ITEM 1. Business
General
The Company, incorporated in Missouri in 1997, is a leading international producer and marketer of a broad line of animal feeds and other agricultural and nutrition products for hogs, dairy cows, beef cattle, poultry (broilers and layers), rabbits, horses, shrimp and fish. The Company operates 71 manufacturing plants in 16 countries on four continents. Management believes that, among commercial producers of complete animal feeds, Agribrands is the most geographically diversified company of its type in the world, and that its local operations rank among the top three in share of the commercial animal feed market in most of the countries in which it operates.
Agribrands business consists of the international animal feed and agricultural products businesses conducted by Ralston prior to April 1, 1998, when the shares of the Company were distributed to the Ralston shareholders. Accordingly, the Company benefits from Ralston's over 100 years of experience in the animal feeds and agricultural products industry, during which time it has built and maintained a leading industry position by consistently providing high-quality, research-proven products and customer service. The Company has more than thirty years' experience operating across four continents.
The Commercial Feed Industry
Feed costs represent the largest component of the total cost to raise animals used in the production of meat, fish, milk and eggs. The commercial feed industry provides feed and feed components, generally to independent animal producers who then market fully-grown animals, fish, milk or eggs to food processing companies who finally supply retail food outlets and the consumer.
The animal production industry is driven by human consumption of protein which is influenced by population and income. In developing economies, consumption of animal protein generally rises with growth in disposable income as consumers shift to more animal-based protein. After per-capita consumption reaches saturation, growth or decline in consumption is driven by changes in population. The commercial animal feed industry is driven by total animal production and economic development. As an economy moves toward specialization, animal production intensifies and competition drives out inefficiencies. Commercial animal feed producers provide the benefits of efficient ingredient procurement, value-added processing, and sophisticated formulation, which raises the efficiency of animal production. However, as animal production techniques evolve, even greater efficiencies can sometimes be gained by concentrating production of a particular species of animal and establishing dedicated feed production as part of a vertically integrated system.
Animal feed is produced by combining grains and proteins with desired vitamins and minerals. Animal producers can achieve the desired ration by purchasing a complete feed or by acquiring and combining the components. Broadly speaking, commercial feed companies sell complete feeds (ready-to-eat rations requiring no additional ingredients or processing), concentrates (requiring the addition of some ingredient or ingredients, usually grain), premixes (vitamin and mineral mix usually requiring the addition of grains and proteins), and supplements (select vitamins and minerals added to other rations to deliver targeted nutrition). The animal producer selects between these product types based on the type of ration desired, availability of ingredients, and capability to process the ingredients with on-farm equipment. Substantial levels of
premixes are produced by large drug companies and sold to commercial feed producers for processing with other ingredients.
Complete feed products are bulky and expensive to transport. Most complete feeds and concentrates are sold within close proximity of the producing feed mill. Where the local infrastructure is adequate, large customers generally buy product in bulk, which is delivered by truck and placed directly in bins connected to the animal production unit. Smaller customers typically purchase bagged product and are generally served by distribution outlets rather than direct from the plant. In very low-intensity farming areas and where commercial feed is used as a supplement to other feed sources, retailers sometimes divide bags into smaller units for sale.
The feed industry around the world prices on a cost-plus-margin basis. Approximately 80% of the cost to produce feed is the cost of the ingredients. Since the majority of ingredients are commodities traded on global markets, cost positions are relatively transparent and the animal producer is aware of the underlying ingredient costs. While decreased demand can place pressure on feed producers' margins, industry participants generally retain their narrow margins and suffer volume declines. The greatest impact of cyclical supply and demand inequalities is usually borne by the animal producer who, when faced with an end-product price less than the cost to raise an animal, reduces production until favorable economics return.
Feed producers generally compete on the basis of cost per unit of feed or projected total cost of feeding to achieve a specific animal output. Using on-farm trial results, producers of premium-priced feeds attempt to demonstrate to the farmer that the additional per-unit cost of the feed is more than compensated by (1) the reduced amount of feed and time required to produce a market-ready animal or output or (2) the improved quality of the end product which itself can be sold at a premium. The producer uses this data to demonstrate that the farmer's total profits are increased through use of the more efficient, higher priced feed.
Animal nutrition research is central to development of more productive feeds. Research provides increasingly precise information regarding the biological factors that determine how nutritional qualities of ingredients and additives are processed by animals, and the effect of feed manufacturing processes and ingredient interactions on nutritional values. Feed manufacturers use this knowledge on a regular basis to reformulate existing products using the lowest cost combination of ingredients that can deliver the desired nutritional values. In addition, research knowledge is the basis of the development of new products that deliver enhanced nutrition for increased animal production or improved end-product characteristics. The challenge for the feed manufacturer is to develop new products whose increased value (in terms of the additional all-in benefit to the farmer) exceeds any additional costs of ingredients or processing.
Principal Products
The Company sells primarily complete feeds, but also sells concentrates, premixes, supplements and animal health and sanitation products. The Company's products are predominantly value-added premium offerings and are generally marketed under the "Purina"(R) and "Chow"(R) trademarks and the "Checkerboard"(R) logo, and product names such as "Omolene"(R) and "Hi-Octane"(R).
Sources and Availability of Raw Materials
Feed is manufactured by processing a combination of grains, proteins, vitamins, and minerals. Approximately 80% of the total cost to produce feed is the cost of these ingredients, most of which are widely traded in Dollar-denominated global commodity markets. Large multinational drug companies
produce and sell globally the micro ingredients, such as vitamins. Vitamins and minerals are also available from brokers, distributors and local companies.
Organizational Structure
The local markets served by Agribrands vary dramatically with respect to locally available ingredients, animal species being raised, climate, real estate values and economic conditions. In order to manage effectively in this environment, day-to-day operating decisions are made by local managers with extensive experience and with knowledge of local factors, who operate on a highly autonomous basis. Regional and global management coordinate global research efforts, assist with U.S.-based ingredient purchasing and market surveillance, consult on process engineering and major capital additions and leverage the considerable cumulative experience of the organization by collecting and sharing management and administrative best practices across the operating units.
Distribution Network
Agribrands' distribution network consists of over 3,400 independent dealers, most of whom sell the Company's products on an exclusive basis. The dealers are independent wholesalers who sell to animal producers and (particularly where animal production is done at a very small scale) redistribute to thousands of points of sale. More than 70% of the Company's sales are made through these dealers, with the balance made through direct sales primarily to large feeders. The Company offers assistance to dealers in establishing sound financial and business practices, including training, marketing support, promotional materials, and formal business management programs, including assistance in obtaining bank financing. As a result, the Company enjoys a high level of dealer loyalty.
Patents and Trademarks
At the time of the Distribution, Ralston entered into a Trademark Agreement with Agribrands pursuant to which Ralston assigned to Agribrands all of Ralston's rights in certain country specific trademarks associated solely with the Agribrands business, such as "Omolene"(R) and "Hi-Octane"(R) and granted to Agribrands a perpetual license, on a royalty-free basis, to use the trademarks "Purina"(R) "Chow"(R) and the "Checkerboard" (R) logo, and certain other trademarks with respect to agricultural and certain other products, subject to the rights of Purina Mills, Inc. ("PMI") referred to below. Agribrands does not have the right to use such trademarks on pet products, other than products produced for Ralston or provided by Ralston.
The Company has agreed with Ralston that, until April 1, 2003, the Company will not engage in the manufacture, distribution or sale of foods for pets, pet products, pet supplies, pet accessories, litter or personal care products for cats, dogs or other pets, subject to certain limited exceptions.
In 1986, Ralston sold the outstanding capital stock of its subsidiary, Purina Mills, Inc. ("PMI") which was engaged in the animal feed and agricultural products business in the United States. In connection with that sale, PMI was granted a perpetual license in the United States with respect to certain significant trademarks which are currently used by Agribrands outside of the United States. Although Agribrands does not currently compete with PMI in the United States, there are no restrictions on Agribrands' right to expand into the United States market, subject to the exclusive rights of PMI to utilize such trademarks, trade
names and certain proprietary technologies in the United States. PMI may expand into markets outside the United States, subject to the exclusive rights of the Company as described above, and is competing with Agribrands in the Philippines.
Seasonality of Business
Sales prices and volume can both be impacted by seasonal factors. Agricultural product sales prices are directly influenced by changes in the underlying commodity prices for the raw materials used to formulate animal feeds. Commodity prices are usually at their lowest in the months immediately following the fall harvest. Sales volume may fluctuate somewhat seasonally as temperature affects caloric intake and breeding cycles. For example, the Company's Mexican subsidiary sells the vast majority of its shrimp feed between June and October due to the nature of the shrimp farming cycle and location of the customers.
Currently, seasonal factors have a limited impact on the Company's total performance in any given period. Seasonality of commodity prices does not materially affect earnings due to the industry practice of pricing at a relatively constant margin over ingredient costs. With the possible exception of shrimp feed sales, seasonally driven changes in sales volume do not materially affect sales or earnings due to the geographic and species diversification of Agribrands' operations.
Competition
The animal feed business has substantial excess capacity on a worldwide basis, including excess capacity in the countries where the Company operates. The Company faces competition in most of its markets from other feed manufacturers, including, in certain countries, large multinational corporations (such as Nutreco, Ridley, Cargill and Charoen Pokphand), cooperatives, single-owner establishments, and government feed companies. Some of these competitors are larger and have greater financial resources than Agribrands, and in some countries cooperatives and government feed companies may have significant financial and political advantages. Because of limited technological or capital constraints on entry into the animal feed business, new competitors with relatively modest return objectives can arise in any market at any time. In addition, less effective but lower priced feed sources become an attractive alternative to Agribrands' products when livestock, poultry and other animal end product prices are low and customers are unwilling to pay a premium for quality feeds. Although the strength of competitors varies by geographic area and product line, Agribrands believes that no other commercial producer of complete feeds produces and markets as broad a line of animal feed products in as many countries as Agribrands.
Local animal production industries are consolidating in concert with the broader development of the local economies. This trend is expected to continue. In the past, Agribrands has been successful in evolving with the sector and generating sales to progressively larger producers. However, the tendency of large producers to vertically integrate their businesses by acquiring or constructing feed production facilities has at times led to significantly less reliance on outside suppliers of feed. As the consolidation of animal producers continues, competition is likely to increase among independent feed suppliers, and this industry is also likely to consolidate. Agribrands believes that the superiority of its products and its reputation for service and knowledge about animal nutrition needs should allow it to effectively compete in the face of such trends.
Much of the competition in the animal feeds and agricultural products industry centers around price, due to the commodity-like aspects of basic animal feed. However, Agribrands believes that product quality, customer service and the ability to identify and satisfy animal production needs in individual markets are also significant competitive factors. Agribrands also believes it has significant advantages due to its extensive dealer distribution network, its nutritional expertise, its ability to convert its research and technology into products which meet the diverse requirements of its customers in different markets under different economic circumstances, its high level of customer service, the responsiveness of its locally autonomous structure, and the breadth, quality and efficacy of its product lines.
The animal feeds and agricultural products business is expected to remain highly competitive in the foreseeable future. Future growth opportunities are expected to depend on the Company's ability to implement its strategies for competing effectively in new, growing agricultural markets, maintaining effective cost controls, making strategic acquisitions, effectively managing customers changing preferences for complete feeds, concentrates or premixes, and developing and implementing methods for more efficient manufacturing and distribution operations, while at the same time maintaining aggressive pricing and promotion of its products.
Research and Development
Agribrands' research and engineering development is coordinated centrally but conducted on a decentralized basis in each of the three regions (Americas, Europe and Asia). Fundamental research is conducted in cooperation with leading agricultural research universities, institutes and commercial entities such as Cornell University (U.S.A.), Massey University (New Zealand), INRA (France), Lethbridge Research Center (Canada) and Guelph University (Canada). Agribrands provides funding for leading edge research in exchange for the rights to commercially apply the results.
Research projects are selected based on priorities established by the Agribrands' research and technology team and an Agribrands interdisciplinary product steering group. The product steering group is composed of senior management, research, engineering, operating personnel and specialists for key animal species groups.
The Agribrands research team consists of more than 25 persons with postgraduate or doctoral degrees in animal nutrition, veterinary medicine or agricultural sciences. In 1999, Agribrands expenditures for research and development amounted to $7.0 million.
During fiscal year 2000 the Company is bringing a newly developed product to market. The product consists of a proprietary blend of enzymes to be applied to feed ingredients using a patented application process. The product is intended to improve ruminant (multiple stomach animals, such as cows) animal digestion. The product and process will be marketed under the brand name "PROMOTE Natural Energy Technology(TM)". Enzymes are naturally occurring proteins that are present in all living animals and act as catalysts in the digestive process. Agribrands secured a license to utilize the patented application process during fiscal year 1999 from The Lethbridge Research Center in Alberta, Canada.
Governmental Regulation and Environmental Matters
Agribrands' operations are subject to regulation by various common market and local governmental entities and agencies, national and local laws and regulations with respect to environmental matters, including air and water quality, noise pollution, underground fuel storage tanks, waste handling and disposal and other regulations intended to protect public health and the environment. Many European countries, as well as the European Union, have been very active in adopting and enforcing environmental regulations. In many countries in which Agribrands operates, there has not been significant governmental regulation relating to the environment, occupational safety, employment practices or other business matters routinely regulated in the United States. As such economies develop, it is possible that new regulations may increase the risk and expense of doing business in such countries. Evolving environmental and zoning requirements have led to Agribrands relocating two of its Korean facilities from urban areas to industrial sites.
While it is difficult to quantify with certainty the potential financial impact of actions regarding expenditures for environmental matters, particularly remediation, and future capital expenditures for environmental control equipment; in the opinion of management, based upon the information currently available, the ultimate liability arising from such environmental matters will not have a material effect on Agribrands' financial position but could be material to capital expenditures or earnings.
Employees
The Company, as a whole, employs 50 employees in the United States and approximately 5,012 in foreign jurisdictions.
Executive Officers of the Registrant
The following is a list of all the executive officers (7) of Agribrands as of August 31, 1999. All of these officers were elected by the Board and serve in such positions until their successors shall have been duly elected and qualified. There are no family relationships between any of the executive officers.
Name Age Positions
William P. Stiritz 65 Chairman of the Board, Chief Executive Officer and President of Agribrands since 1998. Mr. Stiritz joined Ralston in 1963 and served as Chief Executive Officer and President of Ralston from 1982 until his retirement in 1997.
David R. Wenzel 36 Chief Financial Officer of Agribrands since 1998. Mr. Wenzel served as the Chief Financial Officer of Ralston's international agricultural products business since 1996. He joined Ralston's Protein Technologies subsidiary as Director of Strategic Planning in 1993 and in 1994 became Director of Corporate Planning for Ralston. Prior to joining Ralston, Mr. Wenzel was a Manager, Tax Services, for PricewaterhouseCoopers LLP in its St. Louis office.
Bill G. Armstrong 51 Chief Operating Officer of Agribrands since 1998. Mr. Armstrong served as Executive Vice President of Operations of Ralston's international agricultural products business during 1997 and Regional Chief Executive Officer - South Asia from 1995 to 1997. He served as Managing Director of Ralston's international agricultural products Philippine operations from 1992 to 1995.
Kim Ki Yong 54 Chief Operating Officer - North Asia Region of Agribrands since 1998. Mr. Kim served as Regional Chief Executive Officer - North Asia of Ralston's international agricultural products business since 1995 and President and Chief Executive Officer of Ralston's international agricultural products Korean operations from 1993 to 1995.
Eric M. Poole 54 Chief Operating Officer - Europe Region of Agribrands since 1998. Mr. Poole served as Vice President - Americas of Ralston's international agricultural products operations from 1993 to 1995; and as international agricultural products Regional Chief Executive Officer - Europe from 1995 to 1998.
Michael J. Costello 47 Secretary and General Counsel of Agribrands since 1998. Mr. Costello served as International Counsel of Ralston's international animal and human foods businesses from 1989 to 1998.
Robert W. Rickert, Jr. 48 Treasurer of Agribrands since 1998. Mr. Rickert served as Director of International Financial Services of Ralston's international agricultural products business from 1990 to 1998; Director International Finance - Latin America, Middle East, and Africa from 1988 to 1992; and Manager, International Finance from 1986 to 1988.
ITEM 2.
ITEM 2. PROPERTIES
Agribrands' principal properties are its animal feed manufacturing facilities. Shown below are the locations of the principal facilities of Agribrands, all of which, except as indicated, are owned by Agribrands or its wholly owned subsidiaries. Agribrands' facilities in the Peoples Republic of China are located on sites subject to long-term lease agreements. Due to restrictions on foreign land ownership, Agribrands facilities in the Philippines are leased from a company which owns the sites. Agribrands' Philippine affiliate owns forty percent of the shares of the leasing company. Agribrands leases the office space in St. Louis County, Missouri where its principal executive offices are located. Although a substantial number of these manufacturing facilities are more than twenty years old, management believes the Company's facilities are adequately maintained and are suitable and adequate for the purposes for which they are used. During the fiscal year ended August 31, 1999, the utilization of these facilities averaged approximately 70% of capacity, and management believes that existing capacity should be sufficient for anticipated needs.
BRAZIL MEXICO Canoas Cuautitlan Inhumas Guadalajara Maringa(3) Merida (2) Paulinia Mexicali Recife Monterrey Volta Redonda Obregon Salamanca CANADA Tehuacan Addison, Ontario Courtice, Ontario (1) PEOPLE'S REPUBLIC OF CHINA Drummondville, Quebec Fushun (2) Palmerston, Ontario Langfang St. Romuald, Quebec Nanjing (2) Strathroy, Ontario Yantai (2) Woodstock, Ontario PERU COLUMBIA Arequipa (1) Bogota(1) Chiclayo Buga Lima Cartagena Giron (1) PHILIPPINES Ibaque (1) Pulilan Medellin (1) Villasis Mosquera PORTUGAL FRANCE Benavente (3) Courchelettes Cantenhede Limoges (2) Longue SPAIN Pommevic Benavente St. Ybard (2) Don Hermanas Sorcy La Coruna Marcilla GUATEMALA Merida Guatemala City Torrejon Valencia HUNGARY Kaposvar TURKEY Karcag Bolu Gonen ITALY Luleburgaz Borgoratto (3) Sospiro VENEZUELA Spessa Barcelona San Felice Cabimas (2)(3) Termoli Maracaibo Maracay KOREA Hatcheries - Valencia, Venezuela Kimhae Kunsan Songtan
(1) Leased (2) Joint Venture (3) To be Divested
In addition to the properties identified above, Agribrands and its subsidiaries own and/or operate sales offices, regional offices, laboratories, storage facilities, distribution centers and terminals and related properties.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to legal proceedings and claims arising out of its business that cover a wide range of matters, including trade regulation, contracts, environmental issues, product liability, patent and trademark matters, and taxes.
In August 1999, Agribrands (together with Cargill, Incorporated, The Iams Company and by subsequent amended pleading Carl S. Akey, Inc.) filed a complaint in the U.S. District Court for the Northern District of Illinois against F. Hoffman-LaRoche Ltd., Hoffman LaRoche Inc., Roche Vitamins Inc., BASF Aktiengesellschaft, BASF Corporation, Rhone-Poulenc S.A., Rhone-Poulenc Inc., Rhone-Poulenc Animal Nutrition Inc., Lonza A.G., Lonza, Inc., Takeda Chemical Industries, Ltd., Takeda Vitamin & Food USA, Inc., EISAI Co. Ltd., EISAI Corporation of North America, EISAI U.S.A. Inc. DAIICHI Pharmaceutical Co., Ltd., DAIICHI Fine Chemicals, Inc., Chinook Group Limited, Chinook Group, Inc., DuCoa, L.P., E. I. Dupont De Nemours and Company, DCV Inc., Bioproducts, Inc., Roland Bronnimann, Kuno Sommer, John W. Kennedy, Robert Samuelson, Lindell Hilling, J. L. (Pete) Fischer and Antonio Felix. The complaint alleges that the defendants conspired globally to fix the prices of vitamins and allocate customers in support of such arrangement in violation of the U.S. antitrust laws. The defendants have admitted in criminal proceedings to participating in such practices. Agribrands believes that it will be successful in recovering damages arising from these practices. The timing of recovery and the amount of damages are difficult to determine due to the multiple variables which will influence the determination of damages such as period of time covered, percent of overcharge, purchasing entity, as well as other issues and defenses which may be asserted by the defendants. As of August 31, 1999, the Company has not recognized any gain in its financial statements for this matter.
In the fall of 1997, Agribrands' wholly owned subsidiary, Agribrands Philippines, Inc. (formerly Purina Philippines, Inc.), applied for renewal of a warehouse license to store corn and rice and by-products at its Pulilan facility. The Philippines National Food Authority ("NFA"), the governmental agency that administers the Philippines laws and regulations governing the corn and rice industry, advised Agribrands Philippines by letter dated October 31, 1997 that its license renewal application was denied. The letter cited Philippines legislation and regulations requiring that businesses operating in the corn and rice industry not have more than 40% foreign ownership. Since the NFA believes that Agribrands Philippines is in the corn and rice industry, it has requested Agribrands Philippines to file a divestment plan in order to comply with the 40% maximum foreign ownership requirement.
Agribrands Philippines has appealed the denial of its license renewal, and on January 23, 1998, Agribrands Philippines received notification that it may operate its warehouse under a "provisional permit" pending the resolution of the appeal. The appeal is pending in the Office of the President. Agribrands Philippines believes it does not need a warehouse license, as it believes it is not engaged in the corn and rice industry as defined by law. Furthermore, Agribrands Philippines believes that it should not be subject to the NFA regulation based upon its original Board of Investments One Stop investment approval of a 100% foreign owned investment. Agribrands Philippines intends to pursue its appeal in the Philippines legal system.
In the event that Agribrands Philippines is required to file a divestiture plan, it is expected, based on previous case precedents, that a plan would be approved that would permit the necessary divestiture over a considerable period of time.
Various tax and labor claims have been asserted against the Agribrands business in Brazil. The claims arose principally from monetary corrections made in connection with the institution of economic plans by prior Brazilian administrations to control inflation.
Many of the legal matters are in preliminary stages, involve complex issues of law and fact and may proceed for protracted periods of time. The amount of the eventual liability, if any, from these proceedings cannot be determined with certainty; however, in the opinion of Agribrands management, based upon the information presently known, as well as upon the limitation of certain of its liabilities under the Agreement and Plan of Reorganization between Ralston and Agribrands for the spin-off of Agribrands, the ultimate liability of Agribrands, if any, arising from the pending legal proceedings, as well as from asserted legal claims and known potential legal claims which are probable of assertion, taking into account established accruals for estimated liabilities, should not be material to the financial position of Agribrands but could be material to results of operations or cash flows for a particular quarter or annual period.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the New York Stock Exchange under the symbol "AGX". There were 10,965 shareholders of record on October 1, 1999. The Company has not paid cash dividends in 1999 and does not intend to begin paying cash dividends in fiscal year 2000.
The following table sets forth, for the twelve months ended August 31, 1999, and the five months ended August 31, 1998, the range of high and low sale prices of Agribrands common stock as reported on the NYSE Composite Tape.
AGRIBRANDS COMMON STOCK
MARKET PRICES HIGH LOW DIVIDENDS
Fourth Quarter $48.75 $34.06 -- Third Quarter $37.37 $30.94 -- Second Quarter $35.50 $26.69 -- First Quarter $31.69 $21.44 --
Fourth Quarter $35.69 $29.13 -- Third Quarter (April 1 - May 31) $42.69 $32.25 --
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is a summary of the key factors management considers necessary in reviewing Agribrands results of operations, operating segment results, liquidity and capital resources. Management has also included a section on Key Measures and Concepts for Understanding the Business.
Agribrands is a leading international producer and marketer of formula animal feeds and other agricultural products. Prior to April 1, 1998, the Company was a wholly-owned subsidiary of Ralston. On that date, Ralston distributed the common stock of the Company to its shareholders in a tax-free spin-off. The Company is a successor to Ralston's over 100 years of experience in the animal feeds and agricultural products industry.
The production and sale of animal feed was the primary business of Ralston when it was established in 1894. From that date until the Distribution, Ralston built and maintained its industry position by consistently providing high-quality, research-proven products and customer service. Although this business originated in the United States, it expanded throughout the world, entering the Americas (outside of the United States) in 1927, Europe in 1957 and Asia in 1967. The Company now operates 71 manufacturing plants in 16 countries, and has more than thirty years' experience operating across four continents. The primary animal feed business of Agribrands is conducted almost exclusively outside the United States. In 1986, Ralston sold Purina Mills, Inc., its U.S. animal feeds and agricultural products business, to an unrelated third party. Purina Mills is unrelated to Agribrands.
REVIEW OF CONSOLIDATED RESULTS OF OPERATIONS
Unless otherwise noted, all references to prices, costs and margins reflect U.S. Dollar results after translation of foreign currency financial statements in accordance with Statement of Financial Accounting Standards No. 52 (FAS 52).
Net Sales
Consolidated net sales decreased $148.6 million or 10.5% in 1999 as result of lower volume and lower average selling prices. Feed volume declined 215,000 metric tons or 4.2% in 1999 with most of the decline occurring in Europe and Asia. Average selling prices declined $18 per ton or 6.7% in 1999 reflecting lower commodity costs relative to 1998, consistent with the feed industry's practice of adjusting prices to reflect changes in ingredient costs. Consolidated net sales decreased $117.5 million or 7.7% in 1998 primarily as a result of lower commodity costs.
Operating Profit
Operating profit increased $8.1 million or 13.7% in 1999 due to lower operating expenses in Europe and improved margins in Asia. Operating profit increased $12.6 million or 27.0% in 1998 as improved margins and increased volume in the Americas region and lower operating expenses in Europe more than offset a decline in Asia's profitability and higher corporate administrative expenses. Operating profit excludes provisions for restructuring, gains on sale of property, interest expense and other income and expense.
Restructuring activities
In 1998, Agribrands recorded provisions for restructuring which reduced earnings before income taxes and net earnings by $3.0 million and $1.7 million, respectively. These charges represented primarily severance costs and fixed asset write-offs associated with the streamlining of Agribrands' operations in Europe. The restructuring provided for the severance of approximately 40 employees, most of whom were released prior to August 31, 1998. These restructuring actions resulted in pre-tax cost savings of $0.9 million in 1998 and were expected to result in annual savings of approximately $2.0 million.
In 1997, Agribrands recorded provisions for restructuring which reduced earnings before income taxes and net earnings by $3.2 million. These charges primarily represented severance costs and fixed asset write-offs related to the August 1997 closing of a production facility in Portugal. Beginning in 1998, these restructuring actions were expected to result in annual savings of approximately $1.0 million.
Gain on Sale of Property
In 1999, Agribrands realized a $1.8 million gain on the sale of land in Korea and a $0.5 million gain on the sale of property in Spain. The sale of these assets is not expected to have a material impact on future operations.
Interest Expense and Other Income/Expense
Interest expense decreased $4.0 million in 1999 as a result of both lower average borrowings and lower interest rates. Interest expense increased $1.1 million in 1998 primarily due to higher interest rates in the markets where the Company held debt.
Other income/expense, net, changed favorably by $18.8 million in 1999. Foreign exchange losses were $1.5 million in 1999 versus $12.8 million in 1998. Investment income was $5.0 million higher in 1999 due to higher levels of interest bearing investments. Other income/expense, net, changed unfavorably by $10.6 million in 1998 compared to 1997. Foreign exchange losses were substantially higher in 1998 as a result of losses on U.S. Dollar denominated debt in Korea and Colombia and losses on local currency denominated assets in Mexico, where the Company then used hyper-inflationary accounting. Investment income was $1.0 million higher in 1998 compared to 1997 because of higher levels of interest bearing investments. Earnings for 1998 were also adversely impacted by a $2.5 million charge to write off deferred financing costs associated with a credit facility the Company elected not to close.
Net Earnings
Net earnings were $44.0 million for the year ended August 31, 1999 compared to $13.8 million in 1998 and $8.7 million in 1997. Income taxes, which include federal, state and foreign taxes, were 37.5%, 59.6% and 73.7% of pre-tax earnings in 1999, 1998 and 1997, respectively. The effective tax rate in 1999 was favorably impacted by a reduction in valuation allowances against tax loss carryforwards in France and Spain and tax credit carryforwards in Mexico. The effective tax rate in 1999 would have been lower had the Company not recorded a $4.0 million valuation allowance against foreign tax credits awarded in the United States for which no tax benefit is expected to be realized. The effective rates in 1998 and 1997 were unfavorably impacted by both losses in countries for which no tax benefit could be recognized and incremental taxes allocated by Ralston. See Note 10 of the Company's Notes to Financial Statements for more information concerning income taxes.
Refer to Note 4 of the Consolidated Financial Statements for a description of each segment.
Americas
Net sales in the Americas segment (which excludes the United States) decreased $53.1 million or 8.5% in 1999. Average selling prices declined $21 per ton in 1999 as a result of substantially lower ingredient costs everywhere except in Colombia where a new value added tax on certain ingredient purchases went into effect on January 1, 1999. Weakness in consumer purchasing power caused 1999 volume to decline in Brazil, Colombia and Peru. These volume declines were mostly offset by increased volume in Mexico and Venezuela. In Mexico, volumes increased mainly in the hog and poultry lines. In Venezuela, volume to large poultry feeders increased in 1999. Net sales in the Americas increased $26.0 million or 4.3% in 1998 compared to 1997 due to incremental revenue from higher volume, which was only partially offset by a $14 per ton decline in average selling prices. The 1998 decline in average selling prices primarily reflects the decline in commodity costs. Volume for the Americas segment increased 9.3% in 1998, primarily as a result of increased feed sales in Mexico. Agribrands' operations in Mexico experienced increased demand in 1998 due to improved economic conditions compared to the prior year.
Operating profit in the Americas stayed flat in 1999 as a $2.1 million improvement in income over ingredient cost ("IOIC") was mostly offset by a $1.8 million charge to settle a claim by a former joint venture partner in Chile. IOIC improved on higher volume and higher margins in Venezuela and Mexico; however, the improvement was partially offset by weakness in Brazil, Colombia and Peru. Operating profit increased $17.5 million or 109.4% in 1998. The improvement in operating profit and IOIC in 1998 was broad-based but most notable in Mexico, where increased shrimp feed sales, with their overall higher margins, helped improve profitability.
Europe
Net sales in Europe decreased $55.4 million or 13.9% in 1999 and $70.5 million or 15.1% in 1998. The decline in net sales for both years resulted from a combination of lower volume and lower average selling prices. Volume declined 85,000 tons in 1999 mainly as a result of the December 1998 sale of an unprofitable subsidiary of the Company's subsidiary in France. The 1999 decline in volume was mitigated somewhat by increased sales of cattle feed in Spain. Volume declined 101,000 tons in 1998 due to plant closures and a rabbit epidemic that caused a decline in feed consumption. Average selling prices declined $23 per ton or 9.1% in 1999 and $27 per ton or 9.7% in 1998. The lower selling prices reflect lower ingredient costs relative to the prior year, consistent with the feed industry's practice of adjusting prices to reflect changes in ingredient costs.
IOIC in Europe declined $0.2 million in 1999 as the reduction in volume was largely offset by an improvement in margins. IOIC declined $8.0 million in 1998 largely due to the reduction in volume.
Operating profit in Europe increased $3.7 million or 31.1% in 1999 and $6.8 million or 133.3% in 1998 due to a reduction in operating expenses. The Europe segment's operating expenses declined in both years as a result of cost savings from prior year restructurings and translation of local currency costs at weaker foreign currency exchange rates.
Asia
Net sales in Asia decreased $42.7 million or 11.0% in 1999 due to a combination of lower volume and lower ingredient costs. Volume in Asia declined 106,000 tons or 7.6%. Nearly all of this volume decline occurred in Korea, where low hog prices following last year's recession reduced demand for the Company's higher-price, higher-performance hog feeds. Average selling prices in Asia
declined by $10 per ton or 3.8% primarily as a result of lower ingredient costs. Net sales in Asia decreased $73.0 million or 15.9% in 1998. Volume for the Asia region was essentially flat for 1998. Net sales declined in 1998 due to lower ingredient costs and devaluation of the local currencies against the U.S. Dollar in excess of local currency selling price increases. During fiscal year 1998, both the Korean Won and Philippine Peso devalued approximately one-third against the Dollar.
In 1999, the Asia segment's IOIC improved by $12 per ton and $9.1 million overall reflecting a significant movement toward pre-crisis unit margins, specifically in Korea. In 1998, IOIC declined $19 per ton and $26.0 million overall as local pricing adjustments were unable to offset the full effect of the 1998 devaluation of the Asian currencies versus the U.S. Dollar.
Operating profit in Asia increased $4.8 million or 17.0% in 1999 as some of the increase in IOIC was offset by an increase in operating expenses. This increase in operating expenses occurred primarily as a result of capital expenditures made in 1998 including the purchase of one plant and the construction of another in China. Operating profit in Asia decreased $4.6 million or 14.0% in 1998. The 1998 decline in IOIC was largely offset by a reduction in operating expenses which primarily resulted from translating relatively stable local currency costs at significantly weaker foreign currency exchange rates versus the U.S. Dollar.
Corporate and Tradico
The corporate and Tradico segment is located in the United States. This segment contains certain corporate items which are not allocated to other segments. Tradico, a division within the Company, acquires and resells ingredients, equipment and feed products primarily to affiliates. In fiscal year 1999, net sales to non-affiliates consisted primarily of ingredient sales together with some shipments of feed products.
On an operating profit basis, the corporate and Tradico segment recorded a loss (primarily related to unallocated corporate administrative items) of $14.6 million in 1999, $14.3 million in 1998 and $7.2 million in 1997. Corporate administrative expenses increased $7.1 million in 1998, reflecting the stand-alone cost structure of the Company versus the lower overhead expenses incurred while Ralston owned the Agribrands Businesses.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations increased by $77.3 million or 232.1% in 1999 due to increased cash earnings and favorable changes in working capital items, particularly accounts receivable and inventories. Accounts receivable decreased by $20 million in 1999 primarily as a result of collecting $12.9 million due from Ralston at the end of last year. In addition, receivables in Italy declined by around $5 million due to a combination of reduced sales and collection of accounts receivable for value added tax. Consolidated inventories decreased by $12.7 million in 1999 due to lower volumes in Asia, lower worldwide commodity prices and strategic grain purchases made by Mexico in August 1998. Cash flow from operations decreased by $34.5 million or 50.9% in 1998 due to unfavorable changes in working capital items including the $12.9 million receivable from Ralston recorded in connection with the Distribution.
Capital expenditures, primarily to replace or enhance existing production facilities and equipment, were $25.9 million, $44.6 million and $44.1 million in fiscal years 1999, 1998 and 1997, respectively. The Company expects capital expenditures in fiscal year 2000 to be at or near the level for 1999.
The Company has a formal review procedure for the authorization of capital expenditures. Anticipated capital expenditures are expected to be funded with existing cash reserves as well as cash generated from operations.
Agribrands is continually evaluating new investment opportunities. In fiscal year 1998, Agribrands invested $16.6 million to purchase businesses in Venezuela, Italy and China. These acquisitions were funded through a combination of funds provided by Ralston and local country borrowings. Assuming these acquisitions had occurred as of September 1, 1997, they would not have had a material effect on net sales or net earnings during any of the periods presented.
Agribrands' capital expenditures and acquisitions in fiscal years 1998 and 1997 were partially funded with investments by and advances from Ralston. Net proceeds from Ralston were $141.9 million in fiscal year 1998 and $13.7 million in fiscal year 1997. In accordance with the Agreement and Plan of Reorganization, Agribrands was spun off from Ralston in 1998 with approximately $105.0 million of cash and receivables from Ralston (offset by approximately $80.0 million of debt retained by Agribrands and its affiliates).
The Company's working capital requirements for inventories and receivables are influenced somewhat by seasonality, the availability of raw materials and changes in commodity costs, and as a result may fluctuate widely. The Company has generally financed its seasonal and other working capital needs through short-term borrowings provided by local foreign banks and branches of multi-national banks. Intercompany loans are also used by the Company to finance working capital if the loans reduce external local borrowing costs by more than the opportunity cost of lower U.S. invested reserves. In 1999, the Company reduced its short-term borrowings to $18.5 million from $46.9 million in 1998. The Company's foreign affiliates have established uncommitted credit lines with several lenders in order to assure availability of working capital. On August 31, 1999, total unused, uncommitted lines of credit were approximately $200 million. This includes approximately $90 million of uncommitted lines of credit for the Company's Korean subsidiary.
Cash on hand, cash flow from operations and borrowings under various lines of credit are Agribrands' primary sources of liquidity. Management has a strong focus on cash flow and the effective use of excess cash flow. The combined operating, cash and equity position of Agribrands should continue to provide the capital flexibility necessary to fund future opportunities as well as to meet existing obligations.
KEY MEASURES AND CONCEPTS FOR UNDERSTANDING THE BUSINESS
Income over Ingredient Cost (IOIC)
The commercial animal feed industry generally prices products on the basis of aggregate ingredient cost plus a per-unit margin. As ingredient prices fluctuate, the changes are generally passed on to customers through changes in the Company's product pricing. Income over ingredient cost (which is equal to net sales minus the cost of ingredients), rather than sales Dollars, is the key indicator of revenue performance because of the distortions in sales Dollars caused by changes in commodity prices. Management also monitors IOIC per ton to evaluate trends in pricing and relative product value.
Dollar-Responsive Economics of International Feed Operations
Feed is manufactured by processing a combination of grains, proteins, vitamins, and minerals. Approximately 80% of the total cost to produce feed is the cost of these ingredients, most of which are widely traded in
Dollar-denominated global commodity markets. Excluding logistics costs, the Dollar values (and costs) of ingredients around the world are broadly comparable. Local currency prices for ingredients, therefore, typically adjust quickly to reflect changes in quoted Dollar prices and changes in the exchange rate between the local currency and the Dollar. As raw materials inventories are replenished after an exchange rate change, new local currency ingredient costs are reflected in local currency feed prices.
The margin added to ingredient costs is less responsive to exchange rate changes because industry pricing is often established by local competitors. Nevertheless, exchange rates between the U.S. and other countries (particularly countries with systemic high inflation like many of those where the Company operates) are related closely to differentials between the U.S. and local inflation and interest rates. As a result, Dollar-translated IOIC levels of the Company's international operations generally fluctuate closely around long-term norms, particularly on a consolidated basis.
Dollar-Based Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)
Management believes the required method of translating foreign currency financial statements for most of the Company's foreign affiliates (that is using the local currency as functional currency) can distort the economic impact of certain items, specifically costs of goods sold and foreign exchange gains and losses (see Note 2 of the Company's Notes to Financial Statements for more information concerning the Company's translation procedures). Because of the Company's earnings mix, these distortions can have a disproportionate effect on reported results. For this reason, management believes it is important to understand the Company's operational results computed using the U.S. Dollar as the functional currency.
Dollar-based accounting was required practice prior to the issuance of FAS 52 in 1981 and continues to be required for U.S. affiliates operating in hyper-inflationary environments. This exception is in recognition of the possible distortions of local-currency based accounting. "Hyper-inflationary" accounting is limited under FAS 52 to countries with cumulative inflation greater than 100% over three years. This fails to cover numerous countries (including those in which the Company generates the majority of its earnings) with consistently higher inflation than the U.S., whose currency values remain unstable (typically devaluing over time).
When exchange rates fluctuate, earnings results using U.S. Dollar-based accounting differ from results under local currency based accounting in three important ways:
o Cost of goods sold are measured using the exchange rate at the time inventory was purchased rather than the exchange rate at the time finished product was sold.
o Foreign exchange gains and losses are computed on local currency denominated assets and liabilities rather than U.S. Dollar-denominated assets and liabilities.
o Depreciation is computed by applying the appropriate factor to the historical Dollar value of the asset rather than by applying the appropriate factor to the historical local currency value and translating the result at the current exchange rate.
Because of its principal focus on cash flows, management uses Dollar-based EBITDA as a key determinant of awards for corporate management under its annual incentive plan. The following table provides a reconciliation of pre-tax earnings to Dollar-based EBITDA for fiscal years 1999 and 1998 (Data was not available to present 1997 numbers):
------------------------------------------------------------------------------ Dollar-based EBITDA (Dollars in millions)
Year ended August 31, --------------------- 1999 1998 --------- -------
Earnings before Income Taxes $ 70.4 $ 34.2 Add: Provisions for restructuring - 3.0 Gain on sale of property (2.3) - Depreciation and amortization 24.8 21.2 Interest expense 8.0 12.0 ------- ------ EBITDA reported under FAS 52 $ 100.9 $ 70.4 Adjustments to report EBITDA on a U.S. Dollar basis: 1) Difference in cost of sales for ingredient costs (6.1) (16.6) 2) Reversal of foreign exchange loss reported under FAS 52 1.5 12.8 3) Dollar-based foreign exchange gain 3.7 12.6 ------- ------ EBITDA reported on a U.S. Dollar basis $ 100.0 $ 79.2 ======= =======
Explanation of adjustments to EBITDA:
1) Difference in cost of sales for ingredient costs--The operations in the Americas (specifically Brazil and Colombia) accounted for the majority of the adjustment in 1999 while the operations in the Americas and Asia accounted for nearly all of the adjustment in 1998. Ingredient costs were lower under FAS 52 in both years due to devaluation of the local currencies against the Dollar. Under Dollar-based accounting, inventories are initially recorded and maintained in Dollars.
2) Reversal of foreign exchange loss reported under FAS 52--In 1999, foreign exchange losses reported under FAS 52 in Brazil were only partially offset by gains in Mexico and Korea. In 1998, the operations in Colombia, Mexico and Korea accounted for most of the $12.8 million foreign exchange loss reported under FAS 52.
3) Dollar-based foreign exchange gain--In 1999, Dollar-based foreign exchange gains realized in Brazil, Colombia, Italy and Mexico were partially offset by losses in Korea and the Philippines. Except in Mexico, the Company had net local currency liabilities in each of these countries during 1999. Where the local currency weakened against the Dollar (Brazil, Colombia and Italy), this liability decreased in Dollar terms (a foreign exchange gain). Where the local currency strengthened against the Dollar, (Korea and the Philippines), this liability increased in Dollar terms (a loss). In Mexico, the Company had net local currency denominated assets during 1999 which increased in Dollar value (a foreign exchange gain) as the Mexican Peso strengthened against the Dollar. In 1998, Asian currencies weakened against the Dollar generating nearly all of the $12.6 million foreign exchange gain on net obligations denominated in the local Asian currencies.
MARKET RISK SENSITIVITY AND INFLATION RISK
Commodity Price Risks
The availability and price of agricultural products are subject to wide fluctuations due to unpredictable factors such as weather conditions, government regulations, economic climate or other unforeseen circumstances. The Company utilizes highly correlative and effective commodity futures contracts and options to manage certain of these exposures. The Company hedges only firm commitments or anticipated transactions, and Company policy prohibits the use of commodity derivatives for speculation. The potential loss in fair value at August 31, 1999 and 1998 of the Company's commodity positions, excluding inventory on hand and fixed price contracts, resulting from a hypothetical 10% adverse change in commodity prices is $0.4 million and $0.2 million, respectively.
Interest Rate Risks
At August 31, 1999, the Company's debt portfolio was comprised of approximately 60% variable rate debt and 40% fixed rate debt. With respect to the Company's variable rate debt, a hypothetical 10% adverse change in interest rates would have had an unfavorable impact of around $0.5 million on the Company's interest expense for 1999. With respect to the Company's fixed rate debt outstanding at August 31, 1999, a hypothetical 10% adverse change in interest rates would have resulted in approximately a $0.3 million change in the market value of the Company's fixed rate debt.
Foreign Currency Exchange Risks
International operations account for almost all of Agribrands' revenue and operating income. Foreign currency accounting exposures arise from transactions, including firm commitments and anticipated transactions, denominated in a currency other than an entity's functional currency and from foreign denominated revenues and profits translated into U.S. Dollars. At a consolidated level, economic exposures to U.S. Dollar values of the Company's assets and liabilities arise because many assets or liabilities are denominated in local currencies subject to fluctuating rates of exchange with the Dollar.
Agribrands periodically enters into foreign exchange forward contracts to mitigate Agribrands' economic exposure to changes in exchange rates. Company policy allows foreign currency hedging transactions only for identifiable foreign currency exposures, and therefore, Agribrands does not enter into foreign currency contracts for trading purposes where the objective is to generate profits. The potential loss in fair value at August 31, 1999 and 1998 for such net currency positions resulting from a hypothetical 10% adverse change in foreign currency exchange rates is $0.8 million and $0.3 million, respectively.
Because of the U.S. Dollar responsiveness of the Company's international feed operations, management does not believe that fluctuations in the exchange rate between the Dollar and a local currency materially impact the present value of projected future Dollar-translated cash flows from the local operation. As a result, Agribrands does not generally hedge the accounting exposure of its net investments in foreign subsidiaries. The net investment in Agribrands' foreign subsidiaries and affiliates translated into Dollars using the year-end exchange rates is approximately $228 million and $205 million at August 31, 1999, and 1998, respectively. The potential accounting loss in value of Agribrands' net investment in foreign subsidiaries resulting from a hypothetical 10% adverse change in quoted foreign currency exchange rates at August 31, 1999 and 1998 is approximately $20.7 million and $18.7 million, respectively.
Inflation
Management recognizes that inflationary pressures may have an adverse effect on Agribrands through higher asset replacement costs and related depreciation and higher material costs. In addition, hyperinflationary conditions have occurred in many of the countries in which Agribrands operates. Agribrands tries to minimize these effects through geographical diversification, cost reductions and productivity improvements as well as price increases to maintain reasonable profit margins. It is management's view that inflation has not had a significant impact on the consolidated operations in the three years ended August 31, 1999.
Seasonality
Sales prices and volume can both be impacted by seasonal factors. Agricultural product sales prices are directly influenced by changes in the underlying commodity prices for the raw materials used to formulate animal feeds. Commodity prices are usually at their lowest in the months immediately following the fall harvest. Sales volume may fluctuate somewhat seasonally as temperature affects caloric intake and breeding cycles. For example, the Company's Mexican subsidiary sells the vast majority of its shrimp feed between June and October due to the nature of the shrimp farming cycle.
Currently, seasonal factors have a limited impact on the Company's total performance in any given period. Seasonality of commodity prices does not materially affect earnings due to the industry practice of pricing at a relatively constant margin over ingredient costs. With the possible exception of shrimp feed sales, seasonally driven changes in sales volume do not materially affect sales or earnings due to the geographic and species diversification of Agribrands' operations.
YEAR 2000 COSTS
Many old computer systems, and other systems with embedded chip technology, process dates based on two digits for the year of a transaction rather than a full four digits. These systems are unable to properly process dates in the year 2000 and beyond. Agribrands utilizes a number of computer systems across its worldwide operations. The Company has identified its significant software coding issues related to the year 2000 date recognition for key financial and operational systems. The Company estimates that it has resolved approximately 95% of its identified year 2000 coding issues. Agribrands spent approximately $1.2 million to replace existing hardware and software during the year ended August 31, 1999. The Company incurred costs for year 2000 reprogramming of existing systems of approximately $0.9 million and $0.6 million during the years ended August 31, 1999 and 1998, respectively. To make all of its systems year 2000 compliant, the Company estimates incurring an additional $0.2 million of reprogramming costs. In addition, the Company expects to spend an additional $0.3 million on new hardware and software. Completion of all reprogramming, testing and implementation of new hardware and software is expected to occur by November 30, 1999. All costs related to the reprogramming of existing systems for the year 2000 issue are expensed as incurred. Costs of new hardware and software are capitalized.
Based on the Company's efforts to date, management believes that its key computer systems and other systems containing embedded chip technology will be year 2000 compliant before January 1, 2000. The Company has identified its
key customers and suppliers and is working with them to obtain assurances that their systems are year 2000 compliant. However, the Company does not have any control over these third parties and, as a result, cannot currently determine to what extent future operating results may be adversely affected by the failure of these third parties to successfully address their year 2000 issues. In addition, the Company operates in sixteen countries on four continents at various stages of economic development and is dependent on systems operated by governments, financial institutions, utilities, communications suppliers and others in each of these countries. The failure of any of such infrastructural systems to be year 2000 compliant could disrupt the Company's business for a period of time and if not quickly resolved could have a material adverse effect on the Company. The Company believes that its geographic diversification and transactional independence between business units significantly mitigate the risk of material adverse effect from year 2000 disruptions. In the event disruptions do occur, the Company's local operations are expected to respond in the same fashion as they periodically do for disruptions from local natural disasters.
EUROPEAN ECONOMIC MONETARY UNION (EMU)
On January 1, 1999, eleven of the European Union countries (including four countries where Agribrands' operations are located) adopted the Euro as their single currency, and there is now a fixed conversion rate between their existing currencies ("legacy currencies") and the Euro. Following the introduction of the Euro, the legacy currencies will remain legal tender in the participating countries during the transition period from January 1, 1999 through January 1, 2002. Beginning on January 1, 2002, the European Central Bank will issue Euro-denominated bills and coins for use in cash transactions. On or before July 1, 2002, the participating countries will withdraw all legacy bills and coins and use the Euro as their legal currency.
The Company's key financial information systems in Europe are equipped to process both Euro and legacy currency transactions through the transition period ending January 1, 2002; however, they are not ready to handle the July 1, 2002 withdrawal of all legacy currencies. Management is currently planning to modify the Company's key financial systems so they can handle the July 1, 2002 mandatory conversion to the Euro. The Company has not yet incurred any costs associated with the conversion. To modify the key financial systems so they can handle the mandatory conversion, the Company anticipates incurring $0.2 million of reprogramming costs and spending approximately $0.2 million on new software. All reprogramming costs will be expensed as incurred, and all software costs will be capitalized. The Company plans to complete system modifications and necessary testing by September 1, 2001.
From a broader business perspective, conversion to the Euro may cause pricing disparities in different markets to narrow, lowering the Company's margins. Nevertheless, the Company believes the conversion to the Euro will not have a material impact on the Company's consolidated financial results.
OUTLOOK
Near-Term Operating Results
Excluding the combined effect of current local environmental factors, near-term earnings are likely to remain relatively stable. The majority of the Company's earnings come from affiliates that are well established in their local markets and have achieved good coverage in the premium segment across most lines of commercially raised animals. While certain product lines are growing steadily
in some locations (for example, shrimp feed in Mexico), other lines may be declining elsewhere (for example, rabbit feed in Europe).
It is difficult to forecast near-term earnings trends accurately also due to the number of environmental factors that may move results up or down from a "normalized" level. Local agricultural markets are highly responsive to a number of variables including macro-economic conditions, weather, and current concerns over food and environmental safety. Typically, large and small changes in factors like these across the 16 countries where the Company operates will randomly influence consolidated earnings.
However, in 1999 the Company enjoyed strong, or greatly improved, macro-economic fundamentals in a majority of its larger markets, including Korea, the Philippines, Mexico, and Venezuela. The impact of local conditions in these markets more than offset that of difficult conditions in Brazil and Hungary so that the combined effect from local factors was unusually positive. Should macro-economic conditions be less positive in fiscal year 2000, the Company will be challenged to match fiscal 1999 financial performance.
Longer-Term Operating Trends
The Company's traditional operating model is often most effective in emerging markets, with large numbers of small animal producers. Longer-term prospects for the individual operations are heavily dependent on the evolving structures of the local animal production industries. Commercial feed is only one element of a traditional system of animal production where each stage is performed independently. Under appropriate circumstances, animal production becomes more concentrated and efficient and the needs of animal producers change with consequences for the feed manufacturer. In the most extreme case, an entirely integrated production model arises, decreasing the potential number of animals available to be fed by commercial feed producers.
The extent of changes to local animal production methods and the speed at which those changes arise is dependent on many factors, including overall economic development, trade policy initiatives, and popular and governmental attitudes toward food safety, food security and environmental issues. These dynamics already play an important role in the variation of profitability and growth trends across the Agribrands portfolio.
The Company has built up substantial cash reserves (and expects existing operations to continue producing free cash flows) which may be applied toward investments and programs intended to leverage the Company's core capabilities in ingredient knowledge, nutritional expertise and rural distribution, and position the Company to prosper in environments both favorable and hostile to the traditional commercial feed proposition.
Monetary Factors
As with operating earnings, financial costs and income can be difficult to forecast due, in particular, to foreign exchange gains and losses generated by volatile exchange rates and changing capital structures within the foreign affiliates. Currently, the Company's most significant exposures to foreign exchange gains and losses impacting net earnings are in Mexican Pesos, Brazilian Real, Canadian Dollars, Korean Won, and Colombian Pesos. Management focuses on the exchange gains and losses as computed using U.S.
Dollar-based accounting. These too can be volatile as management may not hedge Dollar-based exchange risks when the benefit does not seem to outweigh the cost.
With respect to income taxes, management projects an ongoing effective tax rate of around 35%, absent unforeseen foreign losses. This rate may be subject to one-time reductions should it become more likely than not that the Company will be able to utilize excess foreign tax credits and net operating loss carryforwards whose benefits have not been recognized due to uncertainty about the Company's long-term tax position.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
See MARKET RISK SENSITIVITY AND INFLATION RISK and Note 5 of the Company's Notes to Financial Statements for management's quantitative and qualitative disclosure about market risk.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF MANAGEMENT
The management of Agribrands International, Inc. has prepared the accompanying consolidated financial statements for the years ended August 31, 1999, 1998 and 1997 and is responsible for their integrity and objectivity. The statements were prepared in conformity with accounting principles generally accepted in the United States, applying certain estimates and judgments as required.
The Company maintains accounting and internal control systems which it believes are adequate to provide reasonable assurance that assets are safeguarded against loss from unauthorized use or disposition and financial records are reliable for preparing financial statements. The selection and training of qualified personnel, the establishment and communication of accounting and administrative policies and procedures, and an extensive program of internal audits, are important elements of these control systems.
The Board of Directors, through its Audit Committee consisting solely of non-management directors, meets periodically with management, internal auditors and the independent accountants to discuss audit and financial reporting matters. Both the internal auditors and PricewaterhouseCoopers LLP have direct access to the Audit Committee.
The report of PricewaterhouseCoopers LLP appears below.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of Agribrands International, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of earnings, of cash flows, of shareholders equity, of comprehensive income (loss) present fairly, in all material respects, the financial position of Agribrands International, Inc. and its subsidiaries at August 31, 1999 and 1998, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP - ------------------------------ PricewaterhouseCoopers LLP St. Louis, Missouri October 8, 1999
AGRIBRANDS INTERNATIONAL, INC. CONSOLIDATED STATEMENT OF EARNINGS Year Ended August 31 (Dollars in Millions)
1999 1998 1997 ---------- ---------- ----------
Net Sales $ 1,261.5 $ 1,410.1 $ 1,527.6 ---------- ---------- ---------- Costs and Expenses Cost of products sold 1,050.6 1,207.2 1,322.0 Selling, general and administrative 143.5 143.6 158.9 Interest 8.0 12.0 10.9 Provisions for restructuring - 3.0 3.2 Gain on sale of property (2.3) - - Other (income)/expense, net (8.7) 10.1 (0.5) ---------- ---------- ---------- 1,191.1 1,375.9 1,494.5 ---------- ---------- ----------
Earnings before Income Taxes 70.4 34.2 33.1 Income Taxes 26.4 20.4 24.4 ---------- ---------- ---------- Net Earnings $ 44.0 $ 13.8 $ 8.7 ========== ========== ==========
Earnings Per Share Basic $ 4.16 $ 1.29 $ .82 ========== ========== ========== Diluted $ 4.11 $ 1.29 $ .82 ========== ========== ==========
The above financial statement should be read in conjunction with the Notes to Financial Statements.
AGRIBRANDS INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEET August 31 (Dollars in Millions)
1999 1998 -------- -------- Assets Current Assets Cash and cash equivalents $ 174.5 $ 136.5 Short-term investments 3.5 1.5 Receivables, less allowance for doubtful accounts 77.0 103.0 Inventories 81.3 98.8 Other current assets 4.6 11.1 -------- --------- Total Current Assets 340.9 350.9 -------- ---------
Investments and Other Assets 51.3 50.9 Property, Plant and Equipment - net 174.0 176.6 -------- --------- Total $ 566.2 $ 578.4 ======== =========
Liabilities and Shareholders Equity Current Liabilities Current maturities of long-term debt $ 2.4 $ 8.7 Notes payable 18.5 46.9 Accounts payable and accrued liabilities 125.1 132.8 Income taxes 8.5 8.8 --------- --------- Total Current Liabilities 154.5 197.2 --------- ---------
Long-Term Debt 11.5 14.2 Deferred Income Taxes 3.7 2.7 Other Liabilities 23.2 24.9
Shareholders Equity Common stock, $.01 par value, authorized 50,000,000 shares 0.1 0.1 Capital in excess of par value 419.5 419.5 Retained earnings 50.1 6.1 Common stock in treasury, at cost (10.8) - Accumulated other comprehensive loss (85.6) (86.3) --------- --------- Total Shareholders Equity 373.3 339.4 --------- --------- Total $ 566.2 $ 578.4 ========= =========
The above financial statement should be read in conjunction with the Notes to Financial Statements.
The above financial statement should be read in conjunction with the Notes to Financial Statements.
The above financial statement should be read in conjunction with the Notes to Financial Statements.
AGRIBRANDS INTERNATIONAL, INC. CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) Year Ended August 31 (Dollars in Millions)
1999 1998 1997 ------ -------- --------- Net earnings $ 44.0 $ 13.8 $ 8.7 Foreign currency translation adjustment 0.7 (15.3) (21.4) ------ -------- --------- Comprehensive Income (Loss) $ 44.7 $ (1.5) $ (12.7) ====== ======== =========
The above financial statement should be read in conjunction with the Notes to Financial Statements.
AGRIBRANDS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in millions except per share data)
1. BASIS OF PRESENTATION
Effective April 1, 1998 (the "Distribution Date"), Agribrands International, Inc. (the "Company" or "Agribrands") became an independent, publicly owned company as a result of the distribution by Ralston Purina Company ("Ralston") of the Company's $.01 par value Common Stock to holders of Ralston Common Stock at a distribution ratio of one for ten (the "Distribution"). Prior to the Distribution, the Company was formed as a wholly owned subsidiary of Ralston for the purpose of effecting the Distribution. Included in this transaction was the transfer of substantially all of the assets and liabilities related to the animal feeds and agricultural products businesses (the "Agribrands Businesses"). Ralston's international pet products businesses ("RPI Consumer") were not included in the spin-off. Ralston did not retain any ownership interest in the Company.
Agribrands is one of the leading international producers and marketers of animal feeds and, through its subsidiaries and joint venture partners, operates 71 manufacturing plants in 16 countries. Its products are marketed outside the United States under the "Purina"(R) and "Chow"(R) trademarks and the "Checkerboard"(R) logo through a network of approximately 3,400 independent dealers, as well as an independent and a direct sales force.
The Balance Sheets as of August 31, 1999 and 1998 and the Statement of Earnings for the year ended August 31, 1999 are presented on a consolidated basis. The Statement of Earnings for the year ended August 31, 1998 includes the combined results of operations of the Agribrands Businesses under Ralston for the seven months prior to the Distribution Date and the consolidated results of operations of the Company for the five month period ended August 31, 1998. The Statement of Earnings for all periods prior to the Distribution Date is presented on a combined basis and reflects periods during which the Agribrands Businesses operated primarily as wholly-owned subsidiaries of Ralston and its subsidiaries. The combined financial statements include revenues and expenses that are directly related to the Agribrands Businesses. All significant intercompany transactions have been eliminated from the combined financial statements.
RPI Consumer, while not included in the accompanying financial statements, generally operated within the same subsidiaries and affiliates as the Agribrands Businesses prior to the Distribution Date. See Note 13 for a more complete discussion.
Certain previously reported amounts have been reclassified to make them consistent with the current year presentation.
AGRIBRANDS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in millions except per share data)
2. SUMMARY OF ACCOUNTING POLICIES
Agribrands' significant accounting policies, which conform to accounting principles generally accepted in the United States and are applied on a consistent basis among years, except as indicated, are described below:
Principles of Consolidation - These financial statements include the accounts of Agribrands and its majority-owned subsidiaries. All significant intercompany transactions have been eliminated. Investments in affiliated companies, 20% through 50%-owned, are carried at equity.
Minority interests in earnings of subsidiaries and Agribrands' share of the net earnings of unconsolidated companies carried at equity are included in selling, general and administrative expenses.
Foreign Currency Translation - Financial statements of foreign operations where the local currency is the functional currency are translated using exchange rates in effect at period end for assets and liabilities and average exchange rates during the period for results of operations. Related translation adjustments are reported as a separate component of Shareholders Equity.
For foreign operations where the U.S. Dollar is the functional currency and for countries which are considered highly inflationary, translation practices differ in that inventories, investments, properties, accumulated depreciation and depreciation accounts are translated at historical rates of exchange and related translation adjustments are included in earnings. Gains and losses from foreign currency transactions are included in earnings.
Derivative Financial Instruments - All derivative financial instruments held by the Company are designated as hedges of existing assets, liabilities, firm commitments or identifiable transactions. They have a high degree of correlation with the underlying exposure and are highly effective in offsetting underlying price movements. Accordingly, gains and losses from changes in the fair value of derivatives are deferred and included in the measurement of the related transaction. Losses are not deferred if it is estimated that deferral would lead to recognizing losses in later periods. If the underlying transaction was no longer expected to occur, any gain or loss would be recognized immediately in the Statement of Earnings. See Note 5 for additional information.
Cash Equivalents are considered to be all highly liquid investments with a maturity of three months or less when purchased, including time deposits of $19.2 and $12.8 at August 31, 1999 and 1998, respectively.
Short-term Investments are valued at cost which approximates market.
Inventories are valued generally at the lower of average cost or market.
Property at Cost - Expenditures for new facilities and those which substantially increase the useful lives of the property, including interest during construction, 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.
AGRIBRANDS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in millions except per share data)
Depreciation is generally provided on the straight-line basis by charges to costs or expenses at rates based on the estimated useful lives of the properties. Estimated useful lives range from 3 to 15 years for machinery and equipment and 15 to 40 years for buildings. Depreciation expense was $22.7 in 1999, $19.3 in 1998 and $19.6 in 1997.
Goodwill, which is included in Investments and Other Assets, represents the excess of cost over the net tangible assets of acquired businesses and is amortized over periods of up to 40 years, with the majority being amortized over a 25 year period.
Subsequent to acquisition, Agribrands continually evaluates whether later events and circumstances have occurred that indicate the remaining estimated useful life of businesses carrying goodwill may warrant revision or that the remaining balance of goodwill may not be recoverable. The measurement of possible impairment is based on the ability to recover the balance of goodwill from expected future operating cash flows on an undiscounted basis. In the opinion of management, no such impairment existed as of August 31, 1999 and 1998.
Revenue is recognized when products are shipped to customers. Sales discounts, returns and allowances are included in net sales. The provision for doubtful accounts is included in selling, general and administrative expenses.
Advertising Costs are expensed as incurred and were $13.9 in 1999, $13.7 in 1998 and $16.8 in 1997.
Research and Development Costs are expensed as incurred and were $7.0 in 1999, $6.8 in 1998 and $6.9 in 1997.
Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure 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.
Income Taxes - Agribrands follows the liability method of accounting for income taxes. Deferred income taxes are recognized for the effect of temporary differences between financial and tax reporting. No additional U.S. taxes have been provided on earnings of foreign subsidiaries expected to be reinvested indefinitely. Additional income taxes are provided, however, on planned repatriation of foreign earnings after taking into account tax-exempt earnings and applicable foreign tax credits. Deferred tax assets are reduced by valuation allowances when, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax asset will not be realized.
Earnings per Share - Basic earnings per share are based on the weighted average number of shares outstanding during the year including assumed shares outstanding of 10.7 million for all periods prior to the Distribution Date. Diluted earnings per share are adjusted for the dilutive effect of common stock equivalents. See Note 11 for additional information.
AGRIBRANDS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in millions except per share data)
New Accounting Standards - The Financial Accounting Standards Board issued FAS 133, "Accounting for Derivative Instruments and Hedging Activities," in June 1998. The Company is evaluating the effects this statement will have on its financial reporting and disclosures. The Company will adopt FAS 133 in fiscal year 2001.
3. ACQUISITIONS
In January 1998, the Company acquired feed mills in Maracay, Venezuela and Spessa, Italy for $4.3 and $7.3, respectively. Agribrands had previously leased the feed mills in both Maracay and Spessa.
In December 1997, Agribrands invested $5.0 in Agribrands Purina (Langfang) Feedmill Co., Ltd., a new wholly owned foreign subsidiary. The new subsidiary utilized the funds to acquire a feed mill in Langfang, People's Republic of China.
These acquisitions were accounted for using the purchase method of accounting and the results of operations have been included in the Consolidated Statement of Earnings from the date of acquisition. Assuming these acquisitions had occurred as of the beginning of their respective fiscal years, they would not have had a material effect on net sales, net earnings or earnings per share.
AGRIBRANDS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in millions except per share data)
4. BUSINESS SEGMENT AND GEOGRAPHIC AREA INFORMATION
In fiscal year 1999, the Company adopted FAS 131, "Disclosures about Segments of an Enterprise and Related Information." This standard requires disclosure of segment information on the same basis as used internally for evaluating segment performance. The Company and its subsidiaries are principally engaged in the production and sale of agricultural animal feed. The Company's businesses are organized by geographic area.
o The Americas segment consists of the Company's businesses in Brazil, Canada, Colombia, Guatemala, Mexico, Peru and Venezuela. o The Europe segment consists of the Company's businesses in France, Hungary, Italy, Portugal, Spain and Turkey. o The Asia segment consists of the Company's businesses in China, the Philippines and South Korea. o The corporate and Tradico segment is located in the United States. It includes Tradico, which sources and resells ingredients, equipment, and products primarily to affiliates. This segment also includes certain corporate items that were not allocated to the other segments.
Summarized below is the Company' business segment information for the years ended August 31, 1999, 1998 and 1997. Prior years' information has been restated for the adoption of FAS 131.
1999 1998 1997 ----------- ----------- ----------- Net Sales - External Americas $ 572.5 $ 625.6 $ 599.6 Europe 341.8 397.2 467.7 Asia 344.6 387.3 460.3 Corporate and Tradico (U.S.) 2.6 - - --------- ---------- --------- Total $ 1,261.5 $ 1,410.1 $ 1,527.6 ========= ========== =========
Net Sales - Intersegment Americas $ - $ - $ - Europe - - - Asia - - - Corporate and Tradico (U.S.) 102.0 92.9 55.5 --------- ---------- --------- Total $ 102.0 $ 92.9 $ 55.5 ========= ========== =========
Depreciation & Amortization Americas $ 7.9 $ 6.8 $ 6.9 Europe 8.0 8.3 8.6 Asia 8.1 5.9 6.4 Corporate and Tradico (U.S.) 0.8 0.2 - --------- ---------- --------- Total $ 24.8 $ 21.2 $ 21.9 ========= ========== =========
AGRIBRANDS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in millions except per share data)
1999 1998 1997 ------- ------- -------
Operating Profit Americas $ 33.4 $ 33.5 $ 16.0 Europe 15.6 11.9 5.1 Asia 33.0 28.2 32.8 Corporate and Tradico (U.S.) (14.6) (14.3) (7.2) ------- -------- ------- 67.4 59.3 46.7 Provisions for restructuring - (3.0) (3.2) Gain on sale of property 2.3 - - Interest expense (8.0) (12.0) (10.9) Other income/(expense), net 8.7 (10.1) 0.5 ------- -------- ------- Earnings before Income Taxes $ 70.4 $ 34.2 $ 33.1 ======= ======== =======
Capital Expenditures Americas $ 11.1 $ 16.7 $ 13.3 Europe 5.6 7.7 14.4 Asia 9.1 19.5 16.4 Corporate and Tradico (U.S.) 0.1 0.7 - ------- -------- ------- Total $ 25.9 $ 44.6 $ 44.1 ======= ======== =======
Total Assets Americas $169.3 $ 188.7 $177.8 Europe 116.0 139.7 143.9 Asia 144.5 132.5 156.6 Corporate and Tradico (U.S.) 136.4 117.5 2.9 ------- -------- ------- Total $566.2 $ 578.4 $481.2 ======= ======== =======
Net sales and total assets for each of the Company's businesses were assigned to the geographic area where that business is located. The Company's businesses are located in sixteen countries (and the United States). No single customer accounted for more than 10% of sales. Net sales attributed to South Korea were $238.8, $281.4 and $330.3 in the years ended August 31, 1999, 1998 and 1997, respectively. Net sales attributed to Mexico were $154.3, $162.0 and $128.1 in the years ended August 31, 1999, 1998 and 1997, respectively. Net sales attributable to an individual country, other than South Korea and Mexico, were not material for disclosure. Net property, plant and equipment attributed to South Korea were $101.8 and $94.0 in the years ended August 31, 1999 and 1998, respectively. Net property, plant and equipment attributable to an individual country, other than South Korea, were not material for disclosure.
AGRIBRANDS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in millions except per share data)
5. FINANCIAL INSTRUMENTS
Derivatives - The Company currently uses forwards and option contracts to manage foreign currency risk and futures and options to manage commodity price risk. Derivatives used by the Company have an initial term of less than a year, and all currently hedged transactions are expected to occur within the next year. Because the Company hedges with instruments that have high correlation with the underlying transaction pricing, changes in derivative fair values are expected to be offset by changes in pricing.
The following summarizes the notional transaction amounts, carrying amounts and fair values for all outstanding derivatives, by risk category and instrument type, at August 31:
The fair value of derivative financial instruments is the amount that Agribrands would receive (or pay) to terminate the specific agreements, considering first, quoted market prices of comparable agreements, or in the absence of quoted market prices, such factors as currency exchange rates and remaining maturities.
Concentration of Credit Risk - The Company does not have a material concentration of credit risk. Concentrations of credit risk with respect to accounts receivable are limited due to the large number of customers, generally short payment terms and their dispersion across geographic areas.
Nonderivative Financial Instruments - Nonderivative financial instruments include cash equivalents, short-term investments, and short-term and long-term debt. The carrying amounts for cash equivalents, short-term investments and short-term debt approximate fair value. Agribrands has long-term debt in numerous countries under a variety of terms and arrangements. Based on quoted market prices for borrowing arrangements that are the same or similar to the major components of its long-term debt, the Company believes the carrying amounts for long-term debt approximate fair value.
AGRIBRANDS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in millions except per share data)
6. INCENTIVE COMPENSATION PLANS
Under terms of the Company's 1998 incentive stock plan, officers, directors and employees may be granted non-qualified stock options to purchase the Company's common stock at no less than 100% of the market price on the date the option is granted. The plan also authorizes the issuance of stock appreciation rights (SARs) settled by cash payment. Options and SARs generally vest over five years and have a maximum term of 10 years. At August 31, 1999 and 1998, a total of 0.8 million and 1.5 million shares, respectively, were available for future awards under the plan.
There were 161,750 and 98,500 SARs outstanding at August 31, 1999 and 1998, respectively. The Company recognizes compensation expense for SARs based on the amount that the Company's common share price exceeds the exercise price and the percentage of vesting. During the year-ended August 31, 1999, the Company recognized $0.7 of compensation expense for SARs. No compensation expense was recognized for SARs in 1998 because the exercise prices of the SARs were greater than the year-end market price of the common shares.
The Company applies APB Opinion No. 25 and related interpretations in accounting for its stock options. Had compensation cost for the Company's stock options been recognized based on the fair value on the grant date under the methodology prescribed by FAS 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated in the following table. The pro forma amounts may not be representative of future pro forma disclosures.
1999 1998 ---------- ---------- Reported net earnings $ 44.0 $ 13.8 Pro forma net earnings 40.5 12.8
Reported diluted earnings per share $ 4.11 $ 1.29 Pro forma diluted earnings per share 3.78 1.20
The fair value of options granted (which is amortized to expense over the options vesting period in determining the pro forma impact) is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
1999 1998 ---------- ---------- Risk-free interest rate 4.6% 5.7% Expected life of option 8 years 9 years Expected volatility of Agribrands stock 35.0% 30.0% Expected dividend yield on Agribrands stock 0.0% 0.0%
AGRIBRANDS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in millions except per share data)
The weighted average fair value of options granted during 1999 and 1998 is as follows:
1999 1998 --------- -------- Fair value of each option granted $ 10.19 $ 18.62 Total number of options granted (in millions) 0.65 1.12 --------- -------- Total fair value of options granted (in millions) $ 6.6 $ 20.9 ========= ========
The following summarizes stock option plan activity during the year ended August 31:
A summary of stock options currently outstanding and exercisable at August 31, 1999 is presented below:
AGRIBRANDS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in millions except per share data)
7. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
Certain foreign employees are covered by defined benefit pension plans, some of which are required by local law or coordinated with government-sponsored plans. These plans generally provide retirement or severance benefits based on years of service and compensation. In addition, substantially all U.S. administrative employees participate in the Company's defined contribution plan.
Total pension expense is presented below for the Company's principal defined benefit pension plans (all foreign) and the Company's defined contribution plans for the three years ended August 31:
1999 1998 1997 ------- ------- ------ Defined benefit plans Service cost for benefits earned during the year $ 1.6 $ 1.6 $ 1.7 Interest cost on projected benefit obligation 2.0 2.3 2.6 Assumed return on plan assets (1.6) (2.6) (3.0) Amortization of: Net actuarial (gain)/loss 0.1 (0.1) 0.1 Prior service cost 0.1 0.1 0.1 Transition asset (0.1) (0.3) (0.5) ------ ------- ------ Total costs for defined benefit plans 2.1 1.0 1.0 Defined contribution plans 0.3 0.1 - ------ ------- ------ Total $ 2.4 $ 1.1 $ 1.0 ====== ======= ======
The key actuarial assumptions used in determining annual pension expense for the principal defined benefit plans reflect weighted averages for the component plans. These plans are located in various countries throughout the world, and the assumptions were determined based on local economic conditions in these countries. The assumptions were as follows:
1999 1998 1997 ------ ------ ----- Discount rate 9.2% 9.2% 9.2% Rate of increase of future compensation levels 7.4% 7.4% 7.3% Long-term rate of return on assets 9.9% 9.4% 9.7%
The following tables summarize the changes in the projected benefit obligation and the change in fair market value of plan assets for all of the Company's principal defined benefit pension plans for the two years ended August 31:
AGRIBRANDS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in millions except per share data)
1999 1998 ------- ------- Change in Projected Benefit Obligation (PBO): - -------------------------------------------- PBO, beginning of year $ 20.5 $ 32.6 Service cost 1.6 1.6 Interest cost 2.1 2.4 Employee contributions 0.2 0.2 Plan amendments 0.3 (0.9) Actuarial gain/(loss) 1.3 (0.5) Transfer to Ralston - (6.4) Benefits paid (3.5) (2.1) Translation adjustment 1.8 (6.4) ------- -------
PBO, end of year $ 24.3 $ 20.5 ======= ======= Change in Plan Assets: - --------------------- Fair market value, beginning of year $ 14.6 $ 38.5 Actual return on plan assets 1.6 1.0 Employer contributions 4.0 3.0 Employee contributions 0.2 0.2 Transfer to Ralston - (21.9) Benefits paid (3.4) (2.0) Translation adjustment 1.5 (4.2) ------- -------
Fair market value, end of year $ 18.5 $ 14.6 ======= =======
The following table provides a reconciliation of the funded status of the principal defined benefit plans to the amounts recognized in the balance sheet at August 31:
1999 1998 -------- ------- Funded status - plan assets (under)/over benefit obligation $ (5.8) $ (5.9) Unrecognized net loss 3.6 2.1 Unrecognized prior service cost 1.0 0.6 Unrecognized net asset at transition, net of amortization (0.4) (0.4) -------- -------
Net pension liability $ (1.6) $ (3.6) ======= =======
The net pension liability disclosed above does not include balance sheet accruals for unfunded defined benefit plans of $12.3 and $12.4 as of August 31, 1999 and 1998, respectively. These accruals approximate the actuarial present value of vested benefits for these plans or represent accrual amounts that comply with local regulations for required termination payments.
The Company currently does not provide other postretirement defined benefits. Prior to the Distribution, Ralston provided defined benefit health care and life insurance benefits for a limited group of retired employees. Ralston also sponsored plans whereby certain management employees could defer compensation in exchange for defined cash benefits after retirement. The cost of these postretirement benefits allocated to Agribrands was not significant in 1998 or 1997.
AGRIBRANDS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in millions except per share data)
8. PROVISIONS FOR RESTRUCTURING
In 1998, Agribrands recorded provisions for restructuring which reduced earnings before income taxes by $3.0 and net earnings by $1.7. These charges represented primarily severance costs and fixed asset write-offs associated with the streamlining of Agribrands' operations in Europe. Provisions for restructuring in 1997 related to the closing of production facilities and the reorganization of certain administrative functions. All severance costs related to these restructuring provisions were paid by August 31, 1999.
Components of the provisions for the years ended August 31 are as follows:
1999 1998 1997 ------ ------- ------- Severance $ - $ 2.2 $ 0.6 Other cash costs - 0.1 0.4 Fixed asset writedown - 0.7 2.2 ------ ------- ------- $ - $ 3.0 $ 3.2 ====== ======= =======
The following summarizes activity within the restructuring reserves:
1999 1998 1997 ------ ------- ------- Balance at beginning of year $ 1.3 $ 1.4 $ 4.3 Provision during year - 3.0 3.2 Spending/fixed asset writedown during year (1.3) (3.1) (6.1) ------ ------ ------- Balance at end of year $ - $ 1.3 $ 1.4 ====== ====== =======
9. OTHER (INCOME)/EXPENSE, NET
1999 1998 1997 ------- -------- -------- Foreign exchange loss $ 1.5 $12.8 $ 3.7 Investment income (10.2) (5.2) (4.2) Write-off financing costs - 2.5 - ------ ------ ------ $(8.7) $10.1 $(0.5) ====== ====== ======
In 1998, the Company incurred a $2.5 charge to write off financing costs associated with a credit facility the Company elected not to close.
AGRIBRANDS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in millions except per share data)
10. INCOME TAXES
The provisions for income taxes consisted of the following for the years ended August 31:
1999 1998 1997 ------- --------- -------- Currently payable: United States $ 2.1 $ 1.7 $ 3.8 Foreign 16.7 19.1 14.5 Taxes on repatriation of foreign earnings 5.7 4.7 4.2 ------- -------- ------- Total current 24.5 25.5 22.5 ------- -------- ------- Deferred: United States 0.3 (0.2) - Foreign 1.6 (4.9) 1.9 ------- -------- ------- Total deferred 1.9 (5.1) 1.9 ------- -------- ------- $ 26.4 $ 20.4 $ 24.4 ======= ======== =======
The source of pre-tax earnings was:
1999 1998 1997 ------- -------- ------- United States $ 6.2 $ 1.2 $ 3.2 Foreign 64.2 33.0 29.9 ------- -------- ------- Total $ 70.4 $ 34.2 $ 33.1 ======= ======== =======
A reconciliation of income taxes with the amounts computed at the statutory federal rate follows:
1999 1998 1997 ------- -------- -------- Computed tax at federal statutory rate $ 24.6 $ 12.0 $ 11.6 Increases (decreases) in taxes resulting from: Foreign tax rates other than domestic rate (3.1) (2.7) (1.0) Taxes on repatriation of foreign earnings 5.7 4.7 4.2 U.S. foreign tax credits (4.0) (2.0) - Change in valuation allowance 0.2 3.0 6.9 Incremental taxes allocated by Ralston - 1.1 3.8 Other, net 3.0 4.3 (1.1) ------- -------- --------- $ 26.4 $ 20.4 $ 24.4 ======= ======== =========
AGRIBRANDS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in millions except per share data)
At August 31, deferred tax assets and deferred tax liabilities recorded on the balance sheet are as follows:
1999 1998 ----------- ----------- Deferred Tax Liabilities: Depreciation and property differences $ 7.1 $ 6.3 Inventory differences 4.5 6.2 Retirement plans 3.4 2.3 Other tax liabilities, current 0.6 0.5 Other tax liabilities, non-current 10.1 9.2 -------- --------- Gross deferred tax liabilities $ 25.7 $ 24.5 -------- ---------
Deferred Tax Assets: Tax loss carryforwards $(11.2) $ (13.9) Accrued expenses (7.2) (7.7) Depreciation and property differences (6.3) (5.8) Tax credits (6.1) (5.7) Other tax assets, current (7.3) (5.8) Other tax assets, non-current (3.6) (2.4) -------- --------- Gross deferred tax (assets) $(41.7) $ (41.3) -------- --------- Valuation allowance 19.7 19.5 -------- --------- Net deferred tax liabilities $ 3.7 $ 2.7 ======== =========
Approximately $0.6 of tax loss carryforwards and tax credits expired in 1999. Future expiration of tax loss carryforwards and tax credits, if not utilized, are as follows: 2000 - $0.4, 2001 - $0.1, 2002 - $1.0, 2003 - $4.5, 2004 - $3.9 and beyond - $7.4. The valuation allowance is primarily attributed to certain tax loss carryforwards generated outside the United States and foreign tax credits awarded in the United States for which no tax benefit is expected to be realized. If it becomes evident that sufficient future taxable income will be available in the tax jurisdictions where these deferred tax assets exist, the Company would release the valuation allowance accordingly.
At August 31, 1999, approximately $90.0 of foreign subsidiary net earnings was considered permanently invested in those businesses. Accordingly, U.S. income taxes have not been provided for such earnings. It is not practicable to determine the amount of unrecognized deferred tax liabilities associated with such earnings.
Prior to the Distribution Date, U.S. income tax payments, refunds, credits, provision and deferred tax components were allocated to Agribrands in accordance with Ralston's tax allocation policy. Such policy allocated tax components included in the consolidated income tax return of Ralston to Agribrands to the extent such components were generated by or related to Agribrands. Tax payments due on income earned prior to the Distribution Date are the responsibility of Ralston.
Had Agribrands' income tax provision been calculated as if Agribrands was a single, stand-alone U.S. taxpayer during periods prior to the Distribution Date, the income tax provision would have been lower by approximately $1.1 in the seven months ended March 31, 1998 and $3.8 in the year ended August 31, 1997.
AGRIBRANDS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in millions except per share data)
11. EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed using the average number of common shares outstanding during the period. Diluted EPS gives effect to the dilution that would occur if stock options were exercised. Basic and diluted EPS computations for the three years ended August 31 follow:
There were 10,668,571 shares of common stock outstanding at the Distribution Date. The above EPS calculations assume 10,668,571 shares outstanding for all periods prior to the Distribution Date. Stock options to purchase 1,107,500 and 1,115,000 shares of common stock were outstanding during 1999 and 1998, respectively, but were not included in the computation of diluted EPS because the exercise prices of the options were greater than the average market price of the common shares.
12. PREFERRED AND COMMON STOCK
At August 31, 1999, 10,000,000 shares of $.01 par value preferred stock were authorized and unissued. The Company's Board of Directors is expressly authorized, prior to issuance, to set preferences, voting powers, annual dividend rates (if any) and other terms and conditions relating to the shares.
The Company has been authorized to issue 50,000,000 shares of $.01 par value common stock as of August 31, 1999. Activity for the Company's common stock for the years ended August 31 is summarized below:
AGRIBRANDS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in millions except per share data)
1999 1998 -------------- ------------- Common Stock Issued Common stock issued at beginning of year 10,668,571 - Distribution to Ralston's shareholders - 10,668,571 Shares cancelled (660) - --------------- ------------- Common stock issued at end of year 10,667,911 10,668,571 --------------- -------------
Common Stock in Treasury Treasury stock at beginning of year - - Treasury stock purchased (288,848) - Shares issued under stock plans 242 - -------------- ------------- Treasury stock at end of year (288,606) - -------------- -------------
Common Stock Outstanding 10,379,305 10,668,571 ============== =============
On September 25, 1998, the Company's Board of Directors authorized the purchase by the Company of up to 2,000,000 shares of Agribrands common stock in open market transactions for general corporate purposes. At August 31, 1999, there were 1,711,152 shares available for repurchase under this authorization.
13. RELATED PARTY ACTIVITY
Prior to the Distribution Date, the Agribrands Businesses and RPI Consumer shared some general and administrative functions and distributed some product through a combined distribution network. Costs of these shared activities were allocated to the Company based on utilization or other methods which management believes to be reasonable. Total costs of these shared activities were $22.1 in the seven months ended March 31, 1998 and $46.0 in the year ended August 31, 1997. Of such costs, allocations to Agribrands were $19.1 in the seven months ended March 31, 1998 and $38.7 in the year ended August 31, 1997.
Ralston also provided certain general and administrative services to the Agribrands Businesses including finance, legal, facilities and systems. These expenses were allocated to Agribrands based on utilization or other methods which management believes to be reasonable. These allocations were $1.2 in the seven months ended March 31, 1998 and $2.0 in the year ended August 31, 1997.
AGRIBRANDS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in millions except per share data)
14. LEGAL AND ENVIRONMENTAL MATTERS
The Company is subject to legal proceedings and claims arising out of its business that cover a wide range of matters, including trade regulation, contracts, environmental issues, product liability, patent and trademark matters, and taxes.
In August 1999, Agribrands (together with Cargill, Incorporated, The Iams Company and by subsequent amended pleading Carl S. Akey, Inc.) filed a complaint in the U.S. District Court for the Northern District of Illinois against a group of vitamin producers. The complaint alleges that the defendants conspired globally to fix the prices of vitamins and allocate customers in support of such arrangement in violation of the U.S. antitrust laws. The defendants have admitted in criminal proceedings to participating in such practices. Agribrands believes that it will be successful in recovering damages arising from these practices. The timing of recovery and the amount of damages are difficult to determine due to the multiple variables which will influence the determination of damages such as period of time covered, percent of overcharge, purchasing entity, as well as other issues and defenses which may be asserted by the defendants. As of August 31, 1999, the Company has not recognized any gain in its financial statements for this matter.
In the fall of 1997, Agribrands' wholly owned subsidiary, Agribrands Philippines, Inc. (formerly Purina Philippines, Inc.), applied for renewal of a warehouse license to store corn and rice and by-products at its Pulilan facility. The Philippines National Food Authority ("NFA"), the governmental agency that administers the Philippines laws and regulations governing the corn and rice industry, advised Agribrands Philippines by letter dated October 31, 1997 that its license renewal application was denied. The letter cited Philippines legislation and regulations requiring that businesses operating in the corn and rice industry not have more than 40% foreign ownership. Since the NFA believes that Agribrands Philippines is in the corn and rice industry, it has requested Agribrands Philippines to file a divestment plan in order to comply with the 40% maximum foreign ownership requirement.
Agribrands Philippines has appealed the denial of its license renewal, and on January 23, 1998, received notification that it may operate its warehouse under a "provisional permit" pending the resolution of the appeal. The appeal is pending in the Office of the President. Agribrands Philippines believes it does not need a warehouse license, as it believes it is not engaged in the corn and rice industry as defined by law. Furthermore, Agribrands Philippines believes that it should not be subject to the NFA regulation based upon its original Board of Investments One Stop investment approval of a 100% foreign owned investment. Agribrands Philippines intends to pursue its appeal in the Philippines legal system.
In the event that Agribrands Philippines is required to file a divestiture plan, it is expected, based on previous case precedents, that a plan would be approved that would permit the necessary divestiture over a considerable period of time.
Various tax and labor claims have been asserted against the Agribrands Business in Brazil. The claims arose principally from monetary corrections made in connection with the institution of economic plans by prior Brazilian administrations to control inflation.
Many of the legal matters are in preliminary stages, involve complex issues of law and fact and may proceed for protracted periods of time. The amount of the eventual liability, if any, from these proceedings cannot be determined with certainty; however, in the opinion of Agribrands management,
AGRIBRANDS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in millions except per share data)
based upon the information presently known, as well as upon the limitation of certain of its liabilities under the Agreement and Plan of Reorganization between Ralston and Agribrands for the spin-off of Agribrands, the ultimate liability of Agribrands, if any, arising from the pending legal proceedings, as well as from asserted legal claims and known potential legal claims which are probable of assertion, taking into account established accruals for estimated liabilities, should not be material to the financial position of Agribrands but could be material to results of operations or cash flows for a particular quarter or annual period.
15. OTHER CONTINGENCIES AND COMMITMENTS
Guarantees - At August 31, 1999, Agribrands had third party guarantees outstanding in the aggregate amount of approximately $9.4. These guarantees relate to financial arrangements with customers, suppliers and other business relations.
Sale of Receivables - Agribrands sells certain of its trade accounts receivable and notes receivable to others subject to defined limited recourse provisions. The Company is responsible for collection of the accounts and remits the proceeds to the purchaser on a monthly basis. During 1999, Agribrands sold, on average, accounts receivable totaling $0.8 each month. At August 31, 1999, $0.5 of transferred receivables were outstanding and subject to recourse provisions.
Other Commitments - Future minimum rental commitments under noncancellable operating leases in effect as of August 31, 1999 were: 2000 - $2.0, 2001 - $1.7, 2002 - $1.3, 2003 - $1.0, 2004 - $0.8 and thereafter - $0.5. Total rental expense for all operating leases was $6.2 in 1999, $7.1 in 1998 and $10.8 in 1997.
AGRIBRANDS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in millions except per share data)
16. NOTES PAYABLE
Notes payable of $18.5 and $46.9 at August 31, 1999 and 1998, respectively, had a weighted average interest rate of 10.3% and 18.0%, respectively. At August 31, 1999, substantially all notes payable are denominated in local currencies and are due to banks. Compensating balance arrangements ensure future credit availability and do not restrict the withdrawal of funds. Under these arrangements, Agribrands maintained average compensating bank balances of $18.0 in 1999.
On August 31, 1999, total unused uncommitted lines of credit to affiliates of Agribrands were approximately $200.
17. LONG-TERM DEBT
The detail of long-term debt as of August 31 follows: 1999 1998 -------- --------
Korean subsidiary, interest rate of 8.9%; due 2002 $ 6.7 $ -
Korean subsidiary, interest rate of 10.0% - 5.8
Korean subsidiary, interest rate of 11.0% - 3.7
Italian subsidiary, interest rate of 3.17%; due in annual installments through 2004 2.5 -
Italian subsidiary, interest rate of 3.35% at August 31, 1.6 3.2 1999; due 2000
Other long-term debt with interest rates ranging from 1.0% to 26.0% 3.1 10.2 -------- ------- 13.9 22.9 Less: Current Maturities (2.4) (8.7) -------- ------- $ 11.5 $ 14.2 ======== =======
Aggregate maturities of long-term debt are $1.2, $8.1, $1.3 and $0.5 for the years ending August 31, 2001 through 2004, respectively.
AGRIBRANDS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in millions except per share data)
18. SUPPLEMENTAL BALANCE SHEET INFORMATION
August 31 ----------------------- 1999 1998 ---------- --------- Receivables (current) Trade $ 69.1 $ 79.8 Value added tax 5.1 6.9 Receivable from Ralston - 12.9 Other 14.2 13.8 Allowance for doubtful accounts (11.4) (10.4) --------- -------- $ 77.0 $ 103.0 ========= ========
Inventories Raw materials and supplies $ 61.1 $ 77.8 Finished products 20.2 21.0 --------- -------- $ 81.3 $ 98.8 ========= ========
Investments and Other Assets Goodwill (net of accumulated amortization of $ 29.1 $ 32.4 $6.5 in 1999 and $5.8 in 1998) Investments in affiliated companies 6.3 6.5 Cash surrender value of key man life insurance 5.0 - Long-term receivable for value added tax 4.6 3.8 Deferred charges and other assets 6.3 8.2 --------- -------- $ 51.3 $ 50.9 ========= ========
Property, Plant and Equipment - net Land $ 11.8 $ 11.0 Buildings 81.9 81.8 Machinery and equipment 249.1 241.9 Construction in progress 3.5 12.2 --------- -------- 346.3 346.9 Accumulated depreciation (172.3) (170.3) --------- -------- $ 174.0 $ 176.6 ========= ========
Accounts Payable and Accrued Liabilities Trade accounts payable $ 75.2 $ 81.4 Incentive compensation, salaries and vacations 15.4 15.8 Restructuring reserves - 1.3 Other items 34.5 34.3 --------- -------- $ 125.1 $ 132.8 ========= ========
AGRIBRANDS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS (Dollars in millions except per share data)
August 31 ------------------------ 1999 1998 ----------- ---------- Other Liabilities Retirement and other employee benefits $ 18.1 $ 20.3 Minority interests 2.1 2.7 Other 3.0 1.9 -------- ------- $ 23.2 $ 24.9 ======== =======
19. ALLOWANCE FOR DOUBTFUL ACCOUNTS
1999 1998 1997 -------- -------- --------- Balance, beginning of year $ 10.4 $ 9.8 $ 7.2 Provision charged to expense 3.6 6.4 4.6 Write-offs, less recoveries (2.4) (4.0) (1.0) Translation adjustment (0.2) (1.8) (1.0) -------- -------- -------- Balance, end of year $ 11.4 $ 10.4 $ 9.8 ======== ======== ========
20. SUPPLEMENTAL CASH FLOW STATEMENT INFORMATION
1999 1998 1997 -------- -------- -------- Interest paid $ 8.6 $ 11.8 $ 10.4 ======== ======== ======== Income taxes paid $ 24.8 $ 22.6 $ 21.1 ======== ======== ========
AGRIBRANDS INTERNATIONAL, INC. QUARTERLY FINANCIAL INFORMATION (In millions except per share data) (Unaudited)
The results of any single quarter are not necessarily indicative of Agribrands' results for the year. The sum of the four quarters' earnings per share will not necessarily equal the full year amount. The following tables assume 10.7 million shares outstanding for all periods prior to the Distribution Date.
Fourth quarter 1999 net earnings include an after-tax gain on sale of property of $1.2 ($.11 per share).
Second quarter 1998 net earnings were reduced by $1.1 ($.10 per share) due to provisions for restructuring. Fourth quarter 1998 net earnings were reduced by $0.6 ($.06 per share) due to provisions for restructuring.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding directors and the information appearing under "Compliance with Section 16(a) of the Exchange Act" will be contained in the Notice of the 2000 Annual Meeting and Proxy Statement, to be filed pursuant to Regulation 14A, which is incorporated herein by reference.
The executive officers of the Company are listed under Item 1 of this document.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information appearing under "Executive Compensation", "Compensation Committee Interlocks and Insider Participation", "Nominating and Compensation Committee Report on Executive Compensation", "Performance Graph", "Stock Ownership" and the remuneration information under "Directors Meetings, Committees and Fees" will be contained in the Notice of the 2000 Annual Meeting and Proxy Statement, to be filed pursuant to Regulation 14A, which is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The discussion of the security ownership of certain beneficial owners and management appearing under "Stock Ownership" will be contained in the Notice of the 2000 Annual Meeting and Proxy Statement, to be filed pursuant to Regulation 14A, which is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information appearing under "Compensation Committee Interlocks and Insider Participation" will be contained in the Notice of the 2000 Annual Meeting and Proxy Statement, to be filed pursuant to Regulation 14A, which is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1.) Financial Statements
The following financial statements are filed as a part of this document under Item 8. Financial Statements and Supplementary Data.
Consolidated Statement of Earnings - for years ended August 31, 1999, 1998 and 1997
Consolidated Balance Sheet - for years ended August 31, 1999 and 1998
Consolidated Statement of Cash Flows - for years ended August 31, 1999, 1998 and 1997
Consolidated Statement of Shareholders Equity - for years ended August 31, 1999, 1998, 1997 and 1996
Consolidated Statement of Comprehensive Income (loss)- for years ended August 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
Report of Independent Accountants
(a)(2.) Financial Statement Schedules
All financial statement schedules have been included in the consolidated financial statements or are either not applicable or not significant.
(a)(3.) Exhibits (Listed by numbers corresponding to the Exhibit Table of Item 601 in Regulation S-K)
2.1 Agreement and Plan of Reorganization (Filed as Exhibit (10)(i) to the Company's 10-Q filed for the Quarter Ending February 28, 1998)
3.1 Articles of Incorporation of Agribrands International, Inc. (Filed as Exhibit 3.1 to the Company's Amendment No. 1 to Registration Statement on Form 10 dated February 9, 1998)
3.2 Bylaws of Agribrands International, Inc. (Filed as Exhibit 3.2 to the Company's Amendment No. 1 to Registration Statement on Form 10 dated February 9, 1998)
4.1 Rights Agreement (Filed as Exhibit 4.1 to the Company's Amendment No. 1 to Registration Statement on Form 10 dated February 9, 1998)
10.1 Technology Transfer and License Agreement (Filed as Exhibit (10)(ii) to the Company's Form 10-Q for the Period Ending February 28, 1998)
10.2 Trademark Agreement (Filed as Exhibit (10)(iii) to the Company's Form 10-Q for the Period Ending February 28, 1998)
10.3 Credit Agreements (Long and Short Term) (Filed as Exhibit (10)(iv) to the Company's Form 10-Q for the Period Ending February 28, 1998)
10.4 Tax Sharing Agreement (Filed as Exhibit 2.2 to the Company's Amendment No. 3 to Registration Statement on Form 10 dated March 19, 1998)
10.5 Bridging Agreement (Filed as Exhibit 2.3 to the Company's Amendment No. 3 to Registration Statement on Form 10 dated March 19, 1998)
*10.6 Incentive Stock Plan (Filed as Exhibit 10.1 to the Company's Amendment No. 3 to Registration Statement on Form 10 dated March 19, 1998)
*10.7 Form of Management Continuity Agreement (Filed as Exhibit 10 to the Company's Amendment No. 3 to Registration Statement on Form 10 dated February 9, 1998)
*10.8 Non-Qualified Deferred Compensation Plan (Filed as Exhibit 10.2 to the Company's Amendment No. 3 to Registration Statement on Form 10 dated March 19, 1998)
*10.9 Form of Non-Qualified Stock Option Agreement dated May 12, 1998, with Chief Executive Officer of the Company (Filed as Exhibit 10.1 to Company's Form 10-Q for the Period Ending May 31, 1998)
*10.10 Form of Non-Qualified Stock Option Agreement dated May 29, 1998, with certain executive officers of the Company (Filed as Exhibit 10.2 to the Company's Form 10-Q for the Period Ending May 31, 1998)
10.11 First Amendment to Agreement and Plan of Reorganization dated May 29, 1998 (Filed as Exhibit 10.11 to the Company's Form 10-K for the fiscal year ended August 31, 1998)
*10.12 Form of Notice of Stock Appreciation Right dated May 29, 1998 (Filed as Exhibit 10.12 to the Company's Form 10-K for the fiscal year ended August 31, 1998)
*10.13 Form of Indemnification Agreement between the Company and its Directors (Filed as Exhibit 10.13 to the Company's Form 10-K for the fiscal year ended August 31, 1998)
*10.14 Form of Indemnification Agreement between the Company and its executive officers (Filed as Exhibit 10.14 to the Company's Form 10-K for the fiscal year ended August 31, 1998)
*10.15 Financial Planning Reimbursement Program (Filed as Exhibit 10.15 to the Company's Form 10-K for the fiscal year ended August 31, 1998)
*10.16 Form of Split Dollar Life Insurance Agreement (Filed as Exhibit 10.16 to the Company's Form 10-K for the fiscal year ended August 31, 1998)
*10.17 Form of letter amending the May 29, 1998 Non-Qualified Stock Option Agreements (Filed as Exhibit 10.17 to the Company's Form 10-K for the fiscal year ended August 31, 1998)
10.18 Form of Separation Agreement with Gonzalo Dal Borgo dated April 7, 1999 (Filed as Exhibit 10.1 to the Company's Form 10-Q for the period ending May 31, 1999)
21 Subsidiaries of the Company
23 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule
*Denotes a management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K.
No Current Reports on Form 8-K were filed by the Company during the fourth quarter of its fiscal year ended August 31, 1999.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, Agribrands International, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
AGRIBRANDS INTERNATIONAL, INC.
/s/ William P. Stiritz ------------------------------------- William P. Stiritz Chairman of the Board, Chief Executive Officer and President
Date: October 27, 1999
KNOW ALL MEN BY THESE PRESENTS, that the below-named directors and officers of Agribrands International, Inc. whose signature appears below constitutes and appoints Michael J. Costello and William P. Stiritz and each of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resolution, for him and in his name, place, and stead, in any and all capacities, to sign any and all amendments to this report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ William P. Stiritz Chairman of the Board, October 27, 1999 - --------------------- Chief Executive Officer, William P. Stiritz and President
/s/ David R. Wenzel Chief Financial Officer October 27, 1999 - ---------------------- David R. Wenzel
/s/ Douglas W. Faust Controller (Chief October 27, 1999 - ---------------------- Accounting Officer) Douglas W. Faust
/s/ David R. Banks Director October 27, 1999 - ---------------------- David R. Banks
/s/ Jay W. Brown Director October 27, 1999 - ---------------------- Jay W. Brown
/s/ M. Darrell Ingram Director October 27, 1999 - ---------------------- M. Darrell Ingram
/s/ H. Davis McCarty Director October 27, 1999 - ---------------------- H. Davis McCarty
/s/ Joe R. Micheletto Director October 27, 1999 - ---------------------- Joe R. Micheletto
/S/ Martin K. Sneider Director October 27, 1999 - ---------------------- Martin K. Sneider