10-Q 1 c64228e10-q.txt QUARTERLY REPORT DATED JUNE 30, 2001 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended June 30, 2001 Commission File No. 1-4582 RALSTON PURINA COMPANY ----------------------------------------------------------- (Exact name of registrant as specified in its charter) MISSOURI 43-0470580 -------------------------------------------------------------------------------- (State of Incorporation) (I.R.S. Employer Identification No.) CHECKERBOARD SQUARE, ST. LOUIS MISSOURI 63164 ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (314) 982-1000 ------------------------------------------------------------ (Registrant's telephone number, including area code) Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. YES: X NO: ----- ----- Number of shares of Ralston Purina common stock, $.10 par value, outstanding as of the close of business on August 7, 2001: 310,622,046. 2 PART I - FINANCIAL INFORMATION RALSTON PURINA COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL INFORMATION (dollars in millions except per share data) ---------------------------------------------------------------- OPERATING RESULTS Net earnings for the nine months ended June 30, 2001 were $213.3, or $.74 and $.73 per basic and diluted share, respectively. Included in net earnings are two unusual items which decreased net earnings by $31.9, or $.11 per basic and diluted share, as follows: a net after-tax loss on investments of $3.2, or $.01 per basic and diluted share; and after-tax merger-related costs associated with the pending merger between the Company and Nestle S.A. (see separate section below), consisting primarily of adjustments to employee-related liabilities denominated in share equivalents or tied to stock performance and transaction costs, of $28.7 or $.10 per basic and diluted share. The prior year nine-month net earnings of $446.9, or $1.55 and $1.53 per basic and diluted share, respectively, include several unusual items that increased net earnings by $127.5, or $.44 per basic and diluted share. These unusual items include the following: an unrealized after-tax gain of $89.3, or $.31 per basic and diluted share, representing a market value adjustment of the Company's stock appreciation income linked securities (SAILS) debt; an after-tax gain on investments of $7.1, or $.02 per basic and diluted share; and capital loss tax benefits totaling $31.1, or $.11 per basic and diluted share. Net earnings for the prior year nine months also include net earnings from discontinued operations of $93.9, or $.33 and $.32 per basic and diluted share, respectively. Discontinued operations represents results of the battery products business (Energizer), which was spun off to shareholders on April 1, 2000. Pro forma comparisons are presented below to reflect the impact of the spin-off. 3 Earnings before unusual items were $245.2 for the current nine months, compared to pro forma earnings from continuing operations before unusual items of $233.2 in the prior year. The earnings increase resulted primarily from higher segment profitability and lower interest expense, partially offset by lower equity earnings from the Company's investment in Interstate Bakeries Corporation (IBC). Excluding unusual items in both periods, earnings per share were $.85 and $.84 on a basic and diluted basis, respectively, for the current nine months, compared to pro forma earnings per share from continuing operations of $.81 and $.80 a year ago. The net pro forma adjustment of $7.7 in the prior year nine months represents a reduction in interest expense due to the change in debt structure associated with the spin-off of Energizer, net of an adjustment to income taxes to reflect the Company's post-spin-off tax rate. For the quarter ended June 30, 2001, net earnings were $77.5, or $.27 and $.26 per basic and diluted share, respectively, compared to $61.1, or $.21 per basic and diluted share for the same quarter in 2000. Net earnings for the current quarter include an after-tax gain on investments of $.8, and after-tax merger-related costs, primarily transaction costs, of $9.5, or $.03 per basic and diluted share. Prior year third quarter net earnings include an unrealized after-tax gain on SAILS debt of $2.5, or $.01 per basic and diluted share, and a net loss from discontinued operations of $5.7, or $.02 per basic and diluted share. Earnings before unusual items for the quarter ended June 30, 2001 were $86.2, or $.30 and $.29 per basic and diluted share, respectively, compared to earnings from continuing operations before unusual items of $64.3, or $.22 per basic and diluted share, for the prior year quarter. Earnings increased primarily on higher profitability for all three operating segments and lower interest expense. 4 RESULTS OF CONTINUING OPERATIONS Net sales increased 2.7% in the nine months and 5.8% in the third quarter ended June 30, 2001 on higher sales for each of the Company's operating segments. See the following section for comments on sales changes by operating segment. Gross profit increased $10.4 in the current nine months and $25.5 in the current quarter. In the nine months, gross profit increases for Golden Products and International Pet Foods were partially offset by a decrease for North American Pet Foods. In the quarter, gross profit increased for each operating segment. As a percentage of sales, gross profit was 58.6% in the current year nine months compared to 59.7% a year ago. The decreased percentage reflects lower margins for all operating segments. In the current quarter, the gross profit percentage was 59.3% compared to 58.9% in the prior year third quarter, reflecting higher margins for all operating segments. Selling, general and administrative expenses increased 6.1% in the current nine months and 1.0% in the quarter. The increase for the nine months is primarily attributable to first quarter increases in employee-related costs, particularly unfavorable mark-to-market adjustments on liabilities denominated in share equivalents, and increases in International Pet Foods. Selling, general and administrative expenses increased to 18.3% of sales in the current nine-month period, from 17.7% a year ago. In the quarter, selling, general and administrative expenses decreased to 18.1% of sales, compared to 19.0% in the prior year quarter. Advertising and promotion expense decreased 1.4% in the current nine months due to lower expenses for North American Pet Foods and International Pet Foods, partially offset by higher expenses for Golden Products. In the current quarter, advertising and promotion expense increased 4.6% due to higher spending by North American Pet Foods and Golden Products. As a percentage of sales, advertising and promotion expense was 5 20.8% and 20.7% in the current nine months and third quarter, respectively, compared to 21.7% and 21.0% in the same periods a year ago. Interest expense decreased to $87.9 for the current nine months from $131.1 in the prior year primarily reflecting reduced debt levels as a result of the spin-off of Energizer. Compared to pro forma interest expense of $116.6 for the prior year nine months, interest expense decreased $28.7 in the current nine months. Interest expense for the current quarter was $29.2 compared to $39.7 for the same quarter in the prior year. The decreases in both periods were due to lower current year debt levels as well as lower interest rates. Other income/expense, net, was favorable $17.0 for the nine months and $7.1 for the quarter. The favorable variance for the nine months was primarily attributable to higher investment returns. For the quarter, the favorable variance resulted primarily from the gain on a fixed asset disposition. Income taxes include federal, state and foreign taxes. Excluding the unusual items discussed above, income taxes were 35.5% of pre-tax earnings before equity earnings in both the current year nine months and third quarter. For the prior year nine months and third quarter, pro forma income taxes before unusual items were 34.4% and income taxes before unusual items were 34.0%, respectively, of pre-tax earnings before equity earnings. OPERATING SEGMENTS See Note 5 of the Notes to Condensed Financial Statements for a table of segment sales and profitability for the quarters and nine months ended June 30, 2001 and 2000. Sales for North American Pet Foods increased 1.3% in the nine months and 5.0% in the quarter. In both periods, favorable pricing and product mix were partially offset by an unfavorable size mix. While volumes for the nine months were slightly lower than in 6 the prior year, slightly higher volumes for the quarter contributed to the third quarter sales increase. Profitability for this segment increased 1.9% in the nine months as the sales increase combined with lower advertising expenses was partially offset by higher ingredient costs. In the quarter, profitability increased 12.8% as a result of the sales increase, partially offset by higher promotional expenses in response to increased competitive activity. International Pet Foods' sales increased 3.5% in the nine months and 3.0% in the quarter. These increases resulted primarily from volume growth in most world areas, partially offset by decreased sales in Northern Europe due to lower volumes and unfavorable foreign exchange. Profitability for this segment decreased 6.0% in the nine months primarily as a result of decreased volumes in Northern Europe, expenses associated with expansion in the Asian market and unfavorable foreign exchange. In the quarter, profitability increased 16.2% due primarily to the sales increase and cost containment efforts. Sales for Golden Products increased 13.5% in the nine months and 17.4% in the quarter. These increases are attributable to volume increases in scooping litter, sales of Tidy Cats Crystals Blend, the new blended scoop and conventional litter products introduced in the current quarter, and incremental sales of the new products introduced during the third quarter of the prior year. Profitability for Golden Products increased 12.0% in the nine months and 36.0% in the quarter as the sales increases were partially offset by increased advertising and promotion expenses. Additionally, gross margins improved in the third quarter primarily as a result of improved product mix. 7 FINANCIAL CONDITION The Company's primary source of liquidity is cash flow generated from operations. The Company's investments in E.I. du Pont de Nemours and Company and IBC provide additional sources of liquidity. For the nine months ended June 30, 2001, cash flow from operations was $168.9 compared to cash flow from continuing operations of $191.0 in the nine months ended June 30, 2000. This decrease is primarily attributable to lower cash earnings. Working capital was $194.7 at June 30, 2001, while current liabilities exceeded current assets by $36.7 at September 30, 2000. The working capital change is primarily due to increased cash and cash equivalents and lower accounts payable and accrued liabilities. During the current and prior year nine-month periods, the Company received proceeds from the sale of common stock investments of $117.3 and $88.6, respectively. In connection with the spin-off of Energizer on April 1, 2000, the Company received during the prior year second quarter $478 from new borrowings, and then assigned this debt to Energizer. The majority of the proceeds from the borrowings were used by the Company to pay down its short-term debt. During the prior year third quarter, the Company made a payment of $19.5 to Energizer, representing a post-spin-off adjustment required in connection with the spin-off agreement. The Company used cash of $31.8 and $398.0 during the current and prior year nine months, respectively, for share repurchases. As of July 20, 2001, approximately 7,562,000 shares remained under the current Board of Directors' authorization dated May 25, 2000 for the purchase of 8,000,000 shares of RAL Stock. This authorization is in addition to a continuing authorization permitting the Company to acquire, from time to time and at prevailing market prices, shares of RAL Stock that may be offered for sale by the trustee of the Company's Savings Investment Plan as a result of investment directions from participants in the plan. 8 In connection with the merger agreement (described below), the Company has agreed to customary restrictions on various operating matters including restrictions on incurring debt, capital expenditures, asset dispositions, acquisitions, share repurchases and the declaration or payment of dividends. ACCOUNTING PRONOUNCEMENTS The Company will implement Emerging Issues Task Force (EITF) No. 00-10, "Accounting for Shipping and Handling Fees and Costs", in its fourth quarter of fiscal year 2001. This consensus requires that shipping and handling costs not be reported as a reduction of sales; however, the Company currently classifies certain shipping costs as a reduction of sales. Implementation will result in a reclassification from a reduction of sales to cost of products sold, which will yield an increase in annual sales of approximately 5%. Additionally, handling costs which the Company currently classifies as selling, general and administrative expenses will be reclassified to cost of products sold. The combined annual impact of these reclassifications on cost of products sold will be an increase of approximately 17%. These reclassifications will have no impact on net earnings. In April 2001, the EITF of the Financial Accounting Standards Board reached consensus on Issue No. 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products". This consensus establishes requirements for the earnings statement classification of such consideration as either a reduction of revenue or a cost incurred. This consensus is effective for the Company's second quarter of fiscal year 2002 and will result in certain reclassifications in the Company's earnings statement, the extent of which has not yet been determined by the Company. Issue No. 00-14, "Accounting for Certain Sales Incentives", establishes requirements for the recognition and presentation of sales incentives such as coupons, rebates and other discounts. In April 2001, the EITF reached a consensus to defer the effective date for this 9 guidance to the Company's second quarter of fiscal year 2002. The Company has not completed its evaluation of the impact of EITF No. 00-14 on its financial statements. The Securities and Exchange Commission's Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition", was implemented by the Company with no material impact on the Company's results of operations or financial position. MERGER AGREEMENT On January 16, 2001, the Company and Nestle S.A. announced that Nestle Holdings, Inc. and the Company have entered into a definitive merger agreement. Under the agreement, Nestle Holdings, Inc. will acquire all of the outstanding stock of Ralston Purina for US $33.50 per share in cash. The agreement is subject to regulatory approval, as well as other customary closing conditions. The merger is not subject to a financing condition. While no assurances can be made that the merger will receive the necessary regulatory approvals on acceptable terms, the Company expects the transaction to close by December 31, 2001. 10 RALSTON PURINA COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED) (IN MILLIONS EXCEPT PER SHARE DATA)

See Accompanying Notes to Condensed Financial Statements. 11 RALSTON PURINA COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (CONDENSED AND UNAUDITED) (IN MILLIONS)

See Accompanying Notes to Condensed Financial Statements. 12 RALSTON PURINA COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (CONDENSED AND UNAUDITED) (IN MILLIONS)

See Accompanying Notes to Condensed Financial Statements. 13 RALSTON PURINA COMPANY AND SUBSIDIARIES NOTES TO CONDENSED FINANCIAL STATEMENTS JUNE 30, 2001 (Dollars in millions except per share data) NOTE 1 - The accompanying unaudited financial statements have been prepared in accordance with the instructions for Form 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for any quarter are not necessarily indicative of the results for any other quarter or for the full year. These statements should be read in conjunction with the financial statements and notes thereto included in the Ralston Purina Company (the Company) Annual Report to Shareholders for the year ended September 30, 2000. NOTE 2 - During the nine months ended June 30, 2001, the Company sold its remaining investment in Conoco, Inc. (Conoco) B common stock for $117.3 and recognized a gain of $3.7 after tax, or $5.7 pre-tax. On a per share basis, this gain was $.01 per basic and diluted share. For the quarter ended June 30, 2001, the Company recognized an after-tax and pre-tax gain of $0.8 and $1.2, respectively, on the sale of Conoco B common stock. The cost basis of the shares sold was determined using the average cost method. At March 31, 2001, the Company determined that the reduction in the value of its investment in Heska common stock was other than temporary and, accordingly, recorded an after-tax write-down of $6.9, or $10.8 pre-tax. The amount of the write-down was determined based on the market value of Heska common stock at March 31, 2001. On a per share basis, this write-down was $.02 per basic and diluted share for the nine months ended June 30, 2001. During the nine months ended June 30, 2000, the Company sold a portion of its investment in E.I. du Pont de Nemours and Company (DuPont) common stock for $88.6 and recorded an after-tax gain of $7.1, or $.02 per basic and diluted share. On a pre-tax basis, this gain was $11.1. The cost basis of the shares sold was determined using the average cost method. At June 30, 2001, the Company held 1.2 million shares of Heska common stock, 14.8 million shares of DuPont common stock and 14.8 million shares of Interstate Bakeries Corporation common stock. NOTE 3 - On January 16, 2001, the Company and Nestle S.A. announced that Nestle Holdings, Inc. and the Company have entered into a definitive merger agreement. Under the agreement, Nestle Holdings, Inc. will acquire all of the outstanding stock of Ralston Purina for US $33.50 per share in cash. The agreement is subject to regulatory approval, as well as other customary closing conditions. The merger is not subject to a financing condition. In connection with the merger agreement, the Company has agreed to customary restrictions on various operating matters including restrictions on incurring debt, capital expenditures, asset dispositions, acquisitions, share repurchases and the declaration or payment of dividends. While no assurances can be made that the merger will receive the necessary regulatory approvals on acceptable terms, the Company expects the transaction to close by December 31, 2001. The Company recorded after-tax costs of $28.7 and $9.5 during the nine months and quarter ended June 30, 2001, respectively, related to the pending merger. These costs primarily include registration, legal and financial advisor fees and, additionally for the nine months, adjustments to 14 RALSTON PURINA COMPANY AND SUBSIDIARIES NOTES TO CONDENSED FINANCIAL STATEMENTS JUNE 30, 2001 (Dollars in millions except per share data) employee-related liabilities denominated in share equivalents or tied to stock performance. On a per share basis, these costs were $.10 per basic and diluted share for the nine months and $.03 per basic and diluted share for the quarter. On a pre-tax basis, these costs were $37.2 and $9.4 for the nine months and quarter ended June 30, 2001, respectively. NOTE 4 - On October 1, 2000, the Company implemented, on a prospective basis, Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and SFAS No. 138 (collectively, the Statement). This Statement requires all derivatives to be recognized in the statement of financial position at fair value, with changes in the fair value of derivative instruments to be recorded in current earnings or deferred in other comprehensive income, depending on whether a derivative is designated as and is effective as a hedge and on the type of hedging transaction. In accordance with the provisions of SFAS No. 133, upon implementation the Company reclassified previously deferred hedging losses on designated cash flow hedges of $10.8, which are net of taxes of $6.0, from current assets to accumulated other comprehensive loss. The Company uses derivative instruments, primarily foreign exchange forward contracts and commodity futures contracts, to manage certain of its foreign exchange rate and commodity price risks. The terms of such instruments, and the hedging transactions to which they relate, generally do not exceed 12 months. Company policy allows for the use of derivative financial instruments only for identifiable exposures and, therefore, the Company does not enter into derivative instruments for trading purposes where the objective is to generate profits. With respect to foreign exchange rate risk, the Company's objective is to limit potential losses in earnings or cash flows from adverse foreign currency exchange rate movements related to foreign currency transactions. The Company's foreign currency exposures arise from transactions denominated in a currency other than an entity's functional currency, primarily anticipated purchases of raw materials and sales of finished product, and the settlement of receivables and payables. The primary currencies to which the Company's foreign affiliates are exposed include the U.S. dollar and the euro. The Company also uses commodity futures contracts with the objective of reducing commodity price risks related to future raw material requirements for commodities such as corn, wheat, soybean meal and various other high protein ingredient meals. Commodity price risks arise from price volatility due to factors such as weather conditions, government regulations, economic climate and other unforeseen circumstances. Generally, the Company applies hedge accounting as allowed by the Statement. However, at times the Company may enter into derivatives which economically hedge certain of its risks even though hedge accounting is not allowed by the Statement or is not applied by the Company. For derivatives where hedge accounting is used, the Company formally designates the derivative as either 1) a fair value hedge of a recognized asset or liability or unrecognized firm commitment; 2) a cash flow hedge of an anticipated transaction; or 3) a foreign currency fair value and/or cash flow hedge. The Company also documents the designated hedging relationship upon entering into the derivative, including identification of the hedging instrument and the hedged item or transaction, strategy and risk management objective for undertaking the hedge, and the nature of 15 RALSTON PURINA COMPANY AND SUBSIDIARIES NOTES TO CONDENSED FINANCIAL STATEMENTS JUNE 30, 2001 (Dollars in millions except per share data) the risk being hedged. Furthermore, each derivative is assessed for hedge effectiveness both at the inception of the hedging relationship and on a quarterly basis, for as long as the derivative is outstanding. Hedge accounting is only applied when the derivative is deemed to be highly effective at offsetting changes in fair values or anticipated cash flows of the hedged item or transaction. For hedged forecasted transactions, hedge accounting is discontinued if the forecasted transaction is no longer intended to occur, and any previously deferred hedging gains or losses would be recorded to earnings immediately. Earnings impacts for all designated hedges are recorded in the Consolidated Statement of Earnings generally on the same line item as the gain or loss on the item being hedged. The Company records all derivatives at fair value as assets or liabilities in the Consolidated Balance Sheet, with classification as current or long-term depending on the duration of the instrument. For fair value hedges, the effective and ineffective portions of the change in fair value of the derivative, along with the gain or loss on the hedged item, are recorded in earnings as incurred. For cash flow hedges, the effective portion of the change in fair value of the derivative is deferred in accumulated other comprehensive income in the Consolidated Balance Sheet until the transaction is reflected in the Consolidated Statement of Earnings, at which time any deferred hedging gains or losses are recorded in earnings. The ineffective portion of the change in the fair value of a derivative used as a cash flow hedge is recorded in earnings as incurred. Hedge ineffectiveness and the portion of derivative gains or losses excluded from assessments of hedge effectiveness related to the Company's outstanding cash flow hedges are recorded to earnings. During the nine months and quarter ended June 30, 2001, this amount was a gain of $0.4 and $0.6, respectively. At June 30, 2001, the net deferred hedging loss in Accumulated Other Comprehensive Income was $1.2. This entire deferred loss is expected to be recognized in earnings during the twelve months ended June 30, 2002, at the time the underlying hedged transactions are recognized in the earnings statement. See Note 9 below for comprehensive income for the Company's cash flow hedging activities for the quarter and nine months ended June 30, 2001. NOTE 5 - Segment sales and profitability for the quarters and nine months ended June 30, 2001 and 2000 are as follows:

16 RALSTON PURINA COMPANY AND SUBSIDIARIES NOTES TO CONDENSED FINANCIAL STATEMENTS JUNE 30, 2001 (Dollars in millions except per share data)

(a) Includes gain/loss on investments for the quarter ended June 30, 2001 and for the nine months ended June 30, 2001 and 2000; merger-related costs for the quarter and nine months ended June 30, 2001; and an unrealized gain on SAILS debt for the quarter and nine months ended June 30, 2000. NOTE 6 - During the nine months and quarter ended June 30, 2000, the Company recorded an unrealized after-tax gain of $89.3 and $2.5, respectively, or $139.5 and $3.9 pre-tax, representing a market value adjustment of the Company's stock appreciation income linked securities (SAILS) debt, which matured on August 1, 2000. On a per share basis, this gain was $.31 per basic and diluted share for the nine months and $.01 per basic and diluted share for the quarter. NOTE 7 - During the nine months ended June 30, 2000, the Company recorded capital loss tax benefits totaling $31.1, or $.11 per basic and diluted share, related to the sale and reorganization of two of the Company's subsidiaries. NOTE 8 - On April 1, 2000, the Company completed the tax-free spin-off to shareholders of its Battery Products business (Energizer). This segment is accounted for as a discontinued operation in the prior year financial statements and related notes. 17 RALSTON PURINA COMPANY AND SUBSIDIARIES NOTES TO CONDENSED FINANCIAL STATEMENTS JUNE 30, 2001 (Dollars in millions except per share data) NOTE 9 - The components of total comprehensive income for the quarters and nine months ended June 30, 2001 and 2000 are as follows:

NOTE 10 - Other (income)/expense, net, for the nine months ended June 30, 2001 and 2000, consists of the following:

18 RALSTON PURINA COMPANY AND SUBSIDIARIES NOTES TO CONDENSED FINANCIAL STATEMENTS JUNE 30, 2001 (Dollars in millions except per share data) NOTE 11 - The following table sets forth the computation of basic and diluted earnings per share for the quarters and nine months ended June 30, 2001 and 2000.

* Weighted average shares used for the computation of basic earnings per share exclude 21,964,000 and 21,694,000 shares of common stock held by the Company's Grantor Trust at June 30, 2001 and 2000, respectively. NOTE 12 - At June 30, 2001, there were 287,995,000 shares of common stock outstanding, exclusive of 18,621,000 shares held in treasury and 21,964,000 Grantor Trust shares. At September 30, 2000, there were 286,358,000 shares of common stock outstanding, exclusive of 20,461,000 shares held in treasury and 21,761,000 Grantor Trust shares. 19 RALSTON PURINA COMPANY AND SUBSIDIARIES NOTES TO CONDENSED FINANCIAL STATEMENTS JUNE 30, 2001 (Dollars in millions except per share data) NOTE 13 - Investments and Other Assets consist of the following:

NOTE 14 - Available-for-sale securities at June 30, 2001 and September 30, 2000 consist primarily of shares of E.I. du Pont de Nemours and Company (DuPont) common stock. Available-for-sale securities are carried at fair value, based on quoted market prices. The difference between fair value and cost basis of these securities, net of tax, is shown as a separate component within Accumulated Other Comprehensive Income in the shareholders equity section of the Consolidated Balance Sheet. The table below shows the aggregate fair value, gross unrealized holding loss, tax benefit, and net unrealized holding loss for these securities as of June 30, 2001 and September 30, 2000. The changes in net unrealized holding loss, net of tax, for the quarters and nine-month periods ended June 30, 2001 and 2000 are included as a component of Other Comprehensive Income as shown in Note 9, above.

NOTE 15 - During the first quarter of fiscal 2001, the Company issued 1.2 million shares of restricted common stock of the Company with a five-year vesting period. Upon issuance of the restricted shares, unearned compensation equivalent to the market value at the date of grant was charged to Shareholders Equity and will be amortized to expense over the five-year vesting period. The lapsing of restrictions on these shares will be accelerated in certain circumstances, one of which is a change in control of the Company. 20 PART II - OTHER INFORMATION There is no information required to be reported under any items except those indicated below. Item 1. Legal Proceedings The Company previously disclosed an action entitled Hack, et al. v. Banks, et al. This action was voluntarily dismissed without prejudice by the plaintiffs on June 13, 2001. Item 4. Submission of Matter to a Vote of Security Holders On May 21, 2001 the Company held a special meeting of shareholders to consider and vote upon the proposal to approve the Agreement and Plan of Merger, dated as of January 15, 2001, among the Company, Nestle Holdings, Inc. and a wholly owned subsidiary of Nestle Holdings, Inc., pursuant to which the subsidiary will be merged into the Company and each share of common stock of the Company outstanding immediately prior to the merger will be converted into the right to receive $33.50 in cash. The number of shares voting for and against the proposal, as well as the number of abstentions with respect thereto, is as follows: VOTES VOTES VOTES FOR AGAINST ABSTAINED 231,165,553 5,087,273 1,076,214 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits filed with this Report: (10)(i) Resolution dated May 16, 2001 amending the Trust Agreement (10)(ii) Executive Group Personal Excess Liability Insurance Summary (10)(iii) Resolution dated January 15, 2001 amending the Bonus Plans and Deferred Compensation Plans (b) Reports on Form 8-K A Current Report on Form 8-K was filed by the Company on May 21, 2001 to disclose that the proposed merger with Nestle Holdings, Inc. had received the requisite shareholder approval at the May 21, 2001 special meeting of the Company's shareholders. 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. RALSTON PURINA COMPANY ---------------------- Registrant By: /s/ James R. Elsesser ----------------------------------------- James R. Elsesser Vice President, Chief Financial Officer and Treasurer Date: August 9, 2001 22 EXHIBIT INDEX Exhibits EX-10 Material Contracts (10)(i) Resolution dated May 16, 2001 amending the Trust Agreement (10)(ii) Executive Group Personal Excess Liability Insurance Summary (10)(iii) Resolution dated January 15, 2001 amending the Bonus Plans and Deferred Compensation Plans

RALSTON PURINA CO 10-Q