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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______to______
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)
Registrant's telephone number, including area code: (314) 768-4100
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes...X.... No........
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K [ X ].
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TABLE OF CONTENTS
PAGE
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PART I
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Item 1. Business 3
Item 2. Properties 17
Item 3. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 17
PART II
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Item 5. Market for Registrant's Common Equity and Related 18
Stockholder Matters
Item 6. Selected Financial Data 18
Item 7. Management's Discussion and Analysis of Financial 19
Condition and Results of Operations
Item 7a. Quantitative and Qualitative Disclosure About 27
Market Risk
Item 8. Financial Statements and Supplementary Data 29
Item 9. Changes in and Disagreements with Accountants on 59
Accounting and Financial Disclosure
PART III
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Item 10. Directors and Executive Officers of the Registrant 60
Item 11. Executive Compensation 63
Item 12. Security Ownership of Certain Beneficial Owners 67
and Management
Item 13. Certain Relationships and Related Transactions 67
PART IV
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Item 14. Exhibits, Financial Statement Schedules and Reports 68
on Form 8-K
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ITEM 1. BUSINESS
GENERAL
In September 1993, PM Holdings Corporation ("Holdings"), acquired all of
the outstanding capital stock of Purina Mills, Inc. ("Purina Mills,"
"PMI" or the "Company") (the "Acquisition"). Pursuant to the Agreement
and Plan of Merger among Holdings, Koch Agriculture Company ("Koch
Agriculture") and Arch Acquisition Corporation, a wholly owned
subsidiary of Koch Agriculture, dated as of January 9, 1998 (the "Merger
Agreement"), Arch Acquisition Corporation was merged with and into
Holdings (the "Merger"), with Holdings being the surviving corporation.
As a result of the Merger, 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 the Company. Unless the context otherwise requires, the term
"Holdings" refers to PM Holdings Corporation and its subsidiaries and
the term "Company" refers to Purina Mills, Inc. and its subsidiaries.
Holdings has no direct subsidiaries other than the Company and conducts
no business other than that of the Company.
Portions of this report include forward looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as
amended. Although the Company believes that the expectations reflected
in such forward looking statements are based upon reasonable
assumptions, it can give no assurance that its expectations will be
achieved. Important factors that could cause actual results to differ
materially from the Company's expectations are disclosed in conjunction
with the forward looking statements included herein ("Cautionary
Disclosures"). Subsequent written and oral forward looking statements
attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by the Cautionary Disclosures.
THE COMPANY
Purina Mills is the market leader in the United States in developing,
manufacturing and marketing animal nutrition products for dairy cattle,
beef cattle, hogs and horses. The Company also develops, manufactures
and sells poultry feeds as well as specialty feeds for rabbits, zoo
animals, laboratory animals, birds, fish and pets. In the United States
the Company's products are generally marketed under the widely
recognized brand names Purina(R) and Chow(R), and the "Checkerboard"
Nine Square Logo(R) and other trademarks pursuant to an exclusive,
perpetual, royalty-free license from Ralston Purina Company. The
Company's products are sold as complete feeds or concentrates which are
mixed with the customer's base ingredients. Over the past 100 years,
the Company has built and maintained its industry leadership by
consistently providing high-quality, innovative products and dedicated
customer service.
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The Company develops differentiable feed products, programs and
information through research and development efforts utilizing its
extensive knowledge of the nutritional requirements of animals, the
nutritional content of various ingredients, and process technology.
This knowledge enables the Company to develop high-performance, value-
added products that can be differentiated from other feed alternatives.
The Company's products are designed to provide the balance of nutrients
that meets the needs of a particular species of animal at each phase of
its life cycle. The Company believes that the continued market
leadership of its various products and programs will depend, in part,
upon maintaining a cost-effective balance between weight gain, feed
efficiency, yield, animal health and price.
For the commercial animal business, the Company develops and sells its
products as part of a package that includes nutrition and management
programs. The Company's nutrition programs include information and
services regarding the care of the animals and their facilities, as well
as nutritional, genetic and breeding counseling. The Company's
approximately 500 sales representatives and technical services staff,
including approximately 50 field-based consultants with Ph.D. degrees,
work closely with dealers and customers to help ensure that the
Company's feed products, programs and services are matched with the
animal producer's facilities and overall management practices, as well
as the genetic potential of the specific animal species. To support
increasingly sophisticated customers, the Company has changed its mix of
salespeople in recent years from predominantly "generalists" to approxi-
mately 85% "specialists" who focus on individual species or distribution
channels.
The demand for particular products is affected by a number of factors,
including the price of grains and the price of the end-products of
animal producers. When the price of grains has been relatively high,
more of the Company's customers have tended to purchase complete rations
and the Company's tonnage has been correspondingly higher. During
periods when commodity prices (particularly for corn) have been
relatively low, animal producers have tended to provide their own grains
(resulting in decreased volume) and have purchased concentrated,
nutritional additives, which have higher per unit margins.
Historically, the effect on profitability of lower volume during periods
of low commodity prices has tended to be offset to a large degree by an
increase in overall unit margin.
One of the fastest growing areas for the Company is the retail specialty
area (feed products for horses, rabbits and other companion animals)
which depends on a different set of criteria to be successful. A
differentiated line of products and programs are important but a strong
distribution system, aggressive marketing support and brand reputation
are also required. During the past few years, the Company has been able
to increase sales of specialty products in its 4,500 retail outlets
through the implementation of new products and innovative marketing
programs. The Company intends to continue to invest in resources that
will help develop new dealers and encourage continued growth.
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INDUSTRY OVERVIEW
According to the 1998 Feedstuffs Reference Issue, in 1997 the U.S.
animal feed industry produced approximately 118 million tons of primary
feed and animal producers utilized approximately $25 billion of animal
feed products. The industry is highly fragmented and although it
includes several large producers, it is comprised primarily of regional
competitors with several manufacturing facilities as well as a large
number of small, local manufacturers, many of whom operate only one feed
mill. Animal feed typically represents 50-70% of the total cost of
producing meat, milk and eggs at the farm level. The magnitude of costs
represented by animal feed makes the effective management of feed cost
one of the most important economic components of animal raising.
Although some customers buy feed on the basis of price alone, many
customers consider the performance characteristics of the feed they
purchase and appreciate the cost effectiveness and yields produced by
the Company's value-added products. In 1998, the Company estimates that
the top ten animal feed companies produced approximately 22% of the
total market for animal feed in the United States.
The Company competes in both the commercial feed business and the retail
specialty feed business. The Company defines the commercial feed
business as including nutrition products and programs for dairy cattle,
beef cattle, hogs and poultry and believes the business is characterized
by continued industry consolidation and vertical integration of animal
producers, product price sensitivities and increasing customer
sophistication. In contrast, the Company believes that the retail
specialty feed business, which includes feed products for horses,
rabbits, zoo animals, laboratory animals, birds, fish and pets, requires
aggressive marketing, customer brand awareness and strong national
distribution capabilities.
The feed industry generally prices its products on the basis of Income
Over Ingredient Cost ("IOIC"), a dollar based margin which is added to
aggregate ingredient cost. The Company believes that total IOIC and
gross profit dollars, rather than sales dollars, are the key indicators
of performance because of distortions in sales dollars caused by changes
in commodity prices. Total IOIC less manufacturing costs equals gross
profit. Although feed producers are subject to fluctuations in
ingredient commodity prices, they are generally able to pass on price
increases in raw materials to customers through weekly adjustments in
product prices.
PRODUCTS
The Company develops, manufactures and markets a comprehensive line of
animal nutrition products for dairy cattle, beef cattle, hogs, horses
and poultry, as well as specialty feeds for rabbits, zoo animals,
laboratory animals, birds, fish and pets. The Company's product lines
range from economy feeds to high-performance, value-added products, and
are sold in complete rations or as concentrates to be mixed with grains.
The Company maintains a total of over 40,000 active feed formulas, which
encompass a wide range of animal species.
Although products are the principal point of differentiation, the
Company develops and sells its products as part of nutrition and
management programs that address all critical areas in the production of
meat, milk and eggs. The Company's nutrition programs
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include information and services regarding the care of the animals and
their facilities, as well as nutritional, genetic and breeding
counseling.
The demand for particular products is affected by a number of factors,
including the price of grains and the price of the end-products of
animal producers. When the price of grains has been relatively high,
more of the Company's customers have tended to purchase complete rations
and the Company's tonnage has been correspondingly higher. During
periods when commodity prices (particularly for corn) have been
relatively low, animal producers have tended to purchase the Company's
products as concentrated nutritional additives with which the customers
mix their own commodity ingredients. This results in decreased sales
tonnage for the Company, because the commodity portion of the product is
provided by the customer. The Company's concentrates, however,
generally provide higher per-unit IOIC to the Company than do complete
feeds. In addition, the Company is diversified across a broad range of
different animal species and regions. Consequently, the Company's total
IOIC and gross profit have historically been stable. Because the cost
of feed typically represents more than half of the cost of producing
animals at the farm level, higher ingredient prices over time can result
in a decline in animal production and a decline in the demand for the
Company's products. In addition, when market prices for live animals
and animal products are low, animal producers will also cut back on
production and search for lower-cost feed alternatives. The Company
attempts to counter this producer reaction by maintaining a line of
economy products while emphasizing the relative value of its high-
performance, value-added products.
Although ingredient prices influence producers' decisions to use
concentrate or complete feed products, producers tend to continue with
one of these alternatives until prices change significantly or
replacement investments in feed handling equipment must be made. Using
concentrates requires equipment on the farm to grind commodity
ingredients and mix them with the concentrate components to produce
finished feed. Once this investment is in place, it may influence these
producers' decisions on feeding programs. Producers are generally
unlikely to alternate between complete feed and concentrates on a short-
term basis.
Although competitors may be able to determine the ingredient components
of a particular formulation of a feed product, the Company believes that
several factors prevent competitors from effectively duplicating the
performance of its product lines. Management believes that competitors
generally do not have the extensive nutritional knowledge required to
understand the purpose of individual ingredients in a specific feed
product, or the ability to use substitute ingredients on a cost-
effective basis as prices change, particularly if those substitutes are
not available locally. In addition, the Company markets its feeds as
part of comprehensive feeding programs, which include management and
animal health, as well as the specific feed products. Management
believes that the effective coordination of all of these related
elements is critical to achieving optimal feed performance. Finally,
many of the Company's products are manufactured using proprietary
process technology that provides cost or product attribute advantages
that the Company believes cannot be readily duplicated.
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PRODUCT LINES
The following table sets forth, by major product line, the sales volume
and gross sales for each of the last three years:
<TABLE>
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(In Thousands)
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
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Product Lines:
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Dairy Cattle
Tons sold 1,106 1,154 1,267
Gross sales $ 235,104 $ 270,170 $ 301,260
Beef Cattle
Tons sold 1,284 1,271 1,363
Gross sales $ 247,895 $ 245,151 $ 261,693
Hog
Tons sold 923 960 1,071
Gross sales $ 217,178 $ 273,264 $ 306,441
Horse
Tons sold 444 409 370
Gross sales $ 112,758 $ 109,824 $ 103,513
Poultry
Tons sold 374 425 417
Gross sales $ 65,527 $ 88,797 $ 90,265
Specialty and Other
Tons sold 501 487 496
Gross sales $ 157,575 $ 202,657 $ 186,012
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Total tons sold 4,632 4,706 4,984
Total gross sales $1,036,037 $1,189,863 $1,249,184
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Set forth below is a description of each major product line. The U.S.
market share referred to herein is based on the Company's estimates.
Dairy Cattle. The Company markets dairy cattle products ranging from
economy to high performance. The Company estimates that its 1998 volume
of 1.1 million tons, or approximately 24% of the Company's total feed
tons, represented approximately a 9% market share. The Company regards
dairy cattle products as an attractive growth market.
Milk production per cow has increased by an aggregate of approximately
31% from 1983 to 1997, largely driven by improved genetics and feeding
programs based on enhanced knowledge of cows' nutritional requirements.
Further increases in production per cow are expected to be achieved
through improved genetics, biotechnology and feeding programs, which
include high-performance products such as the Company's Ultimate EXT(R)
product line. According to Company data, these products have produced
average
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increases of approximately five pounds of milk per cow per day in high
producing herds, a 5.0% to 7.5% increase, due primarily to a proprietary
extruded component in the product that delivers nutrients more
effectively than traditional products. Extrusion is a relatively high
cost process not normally used in commercial animal feed production. In
addition, improvements in the efficiency of milk production are critical
to the profitability of dairy operations. The Company believes that its
patented Proteus(R) product line enhances the efficiency of feed protein
utilization by lactating dairy cows. The result is a lowering of feed
costs while maintaining the level of milk production and milk component
yield. An additional benefit of Proteus(R) technology is reduced
urinary nitrogen excretion by dairy cows resulting in an environmentally
favorable nutritional program.
The dairy industry is continuing to experience gradual consolidation.
According to a 1997 report by the United States Department of
Agriculture, the number of dairy operations decreased by approximately
30% from 1991 to 1997; average dairy herd size increased from
approximately 55 head in 1991 to approximately 79 head in 1997, while
the average number of dairy cows was approximately 7% lower in 1997 than
in 1991. Many large dairies require specialized products, programs and
services from their suppliers. The Company believes the success of its
dairy cattle product line is largely due to its value-added products and
the development of a field staff of Ph.D. nutritionists who work with
dealers and directly with customers to develop specialized products,
programs and services to meet their individual needs.
Beef Cattle. The Company offers a complete line of feed products for
beef cattle, ranging from economy to high performance. The Company
estimates that its 1998 volume of approximately 1.3 million tons, or
approximately 28% of the Company's total feed tons, represented
approximately a 13% market share.
Beef cattle operations can be broadly viewed as consisting of cow-calf,
farmer-feeder and feedlot operations. The feedlot market is highly
concentrated. In 1998, over 720 feedlots accounted for 90% of U.S. beef
production and the 45 largest feedlots accounted for almost 24% of U.S.
beef production. Such consolidation has not occurred in cow-calf
operations, which produce calves for growing and finishing, and is not
expected to occur in that part of the market.
Historically, dry feedlot products have not been as profitable as hog
and dairy cattle products because there has been less product
differentiation. However, the Company does offer proprietary, premium
performance products in liquid form primarily for feedlots and the
farmer-feeder and in block form for cow-calf operations. In addition,
the Company's research efforts have resulted in an innovative feeding
management program, Impact(TM), which is designed to significantly
improve feed efficiency and cost-per-pound gain, while maintaining
average daily gain. This feeding program is being used in major feedlot
markets and has recently been introduced for farmer-feeder operations.
Sales volume of this high performance, value added product and program
has grown consistently.
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Hog. The Company offers a complete line of feed products for hogs,
ranging from economy to high performance. The Company estimates that
its 1998 volume of 0.9 million tons, or 20% of the Company's total feed
tons, represented approximately a 7% market share.
In the fall of 1997, the Company launched the Team Lean MBA process.
This process is the foundation of the swine nutrition program.
Developed from Auspig, one of the premier mechanistic pig models in the
world, Team Lean MBA is a process that customizes a feeding program for
each hog operation. This process identifies the hogs unique nutrient
requirements driven by the interaction of their genetic potential and
their environment and develops a feeding program to meet those needs
that accommodates the management practices of the individual producer.
The outcome is maximum lean growth per dollar invested while minimizing
waste nutrients. As consumers demand lower-fat meat products and the
hog packing industry moves further toward establishing prices for live
animals based on lean content rather than weight, hog producers can
improve both their product and their profitability with this process.
The Company has historically been successful in selling to medium-size
producers in the hog industry through its traditional dealer
distribution channel. The Company has also been successful in
generating business directly with hog producers. As consolidation in
the hog production industry continues, the Company expects to have
opportunities for strategic business alliances with producers, or to
provide technology sharing or consulting services. Nevertheless,
consolidation and integration in hog production over the last 20 years
has been significant, with a continuing trend toward fewer but larger
operations. According to the December 29, 1998 USDA Hogs and Pigs
Report, there were approximately 114,000 hog production operations in
November 1998, compared with approximately 870,000 in 1970.
Additionally, the 50 largest producers produce approximately 50% of all
United States pork and most have their own feed manufacturing
facilities. Based on recent trends, the Company anticipates that the
number of hog production operations may drop to approximately 100,000 by
the year 2000. Management anticipates a gradual decline in volumes and
margins in its traditional hog business. However, the Company believes
that larger hog producers are better able to measure animal performance
and, as a result, better appreciate the Company's premium products and
more sophisticated feeding and management programs.
To capitalize on the consolidation of the hog industry, the Company
implemented a strategy that is expected to result in control over the
feeding of approximately six million market hogs over the next four
years. The initiative is expected to provide a source of high quality
feeder pigs to independent hog producers and offers a marketing program
linked with leading pork processors, thereby minimizing market risk to
the producer. The Company believes that the contributions from this
initiative will partially offset the declines in traditional hog
business in the near term. For a more detailed discussion see
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--Overview."
Horse. The Company estimates that its 1998 volume of 444,000 tons, or
approximately 10% of the Company's total feed tons, represented
approximately a 26% market share.
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Volume in this product line has increased each of the past seven years.
Unlike cattle and hogs, most horses are kept for recreation. Horse
owners, therefore, do not generally have a commercial or economic
measure of the value of the Company's products. Since 1992, the Company
has restricted its efforts in the price-driven commodity portion of the
business and has instead focused on the quality-oriented end of the
market for horse feed, where the Company believes the value of its
Omolene(R) and other premium brands are more likely to be recognized.
The Company also introduced a series of pelleted and extruded products
that it believes will appeal to a wide range of feeders, including its
Equine Senior(TM), Equine Adult(TM) and Equine Junior(TM) feeds, which
are designed to meet the nutritional needs of older, adult and younger
horses, respectively, and Strategy(TM), a performance product designed
for stables and more commercially oriented horse operations. Aggressive
marketing programs have been implemented to continue the growth in this
market. A traveling exhibit known as Horse Country was launched in 1997
and proved to be so successful that an additional version was used in
1998 to travel to smaller local events.
Poultry (Laying Chickens and Meatbird). The Company's 1998 volume of
374,000 tons represented approximately 8% of the Company's total feed
volume. The egg production industry is highly concentrated. Because the
nutritional requirements of poultry are relatively simple and widely
known compared to those of beef cattle, dairy cattle or hogs (and thus
comparatively little value can be added through feed) and significant
numbers of birds can be located in concentrated areas, these producers
generally have sufficient scale and nutritional knowledge to manufacture
their own feed. Accordingly, the available market for feed sales is
small relative to the amount of feed consumed in the poultry industry.
The meatbird (broiler chickens, turkeys, ducks, etc.) production
industry is also highly concentrated with a relatively small number of
very large producers that generally manufacture their own feed, again
due to the relative simplicity of the diet and large scale of operations
in this market. Because there is no significant opportunity for product
differentiation in either part of the poultry market, the Company is
pursuing this market less aggressively.
Specialty and Other. In addition to its core commercial feed lines, the
Company develops, manufactures and markets mineral supplements for
livestock and a wide variety of feed products for other animals ranging
from rabbits, birds, commercial fish, dogs and cats to zoo, laboratory
and other exotic animals. This group includes the expanding Mazuri(R)
brand line of feeds, which is widely recognized in the domestic and
international zoological community, as well as PMI Nutrition(TM) line of
dog and cat foods, which was introduced during 1992.
Many products within this group can be manufactured at most of the
Company's feed mills. Other products are highly specialized and
incorporate unique ingredients designed to address particular
nutritional needs, or otherwise require manufacturing process
technology, including extrusion, not available at standard feed plants.
Those specialty items are manufactured at the Company's Richmond,
Indiana specialty plant. The PMI Nutrition dog and cat foods are
produced by a third party feed manufacturer for Purina's subsidiary
PMI Nutrition, Inc.
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The specialty and other product group has the highest overall unit
margins of all the Company's product groups. The Company's 1998 volume
of specialty feeds aggregated 502,000 tons, representing approximately
11% of the Company's total feed volume. The Company believes that these
products have significant potential for continued growth in volume and
profit contributions.
RESEARCH AND DEVELOPMENT
The Company's research efforts are focused on the development of
proprietary product forms and process technologies designed to support
new product development and increase manufacturing efficiency while
lowering processing costs. At its research center in Gray Summit,
Missouri, the Company conducts extensive animal research to develop
value-added products and programs designed to optimize the genetic
performance potential of animals. Basic research is conducted by Ph.D.
scientists and technical staff who are dedicated to each species served
by the Company's products. Each species of animal is closely studied
from birth to maturity to enable scientists to understand the complex
nutritional needs and genetic capabilities at each stage in its life
cycle. By understanding the metabolic process of each species, the
Company's scientists have identified which nutrients are required by an
animal at various stages in its development to maximize its genetic
potential. Further, researchers have gained extensive knowledge of the
nutritional composition and values of the primary ingredients used in
feed and a wide range of acceptable substitute ingredients. In addition
to the development of high-performance feeds through its research
efforts, the Company is able to recommend specific feeding and
management programs that enhance the effectiveness of its feeding
products.
Management believes that its research and development capabilities
enable the Company to develop high-performance, value-added products
that can be differentiated from other feed alternatives. The Company
believes that the continued market leadership of its various products
and programs will depend, in part, upon maintaining an attractive, cost-
effective balance between weight gain, feed efficiency, yield, animal
health and price.
Over 40% of the Company's sales volume in 1998 was derived from products
introduced within the past five years. The Company's research and
development expense (net of revenues realized at the Company's research
facilities and manufacturing expenses associated with the production of
feed for the animals at the research facilities) was $6.8 million,
$7.2 million and $7.0 million in 1998, 1997 and 1996, respectively.
SOURCE AND AVAILABILITY OF RAW MATERIALS
The basic feed manufacturing process consists of grinding various grains
and protein sources into a meal form that is then mixed with certain
nutritional additives, such as vitamins, minerals, synthetic amino
acids, and, in some cases, medications. The resulting products are sold
in a variety of forms, including meal, pellets, blocks and liquids. The
Company's feed formulas are based upon the nutrient content as
determined through proprietary scientific research. When the price of
certain raw ingredients increases, the Company can generally adjust its
feed formulas by substituting lower-cost, alternative ingredients to
produce feeds with comparable nutritional value. By using its least-
cost
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product formulation system, the Company can determine optimal
formulations that meet its nutritional standards and maintain product
quality.
The raw materials used by the Company are generally available from a
number of different sources and the Company has not experienced any
significant interruption in the availability of raw materials.
Following the Merger the Company transferred all of its commodity
purchasing operations to Koch Agriculture and entered into an exclusive
commodity purchasing agreement with a division of Koch Agriculture.
Under the terms of the agreement, Koch Nutrient Services, a division of
Koch Agriculture, supplies the Company with all of its requirements for
feed ingredients, feed additives and feed packaging materials. The
contract provides that the Company will purchase feed ingredients and
feed additives at a price equal to the spot market price less a discount
to be agreed upon between the Company and Koch Agriculture.
MANUFACTURING PROCESS
The Company currently operates 55 feed manufacturing plants located in
25 states. The Company's total feed manufacturing capacity is
approximately 7.1 million tons per year based on a two shift per day,
five-day week, and individual plant capacity ranges from 30,000 tons to
300,000 tons per year. Capacity utilization varies by plant and by
season, with higher utilization during the first and fourth fiscal
quarters.
Potential manufacturing economies of scale are generally not sufficient
in the feed industry to offset the cost of shipping products over
significant distances, as raw ingredients make up a large percentage of
the cost of finished products and are often available locally. As a
result, the Company operates nationally with a network of manufacturing
facilities with sufficient capacity to meet the demands of the local
markets in which the facilities are located. The Company regularly
reviews its plant capacity and factors such as trends in animal
production in specific markets and changes in transportation costs.
Based on these factors, from time to time manufacturing capacity in
particular markets may be expanded, consolidated or eliminated. In this
regard, based on its evaluation of areas where its operations could be
consolidated or rationalized, the Company closed seven feed
manufacturing plants in late 1996. It has recently built new or
replacement plants in Hagerstown, Maryland, Statesville, North Carolina,
and Lubbock, Texas.
The Company has invested in highly sophisticated computerized systems
for mixing, pelleting, micro-ingredient blending and packing. In
addition, the Company has developed and implemented a sophisticated
computer program for feed formulation that incorporates the nutritional
value of substitute ingredients, which is run on the Company's mainframe
computer. The Company believes that this program provides it with a
competitive advantage. Investments have also been made to maintain the
operating capability of the Company's manufacturing facilities.
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SALES AND MARKETING
The Company distributes its products through two primary distribution
channels: through dealers and directly to end-users. During 1998,
approximately 60% of the Company's sales were made through its dealer
network and 40% of sales were made directly to animal producers. To
support increasingly sophisticated customers, the Company's mix of
salespeople includes approximately 85% "specialists" who focus on
individual species or distribution channels. Although sales volume
through the Company's dealer network has always been substantially
higher than the Company's direct sales volume, direct sales to customers
have accounted for an increasing proportion of the Company's sales
volume over the past 10 years and the Company expects this trend to
continue. This trend results from increasing consolidation in the
animal production and processing industries. The Company believes that
consolidation among its customers generally results in a more
sophisticated market for its products and that these purchasers better
appreciate the advantages of high-performance nutrition products and
nutritional programs.
As of December 31, 1998, the Company's dealer network consisted of over
4,500 independent dealers located in 48 states, with approximately 600
dealers representing 67% of total dealer volume and 35% of total Company
volume in 1998. The number of direct customers in 1998 was in excess of
4,500.
During 1998, the Company's top 50 customers represented approximately
17% of its total sales volume and its largest customer accounted for
approximately 1% of the Company's total sales volume.
SEASONALITY
The Company's business is seasonal, with a higher percentage of the feed
volume sold and earnings being generated during the first and fourth
quarters of the year. This seasonality is driven largely by weather
conditions affecting the Company's cattle product lines. If the weather
is particularly cold and wet during the winter, sales of feed for cattle
increase as compared with normal seasonal patterns because the cattle
are unable to graze under those conditions and have higher nutritional
requirements. If the weather is relatively warm during the winter,
sales of feed for cattle may decrease as compared with normal seasonal
patterns because the cattle may be better able to graze under the warmer
conditions. Other product lines are affected marginally by seasonal
conditions but these conditions do not materially affect the Company's
quarter-by-quarter results of operations.
PATENTS AND TRADEMARKS
The Company markets its products under the highly recognized brand names
Purina(R) and Chow(R) and the "Checkerboard" Nine Square Logo(R)
pursuant to an exclusive, perpetual, royalty-free license from Ralston
Purina Company (the "Ralston License"). Under the Ralston License, the
Company may not use those trademarks outside the United States or in
connection with any dog, cat or human food within the United States, and
Ralston uses those trademarks in those markets. The Ralston License may
not be assigned to a major competitor of Ralston or otherwise without
the consent of Ralston. The Company has developed trademarks for use in
international and domestic markets and was granted a
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trademark for the America's Country Store(R) name in 1998. The Company's
operations do not depend to any significant extent upon any single or
related group of patents.
COMPETITION
The Company believes that its market share is approximately 4% of the
total primary feed produced in the United States.
The feed industry, which has substantial excess capacity in certain
areas of the country, is highly competitive. Both the feed production
and animal production industries are consolidating, and this trend is
expected to continue. To date, the Company has been successful at
generating business directly with some large producers of animals.
However, as producers of animals get larger, they historically have
tended to integrate their business by acquiring or constructing feed
production facilities to meet some or all of their requirements and,
consequently, have relied less on outside suppliers of feed. As the
consolidation of animal producers continues, the available market for
commercial feeds may shrink if producers integrate into feed production
and, if so, competition may increase. Management expects consolidation
in the commercial feed industry itself, and acquisitions and other
business combinations in recent years indicate that this consolidation
is occurring.
The industry is highly fragmented, with the bulk of the industry
consisting of regional competitors (including cooperatives) with
several manufacturing facilities and a large number of small, local
manufacturers, many of which operate only one feed mill. Only one
competitor's commercial business approaches the scope of the Company's
national distribution network. The Company believes that it
distinguishes itself from its competitors through a competitive strategy
of differentiation using its high-performance, value-added products,
which it develops and sells on a national basis. Although the strength
of competitors varies by geographic area and product line, the Company
believes that no other competitor produces and markets the breadth of
products that the Company provides.
Much of the competition in the industry centers around price due to the
commodity-like aspects of the basic product lines. However, the Company
focuses its efforts on high-performance, value-added products that are
designed to be cost effective on the basis of weight gain, feed
efficiency, animal health and price. The Company believes that its
extensive expertise in animal nutrition requirements and the nutritional
content of various ingredients, developed through research and combined
with its manufacturing expertise and ingredient purchasing capabilities,
allow the Company to use lower-cost ingredients, as well as alternative
ingredients, to a greater extent than many of its competitors.
The Company also competes on the basis of service by providing training
programs for dealers, using species specialists with advanced technical
qualifications to consult with customers, developing and manufacturing
customized products for customers, and offering various financing
assistance programs to attract and retain dealers and direct customers.
In some areas of the United States, feed companies have increased the
use of contracting for livestock production and market price risk
sharing arrangements to generate and control feed volume. The Company
enters into similar arrangements and joint ventures for animal
production primarily in the swine sector.
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REGULATION
The Company is subject to regulation by the FDA, USDA, EPA and state
feed and livestock remedy laws. The FDA and states regulate all
ingredients that are part of animal feed (feed additives) or that
contact animal feed (feed contact additives). It also regulates animal
drugs that come in dosage form for administration to animals, or that
are added through water or feed. The Company's production facilities
are subject to inspection at least once every two years by the FDA.
The USDA is responsible for assuring that products derived from animals
are wholesome, which includes inspection for any drug residues that the
animal might contain. The USDA monitors residues and when violations
occur, the USDA works in conjunction with FDA to investigate and assign
responsibility. Similar to this federal regime, each state's Department
of Agriculture also regulates the Company's feed production facilities
and feed products manufactured in the state.
ENVIRONMENTAL
The Company has an environmental policy designed to ensure that it
operates in material compliance with applicable environmental
regulations. The Company also has undertaken a compliance audit program
that addresses environmental and other regulatory compliance. The
Company makes expenditures that it believes are necessary to fulfill
its environmental compliance practices. Capital expenditures for
environmental control facilities to maintain compliance with
environmental regulations are included in the Company's overall capital
budget and, together with other environmental related costs, were less
than $1 million in 1998.
EMPLOYEES
The Company had approximately 2,700 full-time employees as of
December 31, 1998, approximately 12% of whom were union members.
Historically, the Company has had a satisfactory relationship with its
unionized workers. Six of the Company's 18 collective bargaining
agreements will expire in 1999. Although the Company has not
historically encountered problems in the renegotiation of the various
collective bargaining agreements to which it is a party, nor does the
Company anticipate such problems in the future, there can be no
assurance that such will be the case.
WORKING CAPITAL
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. Raw ingredients are normally purchased shortly prior to
manufacturing and shipment. In addition, the Company provides programs
whereby customers who are cash basis taxpayers may take advantage of
favorable tax treatment and prepay feed purchases for the following
year. The total of these prepayments was $16.9 million at December 31,
1998 and $16.5 million at December 31, 1997.
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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 29 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 $25 million, of which $6 to $8
million is yet to 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
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.
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ITEM 2. PROPERTIES
The Company owns its corporate headquarters in St. Louis and its 1,188
acre Research Center in Gray Summit, Missouri. The Company operates 55
feed manufacturing plants located in 25 states, two of which are leased.
In addition to on-site storage at each of its manufacturing plants, the
Company also stores its products in 18 warehouses in 15 states.
Thirteen of those warehouses are leased. Substantially all of the
Company's assets are pledged to secure the Company's indebtedness.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is involved in litigation relating to
claims arising out of its operations in the normal course of business,
including product liability claims. The Company believes that it is not
at present a party to any litigation, the outcome of which would have a
material adverse effect on its business or operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
quarter ended December 31, 1998.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's authorized capital consists of 1,000 shares of common
stock. All common stock of the Company is owned by Holdings. The dec-
laration and payment of dividends on the common stock is restricted by
the terms of the Credit Agreement and the Indenture related to the Notes
(the "Notes Indenture"). See Note 6 of Notes to Consolidated Financial
Statements.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data for the period March 13, 1998 to December
31, 1998 are derived from the consolidated financial statements of the
Company, which have been audited by KPMG LLP, independent auditors. The
data for the period January 1, 1998 to March 12, 1998 and for each of
the four years in the period ended December 31, 1997 are derived from
the consolidated financial statements of the Company, which have been
audited by Deloitte & Touche LLP, independent auditors. The data should
be read in conjunction with the consolidated financial statements and
related notes, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and other financial information
included herein.
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS)
---------------- -------------------------------------------------------------------------------------
POST-MERGER PRE-MERGER
---------------- -------------------------------------------------------------------------------------
PERIOD PERIOD
MARCH 13 TO JANUARY 1 TO YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, MARCH 12, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1998 1997 1996 1995 1994
---------------- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $784.4 $214.3 $1,128.4 $1,212.2 $1,047.2 $1,016.4
Net income (loss) $(43.1) $ (8.5) $ 6.9 $ (4.8) $ 3.1 $ 6.1
Total assets $815.7 N/A $ 583.6 $ 606.1 $ 632.2 $ 563.9
Long-term debt,
excluding cur-
rent maturities $538.5 N/A $ 263.1 $ 296.0 $ 310.6 $ 283.5
</TABLE>
During the period January 1 to March 12, 1998, a $237.2 million dividend
was paid to Holdings in connection with the Merger. There were no
dividends paid during any other period.
The consolidated financial statements for periods prior to March 13,
1998 have been prepared on the predecessor cost basis of the Company.
The amount shown for total assets at December 31, 1998 reflects the
purchase price allocated to tangible and intangible assets acquired
based on their estimated fair values as of March 12, 1998 and thus is
not comparable with amounts for prior periods. 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.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND 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 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 somewhat stabilize total IOIC and gross profit
dollars.
The Company expects the U.S. feed industry to further consolidate in the
years ahead. Although the total volume of processed feed sold into the
commercial market segment may decline, larger producers are tending to
purchase products with lower inclusion rates and higher margins. As
they grow larger, these producers are typically better able to measure
performance differences and make sound economic decisions regarding
nutrition and management programs. Competition in the industry
occasionally limits the Company's ability to pass ingredient price
increases on to its customers; however, management believes that the
Company's knowledge of the nutritional value of ingredients and its
sophisticated least-cost formulation system enable the Company to
provide products that meet its nutritional standards and maintain
product quality while minimizing product cost. In addition, the Company
believes that its strong leadership position in research and technology
will enable it to grow its total IOIC from the commercial market segment
more effectively than others in the feed industry.
Competition in the industry has caused the Company and some of its
competitors to develop market and production risk arrangements for their
customers to promote sales. The Company has entered into several
production and marketing joint venture arrangements with its animal
production customers, especially in the swine sector, in order to
facilitate additional feed sales. At December 31, 1998 and 1997, the
Company's
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total investment in such joint ventures was approximately $1.8 million
and $2.5 million, respectively, of which $1.0 million and $0.7 million,
respectively, related to investments in hog joint ventures.
Additionally, to capitalize on the consolidation of the hog industry,
the Company implemented a strategy that was expected to result in
control over the feeding of approximately six million market hogs over
the next 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
December 31, 1998 the Company has future net purchase commitments,
subject to the counterparties' ability to perform, to acquire over 7.7
million feeders over the next nine years through 2007. Approximately
30% of these commitments are at fixed prices whereas the other 70% vary
based on current or published futures prices. The net purchase
commitment of 7.7 million feeders represents gross commitments of
approximately 9.8 million feeders less 2.1 million of which have
contractually been sold. The Company's net position for the next four
years through 2002 is approximately 4.6 million feeders.
Additionally, the Company has direct ownership of several hog operations
which are expected to produce an additional 1.6 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 December 31, 1998 and
1997, the Company had $10.3 million and $5.5 million, respectively, in
direct ownership of hogs.
Hog market prices have decreased drastically during 1998. Prices for
end products for December 1998 have fallen 65% from one year ago.
Furthermore, the overall decrease for 1998 approximated 52%.
Based on published market prices at December 31, 1998, the Company's net
commitments to purchase the 7.7 million feeders totals approximately
$250 million. 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 million and $20 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 and cash flows. Additionally, 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
$11.5 million related 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. At December 31, 1998
the Company had funded $2.0 million on the guarantee and has recorded a
loss reserve for the remaining $9.5 million.
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The Company has focused on managing and mitigating the impact of the
recent significant decline in hog prices on the Company's performance.
The Company has obtained covenant relief from its bank group for the
next two years so that it can work to resolve its swine exposure. With
the price of hogs starting to climb out of the trough of 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 and cashflow. However, at current prices for hogs the
Company's swine exposure could have a material adverse affect on results
of operations in the near term.
The outlook for the horse and retail specialty market is positive. The
Company believes that owners of horses, pets and other companion animals
make buying decisions based on different criteria than commercial
producers. Typically, brand awareness, quality and convenience are
important. As more people migrate to "ruralpolitan" areas and
disposable incomes increase, the Company believes that its high margin
horse and retail specialty product lines will continue to grow. The
Company believes that its brand recognition, coupled with the most
extensive retail dealer network in the country, position the Company
well to capitalize on the anticipated growth in this market segment.
The Company regularly reviews the performance of its facilities to
attempt to optimize overall capacity and maximize profits. As a result,
in 1996 the Company made a decision to discontinue all manufacturing
operations at seven facilities and recorded a loss provision for plant
closings of $14.0 million. See Note 4 of Notes to Consolidated Financial
Statements for a further discussion of the plant closings.
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 December 31, 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 following discussion is based on comparisons of (i) the
seventy-one day period ended March 12, 1998 plus the nine month and
nineteen day period ended December 31, 1998, to the year ended December
31, 1997 and (ii) the year ended December 31, 1997 to the year ended
December 31, 1996.
RESULTS OF OPERATIONS
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Due to overall lower commodity prices, net sales decreased 11.5% from
the 1997 period. Gross profit decreased $28.3 million in 1998, or 13.1%
from 1997. Overall volume was 4.63 million tons for the year ended
December 31, 1998, a 1.6% decrease from 1997. The decrease in volume
was attributable to a decrease in animal numbers, extreme depressed
prices for end products of producers and continued consolidation in the
hog industry. Average feed IOIC per ton was $63.66 for 1998, a 2.2%
decrease from the prior year. The decrease in average feed IOIC per ton
was attributable to intense competition, low commodity prices and the
depressed agriculture economy.
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Beef cattle tons remained consistent with the 1997 period, however IOIC
decreased 7.5% due to lower ingredient profits and intense competition
for the cattle feed business. Dairy cattle tons decreased 4.2% due to
some product mix switch to concentrates and a decrease in the number of
smaller dairy operations. Dairy IOIC decreased 4.6% due primarily to
the decrease in volume. Hog volume and IOIC decreased 3.9% and 7.5%,
respectively, due to the depressed market conditions and the resulting
pressure on hog feed margins.
Horse volume and IOIC increased 8.4% and 4.5%, respectively over the
1998 period. The success in growing this business was the result of
continued aggressive promotion of products. Laying chicken and meatbird
volume decreased 11.9% from 1997 with a corresponding decrease in IOIC
of 7.3%. The decrease can be attributed to the loss of sales of lower
margin turkey and broiler feed to two large customers. Specialty and
other volume and IOIC increased 3.2% and 1.5%, respectively, over 1997.
Cost of products sold decreased $101.4 million, or 11.1% from 1997, due
primarily to the $122.1 million decrease in ingredient costs. This
decrease was partially offset by 1998 net losses of $13.8 million from
the Company's hog program due to the severely depressed hog market.
Manufacturing expenses increased $6.9 million over the 1997 period due
primarily to increased depreciation expense and other costs associated
with the opening of the new Lubbock mill in the fourth quarter of 1998.
Marketing, distribution and advertising costs increased $3.3 million
from 1997 due primarily to an increase in the sales force and costs
associated with the roll out of the America's Country Stores retail
concept. General and administrative expenses increased $31.8 million
primarily due to the $15.9 million of compensation paid to management
and holders of options and stock rights units as a part of the Merger,
an increase in the provision for bad debt losses on capital loans and
trade receivables of $10.2 million and $5.0 million attributable to
increased information system costs and relocation and severance costs.
The additional bad debt provision is primarily related to customers in
the hog industry.
Amortization of intangibles and research and development costs remained
consistent with the 1997 period.
The provision for loss on guarantees of $14.2 million includes an
$11.5 million charge for a guarantee the Company has related to an
entity that provided funding for the Company's network of independently-
owned dealers and producers. The remaining $2.7 million relates to loan
guarantees 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. See Note 12 of Notes to Consolidated
Financial Statements for a further discussion of the loss on guarantees
in 1998.
Other (income) expense, net for 1998 relates to service fees for swine
and dairy management, the (income) loss on the Company's equity
investments, losses on marketing arrangements and losses on the sale of
discontinued products. An increase in service fees of $1.1 million over
1997 was offset by losses on marketing arrangements of $5.9 million due
primarily to the depressed conditions prevailing in the hog market.
Additionally, the Company incurred a charge of $4.6 million on the sale
of discontinued products.
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Interest expense for 1998 increased $13.0 million as a result of the
increase in the outstanding debt under the New Credit Facility and the
Senior Subordinated Notes due 2010. The Company's effective income tax
rate in 1998 approximated the statutory rate. The Company's effective
income tax rate exceeded the statutory rate in 1997 due to amortization
of goodwill not being allowed as a tax deduction. 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.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Due to overall lower commodity prices, net sales decreased 6.9% in 1997.
However, gross profit increased $12.9 million in 1997, or 6.4% over
1996. Overall volume was 4.71 million tons for the year ended
December 31, 1997, a 5.6% decrease from 1996. The decrease in volume
was attributable to a decrease in animal numbers, a switch to more
concentrates and consolidation in the hog industry. Average feed IOIC
per ton was $65.08 for 1997, an 8.1% increase over the year ended
December 31, 1996. The increase in average feed IOIC per ton was
attributable to a shift to the purchase of concentrates and improved
higher value products.
For 1997, beef cattle tons decreased 6.7% from 1996 due primarily to
reduced animal numbers and excellent pasture conditions. However, IOIC
increased 2.7% as customers switched to improved higher value products
with higher margins. Dairy cattle tons decreased 8.9% from 1996 to
1997, though IOIC actually increased as a result of some product mix
switch to concentrates. Hog volume decreased 10.4% with IOIC also
decreasing 4.3%. This decrease in hog volume and IOIC was primarily
attributable to a former customer discontinuing its purchase of feed
under a feed supply agreement and continued consolidation in the hog
industry.
Horse volume and IOIC increased 10.6% and 16.3%, respectively, over
1996. The Company's success in continuing to grow this business was the
result of the aggressive promotion of these products resulting in an
increase in market share. Laying chicken and meatbird volume increased
1.9% over 1996 but IOIC decreased 6.4% due to increased sales of lower
margin duck feed. Specialty and other volume decreased 1.8% from 1996,
but IOIC increased 2.1% due to a shift in product mix.
Cost of products sold decreased $96.7 million in 1997, or 9.6% from
1996, due primarily to the $95.1 million decrease in ingredient costs.
Manufacturing expenses also decreased $1.6 million due to reduced volume
and the cost savings realized as a result of closing seven plants in
late 1996. Marketing, distribution and advertising costs increased
$2.6 million from 1996 due primarily to an increase in field selling
costs. General and administrative expenses decreased $1.8 million due
primarily to reduced severance costs and continued emphasis on cost
control.
The increase in amortization of intangibles for 1997 reflected
additional amortization related to a decrease in the estimated value of
a feed supply contract with a former customer, for which the Company
recorded a $4.4 million loss provision in 1997. See Note 5 of Notes to
Consolidated Financial Statements for a further discussion of the write-
down of the feed supply contract in 1997.
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Research and development costs increased $0.2 million in 1997, or 2.6%
from 1996, as the Company continued its emphasis on research and
enhancement of products.
Other income, net for 1997 related to service fees for swine and dairy
management, the (income) loss on the Company's equity investments and
the (income) loss on marketing arrangements. These amounts were
comparable to 1996 amounts except that other income for 1996 also
reflected the proceeds received in settlement of claims for excess
charges on raw material purchases in prior years and the profit on the
sale of the Company's bromethaline inventory and related trademarks and
other rights.
Interest expense for 1997 decreased as a result of the decrease in
outstanding debt, offset partially by the premium paid on the
extinguishment of $10.0 million of Senior Subordinated Notes due 2003.
The Company's effective income tax rate exceeded the statutory rate in
both 1996 and 1997 due to amortization of goodwill not being allowed as
a tax deduction. 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 29 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
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enhance its information systems beginning in 1997 and through the year
2000 will approximate $25 million, of which $6 to $8 million is yet to
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
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 year ended December 31, 1998, net cash provided by operating
activities was $22.6 million compared to net cash provided by operating
activities of $70.8 million in 1997 and $57.6 million in 1996. The
decrease from the prior year can primarily be attributed to the $15.9
million in compensation paid to management and holders of options and
stock rights units as a part of the Merger and cash losses on swine
operations and market risk programs of $16.6 million. Additionally,
interest paid increased $11.4 million resulting from the increase in
outstanding debt under the Credit Agreement and the Notes due 2010 and
the Company made payments of $2.0 million to fund guarantees.
Net cash used in investing activities was $28.7 million in 1998, $29.3
million in 1997 and $22.1 million in 1996. These amounts consisted
primarily of purchases of property, plant and equipment and other
assets, which totaled $29.8 million in 1998, $30.4 million in 1997 and
$23.9 million in 1996. Capital expenditures in 1998 were consistent
with 1997, as the Company finalized the construction of the Lubbock
plant and continued the implementation of an enhanced accounting and
information reporting system.
In 1997, capital expenditures included approximately $14.5 million for
construction of new plants in Lubbock, Texas and Hagerstown, Maryland.
The 1997 increase in net cash used in investing activities over the 1996
amount was also attributable to costs incurred to purchase and implement
an enhanced accounting and information reporting system. The Company
also makes expenditures that it believes are necessary to fulfill its
environmental compliance practices. Capital expenditures for
environmental control facilities to maintain compliance with
environmental regulations are included in the Company's overall capital
budget and, together with other environmental related costs, were less
than $1 million in each year 1998, 1997 and 1996.
25
<PAGE>
<PAGE>
Net cash provided by financing activities in 1998 includes the proceeds
from the Credit Agreement of $220.0 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, IRB Loans totaling $298.2 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. At December 31, 1998, $20.0 million was outstanding
under the Revolving Credit Facility.
In 1997, net cash used in financing activities included the repayment of
the Senior Term Loan of $26.4 million and the extinguishment of
$10.0 million of the existing Senior Subordinated Notes. Additionally,
in 1997 the Company loaned $1.2 million to the ESOP for the purchase of
shares of Holdings common stock from existing shareholders. In 1996,
net cash used in financing activities included the repayment of the
Senior Term Loan of $27.0 million and $6.0 million under the revolving
credit facility. Additionally, in 1996, the Company loaned $6.3 million
to the ESOP for the purchase of Holdings Common Stock and received
proceeds of $8.3 million from the sale of industrial revenue bonds to
finance the construction of a new manufacturing facility in Hagerstown,
Maryland.
At December 31, 1998, the Company had $41.4 million in cash and cash
equivalents on hand, and approximately $69.2 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. 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). Based on Excess Cash Flow
for 1998, a supplemental repayment is not required.
Effective December 31, 1998, the Company amended its Credit Agreement
with the syndicate of lenders. The amendment increases the interest
rates on the Revolving Credit Facility and Tranche A Term Loan by 0.75%
for bank prime rate and Eurodollar rate loans and increases the interest
rates on the Tranche B Term Loan by 1.00% for bank prime rate and
Eurodollar rate loans. The amendment also changed the computation of
certain financial covenants for the period December 31, 1998 to
March 31, 2001 to account for changes in the Company's financial
condition as of December 31, 1998 and added a covenant limiting the
annual losses related to the Company's swine exposure. While the
26
<PAGE>
<PAGE>
Company was in compliance with its debt covenants in the amended Credit
Agreement at December 31, 1998, there is no assurance that the Company
will be in compliance with such covenants in future periods.
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 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 and could have a material adverse affect
on the Company.
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,
1999; however, the Company does not believe that the adoption of this
statement will have a material impact 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.
ITEM 7A. 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.
27
<PAGE>
<PAGE>
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
December 31,
1999 2000 2001 2002 2003 THEREAFTER TOTAL 1998
---- ---- ---- ---- ---- ---------- ----- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Notes $ -- $ -- $ -- $ -- $ -- $350.0 $350.0 $357.6
Interest rate 9.0%
Variable rate term debt
including current
portion:
Tranche A $7.3 $10.3 $13.3 $16.3 $19.3 $ 29.7 $ 96.2 $ 96.2
Interest rate <F1>
Tranche B $0.3 $ 0.3 $ 0.3 $ 0.3 $ 0.3 $ 98.3 $ 99.8 $ 99.8
Interest rate <F2>
<FN>
<F1> Eurodollar plus 2.75% (7.56% at December 31, 1998)
<F2> Eurodollar plus 3.25% (7.81% at December 31, 1998)
</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 base rate in the Credit
Agreement falls below 5.2% and will receive interest if the base rate in
the Credit Agreement is above 7.0%. There were no material payments or
receipts of interest in 1998. Subsequent to year end, the Company
entered into a swap contract 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. Based on interest rates
at December 31, 1998, an increase in interest rate of 1.0% would result
in an increase in interest expense of $1.3 million after considering the
option contract and the swap contract.
28
<PAGE>
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report--Deloitte & Touche LLP 30
Independent Auditors' Report--KPMG LLP 31
Consolidated Balance Sheets--December 31, 1998 and 1997 32
Consolidated Statements of Operations--Periods March 13, 34
1998 through December 31, 1998 and January 1, 1998
through March 12, 1998 and Years ended December 31,
1997 and 1996
Consolidated Statements of Stockholder's Equity--Periods 35
March 13, 1998 through December 31, 1998 and January 1,
1998 through March 12, 1998 and Years ended December
31, 1997 and 1996
Consolidated Statements of Cash Flows--Periods March 13, 36
1998 through December 31, 1998 and January 1, 1998
through March 12, 1998 and Years ended December 31,
1997 and 1996
Notes to Consolidated Financial Statements 38
29
<PAGE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
BOARD OF DIRECTORS AND STOCKHOLDER
PURINA MILLS, INC.
We have audited the accompanying consolidated balance sheets of Purina
Mills, Inc. and Subsidiaries as of December 31, 1997, and the related
consolidated statements of operations, stockholder's equity, and cash
flows for each of the two years in the period ended December 31, 1997
and the period January 1, 1998 through March 12, 1998. Our audits also
included the consolidated financial statement schedule listed in the
Index at Item 14(a) for each of the two years in the period ended
December 31, 1997 and the period January 1, 1998 through March 12, 1998.
These financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and the financial
statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in
all material respects, the financial position of Purina Mills, Inc. and
Subsidiaries at December 31, 1997, and the results of their operations
and their cash flows for each of the two years in the period ended
December 31, 1997 and the period January 1, 1998 through March 12, 1998,
in conformity with generally accepted accounting principles. Also, in
our opinion, such consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly in all material respects the
information set forth therein.
DELOITTE & TOUCHE LLP
Saint Louis, Missouri
August 7, 1998
30
<PAGE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
BOARD OF DIRECTORS AND STOCKHOLDER
PURINA MILLS, INC.
We have audited the accompanying consolidated balance sheet of Purina
Mills, Inc. and Subsidiaries as of December 31, 1998, and the related
consolidated statements of operations, stockholder's equity, and cash
flows for the period March 13, 1998 through December 31, 1998. In
connection with our audit of the consolidated financial statements, we
have also audited the financial statement schedule as listed in
Item 14 (a) (2) for the period March 13, 1998 through December 31, 1998.
These consolidated financial statements and the financial statement
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
and the financial statement schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Purina Mills, Inc. and Subsidiaries at December 31, 1998, and the
results of their operations and their cash flows for the period March
13, 1998 through December 31, 1998, in conformity with generally
accepted accounting principles. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements,
effective March 12, 1998, Koch Agriculture Company acquired all of the
outstanding stock of PM Holdings Corporation, which owns 100% of Purina
Mills, Inc. and Subsidiaries, in a business combination accounted for as
a purchase. As a result of the acquisition, the consolidated financial
information for the period after the acquisition is presented on a
different cost basis than that for the periods before the acquisition
and, therefore, is not comparable.
KPMG LLP
Saint Louis, Missouri
February 13, 1999
31
<PAGE>
<PAGE>
<TABLE>
PURINA MILLS, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
<CAPTION>
See Note 1
(Dollars in Thousands, Except Share Amounts)
POST-MERGER PRE-MERGER
DECEMBER 31, DECEMBER 31,
ASSETS 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 41,446 $ 27,620
Accounts receivable - trade, net of allowance
for doubtful accounts of $9,044 and $6,539
at December 31, 1998 and 1997, respectively 44,105 51,208
Inventories 61,862 66,800
Prepaid expenses, deferred and other assets 3,785 14,692
Deferred income taxes 16,428 8,746
TOTAL CURRENT ASSETS 167,626 169,066
Property, plant and equipment, net 262,791 243,718
Intangible assets, net 333,633 122,403
Deferred income taxes 10,499 7,881
Notes receivable 4,258 10,775
Deferred financing costs, net 11,456 9,813
Other assets 25,445 19,942
TOTAL ASSETS $815,708 $583,598
- ---------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE>
<PAGE>
<TABLE>
PURINA MILLS, INC. AND SUBSIDIARIES
- ---------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
<CAPTION>
See Note 1
(Dollars in Thousands, Except Share Amounts)
POST-MERGER PRE-MERGER
DECEMBER 31, DECEMBER 31,
LIABILITIES AND STOCKHOLDER'S EQUITY 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable -- other $ 50,559 $ 76,078
Accounts payable -- affiliate 42,321 --
Customer advance payments 16,870 16,503
Accrued expenses 24,881 21,756
Bank borrowings under Revolving Credit Facility 20,000 --
Interest payable 9,861 6,771
Current portion of long-term debt 7,550 19,170
TOTAL CURRENT LIABILITIES 172,042 140,278
Retirement obligations 26,061 28,768
Accrued post retirement benefit costs 458 37,470
Other liabilities 12,461 831
Long-term debt 538,547 263,119
Commitments and contingencies (Notes 12 and 13)
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 (43,151) (27,192)
Accumulated other comprehensive loss -- (2,099)
TOTAL STOCKHOLDER'S EQUITY 66,139 50,396
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $815,708 $583,598
- ---------------------------------------------------------------------------------------------
See accompanying notes.
</TABLE>
33
<PAGE>
<PAGE>
<TABLE>
PURINA MILLS, INC. AND SUBSIDIARIES
- -----------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
See Note 1
(Dollars in Thousands)
POST-MERGER PRE-MERGER PRE-MERGER
MARCH 13 TO JANUARY 1 TO YEAR ENDED DECEMBER 31,
DECEMBER 31, MARCH 12, --------------------------
1998 1998 1997 1996
----------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES $784,408 $214,272 $1,128,390 $1,212,197
COSTS AND EXPENSES:
Cost of products sold 640,359 171,233 912,984 1,009,714
Marketing, distribution and
advertising 73,064 17,543 87,333 84,751
General and administrative 59,880 27,573 55,697 57,532
Amortization of intangibles 14,491 3,838 20,572 19,487
Research and development 5,429 1,376 7,166 6,982
Provision for plant closings and
asset impairments -- -- 4,402 14,042
Provision for loss on guarantees 14,175 -- -- --
Other (income) expense -- net 4,470 109 (4,523) (10,575)
811,868 221,672 1,083,631 1,181,933
OPERATING INCOME (LOSS) (27,460) (7,400) 44,759 30,264
Interest expense 39,467 6,144 32,632 35,703
Income (loss) before income taxes (66,927) (13,544) 12,127 (5,439)
Provision (benefit) for income taxes (23,776) (5,050) 5,193 (646)
NET INCOME (LOSS) $(43,151) $ (8,494) $ 6,934 $ (4,793)
- -----------------------------------------------------------------------------------------------
See accompanying notes.
</TABLE>
34
<PAGE>
<PAGE>
<TABLE>
PURINA MILLS, INC. AND SUBSIDIARIES
- -----------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
<CAPTION>
See Note 1
(Dollars in Thousands)
ACCUMULATED
ADDITIONAL OTHER RETAINED
COMMON PAID-IN COMPREHENSIVE EARNINGS COMPREHENSIVE
STOCK CAPITAL LOSS (DEFICIT) INCOME (LOSS) TOTAL
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PRE-MERGER
- ----------
BALANCE DECEMBER 31, 1995 $ -- $ 82,340 $ -- $ (3,129) $ -- $ 79,211
Released ESOP shares -- 320 -- -- -- 320
Appreciation in value of earned
ESOP shares -- -- -- (1,613) -- (1,613)
Purchase of shares for the ESOP,
net -- (4,587) -- -- -- (4,587)
Activity under stock plans -- 1,366 -- -- -- 1,366
Comprehensive loss, net of tax
Net loss -- -- -- (4,793) (4,793) (4,793)
Other comprehensive loss:
Adjustment for minimum
supplemental retirement
liabilities -- -- (1,241) -- (1,241) (1,241)
-------------
Comprehensive loss -- -- -- -- (6,034)
=============
BALANCE DECEMBER 31, 1996 -- 79,439 (1,241) (9,535) 68,663
Released ESOP shares -- 616 -- -- -- 616
Appreciation in value of earned
ESOP shares -- -- -- (24,591) -- (24,591)
Purchase of shares for the ESOP,
net -- (1,316) -- -- -- (1,316)
Activity under stock plans -- 948 -- -- -- 948
Comprehensive income, net of
tax
Net income -- -- -- 6,934 6,934 6,934
Other comprehensive loss:
Adjustment for minimum
supplemental retirement
liabilities -- -- (858) -- (858) (858)
-------------
Comprehensive income -- -- -- -- 6,076 --
=============
BALANCE DECEMBER 31, 1997 -- 79,687 (2,099) (27,192) 50,396
Comprehensive loss, net of tax
Net loss -- -- -- (8,494) (8,494) (8,494)
=============
Balance March 12, 1998 -- 79,687 (2,099) (35,686) -- 41,902
Adjustments due to merger -- 29,603 2,099 35,686 -- 67,388
POST-MERGER
- -----------
Comprehensive loss, net of tax
Net loss -- -- -- (43,151) (43,151) (43,151)
=============
BALANCE DECEMBER 31, 1998 $ -- $109,290 $ -- $(43,151) $ 66,139
- ------------------------------------------------------------------------------------------------ ------------
See accompanying notes.
</TABLE>
35
<PAGE>
<PAGE>
<TABLE>
PURINA MILLS, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
See Note 1
(Dollars in Thousands)
POST-MERGER PRE-MERGER PRE-MERGER
MARCH 13 TO JANUARY 1 TO YEAR ENDED DECEMBER 31,
DECEMBER 31, MARCH 12, ---------------------------
1998 1998 1997 1996
---------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $(43,151) $ (8,494) $ 6,934 $(4,793)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 39,275 9,908 49,569 50,350
Compensation under ESOP -- -- 5,625 5,726
Provision for deferred income taxes (29,580) (108) (171) (5,855)
Loss on disposal of property, plant and equipment 1,266 169 1,028 999
Provision for loss on plant closings and asset impairments -- -- 4,402 14,042
Provision for loss on guarantees and notes receivable 19,812 -- -- --
Net changes in operating assets and liabilities:
Accounts receivable -- trade (1,628) 8,731 4,608 (317)
Inventories 3,358 1,580 (5,436) 73
Prepaid expenses and other assets 10,165 (6,535) 517 (5,288)
Accounts payable and other liabilities 60,405 (42,602) 3,704 2,712
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 59,922 $(37,351) $70,780 $57,649
</TABLE>
36
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<PAGE>
<TABLE>
PURINA MILLS, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
See Note 1
(Dollars in Thousands)
POST-MERGER PRE-MERGER PRE-MERGER
MARCH 13 TO JANUARY 1 TO YEAR ENDED DECEMBER 31,
DECEMBER 31, MARCH 12, ----------------------------
1998 1998 1997 1996
---------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTING ACTIVITIES:
Purchase of property, plant, equipment and other assets $ (25,280) $ (4,486) $(30,429) $(23,915)
Proceeds from sale of property, plant and equipment 154 58 941 1,097
Net reduction in notes receivable 782 98 182 673
NET CASH USED IN INVESTING ACTIVITIES (24,344) (4,330) (29,306) (22,145)
FINANCING ACTIVITIES:
Proceeds from Senior Subordinated Notes -- 350,000 -- --
Proceeds from Term Loans -- 200,000 -- --
Proceeds (repayment) of Revolving Credit Facility, net 20,000 -- -- (6,000)
Repayment of Term Loans, Senior Subordinated Notes and IRBs (298,151) -- (36,409) (26,962)
Payment of dividends to PM Holdings Corporation -- (237,172) -- --
Proceeds from Industrial Revenue Bonds -- -- -- 8,300
Loan to ESOP -- -- (1,208) (6,318)
Payment of financing costs (371) (11,894) (23) (105)
Other (183) (2,300) (1,676) (436)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (278,705) 298,634 (39,316) (31,521)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (243,127) 256,953 2,158 3,983
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 284,573 27,620 25,462 21,479
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 41,446 $ 284,573 $ 27,620 $ 25,462
- ------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW STATEMENT
INFORMATION:
Interest paid $ 31,070 $ 11,267 $ 30,942 $ 32,417
Income taxes paid (refunded) (800) 43 7,892 5,565
See accompanying notes.
</TABLE>
37
<PAGE>
<PAGE>
PURINA MILLS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Purina Mills, Inc. ("Purina Mills", "PMI" or the "Company") develops,
manufactures and markets animal nutrition products for dairy cattle,
beef cattle, hogs and horses. The Company also develops, manufactures
and sells poultry feeds and specialty feeds for rabbits, zoo animals,
birds, fish and pets. The Company's products are sold as complete feeds
or as concentrates that are mixed with a customer's base ingredients.
The Company distributes its products through two primary distribution
channels, dealers and directly to end-users. The Company's dealer
network consists of over 4,500 independent dealers located in 48 states.
The number of direct customers is in excess of 4,500. The Company
operates 55 feed manufacturing plants located in 25 states.
Pursuant to the Agreement and Plan of Merger among PM Holdings
Corporation ("Holdings"), Koch Agriculture Company ("Koch Agriculture")
and Arch Acquisition Corporation, a wholly owned subsidiary of Koch
Agriculture, dated as of January 9, 1998 (the "Merger Agreement"), Arch
Acquisition Corporation was merged with and into Holdings (the
"Merger"), with Holdings being the surviving corporation. As a result
of the Merger, 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.
38
<PAGE>
<PAGE>
The 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.
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
----------
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 the period 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 consolidated financial statements for periods
prior to March 12, 1998 have been prepared on the predecessor cost basis
of the Company. The consolidated balance sheet at December 31, 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 allocation of the $109.3 million purchase price for the Company is
summarized as follows (in millions):
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
------------
39
<PAGE>
<PAGE>
The following unaudited pro forma financial data for the years ended
December 31, 1998 and 1997, respectively, have been prepared assuming
that the Merger and related financings were consummated on January 1,
1997 (in millions):
YEAR ENDED
DECEMBER 31,
-----------------------------
1998 1997
------ ------
Net sales $998.7 $1,128.4
Net loss $(54.3) $ (14.2)
These pro forma results have been prepared for comparative purposes only
and include certain adjustments such as additional amortization on
intangible assets and increased interest expense on the related 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.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosures of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Inventories: Carrying amounts of merchandise, materials and animal
inventories are generally determined on a moving average cost basis and
are stated at the lower of cost or market.
40
<PAGE>
<PAGE>
Property, Plant and Equipment: Property, plant and equipment are stated
at cost. Expenditures for new facilities and those which substantially
increase the useful lives of property are capitalized. Maintenance,
repairs and minor renewals are expensed as incurred. When properties
are retired or otherwise disposed of, the related cost and accumulated
depreciation are removed from the accounts and gains or losses on the
dispositions are reflected in earnings. Depreciation is generally
provided on the straight-line basis by charges to costs or expenses at
rates based upon the following estimated useful lives:
Buildings and improvements 15 to 30 years
Machinery and equipment 5 to 15 years
Office furniture and equipment 3 to 15 years
Intangible Assets (including Goodwill): Intangible assets represent the
excess of cost over the net tangible assets of the business at the time
of acquisition and are amortized over their estimated period of related
benefit. Intangible assets other than goodwill are amortized over 1 to
20 years. Goodwill is amortized on a straight-line basis over 40 years.
Management periodically reviews the value of its intangible assets to
determine if an impairment has occurred or whether changes have occurred
that would require a revision to the remaining useful life. In making
such determination, management evaluates the performance, on an
undiscounted basis, of the underlying operations or assets which give
rise to such amount. Based on this review, management does not believe
that any such impairment has occurred in the current year.
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.
Statement of Position No. 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use ("SOP 98-1") is
effective for financial statements issued for fiscal years beginning
after December 15, 1998, although early adoption is allowed. Since the
Company's existing policies are 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 $13.4 million and $8.3 million as of December 31, 1998 and
1997, 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.
Deferred Financing Costs: Deferred financing costs are stated at cost
and amortized over the life of the related debt using the effective
interest method. Amortization of deferred financing costs is included
in interest expense.
41
<PAGE>
<PAGE>
Income Taxes: Deferred income taxes are recognized for the effect of
temporary differences between the financial reporting basis and the tax
basis of the assets and liabilities at enacted tax rates expected to be
in effect when such amounts are realized or settled.
The 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 the
period March 13 to December 31, 1998 is computed on this basis. The
results of operations of the Company after March 12, 1998 will be
included in the consolidated U.S. corporation income tax return 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 will be included in the consolidated U.S. corporation income
tax return of Holdings.
Cash Equivalents: For purposes of the consolidated statements of cash
flows, the Company considers all highly liquid investments with an
original maturity of three months or less to be cash equivalents. Cash
includes currency on hand and demand deposits with financial
institutions. The carrying amount reported in the consolidated balance
sheets for cash and cash equivalents approximates their fair value.
Fair Value of Financial Instruments: The carrying amounts of cash and
cash equivalents and short-term borrowings approximate fair value
because of the short-term maturity of these instruments. Notes
receivable carry current market interest rates, so that discounted
future cash flows approximate their carrying value. As of December 31,
1998 and 1997, the fair value of debt, including current maturities, was
$553.6 million and $295.1 million, respectively, compared to its
carrying value of $546.1 million and $282.3 million, respectively. The
fair value of debt instruments as of December 31, 1998 and 1997 was
based on quoted market prices and management's estimate for instruments
without quoted market prices.
Revenue Recognition: Net sales are generally recognized when products
are shipped. Accruals for customer discounts are recorded when revenues
are recognized.
Comprehensive Income: The Financial Accounting Standards Board recently
issued Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income ("SFAS 130"). The Company adopted the standard
effective January 1, 1998. The standard establishes standards for
reporting and presentation of comprehensive income and its components in
a full set of financial statements. Comprehensive income (loss)
consists of net income (loss) and minimum pension liability adjustments
and is presented in the consolidated statements of stockholder's equity.
The Standard requires only additional disclosures in the consolidated
financial statements; it does not affect the Company's financial
position or results of operations. Prior year financial statements have
been reclassified to conform to the requirements of SFAS 130.
42
<PAGE>
<PAGE>
Segment Reporting: The Financial Accounting Standards Board recently
issued Statement of Financial Accounting Standards No. 131, Disclosure
about Segments of an Enterprise and Related Information ("SFAS 131"),
which is effective for periods beginning after December 15, 1997. SFAS
131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial
statements. The Company adopted the standard effective January 1, 1998.
The adoption of the standard did not affect the financial statements.
Reclassifications: Certain reclassifications have been made to the
prior periods consolidated financial statements to conform to the
consolidated financial statement presentation for the current year.
3. INVENTORIES
Inventories consist of the following (in thousands):
DECEMBER 31,
-----------------------------
1998 1997
------ ------
Raw materials $34,619 $42,541
Finished goods 12,391 17,739
Animals 14,852 6,520
Total inventories $61,862 $66,800
-----------------------------
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (in thousands):
DECEMBER 31,
-------------------------------
1998 1997
------ ------
Land $ 13,312 $ 13,327
Buildings 77,192 73,965
Machinery and equipment 188,512 245,145
Construction in progress 7,547 13,674
286,563 346,111
Accumulated depreciation (23,772) (102,393)
Total $262,791 $ 243,718
-------------------------------
Total depreciation expense was $24.0 million, $5.3 million, $26.6
million and $27.6 million for the periods March 13, 1998 to December 31,
1998 and January 1, 1998 to March 12, 1998 and for the years ended
December 31, 1997 and 1996, respectively.
During 1996 the Company made the decision to discontinue all
manufacturing operations at seven of its facilities. Products for
distribution to customers of the closed facilities are being
manufactured at the Company's other facilities. In connection with
these plant closures, the Company recorded a loss of $9.3 million in
1996 on manufacturing assets, representing the amount by which the book
value exceeded the estimated net realizable value. The value of the
43
<PAGE>
<PAGE>
assets awaiting disposition was based on estimates of Company
management. Demolition costs of $.8 million and a write-off of $3.9
million for related goodwill was also recorded.
5. INTANGIBLE ASSETS
Intangible assets consist of the following (in thousands):
DECEMBER 31,
------------------------------
1998 1997
------ ------
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 262,528 57,662
Other intangibles 18,511 24,027
348,122 205,297
Accumulated amortization (14,489) (82,894)
Total $333,633 $122,403
-------------------------------
During 1996 the Company filed a breach of contract suit against a former
customer for lack of performance under a feed supply agreement executed
by the customer for future feed purchases. In 1997 the Company recorded
a loss of $4.4 million to reduce the net book value to management's
estimate of the net realizable value of the contract at that time. The
dispute was settled in 1998 with the former customer not being obligated
to any future feed purchases.
6. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
DECEMBER 31,
-------------------------------
1998 1997
------ ------
Term Loan $196,025 $ --
Senior Term Loan -- 74,622
Senior Subordinated Notes due 2010 350,000 --
Senior Subordinated Notes due 2003 -- 189,965
IRB Loans -- 17,400
Other 72 302
546,097 282,289
Less current portion (7,550) (19,170)
Total $538,547 $263,119
-------------------------------
44
<PAGE>
<PAGE>
The annual amortization schedule of the Term Loan (defined below) is
$7.6 million in 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 any and all of the outstanding existing 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 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 sublimit for letters of credit. The Term Loan consists of
a $100.0 million Tranche A Term Loan and a $100.0 million Tranche B Term
Loan. 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 used to redeem the Company's Industrial Revenue Bonds and
are available to finance the Company's ongoing working capital
requirements. At December 31, 1998, a balance of $20.0 million was
outstanding under the Revolving Credit Facility and $69.2 million was
available for future borrowings. 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 December 31, 1998, the Company had $10.8 million in
outstanding letters of credit. 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 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 7.9% at December 31, 1998. 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 base rate in the Credit
Agreement falls below 5.2% and will receive interest if the base rate in
the Credit Agreement is above 7.0%. There were no material payments or
receipts of interest in 1998.
45
<PAGE>
<PAGE>
The Company is required to make annual supplemental repayments under its
Term Loan in amounts equal to 50% of Excess Cash Flow, as defined in the
Credit Agreement between the Company and the group of lending banks.
Based on Excess Cash Flow for 1998, a supplemental repayment is not
required.
Notes: The Company sold $350.0 million aggregate principal amount of
its 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 December 31, 1998, restricted
net assets of the Company were approximately $66.1 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 in the amended Credit Agreement at
December 31, 1998. See Note 16.
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.
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.
46
<PAGE>
<PAGE>
8. STOCK OPTION PLANS
Pursuant to the Merger, each outstanding option to purchase Holdings
common stock and each stock rights unit entitling the holder thereof to
acquire Holdings common stock became 100% vested. Option holders and
stock rights unit holders received the Merger Consideration for each
share of Holdings common stock into which such options or stock rights
units were exercisable immediately prior to the Merger. Cash proceeds
paid pursuant to the Merger to holders of options and stock rights units
was $13.5 million. During 1998 no additional stock options or stock
rights units were granted and there were no stock options or stock
rights units outstanding as of December 31, 1998.
The Company had three stock option plans as of January 1, 1998: the
1993 Stock Option Plan ("1993 Plan"), the PM Holdings Corporation
Omnibus Stock and Incentive Plan ("1995 Plan"), and the PM Holdings
Corporation Non-Employee Directors Stock Option Plan ("Directors Plan").
The 1993 Plan provides for the issuance of both incentive stock options
and non-qualified options. Under the plan, a maximum of 20,000 shares
may be granted at prices not less than 100% and 85% of the fair market
value of a share of common stock on the date the option is granted, for
incentive stock options and non-qualified options, respectively. The
terms of all options granted may not exceed ten years from the date of
grant. This plan was replaced by the 1995 Plan and no additional awards
will be granted under the 1993 Plan. The 1995 Plan provides for the
issuance of stock options, stock rights units, stock appreciation
rights, restricted stock and common stock to key employees of the
Company. Under the plan the 13,500 shares not previously granted under
the 1993 Plan plus an additional 26,000 shares may be granted. Upon the
exercise of a stock rights unit, a participant receives the equivalent
number of shares of common stock. The Directors Plan provides for each
non-employee director to receive an option to purchase 500 shares at
fair market value on the date of grant. Under the plan a maximum of
15,000 shares may be granted. All options and rights granted under the
three plans vest over a three-year period and have a term of ten years.
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
Accounting for Stock-Based Compensation. The new standard establishes a
fair value based method of accounting for the issuance of stock options
and similar equity instruments to employees. Under the fair value based
method, compensation cost is measured at the grant date based on the
fair value of the award and is recognized over the service period, which
is usually the vesting period. SFAS 123 allows companies to elect fair
value based accounting for stock compensation or continue using the
intrinsic value method of accounting as required by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25). The Company has elected to continue to apply APB 25
in its consolidated financial statements. Under APB 25, no compensation
cost has been recognized for stock options granted under the Company's
three plans. Compensation expense is recognized over the three-year
vesting period for the fair market value of the stock rights units at
the date of grant.
47
<PAGE>
<PAGE>
Pro forma information regarding net income is required by SFAS 123, and
has been determined as if the Company had accounted for its employee
stock options and stock rights under the fair value based method. The
estimated fair value of options and rights granted during 1997 and 1996
is as follows (per share):
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996
------ ------
Stock Options $152.70 $143.30
Stock Rights Units $320.00 $310.00
The fair value for the options and rights was estimated at the date of
grant under the minimum value method. The minimum value was estimated
to be the excess of the fair market value of the stock at the date of
grant over the present value of the exercise price, discounted at the
risk-free rate, over the expected exercise life of the options, with the
following weighted-average assumptions for 1997 and 1996, respectively:
risk-free interest rates of 6.7% and 6.4%, no dividend yield, and a
weighted-average expected life of ten years.
For purposes of pro forma disclosures, the estimated fair value of the
options and rights is amortized to expense over the vesting period. The
Company's pro forma information follows:
(Dollars in Thousands)
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996
------ ------
Net income (loss) per Consolidated
Statements of Operations:
As reported $6,934 $(4,793)
Pro forma $6,412 $(5,139)
48
<PAGE>
<PAGE>
A summary of the status of stock options as of December 31, 1997 and
1996 and activity during the years then ended is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1997 1996
------ ------
WTD. WTD.
AVG. AVG.
EXER. EXER.
SHARES PRICE SHARES PRICE
------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding at beginning
of year 20,935 $208 15,250 $163
Granted 6,155 320 6,385 310
Exercised 434 139 100 108
Forfeited 531 247 600 186
Outstanding at end
of year 26,125 $235 20,935 $208
--------------------------------------------------------
Options exercisable
at year end 13,523 $179 9,758 $153
--------------------------------------------------------
</TABLE>
As of December 31, 1997 and 1996, there were 10,257 and 7,385 stock
rights units outstanding, respectively, under the 1995 Plan. Such stock
rights units were exercisable over a three-year period and 3,635 units
were exercisable at December 31, 1997.
9. EMPLOYEE BENEFIT PLANS
The Company sponsors a defined contribution 401(k) plan which was
available to substantially all eligible employees at the time of the
Merger. New employees of the Company after the Merger participate in a
similar plan sponsored by Koch Industries.
Before the Merger, the Company sponsored an ESOP covering substantially
all employees exclusive of those covered by a collective bargaining
agreement. The Company made contributions to the ESOP in an amount
equal to 50% of employee contributions to the Company's 401(k) plan, up
to a maximum of 4% of an individual employee's compensation. 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 common stock for the Merger Consideration. No contributions
were made to the ESOP during 1998.
49
<PAGE>
<PAGE>
Contributions to the ESOP and compensation expense attributable to
released shares for the years ended December 31, 1997 and 1996 are as
follows (in thousands):
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996
------ ------
Matching contributions $2,652 $2,546
Discretionary contributions 2,631 2,654
Total $5,283 $5,200
----------------------------
Compensation expense $6,305 $5,726
----------------------------
Subsequent to the Merger, the Company made matching contributions to the
Company's 401(k) in an amount equal to 50% of employee contributions to
the Company's 401(k) plan, up to a maximum of 3% of an individual
employee's compensation. Participants in the Company's 401(k) plan vest
in matching contributions at the time they are made.
The Company also made matching contributions for new employees
participating in the plan sponsored by Koch Industries in an amount
equal to 50% of employee contributions to the plan, up to a maximum of
3% of an individual employee's compensation. Participants in the plan
vest in matching contributions over a period of five years.
Effective January 1, 1999, those employees participating in the
Company's 401(k) plan will begin making their employee contributions to
the plan sponsored by Koch Industries. The Company will continue to
make matching contributions in an amount equal to 50% of employee
contributions to the plan, up to a maximum of 3% of an individual
employee's compensation. Participants' prior service with the Company
counts toward the vesting period.
During 1997 the Company maintained two defined benefit plans which
covered those employees whose employment is governed by the terms of a
collective bargaining agreement. Effective January 2, 1998, the net
assets of the plans were merged. The Company made annual contributions
to the plan which at least equal the amounts required by law.
Contribution amounts are determined by independent actuaries using an
actuarial cost method that has an objective of providing an adequate
fund to meet pension obligations as they mature over the long-term
future. At December 31, 1998 and 1997, the assets were held in equity
and fixed securities.
50
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The following table sets forth the funded status of the plan at December
31, 1998 and 1997, and the amounts recognized in the Company's
consolidated balance sheets at that date and the components of net
periodic pension costs related to the above plans for the years ended
December 31, 1998, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1997
---------------------------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $23,856 $22,075
Service cost 349 293
Interest cost 1,646 1,508
Actuarial loss 1,114 1,043
Benefits paid (1,141) (1,063)
Benefit obligation at end of year 25,824 23,856
---------------------------
CHANGES IN PLAN ASSETS:
Fair value of plan assets at beginning of year 22,050 20,652
Actual return on plan assets 2,082 2,461
Employer contribution 16 --
Benefits paid (1,141) (1,063)
Fair value of plan assets at end of year 23,007 22,050
---------------------------
Funded status (2,817) (1,806)
Unrecognized net actuarial loss 1,262 (3,411)
Net amount recognized $(1,555) $(5,217)
===========================
AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE
SHEETS CONSIST OF:
Accrued benefit liability $(1,555) $(5,217)
---------------------------
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
-----------------------------------------
<S> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost $ 349 $ 293 $ 308
Interest cost 1,646 1,508 1,455
Expected return on plan assets (1,682) (1,500) (1,441)
-----------------------------------------
Net periodic benefit cost $ 313 $ 301 $ 322
-----------------------------------------
WEIGHTED AVERAGE ASSUMPTIONS AS OF DECEMBER 31:
Discount rate 6.50% 7.00% 7.00%
Expected return on plan assets 8.50% 8.00% 8.00%
Rate of compensation increase 4.50% 4.00% 4.00%
</TABLE>
The Company has a nonqualified, unfunded supplemental executive
retirement plan for executives whose benefits under a prior salaried
retirement plan sponsored by a former owner were reduced because of
compensation under deferral elections or limitations under federal tax
laws. All benefit accruals under the supplemental employee retirement
plan ceased subsequent to August 31, 1993. The Company has retained
sponsorship of this plan, as well as the responsibility for all benefit
payments thereunder.
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<PAGE>
The Company also has a nonqualified, unfunded capital accumulation plan
for which it has purchased life insurance on the lives of the
participants. A grantor trust is the sole owner and beneficiary of such
policies. The amount of coverage is designed to provide sufficient
revenues to recover all costs of the plan if assumptions made as to
mortality experience, policy earnings and other factors are realized.
The following table sets forth the status of the non-qualified plans at
December 31, 1998 and 1997, and the amounts recognized in the Company's
consolidated balance sheets at that date and the net periodic costs
related to the above plans for the years ended December 31, 1998, 1997
and 1996 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1997
----------------------------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $ 23,551 $ 21,521
Interest cost 1,618 1,479
Actuarial loss 150 1,422
Benefits paid (813) (871)
Benefit obligation at end of year 24,506 23,551
----------------------------
CHANGES IN PLAN ASSETS:
Fair value of plan assets at beginning of year -- --
Employer contribution 813 871
Benefits paid (813) (871)
Fair value of plan assets at end of year -- --
----------------------------
Funded status (24,506) (23,551)
Unrecognized net actuarial loss -- 3,453
Net amount recognized $(24,506) $(20,098)
============================
AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE
SHEETS CONSIST OF:
Accrued benefit liability $(24,506) $(23,551)
Minimum liability adjustment -- 3,453
Net amount recognized $(24,506) $(20,098)
----------------------------
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
-----------------------------------------
<S> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT COST:
Interest cost $1,618 $1,479 $1,370
Amortization of unrecognized net loss 150 11 --
Net periodic benefit cost $1,768 $1,490 $1,370
-----------------------------------------
WEIGHTED AVERAGE ASSUMPTIONS AS OF DECEMBER 31:
Discount rate 6.50% 7.00% 7.00%
</TABLE>
52
<PAGE>
<PAGE>
Subsequent to the Merger, employees of the Company not covered by a
collective bargaining agreement participate in a defined benefit pension
plan sponsored by Koch Industries. The Company is charged a percentage
of eligible employees' compensation. The percentage was 4.1% in 1998
and the total cost to the Company approximated $1.0 million for the
period March 13 to December 31, 1998. The percentage is based primarily
on years of service and compensation rates near retirement.
10. POSTRETIREMENT BENEFITS OTHER THAN
PENSIONS/POSTEMPLOYMENT BENEFITS
The Company provided certain health care and life insurance benefits to
retired employees who met specified age and years of service
requirements. The life insurance plan provided a $5,000 benefit and was
available on a noncontributory basis. The health care plans paid a
stated percentage of most medical expenses reduced for any deductible
and co-payment, payments made by government programs and other group
coverage. The cost of providing these health care benefits was shared
with retirees. All plans were unfunded.
As a result of the Merger, the employee benefit plans of the Company
that provide health care and life insurance benefits to retired
employees were terminated. For any retiree who was 100% vested at the
time of the Merger, the Company will share a portion of their
postretirement health care cost for the three years following the date
of Merger. Retirees who were receiving health benefits under the health
plans of the Company have been provided medical benefits under Koch
Industries' medical plans. After the three-year period expires, neither
the Company nor Koch Industries will share a portion of the retirees'
postretirement health care cost.
53
<PAGE>
<PAGE>
The following table sets forth the status of the accrued postretirement
benefit cost recognized in the Company's consolidated balance sheets at
December 31, 1998 and 1997, and the net periodic postretirement benefit
cost for the years ended December 31, 1998, 1997 and 1996 (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1997
----------------------------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $ 18,710 $ 28,297
Service cost 118 837
Interest cost 336 1,809
Amendments (17,269) --
Actuarial loss (gain) 501 (11,236)
Benefits paid (1,440) (997)
Benefit obligation at end of year 956 18,710
----------------------------
CHANGES IN PLAN ASSETS:
Fair value of plan assets at beginning of year -- --
Employer contribution 1,440 1,793
Benefits paid (1,440) (1,793)
Fair value of plan assets at end of year -- --
----------------------------
Funded status (956) (18,710)
Unrecognized net actuarial loss (gain) 498 (15,246)
Unrecognized prior service credit -- (3,514)
Net amount recognized $ (458) $(37,470)
----------------------------
AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE
SHEETS CONSIST OF:
Accrued benefit liability $ (458) $(37,470)
----------------------------
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
---------------------------------------
<S> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost $ 118 $ 837 $1,182
Interest cost 336 1,809 2,353
Amortization of prior service credit (64) (111) (111)
Amortization of unrecognized net loss (gain) (175) (431) --
Net periodic benefit cost $ 215 $2,104 $3,424
---------------------------------------
WEIGHTED AVERAGE ASSUMPTIONS AS OF DECEMBER 31:
Discount rate 6.50% 7.00% 7.00%
</TABLE>
54
<PAGE>
<PAGE>
Actuarial assumptions used for the Company's retiree health care and
life insurance plans were as follows (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Projected health care cost trend rate 7.0% 8.0% 9.0%
Ultimate trend rate 6.50% 4.25% 4.50%
Year ultimate trend rate is achieved 2001 2002 2001
Effect of a 1% increase in the health
care cost trend rate on the APBO $24 $1,949 $3,202
Effect of a 1% increase in the health
care cost trend rate on the aggregate
of service and interest cost $ 1 $ 236 $ 398
</TABLE>
11. INCOME TAXES
The components of the provision for income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
POST-MERGER PRE-MERGER PRE-MERGER
MARCH 13 TO JANUARY 1 TO YEAR ENDED DECEMBER 31,
DECEMBER 31, MARCH 12, ---------------------------
1998 1998 1997 1996
--------------------------------------------------------------
<S> <C> <C> <C> <C>
CURRENT:
Federal $ 6,047 $(2,013) $4,159 $ 5,154
State (242) (872) 1,205 54
DEFERRED:
Federal (26,001) (2,239) 129 (4,967)
State (3,580) 74 (300) (887)
$(23,776) $(5,050) $5,193 $ (646)
--------------------------------------------------------------
</TABLE>
55
<PAGE>
<PAGE>
The provision for income taxes is different from the amounts computed by
applying the U.S. federal statutory income tax rate. The reasons for
these differences are as follows (in thousands):
<TABLE>
<CAPTION>
POST-MERGER PRE-MERGER PRE-MERGER
MARCH 13 TO JANUARY 1 TO YEAR ENDED
DECEMBER 31, MARCH 12, DECEMBER 31,
----------------------------------------------------
1998 1998 1997 1996
----------------------------------------------------
<S> <C> <C> <C> <C>
Income taxes at statutory rate $(23,424) $(4,739) $4,245 $(1,903)
State income taxes, net of federal benefit (2,485) (519) 587 (541)
Amortization of intangible assets 1,756 107 548 1,917
Meals and entertainment disallowance 75 245 148 303
Life insurance expense, net (104) (35) (463) (54)
Research tax credit (190) -- (64) (81)
Other, net 596 (109) 192 (287)
$(23,776) $(5,050) $5,193 $ (646)
----------------------------------------------------
</TABLE>
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Temporary differences which gave rise to deferred tax assets
and liabilities at December 31, 1998 and 1997 are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
--------------------------
<S> <C> <C>
DEFERRED TAX ASSETS:
Net operating loss carry forwards 20,412 --
Alternative minimum tax credit 9,725 6,736
Bad debt and loan loss reserve 11,597 2,560
Accrued retirement benefits 10,624 26,928
Other accruals not currently deductible for tax 7,531 7,266
Tax over book basis of inventory 328 273
Total deferred tax assets 60,217 43,763
DEFERRED TAX LIABILITIES:
Book over tax basis of property, plant
and equipment 23,243 14,309
Book over tax basis of intangible assets 10,047 12,827
Total deferred tax liabilities 33,290 27,136
Net deferred tax assets $26,927 $16,627
--------------------------
</TABLE>
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.
56
<PAGE>
<PAGE>
12. 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
December 31, 1998 the Company had funded $2.0 million on the guarantee
and had recorded a loss reserve for the remaining $9.5 million. At
December 31, 1997 the amount subject to such guarantee was $5.9 million.
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. A loss reserve for the
entire loan balance has also been recorded in the financial statements.
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 $8.7 million and $11.3 million at December 31, 1998 and
1997, respectively, under these types of arrangements. At December 31,
1998 the Company has recorded a loss reserve of $2.7 million for the
above guarantees. The maturities of these guarantees extend through
January 2009 with most significant maturities occurring prior to 2003.
Concentration of Credit Risk: Financial instruments which potentially
subject the Company to concentration of credit risk consist principally
of trade receivables. Substantially all of the Company's sales are to
companies or individuals in agriculture-related businesses, with
approximately 20% of its sales volume being feed for hogs. Hog
producers experienced severely depressed market prices in 1998 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
that was expected to result in control over the feeding of approximately
six million market hogs over the next 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 December 31, 1998 the Company has
future net purchase commitments, subject to the counterparties' ability
to perform, to acquire over 7.7 million feeders over the next nine years
through 2007. Approximately 30% of these commitments are at fixed
prices whereas the other 70% vary based on current or published futures
prices. The net purchase commitment of 7.7 million feeders represents
gross commitments of approximately 9.8 million feeders less 2.1 million
of which have contractually been sold. The Company's net position for
the next four years through 2002 is approximately 4.6 million feeders.
Additionally, the Company has direct ownership of several hog operations
which are expected to produce an additional 1.6 million feeders over the
next ten years. As hog producers are experiencing severely depressed
market prices for their end products, the Company has
57
<PAGE>
<PAGE>
significant exposure relating to its feeder pig program, direct hog
ownership and joint venture interests in hog operations. At December
31, 1998 and 1997, the Company had $10.3 million and $5.5 million,
respectively, in direct ownership of hogs.
Hog market prices have decreased drastically during 1998. Prices for
end products for December 1998 have fallen 65% from one year ago.
Furthermore, the overall decrease for 1998 approximated 52%.
Based on published market prices at December 31, 1998, the Company's net
commitment to purchase the 7.7 million feeders totals approximately
$250 million. 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 million and $20 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 and cash flows.
13. COMMITMENTS AND CONTINGENCIES
Operating Leases: The Company rents certain transportation vehicles,
warehouses and operating facilities under various operating leases, many
of which contain renewal or purchase options. Rent expense was $3.1
million, $1.0 million, $4.0 million and $3.3 million for the periods
March 13, 1998 to December 31, 1998 and January 1, 1998 to March 12,
1998 and for the years ended December 31, 1997 and 1996, respectively.
Future minimum lease payments for all noncancelable operating leases
having a remaining term in excess of one year consist of the following
at December 31, 1998 (in thousands):
OPERATING
LEASES
-------------
1999 $ 3,896
2000 3,211
2001 2,494
2002 2,075
2003 1,713
Thereafter 3,739
Total minimum lease payments $17,128
-------------
Litigation: The Company, in the ordinary course of business, is engaged
in various litigation and other proceedings principally relating to
product claims. The ultimate liability with respect to such litigation
and proceedings cannot be determined at this time. The Company is of
the opinion that the aggregate amount of any such liabilities will not
have a material impact on its financial position or results of
operations.
58
<PAGE>
<PAGE>
14. ACQUISITION COSTS
Included in general and administrative expenses for the period January
1, 1998 to March 12, 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 the $13.5 million in Merger Consideration
paid to holders of options and stock rights units.
15. 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 December 31, 1998 the total fees incurred in connection
with such services amounted to $2.5 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
December 31, 1998, the Company purchased $395.7 million in commodities
from Koch Agriculture's Nutrient Services division.
At December 31, 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 $15.5 million. The total amount due for
purchases of commodities amounted to $26.8 million.
16. SUBSEQUENT EVENTS
On February 4, 1999 the Company amended its Credit Agreement with the
syndicate of lenders effective December 31, 1998. The amendment
increases the interest rates on the Revolving Credit Facility and
Tranche A Term Loan by 0.75% for bank prime rate and Eurodollar rate
loans and increases the interest rates on the Tranche B Term Loan by
1.00% for bank prime rate and Eurodollar rate loans. The amendment also
changed the computation of certain financial covenants for the period
December 31, 1998 to March 31, 2001 to account for changes in the
Company's financial condition as of December 31, 1998 and added a
covenant limiting the annual losses related to the Company's swine
exposure.
The Company entered into a fixed rate swap agreement on February 26,
1999 effective March 31, 1999 for a portion of the Term Loan. The
Company pays a fixed rate of 5.6% on the outstanding notional principal
and receives the three month Eurodollar rate. The Company entered into
the agreement to mitigate interest rate risk associated with its
floating rate debt.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
59
<PAGE>
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning the
directors and executive officers of the Company as of March 15, 1999.
All directors have been appointed to serve for the ensuing year and
until their successors have been duly elected and qualified or their
prior removal or resignation. All officers have been appointed to serve
until their retirement, removal or resignation.
<TABLE>
<CAPTION>
NAME AGE POSITION YEARS WITH
---- --- -------- ----------
<S> <C> <C> <C>
PURINA MILLS
Dean E. Watson 40 President and Chief Executive Officer <F*>
Arnold E. Sumner 50 Executive Vice President and
Chief Operating Officer 27
Brad J. Kerbs 51 Executive Vice President 27
Darrell D. Swank 35 Chief Financial Officer 1
Rick L. Bowen 46 Vice President 14
Duncan M. Highmark 50 Vice President 28
Del G. Meinz 51 Vice President, Treasurer &
Controller 11
David G. Kabbes 36 Assistant Secretary <F*>
Mark S. Chenoweth 41 Vice President, America's Country Store 12
Scott Cavey 34 Vice President, Commercial Dairy <F*>
Brad D. Schu 41 Vice President, National Retail Sales 19
Danny L. Williams 55 Vice President, Beef 26
Glenn W. Shields 46 Vice President, Swine & Poultry Nutrition 24
David R. Hoogmoed 42 Vice President, Swine Operations 19
Jeff A. Speer 32 Vice President, Operations 1
Jeff Gough 35 Vice President, Human Resources <F*>
Jim R. Emanuelson 40 Vice President, Information Services <F*>
James M. Dumler 38 Director --
Timothy A. Durkin 47 Director --
Dick E. Knudson 48 Director --
- ---------------------------------------------------------------------------------------------------
<FN>
<F*>Less than one year of service
</TABLE>
Mr. Watson was appointed President and Chief Executive Officer on
January 1, 1999. Prior to his appointment, he was Vice President-
Agriculture of Koch Industries since March 1997 and President of Koch
Agriculture since April 1995. He joined Koch Industries in 1982 and has
served in various management positions including President of Koch
Nitrogen Company.
60
<PAGE>
<PAGE>
Mr. Sumner has been Executive Vice President and Chief Operating Officer
since January 1, 1998. He joined the Company in 1971 and has served in
various positions, including Area Controller, Regional Pricing Manager,
Director of Operations, Eastern Regional Vice President, Western
Regional Vice President, Vice President, Control, Vice President,
National Region and Vice President and General Manager, Central Region.
Mr. Kerbs has been Executive Vice President since August 1998. He
joined the Company in 1972 and has served in various positions including
most recently General Manager, Specialty.
Mr. Swank has been Chief Financial Officer of the Company since April 3,
1998. Prior to his appointment, he was Chief Financial Officer of Koch
Agriculture, a position he held since January 1997. Before joining Koch
Agriculture, he was a management consultant with Deloitte & Touche
Consulting.
Mr. Bowen has been Vice President of the Company since October 1995. He
joined the Company in 1984 and has served in various positions including
Manager Financial Services, District Manager, Division Sales Manager,
Region Director of Pricing and Area General Manager.
Mr. Highmark has been Vice President of the Company since March 1993.
He joined the Company in 1970 and has served in various management
positions, including Business Group Director, Dairy and Beef, Regional
Sales Manager, Regional Pricing Director and Division Sales Manager.
Mr. Meinz has been Vice President, Treasurer & Controller of the Company
since August 1998. He joined the Company in February 1988 as Director
of Taxes and was promoted to Controller in September 1993.
Mr. Kabbes was appointed Assistant Secretary on March 1, 1999. Prior to
joining the Company he was lead attorney for Koch Industries agriculture
companies. Prior to joining Koch Industries in July 1997, he was a
partner in the Chicago, IL law firm of Schiff Hardin & Waite.
Mr. Chenoweth has been Vice President of America's Country Store since
August 1998. He joined the Company in 1987 and has served in various
positions, including Marketing Research, Marketing Sales & Analysis,
Branded Meats Marketing Manager, Retail Specialty Marketing Manager and
Director, Retail Business Development of America's Country Store.
Mr. Cavey has been Vice President, Commercial Dairy of the Company since
August 1998. Prior to his appointment, he was President of Koch Feed
Products Division of Koch Agriculture. Before joining Koch Agriculture
in 1996 he was Sales Manager at Manna Pro.
Mr. Schu has been Vice President, National Retail Sales of the Company
since August 1998. He joined the Company in 1981 and has served in
various positions, including most recently Director, Retail Specialty
Business Group.
Dr. Williams has been Vice President, Beef of the Company since February
1999. He joined the Company in 1973 and has held various positions
including Manager of Beef Research and Technical Services, Director of
Beef Cattle Research and most recently Director of the Beef Business
Group.
Mr. Shields has been Vice President, Swine & Poultry Nutrition of the
Company since August 1998. He joined the Company in July 1974 and has
served in various positions in manufacturing,
61
<PAGE>
<PAGE>
sales management, general management, distribution and marketing of
dairy, swine and poultry business, including most recently Director, Hog
and Poultry Business Group.
Mr. Hoogmoed has been Vice President, Swine Operations of the Company
since August 1998. He joined the Company in 1979 and has served in
various positions including District Manager, Division Sales Manager,
Regional Director of Sales and Marketing, Area General Manager, and most
recently Central Region Vice President.
Mr. Speer has been Vice President, Operations since April 1998. Prior
to his appointment, he held various positions within Koch Industries
including Vice President Operations for its Canadian operations.
Mr. Gough has been Vice President, Human Resources since June 1998.
Prior to his appointment, he has held various positions at Koch
Industries including Acquisitions Integration Manager, Manager of Human
Resources - Koch Refining Company and Manager of Refined Products
Accounting. Mr. Gough joined Koch Industries in 1985.
Mr. Emanuelson has been Vice President, Information Services since July
1998. Prior to joining the Company, he was with Compaq Computer
Corporation for seven years where he held various positions including
Director of Corporate Manufacturing Systems.
Mr. Dumler is Executive Vice President, Corporate Finance for Koch
Industries and a Board Member of Purina since March 1999. He joined
Koch Industries in 1989 and has served in management positions including
Vice President, Chemicals Group and CFO Gas Liquids Group.
Mr. Durkin is Director, Corporate Services & Projects for Koch
Industries and a Board Member of Purina since March 1999. He joined
Koch Industries in 1982 serving in various operating and marketing
capacities, including several operating Vice President roles and
President of the former Minerals Division.
Mr. Knudson has been Group Controller for Koch Industries Agriculture
Group since November 1998 and a Board Member of Purina since March 1999.
He joined Koch Industries in 1980 and has held various financial
management positions including Assistant Controller for Koch Industries
as well as Group controller for Koch Refining, Koch Energy and Koch
Chemical.
There are no family relationships between any of the above named
executive officers and directors.
COMPENSATION OF DIRECTORS
The Directors, who are employees of Koch Industries, do not receive any
compensation for Board service.
62
<PAGE>
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table summarizes the compensation paid for the years ended
December 31, 1998, 1997, and 1996 to the Chief Executive Officer and the
four most highly compensated executive officers of the Company (the
"Named Executive Officers") for the services rendered to the Company.
<TABLE>
SUMMARY COMPENSATION TABLE <F1>
<CAPTION>
LONG-TERM COMPENSATION
-----------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------------------------------------
ALL OTHER
SECURITIES UNDERLYING LTIP COMPEN-
NAME AND SALARY BONUS OPTIONS/SARS PAYOUTS<F2> SATION<F3>
PRINCIPAL POSITION YEAR ($) ($) (#) ($) ($)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
D. L. Abbott<F4> 1998 284,350 122,083 -- 785,700 650,286
Former President and Chief 1997 303,750 115,785 470 -- 8,622
Executive Officer 1996 285,000 71,700 485 -- 9,124
A. E. Sumner 1998 200,000 50,000 -- 305,100 227,830
Executive Vice President and 1997 162,400 37,944 155 -- 8,622
Chief Operating Officer 1996 158,800 39,520 160 -- 9,124
D. M. Highmark 1998 139,050 46,500 -- 305,100 177,691
Vice President 1997 134,325 38,595 155 -- 8,622
Research & Marketing 1996 132,300 28,981 160 -- 9,124
P. L. Mooneyham<F5> 1998 132,200 40,000 -- 199,800 173,084
Former Vice President & General 1997 129,477 33,331 140 -- 8,622
Manager, Southern Region 1996 119,645 37,190 130 -- 9,124
J. T. Zerbe<F6> 1998 131,600 46,500 -- 199,800 148,023
Former Vice President & General 1997 128,827 46,500 140 -- 8,622
Manager, Eastern Region 1996 124,095 26,434 130 -- 9,124
- -------------------------------------------------------------------------------------------------------------------------------
<FN>
<F1> Although the Named Executive Officers received limited
perquisites, such as reimbursement of deductible and co-payment
amounts under the Company's health plans and costs of annual
physical examinations, the value of such perquisites received by
any of the Named Executive Officers did not exceed the lesser of
$50,000 or 10% of the salary and bonus reported.
<F2> Long-term incentive plan payouts represent the Merger
Consideration received upon the cancellation of all outstanding
stock rights units issued under the 1995 Plan. At the time of the
Merger, (x) each stock rights unit to purchase shares of Holdings
common stock granted under any stock plan outstanding immediately
prior to the Merger was canceled, whether or not then exercisable,
and (y) each stock rights unit was exchanged for payment from
Holdings equal to the product of (1) the total number of shares of
Holdings common stock subject to such stock rights unit and (2)
the Merger Consideration payable in cash immediately following the
Merger.
<F3> All Other Compensation in 1996 and 1997 for all individuals
represents matching payments made by the Company under the
Company's 401(k) Savings Investment Plan plus discretionary
contributions to the ESOP and allocated to the participants during
the year. The amount for 1998 represents the sum of matching
payments made by the Company under the Company's 401(k) Savings
Investment Plan, the cash bonus received in lieu of Options or
Stock Rights Units for 1997 under Holdings long-term incentive
plan and the cash bonus received in recognition of past service
and contribution in connection with the consummation of the
Merger. Also, Mr. Abbott's 1998 All Other Compensation includes a
cash payment made in connection with the renegotiation of his
employment contract in September 1998.
<F4> Mr. Abbott resigned as President and Chief Executive Officer
effective December 31, 1998.
<F5> Mr. Mooneyham resigned effective March 1, 1999.
<F6> Mr. Zerbe resigned effective December 31, 1998.
</TABLE>
63
<PAGE>
<PAGE>
No stock options or stock appreciation rights were granted by the
Company in 1998. The following table summarizes the value of the
outstanding options exercised by the Named Executive Officers during the
fiscal year ended December 31, 1998 and the value of outstanding options
held by the Named Executive Officers as of December 31, 1998.
<TABLE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FY-END OPTION/SAR VALUES
<CAPTION>
NUMBER OF
SECURITIES UNDER-
LYING UNEXERCISED
OPTIONS/SARS AT
DECEMBER 31, 1998
(#)
SHARES ACQUIRED EXERCISABLE/
NAME ON EXERCISE (#) VALUE REALIZED ($) UNEXERCISABLE
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
D. L. Abbott 1,455 384,950 --/--
A. E. Sumner 565 155,900 --/--
D. M. Highmark 565 155,900 --/--
P. L. Mooneyham 470 138,700 --/--
J. T. Zerbe 370 94,700 --/--
</TABLE>
At the time of the Merger, (x) each employee option to purchase shares
of Holdings common stock granted under any stock option or stock
purchase plan, program or arrangement of Holdings outstanding
immediately prior to the Merger was canceled, whether or not then
exercisable, and (y) each option having an exercise price of less than
the Merger Consideration was exchanged for a cash payment from Holdings
equal to the product of (1) the total number of shares of Holdings
common stock subject to such option and (2) the excess of the Merger
Consideration over the exercise price per share of Holdings common stock
subject to such option.
The Stock Plans terminated at the time of the Merger and no holder of an
option nor any participant in any Stock Plan has any right thereunder to
acquire equity securities of the Company, Holdings, or Koch Agriculture
or its parent corporation or any of their subsidiaries.
64
<PAGE>
<PAGE>
PENSION PLANS
Prior to the Acquisition, the Company maintained a noncontributory,
qualified Defined Benefit Pension Plan in which generally all salaried
employees of the Company participated. The Company also maintains a
nonqualified, unfunded supplemental executive retirement plan that
provides highly paid employees with the portion of their retirement
benefits not permitted to be paid from the Defined Benefit Pension Plan
due to limitations imposed by the Internal Revenue Code of 1986 and
compensation deferral elections. The following table sets forth the
estimated annual retirement benefits payable under the Defined Benefit
Pension Plan and the related supplemental executive retirement plan
(collectively, the "Pension Plans") in the specified final average pay
and years of service classifications.
<TABLE>
<CAPTION>
PENSION PLAN TABLE
YEARS OF SERVICE
FINAL
AVERAGE
PAY 15 20 25 30 35
- ----------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
$100,000 $19,728 $ 26,305 $ 32,881 $ 39,457 $ 46,033
150,000 30,228 40,305 50,381 60,457 70,533
200,000 40,728 54,305 67,881 81,457 95,033
250,000 51,228 68,305 85,381 102,457 119,533
300,000 61,728 82,305 102,881 123,457 144,033
350,000 72,228 96,305 120,381 144,457 168,533
400,000 82,728 110,305 137,881 165,457 193,033
</TABLE>
Final average pay is an average of a participant's highest five
consecutive years of compensation earned during the last 10 years
covered by the Pension Plans. Compensation covered by the Pension Plans
consists of base salary and bonuses. Covered compensation for the Named
Executive Officers is generally the same as that shown in the "annual
compensation" columns of the Summary Compensation Table. The estimated
credited years of service for each of the Named Executive Officers under
the Pension Plans is as follows: Mr. Abbott, 20 years; Mr. Sumner,
21 years; and Mr. Highmark, 23 years; Mr. Mooneyham, 28 years; and Mr.
Zerbe, 26 years.
Benefits are computed on the basis of a five-year certain and life
annuity and reflect deductions for social security and other offset
amounts.
All benefit accruals under the Pension Plans described above ceased upon
completion of the Acquisition. The Company has no further liability in
connection with the funding of the Defined Benefit Pension Plan. The
previous owner has retained sponsorship of the Defined Benefit Pension
Plan and the responsibility to pay all benefits that become due
thereunder. The Company sponsors the supplemental executive retirement
plan and the responsibility to pay all benefits that become due
thereunder.
65
<PAGE>
<PAGE>
As of June 1, 1998, employees not covered by a collective bargaining
agreement are eligible to participate in the Koch Industries Employees'
Pension Plan, a defined benefit pension plan. Koch Industries also
maintains an unfunded, supplemental executive retirement plan that
provides highly paid employees with the portion of their retirement
benefits not permitted to be paid from the Koch Industries Employees'
Pension Plan due to limitations imposed by the Internal Revenue Code of
1986, as amended. Benefits under these plans will accrue only with
respect to service after March 1998. However, eligible employees with
five or more years of service with PMI and Koch Industries will be
vested in the benefits accrued under the plan. The following table sets
forth the estimated annual retirement benefits payable under the Koch
Industries Employees' Pension Plan and the related supplemental
executive retirement plan (collectively, the "Koch Pension Plans") in
the specified final average pay and years of service classifications.
<TABLE>
<CAPTION>
PENSION PLAN TABLE
YEARS OF SERVICE
-------------------------------------------------------------------------------
FINAL
AVERAGE PAY 15 20 25 30 35
- ----------- ------- -------- -------- -------- --------
<C> <C> <C> <C> <C> <C>
$100,000 $18,750 $ 25,000 $ 31,250 $ 37,500 $ 43,750
150,000 28,125 37,500 46,875 56,250 65,625
200,000 37,500 50,000 62,500 75,000 87,500
250,000 46,875 62,500 78,125 93,750 109,375
300,000 56,250 75,000 93,750 112,500 131,250
350,000 65,625 87,500 109,375 131,250 153,125
400,000 75,000 100,000 125,000 150,000 175,000
Final average pay is an average of a participant's highest three years
of compensation earned during the last 10 years covered by the Koch
Pension Plans. Compensation covered by the Koch Pension Plans consists
of base salary. Covered compensation for the Named Executive Officers
is generally the same as that shown in the "salary" column of the
Summary Compensation Table. Years of service includes service after
March 1998. At this time the Named Executive Officers have less than
one year credited years of service under the Koch Pension Plans.
66
<PAGE>
<PAGE>
Capital Accumulation Plan. The Company has maintained a Capital
Accumulation Plan (the "CAP") for key employees. Whether the CAP was
offered in any given year was decided annually. If it was determined to
offer the CAP, an employee relations committee chose those employees
eligible to participate in the CAP. Each selected key employee could
elect to defer all or a portion of the annual bonus that participant was
entitled to receive. The minimum amount of a participant's deferral was
$2,000, and the maximum amount was the participant's annual bonus. The
benefits payable under the CAP are comprised of termination, death and
retirement benefits. All benefits are unfunded and the Company has
purchased life insurance on the lives of the participants. See Note 9
of Notes to Consolidated Financial Statements.
The deferral option under the CAP has not been offered since the
Acquisition. However, the Company has retained the CAP and the
responsibility to pay all benefits due thereunder. The amount of a
participant's "Annual Retirement Income Benefit" under the CAP is
dependent upon the amount of the participant's deferral, the
participant's age on the effective date of the deferral and the
participant's age at the time of termination of employment. The
estimated annual benefits payable under the CAP to the Named Executive
Officers upon retirement at the normal retirement age of 65 are as
follows: Mr. Abbott, $211,047; Mr. Sumner, $124,247; Mr. Highmark,
$72,772; Mr. Mooneyham, $28,134; and Mr. Zerbe, $39,569.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The Company is a wholly owned subsidiary of Holdings, which as a result
of the Merger is a wholly owned subsidiary of Koch Agriculture.
Holdings does not have any material assets other than the stock of the
Company. Koch Agriculture is a wholly owned subsidiary of Koch
Industries. In addition, pursuant to rules adopted by the Commission
under the Exchange Act, each of Messrs. Charles Koch and David Koch my
be deemed to beneficially own the shares of capital stock of the Company
beneficially owned by Koch Industries. The address of Koch Agriculture
and Koch Industries is 4111 E. 37th Street North, Wichita, KS 67220.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN INTERESTS IN THE ACQUISITION
Pursuant to a master procurement agreement, dated as of the May 1, 1998
(the "Supply Agreement"), between Koch Nutrient Services, a division of
Koch Agriculture and the Company, Koch Nutrient Services supplies the
Company with all of its requirements for feed ingredients and feed
packaging materials to be used at the Company's feed milling facilities.
The price of feed ingredients purchased by the Company under the Supply
Agreement is equal to the spot market value for the particular
ingredient less a discount to be agreed upon annually between the
Company and Koch Agriculture. For three specific feed ingredients
(corn, wheat middlings and soybean meal), which the Company expects will
comprise approximately half of the feed ingredients it will purchase
under the Supply Agreement, the spot market value cannot exceed an
amount tied to a formula based on price quotations prevailing in the
market and reported in an industry publication. The discount applicable
to the first year of the Supply Agreement is $3.50 per ton. The price
of packaging materials purchased by the Company under the Supply
Agreement is equal to Koch Nutrient Services' cost. The Supply
Agreement commenced on May 1, 1998 and will have an initial term of five
years, after which it will renew automatically for additional one-year
terms until
67
<PAGE>
<PAGE>
canceled by either party. The Supply Agreement can be terminated by
either party (i) under certain circumstances relating to Koch Industries
and its affiliates no longer controlling a majority of the Company's
common stock, (ii) if the parties are unable to negotiate the discount
or (iii) if the other party breaches its obligations under the Supply
Agreement.
In the ordinary course of business, the Company contracts with Koch
Industries for various administrative and support services. For the
period ended December 31, 1998 the total fees incurred in connection
with such services amounted to $2.5 million. In the opinion of
management, such fees were reasonable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) List of documents filed as part of this Report:
(1) Financial statements: Item 8 of this report lists certain
consolidated financial statements of Purina Mills.
(2) Financial statement schedules:
SCHEDULE PAGE
NUMBER DESCRIPTION NUMBER
- --------------------------------------------------------------------
II Condensed Valuation and Qualifying Accounts 76
Schedules other than those listed above have been omitted either because
the required information is contained in notes to the consolidated
financial statements or because such schedules are not required or are
not applicable.
68
<PAGE>
PAGE>
(3) Exhibits:
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT PAGE NUMBER OR
NUMBER DESCRIPTION INCORPORATION BY REFERENCE TO
- -------------------------------------------------------------------------------------------------------
<S> <C> <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 Filed as Exhibit 4.1 to the
Purina Mills, Inc., as issuer, and The First Registration Statement on
National Bank of Chicago, as trustee, relating to Form S-4 of Purina Mills,
the Notes (the "Indenture") Inc., Registration No.
333-53865 and incorporated herein by
reference
4.2 Form of 9% Senior Subordinated Note due 2010 of Filed as Exhibit 4.2 to the
Purina Mills, Inc. (the "New Notes") (included as Registration Statement on
Exhibit A of the Indenture filed as Exhibit 4.1) Form S-4 of Purina Mills,
Inc., Registration No. 333-53865 and
incorporated herein by reference
4.3 Credit Agreement, dated as of March 12, 1998, Filed as Exhibit 4.3 to the
among Purina Mills, Inc., Chase Bank of Texas, Registration Statement on Form
National Association, as Administrative Agent, S-4 of Purina Mills, Inc.,
and the other financial institutions parties Registration No. 333-53865
thereto and incorporated herein by
reference
4.4 Form of Guarantee and Collateral Agreement, Filed as Exhibit 4.4 to the
dated March 12, 1998, among Purina Mills, Inc., Registration Statement on Form
the subsidiary guarantors of Purina Mills, Inc. S-4 of Purina Mills, Inc.,
that are signatories thereto and Chase Bank of Registration No. 333-53865 and
Texas, National Association incorporated herein by
reference
4.5 PM Holdings Security Agreement, dated March 12, Filed as Exhibit 4.5 to the
1998, between PM Holdings Corporation and Chase Registration Statement on Form
Bank of Texas, National Association S-4 of Purina Mills, Inc.,
Registration No. 333-53865 and
incorporated herein by reference
4.6 PM Holdings Guaranty, dated March 12, 1998, Filed as Exhibit 4.6 to the
between PM Holdings Corporation and Chase Bank of Registration Statement on Form
Texas, National Association S-4 of Purina Mills, Inc.,
Registration No. 333-53865 and
incorporated herein by reference
69
<PAGE>
<PAGE>
<CAPTION>
EXHIBIT PAGE NUMBER OR
NUMBER DESCRIPTION INCORPORATION BY REFERENCE TO
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
4.7 Registration Rights Agreement, dated as of March Filed as Exhibit 4.7 to the
12, 1998, by and among Purina Mills, Inc. and the Registration Statement on Form
Initial Purchasers listed therein, relating to the S-4 of Purina Mills, Inc.,
Notes Registration No. 333-53865 and
incorporated herein by reference
4.8<F*> First Amendment dated as of December 31, 1998, to
Credit Agreement, dated March 12, 1998, among
Purina Mills, Inc., Chase Bank of Texas, National
Association, as Administrative Agent, and the other
financial institutions parties thereto
10.1 Employment Agreement, dated as of November 18, 1997, Filed as Exhibit 10.1 to the
between Purina Mills, Inc. and David L. Abbott, and Registration Statement on Form
amendment thereto, dated as of March 11, 1998 S-4 of Purina Mills, 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
Accumulation Plan for Key Employees Registration Statement on Form
S-4 of Purina Mills, Inc., Registration
No. 333-53865 and incorporated herein
by reference
10.3 Purina Mills, Inc./PM Holdings Corporation Filed as Exhibit 10.3 to the
Severance Program for Key Employees, as amended Registration Statement on Form
and restated effective January 9, 1998 S-4 of Purina Mills, Inc.,
Registration No. 333-53865 and
incorporated herein by reference
10.4 Purina Mills, Inc. Supplemental Executive Filed as Exhibit 10.4 to the
Retirement Plan, 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
10.5 Koch Industries, Inc. Supplemental Executive Filed as Exhibit 10.5 to the
Retirement 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
10.6 Sub-Group Tax Sharing Agreement, dated March 12, Filed as Exhibit 10.6 to the
1998, between PM Holdings Corporation and each of Registration Statement on Form
its subsidiaries listed therein S-4 of Purina Mills, Inc.,
Registration No. 333-53865 and
incorporated herein by reference
10.7 Parent Tax Sharing Agreement, dated March 12, Filed as Exhibit 10.7 to the
1998, between Koch Industries, Inc. and PM Registration Statement on Form
Holdings Corporation S-4 of Purina Mills, Inc.,
Registration No. 333-53865 and
incorporated herein by reference
70
<PAGE>
<PAGE>
<CAPTION>
EXHIBIT PAGE NUMBER OR
NUMBER DESCRIPTION INCORPORATION BY REFERENCE TO
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.8 Jet-Pro License Agreement between Purina Mills, Filed as Exhibit 10.8 to the
Inc. and 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
10.9 Koch Agriculture Supply Agreement between Purina Filed as Exhibit 10.9 to the
Mills, Inc. and Nutrition Supply and Trading, a Registration Statement on Form
division of Koch Agriculture Company, dated March S-4 of Purina Mills, Inc.,
12, 1998 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
Ralston 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
10.11 Employment Agreement dated as of September 18, Filed as Exhibit 10.11 to the
1998, between Purina Mills, Inc. and David L. Quarterly Report for the
Abbott quarterly period ended
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
December 31, 1998.
71
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 29, 1999 /s/Del G. Meinz
---------------
Del G. Meinz
Vice President, Controller & Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE DATE POSITION
--------- ---- --------
<S> <C> <C>
/s/ Dean E. Watson March 29, 1999 President and Chief Executive Officer
- --------------------------
/s/ Darrell D. Swank March 29, 1999 Chief Financial Officer
- --------------------------
Vice President, Controller & Treasurer
/s/ Del G. Meinz March 29, 1999 (principal accounting officer)
- --------------------------
/s/ Dick E. Knudson March 29, 1999 Director
- --------------------------
/s/ Jim M. Dumler March 29, 1999 Director
- --------------------------
/s/ Tim A. Durkin March 29, 1999 Director
- --------------------------
</TABLE>
72
<PAGE>
<PAGE>
<TABLE>
EXHIBIT INDEX
<CAPTION>
EXHIBIT PAGE NUMBER OR
NUMBER DESCRIPTION INCORPORATION BY REFERENCE TO
- -------------------------------------------------------------------------------------------------------
<S> <C> <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 Filed as Exhibit 4.1 to the
Purina Mills, Inc., as issuer, and The First Registration Statement on
National Bank of Chicago, as trustee, relating to Form S-4 of Purina Mills,
the Notes (the "Indenture") Inc., Registration No. 333-53865
and incorporated herein by reference
4.2 Form of 9% Senior Subordinated Note due 2010 of Filed as Exhibit 4.2 to the
Purina Mills, Inc. (the "New Notes") (included as Registration Statement on
Exhibit A of the Indenture filed as Exhibit 4.1) Form S-4 of Purina Mills,
Inc., Registration No. 333-53865 and
incorporated herein by reference
4.3 Credit Agreement, dated as of March 12, 1998, Filed as Exhibit 4.3 to the
among Purina Mills, Inc., Chase Bank of Texas, Registration Statement on
National Association, as Administrative Agent, Form S-4 of Purina Mills,
and the other financial institutions parties Inc., Registration No. 333-53865
thereto and incorporated herein by reference
4.4 Form of Guarantee and Collateral Agreement, Filed as Exhibit 4.4 to the
dated March 12, 1998, among Purina Mills, Inc., Registration Statement on
the subsidiary guarantors of Purina Mills, Inc. Form S-4 of Purina Mills,
that are signatories thereto and Chase Bank of Inc., Registration No. 333-53865
Texas, National Association and incorporated herein by reference
4.5 PM Holdings Security Agreement, dated March 12, Filed as Exhibit 4.5 to the
1998, between PM Holdings Corporation and Chase Registration Statement on
Bank of Texas, National Association Form S-4 of Purina Mills,
Inc., Registration No. 333-53865 and
incorporated herein by reference
73
<PAGE>
<PAGE>
<CAPTION>
EXHIBIT PAGE NUMBER OR
NUMBER DESCRIPTION INCORPORATION BY REFERENCE TO
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
4.6 PM Holdings Guaranty, dated March 12, 1998, Filed as Exhibit 4.6 to the
between PM Holdings Corporation and Chase Bank Registration Statement on
of Texas, National Association Form S-4 of Purina Mills,
Inc., Registration No. 333-53865 and
incorporated herein by reference
4.7 Registration Rights Agreement, dated as of March Filed as Exhibit 4.7 to the
12, 1998, by and among Purina Mills, Inc. and the Registration Statement on
Initial Purchasers listed therein, relating to the Form S-4 of Purina Mills,
Notes Inc., Registration No. 333-53865
and incorporated herein by reference
4.8<F*> First Amendment dated as of December 31, 1998, to
Credit Agreement, dated March 12, 1998, among
Purina Mills, Inc., Chase Bank of Texas, National
Association, as Administrative Agent, and the other
financial institutions parties thereto
10.1 Employment Agreement, dated as of November 18, 1997, Filed as Exhibit 10.1 to
between Purina Mills, Inc. and David L. Abbott, and the Registration Statement
amendment thereto, dated as of March 11, 1998 on Form S-4 of Purina
Mills, 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
Accumulation Plan for Key Employees the Registration 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 Filed as Exhibit 10.3 to
Severance Program for Key Employees, as amended the Registration Statement
and restated effective January 9, 1998 on Form S-4 of Purina Mills, Inc.,
Registration No. 333-53865 and
incorporated herein by reference
10.4 Purina Mills, Inc. Supplemental Executive Filed as Exhibit 10.4 to
Retirement Plan, effective as of January 1, 1998 the Registration 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
Retirement Plan, effective as of May 9, 1994 the Registration 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 Filed as Exhibit 10.6 to
12, 1998, between PM Holdings Corporation and the Registration Statement
each of its subsidiaries listed therein on Form S-4 of Purina
Mills, Inc., Registration No.
333-53865 and incorporated herein by
reference
74
<PAGE>
<PAGE>
<CAPTION>
EXHIBIT PAGE NUMBER OR
NUMBER DESCRIPTION INCORPORATION BY REFERENCE TO
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.7 Parent Tax Sharing Agreement, dated March 12, Filed as Exhibit 10.7 to
1998, between Koch Industries, Inc. and PM the Registration Statement
Holdings Corporation 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, Filed as Exhibit 10.8 to
Inc. and Koch Feed Company, dated March 12, 1998 the Registration 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
Mills, Inc. and Nutrition Supply and Trading, a the Registration Statement
division of Koch Agriculture Company, dated March on Form S-4 of Purina Mills, Inc.,
12, 1998 Registration No. 333-53865 and
incorporated herein by reference
10.10 License Agreement dated October 1, 1986 between Filed as Exhibit 10.10 to
Ralston Purina Company and Purina Mills, Inc. the Registration Statement
on Form S-4 of Purina Mills, Inc.,
Registration No. 333-53865 and
incorporated herein by reference
10.11 Employment Agreement dated as of September 18, Filed as Exhibit 10.11 to
1998, between Purina Mills, Inc. and David L. the Quarterly Report for
Abbott. the quarterly period ended
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>
75
<PAGE>
<PAGE>
SCHEDULE II
<TABLE>
PURINA MILLS, INC. AND SUBSIDIARIES
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
<CAPTION>
ADDITIONS
CHARGED TO
BEGINNING COSTS AND ENDING
CLASSIFICATION DATE EXPENSES DEDUCTIONS BALANCE
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts: $7,595 $2,542 $2,266<F1> $7,871
--------------------------------------------------
Year ended December 31, 1997:
Deducted from asset accounts:
Allowance for doubtful accounts: $7,871 $1,106 $2,438<F1> $6,539
--------------------------------------------------
Year ended December 31, 1998:
Deducted from asset accounts:
Allowance for doubtful accounts:
Period ended March 12, 1998: $6,539 $ 155 $ 117<F1> $6,577
March 13, 1998 to
December 31, 1998: $6,577 $3,382 $ 915<F1> $9,044
- ----------------------------------------------------------------------------------------------
<FN>
<F1> Uncollectible accounts written off, net of recoveries.
</TABLE>
76
<PAGE>
FIRST AMENDMENT TO CREDIT AGREEMENT
This First Amendment to Credit Agreement (this "First Amendment")
---------------
dated as of December 31, 1998 ("First Amendment Effective Date"), is by
------------------------------
and among PURINA MILLS, INC., a Delaware corporation (the "Company"),
-------
CHASE BANK OF TEXAS, NATIONAL ASSOCIATION, individually, as an Issuing
Bank and as Administrative Agent, and the other financial institutions
signatories hereto.
PRELIMINARY STATEMENTS
1. The Company entered into a Credit Agreement dated as of
March 12, 1998, among the Company, Chase Bank of Texas,
National Association, individually, as an Issuing Bank and
as Administrative Agent, and the financial institutions
parties thereto (the "Credit Agreement"). Capitalized terms
----------------
used but not otherwise defined herein shall have the
meanings assigned such terms in the Credit Agreement.
2. The Company has requested that certain provisions of the
Credit Agreement be modified and amended.
3. The Company, the Administrative Agent, the Subsidiary
Guarantors and the Lenders have agreed to amend the Credit
Agreement on the terms and conditions contained herein.
AGREEMENT
In consideration of the premises and the mutual covenants
contained herein and in the Credit Agreement, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto, intending to be legally bound, hereby
agree as follows:
Section 1. Amendment of Section 1.1 of the Credit Agreement.
------------------------------------------------
Section 1.1 of the Credit Agreement is hereby amended by adding the
following new definitions thereto:
(a) immediately following the definition of "Acquisition
Company" contained in Section 1.1:
"Adjusted Senior Debt Leverage Ratio" shall mean on any day,
-----------------------------------
the ratio of (a) Senior Debt as of the date of determination to
(b) Consolidated EBITDA for the Rolling Period ending on the most
recent Quarterly Date as of the date of determination, minus all
amounts added to net income constituting Swine Cash Loss for such
Rolling Period, if any, as provided in the definition of
Consolidated EBITDA.
"Adjusted Swine Cash Loss" shall mean, for any Fiscal Year,
------------------------
Swine Cash Loss minus Swine Cash Mitigation Loss, in each case for
such Fiscal Year.
<PAGE>
<PAGE>
(b) immediately following the definition of "Financing
Documents" contained in Section 1.1:
"First Amendment" shall mean the First Amendment to Credit
---------------
Agreement dated as of the First Amendment Effective Date among the
Company and the Administrative Agent, and the Required Lenders.
"First Amendment Effective Date" shall mean December 31, 1998.
------------------------------
(c) immediately following the definition of "Security
Instruments" contained in Section 1.1:
"Senior Debt" shall mean at any time the sum of the
-----------
Aggregate Revolving Credit Exposure plus the aggregate principal
----
amount of the Tranche A Term Loans outstanding as of such date
plus the aggregate principal amount of the Tranche B Term Loans
----
outstanding as of such date.
"Senior Debt Leverage Ratio" shall mean on any day, the
--------------------------
ratio of (a) Senior Debt as of the date of determination to (b)
Consolidated EBITDA for the Rolling Period ending on the most
recent Quarterly Date as of the date of determination.
(d) immediately following the definition of "Subsidiary
Guarantors" contained in Section 1.1:
"Swine Cash Loss" shall mean on any day, the sum of actual
---------------
cash losses sustained by the Company and the Subsidiary Guarantors
during the applicable Fiscal Year, on a cumulative basis as of the
date of determination in connection with such Person's swine
production, feedlot and marketing operations.
"Swine Cash Mitigation Loss" shall mean that portion of
--------------------------
Swine Cash Loss attributable to actions taken by the Company or a
Subsidiary Guarantor during the applicable Fiscal Year to mitigate
Swine Cash Losses anticipated to occur in subsequent Fiscal Years,
including, without limitation, cash payments made with respect to
the termination or modification of contracts relating to such
Person's swine production, feedlot and marketing operations.
Section 2. Amendment of Existing Terms in Section 1.1 of the
-------------------------------------------------
Credit Agreement.
- ----------------
(a) The definition of "Agreement" contained in Section 1.1 of
the Credit Agreement is hereby amended to read in its entirety as
follows:
"Agreement" shall mean this Credit Agreement, as amended by
---------
the First Amendment and as further amended, modified or
supplemented from time to time.
<PAGE>
<PAGE>
(b) The definition of "Applicable Commitment Fee Percentage"
contained in Section 1.1 of the Credit Agreement is hereby amended to
read in its entirety as follows:
"Applicable Commitment Fee Percentage" shall mean (i) on any
------------------------------------
day after the First Amendment Effective Date through and including
February 4, 1999, the applicable per annum percentage set forth at
the appropriate intersection in the table shown below, based on
the Adjusted Senior Debt Leverage Ratio for the Rolling Period
ending on the most recent Quarterly Date with respect to which the
Company is required to deliver the Current Information:
<TABLE>
<CAPTION>
===================================================================
Adjusted Senior Debt Leverage Commitment Fee Percentage
Ratio
- -------------------------------------------------------------------
<S> <C>
Greater than or equal to 4.00 .500%
- -------------------------------------------------------------------
Greater than or equal to 2.00 but
less than 4.00 .375%
- -------------------------------------------------------------------
Less than 2.00 .300%
===================================================================
</TABLE>
and (ii) on any day on or after February 4, 1999, the applicable
per annum percentage set forth at the appropriate intersection in
the table shown below, based on the Adjusted Senior Debt Leverage
Ratio for the Rolling Period ending on the most recent Quarterly
Date with respect to which the Company is required to deliver the
Current Information:
<TABLE>
<CAPTION>
===================================================================
Adjusted Senior Debt Leverage Commitment Fee Percentage
Ratio
- -------------------------------------------------------------------
<S> <C>
Greater than or equal to 2.5 .500%
- -------------------------------------------------------------------
Less than 2.5 .375%
===================================================================
</TABLE>
In each case, each change in the Applicable Commitment Fee
Percentage based on a change in the Current Information shall be
effective on the date on which the Current Information is received
by the Administrative Agent and shall remain in effect until the
next change to be effected pursuant to this paragraph.
Notwithstanding the foregoing, (a) for the period from February 4,
1999 through September 30, 1999, the Applicable Commitment Fee
Percentage will be .500%, and (b) if at any time the Company fails
to deliver Current Information on or before the date required
pursuant to Section 5.2 (without regard to grace periods), the
Applicable Commitment Fee Percentage will be .500% from the date
such Current Information is due pursuant to Section 5.2 (without
regard to grace periods) through the date the Administrative Agent
receives all Current Information then due pursuant to Section 5.2.
-3-
<PAGE>
<PAGE>
(b) The definition of "Applicable Margin" contained in Section 1.1
of the Credit Agreement is hereby amended to read in its entirety as
follows:
"Applicable Margin" shall mean, (i) on any day from the
-----------------
First Amendment Effective Date through and including February 4,
1999 and with respect to any (a) Tranche B Term Loan, for Base
Rate Loans, 1.25% per annum and for Eurodollar Loans, 2.25% per
annum, and (b) Revolving Credit Loan or Tranche A Term Loan, the
applicable per annum percentage set forth at the appropriate
intersection in the table shown below, based on the Adjusted
Senior Debt Leverage Ratio for the Rolling Period ending on the
most recent Quarterly Date with respect to which the Company is
required to deliver the Current Information:
<TABLE>
<CAPTION>
===========================================================================================
ADJUSTED SENIOR EURODOLLAR LOAN BASE RATE LOAN
DEBT LEVERAGE RATIO APPLICABLE MARGIN APPLICABLE MARGIN
PERCENTAGE PERCENTAGE
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Greater than or equal to 5.00 2.00% 1.00%
- -------------------------------------------------------------------------------------------
Greater than or equal to 4.00 1.75% 0.75%
but less than 5.00
- -------------------------------------------------------------------------------------------
Greater than or equal to 3.00 1.50% 0.50%
but less than 4.00
- -------------------------------------------------------------------------------------------
Greater than or equal to 2.00 1.25% 0.25%
but less than 3.00
- -------------------------------------------------------------------------------------------
Less than 2.00 1.00% 0.00%
===========================================================================================
</TABLE>
and (ii) on any day on or after February 4, 1999, and with respect
to any (a) Tranche B Term Loan, for Base Rate Loans, 2.25% per
annum and for Eurodollar Loans, 3.25% per annum, and (b) Revolving
Credit Loan or Tranche A Term Loan, the applicable per annum
percentage set forth at the appropriate intersection in the table
shown below, based on the Adjusted Senior Debt Leverage Ratio for
the Rolling Period ending on the most recent Quarterly Date with
respect to which the Company is required to deliver the Current
Information (said calculation to be made by the Administrative
Agent as soon as practicable after receipt by the Administrative
Agent of all required Current Information for the applicable
period):
-4-
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
===========================================================================================
ADJUSTED SENIOR EURODOLLAR LOAN BASE RATE LOAN
DEBT LEVERAGE RATIO APPLICABLE MARGIN APPLICABLE MARGIN
PERCENTAGE PERCENTAGE
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Greater than or equal to 4.0 2.75% 1.75%
- -------------------------------------------------------------------------------------------
Greater than or equal to 3.5 2.50% 1.50%
but less than 4.0
- -------------------------------------------------------------------------------------------
Greater than or equal to 3.0 2.25% 1.25%
but less than 3.5
- -------------------------------------------------------------------------------------------
Greater than or equal to 2.5 2.00% 1.00%
but less than 3.0
- -------------------------------------------------------------------------------------------
Less than 2.5 1.75% 0.75%
===========================================================================================
</TABLE>
In each case, each change in the Applicable Margin based on a
change in the Current Information (or the Company's failure to
deliver the Current Information) shall be effective as of the
first day of the third month of each applicable Fiscal Quarter
(but based upon Current Information for the immediately preceding
Rolling Period), or if such day is not a Business Day, then the
first Business Day thereafter. Notwithstanding the foregoing, (a)
for the period from February 4, 1999 through September 30, 1999,
the Eurodollar Loan Applicable Margin for the Revolving Credit
Loans and Tranche A Term Loans will be 2.75% and the Base Rate
Loan Applicable Margin for the Revolving Credit Loans and Tranche
A Term Loans will be 1.75% and (b) if at any time the Company
fails to deliver Current Information on or before the date
required pursuant to Section 5.2 (without regard to grace
periods), the Eurodollar Loan Applicable Margin for the Revolving
Credit Loans and the Tranche A Term Loans will be 2.75% and the
Base Rate Loan Applicable Margin for the Revolving Credit Loans
and the Tranche A Term Loans will be 1.75% from the date such
Current Information is due pursuant to Section 5.2 (without regard
to grace periods) through the date the Administrative Agent
receives all Current Information then due pursuant to Section 5.2.
(c) The definition of "Consolidated EBITDA" contained in
Section 1.1 of the Credit Agreement is hereby amended to read in its
entirety as follows:
"Consolidated EBITDA" shall mean, as to the Company and the
-------------------
Subsidiary Guarantors on a consolidated basis, for any period,
without duplication, the amount equal to net income, less, to the
----
extent included in net income, any non-cash income, extraordinary
gains and gains on the disposition of assets other than those
incurred in the ordinary course of business, and plus, to the
----
extent deducted from net income, Consolidated Interest Expense,
depreciation, depletion and impairment, amortization of leasehold
and intangibles, other non-cash expenses, income tax expenses
(including amounts payable under the Tax Sharing Agreements),
extraordinary losses and losses on the disposition of assets other
than those incurred in the ordinary course of business, in each
case for such period; and plus, to the extent deducted from net
----
income, for each
-5-
<PAGE>
<PAGE>
of the Fiscal Years 1998, 1999 and 2000 only, the lesser of Swine
Cash Loss and (i) $17,000,000 in the aggregate for Fiscal Year
1998, (ii) $25,000,000 in the aggregate for Fiscal Year 1999, or
(iii) $20,000,000 in the aggregate for Fiscal Year 2000.
(d) The definition of "Consolidated Excess Cash Flow" contained
in Section 1.1 of the Credit Agreement is hereby amended to read in its
entirety as follows:
"Consolidated Excess Cash Flow" shall mean (a) Consolidated
-----------------------------
EBITDA for any Fiscal Year, minus (b) all amounts added to net
income constituting Swine Cash Loss for such Fiscal Year, if any,
as provided in the definition of Consolidated EBITDA and minus (c)
for each such Fiscal Year and for the Company and the Subsidiary
Guarantors on a consolidated basis, the sum of (1) scheduled
payments of principal pursuant to Sections 2.5(b) and 2.5(c), plus
(2) the principal portion of scheduled payments under Capital
Lease Obligations, plus (3) Consolidated Interest Expense, plus
(4) cash taxes applicable to such Fiscal Year and paid prior to
the date of determination by or on behalf of the Company and the
Subsidiary Guarantors, plus (5) any dividends to PM Holdings
permitted by Section 6.5 (other than Sections 6.5(d) and (e)) and
actually paid by the Company, and plus (6) the lesser of actual
Capital Expenditures and $40,000,000. Notwithstanding the
foregoing, for the purpose of calculating Consolidated Excess Cash
Flow for the Fiscal Year ending December 31, 1998, such Fiscal
Year shall be deemed to commence on the Closing Date and end on
December 31, 1998.
Section 3. Deletion of Existing Terms in Section 1.1 of the
------------------------------------------------
Credit Agreement. Section 1.1 of the Credit Agreement is hereby amended
- ----------------
by deleting the term "Consolidated Leverage Ratio."
Section 4. Amendment of Section 5.1(n) of the Credit Agreement.
---------------------------------------------------
Section 5.1(n) of the Credit Agreement and Schedule 5.1(n) are hereby
deleted in their entirety.
Section 5. Amendment of Section 5.2 of the Credit Agreement.
------------------------------------------------
Section 5.2 of the Credit Agreement is hereby amended by adding new
Sections 5.2(l) and (m) to read in their entirety as follows:
(l) Monthly Financial Summary. As soon as available and
-------------------------
in any event within 45 days after the end of each month except for the
end of such Fiscal Year which shall be within 90 days, a monthly
unaudited financial summary for the such month in the form attached
hereto as Exhibit I.
(m) Quarterly Swine Operations Summary. As soon as available
----------------------------------
and in any event within 45 days after the end of each Fiscal Quarter, a
quarterly financial and narrative summary of the Company and its
Subsidiaries' operations in connection with their swine production,
feedlot and marketing operations, including, without limitation, its
swine loss mitigation activities and any improvement or deterioration in
its swine production, feedlot and marketing operations.
-6-
<PAGE>
<PAGE>
Section 6. Amendment of Section 6.1 of the Credit Agreement.
------------------------------------------------
Section 6.1 of the Credit Agreement is hereby amended to read in its
entirety as follows:
Section 6.1 Financial Covenants.
-------------------
(a) Consolidated Interest Coverage Ratio. Permit the
------------------------------------
Consolidated Interest Coverage Ratio to be less than the ratio for each
Rolling Period indicated below:
<TABLE>
<CAPTION>
Each Rolling Period ending Ratio
-------------------------- -----
<S> <C>
December 31, 1998 1.30:1.00
March 31, 1999 1.30:1.00
June 30, 1999 1.30:1.00
September 30, 1999 1.30:1.00
December 31, 1999 1.30:1.00
March 31, 2000 1.55:1.00
June 30, 2000 1.55:1.00
September 30, 2000 1.55:1.00
December 31, 2000 1.55:1.00
March 31, 2001 1.75:1.00
Each Rolling Period Ratio
------------------- -----
thereafter 2.00:1.00
----------
</TABLE>
(b) Consolidated Fixed Charge Coverage Ratio. Permit the
----------------------------------------
Consolidated Fixed Charge Coverage Ratio to be less than the ratio for
each Rolling Period indicated below:
<TABLE>
<CAPTION>
Each Rolling Period ending Ratio
-------------------------- -----
<S> <C>
December 31, 1998 0.75:1.00
March 31, 1999 0.75:1.00
June 30, 1999 0.75:1.00
September 30, 1999 0.75:1.00
December 31, 1999 0.75:1.00
March 31, 2000 0.90:1.00
June 30, 2000 0.90:1.00
September 30, 2000 0.90:1.00
December 31, 2000 0.90:1.00
March 31, 2001 1.00:1.00
June 30, 2001 1.15:1.00
September 30, 2001 1.15:1.00
December 31, 2001 1.20:1.00
Each Rolling Period Ratio
------------------- -----
thereafter 1.20:1.00
----------
</TABLE>
-7-
<PAGE>
<PAGE>
(c) Senior Debt Leverage Ratio. Permit the Senior Debt Leverage
--------------------------
Ratio to be greater than the ratio for each Rolling Period indicated
below:
<TABLE>
<CAPTION>
Each Rolling Period ending Ratio
-------------------------- -----
<S> <C>
December 31, 1998 4.00:1.00
March 31, 1999 4.00:1.00
June 30, 1999 4.00:1.00
September 30, 1999 4.00:1.00
December 31, 1999 4.00:1.00
March 31, 2000 3.40:1.00
June 30, 2000 3.40:1.00
September 30, 2000 3.40:1.00
December 31, 2000 3.40:1.00
March 31, 2001 3.00:1.00
Each Rolling Period Ratio
------------------- -----
thereafter 3.00:1.00
----------
</TABLE>
(d) Adjusted Swine Cash Loss. Permit the Adjusted Swine Cash
------------------------
Loss to exceed the amount for each Fiscal Year indicated below:
<TABLE>
<CAPTION>
Fiscal Year ending Amount
------------------ ------
<S> <C>
December 31, 1998 $17,000,000
December 31, 1999 $25,000,000
December 31, 2000 $20,000,000
</TABLE>
(e) Swine Cash Loss. Permit the Swine Cash Loss to exceed the
---------------
amount for each Fiscal Year indicated below:
<TABLE>
<CAPTION>
Fiscal Year ending Amount
------------------ ------
<S> <C>
December 31, 1998 $17,000,000
December 31, 1999 $30,000,000
December 31, 2000 $25,000,000
</TABLE>
Section 7. Amendment to Article 6 of the Credit Agreement.
----------------------------------------------
Article 6 of the Credit Agreement is hereby amended by adding a new
Section 6.19 immediately following Section 6.18, such new Section 6.19
to read in its entirety as follows:
-8-
<PAGE>
<PAGE>
Section 6.19 Hedging Agreements. Make or enter into
------------------
agreements of the types described in the definitions of Commodity
Swap Agreements, Exchange Rate Swap Agreements and Interest Rate
Swap Agreements, including, without limitation, any such
agreements relating to the Company and its Subsidiaries swine
production, feedlot and marketing operations, except for those
Hedge Agreements entered into in the ordinary course of business
for the purpose of hedging against fluctuations in interest rates
(on money borrowed by the Company), commodity prices and foreign
exchange rates as permitted pursuant to Section 6.2(i).
Section 8. Addition of Exhibit I to the Credit Agreement. The
---------------------------------------------
form of Monthly Financial Summary contained in Exhibit I attached hereto
is appended to the Credit Agreement as Exhibit I thereto.
Section 9. Limitations. The amendments set forth herein are
-----------
limited precisely as written and shall not (a) be deemed to be a consent
to, or a waiver or modification of, any other term or condition of any
of the Financing Documents or (b) except as expressly set forth herein,
prejudice any right or rights which the Lenders may now have or may have
in the future under or in connection with any of the Financing Documents
or any of the other documents or instruments referred to therein.
Except as expressly modified hereby or by express written amendments
thereof, each of the Financing Documents and each of the other documents
and instruments executed in connection with any of the foregoing are and
shall remain in full force and effect. In the event of a conflict
between this First Amendment and any of the foregoing documents, the
terms of this First Amendment shall be controlling.
Section 10. Conditions Precedent and Effectiveness. This First
--------------------------------------
Amendment shall not be effective unless (i) this First Amendment has
been executed and delivered by the Required Lenders to the
Administrative Agent, (ii) this First Amendment has been executed and
delivered by the Company to the Administrative Agent, (iii) this First
Amendment has been executed and delivered by each Subsidiary Guarantor
and PM Holdings to the Administrative Agent, (iv) the Administrative
Agent shall have received, on behalf of Chase Securities Inc. and the
Lenders, all fees due and payable to Chase Securities Inc. and the
Lenders pursuant to that certain Fee Letter dated as of January 15, 1999
and (v) the Company shall have executed and delivered to the
Administrative Agent a Deed of Trust substantially in the form of
Exhibit F-3 to the Credit Agreement with respect to its Arcola,
Louisiana real property.
Section 11. Waiver. The Administrative Agent and the Required
------
Lenders hereby (a) waive compliance by the Company with the covenant
contained in Section 5.1(k) of the Credit Agreement, insofar as such
covenant pertains to the Fiscal Years ending December 31, 1998 and
December 31, 1999 and (b) waive any Default or Event of Default that
might occur on account of the Company's failure to comply with such
covenant insofar as it pertains to such Fiscal Years; provided, however,
that if the Company is not in compliance with such Section 5.1(k) on
January 1, 2000, then the waivers contained in the preceding sentence
shall automatically terminate and cease to be of any effect, whereupon
the Administrative Agent and the Lenders shall have and may exercise all
the rights and remedies under the Credit Agreement and the other
Financing Documents as if this waiver had never become effective.
-9-
<PAGE>
<PAGE>
Section 12. Limitation of Waiver. The waivers set forth in
--------------------
Section 11 are limited precisely as written and shall not be deemed to
(a) be a consent to, or waiver or modification of, any other term or
condition of the Credit Agreement or any of the other Financing
Documents, or (b) except as expressly set forth herein, prejudice any
right or rights which the Lenders may now have or may have in the future
under or in connection with the Credit Agreement, the Financing
Documents or any of the other documents referred to therein. Except as
expressly modified hereby or by express written amendments thereof, the
terms and provisions of the Credit Agreement and any other Financing
Documents or any other documents or instruments executed in connection
with any of the foregoing are and shall remain in full force and effect.
Section 13. Representations and Warranties. The Company hereby
------------------------------
represents and warrants to the Administrative Agent and each of the
Lenders that (a) except as affected by the transactions contemplated in
the Credit Agreement and this First Amendment, each of the
representations and warranties made by the Company and the Subsidiary
Guarantors in or pursuant to each of the Financing Documents is true and
correct in all material respects as of the First Amendment Effective
Date, as if made on and as of such date, except for any representations
and warranties made as of a specified date, which are true and correct
in all material respects as of such specified date and (b) no Default or
Event of Default has occurred and is continuing as of the First
Amendment Effective Date.
Section 14. Adoption, Ratification and Confirmation of Credit
-------------------------------------------------
Agreement. Each of the Company, the Administrative Agent and each of
- ---------
the Lenders signatories hereto hereby adopts, ratifies and confirms the
Credit Agreement, as amended hereby, and acknowledges and agrees that
the Credit Agreement, as amended hereby, is and remains in full force
and effect.
Section 15. Ratification and Affirmation of Subsidiary Guaranty.
---------------------------------------------------
Each of the Subsidiary Guarantors hereby expressly (a) acknowledges the
terms of this First Amendment, (b) acknowledges, renews and extends its
continued liability under the Guarantee and Collateral Agreement to
which it is a party and agrees that such Guarantee and Collateral
Agreement remains in full force and effect and (c) agrees with the
Administrative Agent, each Lender and each Issuing Bank to promptly pay
when due all amounts owing or to be owing by it under such Guarantee and
Collateral Agreement pursuant to the terms and conditions thereof.
Section 16. Representations and Warranties of PM Holdings. PM
---------------------------------------------
Holdings hereby represents and warrants to the Administrative Agent and
each of the Lenders that (a) except as affected by the transactions
contemplated in the Credit Agreement and this First Amendment, each of
the representations and warranties made by PM Holdings in or pursuant to
each of the Financing Documents to which it is a party is true and
correct in all material respects as of the First Amendment Effective
Date, as if made on and as of such date, except for any representations
and warranties made as of a specified date, which are true and correct
in all material respects as of such specified date and (b) no Default or
Event of Default has occurred and is continuing as of the First
Amendment Effective Date.
-10-
<PAGE>
<PAGE>
Section 17. Ratification and Affirmation of PM Holdings. PM
-------------------------------------------
Holdings hereby expressly (a) acknowledges the terms of this First
Amendment, (b) acknowledges, renews and extends its continued liability
under the PM Holdings Guaranty to which it is a party and agrees that
such PM Holdings Guaranty remains in full force and effect and (c)
agrees with the Administrative Agent, each Lender and each Issuing Bank
to promptly pay when due all amounts owing or to be owing by it under
such PM Holdings Guaranty pursuant to the terms and conditions thereof.
Section 18. Payment of Expenses. The Company agrees, whether or
-------------------
not the transactions contemplated hereby shall be consummated, to
reimburse and save and hold the Administrative Agent harmless from and
against liability for the payment of all reasonable out-of-pocket costs
and expenses arising in connection with the preparation, execution,
delivery, amendment, modification, waiver and enforcement of, or the
preservation of any rights under this First Amendment, including,
without limitation, the reasonable fees and expenses of any local or
other counsel for the Administrative Agent, and all stamp taxes
(including interest and penalties, if any), recording taxes and fees,
filing taxes and fees and other charges which may be payable in respect
of, or in respect of any modification of, any of the Financing
Documents. The provisions of this Section shall survive the termination
of the Credit Agreement and the repayment of the Loans.
Section 19. Governing Law. THIS FIRST AMENDMENT AND THE RIGHTS
-------------
AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN
ACCORDANCE WITH AND BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK
(INCLUDING SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATION LAW, OR ANY
SIMILAR SUCCESSOR PROVISIONS THERETO, BUT EXCLUDING ALL OTHER CONFLICT-
OF-LAWS RULES) AND TO THE EXTENT CONTROLLING, LAWS OF THE UNITED STATES
OF AMERICA.
Section 20. Descriptive Headings, Etc. The descriptive headings
--------------------------
of the several sections of this First Amendment are inserted for
convenience only and shall not be deemed to affect the meaning or
construction of any of the provisions hereof.
Section 21. Entire Agreement. This First Amendment and the
----------------
documents referred to herein represent the entire understanding of the
parties hereto regarding the subject matter hereof and supersede all
prior and contemporaneous oral and written agreements of the parties
hereto with respect to the subject matter hereof.
Section 22. Counterparts. This First Amendment may be executed in
------------
any number of counterparts (including by telecopy) and by different
parties on separate counterparts and all of such counterparts shall
together constitute one and the same instrument.
[Signature Pages to this First Amendment begin on the next page]
-11-
<PAGE>
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this First
Amendment to be duly executed and delivered by their respective duly
authorized officers as of the First Amendment Effective Date.
COMPANY: PURINA MILLS, INC.
- -------
By: /s/ Darrell D. Swank
--------------------
Name: Darrell D. Swank
Title: Chief Financial Officer
ADMINISTRATIVE AGENT
- --------------------
ON BEHALF OF ITSELF AND AS
- --------------------------
ADMINISTRATIVE AGENT: CHASE BANK OF TEXAS,
- -------------------- NATIONAL ASSOCIATION,
INDIVIDUALLY AND AS ADMINISTRATIVE
AGENT
By: /s/ D. G. Mills
---------------
Name: D. G. Mills
Title: Senior Vice President
[Signature Page to First Amendment -- Page 1]
<PAGE>
<PAGE>
LENDERS:
- -------- ABN AMRO Bank N.V.
By: /s/ Scott J. Albert
-------------------
Name: Scott J. Albert
Title: Vice President
By: /s/ Darin P. Fisher
-------------------
Name: Darin P. Fisher
Title: Assistant Vice President
[Signature Page to First Amendment -- Page 2]
<PAGE>
<PAGE>
BANK OF AMERICA NT & SA
By: /s/ G. Burton Queen
-------------------
Name: G. Burton Queen
Title: Managing Director
[Signature Page to First Amendment -- Page 3]
<PAGE>
<PAGE>
THE BANK OF NOVA SCOTIA
By: /s/ F. C. H. Ashby
------------------
Name: F. C. H. Ashby
Title: Senior Manager Loan Operations
[Signature Page to First Amendment -- Page 4]
<PAGE>
<PAGE>
BANK OF SCOTLAND
By: /s/ Annie Chin Tat
------------------
Name: Annie Chin Tat
Title: Senior Vice President
[Signature Page to First Amendment -- Page 5]
<PAGE>
<PAGE>
PARIBAS
By: /s/Christopher S. Goodwin
-------------------------
Name: Christopher S. Goodwin
Title: Director
By: /s/ Deanna C. Walker
--------------------
Name: Deanna C. Walker
Title: Vice President
[Signature Page to First Amendment -- Page 6]
<PAGE>
<PAGE>
CREDIT AGRICOLE INDOSUEZ
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
[Signature Page to First Amendment -- Page 7]
<PAGE>
<PAGE>
CREDIT LYONNAIS CHICAGO BRANCH
By: /s/ Julie Kanak
---------------
Name: Julie T. Kanak
Title: Vice President
[Signature Page to First Amendment -- Page 8]
<PAGE>
<PAGE>
MERCANTILE BANK NATIONAL ASSOCIATION
By: /s/ Curtis A. Schrieber
-----------------------
Name: Curtis A. Schrieber
Title: Vice President
[Signature Page to First Amendment -- Page 9]
<PAGE>
<PAGE>
NATIONSBANK, N.A.
By: /s/ G. Burton Queen
-------------------
Name: G. Burton Queen
Title: Managing Director
[Signature Page to First Amendment -- Page 10]
<PAGE>
<PAGE>
COOPERATIEVE CENTRALE RAIFFEISEN-
BOERENLEENBANK B.A. "RABOBANK
NEDERLAND," NEW YORK BRANCH
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
[Signature Page to First Amendment -- Page 11]
<PAGE>
<PAGE>
AMARA-2 FINANCE LTD.
By: /s/ Ian David Moore
-------------------
Name: Ian David Moore
Title: Director
[Signature Page to First Amendment -- Page 12]
<PAGE>
<PAGE>
ARCHIMEDES FUNDING, L.L.C.
By: ING Capital Advisors, Inc.
as Collateral Manager
By: /s/ Michael J. Campbell
-----------------------
Name: Michael J. Campbell
Title: Senior Vice President &
Portfolio Manager
[Signature Page to First Amendment -- Page 13]
<PAGE>
<PAGE>
CYPRESSTREE INVESTMENT PARTNERS I, LTD.
By: CypressTree Investment Management
Company, Inc., as Portfolio Manager
By: /s/ Timothy M. Barns
--------------------
Name: Timothy M. Barns
Title: Managing Director
[Signature Page to First Amendment -- Page 14]
<PAGE>
<PAGE>
CYPRESSTREE INVESTMENT MANAGEMENT
COMPANY, INC.
AS: ATTORNEY-IN-FACT AND ON BEHALF OF
FIRST ALLMERICA FINANCIAL LIFE
INSURANCE COMPANY, AS PORTFOLIO
MANAGER
By: /s/ Timothy M. Barns
--------------------
Name: Timothy M. Barns
Title: Managing Director
[Signature Page to First Amendment -- Page 15]
<PAGE>
<PAGE>
KZH III LLC
By: /s/ Virginia Conway
-------------------
Name: Virginia Conway
Title: Authorized Agent
[Signature Page to First Amendment -- Page 16]
<PAGE>
<PAGE>
KZH STERLING LLC
By: /s/ Virginia Conway
-------------------
Name: Virginia Conway
Title: Authorized Agent
[Signature Page to First Amendment -- Page 17]
<PAGE>
<PAGE>
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
[Signature Page to First Amendment -- Page 18]
<PAGE>
<PAGE>
SENIOR DEBT PORTFOLIO
By: Boston Management and Research,
as Investment Advisor
By: /s/ Scott H. Page
-----------------
Name: Scott H. Page
Title: Vice President
[Signature Page to First Amendment -- Page 19]
<PAGE>
<PAGE>
VAN KAMPEN CLO I, LIMITED
By: Van Kampen Management, Inc.,
as Collateral Manager
By: /s/ Jeffrey W. Maillet
----------------------
Name: Jeffrey W. Maillet
Title: Senior Vice President & Director
[Signature Page to First Amendment -- Page 20]
<PAGE>
<PAGE>
PILGRIM AMERICA HIGH INCOME INVESTMENTS
By: /s/ Jeffrey A. Bakalar
----------------------
Name: Jeffrey A. Bakalar
Title: Vice President
[Signature Page to First Amendment -- Page 21]
<PAGE>
<PAGE>
PINEHURST TRADING, INC.
By: /s/ Allen D. Shifflet
---------------------
Name: Allen D. Shifflet
Title: President
[Signature Page to First Amendment -- Page 22]
<PAGE>
<PAGE>
BATTERSON PARK CBO I
By: General Re-New England Asset
Management, Inc., as Collateral
Manager
By: /s/ Theodore M. Haag
--------------------
Name: Theodore M. Haag
Title: Vice President
[Signature Page to First Amendment -- Page 23]
<PAGE>
<PAGE>
DEEPROCK & CO.
By: Eaton Vance Management,
as Investment Advisor
By: /s/ Scott H. Page
-----------------
Name: Scott H. Page
Title: Vice President
[Signature Page to First Amendment -- Page 24]
<PAGE>
<PAGE>
SUBSIDIARY GUARANTORS: AMERICAN DAIRY
---------------------
MANAGEMENT COMPANY, INC.
CAROLINA AGRI-PRODUCTS, INC.
COLE GRAIN COMPANY, INC.
COASTAL AG-DEVELOPMENT, INC.
PMI NUTRITION INTERNATIONAL, INC.
PMI NUTRITION, INC.
By: /s/ Del G. Meinz
----------------
Name: Del G. Meinz
Title: President
PM NUTRITION COMPANY, INC.
PURINA LIVESTOCK MANAGEMENT SERVICES,
INC.
By: /s/ Del G. Meinz
----------------
Name: Del G. Meinz
Title: President/Vice President
PMI AGRICULTURE L.L.C.
By: Purina Mills, Inc., as its Member
By: /s/ Del G. Meinz
----------------
Name: Del G. Meinz
Title: Vice President
PM HOLDINGS: PM HOLDINGS CORPORATION
-----------
By: /s/ Richard E. Knudson
----------------------
Name: Richard E. Knudson
Title: President
[Signature Page to First Amendment -- Page 25]
<PAGE>
<PAGE>
<TABLE>
EXHIBIT I
PURINA MILLS, INC.
MONTHLY FINANCIAL SUMMARY
MONTH AND Y-T-D ENDED ____________
(000'S)
<CAPTION>
Current Month Prior Year
------------- ----------
Balance Sheet
- -------------
<S> <C> <C>
Current Assets
Cash and Cash Equivalents $____________ $___________
Net Trade Accounts Receivable ____________ ___________
Inventory ____________ ___________
Other Current Assets ____________ ___________
Total Current Assets $____________ $___________
Property, Plant & Equipment ____________ ___________
Intangible Assets ____________ ___________
Other Assets ____________ ___________
Total Assets $____________ $___________
Accounts Payable & Accrued Expenses $____________ $___________
Revolver Balance ____________ ___________
Current Portion of Long Term Debt ____________ ___________
Long Term Debt _____________ ___________
Other Liabilities ____________ ___________
Total Liabilities $____________ $___________
Net Equity $____________ $___________
<CAPTION>
Income Statement
- ----------------
Current Month and Y-T-D Prior Year Month and Y-T-D
----------------------- --------------------------
Month of Y-T-D ended Month of Y-T-D ended
________, ___ ________, ___ ________, ___ ________, ___
<S> <C> <C> <C> <C>
Gross Revenues $____________ $____________ $____________ $____________
Gross profit $____________ $____________ $____________ $____________
Operating Costs ____________ ____________ ____________ ____________
Operating Profit (Loss) ____________ ____________ ____________ ____________
Interest Expense ____________ ____________ ____________ ____________
Tax Expense (Benefit) ____________ ____________ ____________ ____________
Net Income (Loss) $____________ $____________ $____________ $____________
<PAGE>
<PAGE>
<CAPTION>
EBITDA
- ------
Current Month and Y-T-D Prior Year Month and Y-T-D
----------------------- --------------------------
Month of Y-T-D ended Month of Y-T-D ended
________, ___ ________, ___ ________, ___ ________, ___
<S> <C> <C> <C> <C>
Base Business $____________ $____________ $____________ $____________
Swine Production/
Market Risk ____________ ____________ ____________ ____________
Operating Profit (Loss) ____________ ____________ ____________ ____________
Depreciation &
Amortization ____________ ____________ ____________ ____________
Asset Write-offs ____________ ____________ ____________ ____________
Other Non-Cash Charges ____________ ____________ ____________ ____________
EBITDA $____________ $____________ $____________ $____________
<CAPTION>
CAPEX AND SWINE
- ---------------
CASH LOSS
- ---------
Current Month and Y-T-D Prior Year Month and Y-T-D
----------------------- --------------------------
Month of Y-T-D ended Month of Y-T-D ended
________, ___ ________, ___ ________, ___ ________, ___
<S> <C> <C> <C> <C>
Purchase of Property,
Plant, Equip. &
Intangibles $____________ $____________ $____________ $____________
Total Swine Cash
Loss $____________ $____________ $____________ $____________
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 41,446
<SECURITIES> 0
<RECEIVABLES> 44,105
<ALLOWANCES> 9,044
<INVENTORY> 61,862
<CURRENT-ASSETS> 167,626
<PP&E> 262,791
<DEPRECIATION> 23,772
<TOTAL-ASSETS> 815,708
<CURRENT-LIABILITIES> 172,042
<BONDS> 538,547
<COMMON> 0
0
0
<OTHER-SE> 109,290
<TOTAL-LIABILITY-AND-EQUITY> 815,708
<SALES> 998,680
<TOTAL-REVENUES> 998,680
<CGS> 811,592
<TOTAL-COSTS> 811,592
<OTHER-EXPENSES> 221,948
<LOSS-PROVISION> 23,349
<INTEREST-EXPENSE> 45,611
<INCOME-PRETAX> (80,471)
<INCOME-TAX> (28,826)
<INCOME-CONTINUING> (51,645)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (51,645)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
