Purina") and Koch Nutrient
Services (formerly known as Nutrient Supply and Trading), a division of
Koch Agriculture Company ("KNS"), have entered into that certain Master
Procurement Agreement dated as of March 12, 1998 (the "Agreement").
Section 1.4(b) of the Agreement obligates Purina and KNS to re-negotiate
the Discount (as defined in the Agreement) on or before the expiration
of the first year of the Agreement, which date is May 1, 1999. Pursuant
to letters dated April 30, 1999 and May 25,1999, we mutually agreed to
extend that time period until July 1, 1999. Pursuant to our
discussions, Purina and KNS have agreed to extend the time period for
the negotiation of the new discount until September 1, 1999. It is also
understood and agreed by Purina and KNS that any discount that may
ultimately be negotiated, if any, would be retroactive back to May 1,
1999.
Except as otherwise modified by this letter, the Agreement shall
remain in full force and effect. In addition, KNS and Purina
acknowledge and agree that entering into this letter agreement in no way
acts as an admission by either party that they will be able, in good
faith, to negotiate a new Discount.
If the above correctly summarizes your understanding of our
agreement on this issue, please have a duly authorized representative of
Purina execute this letter in the space provided below and return a duly
executed copy of this letter to the undersigned.
Very truly yours,
KOCH NUTRIENT SERVICES, a division of Koch
Agriculture Company
By: /s/ Dave Robertson
----------------------------
Print Name: Dave Robertson
Title: President
<PAGE>
<PAGE>
Purina Mills, Inc.
April 30, 1999
Page 2
AGREED TO AND ACCEPTED this
30th day of June, 1999, by:
PURINA MILLS, INC.
By: /s/ Arnold E. Sumner
-----------------------------
Print Name: Arnold E. Sumner
Title: President & COO
<PAGE>
Amendment to License Agreement
Dated March 12, 1998
by and between
Koch Feed Technologies Company
and
Purina Mills, Inc.
This Amendment (the "Amendment") is entered into as of June 24,
1999, between Koch Feed Technologies Company ("Koch"), and Purina Mills,
Inc. ("Purina").
WHEREAS, Koch and Purina entered into a License Agreement dated March
12, 1998 (the "Agreement") wherein Koch granted a license to Purina to
use or practice the Textured Drying Process (the Patent Rights");
WHEREAS, Koch desires to license the Patent Rights to a third party and
sell the Patent Rights to another third party; and
WHEREAS, Koch and Purina each individually deem it in its best interest
to amend the Agreement pursuant to the terms set forth below to remove
any restriction prohibiting Koch from selling or granting a license to
the Patent Rights to these third parties, or others.
NOW, THEREFORE, in consideration of the foregoing recitals, the mutual
covenants set forth below, and other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
1. Amendment. On line twelve in paragraph 2.2(a) of the
---------
Agreement, the following language shall be deleted:
"Notwithstanding the nonexclusivity of this license, for so
long as Koch Industries, Inc. and its affiliates directly or
indirectly own greater than 50% of the common stock of
Licensee, Licensor shall not grant a license to the Patent
Rights to any commercial feed producer in the United States
which is a direct competitor of Licensee."
2. Consideration. In consideration for amending the Agreement
-------------
as set forth above, Koch shall pay to Purina the amount of Seven Hundred
Fifty Thousand Dollars (U.S. $750,000.00) to be payable by wire transfer
of immediately available funds at the execution of this Amendment.
3. Miscellaneous Terms.
-------------------
(a) All capitalized terms in this Amendment shall have the
same meaning as stated in the Agreement.
(b) Except as hereby amended, the parties hereto ratify and
confirm the terms and conditions of the Agreement, that such
Agreement shall remain in full force and effect and no other
modification to the terms therein shall be implied from this
Amendment.
<PAGE>
<PAGE>
IN WITNESS WHERE, Koch and Purina have each caused this Amendment to be
signed by their respective authorized officers on the date first written
above.
KOCH FEED TECHNOLOGIES COMPANY PURINA MILLS, INC.
By: /s/ Steve Pankey By: /s/ Arnold E. Sumner
------------------ ----------------------
Print Name: Steve Pankey Print Name: Arnold E. Sumner
Title: President Title: President & COO
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
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<RECEIVABLES> 40,451
<ALLOWANCES> 15,236
<INVENTORY> 59,355
<CURRENT-ASSETS> 115,135
<PP&E> 280,337
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<CURRENT-LIABILITIES> 98,107
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<OTHER-SE> 31,136
<TOTAL-LIABILITY-AND-EQUITY> 751,461
<SALES> 437,442
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<OTHER-EXPENSES> 104,801
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<INCOME-TAX> (16,054)
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