DEF 14A 1 ddef14a.htm DEFINITIVE PROXY STATEMENT Definitive Proxy Statement
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

(Rule 14a-101)

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

Filed by the Registrant þ

Filed by a Party other than the Registrant ¨

Check the appropriate box:

 

¨        Preliminary Proxy Statement

  

¨        Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

 

þ  Definitive Proxy Statement

 

¨  Definitive Additional Materials

 

¨  Soliciting Material Pursuant to §240.14a-12

RALCORP HOLDINGS, INC.

 

 

(Name of Registrant as Specified In Its Charter)

 

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

 

þ  No fee required.

 

¨  Fee computed below per Exchange Act Rules 14a-6(i)(1) and 0-11.

 

  1)  Title of each class of securities to which transaction applies:

  

 
  2)  Aggregate number of securities to which transaction applies:

  

 
  3)  Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

  

 
  4)  Proposed maximum aggregate value of transaction:

  

 
  5)  Total fee paid:

  

 

 

¨  Fee paid previously with preliminary materials.

 

¨  Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

 

  1)  Amount Previously Paid:

  

 
  2)  Form, Schedule or Registration Statement No.:

  

 
  3)  Filing Party:

  

 
  4)  Date Filed:

  

 


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EXPLANATORY NOTE

This proxy statement relates to the special meeting of shareholders of Ralcorp Holdings, Inc. (“Ralcorp”) to approve the issuance of shares of Ralcorp common stock in connection with the merger of Cable Holdco, Inc. (“Splitco”), which is a subsidiary of Kraft Foods Inc. (“Kraft”), with and into Ralcorp Mailman LLC, which is a subsidiary of Ralcorp. In addition, Ralcorp has filed a registration statement on Form S-4 (Reg. No. 333-150222) to register the shares of its common stock, par value $0.01 per share, which will be issued in connection with the merger. Splitco has filed a registration statement on Form S-4 and Form S-1 (Reg. No. 333-150212) to register shares of its common stock, par value $0.01 per share, which will be distributed to Kraft shareholders pursuant to a spin-off or a split-off in connection with the merger, which shares of Splitco common stock will be immediately converted into shares of Ralcorp common stock in the merger.


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LOGO

June 17, 2008

Dear Fellow Ralcorp Shareholder:

We are excited about Ralcorp Holdings, Inc.’s opportunity to acquire the Post cereals business from Kraft Foods Inc. To facilitate the acquisition, Kraft will contribute the Post cereals business to a subsidiary of Cable Holdco, Inc., which is a newly created, wholly owned subsidiary of Kraft (“Splitco”). In connection with the contribution, Splitco will assume $300.0 million in newly incurred bank debt, the proceeds of which will be received by Kraft, and will issue to Kraft approximately $662.2 million in debt securities. Kraft will then split-off Splitco to Kraft’s shareholders. Immediately after the split-off, Splitco will merge with and into Ralcorp Mailman LLC, a wholly owned subsidiary of Ralcorp, and each issued share of Splitco common stock will be converted into the right to receive one share of Ralcorp common stock, followed immediately by the merger of Ralcorp Mailman with and into Ralcorp. As a result, Ralcorp will own the Post cereals business and the bank debt and the debt securities will become debt obligations of Ralcorp. Consummation of the transactions is expected to result in Kraft’s shareholders holding approximately 54% of Ralcorp’s common stock and existing Ralcorp shareholders holding approximately 46% of Ralcorp’s common stock immediately after the merger. Although believed remote, if Ralcorp is required to issue additional shares of its common stock under certain circumstances, Ralcorp shareholders’ ownership interest after the merger may be diluted to as low as 41.9%. Ralcorp common stock is listed on the New York Stock Exchange under the symbol “RAH.” Our existing shareholders will not receive any new shares in the merger and will continue to hold their existing shares of Ralcorp common stock after the merger.

In order to complete the merger, Ralcorp must obtain the approval of its shareholders for the issuance of Ralcorp common stock in connection with the merger. Ralcorp will issue an aggregate number of shares of its common stock equal to 1.1602, multiplied by the number of shares of Ralcorp common stock expected to be outstanding on a fully diluted basis as of the closing date, as estimated prior to the closing date and subject to possible adjustments. Therefore, the total number of shares of Ralcorp common stock to be issued in the merger will not be known until the closing date.

We cordially invite you to attend the special meeting of Ralcorp shareholders to be held on July 17, 2008 at the Bank of America Plaza located at 800 Market Street, 26th Floor, St. Louis, Missouri 63101, at 8:30 a.m., local time. At the special meeting, we will ask you to consider and vote on the proposal to approve the issuance of shares of Ralcorp common stock in connection with the merger.

On November 14, 2007, our board of directors approved, adopted and declared advisable Ralcorp’s entering into the transaction agreement, the merger and the other transactions contemplated by the transaction agreement. In addition, the board determined that the merger and the other transactions contemplated by the transaction agreement were in the best interests of Ralcorp and its shareholders. A copy of the transaction agreement is included with the attached document as Annex A.

Your vote is very important. We cannot complete the merger and the other transactions unless the proposal relating to the issuance of Ralcorp common stock in connection with the merger is approved by the affirmative vote of a majority of the shares of Ralcorp common stock present in person and voting on the proposal or represented by proxy and voting on the proposal (provided that the total vote cast on the proposal represents over 50% in interest of all securities entitled to vote on the proposal).


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Only shareholders who owned shares of Ralcorp common stock at the close of business on June 13, 2008, the record date for the special meeting, will be entitled to vote at the special meeting and any adjournment or postponement of it. Whether or not you plan to be present at the special meeting, please complete, sign, date and return your proxy card in the enclosed envelope, or authorize the individuals named on your proxy card to vote shares by calling the toll-free telephone number or by using the Internet as described in the instructions included with your proxy card. If you hold your shares in “street name,” you should instruct your broker how to vote in accordance with your voting instruction form.

The accompanying document will provide you with information regarding the transactions contemplated by the transaction agreement and information about the Post cereals business. Please review this document carefully. The merger and the other transactions contemplated by the transaction agreement involve risks, some of which may be significant, and its completion is subject to several conditions that either must be satisfied or waived. We discuss these risks and conditions in greater detail in the accompanying document and urge you to read the sections entitled “Risk Factors” beginning on page 23 and “The Transaction Agreement—Conditions to the Consummation of the Transactions” beginning on page 118.

On behalf of our board of directors, we thank you for your support and appreciate your consideration of this matter.

 

Sincerely,   

LOGO

 

David P. Skarie

Co-Chief Executive Officer and President

  

LOGO

Kevin J. Hunt

Co-Chief Executive Officer and President

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this document. Any representation to the contrary is a criminal offense.

This document is dated June 17, 2008 and is first being mailed to Ralcorp shareholders on or about June 18, 2008.


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LOGO

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS

To the Shareholders of Ralcorp Holdings, Inc.:

The special meeting of shareholders of Ralcorp Holdings, Inc. will be held on July 17, 2008 at the Bank of America Plaza at 800 Market Street, 26th Floor, St. Louis, Missouri 63101, at 8:30 a.m., local time. The special meeting is being held for the following purposes:

 

  1. to approve the issuance of shares of Ralcorp common stock in connection with the acquisition by Ralcorp of the Post cereals business through the merger (the “Merger”) of Cable Holdco, Inc., a newly-created, wholly owned subsidiary of Kraft Foods Inc. (“Splitco”), with and into Ralcorp Mailman LLC, a wholly owned subsidiary of Ralcorp;

 

  2. to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies if there are not sufficient votes at the time of the special meeting to approve the issuance of shares of Ralcorp common stock in connection with the Merger; and

 

  3. to transact any and all other business that may properly come before the special meeting or any adjourned session of the special meeting.

Approval of the proposal set forth in item one is required for completion of the Merger and the other transactions contemplated by the RMT Transaction Agreement (collectively, the “Transactions”) dated as of November 15, 2007 between Kraft Foods Inc., Splitco, Ralcorp and Ralcorp Mailman (the “Transaction Agreement”).

Only shareholders who owned shares of Ralcorp common stock at the close of business on June 13, 2008, the record date for the special meeting, are entitled to notice of, and to vote at, the special meeting and any adjournment or postponement of it.

The Transaction Agreement and the Merger, along with the other Transactions, are described more fully in the attached document, and we urge you to read it carefully. Ralcorp shareholders have no appraisal rights under Missouri law in connection with the Merger or the other Transactions.

The Ralcorp Holdings, Inc. board of directors has approved the Transaction Agreement, the Merger and the other Transactions and recommends that Ralcorp shareholders vote for the issuance of Ralcorp common stock in connection with the Merger, which is necessary to effect the Merger and the other Transactions, and, if necessary or appropriate, vote for the adjournment of the special meeting to solicit additional proxies for the proposal.

To ensure that your shares of Ralcorp common stock are represented at the special meeting, please complete, date and sign the enclosed proxy card and mail it promptly in the envelope provided. Any executed but unmarked proxy cards will be voted in accordance with the recommendations of the Ralcorp Holdings, Inc. board


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of directors, including FOR the approval of the issuance of shares of Ralcorp common stock in connection with the Merger. Ralcorp shareholders may revoke their proxy in the manner described in the accompanying document before it has been voted at the special meeting.

By Order of the Board of Directors,

LOGO

Charles G. Huber, Jr.

Corporate Vice President, General Counsel and Secretary

St. Louis, Missouri

June 17, 2008


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TABLE OF CONTENTS

 

     Page

References To Additional Information

   1

Helpful Information

   2

Questions And Answers About The Transactions And The Ralcorp Special Meeting

   4

Summary

   11

The Companies

   11

The Transactions

   12

Summary Historical And Pro Forma Financial Data

   18

Summary Historical Combined Financial Data of the Post Cereals Business

   18

Summary Historical Financial Data of Ralcorp

   18

Summary Unaudited Pro Forma Combined Condensed Financial Data of Ralcorp

   21

Comparative Historical and Pro Forma Per Share Data

   21

Ralcorp Common Stock Market Price

   22

Ralcorp Dividend Policy

   22

Repurchases of Ralcorp Common Stock

   22

Risk Factors

   23

Risks Related to the Transactions

   23

Other Risks that Relate to Ralcorp, Including the Post Cereals Business after the Transactions

   27

Cautionary Statement On Forward-Looking Statements

   34

Information About The Ralcorp Special Meeting

   35

General; Date; Time and Place; Purposes of the Meeting

   35

Record Date; Voting Information; Required Votes

   35

Recommendation of Ralcorp’s Board of Directors

   36

How to Vote

   36

Solicitation of Proxies

   37

Revocation of Proxies

   38

Adjournments and Postponements

   38

Attending the Special Meeting

   38

Householding

   38

Questions and Additional Information

   39

Information On Kraft’s Offer to Exchange

   40

Information On Ralcorp

   41

Ralcorp’s Business After the Transactions

   41

Ralcorp’s Liquidity and Capital Resources After the Transactions

   42

Directors and Officers of Ralcorp Before and After the Transactions

   42

Compensation of Ralcorp’s Directors and Officers; Certain Relationships

   44

Information On The Post Cereals Business

   45

Management’s Discussion And Analysis Of Financial Condition And Results Of Operations For The Post Cereals Business

   49

Selected Historical And Pro Forma Financial Data

   59

Selected Historical Combined Financial Data of the Post Cereals Business

   59

Selected Historical Consolidated Financial Data of Ralcorp

   60

Unaudited Pro Forma Condensed Combined Financial Data of Ralcorp and the Post Cereals Business

   62

 

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     Page

Comparative Historical and Pro Forma Per Share Data

   71

Historical Common Stock Market Price

   71

Ralcorp Dividend Policy

   72

Repurchases of Ralcorp Common Stock

   72

The Transactions

   73

Determination of Number of Shares of Splitco Common Stock to be Distributed to Kraft Shareholders

   77

Background of the Transactions

   78

Ralcorp’s Reasons for the Transactions

   82

Certain Financial Forecasts Prepared by Ralcorp Relating to the Post Cereals Business

   84

Opinion and Analysis of Ralcorp’s Financial Advisor

   87

Kraft’s Reasons for the Transactions

   96

Interests of Certain Persons in the Transactions

   97

Material U.S. Federal Income Tax Consequences of the Distribution, the Merger and Related Transactions

   97

Accounting Treatment of the Merger

   99

Regulatory Approvals

   99

Federal Securities Law Consequences; Resale Restrictions

   99

No Appraisal or Dissenters’ Rights

   99

The Transaction Agreement

   100

Overview

   100

The Newco Contribution

   100

Modesto Purchase

   103

Bank Debt

   103

Splitco Contribution

   103

Internal Spin, Internal Debt Repayment and Internal Debt Exchange

   105

Distribution

   105

The Merger

   105

Upstream Merger

   106

Non-U.S. Transfer

   106

Closing of the Transactions

   106

Effective Time

   106

Representations and Warranties

   107

Covenants

   109

Conditions to the Consummation of the Transactions

   118

Termination of the Transaction Agreement

   120

Effect of Termination

   121

Indemnification and Survival

   121

Amendments and Waiver

   121

Bank Debt and Debt Securities

   122

Bank Debt

   122

Debt Securities

   123

Additional Agreements

   124

Tax Allocation Agreement

   124

Transition Services Agreement

   126

Master External Manufacturing Agreements

   127

 

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     Page

Description of Ralcorp Capital Stock

   129

Ralcorp Common Stock

   129

Ralcorp Preferred Stock

   129

Limitation on Liability and Indemnification Matters

   129

Amendment of Articles of Incorporation and Bylaws

   130

Certain Anti-Takeover Effects of Provisions of Ralcorp’s Articles of Incorporation, By-Laws and Missouri Law

   130

Certain Business Combinations

   133

Control Share Statutes

   134

Takeover Bid Disclosure Statute

   134

Listing

   134

Ralcorp Transfer Agent and Registrar

   134

Ownership of Ralcorp Common Stock

   135

Shareholder Proposals for 2009 Annual Meeting

   138

Where You Can Find More Information; Incorporation By Reference

   139

Index to Financial Pages

   F-1

Annexes

   A-1

The Transaction Agreement

   A-1

The Tax Allocation Agreement

   B-1

Opinion of Banc of America Securities LLC

   C-1

 

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REFERENCES TO ADDITIONAL INFORMATION

This document incorporates important business and financial information about Ralcorp from other documents that are not included in or delivered with this document. This information is available to Ralcorp shareholders without charge upon written or oral request. Ralcorp shareholders can obtain the documents incorporated by reference into this document by accessing the Securities and Exchange Commission’s website maintained at http://www.sec.gov or by requesting copies in writing or by telephone from Ralcorp at the following address: Ralcorp Holdings, Inc., Attn: Corporate Secretary, 800 Market Street, Suite 2600, St. Louis, Missouri 63101; telephone: (314) 877-7046. See “Where You Can Find More Information; Incorporation by Reference.”

All information contained in this document with respect to Kraft, Splitco, or their subsidiaries or the Post cereals business has been provided by Kraft. All information contained or incorporated by reference in this document with respect to Ralcorp and its subsidiaries (up to the closing date of the Transactions) has been provided by Ralcorp.

The information included in this document regarding Kraft’s exchange offer is being provided to Ralcorp’s shareholders for informational purposes only and does not purport to be complete. For additional information on Kraft’s exchange offer and the terms and conditions of Kraft’s exchange offer, Ralcorp shareholders are urged to read Splitco’s registration statement on Form S-4 and Form S-1, or Ralcorp’s registration statement on Form S-4 (Reg. No. 333-150222), and all other documents Splitco will file with the SEC. This document constitutes only a proxy statement for Ralcorp shareholders relating to the approval of the issuance of shares of Ralcorp common stock in connection with the Merger and is not an offer to sell or an offer to purchase shares of Ralcorp common stock.

 

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HELPFUL INFORMATION

In this document:

 

   

“Bank Debt” means $300.0 million in new bank debt incurred by Kraft that Splitco will assume and which will become debt obligations of Ralcorp as part of the Transactions;

 

   

“Code” means the Internal Revenue Code of 1986, as amended;

 

   

“Contributions” means the Splitco Contribution together with the Newco Contribution;

 

   

“Debt Securities” means the approximately $662.2 million in new debt securities that Splitco will issue to Kraft, that Kraft expects to exchange for debt obligations of Kraft on the closing date (and the Debt Securities will then be sold to third-party investors on or about the closing date) and which will become debt obligations of Ralcorp as part of the Transactions;

 

   

“Distribution” means the distribution by Kraft of its shares of Splitco common stock to the holders of shares of Kraft common stock by way of the exchange offer and, with respect to any shares of Splitco common stock that are not subscribed for in the exchange offer, a pro rata dividend to the holders of shares of Kraft common stock;

 

   

“External Debt Exchange” means the transfer of the Debt Securities by Kraft on or about the closing date to investment banks and/or commercial banks in exchange for debt obligations of Kraft;

 

   

“Internal Debt Exchange” means the transfer by KFG to Kraft of the Debt Securities in exchange for the repayment of intercompany debt;

 

   

“Internal Debt Repayment” means the transfer by KFG to Kraft of the cash proceeds of the Bank Debt in repayment of an equal amount of intercompany debt;

 

   

“Internal Spin” means the distribution of all of the shares of Splitco common stock held by KFG to Kraft;

 

   

“KFG” means Kraft Foods Global, Inc., a Delaware corporation and wholly owned subsidiary of Kraft;

 

   

“Kraft” means Kraft Foods Inc., a Virginia corporation, and, unless the context otherwise requires, its subsidiaries, other than Splitco and Newco and any of their respective subsidiaries;

 

   

“Kraft shareholders” means the holders of Kraft common stock;

 

   

“Newco” means Cable Newco, LLC, a Delaware limited liability company and wholly owned subsidiary of Kraft;

 

   

“Newco Contribution” means the transfer by KFG of certain of the assets related to Kraft’s Post cereals business located in the United States and cash to Newco;

 

   

Post cereals business” means the business of Kraft and its subsidiaries relating to the production, distribution, manufacture, marketing, packaging and sale of ready-to-eat dry cereals and granola (other than Back to Nature, South Beach Living (previously known as South Beach Diet) and LiveActive) that will be transferred by Kraft and its subsidiaries to Newco as part of the Newco Contribution and transferred to subsidiaries of Ralcorp as part of the Non-U.S. Transfer. See “The Transaction Agreement—The Newco Contribution” and “The Transaction Agreement—Non-U.S. Transfer;”

 

   

“Ralcorp” means Ralcorp Holdings, Inc., a Missouri corporation, and, unless the context otherwise requires, its subsidiaries;

 

   

“Ralcorp Mailman” means Ralcorp Mailman LLC, a Delaware limited liability company and wholly owned subsidiary of Ralcorp;

 

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“Splitco” means Cable Holdco, Inc., a Delaware corporation and, prior to the Merger, a wholly owned subsidiary of Kraft and, unless the context otherwise requires, its subsidiaries;

 

   

“Splitco Contribution” means the contribution by KFG of all the issued and outstanding limited liability company interests in Newco to Splitco;

 

   

“Transaction Agreement” means the RMT Transaction Agreement, dated as of November 15, 2007, among Kraft, Splitco, Ralcorp and Ralcorp Mailman, which is attached hereto as Annex A; and

 

   

“Transactions” means the transactions contemplated by the Transaction Agreement, which provides for the Newco Contribution, the Bank Debt, the Debt Securities, the Splitco Contribution, the Internal Spin, the Internal Debt Repayment, the Internal Debt Exchange, the Distribution—Split-Off, the Merger and the Upstream Merger, the Non-U.S. Transfer and the External Debt Exchange.

 

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QUESTIONS AND ANSWERS ABOUT THE TRANSACTIONS

AND THE RALCORP SPECIAL MEETING

The following are some of the questions that Ralcorp shareholders may have, and answers to those questions. These questions and answers, as well as the following summary, are not meant to be a substitute for the information contained in the remainder of this document, and this information is qualified in its entirety by the more detailed descriptions and explanations contained elsewhere in this document. Ralcorp urges its shareholders to read this document in its entirety prior to making any decision.

 

Q: Why am I receiving this document?

 

A: Ralcorp and Kraft have entered into the Transaction Agreement pursuant to which Ralcorp will acquire the Post cereals business from Kraft. Ralcorp is holding a special meeting of its shareholders in order to obtain shareholder approval of the issuance of shares of Ralcorp common stock in connection with the Merger. Ralcorp cannot complete the Merger unless the proposal relating to the issuance of Ralcorp common stock in connection with the Merger is approved by the affirmative vote of a majority of the shares of Ralcorp common stock present in person and voting on the proposal or represented by proxy and voting for the proposal (provided that the total vote cast on the proposal represents over 50% in interest of all securities entitled to vote on the proposal). When the term “Merger” is used throughout this document, it means the merger of Splitco, a wholly owned subsidiary of Kraft, with and into Ralcorp Mailman, with Ralcorp Mailman continuing as the surviving entity.

This document includes important information about the Merger and the other transactions contemplated by the Transaction Agreement (collectively, the “Transactions”) and the special meeting of the shareholders of Ralcorp. Ralcorp shareholders should read this information carefully and in its entirety. A copy of the Transaction Agreement is attached as Annex A to this document. The enclosed voting materials allow Ralcorp shareholders to vote their shares without attending the Ralcorp special meeting. The vote of Ralcorp shareholders is very important and Ralcorp encourages its shareholders to vote their proxy as soon as possible. Please follow the instructions set forth on the enclosed proxy card or on the voting instruction form provided by the record holder if the shares of Ralcorp shareholders are held in the name of their broker or other nominee.

 

Q: What is Ralcorp proposing?

 

A: Ralcorp is proposing to acquire Kraft’s Post cereals business pursuant to the Transaction Agreement. The acquisition will be effected through a series of Transactions that are described in more detail below and elsewhere in this document. At the conclusion of these Transactions:

 

   

Kraft will have no ownership interest in Ralcorp or Splitco;

 

   

the Post cereals business will be owned by Ralcorp;

 

   

Ralcorp will be the obligor on $962.2 million of new debt obligations, which will consist of (i) $300.0 million of Bank Debt of which Kraft will receive the proceeds and (ii) approximately $662.2 million of Debt Securities that will be issued by Splitco to a subsidiary of Kraft;

 

   

subject to adjustment, approximately 54% of the outstanding Ralcorp common stock is expected to be owned by pre-Merger holders of Kraft common stock, with approximately 46% expected to be owned by pre-Merger holders of Ralcorp common stock, in each case on a “fully diluted basis.” Although believed remote, if Ralcorp is required to issue additional shares of its common stock under certain circumstances, Ralcorp shareholders’ ownership interest after the Merger may be diluted to as low as 41.9% on a “fully diluted basis.” As used within this document, the term “fully diluted basis” means Ralcorp’s and Kraft’s estimate of the number of shares of Ralcorp common stock that will be outstanding on the closing date of the Transactions together with the estimated number of shares of Ralcorp common stock that will be issuable on the closing date upon exercise of any options or rights based on the treasury stock method. Ralcorp’s and Kraft’s binding estimate of the number of shares of

 

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Ralcorp common stock on a “fully diluted basis” will be made in good faith prior to the closing date using, for the purposes of the treasury stock method calculations,

 

   

$55.90 per share for the price of Ralcorp common stock for certain specified options and

 

   

the volume weighted average trading price of Ralcorp common stock on the NYSE during the 10 trading days preceding the estimation date for any options or rights granted between the date of the Transaction Agreement and the closing date of the Transactions.

 

Q: What are the key steps of the Transactions?

 

A: Below is a summary of the key steps of the Transactions. A step-by-step description of material events relating to the Transactions is set forth under “The Transactions.”

 

   

In the Transactions, Kraft will consolidate the U.S. Post cereals business under a wholly owned subsidiary of Kraft (“Splitco”).

 

   

In addition, prior to the split-off, Kraft will receive the proceeds of $300.0 million in Bank Debt that Splitco will assume, and Kraft will receive approximately $662.2 million in Debt Securities issued by Splitco.

 

   

Kraft will offer to holders of Kraft common stock the right to exchange all or a portion of their Kraft common stock for Splitco common stock (in a “split-off”). Any shares of Splitco common stock that are not subscribed for in the exchange offer will be distributed to Kraft shareholders in a spin-off that will also be consummated on the closing date. If the Distribution is effected as a spin-off, up to an aggregate of 100,000 shares of Splitco common stock will be distributed to the holders of Kraft’s deferred stock awards. Splitco has filed a registration statement on Form S-4 and Form S-1 under the assumption that the shares of Splitco will be distributed to Kraft shareholders pursuant to a split-off.

 

   

Splitco will then be merged with and into Ralcorp Mailman and holders of Splitco common stock will be issued shares of Ralcorp common stock.

 

   

If the closing were to occur on the date of this document, pre-Merger Kraft shareholders would be expected to own approximately 54%, and pre-Merger Ralcorp shareholders would be expected to own approximately 46%, of the Ralcorp common stock after the Merger, on a “fully diluted basis.” Although believed remote, if Ralcorp is required to issue additional shares of its common stock under certain circumstances, Ralcorp shareholders’ ownership interest after the Merger may be diluted to as low as 41.9% on a “fully diluted basis.”

 

   

After consummation of the Merger, Ralcorp Mailman will merge with and into Ralcorp and the Bank Debt and Debt Securities will become debt obligations of Ralcorp.

 

   

A Canadian subsidiary of Ralcorp (“Ralcorp Canada”) will purchase assets for cash and assume liabilities relating to the Post cereals business in Canada from Kraft or its affiliates that hold the relevant assets and liabilities that relate to the conduct of the Post cereals business in Canada. Any transferred assets located outside the United States or Canada will similarly be purchased by Ralcorp (or a subsidiary of Ralcorp) from the Kraft affiliate that currently owns them.

 

Q: What are the material U.S. federal income tax consequences to Ralcorp and Ralcorp shareholders resulting from the Transactions?

 

A: Ralcorp will not recognize any gain or loss for U.S. federal income tax purposes as a result of the Merger. Because Ralcorp shareholders do not participate in the Distribution or the Merger, Ralcorp shareholders will generally not recognize gain or loss upon either the Distribution or the Merger. Ralcorp shareholders should consult their own tax advisor for a full understanding of the tax consequences to them of the Distribution and the Merger. The material U.S. federal income tax consequences of the Distribution and the Merger are described in more detail under “Material U.S. Federal Income Tax Consequences of the Distribution, the Merger and Related Transactions.”

 

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Q: What will Ralcorp shareholders receive in the Merger?

 

A: Ralcorp shareholders will not directly receive any consideration in the Merger. All shares of Ralcorp common stock issued and outstanding immediately before the Merger will remain issued and outstanding after consummation of the Merger. Immediately after the Merger, Ralcorp shareholders will continue to own shares in Ralcorp, which will include the Post cereals business and additional obligations of approximately $962.2 million of debt.

 

Q: What are the principal adverse consequences of the Transactions to Ralcorp shareholders?

 

A: Following the consummation of the Transactions, Ralcorp shareholders will participate in a company that indirectly holds the Post cereals business, but their interests in this company will have been diluted. Pre-merger Ralcorp shareholders are expected to own approximately 46% of Ralcorp after the Transactions on a “fully diluted basis.” Therefore, Ralcorp’s current shareholders will not be able to exercise as much influence over the management and policies of Ralcorp immediately following the Merger as they could immediately prior to the Merger. Although believed remote, Ralcorp may be required to issue up to an additional 6.0 million shares of its common stock to the extent the exchange by Kraft of some or all of the Debt Securities at par as of the closing date would not be reasonably practicable without a reduction in the principal amount of the Debt Securities. If such shares are issued, Ralcorp shareholders’ ownership interest in Ralcorp after the Merger may be diluted to as low as 41.9% on a “fully diluted basis.” Kraft shareholders that participate in the exchange offer will be exchanging their shares of Kraft common stock for shares of Splitco common stock at a discount to the per-share value of Ralcorp common stock. The existence of a discount, along with the issuance of shares of Ralcorp common stock pursuant to the Merger may negatively affect the market price of Ralcorp common stock. Please see “Information on Kraft’s Offer to Exchange” to obtain additional information regarding the discount. Further, Ralcorp will become the obligor on approximately $962.2 million of debt, including the $300.0 million in Bank Debt and approximately $662.2 million in Debt Securities. This additional indebtedness could adversely affect the operations and financial condition of Ralcorp. Ralcorp will also incur financial, legal and accounting costs that it estimates to be approximately $15.0 million in connection with the Transactions, which may have an adverse impact on its operating results. Finally, Ralcorp’s management will be required to devote a significant amount of time and attention to the process of integrating the operations of Ralcorp and the Post cereals business. If Ralcorp management is not able to effectively manage the process, Ralcorp’s business could suffer and its stock price may decline. Please see “Risk Factors—Risks Relating to the Transactions” for a further discussion of the material risks associated with the Transactions.

 

Q: How will the Transactions impact the future liquidity and capital resources of Ralcorp?

 

A: Upon consummation of the Transactions, the $300.0 million in Bank Debt and approximately $662.2 million in Debt Securities will become debt obligations of Ralcorp. Ralcorp anticipates that its primary sources of liquidity after the Transactions will be cash provided by operations and additional credit facilities to be established. Ralcorp is currently negotiating with a syndicate of lenders the formation of a $450.0 million, three year revolving credit facility that would serve as the primary source of liquidity for working capital and operating activities, including any future acquisitions. There can be no assurance that the terms of the proposed credit facility will be consistent with those in the preceding sentence.

 

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Q: What will Kraft and Kraft shareholders receive in the Transactions?

 

A: Kraft will receive the proceeds of $300.0 million in Bank Debt that Splitco will assume and Splitco will issue approximately $662.2 million in Debt Securities that will be transferred to Kraft and that Kraft expects to exchange for debt obligations of Kraft on the closing date (and the Debt Securities will then be sold to third-party investors on or about the closing date). The Bank Debt and the Debt Securities will become debt obligations of Ralcorp as part of the Transactions.

 

     If Kraft shareholders decide to tender their shares of Kraft common stock in Kraft’s exchange offer, they will receive shares of Splitco common stock. Any shares of Splitco common stock that are not subscribed for in the exchange offer will be distributed to Kraft shareholders in a spin-off that will also be consummated on the closing date. In addition, to the extent that the Distribution is effected as a spin-off, up to an aggregate of 100,000 shares of Splitco common stock will be distributed to the holders of Kraft’s deferred stock awards. In the Merger, each share of Splitco common stock will be converted into the right to receive one fully paid and nonassesable share of Ralcorp common stock.

 

Q: Are there any conditions to the consummation of the Transactions?

 

A: Yes. Consummation of the Transactions is subject to a number of conditions, including:

 

   

the approval of Ralcorp’s shareholders of the issuance of shares of Ralcorp common stock in connection with the Merger;

 

   

the receipt of a tax opinion from counsel to Kraft;

 

   

the completion of the various transaction steps; and

 

   

other customary conditions.

In the event that Ralcorp waives the satisfaction of a material condition to the consummation of the Transactions, Ralcorp will resolicit shareholder approval of the issuance of shares of Ralcorp common stock in connection with the Merger if required to do so by law.

This document describes these conditions in more detail under “The Transaction Agreement—Conditions to the Consummation of the Transactions.”

 

Q: When will the Transactions be completed?

 

A: The Transactions are expected to be completed in mid-2008. However, it is possible that factors outside Ralcorp’s and Kraft’s control could require the parties to complete the Transactions at a later time or not complete them at all. For a discussion of the conditions to the Transactions, see “The Transaction Agreement—Conditions to the Consummation of the Transactions.”

 

Q: Are there risks associated with the Transactions?

 

A: Yes. The material risks associated with the Transactions are discussed in the section entitled “Risk Factors.” Those risks include, among others, the possibility that Ralcorp may fail to realize the anticipated benefits of the acquisition, the uncertainty that Ralcorp will be able to integrate the Post cereals business successfully, and the possibility that Ralcorp may be unable to provide benefits and services or access to equivalent financial strength and resources to the Post cereals business that historically have been provided by Kraft.

 

Q: Will there be any change to the board of directors or the executive officers of Ralcorp after the Transactions?

 

A: No. The directors and executive officers of Ralcorp immediately following the closing of the Transactions are expected to be the directors and executive officers of Ralcorp immediately prior to the closing of the Transactions.

 

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Q: What shareholder approvals are needed in connection with the Transactions?

 

A: Ralcorp cannot complete the Transactions unless the proposal relating to the issuance of shares of Ralcorp common stock in connection with the Merger is approved by a majority of the votes cast by the holders of Ralcorp common stock (provided that the total vote cast on the proposal represents over 50% in interest of all securities entitled to vote on the proposal). No vote of Kraft shareholders is required or being sought in connection with the Transactions.

 

Q: What if a Ralcorp shareholder does not vote on the issuance of shares of Ralcorp common stock in connection with the Merger?

 

A: The outcome depends on how the Ralcorp common stock is held and whether any vote is cast or not:

 

   

If a Ralcorp shareholder responds but does not indicate how he or she wants to vote on the proposals, it will be counted as a vote for the proposal.

 

   

If a Ralcorp shareholder responds and abstains from voting, it will have the same effect as a vote against the proposal.

 

   

If a Ralcorp shareholder fails to respond, his or her shares will not count towards the required quorum of 50% in interest of all shares entitled to vote on the proposal to approve the issuance of shares of Ralcorp common stock in connection with the Merger.

 

   

If a Ralcorp shareholder holds shares registered in the name of a bank, broker, or other “street name” agent, such shares will be considered to be represented at the special meeting and voted only as to those matters marked on the proxy card.

 

Q: How does the Ralcorp board of directors recommend shareholders vote?

 

A: Ralcorp’s board of directors has recommended that Ralcorp shareholders vote to approve the issuance of shares of Ralcorp common stock in connection with the Merger.

 

Q: Do Kraft shareholders have to vote to approve the Transactions?

 

A: No. No vote of Kraft shareholders is required or being sought in connection with the Transactions.

 

Q: Have any Ralcorp shareholders already agreed to vote for the issuance of Ralcorp common stock in connection with the Merger?

 

A: No.

 

Q: How do Ralcorp shareholders vote?

 

A: Ralcorp shareholders may vote before the special meeting in one of the following ways:

 

   

use the toll-free number shown on the proxy card;

 

   

visit the website shown on the proxy card to submit a proxy via the Internet;

 

   

complete, sign, date and return the enclosed proxy card in the enclosed postage-paid envelope; or

 

   

attend the special meeting and vote their shares.

If Ralcorp shareholders participate in Ralcorp’s Savings Investment Plan (SIP) and are the record holder of Ralcorp common stock in exactly the same name as they are identified by in the SIP, then they will receive a single proxy card to vote all of their shares. If the SIP account is not in exactly the same name as the shares of record of a Ralcorp shareholder, then the shareholder will receive one proxy card for his or her SIP shares and one for his or her record shares.

 

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If Ralcorp shareholders own shares through the SIP and Ralcorp has not received their vote by 5:00 p.m. Eastern time on July 14, 2008, then the trustee will vote their shares in the same proportion as the shares that are voted on behalf of the other participants in the SIP. The trustee will also vote unallocated shares of Ralcorp common stock held in the SIP in direct proportion to the voting of allocated shares in the SIP as to which voting instructions have been received, unless doing so would be inconsistent with the trustee’s duties.

 

Q: If I am not going to attend the special meeting, should I return my proxy card(s) or otherwise vote my shares?

 

A: Yes. Returning the proxy card(s) or voting by calling the toll-free number shown on the proxy card or visiting the website shown on the proxy card ensures that the shares will be represented and voted at the special meeting, even if the Ralcorp shareholders are unable to or do not attend.

 

Q: If my Ralcorp shares are held in “street name” by my broker, will my broker vote my shares for me?

 

A: Brokers will vote shares of Ralcorp shareholders on the issuance of Ralcorp common stock in connection with the Merger only if the shareholder provides instructions on how to vote. Ralcorp shareholders should follow the directions provided by their brokers regarding how to instruct their brokers to vote their shares. Shares registered in the name of a bank, broker, or other “street name” agent, for which proxies are voted on some, but not all matters, will be considered to be represented at the special meeting and voted only as to those matters marked on the proxy card.

 

Q: Can Ralcorp shareholders change their vote after they mail their proxy card?

 

A: Yes. If a holder of record of Ralcorp common stock has properly completed and submitted his or her proxy card, the Ralcorp shareholder can change his or her vote in any of the following ways:

 

   

by sending a written notice to the corporate secretary of Ralcorp that is received prior to the special meeting stating that the Ralcorp shareholder revokes his or her proxy;

 

   

by properly completing a new proxy card bearing a later date and properly submitting it so that it is received prior to the special meeting;

 

   

by logging onto the Internet website specified on the proxy card in the same manner a shareholder would to submit his or her proxy electronically or by calling the toll-free number specified on the proxy card prior to the special meeting, in each case if the Ralcorp shareholder is eligible to do so and following the instructions on the proxy card; or

 

   

by attending the special meeting and voting in person.

Simply attending the special meeting will not revoke a proxy.

If a Ralcorp shareholder holds shares in “street name” by his or her broker and has directed such person to vote his or her shares, he or she should instruct such person to change his or her vote.

For further details about how a Ralcorp shareholder can change their vote see below “—Revocation of Proxies.”

 

Q: What should Ralcorp shareholders do now?

 

A: After carefully reading and considering the information contained in this document, Ralcorp shareholders should vote their shares as soon as possible so that their shares will be represented and voted at the Ralcorp special meeting. Ralcorp shareholders should follow the instructions set forth on the enclosed proxy card or on the voting instruction form provided by the record holder if their shares are held in the name of a broker or other nominee.

 

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Q: Can Ralcorp shareholders dissent and require appraisal of their shares?

 

A: No. Ralcorp shareholders do not have dissenters’ rights in connection with the Transactions.

 

Q: Will the instruments that govern the rights of Ralcorp shareholders with respect to their shares of Ralcorp common stock after the Transactions be different from those that govern the rights of current Ralcorp shareholders?

 

A: No. The rights of Ralcorp shareholders with respect to their shares of Ralcorp common stock after the Transactions will be governed by federal and local laws and Ralcorp’s current governing documents, including:

 

   

corporate law of the State of Missouri;

 

   

restated articles of incorporation of Ralcorp; and

 

   

by-laws of Ralcorp, as amended.

 

Q: Who can answer my questions?

 

A: If a Ralcorp shareholder has any questions about the Transactions, please contact Georgeson Inc. at (800) 280-0738. Ralcorp has retained Georgeson to provide proxy solicitation services for the Transactions.

 

Q: Where can I find more information about Ralcorp and the Post cereals business?

 

A: Ralcorp shareholders can find more information about Ralcorp and the Post cereals business in the section entitled “Information on Ralcorp” and “Information on the Post Cereals Business” and from the various sources described under “Where You Can Find More Information; Incorporation by Reference.”

 

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SUMMARY

The following summary contains certain information from this document. It does not contain all the details concerning the Transactions, including information that may be important to you. To better understand the Transactions, you should carefully review this entire document and the documents it refers to. See “Where You Can Find More Information; Incorporation by Reference.”

The Companies

Ralcorp Holdings, Inc.:

Ralcorp Holdings, Inc.

800 Market St.

Suite 2600

St Louis, MO 63101

Telephone: (314) 877-7046

Ralcorp is primarily engaged in the manufacturing, distribution and marketing of store brand (private label) food products in the grocery, mass merchandise, drug and foodservice channels. Ralcorp products include: ready-to-eat and hot cereal products; store brand and value brand snack mixes and corn-based snacks; store brand and branded crackers and cookies; foodservice, store brand and branded frozen griddle products (pancakes, waffles, French toast and custom griddle products) and biscuits; foodservice and store brand breads, rolls and muffins; store brand wet-filled products such as salad dressings, mayonnaise, peanut butter, syrups, jams and jellies, and specialty sauces; and store brand and value branded snack nuts and chocolate candy. During fiscal year 2007 Ralcorp’s businesses were comprised of four reportable business segments: Cereals, Crackers & Cookies (consisting of Ralston Foods and Bremner, Inc.); Frozen Bakery Products; Dressings, Syrups, Jellies & Sauces (The Carriage House Companies, Inc.); and Snack Nuts & Candy (Nutcracker Brands, Inc.).

Ralcorp Mailman LLC:

Ralcorp Mailman LLC

c/o Ralcorp Holdings, Inc.

800 Market St.

Suite 2600

St. Louis, MO 63101

(314) 877-7046

Ralcorp Mailman is a newly formed, wholly owned subsidiary of Ralcorp and was organized specifically for the purpose of completing the Merger. Ralcorp Mailman has engaged in no business activities to date and it has no material assets or liabilities of any kind, other than those incident to its formation and in connection with the Transactions.

Kraft Foods Inc.:

Kraft Foods Inc.

Three Lakes Drive

Northfield, IL 60093

Telephone: (847) 646-5494

Kraft is one of the world’s largest food and beverage companies, with 2007 net revenues, including the Post cereals business, of more than $37 billion. For over 100 years, Kraft has offered consumers delicious and wholesome foods that fit the way they live. Kraft markets a broad portfolio of iconic brands in more than 150 countries, including nine brands with revenues exceeding $1 billion: Kraft cheeses, dinners and dressings; Oscar

 

 

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Mayer meats; Philadelphia cream cheese; Maxwell House coffee; Nabisco cookies and crackers and its Oreo brand; Jacobs coffees; Milka chocolates and LU biscuits. Kraft is a fully independent company and is listed in the Standard & Poor’s 100 and 500 indexes.

Cable Holdco, Inc.:

Cable Holdco, Inc.

c/o Kraft Foods, Inc.

Three Lakes Drive

Northfield, IL 60093

Telephone: (847) 646-5494

Cable Holdco, Inc. is a newly-formed, wholly owned subsidiary of KFG (“Splitco”) and was organized specifically to transfer all of the U.S. assets and liabilities of the Post cereals business to Ralcorp. Splitco has engaged in no business activities to date and it has no material assets or liabilities of any kind, other than those incident to its formation and those incurred in connection with the Transactions. Unless the context requires otherwise this document describes Splitco as if it held the Post cereals business for all periods discussed.

The Transactions

On November 15, 2007, Ralcorp and Kraft announced that they had entered into the Transaction Agreement, which provides for Ralcorp’s acquisition of Kraft’s Post cereals business. In the Transactions, Kraft will consolidate the U.S. assets and liabilities of the Post cereals business under Splitco. In addition, prior to the split-off of Splitco, Kraft will receive the proceeds of $300.0 million in Bank Debt that Splitco will assume, and Kraft will receive approximately $662.2 million in Debt Securities issued by Splitco. On the closing date of the Transactions, Kraft will split-off Splitco. Splitco will then be merged with and into Ralcorp Mailman, and holders of Splitco common stock will be issued shares of Ralcorp common stock. Ralcorp anticipates distributing approximately 30,459,625 shares of Ralcorp common stock to holders of Splitco common stock, which would have a value of approximately $1.7 billion based on the closing sales price of Ralcorp shares on the NYSE on June 13, 2008. If the closing were to occur on the date of this document, pre-Merger Kraft shareholders would be expected to own approximately 54%, and pre-Merger Ralcorp shareholders would be expected to own approximately 46%, of the Ralcorp common stock after the Merger, on a “fully diluted basis.” Although believed remote, Ralcorp may be required to issue up to an additional 6.0 million shares of its common stock to the extent that the exchange by Kraft of some or all of the Debt Securities for debt obligations of Kraft and the subsequent sale of the Debt Securities to third-party investors at par as of the closing date would not be reasonably practicable without a reduction in the principal amount of the Debt Securities. If such shares are issued, Ralcorp shareholders’ ownership interest in Ralcorp after the Merger may be diluted to as low as 41.9% on a “fully diluted basis.”

After consummation of the Merger, Ralcorp Mailman will merge with and into Ralcorp and the Bank Debt and Debt Securities (obligations with an aggregate principal amount of approximately $962.2 million) will become debt obligations of Ralcorp. A Canadian subsidiary of Ralcorp, referred to as “Ralcorp Canada,” will then purchase assets for cash and assume liabilities relating to the Post cereals business in Canada from Kraft or its affiliates that hold the relevant assets and liabilities that relate to the conduct of the Post cereals business in Canada. The discussion in this document of the Transactions is qualified by reference to the Transaction Agreement, which is attached hereto as Annex A.

During the initial bidding process for the Post cereals business, Kraft requested that potential buyers seek to maximize the cash portion of the valuation of the business while ensuring that Kraft shareholders own at least 55% of the combined company on a fully diluted basis. Ralcorp and Kraft determined the terms of the financing to comply with the above requests while still maintaining Ralcorp’s approximate pre-Transaction debt to equity profile.

 

 

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Below is a step-by-step description of the sequence of material events relating to the Transactions.

 

Step 1

   Newco Contribution
   Kraft Foods Global, Inc., or “KFG,” which is a wholly owned subsidiary of Kraft, will transfer to Newco, which is a newly-formed, wholly owned, indirect subsidiary of Kraft, assets relating to the Post cereals business in the United States, along with sufficient cash to purchase a specific Kraft facility and assets related to the conduct of the Post cereals business in countries other than the United States (the “Newco Contribution”). Newco will also assume liabilities associated with the assets relating to the Post cereals business in the United States. Following the Newco Contribution, Newco will purchase the specific Kraft facility using cash contributed to it by KFG.

Step 2

   Bank Debt
   KFG will incur new indebtedness in the form of a bank credit facility (the “Bank Debt”) and will receive $300.0 million in net cash proceeds. Upon consummation of the Transactions, the Bank Debt will become debt obligations of Ralcorp.

Step 3

   Splitco Contribution; Issuance of Splitco Common Stock; Issuance of Debt Securities
  

In the “Splitco Contribution,” KFG will contribute the limited liability company interests in Newco to Splitco, and Newco will become a wholly owned subsidiary of Splitco, in exchange for:

 

•   the issuance by Splitco to KFG of no less than 30.32 million shares of Splitco common stock as described below;

 

•   the issuance by Splitco to KFG of approximately $662.2 million in aggregate principal amount of debt securities (the “Debt Securities”) as described below; and

 

•   the assumption by Splitco of the $300.0 million of Bank Debt.

 

The Newco Contribution and the Splitco Contribution are referred to together as the “Contributions.”

 

The Debt Securities will consist of approximately $662.2 million in aggregate principal amount of debt securities of Splitco. The Debt Securities will have a minimum term of ten years, will not be callable for the first five years of the term, will carry an interest rate and will include other terms as required by market conditions at issuance to permit the Debt Securities to be exchanged for debt obligations of Kraft and then sold to third-party investors at par upon issuance. Upon consummation of the Transactions, the Debt Securities will become debt obligations of Ralcorp.

 

Ralcorp and Kraft expect the Debt Securities to be transferred by Kraft on or about the closing date to investment banks and/or commercial banks in exchange for debt obligations of Kraft and then to be sold to third-party investors pursuant to an exemption from registration under the Securities Act of 1933 (either in a private placement or a “Rule 144A” transaction). To the extent that the exchange by Kraft of some or all of the Debt Securities for debt obligations of Kraft and the subsequent sale of the Debt Securities to third-party investors at par as of the closing date would not be reasonably practicable without a reduction in the principal amount of the Debt Securities, then the principal amount of the Debt Securities will be reduced to the maximum amount that could be so exchanged and sold at par and the amount of the reduction will be replaced with additional shares of Splitco common stock having an equivalent aggregate fair market value, except that not more than an additional 6.0 million shares of Splitco common stock may be issued in the Splitco Contribution. Any such additional shares will be distributed along with the other shares of Splitco common stock and converted into the right to receive shares of Ralcorp common stock in the Merger.

 

 

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Step 4

   Kraft Transfers
  

KFG will distribute all of the shares of Splitco common stock held by KFG to Kraft (the “Internal Spin”), which Kraft will distribute in the Distribution as described below.

 

KFG will transfer to Kraft the cash proceeds of the Bank Debt in repayment of an equal amount of intercompany debt (the “Internal Debt Repayment”).

 

KFG will transfer to Kraft the Debt Securities in repayment of intercompany debt (the “Internal Debt Exchange”).

Step 5

   Distribution—Split-off
  

Kraft will offer to holders of Kraft common stock the right to exchange all or a portion of their Kraft common stock for shares of Splitco common stock (in a “split-off”).

 

Any shares of Splitco common stock that are not subscribed for in the split-off will be distributed to Kraft shareholders in a spin-off that will also be consummated on the closing date of the Transactions. In addition, to the extent that the Distribution is effected as a spin-off, up to an aggregate of 100,000 shares of Splitco common stock will be distributed to the holders of Kraft’s deferred stock awards.

   Splitco has filed a registration statement on Form S-4 and Form S-1 under the assumption that the shares of Splitco will be distributed to Kraft shareholders pursuant to a split-off. Based on market conditions prior to closing, Kraft will determine whether the Splitco shares will be distributed to Kraft’s shareholders in a spin-off or a split-off and, once a final decision is made, this document may be amended to reflect that decision.

Step 6

   Merger
  

Immediately after the Distribution, and on the closing date of the Transactions, Splitco will merge with and into Ralcorp Mailman, with Ralcorp Mailman as the surviving entity (the “Merger”). Each share of Splitco common stock will be converted into the right to receive one fully paid and nonassessable share of Ralcorp common stock.

 

After completion of the Merger, approximately 54% of Ralcorp common stock is expected to be held by pre-Merger holders of Kraft common stock on a “fully diluted basis” and approximately 46% of Ralcorp common stock is expected to be held by pre-Merger Ralcorp shareholders on a “fully diluted basis.” Although believed remote, if Ralcorp is required to issue additional shares of its common stock under certain circumstances, Ralcorp shareholders’ ownership interest after the Merger may be diluted to as low as 41.9% on a “fully diluted basis.” Ralcorp, through its subsidiary, Newco, will hold the assets and liabilities of the Post cereals business in the United States.

Step 7

   Upstream Merger
   Immediately following the Merger, Ralcorp Mailman will merge with and into Ralcorp, with Ralcorp as the surviving entity (the “Upstream Merger”). After giving effect to the Upstream Merger, Newco will be a direct, wholly owned subsidiary of Ralcorp and the Debt Securities and the Bank Debt will be debt obligations of Ralcorp.

 

 

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Step 8    Non-U.S. Transfer
   A Canadian subsidiary of Ralcorp (“Ralcorp Canada”) will purchase assets and assume liabilities relating to the Post cereals business in Canada from the Kraft affiliate or affiliates that hold the relevant assets and liabilities that relate to the conduct of the Post cereals business in Canada (“Kraft Canada”). Any transferred assets located outside the United States or Canada will similarly be purchased by Ralcorp (or a subsidiary of Ralcorp) and certain related liabilities will be assumed from the Kraft affiliate that currently owns them. This document refers to the transfer of the assets and liabilities located outside the United States as the “Non-U.S. Transfer.” The purchase price paid in the Non-U.S. Transfer will be the fair market value of the assets and liabilities transferred, and will be paid from cash contributed by Kraft in the Newco Contribution.

Step 9

   Sale of Debt Securities to Third-Party Investors; External Debt Exchange
   As described in Step 3 above, Ralcorp and Kraft expect the Debt Securities to be transferred by Kraft on or about the closing date to investment banks and/or commercial banks in exchange for debt obligations of Kraft (the “External Debt Exchange”) and then to be sold by such banks to third-party investors pursuant to an exemption from registration under the Securities Act of 1933 in either a private placement or a “Rule 144A” transaction.

 

 

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Set forth below are diagrams that graphically illustrate, in simplified form, the existing corporate structure, the corporate structure immediately following the Contributions and the Distribution, and the corporate structure immediately following the consummation of the Transactions contemplated by the Transaction Agreement.

LOGO

LOGO

 

 

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LOGO

After completion of all of the steps mentioned above, Ralcorp’s subsidiary, Newco, will hold the assets and liabilities of the Post cereals business and Ralcorp will be the obligor on the Bank Debt and Debt Securities; Kraft will receive the $300.0 million in cash proceeds of the Bank Debt and will exchange the $662.2 million in Debt Securities for debt obligations of Kraft (and the Debt Securities will then be sold to third-party investors). Pre-Merger holders of Kraft common stock are expected to hold approximately 54% of Ralcorp common stock and pre-Merger Ralcorp shareholders are expected to hold approximately 46% of Ralcorp common stock, in each case, on a “fully diluted basis.” Although believed remote, if Ralcorp is required to issue additional shares of its common stock under certain circumstances, Ralcorp shareholders’ ownership interest after the Merger may be diluted to as low as 41.9% on a “fully diluted basis.”

In connection with the Transactions, Ralcorp, Ralcorp Mailman, Kraft, KFG and/or Splitco will also enter into other agreements relating to, among other things, tax allocation, the license of certain intellectual property, the provision of certain transition services during a transition period following the consummation of the Transactions, and co-manufacturing agreements. See “Additional Agreements.”

 

 

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SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA

The following summary combined financial data of the Post cereals business and summary consolidated financial data of Ralcorp are being provided to help you in your analysis of the financial aspects of the Transactions. You should read this information in conjunction with the financial information included elsewhere and incorporated by reference into this document. See “Where You Can Find More Information; Incorporation by Reference,” “Information on the Post Cereals Business,” “Information on Ralcorp,” and “Selected Historical and Pro Forma Financial Data.”

Summary Historical Financial Data of the Post Cereals Business

The following summary historical combined financial data of the Post cereals business for the years ended December 29, 2007, December 30, 2006, and December 31, 2005 and the financial data at December 29, 2007 has been derived from the audited combined financial statements of the Post cereals business. The following summary historical condensed combined financial data of the Post cereals business for the three-month periods ended March 29, 2008 and March 31, 2007 and the financial data at March 29, 2008 has been derived from the unaudited condensed combined financial statements of the Post cereals business and is not necessarily indicative of the results for the remainder of the fiscal year or any future period. The management of the Post cereals business believes that the unaudited condensed combined financial data reflects all normal and recurring adjustments necessary for a fair presentation of the results for the interim periods presented. This information is only a summary and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Post Cereals Business” and the financial statements of the Post cereals business and the notes thereto included elsewhere in this document.

 

     Condensed
Combined Statements of Earnings
for the Three Months Ended
   Combined Statements of Earnings
for the Years Ended
(in millions)    March 29,
2008
   March 31,
2007
   December 29,
2007
   December 30,
2006
   December 31,
2005

Net revenues

   $ 270    $ 265    $ 1,103    $ 1,093    $ 1,091

Cost of sales

     157      158      640      637      612
                                  

Gross profit

     113      107      463      456      479

Marketing, administration and research costs

     53      63      228      224      222

Selling expense

     10      10      39      33      38

Asset impairment and exit costs

     2      1      15      9      2
                                  

Operating income

     48      33      181      190      217

Provision for income taxes

     18      12      64      68      81
                                  

Net earnings

   $ 30    $ 21    $ 117    $ 122    $ 136
                                  

 

(in millions)    Condensed
Combined Balance Sheet Data
at March 29, 2008

Total inventories

   $ 95

Total current assets

     174

Property, plant and equipment, net

     441

Total assets

     931

Total current liabilities

     115

Total liabilities

     313

Total equity

     618

Summary Historical Financial Data of Ralcorp

The following table sets forth selected historical consolidated financial data of Ralcorp for each of the three fiscal years ended September 30, 2007 and for the six-month periods ended March 31, 2008 and 2007. The selected historical consolidated financial data for each of the three years ended September 30, 2007 was derived from Ralcorp’s audited consolidated financial statements as of and for each of the years in the three-year period ended September 30, 2007. The financial data for the six-month periods ended March 31, 2008 and 2007 has

 

 

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been derived from the unaudited condensed consolidated financial statements of Ralcorp and is not necessarily indicative of the results for the remainder of the fiscal year or any future period. Ralcorp’s management believes that the unaudited condensed consolidated financial statements reflect all adjustments necessary, consisting only of normal recurring accruals, for a fair presentation of the results for the interim periods presented. This information is only a summary and should be read in conjunction with the financial statements of Ralcorp and the notes thereto and the “Management’s Discussion and Analysis” section contained in Ralcorp’s annual report on Form 10-K for the year ended September 30, 2007 and quarterly report on Form 10-Q for the period ended March 31, 2008, each of which is incorporated by reference into this document. See “Where You Can Find More Information; Incorporation by Reference.”

 

    As of and for the
Six Months Ended
March 31,
    As of and for the Year Ended
September 30,
 
(in millions, except per share data)   2008     2007     2007     2006     2005  

Statement of Earnings Data

         

Net sales (a)

  $ 1,292.3     $ 1,041.7     $ 2,233.4     $ 1,850.2     $ 1,675.1  

Cost of products sold

    (1,076.3 )     (837.4 )     (1,819.2 )     (1,497.2 )     (1,339.1 )
                                       

Gross profit

    216.0       204.3       414.2       353.0       336.0  

Selling, general and administrative expenses

    (135.5 )     (125.8 )     (252.8 )     (226.4 )     (215.1 )

Interest expense, net

    (22.5 )     (18.8 )     (42.3 )     (28.1 )     (16.5 )

Gain (loss) on forward sale contracts (b)

    62.3       (52.5 )     (87.7 )     (9.8 )     —    

Gain on sale of securities (c)

    —         —         —         2.6       —    

Restructuring charges (d)

    (1.4 )     —         (0.9 )     (0.1 )     (2.7 )

Litigation settlement income (e)

    —         —         —         —         1.8  
                                       

Earnings before income taxes and equity earnings/loss

    118.9       7.2       30.5       91.2       103.5  

Income taxes

    (41.9 )     (1.8 )     (7.5 )     (29.9 )     (36.6 )

Equity in (loss) earnings of Vail Resorts, Inc., net of related deferred income taxes

    3.9       2.7       8.9       7.0       4.5  
                                       

Net earnings

    80.9       8.1       31.9       68.3       71.4  
                                       

Earnings per share:

         

Basic

  $ 3.16     $ 0.30     $ 1.20     $ 2.46     $ 2.41  

Diluted

  $ 3.08     $ 0.29     $ 1.17     $ 2.41     $ 2.34  

Weighted average shares outstanding:

         

Basic

    25.5       26.8       26.4       27.7       29.6  

Diluted

    26.2       27.4       27.1       28.2       30.4  

Balance Sheet Data

         

Cash and cash equivalents

  $ 15.7       $ 9.9     $ 19.1     $ 6.2  

Working capital (excl. cash and cash equivalents)

    155.9         165.3       170.3       92.4  

Total assets

    1,867.9         1,853.1       1,507.5       1,269.5  

Long-term debt

    745.8         763.6       552.6       422.0  

Other long-term liabilities

    305.4         382.6       281.5       157.8  

Shareholders’ equity

    554.1         483.4       476.4       518.3  

Other Data

         

Cash provided (used) by:

         

Operating activities

  $ 63.0     $ 125.8     $ 218.3     $ 52.8     $ 161.0  

Investing activities

    (32.3 )     (345.7 )     (387.5 )     (162.2 )     (156.3 )

Financing activities

    (24.9 )     214.3       160.0       122.3       (22.2 )

Depreciation and amortization

    44.9       36.7       82.4       66.8       55.8  

Dividends declared per share

  $ —       $ —       $ —       $ —       $ —    

 

 

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(a) Ralcorp acquired Pastries Plus of Utah, Inc., Bloomfield Bakers, and Cottage Bakery, Inc. in 2007; Parco Foods, L.L.C. and Western Waffles, Ltd. in 2006; and Medallion Foods, Inc. in 2005.

 

   

On August 14, 2007, Ralcorp acquired certain assets and lease obligations of Pastries Plus of Utah, a competing manufacturer of branded and private label thaw-and-sell cookies with annual gross sales of approximately $10.

 

   

Bloomfield Bakers, acquired on March 16, 2007, is a manufacturer of nutritional and cereal bars and natural and organic specialty cookies, crackers, and cereals. The acquired business, which had net sales of $188 for its fiscal year ended December 31, 2006, operates two leased manufacturing facilities in Azusa and Los Alamitos, California and employs approximately 500 people.

 

   

Cottage Bakery, acquired on November 10, 2006, is a manufacturer of par-baked breads and frozen dough sold in the retail and foodservice channels. The acquired business operates one manufacturing facility in Lodi, California, employs approximately 690 people, and had gross sales of approximately $125 for its fiscal year ended June 30, 2006.

 

   

Parco Foods, acquired on February 7, 2006, is a manufacturer of cookies primarily in the in-store bakery channel which had net sales of approximately $50 for the year ended December 25, 2005.

 

   

Western Waffles, acquired on November 15, 2005, is a Canadian manufacturer of private label frozen griddle products with three manufacturing facilities, approximately 370 employees, and annual net sales at acquisition of approximately $75.

 

   

Medallion Foods, acquired on June 22, 2005, is a manufacturer of value brand and private label corn-based chips and extruded corn products. The acquired company employs 270 employees at its plant in Newport, Arkansas and had net sales of approximately $43 for the year ended December 31, 2004.

 

(b) During the quarter ended December 31, 2005, Ralcorp entered into a forward sale contract relating to 1.78 million shares of its Vail common stock. Under the contract, at the maturity dates (half on November 21, 2008 and half on November 22, 2010) Ralcorp can deliver a variable number of shares of Vail stock (or cash) to the counterparty. During the quarter ended June 30, 2006, Ralcorp entered into a similar agreement relating to 1.97 million additional shares of its Vail common stock, with maturity dates of November 18, 2009 and November 16, 2011. A third contract was entered into during the quarter ended December 31, 2006, relating to 1.2 million additional shares, with a maturity date of November 15, 2013. The calculation of the number of shares ultimately delivered will depend on the price of Vail shares at settlement and includes a price collar. Ralcorp received a total of $140.0 under the discounted advance payment features on the contracts. Amortization of the related discounts is included in “Interest expense, net” on the statements of earnings and totaled $4.3 for the six months ended March 31, 2008, $4.0 for the six months ended March 31, 2007, $8.3 for the year ended September 30, 2007 and $3.7 for the year ended September 30, 2006. At March 31, 2008, and September 30, 2007 and 2006, the fair value of the contracts was $191.5, $249.5 and $124.0, respectively. Because Ralcorp accounts for its investment in Vail Resorts using the equity method, these contracts, which are intended to hedge the future sale of those shares, are not eligible for hedge accounting. Therefore, any gains or losses on the contracts are immediately recognized in earnings.

 

(c) On March 21, 2006, Ralcorp sold 100,000 of its shares of Vail Resorts for a total of $3.8. The shares had a carrying value of $1.2, so the transaction resulted in a $2.6 gain.

 

(d) For the six months ended March 31, 2008, the majority of charges were due to the accrual of certain employee termination benefits related to the closing of the Billerica, Massachusetts facility. In 2007, charges were due to the closing of the Blue Island, Illinois facility. The majority of these charges related to employee termination benefits. In 2006, restructuring costs consisted of miscellaneous charges related to the closing of the plant in City of Industry, California. In 2005, charges were due to employee termination benefits and other charges related to the closing of the City of Industry plant as well as a write-down of property to be sold related to the closing of the Kansas City, Kansas plant.

 

(e) Ralcorp received payments in settlement of legal claims, primarily related to antitrust litigation, which are shown net of related expenses.

 

 

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Summary Unaudited Pro Forma Combined Condensed Financial Data of Ralcorp

This summary unaudited combined pro forma financial data is being provided for illustrative purposes only, and this information should not be relied upon for purposes of making any investment or other decisions. Ralcorp and the Post cereals business may have performed differently had they been combined during the period presented. You should not rely on the unaudited combined financial data as being indicative of the results that would have been achieved had Ralcorp and the Post cereals business been combined during the period presented or of the future results of Ralcorp following the Transactions.

 

(in millions)    As of and for the
Six Months Ended
March 31, 2008
   For the
Year Ended
September 30, 2007

Net sales

   $ 1,818.0    $ 3,336.1

Gross profit

     443.2      886.0

Net earnings

     116.5      99.0

Earnings per share:

     

Basic

   $ 2.08    $ 1.74

Diluted

   $ 2.06    $ 1.72

Weighted average shares outstanding:

     

Basic

     55.9      56.8

Diluted

     56.6      57.5

Working capital

   $ 230.4   

Total assets

     5,468.6   

Long-term debt

     1,708.0   

Other long-term liabilities

     1,036.8   

Shareholders’ equity

     2,338.2   

Comparative Historical and Pro Forma Per Share Data

The following table sets forth certain historical and pro forma per share data for Ralcorp. The historical data has been derived from and should be read together with the audited consolidated financial statements of Ralcorp and related notes thereto contained in Ralcorp’s Form 10-K for the fiscal year ended September 30, 2007, and Ralcorp’s unaudited condensed consolidated financial statements and related notes thereto contained in Ralcorp’s Form 10-Q for the period ended March 31, 2008, which are incorporated by reference into this document and the audited financial statements of the Post cereals business and related notes contained thereto, which are included elsewhere in this document, and in the documents incorporated by reference herein that are described under the section entitled “Where You Can Find More Information; Incorporation by Reference.” The pro forma data has been derived from the selected unaudited pro forma financial data of Ralcorp included elsewhere in this document.

This summary of comparative historical and pro forma per share data is being provided for illustrative purposes only. Ralcorp and the Post cereals business may have performed differently had the Transactions occurred prior to the period presented. You should not rely on the pro forma per share data presented as being indicative of the results that would have been achieved had Ralcorp and the Post cereals business been combined during the period presented or of the future results of Ralcorp following the Transactions.

 

     As of and for the
Six Months Ended
March 31, 2008
   As of and for the
Year Ended
September 30, 2007
     Historical    Pro Forma    Historical    Pro Forma

Earnings per share—basic

   $ 3.16    $ 2.08    $ 1.20    $ 1.74

Earnings per share—diluted

     3.08      2.06      1.17      1.72

Dividends declared per share

     —        —        —        —  

Book value per share

     21.54      41.66      18.76      n/a

 

 

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Ralcorp Common Stock Market Price

Ralcorp’s common stock is currently traded on the NYSE under the symbol “RAH.” On November 14, 2007, the last trading day before the announcement of the Transactions, the last sale price of Ralcorp common stock reported by the NYSE was $55.47. On June 13, 2008, the last sale price of Ralcorp common stock reported by the NYSE was $57.00. The following table sets forth the high and low sale prices of Ralcorp common stock for the periods indicated. For current price information, Ralcorp shareholders are urged to consult publicly available sources. See “Selected Historical and Pro Forma Financial Data—Historical Common Stock Market Price.”

 

     Ralcorp Common Stock
         High            Low    

Fiscal Year Ended September 30, 2006

     

First Quarter

   $ 45.10    $ 38.42

Second Quarter

   $ 40.35    $ 34.30

Third Quarter

   $ 43.00    $ 35.22

Fourth Quarter

   $ 54.16    $ 39.80

Fiscal Year Ended September 30, 2007

     

First Quarter

   $ 52.85    $ 47.38

Second Quarter

   $ 64.64    $ 50.61

Third Quarter

   $ 69.59    $ 51.86

Fourth Quarter

   $ 62.80    $ 50.53

Fiscal Year Ending September 30, 2008

     

First Quarter

   $ 64.80    $ 53.13

Second Quarter

   $ 61.72    $ 51.26

Third Quarter (through June 13, 2008)

   $ 63.15    $ 55.19

Ralcorp Dividend Policy

Ralcorp paid a special dividend of $1.00 per share on October 22, 2004, but has no plans to pay cash dividends in the foreseeable future.

Repurchases of Ralcorp Common Stock

Ralcorp initiated a stock repurchase program in August 2005. Ralcorp purchased a total of $10.3 million of its common stock (243,000 shares) in fiscal 2005, $134.9 million (3,422,000 shares) in fiscal 2006, $78.8 million (1,382,500 shares) in fiscal 2007 and $5.6 million (100,000 shares) to date in fiscal 2008. On May 25, 2006, the board of directors of Ralcorp authorized the repurchase of up to 2,000,000 additional shares of which 517,500 remain available for repurchase as of March 31, 2008. From time to time, Ralcorp may repurchase its common stock through plans established under Rule 10b5-1 of the Exchange Act. Typically, these plans direct a broker to purchase a variable amount of shares each day (usually between 0 and 50,000) depending on the previous day’s closing share price. Pursuant to the Transaction Agreement, until the closing of the Transactions Ralcorp may repurchase shares of Ralcorp common stock only to the extent that the shares have been issued after execution of the Transaction Agreement in connection with the exercise of rights, warrants or options of Ralcorp. In addition, following the closing date of the Transactions, Ralcorp may repurchase shares of Ralcorp common stock only so long as such repurchases comply with the provisions of the tax allocation agreement.

 

 

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RISK FACTORS

You should carefully consider each of the following risks and all of the other information contained in this document and the annexes hereto. Some of the risks described below relate principally to the business and the industry in which Ralcorp, including the Post cereals business, will operate after the Transactions, while others relate principally to the Transactions. The remaining risks relate principally to the securities markets generally and ownership of Ralcorp common stock. The risks described below are not the only risks facing Ralcorp following the Transactions. Additional risks and uncertainties not currently known or that are currently deemed to be immaterial may also materially and adversely affect Ralcorp’s business operations and financial condition or the price of Ralcorp’s common stock following completion of the Transactions.

Risks Related to the Transactions

The calculation of the merger consideration will not be adjusted in the event the value of the business or assets of the Post cereals business declines before the Merger is completed.

The calculation of the number of shares of Ralcorp common stock to be distributed in the Merger will not be adjusted in the event the value of the business or assets of the Post cereals business declines prior to the consummation of the Merger or the value of Ralcorp increases prior to the Merger. Ralcorp will not be required to consummate the Merger if there has been any material adverse effect (as this term is described in “The Transaction Agreement—Representations and Warranties”) on the Post cereals business. However, Ralcorp will not be permitted to terminate the Transaction Agreement or resolicit the vote of Ralcorp shareholders because of any changes in the market prices of Ralcorp’s common stock or any changes in the value of the Post cereals business that do not rise to the level of a material adverse effect on the Post cereals business.

Current Ralcorp shareholders’ ownership interest in Ralcorp may be diluted to less than 46%.

Following the consummation of the Merger, Ralcorp’s shareholders will, in the aggregate, own a significantly smaller percentage of Ralcorp than they will own of Ralcorp immediately prior to the Merger. Following consummation of the Merger, Ralcorp’s shareholders immediately prior to the Merger are expected to collectively own approximately 46% of Ralcorp on a “fully diluted basis.” Consequently, Ralcorp’s shareholders, as a group, will be able to exercise less influence over the management and policies of Ralcorp following the Merger than they will exercise over the management and policies of Ralcorp immediately prior to the Merger. In addition, to the extent the exchange by Kraft of some or all of the Debt Securities at par as of the closing date would not be reasonably practicable without a reduction in the principal amount of the Debt Securities, the number of shares of Ralcorp common stock issued in connection with the Merger may be increased by up to 6.0 million shares and, as a result, current Ralcorp shareholders’ ownership interest in Ralcorp may be diluted to as low as 41.9% on a “fully diluted basis.”

Ralcorp expects that it will incur significant costs related to the consummation of the Transactions that could have an adverse effect on its operating results.

Ralcorp will incur financial, legal and accounting costs that it estimates will be approximately $15.0 million in connection with the Transactions. In addition, Ralcorp anticipates that it will incur significant costs in connection with the integration of the Post cereals business and Ralcorp’s current operations. These costs may have a negative impact on Ralcorp’s cash flows and operating results.

Ralcorp’s substantial long-term indebtedness and liabilities following the Transactions, which would have been approximately $2.74 billion on a pro forma basis as of March 31, 2008, could adversely affect its operations and financial condition.

If the Transactions are consummated, Ralcorp will have a significant amount of indebtedness. As of March 31, 2008, on a pro forma basis after giving effect to the Transactions, Ralcorp would have had approximately $2.74 billion of outstanding long-term indebtedness and liabilities.

 

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After the consummation of the Transactions, Ralcorp’s indebtedness could have important consequences, including but not limited to:

 

   

limiting its ability to invest operating cash flow in its operations due to debt service requirements;

 

   

limiting its ability to obtain additional debt or equity financing for working capital expenditures, product development or other general corporate purposes;

 

   

limiting its operational flexibility due to the covenants contained in its debt agreements;

 

   

requiring it to dispose of significant assets in order to satisfy its debt service obligations;

 

   

limiting its flexibility in planning for, or reacting to, changes in its business or industry, thereby limiting its ability to compete with companies that are not as highly leveraged; and

 

   

increasing its vulnerability to economic downturns and changing market conditions.

After consummation of the Transactions, Ralcorp’s ability to meet its expenses and debt service obligations will depend on the factors described above, as well as its future performance, which will be affected by financial, business, economic and other factors, including potential changes in consumer preferences, the success of product and marketing innovation and pressure from competitors. If Ralcorp does not generate enough cash to pay its debt service obligations, it may be required to refinance all or part of its existing debt, sell its assets, borrow more money or raise equity. There is no assurance that Ralcorp will be able to, at any given time, refinance its debt, sell its assets, borrow more money or raise equity on terms acceptable to it or at all.

Sales of Ralcorp common stock after the Transactions may negatively affect the market price of Ralcorp common stock.

The shares of Ralcorp common stock issued in the Transactions to holders of Splitco common stock will generally be eligible for immediate resale. The market price of Ralcorp common stock could decline as a result of sales of a large number of shares of Ralcorp common stock in the market after the consummation of the Transactions or even the perception that these sales could occur.

It is expected that immediately after the consummation of the Transactions, Kraft shareholders or former Kraft shareholders will hold approximately 54% of Ralcorp’s common stock and Ralcorp’s existing shareholders will hold approximately 46% of Ralcorp’s common stock, in each case on a “fully diluted basis.” Currently, Kraft shareholders include index funds that have performance tied to the Standard & Poor’s 500 Index or other stock indices, and institutional investors subject to various investing guidelines. Because Ralcorp may not be included in these indices following consummation of the Transactions or may not meet the investing guidelines of some of these institutional investors, these index funds and institutional investors may decide to or may be required to sell the Ralcorp common stock that they receive in the Transactions. In addition, the investment fiduciary of Kraft’s defined contribution plans may decide to sell any Ralcorp common stock that the trust receives in the Transactions, or not participate in the exchange offer, in response to fiduciary obligations under applicable law. These sales, or the possibility that these sales may occur, may also make it more difficult for Ralcorp to obtain additional capital by selling equity securities in the future at a time and at a price that it deems appropriate.

The historical financial information of the Post cereals business may not be representative of its results if it had been operated independently of Kraft and, as a result, may not be a reliable indicator of its future results.

The Post cereals business is currently a business unit of Kraft. Consequently, the financial information of the Post cereals business included in this document has been derived from the consolidated financial statements and accounting records of Kraft and reflects assumptions and allocations made by Kraft. The financial position, results of operations and cash flows of the Post cereals business presented may be different from those that would have resulted had the Post cereals business been operated independently. For example, in preparing the Post cereals business financial statements, Kraft made an appropriate allocation of costs and expenses that are

 

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attributable to the Post cereals business. However, these costs and expenses reflect the costs and expenses attributable to the Post cereals business operated as part of a larger organization and do not reflect costs and expenses that would be incurred by the Post cereals business had it been operated independently. As a result, the historical financial information of the Post cereals business may not be a reliable indicator of future results.

Ralcorp may be unable to provide benefits and services or access to equivalent financial strength and resources to the Post cereals business that historically have been provided by Kraft.

As an integrated business unit of Kraft, the Post cereals business has been able to receive benefits and services from Kraft and has been able to benefit from Kraft’s financial strength and extensive business relationships. After the Transactions, the Post cereals business will be owned by a subsidiary of Ralcorp and will no longer benefit from Kraft’s resources. While Ralcorp has entered into separation related agreements and Kraft has agreed to provide transition services for up to 18 months following the Transactions, it cannot be assured that Ralcorp will be able to adequately replace those resources or replace them at the same cost. If Ralcorp is not able to replace the resources provided by Kraft or is unable to replace them at the same cost or is delayed in replacing the resources provided by Kraft, Ralcorp’s results of operations may be negatively impacted.

Ralcorp’s business, financial condition and results of operations may be adversely affected following the Transactions if Ralcorp cannot negotiate terms that are as favorable as those Kraft has received when Ralcorp replaces contracts after the closing of the Transactions.

Prior to completion of the Transactions, certain functions (such as purchasing, information systems, sales, logistics and distribution) for the Post cereals business have generally been performed under Kraft’s centralized systems and, in some cases, under contracts that are also used for Kraft’s other businesses and which are not intended to be assigned to Newco with the Post cereals business. In addition, some other contracts require consents of third parties to assign them to Ralcorp. While Kraft, under the transition services agreement, has agreed to generally provide Ralcorp with purchasing services and use commercially reasonable efforts to provide the benefits of any contracts that cannot be assigned for a transition period, there can be no assurance that Ralcorp will be able to negotiate terms that are as favorable as those Kraft received when Ralcorp replaces these contracts with its own agreements. This could have a material adverse impact on Ralcorp’s business, financial condition and results of operations following the Transactions.

If the Distribution or the Merger does not qualify for tax-free treatment under Sections 355 and 368 and other related provisions of the Code, either as a result of actions taken in connection with the Distribution or the Merger or as a result of subsequent acquisitions of shares of Ralcorp or Splitco common stock, then Kraft and/or Kraft shareholders may be responsible for payment of U.S. federal income tax.

The Distribution and the Merger are conditioned on both a private letter ruling from the IRS (which has been obtained) and an opinion from Sutherland Asbill & Brennan LLP, tax counsel to Kraft, to the effect that, on the basis of facts, representations, assumptions and undertakings set forth in the written request for the ruling or the opinion, in each case consistent with the state of facts existing as of the effective time of the Distribution, the Distribution and the Merger will be tax-free. Neither Kraft nor Splitco intends to waive these conditions.

Although a private letter ruling from the IRS generally is binding on the IRS, if the representations, assumptions, or undertakings made in the letter ruling request are untrue or have been violated, then Kraft will not be able to rely on the ruling. Moreover, the private letter ruling does not address all the issues that are relevant to determining whether the Distribution will qualify for tax-free treatment. The issues not addressed by the private letter ruling consist primarily of issues on which the IRS customarily declines to rule. Certain issues not addressed by the private letter ruling are expected to be addressed by the opinion. The opinion will be based on, among other things, current law and certain representations and assumptions as to factual matters made by Kraft, Splitco and Ralcorp. Any change in currently applicable law, which may or may not be retroactive, or the failure of any factual representation or assumption to be true, correct and complete in all material respects, could

 

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adversely affect the conclusions reached by counsel in its opinion. The opinion will not be binding on the IRS or the courts, and the IRS or the courts may not agree with the opinion.

The Distribution would become taxable to Kraft pursuant to Section 355(e) of the Code if a 50% or greater interest (by vote or value) in Ralcorp was acquired, directly or indirectly, by persons other than Kraft shareholders as part of a plan or series of related transactions that included the Distribution. Because the Kraft shareholders will own more than 50% of Ralcorp common stock following the Merger, the Merger, by itself, will not cause the Distribution to be taxable to Kraft under Section 355(e) of the Code. However, if the IRS were to determine that other acquisitions of Ralcorp stock after the Distribution, were part of a plan or series of related transactions that included the Distribution, such determination could result in the recognition of gain by Kraft under Section 355(e) of the Code. In such case, the gain recognized by Kraft likely would include the entire fair market value of the Splitco common stock distributed to Kraft’s shareholders, and thus would be substantial.

In certain circumstances, under the tax allocation agreement among Kraft, Splitco and Ralcorp, Ralcorp generally would be required to indemnify Kraft against tax-related losses to Kraft and/or its shareholders that are attributable to actions or failure to take actions by Ralcorp or Splitco after the Distribution. If Kraft and/or its shareholders recognize gain on the Distribution for reasons not related to such actions, Kraft would not be entitled to be indemnified under the tax allocation agreement. If Kraft should recognize gain on the Merger for reasons not related to a breach by Kraft of a representation or covenant, Kraft would generally be entitled to indemnification by Ralcorp under the tax allocation agreement.

Ralcorp may be affected by significant restrictions following the Transactions in order to avoid significant tax-related liabilities.

Even if the Distribution otherwise qualifies for tax-free treatment under Section 355 of the Code, the Distribution may not qualify as a transaction that is tax-free to Kraft if a 50% or greater interest (by vote or value) in Ralcorp is acquired by persons other than Kraft shareholders as part of a “plan” that includes the Distribution pursuant to Section 355(e) of the Code.

The tax allocation agreement requires that Splitco, Ralcorp, and their affiliates, for a two-year period following the date of the Distribution, avoid taking certain actions that might cause the Distribution to be treated as part of a plan pursuant to which a 50% or greater interest (by vote or value) in Ralcorp is acquired. Actions of Ralcorp subject to restriction include:

 

   

merger or consolidation with any other person;

 

   

an ownership change of a 2% or greater interest (by vote or value) resulting from a combination of any of the following: (i) adoption, modification or amendment of any employee stock purchase agreement or equity compensation plan, (ii) entering into any negotiations, agreements, understandings or arrangements as determined under Section 355(e) of the Code in connection with transactions or events that may alone or in the aggregate result in one or more persons acquiring directly or indirectly any interest in Ralcorp stock and (iii) issuance of any stock (or any instrument convertible or exchangeable into stock), other than pursuant to employee equity grants that qualify under certain safe harbors of the Treasury regulations;

 

   

liquidation or partial liquidation;

 

   

discontinuation of the operations of the Post cereals business;

 

   

sale or transfer of all or substantially all of the assets of the Post cereals business;

 

   

redemption or repurchase of any of its shares in a manner contrary to IRS guidelines or in any manner contrary to the tax representations made by Ralcorp or Splitco in any tax opinion or private letter ruling; and

 

   

amendment of its certificate of incorporation (or other organizational documents), or taking any other action, affecting the relative voting rights of its separate classes of stock.

 

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Ralcorp will be permitted to take the actions above if it obtains the prior written consent of Kraft or provides Kraft with a supplemental ruling (or, if in the second year following the date of the Distribution, a supplemental tax opinion at Ralcorp’s election) from the IRS to the effect that such actions would not adversely affect the intended tax-free treatment of the Distribution. However, if Ralcorp takes any of the actions above and such actions result in tax-related losses to Kraft, then Ralcorp generally will be required to indemnify Kraft for such losses, without regard to whether Kraft has given Ralcorp prior consent. See “Additional Agreements—Tax Allocation Agreement.”

Due to these restrictions and indemnification obligations under the tax allocation agreement, Ralcorp may be limited in its ability to pursue strategic transactions, equity or convertible debt financings or other transactions that may maximize the value of the business. Also, Ralcorp’s potential indemnity obligation to Kraft might discourage, delay or prevent a change of control during this two-year period that Ralcorp shareholders may consider favorable to its ability to pursue strategic transactions, equity or convertible debt financings, or other transactions that may maximize the value of its business.

Failure to consummate the Transactions could adversely impact the market price of Ralcorp’s common stock as well as Ralcorp’s business, financial condition and results of operations.

If the Transactions are not completed for any reason, the price of Ralcorp’s common stock may decline. In addition, Ralcorp may be subject to additional risks, including:

 

   

depending on the reasons for and the timing of the termination of the Transaction Agreement, the requirement in the Transaction Agreement that Ralcorp pay Kraft a termination fee of $60.0 million and reimburse Kraft for certain out-of-pocket costs (not to exceed $15.0 million);

 

   

Ralcorp’s expenditure of approximately $1.5 million on infrastructure and network systems integration and planning prior to the consummation of the Transactions, a significant portion of which will be spent on assets and services which may not be useful in Ralcorp’s existing business;

 

   

substantial costs related to the acquisition, such as legal, accounting, filing, financial advisory and financial printing fees, which must be paid regardless of whether the Transactions are completed; and

 

   

potential disruption to the business of Ralcorp and distraction of its workforce and management team.

The Transaction Agreement contains provisions that may discourage other companies from trying to acquire Ralcorp. In addition, Ralcorp will have more shares of its common stock outstanding after the Transactions, which may discourage other companies from trying to acquire Ralcorp.

The Transaction Agreement contains provisions that may discourage a third-party from submitting a business combination proposal to Ralcorp prior to the closing of the Transactions that might result in greater value to Ralcorp shareholders than the Transactions. The Transaction Agreement generally prohibits Ralcorp from soliciting any takeover proposal. In addition, if the Transaction Agreement is terminated by Ralcorp or Kraft in circumstances that obligate Ralcorp to pay a termination fee and to reimburse transaction expenses to Kraft, Ralcorp’s financial condition may be adversely affected as a result of the payment of the termination fee and transaction expenses, which might deter third parties from proposing alternative business combination proposals.

Ralcorp may issue up to 36.4 million shares of its common stock as part of the Transactions. Because Ralcorp will have significantly more shares of its common stock outstanding after the Transactions, an acquisition of Ralcorp will become more expensive. As a result, some companies may not seek to acquire Ralcorp, which may impact the price of Ralcorp’s common stock.

Other Risks that Relate to Ralcorp, Including the Post Cereals Business after the Transactions

Continued increases in the cost of commodities and packaging could negatively impact profits.

The primary commodities and packaging used by Ralcorp and the Post cereals business include sugar, oats, wheat, soybean oil, corn sweeteners, almonds and other tree nuts, linerboard cartons, corrugated boxes, glass

 

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containers, caps and plastic packaging. Ralcorp may experience shortages in these items as a result of commodity market fluctuations, availability, increased demand, weather conditions, and natural disasters as well as other factors outside of Ralcorp’s control. Prices for these items are volatile. Changes in the prices of Ralcorp’s products may lag behind changes in the costs of its commodities. Competitive pressures also may limit Ralcorp’s ability to raise prices in response to increased raw and packaging material costs. Accordingly, if Ralcorp is unable to increase prices to offset these costs, these costs may have a material adverse effect on Ralcorp’s operating profits and margins.

Higher energy costs could negatively impact profits.

Higher prices for natural gas, electricity and diesel fuel could increase Ralcorp’s production and delivery costs after the Transactions. Many of Ralcorp’s manufacturing operations will use large quantities of natural gas and electricity. Ralcorp’s inability to respond to these cost increases may negatively affect its operating results. In addition, Ralcorp has experienced increases in the cost of transporting finished goods to customers. Due to the increased cost of fuel and limited supply of freight carriers, Ralcorp’s costs have risen. In the event that this situation continues to worsen, Ralcorp may experience service problems and reduced customer sales.

The integration of Ralcorp and the Post cereals businesses may not be successful or anticipated benefits from the Transactions may not be realized.

After completion of the Transactions, Ralcorp will have significantly more sales, assets and employees than it did prior to the Transactions. The integration process will require Ralcorp to significantly expand the scope of its operations and financial systems. Ralcorp’s management will be required to devote a significant amount of time and attention to the process of integrating the operations of Ralcorp’s business and the Post cereals business. There is a significant degree of difficulty and management involvement inherent in that process. These difficulties include:

 

   

integrating the operations of the Post cereals business while carrying on the ongoing operations of each business;

 

   

managing a significantly larger company than before completion of the Transactions;

 

   

the possibility of faulty assumptions underlying Ralcorp’s expectations regarding the integration process;

 

   

coordinating businesses located in different geographic regions;

 

   

integrating two unique business cultures, which may prove to be incompatible;

 

   

attracting and retaining the personnel associated with the Post cereals business following the Transactions;

 

   

creating uniform standards, controls, procedures, policies and information systems and minimizing the costs associated with such matters; and

 

   

integrating information, purchasing, accounting, finance, sales, billing, payroll and regulatory compliance systems.

There is no assurance that the Post cereals business will be successfully or cost-effectively integrated into Ralcorp. The process of integrating the Post cereals business into Ralcorp’s operations may cause an interruption of, or loss of momentum in, the activities of Ralcorp’s business after completion of the Transactions. If Ralcorp management is not able to effectively manage the integration process, or if any significant business activities are interrupted as a result of the integration process, Ralcorp’s business could suffer and its results of operations and financial condition may be harmed.

All of the risks associated with the integration process could be exacerbated by the fact that Ralcorp may not have a sufficient number of employees with the requisite expertise to integrate the businesses or to operate

 

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Ralcorp’s business after the Transactions. Furthermore, the Post cereals business requires services that Ralcorp has limited experience in providing, the most significant of which are advertising and marketing services. If Ralcorp does not hire or retain employees with the requisite skills and knowledge to run Ralcorp after the Transactions, it may have a material adverse effect on Ralcorp’s business.

Even if Ralcorp is able to successfully combine the two business operations, it may not be possible to realize the full benefits of the increased sales volume and other benefits that are currently expected to result from the Transactions, or realize these benefits within the time frame that is currently expected. For example, the elimination of duplicative costs may not be possible or may take longer than anticipated, or the benefits from the Transactions may be offset by costs incurred or delays in integrating the companies. In addition, the benefits of the Transactions may be offset by operating losses relating to changes in commodity or energy prices, or in increased competition, or by risks and uncertainties relating to Ralcorp’s private label and branded cereal products after the Transactions. If Ralcorp fails to realize the benefits it anticipates from the acquisition, Ralcorp’s results of operations may be adversely affected.

Following the Transactions, Ralcorp may not be able to effectively manage the growth from acquisitions or continue to make acquisitions at the rate at which Ralcorp has been acquiring in the past.

Ralcorp has experienced significant growth in sales and operating profits through the acquisition of other companies. However, acquisition opportunities may not always present themselves. In such cases, Ralcorp’s sales and operating profit may not continue to grow from period to period at the same rate as in the past. In addition, acquisitions may be limited by restrictions agreed upon by Ralcorp in connection with the Transactions, see above “—Ralcorp may be affected by significant restrictions following the Transactions in order to avoid significant tax-related liabilities.”

The success of Ralcorp’s acquisitions following the Transactions, if any occur, will depend on many factors, such as its ability to identify potential acquisition candidates, negotiate satisfactory purchase terms and to successfully integrate and manage the growth from acquisitions. Integrating the operations, financial reporting, disparate technologies and personnel of newly acquired companies involves risks. There is no guarantee that Ralcorp will be successful or cost-effective in integrating any new businesses into its businesses after the Transactions. The process of integrating newly acquired businesses may cause interruption or slow down the operations of Ralcorp. As a result, Ralcorp may not be able to realize potential synergies or other anticipated benefits of acquisitions.

Ralcorp’s inability to successfully manage the price gap between Ralcorp’s private-label products and those of Ralcorp’s branded competitors may adversely affect Ralcorp’s results of operations.

Competitors’ branded products have an advantage over Ralcorp’s private label products primarily due to advertising and name recognition. When branded competitors focus on price and promotion, the market for private label products becomes more challenging because the price gaps between private label and branded products can become less meaningful.

At the retail level, private label products sell at a discount to those of branded competitors. If branded competitors continue to reduce the price of their products, the price of branded products offered to consumers may approximate or be lower than the prices of Ralcorp’s private label products. Further, promotional activities by branded competitors such as temporary price rollbacks, buy-one-get-one-free offerings and coupons have the effect of price decreases. Price decreases taken by competitors could result in a decline in Ralcorp’s sales volumes, selling prices or both.

Loss of any of Ralcorp’s significant customers following the Transactions may adversely affect its results of operations.

A limited number of customer accounts represent a large percentage of Ralcorp’s business and the Post cereals business. Wal-Mart Stores, Inc. (“Wal-Mart”) accounted for approximately 15-16% of Ralcorp’s net sales in each of

 

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2007, 2006 and 2005 and approximately 20-21% of net sales of the Post cereals business in each of 2007, 2006 and 2005. The loss of Wal-Mart as a customer for either business would have an adverse effect on Ralcorp’s net sales following the Transactions. No other single customer accounted for more than 10% of either business’s net sales in the last three fiscal years. The five largest customers of Ralcorp accounted for approximately 40% of gross sales in 2007, 38% in 2006 and 38% in 2005. The five largest customers of the Post cereals business accounted for approximately 43% of net sales in each of 2007, 2006 and 2005. The success of Ralcorp’s business following the Transactions depends, in part, on the ability to maintain the level of sales and product distribution through high volume food retailers, super centers and mass merchandisers. The competition to supply products to these high volume stores is intense. These high volume stores and mass merchandisers frequently re-evaluate the products they carry; if a major customer elected to stop carrying one of Ralcorp’s products or if Ralcorp is otherwise unable to continue the customer relationships of the Post cereals business, Ralcorp’s sales may be adversely affected.

Unsuccessful implementation of business strategies to reduce costs may adversely affect Ralcorp’s results of operations.

Many of Ralcorp’s costs, such as raw materials, energy and freight, will be outside its control. Therefore, Ralcorp must seek to reduce costs in other areas, such as operating efficiency. If Ralcorp is not able to complete projects which are designed to reduce costs and increase operating efficiency on time or within budget, its operating profits may be adversely impacted. In addition, if the cost saving initiatives Ralcorp has implemented or any future cost savings initiatives do not generate the potential cost savings and synergies, Ralcorp’s results of operations may be adversely affected.

Ralcorp’s ability to raise prices for its products may be adversely affected by a number of factors, including but not limited to industry supply, market demand, and promotional activity by competitors. If Ralcorp is unable to increase prices for its products as may be necessary to cover cost increases, its results of operations could be adversely affected. In addition, price increases typically generate lower volumes as customers purchase fewer units. If these losses are greater than expected or if Ralcorp loses distribution as a result of a price increase, Ralcorp’s results of operations could be adversely affected.

In order to remain competitive, Ralcorp must be able to anticipate changes in consumer preferences and trends.

Ralcorp’s success depends in part on its ability to anticipate the tastes and eating habits of consumers and to offer products that appeal to their preferences. Consumer preferences change from time to time and can be affected by a number of different and unexpected trends. Ralcorp’s failure to anticipate, identify or react quickly to these changes and trends, and to introduce new and improved products on a timely basis, could result in reduced demand for its products, which would in turn cause its revenues and profitability to suffer. Similarly, demand for Ralcorp’s products, including products of the Post cereals business, could be affected by consumer concerns regarding the health effects of nutrients or ingredients such as trans fats, sugar, processed wheat or other product attributes.

Ralcorp and the Post cereals business compete in mature categories with strong competition.

Ralcorp’s businesses and the Post cereals business currently compete in mature segments with competitors that have a large percentage of segment sales. Ralcorp’s private label products also face strong competition from branded competitors for shelf space and sales. Competitive pressures could cause Ralcorp to lose market share, which may require it to lower prices, increase marketing expenditures or increase the use of discounting or promotional programs, each of which would adversely affect Ralcorp’s margins and could result in a decrease in its operating results and profitability and may not be successful.

Ralcorp will compete with both private label and branded label food producers, some of which will have greater financial resources and lower production costs than Ralcorp. The principal basis for competition is selling

 

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price. Ralcorp’s ability to maintain satisfactory margins after the Transactions will depend in large part on its ability to control its costs. It cannot be assured that Ralcorp will be able to compete effectively and maintain current levels of profitability. If Ralcorp is unable to compete effectively and maintain current levels of profitability after the Transactions, such failure would have a material adverse effect on its business, financial condition and results of operations.

The termination or expiration of current co-manufacturing arrangements could reduce Ralcorp’s sales volume and adversely affect its results of operations.

Ralcorp’s businesses periodically enter into co-manufacturing arrangements with manufacturers of branded products. Terms of these agreements vary but are generally for relatively short periods of time (less than two years). Volumes produced under each of these agreements can fluctuate significantly based upon the product’s life cycle, product promotions, alternative production capacity and other factors, none of which are under Ralcorp’s direct control. Ralcorp’s future ability to enter into co-manufacturing arrangements is not guaranteed, and a decrease in current co-manufacturing levels could have a significant negative impact on Ralcorp’s sales volume.

In addition to the provisions of the Transaction Agreement, Ralcorp’s articles of incorporation and by-laws and Missouri corporate law contain provisions that may inhibit a takeover.

Ralcorp’s current articles of incorporation and by-laws, which will continue to be the organizational documents for Ralcorp after the Transactions, as well as Missouri law, may inhibit changes in control that are not approved by Ralcorp’s board of directors and could delay or prevent a change of control of Ralcorp that its shareholders may favor. These provisions include:

 

   

a classified board of directors;

 

   

limiting the ability to call special meetings of shareholders to the board of directors, the chairman of the board of directors, the president or chief executive of the company; and

 

   

advance notice requirements for nominations of director candidates.

You can find more information under the section entitled “Description of Ralcorp Capital Stock.”

Changing currency exchange rates may adversely affect earnings and financial position.

Ralcorp has significant operations and assets in Canada. Ralcorp’s consolidated financial statements are presented in U.S. dollars; therefore, Ralcorp must translate its Canadian assets, liabilities, revenue and expenses into U.S. dollars at applicable exchange rates. Consequently, fluctuations in the value of the Canadian dollar may negatively affect the value of these items in Ralcorp’s consolidated financial statements. To the extent Ralcorp fails to manage its foreign currency exposure adequately, Ralcorp may suffer losses in value of its net foreign currency investment and Ralcorp’s consolidated results of operations and financial position may be negatively affected. Because Ralcorp will acquire certain Canadian assets and assume certain Canadian liabilities in the Transactions, this expense may increase after the Transactions.

If Ralcorp’s assessments and assumptions about commodity prices, as well as ingredient and other prices, prove to be incorrect in connection with its hedging or forward-buy efforts or planning cycles, its costs may be greater than anticipated and Ralcorp’s financial results could be adversely affected.

Ralcorp expects to continue to use commodity futures and options to reduce the price volatility associated with anticipated commodity purchases of oats, sugar, tree nuts, wheat and rice used in the production of certain of its products. Additionally, Ralcorp maintains a hedging program for heating oil relating to diesel fuel prices, natural gas, and corrugated paper products. The extent of Ralcorp’s hedges at any given time will depend upon its assessment of the markets for these commodities, including its assumptions for future prices. For example, if

 

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Ralcorp believes that the market prices for the commodities Ralcorp uses are unusually high, Ralcorp may choose to hedge less, or possibly not hedge any, of Ralcorp’s future requirements. If Ralcorp fails to hedge and prices subsequently increase, or if it institutes a hedge and prices subsequently decrease, its costs may be greater than anticipated or greater than its competitors’ costs and Ralcorp’s financial results could be adversely affected.

Consolidation among the retail grocery and foodservice industries may hurt profit margins.

Over the past several years, the retail grocery and foodservice industries have undergone significant consolidations and mass merchandisers are gaining market share. As this trend continues and such customers grow larger, they may seek lower pricing or increased promotional pricing from suppliers since they represent more volume and thus, may have additional purchasing power. As a result, Ralcorp’s profit margins as a grocery and foodservice supplier may be negatively impacted. In the event of consolidation, if the surviving entity is not a customer, Ralcorp may lose key business once held with the acquired retailer.

Labor strikes or work stoppages by employees could harm Ralcorp’s business.

Currently, a significant number of Ralcorp’s full-time distribution, production and maintenance employees and the production and maintenance employees of the Post cereals business are covered by collective bargaining agreements. A dispute with a union or employees represented by a union could result in production interruptions caused by work stoppages. If a strike or work stoppage were to occur, Ralcorp’s results of operations could be adversely affected.

Ownership of Vail Resorts creates a risk to Ralcorp’s earnings.

Ralcorp owns approximately 19% of the outstanding common stock of Vail Resorts, Inc. (“Vail”). Because Ralcorp accounts for this investment using the equity method of accounting, Ralcorp’s non-cash earnings may be adversely affected by unfavorable results from Vail. As of March 31, 2008, Ralcorp reported an investment of $116.9 million in Vail for financial reporting purposes. Vail typically yields more than the entire year’s equity income during Ralcorp’s second and third fiscal quarters; as a result Ralcorp’s net earnings are seasonal. In addition, Vail’s results of operations are also dependent in part on weather conditions and consumer discretionary spending trends. In light of Ralcorp’s significant ownership in Vail, changes in its common stock price or earnings may impact Ralcorp’s stock price.

Impairment in the carrying value of goodwill or other intangibles could negatively impact Ralcorp’s net worth.

The carrying value of goodwill represents the fair value of acquired businesses in excess of identifiable assets and liabilities as of the acquisition date. The carrying value of other intangibles represents the fair value of trademarks, trade names, and other acquired intangibles. Goodwill and other acquired intangibles expected to contribute indefinitely to Ralcorp’s cash flows are not amortized, but must be evaluated by management at least annually for impairment. Impairments to goodwill may be caused by factors outside Ralcorp’s control, such as the inability to quickly replace lost co-manufacturing business, increasing competitive pricing pressures, or the bankruptcy of a significant customer and could negatively impact Ralcorp’s net worth.

Product liability or recalls could result in significant and unexpected costs to Ralcorp.

Ralcorp may need to recall some or all of its products if they become adulterated or misbranded. This could result in destruction of product inventory, negative publicity, temporary plant closings, and substantial costs of compliance or remediation. Any of these events, including a significant product liability judgment against Ralcorp, could result in a loss of confidence in Ralcorp’s food products. This could have an adverse affect on Ralcorp’s financial condition, results of operations or cash flows.

 

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New laws or regulations could adversely affect Ralcorp.

Food production and marketing are highly regulated by a variety of federal, state, local and foreign agencies. Changes in laws or regulations that impose additional regulatory requirements on Ralcorp or the Post cereals business could increase Ralcorp’s costs of doing business or restrict its actions, causing Ralcorp’s results of operations to be adversely affected. In addition, as Ralcorp advertises its products, it could be the target of claims relating to false or deceptive advertising under federal, state and foreign laws and regulations.

The bankruptcy or insolvency of a significant customer could negatively impact profits.

If any of the significant customers of Ralcorp, or of the Post cereals business, file for bankruptcy protection and the bad debt reserve is inadequate to cover the amounts owed by bankrupt customers, Ralcorp may have to write off the amount of the receivable to the extent the receivable is greater than Ralcorp’s bad debt reserve. In the event a bankrupt customer is not able to emerge from bankruptcy or Ralcorp is not able to replace sales lost from such customer, Ralcorp’s profits could be negatively impacted.

Changes in weather conditions, natural disasters and other events beyond Ralcorp’s control can adversely affect Ralcorp’s results of operations.

Changes in weather conditions and natural disasters, such as floods, droughts, frosts, earthquakes, hurricanes or pestilence, may affect the cost and supply of commodities and raw materials, including grain and grain products, tree nuts, corn syrup, sugar and wheat. Additionally, these events can result in reduced supplies of raw materials and longer recoveries of usable raw materials. Competing manufacturers can be affected differently by weather conditions and natural disasters depending on the location of their suppliers and operations. Damage or disruption to Ralcorp’s manufacturing or distribution capabilities due to weather, natural disaster, fire, terrorism, pandemic, strikes or other reasons could impair Ralcorp’s ability to manufacture or sell its products. Failure to take adequate steps to reduce the likelihood or mitigate the potential impact of such events, or to effectively manage such events if they occur, particularly when a product is sourced from a single location, could adversely affect Ralcorp’s business and results of operations, as well as require additional resources to restore Ralcorp’s supply chain.

Ralcorp may experience losses or be subject to increased funding and expenses to its pension plan, which could negatively impact profits.

Ralcorp maintains a defined benefit pension plan. Certain Post cereals business union employees are entitled to defined benefit pension benefits in accordance with applicable collective bargaining agreements, and certain Post cereals business non-union employees are entitled to defined benefit pension benefits for two years after the consummation of the Transactions. Although Ralcorp has frozen benefits under its defined benefit pension plan for all Ralcorp administrative employees and many Ralcorp production employees, Ralcorp remains obligated to ensure that the plan is funded in accordance with applicable regulations. The plan remains underfunded pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 87 guidelines. In the event the stock market deteriorates, the funds in which Ralcorp’s defined benefit pension plan has invested do not perform according to expectations, or the underfunded nature of the plan worsens, Ralcorp may be required to make significant cash contributions to the pension plan and recognize increased expense within its financial statements.

Ralcorp does not anticipate paying any dividends on Ralcorp common stock in the foreseeable future.

Ralcorp does not expect to declare or pay any cash or other dividends in the foreseeable future on Ralcorp common stock. Ralcorp plans to retain all earnings, if any, for the foreseeable future for use in the operation of Ralcorp’s business and to fund the pursuit of future growth. As a result, capital appreciation, if any, of Ralcorp common stock will be a shareholder’s sole source of gain for the foreseeable future.

 

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CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS

This document and other materials Ralcorp has filed or will file with the SEC (as well as information included in Ralcorp’s other written or oral statements) contain, or will contain, disclosures which are “forward-looking statements.” Forward-looking statements include all statements that do not relate solely to historical or current facts, and can generally be identified by the use of words such as “strategy,” “may,” “forecast,” “believe,” “will,” “expect,” “project,” “estimate,” “anticipate,” “plan,” “continue,” “intend,” “project,” “goal,” “target” or similar expressions. These forward-looking statements address, among other things, the anticipated effects of the Transactions. These forward-looking statements are based on the current plans and expectations of Ralcorp’s management and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated. Accordingly, no assurances can be given that any of the events anticipated by the forward-looking statements will occur, or if any of them occurs, what effect they will have on the results of operations or financial condition. These factors include, but are not limited to the effect of general economic conditions, particularly in the United States; the level of competition; pricing pressures and actions; difficulties in obtaining materials from suppliers, and the rising cost of raw materials used in manufacturing products; unexpected safety or manufacturing issues; market demand for the Post cereals business’ and Ralcorp’s products, which may be tied to the relative strength of various business segments; FDA or other regulatory actions or delays, and changes in accounting regulations; the loss of current customers or the inability to obtain new customers; legal proceedings; the ability to protect intellectual and other proprietary rights; the ability to retain key employees; the successful integration of the Post cereals business with Ralcorp and the execution of internal performance plans; changes in asset valuations, including writedowns of property, plant and equipment, inventory, accounts receivable or other assets for impairment or other reasons; changes in currency exchange rates; and the other factors described under “Risk Factors.”

You are cautioned not to unduly rely on such forward-looking statements, which speak only as of the date made, when evaluating the information presented in this document. Ralcorp does not assume any obligation to update or revise these forward-looking statements to reflect new events or circumstances.

 

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INFORMATION ABOUT THE RALCORP SPECIAL MEETING

General; Date; Time and Place; Purposes of the Meeting

The enclosed proxy is solicited on behalf of Ralcorp’s board of directors for use at a special meeting of shareholders to be held on July 17, 2008, at 8:30 a.m., local time, or at any adjournments or postponements of the special meeting, for the purposes set forth in this document and in the accompanying notice of special meeting. The special meeting will be held at the Bank of America Plaza located at 800 Market Street, 26th Floor, St. Louis, Missouri 63101. This document and the accompanying proxy card are being mailed on or about June 18, 2008 to all shareholders entitled to vote at the special meeting.

At the special meeting, shareholders will be asked:

 

   

to approve the issuance of shares of Ralcorp common stock in connection with the Merger;

 

   

to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies if there are not sufficient votes at the time of the special meeting to approve the issuance of shares of Ralcorp common stock in connection with the Merger; and

 

   

to transact any and all other business that may properly come before the special meeting or any adjourned session of the special meeting.

A copy of the Transaction Agreement is attached to this document as Annex A. All shareholders of Ralcorp are urged to read the Transaction Agreement carefully and in its entirety.

Ralcorp does not expect a vote to be taken on any other matters at the special meeting. If any other matters are properly presented at the special meeting for consideration, however, the holders of the proxies, if properly authorized, will have discretion to vote on these matters in accordance with their best judgment.

When this document refers to the “special meeting,” it is also referring to any adjournment or postponement of the special meeting, if necessary.

Record Date; Voting Information; Required Votes

Shareholders of record of Ralcorp common stock at the close of business on June 13, 2008, the record date for the special meeting, are entitled to notice of, and to vote at, the special meeting and any adjournments thereof. At the close of business on the record date, 25,758,023 shares of Ralcorp common stock were outstanding and entitled to vote. Shareholders are entitled to one vote on each matter submitted to the shareholders for each share of Ralcorp common stock held as of the record date.

Shares entitled to vote at the special meeting may take action on a matter at the special meeting only if a quorum of those shares exists with respect to that matter. The presence at the meeting, in person or by proxy, of the holders of a majority of the outstanding shares of Ralcorp common stock entitled to vote at the special meeting will constitute a quorum for the transaction of business at the special meeting. If a share is represented for any purpose at the special meeting, it will be deemed present for purposes of determining whether a quorum exists.

Under the rules that govern brokers who have record ownership of shares that are held in brokerage accounts for their clients, who are the beneficial owners of those shares, brokers typically have the authority to vote on “routine” proposals when they have not received instructions from beneficial owners. Absent specific instructions from the beneficial owner of the shares, however, brokers are not allowed to exercise their voting discretion with respect to the approval of non-routine matters, such as the issuance of the Ralcorp common stock in connection with the Merger. Proxies submitted without a vote by brokers on these matters are referred to as “broker non-votes.”

 

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Abstentions are counted as present and entitled to vote for purposes of determining a quorum. An abstention from voting will have the same affect as a vote against the issuance of Ralcorp common stock in connection with the Merger. Under New York Stock Exchange listing standards, broker non-votes will be excluded from the tabulation of votes cast, and therefore will not affect the outcome of the vote (except to the extent such broker non-votes result in a failure to obtain total votes cast on the proposal representing more than 50% in interest of all shares entitled to vote thereon as required by New York Stock Exchange listing standards).

The issuance of Ralcorp common stock in connection with the Merger must be approved by a majority of the votes cast by holders of Ralcorp common stock (provided that the total vote cast on the proposal represents over 50% in interest of all securities entitled to vote on the proposal). If Ralcorp’s shareholders fail to approve the issuance of shares of Ralcorp common stock in connection with the Merger upon a vote at the Ralcorp special meeting, each of Kraft and Ralcorp will have the right to terminate the Transaction Agreement, as described under “The Transaction Agreement—Termination of the Transaction Agreement.”

Recommendation of Ralcorp’s Board of Directors

After careful consideration, the board of directors of Ralcorp resolved that the Transactions contemplated by the Transaction Agreement are in the best interests of the holders of Ralcorp common stock and approved the Transaction Agreement, the Merger and the other Transactions. The Ralcorp board of directors recommends that the shareholders of Ralcorp vote “FOR” approval of the issuance of shares of Ralcorp common stock in connection with the Merger, and, if necessary or appropriate, “FOR” the adjournment of the special meeting to solicit additional proxies if there are not sufficient votes at the time of the special meeting for the proposal.

How to Vote

Ralcorp shareholders can vote in person by completing a ballot at the Ralcorp special meeting, or Ralcorp shareholders can vote before the Ralcorp special meeting by proxy. Even if Ralcorp shareholders plan to attend the special meeting, Ralcorp encourages its shareholders to vote their shares as soon as possible by proxy. Ralcorp shareholders can vote by proxy using the Internet, by telephone, or by mail, as discussed below.

Vote by Internet: Ralcorp shareholders can vote their shares using the Internet. With the enclosed proxy card in hand, go to the web site indicated on the proxy card and follow the instructions. Internet voting is available twenty-four hours a day, seven days a week until 11:59 p.m. Eastern time on July 16, 2008. Ralcorp shareholders will be given the opportunity to confirm that their instructions have been properly recorded. If Ralcorp shareholders vote on the Internet, they do NOT need to return the proxy card.

Vote by Telephone: Ralcorp shareholders can vote their shares by telephone if they have a touch-tone telephone. With the enclosed proxy card in hand, call the toll-free number shown on the proxy card and follow the instructions. Telephone voting is available twenty-four hours a day, seven days a week until 11:59 p.m. Eastern time on July 16, 2008. Easy-to-follow voice prompts allow Ralcorp shareholders to vote their shares and confirm that their instructions have been properly recorded. If Ralcorp shareholders vote by telephone, they do NOT need to return their proxy card.

Vote by Mail: If Ralcorp shareholders prefer to vote by mail, mark the proxy card, date and sign it, and return it in the postage-paid envelope provided. If Ralcorp shareholders sign the proxy card but do not specify how they want their shares to be voted, their shares will be voted in accordance with the directors’ recommendation on the proposals. All properly executed proxy cards received before the polls are closed at the Ralcorp special meeting, and not revoked or superseded, will be voted at the Ralcorp special meeting in accordance with the instructions indicated by those proxy cards.

 

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Registered Owners: If a Ralcorp shareholder’s shares of common stock are registered directly in his or her name with Ralcorp’s transfer agent, Computershare, the Ralcorp shareholder is considered a “registered shareholder” with respect to those shares. If this is the case, the proxy materials have been sent or provided directly to the Ralcorp shareholder by Ralcorp.

Beneficial Owners: If Ralcorp shareholders hold shares of Ralcorp common stock in “street name” or “beneficial name” (that is, the Ralcorp shareholders hold their shares through a broker, bank, or other nominee), the proxy materials have been forwarded to the Ralcorp shareholders by their brokerage firm, bank, or other nominee, or their agent which is considered the shareholder of record with respect to these shares. As the beneficial holder, Ralcorp shareholders have the right to direct their broker, bank, or other nominee as to how to vote their shares by using the voting instruction form or proxy card included in the proxy materials, or by voting via the Internet or by telephone, but the scope of their rights depends upon the voting processes of the broker, bank, or other nominee. Please follow the voting instructions provided by the brokerage firm, bank, or other nominee, or their agent carefully.

Shares Held in the Savings Investment Plan: If Ralcorp shareholders participate in the Ralcorp’s Savings Investment Plan (SIP) and are the record holders of Ralcorp common stock in exactly the same name as they are identified by in the SIP, then they will receive a single proxy card to vote all of their shares. If the SIP account is not in exactly the same name as the shares of record of a Ralcorp shareholder, then the shareholder will receive one proxy card for his or her SIP shares and one for his or her record shares.

If Ralcorp shareholders own shares through the SIP and their votes are not received by 5:00 p.m. Eastern time on July 14, 2008, then their shares will be voted by the trustee in the same proportion as the shares that are voted on behalf of the other participants in the SIP. The trustee will also vote unallocated shares of Ralcorp common stock held in the SIP in direct proportion to the voting of allocated shares in the SIP as to which voting instructions have been received, unless doing so would be inconsistent with the trustee’s duties.

If Ralcorp shareholders sign their proxy card without indicating their vote, their shares will be voted “FOR” approval of the issuance of shares of Ralcorp common stock in connection with the Merger and “FOR” the proposal to approve the adjournment of the special meeting, if necessary, to solicit additional proxies, and in accordance with the recommendations of the Ralcorp board of directors on any other matters properly brought before the special meeting for a vote or any adjourned session of the special meeting.

Solicitation of Proxies

Ralcorp will bear the entire cost of soliciting proxies from its shareholders. In addition to solicitation of proxies by mail, Ralcorp will request that banks, brokers and other nominees send proxies and proxy material to the beneficial owners of Ralcorp common stock and secure their voting instructions, if necessary or appropriate. Ralcorp will reimburse the banks, brokers and other nominees for their reasonable expenses in taking those actions. Ralcorp also has made arrangements with Georgeson Inc. to assist it in soliciting proxies and has agreed to pay it $35,000 plus reasonable expenses for these services. If necessary, proxies may be solicited by Ralcorp’s directors, officers and employees, who will not be specially compensated, either personally or by telephone, facsimile, letter or other electronic means.

In the event that Ralcorp waives the satisfaction of a material condition to the consummation of the Transactions, Ralcorp will resolicit shareholder approval of the issuance of shares of Ralcorp common stock in connection with the Merger if required to do so by law.

 

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Revocation of Proxies

Any person giving a proxy pursuant to this solicitation has the power to revoke and change it at any time before it is voted. It may be revoked and changed by filing a written notice of revocation with the Corporate Secretary of Ralcorp at Ralcorp’s headquarters, 800 Market Street, Suite 2600, St. Louis, Missouri 63101, by submitting in writing a proxy bearing a later date, by logging onto the Internet website specified on the proxy card in the same manner Ralcorp shareholders would to submit their proxy electronically or by calling the toll-free number specified on their proxy card prior to the special meeting, in each case if the Ralcorp shareholder is eligible to do so and following the instructions on the proxy card, or by attending the special meeting and voting in person. Attendance at the special meeting will not, by itself, revoke a proxy. If Ralcorp shareholders hold their shares in the SIP, they may revoke their shares at any time before 5:00 p.m. Eastern time on Monday, July 14, 2008 by any of the foregoing methods. If Ralcorp shareholders have given voting instructions to a broker, bank, or other nominee that holds their shares in “street name,” they may revoke those instructions by following the directions given by the broker, bank, or other nominee.

Adjournments and Postponements

Although it is not currently expected, the special meeting may be adjourned or postponed, if necessary, for the purpose of soliciting additional proxies if there are not sufficient votes at the time of the special meeting to approve the issuance of shares of Ralcorp common stock in connection with the Merger. In order to approve the proposal to adjourn the special meeting, the affirmative vote of a majority of the voting power present at the special meeting and entitled to vote thereat is required, whether or not a quorum exists at the special meeting, provided that resumption of such meeting will not take place more than 90 days after the meeting is adjourned. Any adjournment or postponement of the special meeting for the purpose of soliciting additional proxies will allow Ralcorp shareholders who have already sent in their proxies to revoke them at any time prior to their use at the special meeting as adjourned or postponed. If the special meeting is adjourned or postponed to a different place, date, or time, Ralcorp need not give notice of the new place, date, or time if the new place, date, and time is announced at the meeting before adjournment, unless the adjournment is for more than 90 days after the date fixed for the original meeting. If a new record date is or must be set for the adjourned meeting, notice of the adjourned meeting shall be given to persons who are shareholders as of the new record date.

The adjournment proposal relates only to an adjournment of the special meeting occurring for purposes of soliciting additional proxies for the approval of the issuance of shares of Ralcorp common stock in connection with the Merger. Ralcorp’s board of directors retains full authority to adjourn the special meeting for any other purpose, including the absence of a quorum, or to postpone the special meeting before it is convened, without the consent of any shareholders.

Attending the Special Meeting

All Ralcorp shareholders, including shareholders of record and shareholders who hold their shares through banks, brokers, nominees or any other holder of record, are invited to attend the Ralcorp special meeting. Shareholders of record can vote in person at the special meeting. If Ralcorp shareholders are not a shareholder of record, they must obtain a proxy executed in their favor, from the record holder of their shares, such as a broker, bank or other nominee, to be able to vote in person at the special meeting. If Ralcorp shareholders plan to attend the special meeting, they must hold their shares in their own name or have a letter from the record holder of their shares confirming their ownership and they must bring a form of personal photo identification with them in order to be admitted. Ralcorp reserves the right to refuse admittance to anyone without proper proof of share ownership and without proper photo identification.

Householding

SEC rules allow delivery of a single document to households at which two or more shareholders reside. Accordingly, shareholders sharing an address who have been previously notified by their broker or its

 

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intermediary will receive only one copy of this document, unless the shareholder has provided contrary instructions. Individual proxy cards or voting instruction forms (or electronic voting facilities) will, however, continue to be provided for each shareholder account. This procedure, referred to as “householding,” reduces the volume of duplicate information received by shareholders, as well as Ralcorp’s expenses. Shareholders having multiple accounts may have received householding notifications from their respective brokers and, consequently, such shareholders may receive only one document. Shareholders who prefer to receive separate copies of the document, may request to receive separate copies of the document by notifying Ralcorp’s Secretary in writing or by telephone at the following address: Ralcorp Holdings, Inc., Attn: Corporate Secretary, 800 Market Street, Suite 2600, St. Louis, Missouri 63101; telephone: (314) 877-7046. Ralcorp undertakes to provide the document promptly upon request. Shareholders currently sharing an address with another shareholder who wish to have only one proxy statement and annual report delivered to the household in the future should also contact Ralcorp’s Secretary.

Questions and Additional Information

If Ralcorp shareholders have more questions about the Transactions or how to submit their proxy, or if they need additional copies of this document or the enclosed proxy card or voting instructions, please contact Computershare Investor Services inside the U.S. at (877) 282-1168 and outside the U.S. at (781) 575-2879 or Georgeson Inc. at (800) 280-0738.

The vote of Ralcorp shareholders is important. Please sign, date, and return the proxy card or submit the proxy and/or voting instructions via the Internet or by telephone promptly.

 

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INFORMATION ON KRAFT’S OFFER TO EXCHANGE

In the Transactions, Kraft will offer to holders of Kraft common stock the right to exchange all or a portion of their Kraft common stock for shares of Splitco common stock (see “The Transactions”). Splitco has filed a registration statement on Form S-4 and Form S-1 (Reg. No. 333-150212) to register shares of its common stock, par value $0.01 per share, which will be distributed to Kraft shareholders pursuant to the exchange offer in connection with the Merger. All shares of Splitco common stock will be immediately converted into shares of Ralcorp common stock in the Merger. The terms and conditions of the exchange offer are described in Splitco’s registration statement and also in a registration statement Ralcorp has filed on Form S-4 (Reg. No. 333-150222). Ralcorp has filed its registration statement to register the shares of its common stock, par value $0.01 per share, which will be issued in connection with the Merger. Ralcorp and Ralcorp shareholders are not a party to the exchange offer and are not being asked to separately vote on the exchange offer or to otherwise participate in the exchange offer.

Pursuant to the terms of Kraft’s exchange offer, Kraft shareholders that participate in the exchange offer will be exchanging their shares of Kraft common stock for shares of Splitco common stock at a discount to the per-share value of Ralcorp common stock. After such discount has been determined by Kraft, Ralcorp will promptly file a Current Report on Form 8-K disclosing such discount. Once announced, Kraft also intends to maintain a website at www.kraft.com/Investor/ that displays the discount rate and indicative exchange ratios and make such information available through the information agent for its exchange offer at 800-431-9633. Because such discount may be adjusted by Kraft from time to time, shareholders interested in knowing the amount of the discount may review Ralcorp’s Current Reports filed on Form 8-K or the website at www.kraft.com/Investor/ until the date of the special meeting for information on any adjustments to such discount.

The aggregate number of shares of Splitco common stock offered in the exchange offer is approximately 30,459,625, subject to possible adjustments (see “The Transactions—Determination of Number of Shares of Splitco Common Stock to be Distributed to Kraft Shareholders”). If the exchange offer is consummated but less than all shares of Splitco common stock owned by Kraft are exchanged because the exchange offer is not fully subscribed, the additional shares of Splitco common stock owned by Kraft will be distributed as pro rata dividend to the holders of shares of Kraft common stock (and to holders of Kraft’s deferred stock awards).

Kraft’s exchange offer is subject to various conditions listed in Splitco’s registration statement and will close on the closing date of the Transactions.

The information included in this section regarding Kraft’s exchange offer is being provided to Ralcorp’s shareholders for informational purposes only and does not purport to be complete. For additional information on Kraft’s exchange offer and the terms and conditions of Kraft’s exchange offer, Ralcorp shareholders are urged to read Splitco’s registration statement on Form S-4 and Form S-1, or Ralcorp’s registration statement on Form S-4, and all other documents Splitco will file with the SEC. This document constitutes only a proxy statement for Ralcorp shareholders relating to the approval of the issuance of shares of Ralcorp common stock in connection with the Merger and is not an offer to sell or an offer to purchase shares of Ralcorp common stock.

 

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INFORMATION ON RALCORP

Ralcorp is primarily engaged in the manufacturing, distribution and marketing of store brand (private label) food products in the grocery, mass merchandise, drug and foodservice channels. Incorporated on October 23, 1996 in Missouri, Ralcorp products include: ready-to-eat and hot cereal products; store brand and value brand snack mixes and corn-based snacks; store brand and branded crackers and cookies; foodservice, store brand and branded frozen griddle products (pancakes, waffles, French toast and custom griddle products) and biscuits; foodservice and store brand breads, rolls and muffins; store brand wet-filled products such as salad dressings, mayonnaise, peanut butter, syrups, jams and jellies, and specialty sauces; and store brand and value branded snack nuts and chocolate candy.

During fiscal year 2007, Ralcorp’s businesses were comprised of four reportable business segments: Cereals, Crackers & Cookies (consisting of Ralston Foods and Bremner, Inc.); Frozen Bakery Products; Dressings, Syrups, Jellies & Sauces (The Carriage House Companies, Inc.); and Snack Nuts & Candy (Nutcracker Brands, Inc.).

Ralcorp develops, manufactures, and markets emulations of various types of branded food products that retailers, mass merchandisers and drug stores sell under their own “store” brands or under value brands. In the event branded producers modify their existing products or successfully introduce new products, Ralcorp may attempt to emulate the modified or new products. In conjunction with its customers, Ralcorp develops packaging and graphics that rival the national brands.

Ralcorp also develops, manufactures and markets signature frozen value-added bakery products for the foodservice, in-store bakery, retail and mass merchandising channels. Ralcorp’s frozen products typically are not emulations of branded products. Instead, they are designed to have unique tastes or characteristics that customers desire.

For the fiscal year ended September 30, 2007, Ralcorp had $2,233.4 million in net sales. Substantially all of Ralcorp’s products are sold to customers within the United States. Ralcorp’s strategy is to grow its businesses through increased sales of existing and new products and through the acquisition of other companies. Since 1997, Ralcorp has completed nineteen business acquisitions.

Ralcorp’s Business After the Transactions

The combination of the Post cereals business with Ralcorp’s existing business is intended to create a portfolio of businesses balanced between branded, private label and frozen bakery products. The addition of the Post cereals business will give Ralcorp a distinctive line of branded cereal products plus a branded infrastructure and platform that Ralcorp intends to build on through organic growth and acquisitions. The Transactions, if consummated, will make Ralcorp the third largest maker of ready-to-eat breakfast cereal in the U.S. based on annual revenue.

Ralcorp’s plans for the combined business include that:

 

   

the Post cereals business will have a sales and marketing team separate and distinct from Ralcorp’s existing private labels cereals business;

 

   

the Post cereals business team will include Post’s existing marketing and sales support team and its existing research and development team; and

 

   

a nationwide sales management and broker network will be built and devoted to the brands used in the Post cereals business.

Prior to completion of the Transactions, certain functions (such as purchasing, information systems, sales, logistics and distribution) for the Post cereals business have generally been performed under Kraft’s centralized systems and, in some cases, under contracts that are also used for Kraft’s other businesses and which are not intended to be assigned to Newco with the Post cereals business. To enable Ralcorp to manage an orderly

 

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transition in its operation of the Post cereals business, Ralcorp and KFG will enter into a transition services agreement. Pursuant to the transition services agreement, KFG or its affiliates will generally provide Ralcorp with services performed by Kraft’s centralized system and use commercially reasonable efforts to provide the benefits of any contracts that cannot be assigned for a transition period of up to 18 months following the closing date of the Transactions if Ralcorp elects to extend the agreement. See “Additional Agreements—Transition Services Agreement.” In addition, some contracts require consents of third parties to assign them to Ralcorp. Pursuant to the Transaction Agreement, Kraft has agreed to use its reasonable best efforts, for a period of 18 months following the closing date of the Transactions, to obtain those third-party consents. See “The Transaction Agreement—Splitco Contribution—Delayed Transfer of Assets and Liabilities; Subsequent Transfers.” Kraft has advised Ralcorp that as of the date of this document, no third parties have refused to grant any such consents.

Ralcorp believes that the combination of the operations, purchasing and logistics networks of the Post cereals business and Ralcorp’s existing business will result in efficiencies in the long-term.

Ralcorp’s Liquidity and Capital Resources After the Transactions

As of March 31, 2008, Ralcorp had current liabilities of approximately $262.6 million and long-term debt of approximately $745.8 million. In addition, upon consummation of the Transactions, the $300.0 million in Bank Debt and approximately $662.2 million in Debt Securities will become debt obligations of Ralcorp. Historically, Ralcorp has funded operating needs by generating positive cash flows through operations. Ralcorp anticipates that its primary sources of liquidity after consummation of the Transactions will be cash provided by operations and additional credit facilities. Ralcorp has entered into a commitment letter with J.P. Morgan Securities Inc. and SunTrust Robinson Humphrey, Inc. which provides for a $450.0 million, three year revolving credit facility to be provided to Ralcorp. Ralcorp anticipates that this credit facility will replace its current $150 million credit facility and will serve as a source of liquidity for working capital and operating activities including any future acquisitions. Ralcorp anticipates that the definitive documents will include customary affirmative and negative covenants, as well as a financial covenant that would limit the ratio of debt to EBITDA (earnings before interest, taxes, depreciation and amortization) to no more than 3.75 to 1, and would require a ratio of EBIT to interest expense of not less than 3 to 1. The facility would be guaranteed by Ralcorp’s material domestic subsidiaries, and secured by a pledge of 65% of the stock of certain material foreign subsidiaries. Ralcorp anticipates that loans under the credit facility will bear an initial interest rate equal to either the prime rate, or LIBOR (London interbank offered rate) plus 1.25%, at its election. The interest rate will increase or decrease by an amount not exceeding 0.50% in each direction based on the ratio of debt to EBITDA at the end of each fiscal quarter. Ralcorp expects these sources of liquidity will be sufficient for the foreseeable future to provide working capital and to pay for operating expenses.

Ralcorp believes that its long-term debt to total capital (which is the total of long-term debt and total shareholders equity) ratio will be approximately 43% on a pro forma basis after the Transactions. With regard to the Debt Securities, based on current market conditions, Ralcorp anticipates the interest rate will be based on the 10-year U.S. Treasury Rate plus 250 to 300 basis points applicable to issuances of companies with similar credit profiles. There can be no assurance that the terms of the credit facility and Debt Securities will be consistent with those discussed above.

For more information on the Post cereals business’ and Ralcorp’s existing sources of liquidity, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Post Cereals Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Ralcorp’s annual report on Form 10-K for the year ended September 30, 2007 filed with the SEC, which is incorporated by reference into this document. See “Where You Can Find More Information; Incorporation by Reference.”

Directors and Officers of Ralcorp Before and After the Transactions

Board of Directors

The directors of Ralcorp immediately following the closing of the Transactions are expected to be the directors of Ralcorp immediately prior to the closing of the Transactions. The members of Ralcorp’s board of directors are classified into three classes pursuant to Ralcorp’s articles of incorporation.

 

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Listed below is the biographical information for each person who is currently a member of the board of directors of Ralcorp.

William P. Stiritz is Ralcorp’s Chairman of the Board. Mr. Stiritz (age 73) is a private equity investor and has been a director since 1994. Mr. Stiritz served as Chairman Emeritus of Energizer Holdings, Inc. from January 2007 to May 2008. He also served as Chairman of the Board of Energizer from 2000 to January 2007 and Chairman of Energizer Holdings, Inc. Management Strategy and Finance Committee from 2000 to 2005. Mr. Stiritz is also a director of Reliance Bancshares, Inc. and Vail Resorts, Inc.

Bill G. Armstrong has been a director since 2004. Mr. Armstrong (age 60) served as Executive Vice President and Chief Operating Officer of Cargill Animal Nutrition from May 2001 to September 2004. Mr. Armstrong is also a director of Energizer Holdings, Inc.

David R. Banks has been a director since 2001. Mr. Banks (age 71) is a private equity investor and serves as a director of Nationwide Health Properties, Inc.

Jack W. Goodall has been a director since 1994. Mr. Goodall (age 69) is a private equity investor and serves as a director of Rubio’s Restaurants, Inc.

Kevin J. Hunt has been a director since 2004. Mr. Hunt (age 56) has been Co-Chief Executive Officer and President of Ralcorp since September 2003 and Chief Executive Officer of Bremner Food Group, Inc. since 1995, Nutcracker Brands, Inc. since September 2003, Frozen Bakery Products, Inc. since June 2005 and The Carriage House Companies, Inc. since March 2008. Mr. Hunt has been employed with Ralcorp since 1985.

David W. Kemper has been a director since 1994. Mr. Kemper (age 57) has been Chairman, President and Chief Executive Officer of Commerce Bancshares, Inc. since October 1991. Mr. Kemper is also a director of Tower Properties Company.

Richard A. Liddy has been a director since 2001. Mr. Liddy (age 72) is a private equity investor and a director of Energizer Holdings, Inc.

Joe R. Micheletto has been a director since 1994. Mr. Micheletto (age 71) has been Vice-Chairman of the Board of Directors of Ralcorp since September 2003. He served as Chief Executive Officer and President of Ralcorp from September 1996 to September 2003. Mr. Micheletto is also a director of Energizer Holdings, Inc. and Chairman of the Board of Vail Resorts Inc.

J. Patrick Mulcahy has been a director since 2007. Mr. Mulcahy (age 64) has been Chairman of the Board of Energizer Holdings, Inc. since January 2007 and prior to that time served as Vice Chairman of Energizer Holdings, Inc. from January 2005 to January 2007. He served as Chief Executive Officer of Energizer Holdings, Inc. from 2000 to 2005. Mr. Mulcahy is also a director of Solutia, Inc. and Hanesbrands, Inc.

David P. Skarie has been a director since 2004. Mr. Skarie (age 61) has been Co-Chief Executive Officer and President of Ralcorp since September 2003 and Chief Executive Officer of Ralston Foods since 2002. He previously served as Chief Executive Officer of The Carriage House Companies, Inc. from 2002 to 2008. Mr. Skarie has been employed with Ralcorp since 1986.

David R. Wenzel has been a director since 2007. Mr. Wenzel (age 45) served as Chief Operating Officer of EFR Group from October 2005 to May 2008, and prior to that time served as Chairman of Manna-Pro Corporation from 2004 to 2006. Mr. Wenzel also served as Executive Director of Catholic Social Services of Southern Illinois from 2002 to 2005.

Executive Officers

The executive officers of Ralcorp immediately following the closing of the Transactions are expected to be the officers of Ralcorp immediately prior to the closing of the Transactions.

 

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Listed below is the biographical information for each person who is currently an executive officer of Ralcorp.

Kevin J. Hunt is Ralcorp’s Co-Chief Executive Officer and President of Ralcorp. Mr. Hunt (age 56) has been Co-Chief Executive Officer and President of Ralcorp since September 2003 and Chief Executive Officer of Bremner Food Group, Inc. since 1995, Nutcracker Brands, Inc. since September 2003, Frozen Bakery Products, Inc. since June 2005 and The Carriage House Companies, Inc. since March 2008. Mr. Hunt has been employed with Ralcorp since 1985.

David P. Skarie is Ralcorp’s Co-Chief Executive Officer and President of Ralcorp. Mr. Skarie (age 61) has been Co-Chief Executive Officer and President of Ralcorp since September 2003 and Chief Executive Officer of Ralston Foods since 2002. He previously served as Chief Executive Officer of The Carriage House Companies, Inc. from 2002 to 2008. Mr. Skarie has been employed with Ralcorp since 1986.

Thomas G. Granneman (age 58) has been Ralcorp’s Corporate Vice President and Controller since January 1999 and has been employed with Ralcorp since 1996.

Charles G. Huber, Jr. has been Ralcorp’s Corporate Vice President, General Counsel and Secretary of Ralcorp since October 2003. Mr. Huber (age 43) served as Vice President and Assistant General Counsel from September 2001 to October 2003. He has been employed with Ralcorp since 1989.

Richard R. Koulouris is Corporate Vice President and has been President of Bremner Food Group, Inc. and Nutcracker Brands, Inc. since March 2008 and President of The Carriage House Companies, Inc. since December 2006. Mr. Koulouris (age 51) previously served as Corporate Vice President, and President of Bremner Food Group, Inc. and Nutcracker Brands, Inc. from November 2003 to November 2006. He also served as Vice President of Operations for Bremner Food Group, Inc. from September 1995 to November 2003. He has held the Corporate Vice President position since November 2003. Mr. Koulouris has been employed with Ralcorp since 1980.

Scott Monette (age 46) has been Corporate Vice President and Treasurer since September 2001 and has been employed with Ralcorp since 2001.

Richard G. Scalise has been Corporate Vice President, and President of Frozen Bakery Products since July 2005. Prior to joining Ralcorp, Mr. Scalise (age 53) was President/Chief Operating Officer of ConAgra’s Refrigerated Food Group from 2003 to 2005 and President/Chief Operating Officer of ConAgra’s Dairy Foods Group from 2000 to 2003. Mr. Scalise has been employed with Ralcorp since 2005.

Ronald D. Wilkinson is Corporate Vice President, and has been President of Ralston Foods since March 1, 2008. Mr. Wilkinson (age 57) is also leading the integration of the Post cereals business into Ralcorp. Mr. Wilkinson was previously President of Bremner Food Group, Inc. and Nutcracker Brands, Inc. from December 2006 to March 2008. Mr. Wilkinson also served as Director of Product Supply of Ralston Foods from October 1996 to November 2006 and of The Carriage House Companies from January 2003 to November 2006. He has held the Corporate Vice President position since October 1996. Mr. Wilkinson has been employed with Ralcorp since 1995.

Compensation of Ralcorp’s Directors and Officers; Certain Relationships

Information on the compensation of Ralcorp’s directors and officers is described on pages 11 through 27, information regarding certain relationships and related transactions is reported on page 29, and information regarding compensation committee interlocks and insider participation, if any, is reported on page 28, of Ralcorp’s definitive proxy statement with respect to the 2008 annual meeting of shareholders, which Ralcorp filed on Schedule 14A with the SEC on November 29, 2007, which information is incorporated into this document by reference. For more information regarding how to obtain a copy of such documents, see “Where You Can Find More Information; Incorporation by Reference.”

 

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INFORMATION ON THE POST CEREALS BUSINESS

The Post cereals business is currently operated by Kraft. The U.S. portion of the Post cereals business will be transferred to Splitco prior to the Distribution.

Overview

The Post cereals business, founded in 1895 by C.W. Post, currently is the third largest seller of ready-to-eat cereals in the United States based on market share, with a market share of approximately 14% in 2007 based on revenues. Since its founding, Post has been creating cereals that define the breakfast experience for generations of families, including the third highest revenue brand of ready-to-eat cereal, Honey Bunches of Oats. The Post cereals business is primarily engaged in the production, manufacture, marketing and packaging of these ready-to-eat dry cereals, and has a flexible manufacturing platform that may facilitate growth, operational flexibility and opportunities for cost-optimization. Products of the Post cereals business are sold in the United States, Canada and certain other international markets. The Post cereals business generated net revenues of $270 million in the first quarter of 2008 and $1.1 billion in 2007 and has experienced a compound annual growth rate, or CAGR, of 0.6% from 2005 through 2007.

Products

The principal products of the Post cereals business are ready-to-eat cereals. The Post cereals business primarily markets its cereal products under the Post brand and sells to the grocery, mass merchant, club, supercenter and drug store trade through Kraft’s direct sales force for resale to consumers. The Post cereals business also utilizes broker, distribution or similar arrangements, predominantly for sales of products outside the United States and Canada.

Facilities, Manufacturing and Distribution

The Post cereals business’ products are manufactured in the United States and Canada. The four manufacturing facilities in the United States are located in Battle Creek, Michigan; Jonesboro, Arkansas; Modesto, California; and Naperville, Illinois. The two manufacturing facilities in Canada are located in Niagara Falls, Ontario and Cobourg, Ontario. The Battle Creek, Jonesboro, Modesto and Niagara Falls facilities will be transferred to Ralcorp as a result of the Transactions. Splitco will own these manufacturing and processing facilities other than the Niagara Falls facility, which will be purchased by Ralcorp Canada from the relevant Kraft affiliate. Certain ready-to-eat cereal production and packaging equipment will be transferred from the Naperville and Cobourg facilities to Ralcorp as a result of the Transaction. Kraft will redeploy certain non ready-to-eat cereal production and packaging equipment from the Jonesboro, Modesto and Niagara Falls facilities to other Kraft facilities as a result of the Transactions.

The Post cereals business uses a variety of widely-used ready-to-eat cereal production processes, including shredding, extrusion, gun-puffing, batch cooking and continuous cooking. Certain processes are used in multiple facilities, providing a flexible manufacturing platform, that may facilitate growth, operational flexibility and opportunities for cost-optimization.

As of March 31, 2008, Kraft owned a single distribution center dedicated to the Post cereals business located at the Battle Creek facility. This distribution center housed a 50,000 pallet automated warehouse allowing approximately 60% of volume produced at Battle Creek to be shipped directly to customers. The Post cereals business has historically used Kraft’s distribution centers located in the United States and Canada for the remainder of its distribution needs. All of the plants and properties used in the Post cereals business are maintained in good condition (reasonable wear and tear excepted), and management of the Post cereals business believes that they are suitable and adequate for its present needs.

 

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Raw Materials, Freight, and Energy

Raw materials used in the Post cereals business consist of ingredients and packaging materials. The principal ingredients are agricultural commodities, including wheat, oats, other grain products, soybean and other vegetable oils, fruits, almonds and other tree nuts, cocoa, corn syrup and sugar. The principal packaging materials are linerboard cartons, corrugated boxes, plastic containers and cartonboard. Kraft purchases raw materials for the Post cereals business from local, regional, national and international suppliers. The prices paid for raw materials can fluctuate widely due to weather conditions, labor disputes, government policies and regulations, economic climate, energy shortages, transportation delays, commodity market prices and currency fluctuations. Kraft continuously monitors worldwide supply and cost trends of these raw materials to enable it to take appropriate action to obtain ingredients and packaging needed for production. Although the prices of the principal raw materials can be expected to fluctuate, Kraft believes such raw materials to be in adequate supply and generally available from numerous sources. Kraft uses, and the Post cereals business realizes gains or losses from, hedging techniques to minimize the impact of price fluctuations in its principal raw materials. However, Kraft does not fully hedge against changes in commodity prices and these strategies may not protect the Post cereals business from increases in specific raw material costs.

Cereal processing ovens are generally fueled by natural gas or propane, which are obtained from local utilities or other local suppliers. Electricity and steam (generated in on-site, gas-fired boilers) are also used in the Post cereals business processing facilities. Short-term standby propane storage exists at several plants for use in the event of an interruption in natural gas supplies. Oil may also be used to fuel certain operations at various plants in the event of natural gas shortages or when its use presents economic advantages. In addition, considerable amounts of diesel fuel are used in connection with the distribution of products of the Post cereals business.

Trademarks and Intellectual Property

Trademarks are, in the aggregate, material to the Post cereals business and in most cases are protected through registration in the United States and most other markets where the related products are sold. Kraft from time to time has granted various parties exclusive or non-exclusive licenses to use one or more of its trademarks in particular locations. Management of the Post cereals business does not believe that these licensing arrangements have had a material effect on the conduct of its business or operating results. Pebbles ready-to-eat cereals are sold under trademarks that have been licensed from others.

Similarly, Splitco will own several patents in North America. While the patent portfolio as a whole is material to the Post cereals business, no one patent or group of related patents is material to the Post cereals business. In addition, Splitco will have proprietary trade secrets, technology, know-how processes and other intellectual property rights that are not registered.

Seasonality

Demand for ready-to-eat cereal has generally been approximately level throughout the year, although demand for certain products may be influenced by holidays, changes in seasons or other annual events.

Customers

The five largest customers of the Post cereals business accounted for approximately 43% of net revenues in 2007, 2006 and 2005, and its ten largest customers accounted for approximately 57% of net revenues in 2007, 56% in 2006 and 57% in 2005. One customer, Wal-Mart Stores, Inc., accounted for approximately 21% of net revenues of the Post cereals business in 2007, 20% in 2006 and 20% in 2005.

 

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Competition

The Post cereals business faces intense competition from large manufacturers of branded ready-to-eat cereal, as well as manufacturers of private label and value brand ready-to-eat cereals. Top branded ready-to-eat cereal competitors include Kellogg, General Mills and Quaker Oats (owned by PepsiCo). Leading private label and value brand manufacturers of ready-to-eat cereal include Malt-O-Meal, Ralcorp, Gilster Mary Lee and Sturm Foods.

The ready-to-eat cereal industry is highly sensitive to both pricing and promotion. Competition is based upon product quality, price, effective promotional activities, and the ability to identify and satisfy emerging consumer preferences. The ready-to-eat cereal industry is expected to remain highly competitive in the foreseeable future. In addition, Post cereals business customers do not typically commit to buy predetermined amounts of products.

Future growth opportunities are expected to depend on Ralcorp’s ability to implement strategies for competing effectively in the ready-to-eat cereal industry, including strategies relating to enhancing the performance of its employees, maintaining effective cost control programs, developing and implementing methods for more efficient manufacturing and distribution operations, and developing successful new products, while at the same time maintaining high product quality, aggressive pricing and promotion of its products.

Research and Development

The Post cereals business has a team of 40 R&D, quality and packaging development professionals that will transfer to Ralcorp as a result of the Transactions, of which 34 are located at the Battle Creek, Michigan facility. R&D capabilities span ingredients, grains and packaging technologies; product and process development, as well as analytical support; bench-top and pilot plant capabilities; and research support to operations. All the R&D equipment located at Battle Creek is intended to be included as part of the Transactions. In the past, research and development efforts for the Post cereals business have been complemented by other Kraft R&D resources, primarily food scientists, chemists and engineers at Kraft’s technology center at Glenview, Illinois. Research and development expense allocated to the Post cereals business was $3.3 million in the first quarter of 2008 and $4.5 million in the first quarter of 2007. Research and development expense allocated to the Post cereals business was $18.9 million in 2007, $18.8 million in 2006 and $15.7 million in 2005.

Regulation

All of the Post cereals business’ U.S. food products and packaging materials are regulated by the Food and Drug Administration. This agency enacts and enforces regulations relating to the manufacturing, distribution and labeling of food products.

States and some local governments may license and inspect plants and warehouses and also enforce prohibitions against misbranded and adulterated food.

Most of the food commodities on which the Post cereals business relies are subject to governmental agricultural programs. These programs have substantial effects on prices and supplies and are subject to Congressional and administrative review.

The activities of the Post cereals business food operations in Canada are subject to local and national regulations similar to those applicable to the Post cereals business in the United States.

Environmental Regulation

The Post cereals business is subject to various federal, state, local and foreign laws and regulations relating to the protection of the environment. In Canada, the Post cereals business is subject to applicable Canadian national and local environmental laws and regulations. The Post cereals business accrues for environmental

 

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remediation obligations on an undiscounted basis when amounts are probable and can be reasonably estimated. The accruals are adjusted as new information develops or circumstances change. Recoveries of environmental remediation costs from third parties are recorded as assets when their receipt is deemed probable. In the United States, the laws and regulations include the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act and Superfund, which imposes joint and several liability on each responsible party. Splitco is not a party to any material proceedings arising under these regulations.

Based on information currently available, management of the Post cereals business believes that the ultimate resolution of existing environmental remediation actions and its compliance in general with environmental laws and regulations will not have a material effect on its financial position or results. However, the potential impact of future compliance efforts, including those due to changes in law and environmental remediation actions, cannot be quantified with certainty.

Employees

Splitco will have approximately 1,230 employees, of whom approximately 1,030 were located in the United States and approximately 200 were located in Canada. The U.S. based employees will transfer to Ralcorp while the Canadian employees will transfer to Ralcorp Canada as a result of the Transactions. Splitco, or Kraft on behalf of Splitco, has entered into several collective bargaining agreements. Most of the unionized workers at the Post cereals business’ locations are represented under contracts with either the United Cereal, Bakery, and Food Workers Union of the Retail, Wholesale & Department Store Union U.F.C.W; the Canadian Auto Workers; or the International Brotherhood of Teamsters. These contracts expire at various times throughout the next several years. Management of the Post cereals business believes that its relations with employees and their representative organizations are good.

Legal Proceedings

Kraft is a defendant in a variety of legal proceedings relating to the Post cereals business. Plaintiffs in certain of those cases seek substantial damages. Management of the Post cereals business cannot predict with certainty the results of these proceedings. However, management of the Post cereals business believes that the final outcome of these proceedings will not materially affect the financial position or results of the Post cereals business.

Board of Directors

Following the Distribution, Splitco will merge with and into Ralcorp Mailman, the separate corporate existence of Splitco will cease and shareholders of Splitco will receive one share of Ralcorp common stock for each share of Splitco common stock received by them in the exchange offer. The directors and executive officers of Ralcorp immediately following the closing of the Transactions are expected to be the directors and executive officers of Ralcorp immediately prior to the closing of the Transactions.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS FOR THE POST CEREALS BUSINESS

Introduction

The following discussion and analysis is intended to provide investors with an understanding of the historical performance of the Post cereals business and its financial condition. This discussion and analysis presents the factors that had a material effect on the results of operations of the Post cereals business during the three months ended March 29, 2008 and March 31, 2007, and during the fiscal years ended December 29, 2007, December 30, 2006 and December 31, 2005.

The financial statements of the Post cereals business have been derived from Kraft’s historical accounting records and reflect significant allocations of direct costs and expenses. All of the allocations and estimates in these financial statements are based on assumptions that management of the Post cereals business believes are reasonable. However, the financial statements do not necessarily represent the financial position of the Post cereals business had it been operated as a separate independent entity.

You should read this discussion in conjunction with the historical combined financial statements of the Post cereals business and the notes to those statements, the unaudited historical condensed combined financial statements of the Post cereals business and the notes to those statements and the unaudited pro forma condensed combined financial data and the notes to the pro forma condensed combined financial data of Ralcorp included elsewhere in this document.

The following discussion and analysis contains forward-looking statements. See “Cautionary Statement on Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements.

Overview

The Post cereals business, founded in 1895 by C.W. Post, currently is the third largest seller of ready-to-eat cereals in the United States based on market share, with a market share of approximately 14% in 2007 based on revenues. Since its founding, the Post cereals business has been creating cereals that define the breakfast experience for generations of families. The Post cereals business is primarily engaged in the production, manufacture, marketing and packaging of these ready-to-eat dry cereals.

The Post cereals business manufactures and markets products under several brand names, including the third highest revenue brand of ready-to-eat cereal, Honey Bunches of Oats. Other brands include Pebbles, Post Selects, Post Shredded Wheat, Post Raisin Bran, Grape-Nuts and Honeycomb. The Post cereals business’ products are generally sold to supermarket chains, wholesalers, supercenters, club stores, mass merchandisers, distributors, convenience stores and the foodservice channel in North America. Products of the Post cereals business are manufactured at six facilities located in Battle Creek, Michigan; Jonesboro, Arkansas; Modesto, California; Naperville, Illinois; Cobourg, Ontario; and Niagara Falls, Ontario. The Naperville, Illinois and Cobourg, Ontario facilities will remain with Kraft following the consummation of the Transactions and the other facilities will be transferred to Splitco. Approximately 1,230 employees involved in the Post cereals business will join Ralcorp following the consummation of the Transactions.

Separation of the Post Cereals Business from Kraft Foods Inc.

The Post cereals business is currently operated by Kraft but will be combined with Ralcorp pursuant to the Transaction Agreement. Prior to the Distribution, Kraft will transfer to Newco, which is a newly-formed, wholly owned, indirect Kraft subsidiary, the assets of the Post cereals business. KFG, a wholly owned subsidiary of Kraft and the parent of Newco at the time of the transfer of the assets of the Post cereals business, will then contribute the limited liability interests in Newco to Splitco and Newco will become a wholly owned subsidiary of Splitco. KFG will then distribute all of the shares of Splitco common stock held by KFG to Kraft.

 

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Splitco is a newly-formed company organized for the sole purpose of holding the Post cereals business and consummating the Transactions with Ralcorp. Splitco had no operations prior to the Contributions. Splitco will be a holding company and, prior to the Merger, will directly own all shares or other equity interests in Newco (which will, in turn, hold the Post cereals business).

Splitco will record assets and liabilities received from Kraft at the amount that the assets and liabilities are carried on Kraft’s consolidated financial statements. Neither the exchange of Kraft common stock for Splitco common stock, nor the distribution of Splitco common stock, in and of themselves, will affect the financial condition or results of operations of Splitco.

Although Kraft will not have a continuing proprietary interest in Splitco after the consummation of the Transactions, Ralcorp will enter into several agreements with Kraft and/or certain of its subsidiaries in connection with the Transactions, including a tax allocation agreement, an intellectual property licensing agreement, a transition services agreement and a co-manufacturing agreement. See “Additional Agreements.” These agreements are designed to enable Ralcorp to conduct the Post cereals business promptly following the completion of the Transactions.

Kraft Restructuring Program

In January 2004, Kraft announced a three-year restructuring program (the “Restructuring Program”) and, in January 2006, extended it through 2008. The Post cereals business is part of the Restructuring Program. The objectives of this program are to leverage Kraft’s global scale, realign and lower its cost structure and optimize capacity.

Under the Restructuring Program, the Post cereals business recorded asset impairment and exit costs of $1.5 million during the first quarter of 2008, $0.7 million during the first quarter of 2007, $15.2 million during 2007, $9.3 million during 2006 and $2.6 million during 2005. Kraft announced the closure of one Post cereals business plant in December 2007, which was the only plant closure announced for the Post cereals business since the program began in 2004. Management of the Post cereals business expects to pay cash for all of the charges incurred during the first quarter of 2008, and for approximately $6.9 million of the charges incurred during 2007 under the Restructuring Program. Since the inception of the Restructuring Program, the Post cereals business has incurred $33.8 million in charges and paid cash for $14.5 million related to those charges through March 29, 2008. Management of the Post cereals business expects to incur approximately $7 million in additional allocated asset impairment and exit costs during the remainder of 2008, which is the final year of the program.

In connection with severance initiatives under the Restructuring Program, as of March 29, 2008, Kraft eliminated approximately 425 Post cereals business positions; at that time Kraft also announced the elimination of an additional 50 Post cereals business positions.

Provision for Income Taxes

The effective tax rate for the Post cereals business was 36.7% in the first quarter of 2008, 35.8% in the first quarter of 2007, 35.5% in 2007, 35.9% in 2006 and 37.5% in 2005. The first quarter of 2008 effective tax rate includes $2.3 million of net state tax expense and the impact of the expiration of the research and experimentation credit. The 2007 effective tax rate includes $5.4 million of net state tax expense, partially offset by an increased domestic manufacturing deduction provided by the American Jobs Creation Act. The 2006 effective tax rate includes $6.3 million of net state tax expense, partially offset by the domestic manufacturing deduction and lower Canadian tax rates enacted in 2006. The 2005 effective tax rate includes $7.1 million of net state tax expense, partially offset by the domestic manufacturing deduction.

 

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Commodity Trends

Raw materials for the Post cereals business consist of ingredients and packaging materials. The principal ingredients are agricultural commodities, including wheat, oats, other grain products, soybean and other vegetable oils, fruits, almonds and other tree nuts, cocoa, corn syrup and sugar. The principal packaging materials are linerboard cartons, corrugated boxes, plastic containers and cartonboard. Kraft purchases raw materials for the Post cereals business from local, regional, national and international suppliers. The prices paid for raw materials can fluctuate widely due to weather conditions, labor disputes, government policies and regulations, economic climate, energy shortages, transportation delays, commodity market prices and currency fluctuations. Kraft continuously monitors worldwide supply and cost trends of these raw materials to enable it to take appropriate action to obtain ingredients and packaging needed for production.

Cereal processing ovens are generally fueled by natural gas or propane, which are obtained from local utilities or other local suppliers. Electricity and steam (generated in on-site, gas-fired boilers) are also used in the Post cereals business processing facilities. Short-term standby propane storage exists at several plants for use in the event of an interruption in natural gas supplies. Oil may also be used to fuel certain operations at various plants in the event of natural gas shortages or when its use presents economic advantages. In addition, considerable amounts of diesel fuel are used in connection with the distribution of products.

Commodity costs on average were higher in the first quarter of 2008 than in the first quarter of 2007, on average were higher in 2007 than in 2006, and on average were higher in 2006 than in 2005.

Results of Operations

Many factors impact the timing of sales to customers. These factors include, among others, the timing of holidays and other annual or special events, seasonality, significant weather conditions, timing of incentive programs and pricing actions of the Post cereals business or customers, customer inventory programs and general economic conditions. The Post cereals business reports year-end results as of the Saturday closest to the end of each year. This resulted in 53 weeks of operating results in its combined statement of earnings for the year ended December 31, 2005, versus 52 weeks for the years ended December 29, 2007 and December 30, 2006.

Comparison of Results of Operations for the Three Months Ended March 29, 2008 and March 31, 2007

The following discussion compares combined operating results of the Post cereals business for the three months ended March 29, 2008 and March 31, 2007.

 

     For the Three Months Ended    $ change     % change  
(Dollars in millions)        March 29,    
2008
       March 31,    
2007
    

Net revenues

   $ 270    $ 265    $ 5     1.9 %

Cost of sales

     157      158      (1 )   (0.6 )%

Marketing, administration and research costs

     53      63      (10 )   (15.9 )%

Selling Expense

     10      10          0.0 %

Asset impairment and exit costs

     2      1      1     100.0 %
                  

Operating income

     48      33      15     45.5 %

Provision for income taxes

     18      12      6     50.0 %
                  

Net earnings

     30      21      9     42.9 %
                  

Net Revenues. Net revenues increased $5.3 million (1.9%), due primarily to higher net pricing and favorable currency exchange rates, partially offset by lower volume. Currency fluctuations increased net revenues by approximately $2.9 million due to the continuing strength of the Canadian dollar against the U.S. dollar. Total volume was lower for the three months ended March 29, 2008 due to declines in cereals typically marketed to and consumed by adults, partially offset by gains in cereals typically marketed to and consumed by children.

 

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Cost of Sales. Cost of sales decreased by $0.5 million (0.6%) from the three months ended March 31, 2007 to the three months ended March 29, 2008. The decrease was primarily due to lower input costs (productivity benefits offset by higher commodity costs) and lower allocated costs from Kraft, partially offset by higher fixed manufacturing costs. Cost of sales includes allocated costs of $1.0 million for the three months ended March 29, 2008 and $3.8 million for the three months ended March 31, 2007.

Marketing, Administration and Research Costs. Marketing, administration and research costs decreased by $10.0 million (15.9%) from the three months ended March 31, 2007 to the three months ended March 29, 2008. The decrease was primarily driven by lower advertising spending. In addition, marketing, administration and research costs include allocated costs of $15.1 million for the three months ended March 29, 2008 and $17.1 million for the three months ended March 31, 2007.

Selling Expense. Selling expense was flat from the three months ended March 31, 2007 to the three months ended March 29, 2008. As selling expense consists of allocated variable and fixed selling costs incurred by Kraft’s sales and customer service group, these costs reflect the impact of the change in volume and revenue of the Post cereals business relative to total Kraft volume and revenue.

Asset Impairment and Exit Costs. Asset impairment and exit costs increased by $0.7 million (100.0%) from the three months ended March 31, 2007 to the three months ended March 29, 2008. The increase is due primarily to an increase in allocated exit costs from Kraft for the three months ended March 29, 2008 related to its strategy to rewire the organization for growth. Asset impairment and exit costs include allocated costs of $1.4 million for the three months ended March 29, 2008 and $0.7 million for the three months ended March 31, 2007.

Provision for Income Taxes. Provision for income taxes increased by $5.8 million (50.0%) from the three months ended March 31, 2007 to the three months ended March 29, 2008, due primarily to an increase in operating income and the expiration of the research and experimentation credit in 2007.

Comparison of Results of Operations for the Years Ended 2007 and 2006 and 2006 and 2005

The following discussion compares combined operating results of the Post cereals business for 2007 with 2006, and for 2006 with 2005.

 

(Dollars in millions)    2007    2006    $ change     % change  

Net revenues

   $ 1,103    $ 1,093    $ 10     0.9 %

Cost of sales

     640      637      3     0.5 %

Marketing, administration and research costs

     228      224      4     2.0 %

Selling expense

     39      33      6     16.8 %

Asset impairment and exit costs

     15      9      6     63.0 %
                  

Operating income

     181      190      (9 )   (4.7 )%

Provision for income taxes

     64      68      (4 )   (5.8 )%
                  

Net earnings

     117      122      (5 )   (4.2 )%
                  

 

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(Dollars in millions)    2006    2005    $ change     % change  

Net revenues

   $ 1,093    $ 1,091    $ 2     0.2 %

Cost of sales

     637      612      25     4.0 %

Marketing, administration and research costs

     224      222      2     1.1 %

Selling expense

     33      38      (5 )   (12.3 )%

Asset impairment and exit costs

     9      2      7     100.0+ %
                  

Operating income

     190      217      (27 )   (12.4 )%

Provision for income taxes

     68      81      (13 )   (16.1 )%
                  

Net earnings

     122      136      (14 )   (10.1 )%
                  

2007 compared with 2006

Net Revenues. Net revenues increased $9.9 million (0.9%), due primarily to higher net pricing and favorable currency exchange rates partially offset by lower volume. Currency fluctuations increased net revenues by approximately $3.9 million due to the continuing weakness of the U.S. dollar against the Canadian dollar. Total volume was lower in 2007 due to declines in cereals typically marketed to and consumed by adults, partially offset by gains in cereals typically marketed to and consumed by children.

Cost of Sales. Cost of sales increased by $2.9 million (0.5%) from 2006 to 2007. The increase was primarily driven by higher commodity costs in 2007. Cost of sales includes allocated costs of $9.1 million in 2007 and $11.5 million in 2006.

Marketing, Administration and Research Costs. Marketing, administration and research costs increased by $4.5 million (2.0%) from 2006 to 2007. The increase was primarily driven by higher advertising and consumer promotion costs in 2007. In addition, marketing, administration and research costs include allocated costs of $67.1 million in 2007 and $69.3 million in 2006.

Selling Expense. Selling expense increased by $5.6 million (16.8%) from 2006 to 2007. As selling expense consists of allocated variable and fixed selling costs incurred by Kraft’s sales and customer service group, the increase in these costs reflects the impact of the change in volume and revenue of the Post cereals business relative to total Kraft volume and revenue.

Asset Impairment and Exit Costs. Asset impairment and exit costs increased by $5.9 million (63.0%) from 2006 to 2007. The increase is due primarily to severance and asset impairment charges from the Post cereals business operations at Kraft’s Cobourg facility, partially offset by a decrease in allocated exit costs from Kraft during 2007. Asset impairment and exit costs include allocated costs of $3.0 million in 2007 and $5.9 million in 2006.

Provision for Income Taxes. Provision for income taxes decreased by $3.9 million (5.8%) from 2006 to 2007 due primarily to a decrease in operating income and an increase in the domestic manufacturing tax deduction provided by the American Jobs Creation Act in 2007.

2006 compared with 2005

The 2005 results of the Post cereals business included 53 weeks of operating results compared with 52 weeks in 2006. This extra week positively impacted net revenues by approximately $20.6 million and operating income by approximately $4.1 million in 2005.

Net Revenues. Net revenues increased $2.1 million (0.2%), due to higher net pricing and favorable currency exchange rates partially offset by unfavorable volume/mix (including the 53rd week in 2005). Currency fluctuations increased net revenues by approximately $5.3 million due to the weakness of the U.S. dollar against

 

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the Canadian dollar. Volume decreased due to the impact of the 53rd week in 2005 results. Excluding the impact of the 53rd week of shipments in 2005, volume increased primarily in cereals typically marketed to and consumed by adults, partially offset by declines in cereals typically marketed to and consumed by children.

Cost of Sales. Cost of sales increased by $24.5 million (4.0%) from 2005 to 2006. The increase was primarily driven by higher commodity costs. Cost of sales includes allocated costs of $11.5 million in 2006 and $9.7 million in 2005.

Marketing, Administration and Research Costs. Marketing, administration and research costs increased by $2.5 million (1.1%) from 2005 to 2006. Marketing, administration and research costs include allocated costs of $69.3 million in 2006 and $65.8 million in 2005.

Selling Expense. Selling expense decreased by $4.7 million (12.3%) from 2005 to 2006. As selling expense consists of allocated variable and fixed selling costs incurred by Kraft’s sales and customer service group, the decrease in these costs reflects the impact of the change in Post cereals business volume and revenue relative to total Kraft volume and revenue.

Asset Impairment and Exit Costs. Asset impairment and exit costs increased by $6.7 million (100+%) from 2005 to 2006. The increase primarily relates to increased asset impairment charges at the Post cereals business Battle Creek facility and an increase in allocated exit costs from Kraft during 2006. Asset impairment and exit costs include allocated costs of $5.9 million in 2006 and $2.6 million in 2005.

Provision for Income Taxes. Provision for income taxes decreased by $13.1 million (16.1%) from 2005 to 2006 due primarily to a decrease in operating income and lower Canadian tax rates enacted in 2006.

Liquidity and Capital Resources

Historically, the Post cereals business has funded its operating needs by generating positive cash flows through operations. The following table sets forth a summary of cash flows for the three months ended March 29, 2008 and March 31, 2007 and the fiscal years ended December 29, 2007, December 30, 2006 and December 31, 2005:

 

     Three Months Ended     Year Ended  
(in millions)    March 29,
2008
    March 31,
2007
    December 29,
2007
    December 30,
2006
    December 31,
2005
 

Net cash provided by/(used in):

          

Operating activities

   $ 54     $ 47     $ 141     $ 169     $ 168  

Investing activities

     (8 )     (1 )     (19 )     (32 )     (34 )

Financing activities

     (46 )     (46 )     (122 )     (137 )     (134 )

Net Cash Provided By Operating Activities. Cash provided by operating activities increased $7.4 million (15.9%) in the first quarter of 2008 from the first quarter of 2007, primarily due to higher earnings, partially offset by higher working capital costs.

Cash provided by operating activities decreased by $27.5 million (16.3%) in 2007 from 2006, primarily due to the timing of payments for accounts payable and accrued liabilities. Cash provided by operating activities increased by $1.2 million (0.7%) in 2006 from 2005, primarily due lower inventories and lower income tax payments.

Net Cash Used In Investing Activities. Cash used in investing activities increased $6.8 million (100.0+%) in the first quarter of 2008 from the first quarter of 2007. The increase primarily relates to an increase in capital expenditures. Capital expenditures, which were funded by operating activities, were $7.8 million in the first quarter of 2008 and $2.0 million in the first quarter of 2007.

 

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Cash used in investing activities decreased by $12.9 million (39.8%) in 2007 from 2006 and by $1.6 million (4.7%) in 2006 from 2005. The decreases in 2007 and in 2006 primarily relate to declines in capital expenditures. Capital expenditures, which were funded by operating activities, were $20.7 million in 2007, $32.5 million in 2006 and $34.1 million in 2005.

Capital expenditures in the first quarter of 2008 and in fiscal year 2007 were primarily to modernize manufacturing facilities, implement the Restructuring Program and support new productivity initiatives.

Net Cash Used In Financing Activities. Cash used in financing activities increased by $0.6 million (1.3%) in the first quarter of 2008 from the first quarter of 2007, decreased by $14.5 million (10.7%) in 2007 from 2006 and increased by $2.9 million (2.1%) in 2006 from 2005, due to fluctuations in the distribution to Kraft. Under Kraft’s centralized cash management system, the Post cereals business cash requirements are provided directly by Kraft, and cash generated by the Post cereals business is generally remitted directly to Kraft.

Off-Balance Sheet Arrangements

The Post cereals business does not have any off-balance sheet arrangements other than the contractual obligations that are listed below.

Quantitative and Qualitative Disclosures About Market Risk

The Post cereals business market risk primarily relates to trends in commodity pricing. See “—Commodity Trends.” Prior to the completion of the Transactions, the purchasing functions for the Post cereals business have been performed under Kraft’s centralized systems.

Contractual Obligations and Commercial Commitments

The following table summarizes significant contractual obligations of the Post cereals business as of December 29, 2007:

 

(in millions)    Total    2008    2009-10    2011-12    2013 and
thereafter

Operating leases (1)

   $ 31    $ 14    $ 9    $ 4    $ 4

Purchase obligations (2)

     —        —        —        —        —  

Other long-term liabilities (3)

     —        —        —        —        —  
                                  
   $ 31    $ 14    $ 9    $ 4    $ 4

 

(1) Operating leases represent the minimum rental commitments under non-cancellable operating leases. The Post cereals business has no capital leases.

 

(2) Prior to the completion of the Transactions, the purchasing functions for the Post cereals business have been performed under Kraft’s centralized systems.

 

(3) The following long-term liabilities included on the combined balance sheet are excluded from the table above: income taxes, insurance accruals and other accruals. Management of the Post cereals business is unable to estimate the timing of the payments for these items. As of December 29, 2007, the Post cereals business liability for uncertain tax positions and associated accrued interest and penalties was $5.3 million. While years 2000 through 2003 are currently under examination by the IRS, management of the Post cereals business is not able to reasonably estimate the timing of future cash flows due to uncertainties in the timing of this and other tax audit outcomes. Additionally, management of the Post cereals business plans to contribute approximately $0.5 million to its Canadian pension plans in 2008, based on current tax law. However, management of the Post cereals business is unable to reasonably estimate the timing of future pension contributions beyond that.

 

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Critical Accounting Policies and Estimates

Significant accounting policies of the Post cereals business are described in Note 1, Summary of Significant Accounting Policies, to the 2007 combined financial statements of the Post cereals business included elsewhere in this document, as updated in the condensed combined financial statements of the Post cereals business for the first quarter of 2008 included elsewhere in this document. The Post cereals business prepares its financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which require the Post cereals business to make certain elections as to its accounting policy, estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the dates of the financial statements and the reported amounts of net revenues and expenses during the reporting periods. Actual results could differ from those estimates.

The following is a review of the more significant assumptions and estimates, as well as the accounting policies used to prepare the combined financial statements.

Principles of Combination. The Post cereals business reports year-end results as of the last Saturday of each year. This resulted in 53 weeks of operating results in the combined statement of earnings for the year ended December 31, 2005, versus 52 weeks for the years ended December 29, 2007 and December 30, 2006. All intercompany transactions were eliminated. Transactions between the Post cereals business and Kraft are included in the financial statements of the Post cereals business.

Use of Estimates and Allocations. The financial statements of the Post cereals business are prepared in accordance with U.S. GAAP, which requires management of the Post cereals business to make estimates and assumptions that affect a number of amounts in the financial statements. These amounts include, among others, pension and benefit plan assumptions, valuation assumptions of goodwill and intangible assets, marketing programs and income taxes. Estimates are based on historical experience and other assumptions that management of the Post cereals business believes are reasonable. If actual amounts differ from estimates, revisions are included in the combined results of operations in the period the actual amounts become known. Historically, the aggregate differences, if any, between the estimates and actual amounts in any year have not had a significant impact on the combined financial statements.

Throughout the periods covered by the financial statements, the operations of the Post cereals business were conducted and accounted for as part of Kraft. The Post cereals business financial statements were derived from Kraft’s historical accounting records and reflect significant allocations of direct costs and expenses. All of the allocations and estimates in the financial statements are based on assumptions that management of the Post cereals business believes are reasonable. The financial statements do not necessarily represent the financial position of the Post cereals business had it been operated as a separate independent entity.

Related Party Transactions. Under Kraft’s centralized cash management system, cash requirements are provided directly by Kraft, and cash generated by the Post cereals business is generally remitted directly to Kraft. Transaction systems (e.g., payroll, employee benefits, and accounts payable) used to record and account for cash disbursements are provided by centralized Kraft organizations. Kraft also provides centralized sales, order management, billing, credit and collection functions to the Post cereals business. These sales and customer service functions operate on a regional basis and are customer rather than business or product focused. Transaction systems (e.g., revenues, accounts receivable, and cash application) used to record and account for cash receipts are also provided by centralized Kraft organizations. Most of these corporate systems are not designed to track assets/liabilities and receipts/payments on a business specific basis.

 

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Net revenues in the combined statements of earnings represent net sales directly attributable to the Post cereals business. Costs and expenses in the combined statements of earnings represent direct and allocated costs and expenses related to the Post cereals business. Costs for certain functions and services performed by centralized Kraft organizations have been allocated to the Post cereals business based on reasonable activity-based (generally volume, revenues, or a combination as compared to total Kraft and/or supporting segment or division amounts) and historical methods. The combined statements of earnings include expense allocations for:

 

   

certain sales allowances;

 

   

certain fixed and variable manufacturing, shipping, distribution, and related systems and administration costs;

 

   

administrative costs of the marketing division responsible for the Post cereals business, including systems, accounting, and finance;

 

   

certain Kraft corporate marketing and administrative expenses;

 

   

research and development costs; and

 

   

certain variable and fixed selling expenses for the Kraft sales and customer service functions, including systems and sales administrative expenses.

Kraft maintains all debt obligations on a consolidated basis to fund and manage operations. During the periods presented in these financial statements, the Post cereals business had no debt obligations and Kraft did not allocate debt or interest expense to the Post cereals business operations.

Inventories. Inventories are stated at the lower of cost or market. The last-in, first-out (“LIFO”) method is used to cost a majority of inventories. The LIFO method was used to determine the cost of 79% of inventories at December 29, 2007 and 84% of inventories at December 30, 2006. The cost of other inventories is principally determined by the average cost method. The stated LIFO amounts of inventories were $3.8 million lower at December 29, 2007 and $0.3 million lower at December 30, 2006 than the current cost of inventories. The Post cereals business also records inventory allowances for overstocked and obsolete inventories due to ingredient and packaging changes. The Jonesboro, Naperville, Modesto, Cobourg, and Niagara Falls plants manufacture products other than for the Post cereals business. Raw materials and spare parts at these plants attributed to the Post cereals business were allocated based on reasonable activity-based methodologies.

Long-lived assets. The Post cereals business reviews long-lived assets for impairment when conditions exist that indicate the carrying amount of the assets may not be fully recoverable. Undiscounted operating cash flow analyses are performed to determine if an impairment exists. When testing assets held for use for impairment, assets and liabilities are grouped at the lowest level for which cash flows are separately identifiable. If an impairment is determined to exist, the loss is calculated based on fair value. Impairment losses on assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal.

Goodwill. SFAS No. 142, Goodwill and Other Intangible Assets, requires companies to test goodwill at least annually for impairment. To test goodwill, the fair value of each reporting unit is compared to the carrying value of the reporting unit. If the carrying value exceeds the fair value, goodwill is considered impaired. The impairment loss is measured as the difference between the carrying value and implied fair value of goodwill, which is determined using discounted cash flows. The annual impairment review of goodwill of the Post cereals business has been completed as of December 1. No impairments resulted from these reviews in 2007, 2006 and 2005.

Revenue recognition. The Post cereals business recognizes revenues when title and risk of loss pass to customers, which occurs upon shipment or delivery of goods. Revenues are recorded net of consumer incentives and trade promotions and include all shipping and handling charges billed to customers. Shipping and handling costs are classified as part of cost of sales. Provisions and allowances for estimated sales returns and bad debts are also recorded in the combined financial statements.

 

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Marketing costs. Kraft promotes Post cereals business products with advertising, consumer incentives and trade promotions. These programs include, but are not limited to, discounts, coupons, rebates, in-store display incentives and volume-based incentives. The Post cereals business expenses advertising costs either in the period the advertising first takes place or as incurred. Consumer incentive and trade promotion activities are recorded as a reduction of revenues based on amounts estimated as being due to customers and consumers at the end of a period. Kraft bases these estimates principally on historical utilization and redemption rates. The Post cereals business does not defer amounts on the year-end combined balance sheet and all marketing costs are recorded as an expense in the year incurred. Advertising expenses include direct and indirect costs associated with advertising the Post cereals business’ brand name and products in the media (television, newspapers, periodicals, billboards, or other forms). Promotional expenses include costs associated with consumer promotions such as coupon production, distribution and processing, and costs for merchandise displays and/or sample costs. Total direct advertising expense for the Post cereals business was $20.4 million in the first quarter of 2008 and $25.8 million in the first quarter of 2007. Total direct advertising expense of the Post cereals business was $82.4 million in 2007, $88.0 million in 2006 and $86.7 million in 2005.

Environmental costs. The Post cereals business is subject to laws and regulations relating to the protection of the environment. The Post cereals business accrues for environmental remediation obligations on an undiscounted basis when such amounts are probable and can be reasonably estimated. The accruals are adjusted as new information develops or circumstances change. Recoveries of environmental remediation costs from third parties are recorded as assets when their receipt is deemed probable.

Based on information currently available, management of the Post cereals business believes that the ultimate resolution of existing environmental remediation actions and its compliance in general with environmental laws and regulations will not have a material effect on its financial position or results. However, management of the Post cereals business cannot quantify with certainty the potential impact of future compliance efforts, including those due to changes in law and environmental remediation actions.

Income taxes. The Post cereals business accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. Through the date of the completion of the Transactions, the Post cereals business will be included in Kraft’s consolidated federal income tax return, and prior to Kraft’s spin-off from Altria Group Inc. (“Altria”) on March 30, 2007, the Post cereals business was included in Altria’s consolidated federal income tax return. The Post cereals business generally computed income taxes on a separate company basis. The tax effects resulting from being included in either Kraft’s or Altria’s tax return are included in amounts distributed to Kraft.

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, Accounting for the Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 (“FIN 48”). The Post cereals business adopted the provisions of FIN 48 effective December 31, 2006. FIN 48 clarifies when tax benefits should be recorded in the financial statements and provides measurement criteria for valuing such benefits. In order to recognize benefits, a tax position must be more likely than not to be sustained upon audit. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. The adoption of FIN 48 resulted in a decrease to shareholder’s equity as of December 31, 2006 of $1.8 million.

 

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SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA

Selected Historical Combined Financial Data of the Post Cereals Business

Splitco is a newly-formed holding company organized for the sole purpose of indirectly holding the Post cereals business and consummating the Transactions with Ralcorp. The following data, insofar as it relates to each of the years 2003 through 2007, has been derived from annual financial statements, including the combined balance sheets at December 29, 2007 and December 30, 2006 and the related combined statements of earnings for each of the three years in the period ended December 29, 2007 and notes thereto appearing elsewhere herein. The data as of December 31, 2005 and as of and for the years ended December 25, 2004 and December 27, 2003 has been derived from unaudited combined financial information, not included in this document. The data as of and for the three months ended March 29, 2008 and for the three months ended March 31, 2007 has been derived from unaudited condensed combined financial statements included herein and is not necessarily indicative of the results for the remainder of the fiscal year or any future period. Splitco reports year-end results as of the Saturday closest to the end of each year. This resulted in 53 weeks of operating results in Splitco’s combined statement of earnings for the year ended December 31, 2005, and 52 weeks for each of the other years presented in the table below. This information is only a summary and you should read the table below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Post Cereals Business” and the financial statements of the Post cereals business and the notes thereto included elsewhere in this document.

 

    As of and for the
Three Months Ended
  As of and for the Year Ended
(in millions)   March 29,
2008
  March 31,
2007
  December 29,
2007
  December 30,
2006
  December 31,
2005
  December 25,
2004
  December 27,
2003

Combined Statement of Earnings Data:

             

Net revenue

  $ 270   $ 265   $ 1,103   $ 1,093   $ 1,091   $ 1,030   $ 1,078

Net earnings

    30     21     117     122     136     130     167

Combined Balance Sheet Data:

             

Total assets

  $ 931     $ 919   $ 914   $ 941   $ 929   $ 933

Long-term obligations

    199       194     186     185     180     167

 

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Selected Historical Consolidated Financial Data of Ralcorp

The following table sets forth selected historical consolidated financial data of Ralcorp. The statement of earnings data and balance sheet data for the fiscal years ended September 30, 2007, 2006, 2005, 2004, and 2003 are derived from the audited consolidated financial statements incorporated by reference into this document. See “Where You Can Find More Information; Incorporation by Reference.” The following table also sets forth summary historical condensed consolidated financial data for the six months ended March 31, 2008 and 2007, which data has not been audited. You should read the following data in conjunction with those consolidated financial statements and related notes, and in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Ralcorp’s Form 10-K for the year ended September 30, 2007 and Form 10-Q for the quarter ended March 31, 2008. The historical results are not necessarily indicative of results to be expected in any future period. See “—Unaudited Pro Forma Condensed Combined Financial Data of Ralcorp and the Post Cereals Business.”

 

    As of and for the
Six Months Ended

March 31,
    As of and for the Year Ended September 30,  
(in millions, except per share data)   2008     2007     2007     2006     2005     2004     2003  

Statement of Earnings Data

             

Net sales (a)

  $ 1,292.3     $ 1,041.7     $ 2,233.4     $ 1,850.2     $ 1,675.1     $ 1,558.4     $ 1,303.6  

Cost of products sold

    (1,076.3 )     (837.4 )     (1,819.2 )     (1,497.2 )     (1,339.1 )     (1,237.2 )     (1,045.6 )
                                                       

Gross profit

    216.0       204.3       414.2       353.0       336.0       321.2       258.0  

Selling, general and administrative expenses

    (135.5 )     (125.8 )     (252.8 )     (226.4 )     (215.1 )     (204.7 )     (171.3 )

Interest expense, net

    (22.5 )     (18.8 )     (42.3 )     (28.1 )     (16.5 )     (13.1 )     (3.3 )

Gain (loss) on forward sale contracts (b)

    62.3       (52.5 )     (87.7 )     (9.8 )     —         —         —    

Gain on sale of securities (c)

    —         —         —         2.6       —         —         —    

Restructuring charges (d)

    (1.4 )     —         (0.9 )     (0.1 )     (2.7 )     (2.4 )     (14.3 )

Litigation settlement income (e)

    —         —         —         —         1.8       0.9       14.6  

Goodwill impairment loss (f)

    —         —         —         —         —         —         (59.0 )
                                                       

Earnings before income taxes and equity earnings/loss

    118.9       7.2       30.5       91.2       103.5       101.9       24.7  

Income taxes

    (41.9 )     (1.8 )     (7.5 )     (29.9 )     (36.6 )     (37.2 )     (16.9 )

Equity in earnings (loss) of Vail Resorts, Inc., net of related deferred income taxes (g)

    3.9       2.7       8.9       7.0       4.5       0.4       (0.4 )
                                                       

Net earnings

    80.9       8.1     $ 31.9     $ 68.3     $ 71.4     $ 65.1     $ 7.4  
                                                       

Earnings per share:

             

Basic

  $ 3.16     $ 0.30     $ 1.20     $ 2.46     $ 2.41     $ 2.22     $ 0.25  

Diluted

  $ 3.08     $ 0.29     $ 1.17     $ 2.41     $ 2.34     $ 2.17     $ 0.25  

Weighted average shares outstanding:

             

Basic

    25.5       26.8       26.4       27.7       29.6       29.2       29.3  

Diluted

    26.2       27.4       27.1       28.2       30.4       29.9       29.7  

Balance Sheet Data

             

Cash and cash equivalents

  $ 15.7       $ 9.9     $ 19.1     $ 6.2     $ 23.7     $ 29.0  

Working capital (excluding cash and cash equivalents)

    155.9         165.3       170.3       92.4       107.3       84.2  

Total assets

    1,867.9         1,853.1       1,507.5       1,269.5       1,221.6       794.3  

Long-term debt

    745.8         763.6       552.6       422.0       425.7       155.9  

Other long-term liabilities

    305.4         382.6       281.5       157.8       152.4       95.0  

Shareholders’ equity

    554.1         483.4       476.4       518.3       444.4       412.7  

Other Data

             

Cash provided (used) by:

             

Operating activities

  $ 63.0     $ 125.8     $ 218.3     $ 52.8     $ 161.0     $ 78.7     $ 101.0  

Investing activities

    (32.3 )     (345.7 )     (387.5 )     (162.2 )     (156.3 )     (365.5 )     (30.7 )

Financing activities

    (24.9 )     214.3       160.0       122.3       (22.2 )     281.5       (44.5 )

Depreciation and amortization

    44.9       36.7       82.4       66.8       55.8       47.5       38.7  

Dividends declared per share

  $ —       $ —       $ —       $ —       $ —       $ 1.00     $ —    

 

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(a) Ralcorp acquired Pastries Plus of Utah, Inc., Bloomfield Bakers, and Cottage Bakery, Inc. in 2007; Parco Foods, L.L.C and Western Waffles, Ltd. in 2006; Medallion Foods, Inc. in 2005; and Concept 2 Bakers and Bakery Chef in 2004.

 

   

On August 14, 2007, Ralcorp acquired certain assets and lease obligations of Pastries Plus of Utah, a competing manufacturer of branded and private label thaw-and-sell cookies with annual gross sales of approximately $10.

 

   

Bloomfield Bakers, acquired on March 16, 2007, is a manufacturer of nutritional and cereal bars and natural and organic specialty cookies, crackers, and cereals. The acquired business, which had net sales of $188 for its fiscal year ended December 31, 2006, operates two leased manufacturing facilities in Azusa and Los Alamitos, California and employs approximately 500 people.

 

   

Cottage Bakery, acquired on November 10, 2006, is a manufacturer of par-baked breads and frozen dough sold in the retail and foodservice channels. The acquired business operates one manufacturing facility in Lodi, California, employs approximately 690 people, and had gross sales of approximately $125 for its fiscal year ended June 30, 2006.

 

   

Parco Foods, acquired on February 7, 2006, is a manufacturer of cookies primarily in the in-store bakery channel which had net sales of approximately $50 for the year ended December 25, 2005.

 

   

Western Waffles, acquired on November 15, 2005, is a Canadian manufacturer of private label frozen griddle products with three manufacturing facilities, approximately 370 employees, and annual net sales at acquisition of approximately $75.

 

   

Medallion Foods, acquired on June 22, 2005, is a manufacturer of value brand and private label corn-based chips and extruded corn products. The acquired company employs 270 employees at its plant in Newport, Arkansas and had net sales of approximately $43 for the year ended December 31, 2004.

 

   

On February 27, 2004, Ralcorp purchased the assets, including a bakery in Fridley, Minnesota, of Concept 2 Bakers (C2B), a manufacturer of high quality, frozen par-baked artisan breads. At acquisition, C2B had annual net sales of approximately $34.

 

   

Bakery Chef, acquired on December 3, 2003, is a manufacturer of frozen griddle products (pancakes, waffles, and French toast) and pre-baked biscuits and breads. The acquired company operates five manufacturing facilities, employs approximately 800 people, and had net sales of $165 for the year ended December 31, 2002.

 

(b) During the quarter ended December 31, 2005, Ralcorp entered into a forward sale contract relating to 1.78 million shares of its Vail common stock. Under the contract, at the maturity dates (half on November 21, 2008 and half on November 22, 2010) Ralcorp can deliver a variable number of shares of Vail stock (or cash) to the counterparty. During the quarter ended June 30, 2006, Ralcorp entered into a similar agreement relating to 1.97 million additional shares of its Vail common stock, with maturity dates of November 18, 2009 and November 16, 2011. A third contract was entered into during the quarter ended December 31, 2006, relating to 1.2 million additional shares, with a maturity date of November 15, 2013. The calculation of the number of shares ultimately delivered will depend on the price of Vail shares at settlement and includes a price collar. Ralcorp received a total of $140.0 under the discounted advance payment features on the contracts. Amortization of the related discounts is included in “Interest expense, net” on the statements of earnings and totaled $4.3 for the six months ended March 31, 2008, $4.0 for the six months ended March 31, 2007, $8.3 for the year ended September 30, 2007 and $3.7 for the year ended September 30, 2006. At March 31, 2008, and September 30, 2007 and 2006, the fair value of the contracts was $191.5, $249.5 and $124.0, respectively. Because Ralcorp accounts for its investment in Vail Resorts using the equity method, these contracts, which are intended to hedge the future sale of those shares, are not eligible for hedge accounting. Therefore, any gains or losses on the contracts are immediately recognized in earnings.

 

(c) On March 21, 2006, Ralcorp sold 100,000 of its shares of Vail Resorts for a total of $3.8. The shares had a carrying value of $1.2, so the transaction resulted in a $2.6 gain.

 

(d) For the six months ended March 31, 2008, the majority of charges were due to the accrual of certain employee termination benefits related to the closing of the Billerica, Massachusetts facility. In 2007, charges were due to the closing of the Blue Island, Illinois facility. The majority of these charges related to employee termination benefits. In 2006, restructuring costs consisted of miscellaneous charges related to the closing of the plant in City of Industry, California. In 2005, charges were due to employee termination benefits and other charges related to the closing of the City of Industry plant as well as a write-down of property to be sold related to the closing of the Kansas City, Kansas plant. In 2004, charges were due to the closing of the Kansas City, Kansas plant. In 2003, charges were due to the reduction of Ralcorp’s operations in Streator, Illinois, the sale of the ketchup and tomato paste businesses, and the relocation of in-store bakery production.

 

(e) Ralcorp received payments in settlement of legal claims, primarily related to antitrust litigation, which are shown net of related expenses.

 

(f) In 2003, a non-cash goodwill impairment loss related to the Carriage House reporting unit was recorded in accordance with SFAS No. 142.

 

(g) In 2003, Ralcorp adjusted its equity earnings to reflect the cumulative effect of earnings restatements made by Vail Resorts, Inc.

 

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Unaudited Pro Forma Condensed Combined Financial Data of Ralcorp and the Post Cereals Business

The following unaudited pro forma condensed combined financial information is provided for informational purposes only. The unaudited pro forma condensed combined financial information is not necessarily indicative of what Ralcorp’s or the Post cereals business’ financial position or results of operations actually would have been had the Transactions been completed at the dates indicated. In addition, the unaudited pro forma condensed combined financial information does not purport to project the future financial position or operating results of Ralcorp after consummation of the Transactions.

The unaudited pro forma condensed combined statements of earnings combine the historical consolidated statements of earnings of Ralcorp and the Post cereals business, giving effect to the Transactions as if they had occurred on October 1, 2006. The unaudited pro forma condensed combined balance sheet combines the historical consolidated balance sheets of Ralcorp and the Post cereals business, giving effect to the Transactions as if they had been consummated on March 31, 2008. You should read this information in conjunction with the:

 

   

accompanying notes to the unaudited pro forma condensed combined financial information;

 

   

separate unaudited historical financial statements of Ralcorp as of and for the period ended March 31, 2008, included in the Ralcorp quarterly report on Form 10-Q for the period ended March 31, 2008, which is incorporated by reference into this document;

 

   

separate historical financial statements of Ralcorp as of and for the fiscal year ended September 30, 2007, included in the Ralcorp annual report on Form 10-K for the fiscal year ended September 30, 2007, which financial statements are incorporated by reference into this document; and

 

   

separate historical financial statements of the Post cereals business as of and for the year ended December 29, 2007, which are included in this document.

 

   

separate unaudited historical financial statements of the Post cereals business as of and for the three months ended March 29, 2008, which are included in this document.

As more fully described in “The Transactions—Accounting Treatment of the Merger” below, the Merger will be treated as a purchase of Splitco by Ralcorp, with Ralcorp as the acquiring entity in accordance with SFAS No. 141, Business Combinations. Accordingly, goodwill arising from the Merger will be determined as the excess of the acquisition cost of Splitco over the fair value of its net assets. In the unaudited pro forma condensed combined balance sheet, Ralcorp’s cost to acquire Splitco has been allocated to the assets acquired and liabilities assumed based upon Ralcorp’s preliminary estimate of their respective fair values as of the date of acquisition. Please refer to note (b) to the following unaudited pro forma condensed combined financial information for additional information on the allocation. Definitive allocations will be performed and finalized based upon certain valuations and other studies after the closing date of the Merger. Accordingly, the purchase allocation pro forma adjustments are preliminary and have been made solely for the purpose of providing unaudited pro forma condensed combined financial information and are subject to revision based on a final determination of fair value after the closing of the Merger. Thus, the final purchase allocation may differ in material respects from that presented in the unaudited pro forma condensed combined financial information. The unaudited pro forma condensed combined statements of earnings also include certain purchase accounting adjustments, including items expected to have a continuing impact on the combined results, such as increased depreciation and amortization expense on acquired tangible and intangible assets.

Ralcorp has a fiscal year end of September 30 whereas the Post cereals business reports year-end results as of the Saturday closest to the end of each calendar year. The pro forma condensed combined financial information presented herein combines the Post cereals business’ six months ended March 29, 2008 with Ralcorp’s six months ended March 31, 2008 and combines the Post cereals business’ year ended December 29, 2007 with Ralcorp’s year ended September 30, 2007. Consequently, the Post cereals business’ results for the period from October 1, 2007 to December 29, 2007 were included more than once in the unaudited pro forma condensed combined statements of earnings, as part of both the pro forma year ended September 30, 2007 and the subsequent pro forma interim period.

 

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Items Not Reflected in the Unaudited Pro Forma Condensed Combined Financial Information

The unaudited pro forma condensed combined statements of earnings do not include the impacts of any revenue, cost or other operating synergies that may result from the Transactions. In addition, as disclosed in the notes to combined financial statements of the Post cereals business, “Throughout the periods covered by the financial statements, operations of the Post cereals business were conducted and accounted for as part of Kraft. These financial statements have been derived from Kraft’s historical accounting records and reflect significant allocations of direct costs and expenses. All of the allocations and estimates in these financial statements are based on assumptions that management of the Post cereals business believes are reasonable. The financial statements do not necessarily represent the financial position of the Post cereals business had it been operated as a separate independent entity.” Ralcorp’s management prepared projections for the Post cereals business using numerous estimates and assumptions relating to the ability of Ralcorp to operate the Post cereals business outside of Kraft for consideration by Ralcorp’s financial advisors in developing their fairness opinion and Ralcorp’s board of directors in consideration of the Transactions. Please refer to “Certain Financial Forecasts Prepared by Ralcorp Relating to the Post Cereals Business” for more information on these projections.

The unaudited pro forma condensed combined financial information does not reflect the impact of any financing, liquidity or other balance sheet repositioning that may be undertaken in connection with or subsequent to the closing of the Transactions.

Ralcorp may be required to issue up to an additional 6.0 million shares of its common stock to the extent that the exchange by Kraft of some or all of the Debt Securities for debt obligations of Kraft and the subsequent sale of the Debt Securities to third-party investors at par as of the closing date would not be reasonably practicable without a reduction in the principal amount of the Debt Securities. Such an issuance is believed to be remote because, pursuant to the terms of the Transaction Agreement, the Debt Securities may be issued at interest rates and under terms and covenants necessary to ensure the securities are sold at par. Therefore, the additional shares are not included in the unaudited pro forma financial information. However, the following tables shows the pro forma effects as if the additional 6.0 million shares referenced above were issued.

 

     As of March 31, 2008  
     Pro Forma
as
Presented
    Pro Forma
Including
Additional Shares
 

Total acquisition cost

   $ 1,799.1     $ 2,151.3  

Assumption of debt issued immediately prior to Merger

     (962.2 )     (610.0 )

Residual goodwill created from the Merger

     1,493.5       1,493.5  

 

     For the Year Ended
September 30, 2007
    For the Six Months Ended
March 31, 2008
 
     Pro Forma
as
Presented
    Pro Forma
Including
Additional Shares
    Pro Forma
as
Presented
    Pro Forma
Including
Additional Shares
 

Interest expense, net

   $ (102.4 )   $ (80.4 )   $ (52.6 )   $ (41.6 )

Income taxes

     (43.9 )     (51.8 )     (59.4 )     (63.4 )

Net earnings

     99.0       113.1       116.5       123.5  

Earnings per share:

        

Basic

   $ 1.74     $ 1.80     $ 2.08     $ 2.00  

Diluted

   $ 1.72     $ 1.78     $ 2.06     $ 1.97  

Weighted average shares outstanding:

        

Basic

     56.8       62.8       55.9       61.9  

Diluted

     57.5       63.5       56.6       62.6  

 

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Ralcorp’s blended state tax rate could increase subsequent to the closing of the Transactions as a result of a change in the jurisdictions in which Ralcorp will conduct its operations. As a result, upon completion of the Transactions, Ralcorp will assess whether a higher blended state tax rate will be required to be applied to its taxable income, which could increase its effective tax rate and cash taxes on a prospective basis. In addition, as of the closing date of the Transactions, Ralcorp will evaluate whether to recognize immediately in earnings the change, if any, in the effective deferred tax rates expected to be applied to its existing net taxable temporary differences. The effect, if any, of such adjustment is excluded from the unaudited pro forma condensed combined financial information.

Based on Ralcorp’s review of the summary of significant accounting policies disclosed in the financial statements of the Post cereals business, the nature and amount of any adjustments to the historical financial statements of the Post cereals business to conform its accounting policies to those of Ralcorp are not expected to be significant other than those related to the change of inventory accounting method described in note (n) to the unaudited pro forma condensed combined financial information. Upon consummation of the Transactions, further review of the accounting policies and financial statements of the Post cereals business may result in required revisions to the policies and classifications of the Post cereals business to conform to Ralcorp’s.

 

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Unaudited Pro Forma Condensed Combined Balance Sheet

 

     As of March 31, 2008  
(in millions)    Ralcorp     Post Cereals
Business (a)
    Pro Forma
Adjustments
    Pro Forma
Combined
 

Assets

        

Current Assets

        

Cash and cash equivalents

   $ 15.7     $ —       $ —       $ 15.7  

Marketable securities

     10.9       —         —         10.9  

Investment in Ralcorp Receivables Corporation

     44.1       —         —         44.1  

Receivables, net

     96.6       61.3       —         157.9  

Inventories

     246.4       95.0       10.0 (c)     351.4  

Deferred income taxes

     —         17.4       (2.0 )(d)     15.4  

Prepaid expenses and other current assets

     20.5       .1       —         20.6  
                                

Total Current Assets

     434.2       173.8       8.0       616.0  

Investment in Vail Resorts, Inc.

     116.9       —         —         116.9  

Property, Net

     449.0       441.4       100.0 (e)     990.4  

Goodwill

     578.2       297.0       1,196.5 (b)     2,071.7  

Other Intangible Assets, Net

     249.2       9.0       1,370.0 (f)     1,628.2  

Other Assets

     40.4       9.6       (4.6 )(g)     45.4  
                                

Total Assets

   $ 1,867.9     $ 930.8     $ 2,669.9     $ 5,468.6  
                                

Liabilities and Shareholders’ Equity

        

Current Liabilities

        

Accounts and notes payable

   $ 158.0     $ 35.6     $ 10.4 (g)   $ 204.0  

Deferred income taxes

     2.0       —         (2.0 )(d)     —    

Other current liabilities

     102.6       79.0       —         181.6  
                                

Total Current Liabilities

     262.6       114.6       8.4       385.6  

Long-term Debt

     745.8       —         962.2 (h)     1,708.0  

Deferred Income Taxes

     58.7       187.3       532.8 (i)     778.8  

Other Liabilities

     246.7       11.3       —         258.0  
                                

Total Liabilities

     1,313.8       313.2       1,503.4       3,130.4  
                                

Shareholders’ Equity

        

Common stock

     .3       —         .3 (j)     .6  

Additional paid-in capital

     126.7       —         1,783.8 (k)     1,910.5  

Common stock in treasury, at cost

     (260.5 )     —         —         (260.5 )

Contribution from Kraft

     —         290.1       (290.1 )(l)     —    

Retained earnings

     682.0       351.5       (351.5 )(l)     682.0  

Accumulated other comprehensive income

     5.6       (24.0 )     24.0 (l)     5.6  
                                

Total Shareholders’ Equity

     554.1       617.6       1,166.5       2,338.2  
                                

Total Liabilities and Shareholders’ Equity

   $ 1,867.9     $ 930.8     $ 2,669.9     $ 5,468.6  
                                

See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Information.

 

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Unaudited Pro Forma Condensed Combined Statements of Earnings

 

     For the Year Ended September 30, 2007  
(in millions, except per share data)    Ralcorp (m)     Post Cereals
Business (a)
    Pro Forma
Adjustments
    Pro Forma
Combined
 

Net Sales

   $ 2,233.4     $ 1,102.7     $ —       $ 3,336.1  

Cost of products sold

     (1,819.2 )     (639.5 )     8.6 (n)     (2,450.1 )
                                

Gross Profit

     414.2       463.2       8.6       886.0  

Selling, general and administrative expenses

     (252.8 )     (267.0 )     (26.0 )(o)     (545.8 )

Interest expense, net

     (42.3 )     —         (60.1 )(h)     (102.4 )

Loss on forward sale contracts

     (87.7 )     —         —         (87.7 )

Asset impairment and exit costs

     (0.9 )     (15.2 )     —         (16.1 )
                                

Earnings before Income Taxes and Equity Earnings

     30.5       181.0       (77.5 )     134.0  

Income taxes

     (7.5 )     (64.3 )     27.9 (i)     (43.9 )
                                

Earnings before Equity Earnings

     23.0       116.7       (49.6 )     90.1  

Equity in earnings of Vail Resorts, Inc., net of related deferred income taxes

     8.9       —         —         8.9  
                                

Net Earnings

   $ 31.9     $ 116.7     $ (49.6 )   $ 99.0  
                                

Earnings per Share

        

Basic

   $ 1.20         $ 1.74  

Diluted

   $ 1.17         $ 1.72  

Weighted Average Shares Outstanding

        

Basic

     26.4         30.4 (p)     56.8  

Diluted

     27.1         30.4 (p)     57.5  

See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Information.

 

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Unaudited Pro Forma Condensed Combined Statements of Earnings

 

     For the Six Months Ended March 31, 2008  
(in millions, except per share data)    Ralcorp     Post Cereals
Business (a)
    Pro Forma
Adjustments
    Pro Forma
Combined
 

Net Sales

   $ 1,292.3     $ 526.5     $ —       $ 1,818.8  

Cost of products sold

     (1,076.3 )     (303.8 )     4.5 (n)     (1,375.6 )
                                

Gross Profit

     216.0       222.7       4.5       443.2  

Selling, general and administrative expenses

     (135.5 )     (117.0 )     (13.0 )(o)     (265.5 )

Interest expense, net

     (22.5 )     —         (30.1 )(h)     (52.6 )

Gain on forward sale contracts

     62.3       —         —         62.3  

Asset impairment and exit costs

     (1.4 )     (14.0 )     —         (15.4 )
                                

Earnings before Income Taxes and Equity Earnings

     118.9       91.7       (38.6 )     172.0  

Income taxes

     (41.9 )     (31.4 )     13.9 (i)     (59.4 )
                                

Earnings before Equity Earnings

     77.0       60.3       (24.7 )     112.6  

Equity in earnings of Vail Resorts, Inc., net of related deferred income taxes

     3.9       —         —         3.9  
                                

Net Earnings

   $ 80.9     $ 60.3     $ (24.7 )   $ 116.5  
                                

Earnings per Share

        

Basic

   $ 3.16         $ 2.08  

Diluted

   $ 3.08         $ 2.06  

Weighted Average Shares Outstanding

        

Basic

     25.5         30.4 (p)     55.9  

Diluted

     26.2         30.4 (p)     56.6  

See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Information.

 

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Notes to Unaudited Pro Forma Condensed Combined Financial Information

(dollars in millions, except per share data)

 

(a) Certain reclassifications have been made to the historical presentation of the Post cereals business to conform to the presentation used in the unaudited pro forma condensed combined balance sheet and the unaudited pro forma condensed combined statements of earnings.

 

(b) Under the purchase method of accounting, the total consideration will be determined using the number of shares issued by Ralcorp multiplied by the average closing price of Ralcorp shares for a few days before and after the date the number of Ralcorp shares to be issued becomes fixed without subsequent substantive revision. For purposes of the unaudited pro forma condensed combined financial information contained herein, Ralcorp assumed the issuance of 30,393,589 shares, which is the approximate number of Ralcorp shares that Ralcorp anticipates will be issued in the Merger, and the market price was assumed to be $58.70 per share, which was the average daily closing market price for the three business days before and after the announcement of the execution of the Transaction Agreement (November 15, 2007). The number of shares to be issued is discussed further in note (j) below. The preliminary total cost of the acquisition is as follows:

 

     Common Stock
($0.01 par value)
   Additional
Paid-in
Capital
   Total

Issuance of Ralcorp shares to Kraft’s shareholders (30,393,589 shares at $58.70)

   $ 0.3    $ 1,783.8    $ 1,784.1

Estimated Ralcorp transaction costs (g)

           15.0
            

Total acquisition cost

         $ 1,799.1
            

Ralcorp has not completed an assessment of the fair value of assets and liabilities of the Post cereals business and the related business integration plans. The table below represents a preliminary allocation of the total acquisition cost to the tangible and intangible assets of the Post cereals business and liabilities based on management’s preliminary estimate of their respective fair value as of the date of the business combination:

 

Historical net book value of the Post cereals business (l)

   $ 617.6  

Elimination of the historical goodwill of the Post cereals business

     (297.0 )

Assumption of debt issued immediately prior to Merger (h)

     (962.2 )

Preliminary valuation adjustment to inventories (c)

     10.0  

Preliminary valuation adjustment to property (e)

     100.0  

Preliminary valuation of identifiable intangible assets (f)

     1,370.0  

Deferred tax impact of purchase accounting adjustments (i)

     (532.8 )

Residual goodwill created from the Merger

     1,493.5  
        

Total acquisition cost allocated

   $ 1,799.1  
        

As noted above, upon completion of the fair value assessment after the closing of the Transactions, Ralcorp anticipates that the ultimate acquisition cost allocation may differ materially from the preliminary assessment outlined above. Any changes to the initial estimates of the fair value of the assets and liabilities will be allocated to residual goodwill.

 

(c) Historical inventory of the Post cereals business values have been adjusted to estimated fair value as discussed in note (b) above.

 

(d) Historical current deferred income tax assets and liabilities were combined for purposes of the unaudited pro forma condensed combined financial information resulting in net current deferred income tax assets.

 

(e)

For purposes of the preliminary allocation discussed in note (b) above, Ralcorp estimated a fair value adjustment for property of the Post cereals business based on a preliminary assessment of the assets and

 

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valuation studies from other recent Ralcorp acquisitions. For purposes of the unaudited pro forma condensed combined financial information, the fair value adjustment is being depreciated over an estimated weighted average useful life of 10 years.

 

(f) Ralcorp has estimated the fair value of identifiable intangible assets of the Post cereals business as $1,370.0. As discussed in note (b) above, the preliminary allocation to such intangible assets included in this unaudited pro forma financial information is as follows (by asset class):

 

     Estimated
Value
   Estimated Average
Remaining

Useful Life

Brand intangibles—indefinite lived

   $ 1,000.0    Indefinite

Brand intangibles—finite lived

     120.0    20 years

Customer relationships

     200.0    20 years

Technology-based intangibles

     30.0    6 years

Contract-based intangibles

     20.0    4 years
         
   $ 1,370.0   
         

Preliminary estimated values for each individual brand intangible, including Post, Honey Bunches of Oats, Grape-Nuts, Honeycomb and others, were determined based upon the present value of the estimated future cash flows attributable to the individual brand. Preliminary estimated values and lives for customer relationships and technology-based and contract-based intangibles were primarily based upon the present values of estimated future cash flows, Ralcorp’s experience during recent acquisitions and Ralcorp’s review of similar public transactions. Cash flows of individual intangible assets were estimated based upon historical cash flows adjusted for anticipated future changes, primarily future sales volume and pricing changes. Cash flows were discounted using rates between 9% and 12.5% depending upon the estimated relative risk of the individual intangible asset.

Ralcorp’s preliminary assessment as to brand intangibles that have an indefinite life and those that have a finite life was based upon a number of factors, including the competitive environment, market share, brand history, operating plan and the macroeconomic environment of the countries in which the brands are sold. Individual brands that have a large market share, a long history of performance and a strong competitive position were preliminarily deemed to have an indefinite life. For perspective, if Ralcorp determines that 25% of the amount allocated to indefinite lived intangible assets is more appropriately allocated to finite lived intangible assets with an estimated weighted average useful life of 20 years, the impact on the unaudited pro forma condensed combined statement of earnings for the year ended September 30, 2007 is estimated as $8.0 after-tax, or $0.14 per share.

 

(g) As shown in note (b) above, the $15.0 in estimated expenses related to the Transactions will be allocated, along with the transaction consideration, to assets and liabilities and residual goodwill of the Post cereals business. Ralcorp had incurred approximately $4.6 of transaction costs as of March 31, 2008, and these amounts were recorded in Other Assets on Ralcorp’s historical financial statements. Upon completion of the Transactions, the amount of those costs will be removed from Other Assets. The remaining $10.4 of the estimated transaction costs to be incurred is reflected as an increase in accounts payable as of the unaudited pro forma condensed combined balance sheet as of March 31, 2008.

 

(h) Ralcorp will incur additional long-term indebtedness of approximately $962.2 as part of the Transactions. The terms of the issuances are not known at this time. An estimated weighted average interest rate of 6.25% has been used for the purposes of calculating related interest expense. This rate was based on the 10-year Treasury rate plus the 250 to 300 basis points applicable to issuances of companies with similar credit profiles. An assumed interest rate increase of 125 basis points would increase annual interest expense by an additional $1.2, which is $0.8 after-tax, or $0.01 per share.

 

(i) Income tax impacts as a result of purchase accounting and other pro forma adjustments are estimated at Ralcorp’s incremental effective income tax rate for the periods presented (approximately 36%), which reflects Ralcorp’s best estimate of its statutory income tax rates for all tax jurisdictions.

 

(j)

As discussed above, the number of Ralcorp shares of common stock to be issued in the Merger will be 1.1602 multiplied by the number of shares of Ralcorp common stock outstanding on a “fully diluted basis”

 

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as of the closing date. For purposes of the unaudited pro forma condensed combined financial information, the issuance of 30,393,589 shares of Ralcorp common stock was assumed, which is the approximate number of Ralcorp shares that Ralcorp anticipates will be issued in the Merger.

 

(k) The adjustment to additional paid-in capital is equal to the total consideration, less the par value of common stock issued. See note (b) above.

 

(l) Historical equity accounts of the Post cereals business (the total of which is equal to its book value), which consisted of an equity contribution from Kraft, retained earnings, and accumulated other comprehensive income, will be eliminated in recording the Transactions.

 

(m) On November 10, 2006, Ralcorp acquired Cottage Bakery, Inc., and on March 16, 2007, Ralcorp acquired Bloomfield Bakers and its affiliate, Lovin Oven L.L.C. Ralcorp’s historical operating results include results of each of these businesses from their respective acquisition dates.

 

(n) Depreciation expense will increase as a result of the fair value adjustments to property of the Post cereals business described in note (e) above. Also, Kraft will retain all liability for providing any retiree welfare benefits including life, medical and dental benefits to any transferring employee of the Post cereals business who retired or satisfied the age and services requirements to become eligible for such benefits prior to the transfer time, so related expenses have been eliminated. Finally, because the Post cereals business will be required to change its inventory accounting method from LIFO to FIFO upon completion of the Transactions, LIFO adjustments have been eliminated. The amounts of these pro forma adjustments are as follows:

 

     For the Year Ended
September 30, 2007
    For the Six
Months Ended
March 31, 2008
 

Depreciation adjustment

   $ (10.0 )   $ (5.0 )

Retiree welfare benefits adjustment

     15.0       7.0  

LIFO inventory adjustment

     3.6       2.5  
                
   $ 8.6     $ 4.5  
                

 

(o) Intangible asset amortization expense will increase as a result of the fair value adjustments to the intangible assets of the Post cereals business described in note (f) above.

 

(p) The pro forma combined per share amounts and weighted average common shares reflect the combined weighted average of Ralcorp common shares for each period presented and the assumed number of Ralcorp common shares to be issued in the Transactions, including the impact of net shares issued to satisfy the outstanding equity-based awards of the Post cereals business using the treasury stock method. See note (j) above for more information about the number of Ralcorp shares to be issued.

 

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Comparative Historical and Pro Forma Per Share Data

The following table sets forth certain historical and pro forma per share data for Ralcorp. The data has been derived from and should be read together with the audited consolidated financial statements of Ralcorp and related notes thereto contained in Ralcorp’s Form 10-K for the fiscal year ended September 30, 2007, and the unaudited condensed consolidated financial statements of Ralcorp and related notes thereto contained in Ralcorp’s Form 10-Q for the period ended March 31, 2008, which are incorporated by reference into this document and the audited financial statements of the Post cereals business and related notes contained thereto, which are included elsewhere in this document, and in the documents incorporated by reference herein that are described under the section entitled “Where You Can Find More Information; Incorporation by Reference.”

This summary of comparative historical and pro forma per share data is being provided for illustrative purposes only. Ralcorp and the Post cereals business may have performed differently had the Transactions occurred prior to the period presented. You should not rely on the pro forma per share data presented as being indicative of the results that would have been achieved had Ralcorp and the Post cereals business been combined during the period presented or of the future results of Ralcorp following the Transactions.

 

     As of and for the
Six Months Ended
March 31, 2008
   As of and for the
Year Ended
September 30, 2007
     Historical    Pro Forma    Historical    Pro Forma

Earnings per share—basic

   $ 3.16    $ 2.08    $ 1.20    $ 1.74

Earnings per share—diluted

     3.08      2.06      1.17      1.72

Dividends declared per share

     —        —        —        —  

Book value per share

     21.54      41.66      18.76      n/a

Historical Common Stock Market Price

Historical market price data for Splitco has not been presented as the Post cereals business is currently operated by Kraft and there is no established trading market in Splitco common stock. Shares of Splitco common stock do not currently trade separately from Kraft common stock.

Ralcorp’s common stock is currently traded on the NYSE under the symbol “RAH.” On November 14, 2007, the last trading day before the announcement of the Transactions, the last sale price of Ralcorp common stock reported by the NYSE was $55.47. On June 13, 2008, the last sale price of Ralcorp common stock reported by the NYSE was $57.00. The following table sets forth the high and low sale prices of Ralcorp common stock for the periods indicated. For current price information, Ralcorp shareholders are urged to consult publicly available sources.

 

     Ralcorp Common Stock
         High            Low    

Fiscal Year Ended September 30, 2006

     

First Quarter

   $ 45.10    $ 38.42

Second Quarter

   $ 40.35    $ 34.30

Third Quarter

   $ 43.00    $ 35.22

Fourth Quarter

   $ 54.16    $ 39.80

Fiscal Year Ended September 30, 2007

     

First Quarter

   $ 52.85    $ 47.38

Second Quarter

   $ 64.64    $ 50.61

Third Quarter

   $ 69.59    $ 51.86

Fourth Quarter

   $ 62.80    $ 50.53

Fiscal Year Ending September 30, 2008

     

First Quarter

   $ 64.80    $ 53.13

Second Quarter

   $ 61.72    $ 51.26

Third Quarter (through June 13, 2008)

   $ 63.15    $ 55.19

 

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Ralcorp Dividend Policy

Ralcorp paid a special dividend of $1.00 per share on October 22, 2004, but has no plans to pay cash dividends in the foreseeable future.

Repurchases of Ralcorp Common Stock

Ralcorp initiated a stock repurchase program in August 2005. Ralcorp purchased a total of $10.3 million of its common stock (243,000 shares) in fiscal 2005, $134.9 million (3,422,000 shares) in fiscal 2006, $78.8 million (1,382,500 shares) in fiscal 2007 and $5.6 million (100,000 shares) to date in fiscal 2008. On May 25, 2006, the board of directors of Ralcorp authorized the repurchase of up to 2,000,000 additional shares of which 517,500 remain available for repurchase as of March 31, 2008. From time to time, Ralcorp may repurchase its common stock through plans established under Rule 10b5-1 of the Exchange Act. Typically, these plans direct a broker to purchase a variable amount of shares each day (usually between 0 and 50,000) depending on the previous day’s closing share price. Pursuant to the Transaction Agreement, until the closing of the Transactions Ralcorp may repurchase shares of Ralcorp common stock only to the extent that the shares have been issued after execution of the Transaction Agreement in connection with the exercise of rights, warrants or options of Ralcorp. In addition, following the closing date of the Transactions, Ralcorp may repurchase shares of Ralcorp common stock only so long as such repurchases comply with the provisions of the tax allocation agreement.

 

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THE TRANSACTIONS

On November 15, 2007, Ralcorp and Kraft announced that they had entered into the Transaction Agreement, which provides for Ralcorp’s acquisition of Kraft’s Post cereals business. In the Transactions, Kraft will consolidate the U.S. assets and liabilities of the Post cereals business under Splitco. In addition, prior to the split-off of Splitco, Kraft will receive the proceeds of $300.0 million in Bank Debt that Splitco will assume, and Kraft will receive approximately $662.2 million in Debt Securities issued by Splitco. On the closing date of the Transactions, Kraft will split-off Splitco. Splitco will then be merged with and into Ralcorp Mailman and holders of Splitco common stock will be issued shares of Ralcorp common stock. Ralcorp anticipates distributing approximately 30,459,625 shares of Ralcorp common stock to holders of Splitco common stock, which would have a value of approximately $1.7 billion based on the closing sales price of Ralcorp shares on the NYSE on June 13, 2008. If the closing were to occur on the date of this document, pre-Merger Kraft shareholders would be expected to own approximately 54%, and pre-Merger Ralcorp shareholders would be expected to own approximately 46%, of the Ralcorp common stock after the Merger, on a “fully diluted basis.” Although believed remote, Ralcorp may be required to issue up to an additional 6.0 million shares of its common stock to the extent that the exchange by Kraft of some or all of the Debt Securities for debt obligations of Kraft and the subsequent sale of the Debt Securities to third-party investors at par as of the closing date would not be reasonably practicable without a reduction in the principal amount of the Debt Securities. If such shares are issued, Ralcorp shareholders’ ownership interest in Ralcorp after the Merger may be diluted to as low as 41.9% on a “fully diluted basis.”

After consummation of the Merger, Ralcorp Mailman will merge with and into Ralcorp and the Bank Debt and Debt Securities (obligations with an aggregate principal amount of approximately $962.2 million) will become debt obligations of Ralcorp. A Canadian subsidiary of Ralcorp, referred to as “Ralcorp Canada,” will then purchase assets for cash and assume liabilities relating to the Post cereals business in Canada from Kraft or its affiliates that hold the relevant assets and liabilities that relate to the conduct of the Post cereals business in Canada. The discussion in this document of the Transactions is qualified by reference to the Transaction Agreement, which is attached hereto as Annex A, and which is incorporated by reference herein.

During the initial bidding process for the Post cereals business, Kraft requested that potential buyers seek to maximize the cash portion of the valuation of the business while ensuring that Kraft shareholders own at least 55% of the combined company on a fully diluted basis. Ralcorp and Kraft determined the terms of the financing to comply with the above requests while still maintaining Ralcorp’s approximate pre-Transaction debt to equity profile.

Below is a step-by-step description of the sequence of material events relating to the Transactions.

 

Step 1

     Newco Contribution
     Kraft Foods Global, Inc., or “KFG,” which is a wholly owned subsidiary of Kraft, will transfer to Newco, which is a newly-formed, wholly owned, indirect subsidiary of Kraft, assets relating to the Post cereals business in the United States, along with sufficient cash to purchase a specific Kraft facility and assets related to the conduct of the Post cereals business in countries other than the United States (the “Newco Contribution”). Newco will also assume liabilities associated with the assets relating to the Post cereals business in the United States. Following the Newco Contribution, Newco will purchase the specific Kraft facility using cash contributed to it by KFG.

Step 2

     Bank Debt
     KFG will incur new indebtedness in the form of a bank credit facility (the “Bank Debt”) and will receive $300.0 million in net cash proceeds. Upon consummation of the Transactions, the Bank Debt will become debt obligations of Ralcorp.

 

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Step 3

     Splitco Contribution; Issuance of Splitco Common Stock; Issuance of Debt Securities
     In the “Splitco Contribution,” KFG will contribute the limited liability company interests in Newco to Splitco, and Newco will become a wholly owned subsidiary of Splitco, in exchange for:
    

•        the issuance by Splitco to KFG of no less than 30.32 million shares of Splitco common stock as described below;

    

•        the issuance by Splitco to KFG of approximately $662.2 million in aggregate principal amount of debt securities (the “Debt Securities”) as described below; and

    

•        the assumption by Splitco of the $300.0 million of Bank Debt.

     The Newco Contribution and the Splitco Contribution are referred to together as the “Contributions.”
     The Debt Securities will consist of approximately $662.2 million in aggregate principal amount of debt securities of Splitco. The Debt Securities will have a minimum term of ten years, will not be callable for the first five years of the term, will carry an interest rate and will include other terms as required by market conditions at issuance to permit the Debt Securities to be exchanged for debt obligations of Kraft and then sold to third-party investors at par upon issuance. Upon consummation of the Transactions, the Debt Securities will become debt obligations of Ralcorp.
     Ralcorp and Kraft expect the Debt Securities to be transferred by Kraft on or about the closing date to investment banks and/or commercial banks in exchange for debt obligations of Kraft and then to be sold to third-party investors pursuant to an exemption from registration under the Securities Act of 1933 (either in a private placement or a “Rule 144A” transaction). To the extent that the exchange by Kraft of some or all of the Debt Securities for debt obligations of Kraft and the subsequent sale of the Debt Securities to third-party investors at par as of the closing date would not be reasonably practicable without a reduction in the principal amount of the Debt Securities, then the principal amount of the Debt Securities will be reduced to the maximum amount that could be so exchanged and sold at par and the amount of the reduction will be replaced with additional shares of Splitco common stock having an equivalent aggregate fair market value, except that not more than an additional 6.0 million shares of Splitco common stock may be issued in the Splitco Contribution. Any such additional shares will be distributed along with the other shares of Splitco common stock and converted into the right to receive shares of Ralcorp common stock in the Merger.

Step 4

     Kraft Transfers
     KFG will distribute all of the shares of Splitco common stock held by KFG to Kraft (the “Internal Spin”), which Kraft will distribute in the Distribution as described below.
     KFG will transfer to Kraft the cash proceeds of the Bank Debt in repayment of an equal amount of intercompany debt (the “Internal Debt Repayment”).
     KFG will transfer to Kraft the Debt Securities in repayment of intercompany debt (the “Internal Debt Exchange”).

 

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Step 5      Distribution—Split-off
     Kraft will offer to holders of Kraft common stock the right to exchange all or a portion of their Kraft common stock for shares of Splitco common stock (in a “split-off”).
     Any shares of Splitco common stock that are not subscribed for in the split-off would be distributed to Kraft shareholders in a spin-off that will also be consummated on the closing date of the Transactions. In addition, to the extent that the Distribution is effected as a spin-off, up to an aggregate of 100,000 shares of Splitco common stock will be distributed to the holders of Kraft’s deferred stock awards.
     Splitco has filed a registration statement on Form S-4 and Form S-1 under the assumption that the shares of Splitco will be distributed to Kraft shareholders pursuant to a split-off. Based on market conditions prior to closing, Kraft will determine whether the Splitco shares will be distributed to Kraft’s shareholders in a spin-off or a split-off and, once a final decision is made, this document may be amended to reflect that decision.
Step 6      Merger
     Immediately after the Distribution, and on the closing date of the Transactions, Splitco will merge with and into Ralcorp Mailman, with Ralcorp Mailman as the surviving entity (the “Merger”). Each share of Splitco common stock will be converted into the right to receive one fully paid and nonassessable share of Ralcorp common stock.
     After completion of the Merger, approximately 54% of Ralcorp common stock is expected to be held by pre-Merger holders of Kraft common stock on a “fully diluted basis” and approximately 46% of Ralcorp common stock is expected to be held by pre-Merger Ralcorp shareholders on a “fully diluted basis.” Although believed remote, if Ralcorp is required to issue additional shares of its common stock under certain circumstances, Ralcorp shareholders’ ownership interest after the Merger may be diluted to as low as 41.9% on a “fully diluted basis.” Ralcorp, through its subsidiary, Newco, will hold the assets and liabilities of the Post cereals business in the United States.
Step 7      Upstream Merger
     Immediately following the Merger, Ralcorp Mailman will merge with and into Ralcorp, with Ralcorp as the surviving entity (the “Upstream Merger”). After giving effect to the Upstream Merger, Newco will be a direct, wholly owned subsidiary of Ralcorp and the Debt Securities and the Bank Debt will be debt obligations of Ralcorp.
Step 8      Non-U.S. Transfer
     A Canadian subsidiary of Ralcorp (“Ralcorp Canada,”) will purchase assets and assume liabilities relating to the Post cereals business in Canada from the Kraft affiliate or affiliates that hold the relevant assets and liabilities that relate to the conduct of the Post cereals business in Canada (“Kraft Canada”). Any transferred assets located outside the United States or Canada will similarly be purchased by Ralcorp (or a subsidiary of Ralcorp) and certain related liabilities will be assumed from the Kraft affiliate that currently owns them. This document refers to the transfer of the assets and liabilities located outside the United States as the “Non-U.S. Transfer.” The purchase price paid in the Non-U.S. Transfer will be the fair market value of the assets and liabilities transferred, and will be paid from cash contributed by Kraft in the Newco Contribution.
Step 9      Sale of Debt Securities to Third-Party Investors; External Debt Exchange
     As described in Step 3 above, Ralcorp and Kraft expect the Debt Securities to be transferred by Kraft on or about the closing date to investment banks and/or commercial banks in exchange for debt obligations of Kraft (the “External Debt Exchange”) and then to be sold by such banks to third-party investors pursuant to an exemption from registration under the Securities Act of 1933 in either a private placement or a “Rule 144A” transaction.

 

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Set forth below are diagrams that graphically illustrate, in simplified form, the existing corporate structure, the corporate structure immediately following the Contributions and the Distribution, and the corporate structure immediately following the consummation of the Transactions contemplated by the Transaction Agreement.

LOGO

LOGO

 

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LOGO

After completion of all of the steps mentioned above, Ralcorp’s subsidiary, Newco, will hold the assets and liabilities of the Post cereals business and Ralcorp will be the obligor on the Bank Debt and Debt Securities; Kraft will receive the $300.0 million in cash proceeds of the Bank Debt and will exchange the $662.2 million in Debt Securities for debt obligations of Kraft (and the Debt Securities will then be sold to third-party investors). Pre-Merger holders of Kraft common stock are expected to hold approximately 54% of Ralcorp common stock and pre-Merger Ralcorp shareholders are expected to hold approximately 46% of Ralcorp common stock, in each case, on a “fully diluted basis.” Although believed remote, if Ralcorp is required to issue additional shares of its common stock under certain circumstances, Ralcorp shareholders’ ownership interest after the Merger may be diluted to as low as 41.9% on a “fully diluted basis.”

In connection with the Transactions, Ralcorp, Ralcorp Mailman, Kraft, KFG and/or Splitco will also enter into other agreements relating to, among other things, tax allocation, the license of certain intellectual property, the provision of certain transition services during a transition period following the consummation of the Transactions, and co-manufacturing agreements. See “Additional Agreements.”

Determination of Number of Shares of Splitco Common Stock to be Distributed to Kraft Shareholders

As part of the Splitco Contribution, Splitco will issue to KFG additional shares of Splitco common stock so that the total number of shares of Splitco common stock issued and outstanding will be 1.1602 times the number of shares of Ralcorp common stock, in each case calculated on a “fully diluted basis,” but in no event will Splitco have fewer than 30,320,000 total shares of common stock outstanding following the Splitco Contribution. To the extent that the exchange by Kraft of some or all of the Debt Securities for debt obligations of Kraft and the subsequent sale of the Debt Securities to third-party investors at par as of the closing date would not be reasonably practicable without a reduction in the principal amount of the Debt Securities, then the principal amount of the Debt Securities will be reduced to the maximum amount that could be so exchanged and sold at par and the amount of the reduction will be replaced with additional shares of Splitco common stock having an equivalent aggregate fair market value, except that not more than an additional 6.0 million shares of Splitco common stock may be issued in the Splitco Contribution. Any such additional shares will be distributed along with the other shares of Splitco common stock and converted into the right to receive shares of Ralcorp common stock in the Merger.

 

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The term “fully diluted basis” means Ralcorp’s and Kraft’s estimate of the number of shares of Ralcorp common stock that will be outstanding on the closing date of the Transactions together with the estimated number of shares of Ralcorp common stock that will be issuable on the closing date of the Transactions upon exercise of any options or rights based on the treasury stock method. Ralcorp’s and Kraft’s binding estimate of the number of shares of Ralcorp common stock on a “fully diluted basis” was made using, for the purposes of the treasury stock method calculations,

 

   

$55.90 per share for the price of Ralcorp common stock for certain specified options; and

 

   

the volume weighted average trading price of Ralcorp common stock on the NYSE during the ten trading days preceding the estimation date for any options or rights granted between the date of the Transaction Agreement and the closing date of the Transactions.

No Fractional Shares; Exchange of Certificates

No fractional shares of Ralcorp common stock will be issued. In lieu of any fractional shares of Ralcorp common stock, holders of Splitco common stock who would otherwise be entitled to receive such fractional shares will be entitled to an amount in cash, without interest, rounded to the nearest cent, equal to the product of (x) the amount of the fractional share interest in a share of Ralcorp common stock to which such holder is entitled and (y) the average of the closing sale prices for Ralcorp common stock on the New York Stock Exchange, as reported in the Wall Street Journal, Northeastern edition, for each of the ten consecutive trading days ending with the fifth complete trading day prior to the date of the Merger (not counting such date).

Upon consummation of the Merger, shares of Splitco common stock will no longer be outstanding and will automatically be canceled and retired. Prior to or promptly following the Merger, Ralcorp will deposit with the transfer agent the certificates representing the shares of Ralcorp common stock issuable in the Merger. To the extent not previously distributed in connection with the Distribution, the transfer agent will mail to each holder of record of Splitco common stock a letter of transmittal and instructions for use in effecting the surrender of any certificates in the Merger.

Background of the Transactions

At various times over the years, Ralcorp’s board of directors has engaged with Ralcorp’s senior management in strategic reviews, including reviews of acquisition, disposition and merger opportunities. As part of these reviews, publicly available information on Kraft’s Post cereals business and the strategic and financial opportunities of a combination of Ralcorp’s business with all or a portion of Kraft’s Post cereals business were discussed from time to time.

From time to time, Kraft’s board of directors and senior management have reviewed Kraft’s portfolio of businesses and considered possible disposition and merger opportunities. As a result of that process, and in connection with Kraft’s transformation plan announced in February, 2007, Kraft decided that the Post cereals business was not a long term strategic fit with its larger portfolio and that, without the Post cereals business, Kraft could better concentrate on its remaining businesses.

In April 2007, Kraft engaged Centerview Partners LLC and Blackstone Advisory Services L.P. to assist Kraft with a potential sale transaction. Kraft considered the sale of the Post cereals business alone as well as the sale of the Post cereals business combined with a sale of selected smaller businesses.

Kraft reviewed possible transaction structures, primarily with a view to the after-tax value for Kraft and its shareholders, including a “reverse morris trust” structure and an asset sale for cash consideration. While the proceeds of an asset sale for cash consideration would generally be taxable to Kraft, a “reverse morris trust” structure would generally result in tax-free treatment to Kraft and Kraft’s shareholders, if the acquirer and the transaction structure meet all applicable requirements (including that after giving effect to the transactions, a

 

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majority of the shares of the acquirer would be held by Kraft shareholders). Kraft expected that a transaction with Ralcorp could meet those requirements, so the structure contemplated for a transaction with Ralcorp was a “reverse morris trust” transaction. During the initial bidding process for the Post cereals business, Kraft consequently requested that Ralcorp seek to maximize the cash portion of the valuation of the business while ensuring that Kraft shareholders own at least 55% of the combined company on a fully diluted basis.

As a part of the sale process, Kraft’s financial advisors contacted potential bidders and informed them of the proposed transaction, and the potential bidders executed confidentiality and non-disclosure agreements. On July 13, 2007, a representative of Blackstone Advisory Services L.P. contacted a representative of Ralcorp to advise Ralcorp that Kraft was considering a possible sale of its Post cereals business and selected smaller businesses, and on July 18, 2007, Ralcorp executed a confidentiality and non-disclosure agreement with Kraft.

On August 2, 2007, certain members of senior management of Ralcorp, along with Banc of America Securities LLC (“Banc of America Securities”), Ralcorp’s financial advisor, attended a management presentation given by members of Kraft’s senior management. Between August 2, 2007 and September 27, 2007, Ralcorp, Banc of America Securities, and Bryan Cave LLP, Ralcorp’s outside legal advisor, conducted a preliminary due diligence investigation of Kraft’s Post cereals business and selected smaller businesses. In July and August 2007, Kraft gave management presentations to other potential bidders covering the Post cereals business alone as well as the Post cereals business and selected smaller businesses, depending on the bidder, and from the end of July to the end of September 2007, Kraft responded to information requests and held follow-up discussions with the potential bidders.

On September 5, 2007, Blackstone Advisory Services L.P. and Centerview Partners delivered a process letter and other materials to Ralcorp and the other potential bidders that outlined the procedures and proposed structure of the transaction and a draft of the acquisition agreement and ancillary agreements contemplated in connection with the transaction. In those letters, Blackstone Advisory Services L.P. and Centerview Partners, on behalf of Kraft, requested bid proposals by September 26, 2007.

On September 12, 2007, Ralcorp, Bryan Cave, Banc of America Securities, Kraft, Cravath, Swaine & Moore LLP, Kraft’s outside legal advisor, Blackstone Advisory Services L.P. and Centerview Partners had a preliminary discussion regarding the proposed structure of the transaction.

On September 26, 2007, at a meeting of the Ralcorp board of directors, members of senior management of Ralcorp advised its board of directors of the preliminary discussions with Kraft and Banc of America Securities discussed with Ralcorp’s board of directors potential implications of a possible transaction. At this meeting, members of senior management of Ralcorp also discussed the results of its initial due diligence on Kraft’s Post cereals business and selected smaller businesses and legal counsel presented to the board of directors an overview of the expected terms of the transaction documents and reviewed with the board the fiduciary duties of the directors in connection with the proposed transaction. At this meeting, Ralcorp’s board of directors approved the submission of a combined offer to purchase both Kraft’s Post cereals business and the selected smaller businesses.

On September 27, 2007, Ralcorp responded to Kraft’s solicitation of a proposal. Ralcorp’s combined bid for the Post cereals business and the selected smaller businesses was for approximately 33.4 million shares of Ralcorp common stock and $1,153 million of value to Kraft through the issuance of certain debt obligations that would become obligations of Ralcorp in the transactions. At this time, Ralcorp delivered to Kraft a revised draft of the transaction agreement and ancillary agreements. In accordance with Kraft’s request, Ralcorp proposed that the transaction be structured as a “reverse morris trust” as outlined in the transaction documents. Pursuant to Ralcorp’s proposal, following the closing of the transactions, Kraft’s shareholders would own approximately 56% of Ralcorp on a fully diluted basis. Ralcorp indicated that its proposal was subject to satisfactory completion of due diligence and the negotiation of mutually acceptable definitive agreements.

 

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On October 1, 2007, The Blackstone Group and Centerview Partners contacted Banc of America Securities to discuss several points in Ralcorp’s proposal, including transaction financing, outstanding due diligence and plans for the combined company. The Blackstone Group and Centerview Partners informed Banc of America Securities that each bidder was instructed to provide a “best and final offer” to be submitted by October 4, 2007.

On October 4, 2007, Ralcorp provided Kraft with a modified proposal for both Kraft’s Post cereals business and the selected smaller businesses reflecting discussions between Ralcorp and Kraft and their advisors since Ralcorp’s initial proposal. Ralcorp’s revised proposal offered approximately 33.4 million shares of Ralcorp common stock and $1,191 million of value to Kraft through the issuance of certain debt obligations that would become obligations of Ralcorp in the transactions. Ralcorp also sent a revised letter discussing the points referenced by Blackstone Advisory Services L.P. and Centerview Partners. The modified proposal also contemplated that following the closing Kraft’s shareholders would own approximately 56% of Ralcorp on a fully diluted basis.

Throughout the process, Kraft’s senior management provided the Kraft board of directors with periodic status updates. At a meeting on October 4, 2007, Kraft’s board of directors considered the bids received, and reviewed presentations by Kraft’s financial advisors and senior management.

On October 5, 2007 and October 6, 2007, representatives of Ralcorp, Bryan Cave and Cravath, Swaine & Moore discussed a number of issues related to the transaction agreement and the ancillary documents. On October 8, 2007, in response to a request from Ralcorp, Ralcorp was orally informed by Kraft that it would negotiate exclusively with Ralcorp assuming progress continued to be made between Kraft’s advisors and Ralcorp’s advisors on the transaction agreement. On October 11, 2007 and October 12, 2007, representatives of Ralcorp and Bryan Cave met with representatives of Kraft and Cravath, Swaine & Moore in New York at the offices of Cravath, Swaine & Moore to negotiate the transaction agreement and the ancillary documents.

Between October 12, 2007 and October 24, 2007, Ralcorp inspected certain of Kraft’s manufacturing plants related to the Post cereals business and the selected smaller businesses and reviewed additional due diligence materials.

On October 16, 2007, as part of Kraft’s due diligence review of Ralcorp, Kraft’s management and financial and legal advisors attended a management presentation regarding Ralcorp in St. Louis, Missouri. Ralcorp’s management and its financial and legal advisors were also present at the meeting. Prior to that meeting, Kraft executed a non-disclosure and confidentiality agreement with Ralcorp. In October and November, Ralcorp provided Kraft and its advisors with access to due diligence materials regarding Ralcorp.

On October 24, 2007, at a meeting of the Ralcorp board of directors, members of Ralcorp’s senior management advised the board of directors of the status of negotiations with Kraft and the results of management’s due diligence. At the meeting Ralcorp’s senior management provided the board of directors with an update on the performance of Kraft’s Post cereals business and the selected smaller businesses for the fiscal 2007 third quarter and its estimates for the remainder of the fiscal year. Management also reviewed the potential financing options for the transaction.

On October 25, 2007, at a meeting in New York, Kraft provided to Ralcorp and Banc of America Securities a business update on third quarter results for the Post cereals business and selected smaller businesses, along with guidance on the fourth quarter results. From October 8, 2007 through November 15, 2007, Ralcorp, Bryan Cave, Kraft and Cravath, Swaine & Moore continued to negotiate and finalize the transaction agreement and ancillary agreements.

On October 28, 2007, due to Ralcorp’s further consideration of the complexity of the brand portfolio and manufacturing processes for the selected smaller businesses as well as the fact that those businesses were not key

 

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strategic acquisitions for Ralcorp, Ralcorp submitted two alternative proposals to Kraft. The first proposal was for a transaction involving the Post cereals business only (without the selected smaller businesses) for consideration consisting of 30.166 million shares of Ralcorp common stock and $939 million of value to Kraft through the issuance of certain debt obligations that would become obligations of Ralcorp in the transactions. The second proposal continued to include the Post cereals business and added the selected smaller businesses for additional consideration consisting of approximately $200.0 million of value to Kraft.

On October 29, 2007, at a meeting Kraft’s board of directors reviewed the status of the negotiations and assessed the revised proposals from Ralcorp.

On October 30, 2007, Ralcorp’s board of directors held a meeting to review the proposed terms of the business combination and the third quarter results for the Post cereals business and the selected smaller businesses. At the meeting, members of Ralcorp’s senior management and Bryan Cave provided an update regarding the discussions between Ralcorp and Kraft, including a description of the material terms of the current transaction proposals, and representatives of Banc of America Securities provided a financial review of the proposed transaction. The Ralcorp board of directors discussed the terms of the revised proposals and authorized senior management to continue discussions with Kraft regarding a transaction for only the Post cereals business.

On November 5, 2007, Centerview Partners informed Banc of America Securities that Kraft had decided to proceed with a business combination involving the Post cereals business only and discussed remaining unresolved issues in the negotiations. From November 7, 2007 through November 15, 2007, Ralcorp and Kraft, as well as their respective advisors, participated in numerous discussions regarding those issues and the other terms of the transaction agreement, the ancillary agreements and their contemplated financing arrangements with potential financing sources. As part of the resolution of the remaining issues, Ralcorp agreed to increase the consideration to no less than 30.32 million shares of Ralcorp common stock (which was reflected in an exchange ratio of 1.1602 shares of Splitco common stock to be issued for every one share of Ralcorp common stock on a “fully diluted basis”) and $962.2 million of value to Kraft in the form of assumption of bank debt and debt securities that would become obligations of Ralcorp in the transactions. In determining the amount of consideration to be offered, Ralcorp sought to maximize the cash portion of the valuation of the Post cereals business per Kraft’s request and still maintain Ralcorp’s approximate pre-transaction debt to equity profile.

On November 13, 2007, Ralcorp’s board of directors held a meeting to review the current status of negotiations. Ralcorp’s senior management and representatives of Bryan Cave and Banc of America Securities provided an update of the discussions between Ralcorp and Kraft. Representatives of Bryan Cave discussed the proposed structure of the transactions and the key terms of the transaction documents. They also reviewed with the board the fiduciary duties of the directors in connection with the proposed transactions. Representatives of Banc of America Securities reviewed with Ralcorp’s board of directors its financial analysis of the proposed transactions. Members of senior management reviewed with the board of directors the final results of due diligence, remaining points to be negotiated between the parties, and the financial analysis and financing plans relating to the transactions.

On November 13, 2007, Kraft’s board of directors also held a meeting to consider the transactions. Members of senior management of Kraft and representatives of Kraft’s financial and legal advisors discussed the proposed structure of the transactions and the financial, tax and other aspects of the transactions, and members of senior management presented the results of Kraft’s due diligence review of Ralcorp. At the conclusion of the meeting, the board of directors of Kraft approved the transaction agreement, the merger and the other transactions substantially on the terms and conditions presented to the board of directors.

On November 14, 2007, Ralcorp’s board of directors had a meeting to consider the transactions. Members of senior management of Ralcorp, Banc of America Securities and representatives of Bryan Cave presented Ralcorp’s board of directors with the finally agreed upon terms of the proposed transactions, including the financing plans and structure for determining the amount of debt obligations Ralcorp would assume (and

 

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corresponding amount of cash Kraft would retain). At the meeting, Banc of America Securities reviewed with the board of directors of Ralcorp its financial analysis of the exchange ratio pursuant to the transaction agreement, including the financial analysis described in the section “—Opinion and Analysis of Ralcorp’s Financial Advisor.” At the conclusion of the meeting, the board determined that the transactions were in the best interests of Ralcorp and its shareholders, and approved, adopted and declared advisable the transaction agreement, the merger and other transactions, including the issuance of Ralcorp’s common stock in connection with the merger.

On November 15, 2007, Kraft, Splitco, Ralcorp and Ralcorp Mailman entered into the Transaction Agreement.

On November 15, 2007, Banc of America Securities and JPMorgan provided Ralcorp with final commitment letters regarding the new senior credit facilities representing the Bank Debt to be entered into in connection with the consummation of the Transactions. Ralcorp and Kraft each issued a press release publicly announcing the approval of the proposed Transactions and the execution of the Transaction Agreement. In addition, Ralcorp announced results from its fourth quarter and fiscal year ended on September 30, 2007.

Subsequently, the parties prepared and filed the necessary applications for regulatory approval of the Transactions. In addition, the parties prepared and filed the IRS ruling request letter and engaged in various telephonic and in-person meetings to discuss, among other things, this document.

Ralcorp’s Reasons for the Transactions

In reaching its decision that the Transactions are in the best interests of Ralcorp and its shareholders and in approving the Transaction Agreement, Ralcorp’s board of directors considered the future prospects of Ralcorp on a standalone basis relative to its future prospects resulting from the acquisition. Ralcorp’s board of directors also considered the strategic options available to Ralcorp, including other potential transactional opportunities, and the risks and uncertainties associated with such alternatives.

In addition, the Ralcorp board of directors considered the following factors as generally supporting its decision to approve the Transactions and the Transaction Agreement:

Increased Size and Economies of Scale

 

   

The increased size, economies of scale and total capabilities of Ralcorp after the Transactions are expected to enable it to improve the cost structure and help increase profitability.

 

   

The acquisition would create a better opportunity for product diversification due to the broader customer base.

 

   

The acquisition should offer Ralcorp additional growth opportunities and allow it to engage in additional acquisitions, so long as such acquisitions are consistent with the tax allocation agreement, and generate additional synergies from such acquisitions.

Improved Financial Profile

 

   

The increased market capitalization of Ralcorp after the Transactions may improve liquidity in its common stock.

 

   

Anticipated cash flow generation would allow Ralcorp to reduce its debt obligations over time.

 

   

The acquisition could generate increased visibility in the capital markets, which could enhance the market valuation of Ralcorp’s common stock.

 

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Experienced and Proven Directors and Officers

 

   

The experienced and proven directors and executive officers of Ralcorp prior to the closing of the Transactions are expected to be the directors and executive officers of Ralcorp immediately following the closing of the Transactions.

Potential Cost Savings

 

   

The potential positive financial impact resulting from such an acquisition (including the potential achievement of annual net cost savings from the combination) which would benefit Ralcorp’s shareholders.

Tax Treatment

 

   

The board of directors considered the fact that the Merger is intended to be a tax-free reorganization for U.S. federal income tax purposes and, accordingly, would not be taxable to either Ralcorp or its shareholders.

Analysis of Financial Advisor

 

   

The board of directors evaluated the financial analyses and presentations of its financial advisor, including the analysis described in the section “—Opinion and Analysis of Ralcorp’s Financial Advisor.”

Transaction Agreement

 

   

The board of directors reviewed the fact that the Transaction Agreement and the aggregate consideration to be paid by Ralcorp pursuant to the Transaction Agreement was the result of extensive arms-length negotiations between Ralcorp and Kraft and each party’s financial and legal advisors.

 

   

The fact that the Transaction Agreement allows the board to accept a superior proposal upon payment of a termination fee of $60.0 million and reimbursement to Kraft of certain expenses under certain circumstances.

Ralcorp’s board of directors considered the following factors as generally weighing against its decision to recommend the Transaction Agreement:

 

   

the fact that current Ralcorp shareholders as a group would control less than a majority of Ralcorp after consummation of the Transactions;

 

   

the challenges and difficulties, foreseen and unforeseen, relating to integrating the Post cereals business with Ralcorp’s current operations;

 

   

the possibility of management and employee disruption associated with the Transactions and integrating the operations of the companies, including the risk that, despite Ralcorp’s intention to retain such personnel, key management of the Post cereals business might not be employed with Ralcorp after the Transactions;

 

   

the risk that the Transactions and integration may divert management attention and resources away from other strategic opportunities and from operational matters;

 

   

the risk that the potential benefits sought in the Transactions might not be fully realized or realized within the expected time frame;

 

   

the fact that, in order to preserve the tax-free treatment of the Transactions, Ralcorp would be required to abide by certain restrictions that could reduce its ability to engage in certain future business transactions that might be advantageous;

 

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the risk that the Transactions might not receive the necessary regulatory approvals and clearances to complete the Transactions or that governmental authorities could attempt to condition their approval of the Transactions on compliance with certain burdensome conditions or that regulatory approvals may be delayed;

 

   

the risks associated with the Post cereals business operations;

 

   

the potential consequences that could result from Ralcorp’s indebtedness following consummation of the Transactions;

 

   

the fact that certain provisions of the Transaction Agreement may dissuade third parties from seeking to acquire Ralcorp or otherwise increase the cost of any potential acquisition;

 

   

the fact that under the Transaction Agreement, Ralcorp may be required to pay Kraft a termination fee and reimburse Kraft for certain expenses under certain circumstances;

 

   

the risk that the Transactions may not be completed in a timely manner or at all; and

 

   

the other risks described under the section entitled “Risk Factors.”

The foregoing discussion of the information and factors considered by Ralcorp’s board of directors is not exhaustive, but includes all material factors considered by the board of directors of Ralcorp, including factors that support the Transactions as well as those that weigh against it. In view of the wide variety of factors considered by Ralcorp’s board of directors in connection with its evaluation of the Transactions and the complexity of these matters, the board of directors did not consider it practical to, nor did it attempt to, quantify, rank or otherwise assign relative weights to the specific factors that it considered in reaching its decision. Rather, Ralcorp’s board of directors based its recommendation on the totality of the information presented to and considered by it. Ralcorp’s board of directors evaluated the factors described above, including asking questions of Ralcorp’s senior management as well as its legal and financial advisors. In considering the factors described above, individual members of Ralcorp’s board of directors may have given different weights to different factors.

It should be noted that this explanation of the Ralcorp board’s reasoning and other information presented in this section is in part forward-looking in nature and, therefore, should be read in light of the factors discussed in “Cautionary Statement on Forward-Looking Statements” and “Risk Factors.”

Certain Financial Forecasts Prepared by Ralcorp Relating to the Post Cereals Business

Ralcorp entered into the Transaction Agreement for the reasons described in “Ralcorp’s Reasons for the Transactions.” In connection with the Transaction Agreement, Kraft provided Ralcorp with certain unaudited financial information prepared by Kraft reflecting the revenues, expenses and net contributions from operations for the Post cereals business for the fiscal years ended December 31, 2005 and 2006 and for the thirty-nine week period starting January 1, 2007 and ending September 30, 2007, in each case subject to a number of exceptions and limitations. At the August and October 2007 management presentations, Kraft also provided forecasts of revenues, expenses and net contribution of the Post cereal business for the fiscal year ended December 31, 2007. At the October management presentations, Kraft further provided information regarding new product introductions and overall advertising, consumer and trade spending for 2008. Kraft did not provide any other information regarding future periods. Please see “Selected Historical Combined Financial Data of the Post Cereals Business” for a discussion of the audited financial statements of the Post cereals business for the years ended December 29, 2007 and December 30, 2006. The audited financial statements are different from, and calculated on a different basis than, the forecasts created by Ralcorp and included below as the audited financial statements of the Post cereals business include certain Kraft costs allocated to the Post cereals business, which were not provided when Ralcorp was preparing its forecasts. In addition, the gross profit in the audited financial statements for 2007 were less than indicated in Ralcorp’s forecasts for the Post cereals business set forth below. Ralcorp does not believe the difference is material.

 

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Ralcorp used the above described financial information and Ralcorp’s assessment of the Post cereals business to develop forecasts for the Post cereals business’ fiscal years 2007 through 2012. Ralcorp’s forecasts for the fiscal year ending December 31, 2007 differ from the final forecasts provided by Kraft in October 2007 for the fiscal year ending December 31, 2007 because Ralcorp’s forecasts include expenses not assumed in Kraft’s forecasts but specific to Ralcorp’s anticipated operation of the Post cereals business. Ralcorp’s forecasts also excluded non-recurring items that Ralcorp expects to experience within the first two years after completion of the Transactions. Most notably, the following items were excluded: capital spending to separate the Post cereals operating facilities from Kraft; creation of an information systems network for the Post cereals business; costs to obtain financing in connection with the Transactions; duplication of costs during periods when Ralcorp will be hiring additional personnel while also paying Kraft for transition services; and costs of financial and legal advisors relating to the Transactions. Ralcorp’s forecasts for the Post cereals business included the following significant information:

 

     For the Fiscal Year
Ending
December 31,
 
(in millions)    2007     2008  

Net Sales

   $ 1,106     $ 1,106  

Costs of Sales

     (627 )     (627 )
                

Gross Profit

     479       479  

Advertising & Consumer Expenses

     (122 )     (122 )

Other Expenses (1)

     (104 )     (104  
                

Adjusted Earnings before interest and taxes

     253       253  

Add: Depreciation

     37       37  
                

Earnings before interest, taxes, depreciation and amortization (2)

   $ 290     $ 290  
                

 

(1) Other Expenses include items Ralcorp estimated would need to be incurred annually to operate the Post cereal business as part of Ralcorp, including items which would ultimately be classified as costs of sales.

 

(2) For fiscal years after fiscal 2008, Ralcorp assumed no increases in Net Sales and approximately 1.7% annual year increases in Earnings before interest, taxes, depreciation and amortization.

Included below are Ralcorp’s forecasts for the year ending September 30, 2008 to illustrate Ralcorp’s anticipated performance excluding the effects of the Transactions. These were provided to Ralcorp’s financial advisor during the consideration of the Transactions.

 

(in millions)    Year Ending
September 30,
2008
 

Net sales

   $ 2,550.6  

Cost of products sold

     (2,094.1 )
        

Gross profit

     456.5  

Selling, general and administrative

     (285.6 )

Interest expense

     (45.1 )
        

Earnings before income taxes and equity earnings

     125.8  

Add: Interest expense

     45.1  

Add: Depreciation and amortization

     91.5  
        

Earnings before interest, taxes, depreciation, amortization, and equity earnings (a)

   $ 262.4  
        

 

(a) For fiscal years after fiscal 2008, Ralcorp projected approximately 4.7% annual year increases in Earnings before interest, taxes, depreciation, amortization, and equity earnings.

 

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Ralcorp utilized the above forecasts of EBITDA for the Post Cereal Business and for the existing Ralcorp businesses in order to estimate diluted earnings per share for the combined entity for 2008, assuming the transaction closed on the first day of the fiscal year. This estimate of diluted earnings per share excluded all non-recurring items that Ralcorp expects to experience within the first two years after completion of the Transactions discussed above. In addition, the estimate included significant assumptions on amortization of intangibles acquired in the Transactions, interest expense on additional debt, equity earnings recorded on Ralcorp’s investment in Vail Resorts, Inc., effective income tax rates and fully diluted shares outstanding. This estimate of diluted earnings per share for the combined entity was $0.44 greater than the corresponding amount for Ralcorp on a stand alone basis.

The above forecasts for the Post cereals business were created by Ralcorp exclusively for consideration by Ralcorp’s board of directors in its consideration of the Transactions and by Ralcorp’s financial advisors in connection with its financial analyses. These forecasts do not reflect Kraft’s internal budgets related to the Post cereals business, to the extent those were prepared. The Post cereals business forecasts were not created as part of Ralcorp’s internal budgeting process and therefore, do not reflect the same level of accuracy as will be included in Ralcorp’s internal budgets. Forecasts for fiscal years after fiscal 2008 were developed using only an assumed growth rate for earnings before interest, taxes, depreciation and amortization without any further analysis of the underlying line items. Further, neither the Post cereals business forecasts nor the Ralcorp forecasts were prepared for purposes of public disclosure and do not fully comply with the SEC’s rules, U. S. generally accepted accounting principles, or the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of forecast information. Finally, these forecasts have been prepared by, and are the responsibility of, Ralcorp’s management. Kraft did not examine or express any form of assurance with respect to Ralcorp’s forecasts. PricewaterhouseCoopers LLP has neither examined nor compiled the accompanying prospective financial information and, accordingly, PricewaterhouseCoopers LLP does not express an opinion or any other form of assurance with respect thereto. The PricewaterhouseCoopers LLP report included in this proxy relates to Ralcorp’s historical financial information. It does not extend to the forecasts above and should not be read to do so.

These forecasts reflect numerous estimates and assumptions relating to the ability of Ralcorp to successfully operate the Post cereals business outside of Kraft and Ralcorp’s existing business operations and are subject to significant economic, industry and competitive uncertainties, including those risk factors detailed in the sections entitled “Risk Factors” and those described in the “Cautionary Statement on Forward Looking Statements” all of which are difficult to predict and many of which are beyond the control of Ralcorp management, Kraft management or the Post cereals business. Accordingly, there can be no assurance that the estimates and assumptions made in preparing these forecasts will prove to be accurate, or that these forecasts will be realized. In addition, please note that Ralcorp does not intend to update, correct or otherwise revise any of these forecasts included in this document to reflect circumstances existing after the date when such forecasts were made or to reflect the occurrence of future events, even in the event that any or all underlying assumptions are shown to be in error.

Ralcorp and Kraft shareholders should not rely upon these forecasts as being indicative of future results. Actual results may differ materially from those presented in the forecasts above. In light of the foregoing, Ralcorp and Kraft shareholders should not place undue reliance on these forecasts. The inclusion of the information above in this document should not be regarded as an indication that these forecasts will necessarily be reflective of actual future results, and these forecasts should not be relied upon as such. These forecasts are presented to explain the information considered by Ralcorp’s Board of Directors and Ralcorp’s financial advisor and are not presented in order to induce any shareholder to vote in favor of the issuance of shares of Ralcorp common stock in connection with the Merger.

 

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Opinion and Analysis of Ralcorp’s Financial Advisor

Ralcorp has retained Banc of America Securities to act as Ralcorp’s financial advisor in connection with the Transactions. Banc of America Securities is an internationally recognized investment banking firm which is regularly engaged in the valuation of businesses and securities in connection with mergers and acquisitions, negotiated underwritings, secondary distributions of listed and unlisted securities, private placements and valuations for corporate and other purposes. Ralcorp selected Banc of America Securities to act as Ralcorp’s financial advisor in connection with the Transactions on the basis of Banc of America Securities’ experience in transactions similar to the Merger, its reputation in the investment community and its familiarity with Ralcorp and its business.

On November 14, 2007, at a meeting of the board of directors of Ralcorp held to evaluate the Transactions, Banc of America Securities delivered to the board of directors of Ralcorp its oral opinion, which was subsequently confirmed by delivery of a written opinion dated November 15, 2007, to the effect that, as of the date of the opinion and based upon and subject to various assumptions and limitations set forth in its opinion, the exchange ratio pursuant to the Transaction Agreement of 1.1602, which this document refers to as the “Exchange Ratio,” was fair, from a financial point of view, to Ralcorp.

The full text of Banc of America Securities’ written opinion to the board of directors of Ralcorp, which describes, among other things, the assumptions made, procedures followed, factors considered and limitations on the review undertaken, is attached as Annex C to this document and is incorporated herein. Ralcorp encourages its shareholders to read the opinion carefully and in its entirety. The following summary of Banc of America Securities’ opinion is qualified by reference to the full text of the opinion. Banc of America Securities delivered its opinion to the board of directors of Ralcorp for the benefit and use of the board of directors of Ralcorp in connection with and for purposes of its evaluation of the Transactions. Banc of America Securities has expressed no opinion or recommendation as to how any shareholder should vote or act in connection with the Transactions.

In connection with rendering its opinion, Banc of America Securities:

 

   

reviewed certain publicly available financial statements and other business and financial information relating to Ralcorp and the Post cereals business, respectively;

 

   

reviewed certain internal financial statements and other financial and operating data concerning Ralcorp and the Post cereals business, respectively;

 

   

reviewed certain financial forecasts relating to Ralcorp prepared by the management of Ralcorp, or the “Ralcorp Forecasts”;

 

   

reviewed certain financial forecasts relating to the Post cereals business prepared by the management of Ralcorp, or the “Ralcorp Post Cereals Forecasts”;

 

   

discussed the past and current operations, financial condition and prospects of Ralcorp with senior executives of Ralcorp, and discussed the past and current operations, financial condition and prospects of the Post cereals business with senior executives of Kraft and Ralcorp;

 

   

reviewed the potential pro forma financial impact of the Merger on the future financial performance of Ralcorp, including the potential effect on Ralcorp’s estimated earnings per share;

 

   

reviewed the reported prices and trading activity for Ralcorp common stock;

 

   

compared the financial performance of Ralcorp and the Post cereals business with that of certain publicly traded companies it deemed relevant;

 

   

compared certain financial terms of the Merger to financial terms, to the extent publicly available, of certain other business combination transactions it deemed relevant;

 

   

reviewed the relative financial contributions of Ralcorp and the Post cereals business to the future financial performance of the combined company on a pro forma basis;

 

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participated in discussions and negotiations among representatives of Ralcorp, Kraft, the Post cereals business and their respective advisors;

 

   

reviewed the Transaction Agreement; and

 

   

performed such other analyses and considered such other factors as Banc of America Securities deemed appropriate.

In arriving at its opinion, Banc of America Securities assumed and relied upon, without independent verification, the accuracy and completeness of the financial and other information reviewed by it. Banc of America Securities was not provided with, and did not have any access to, financial forecasts related to the Post cereals business prepared by the management of Kraft for periods beyond December 31, 2007 and was directed by the management of Ralcorp to utilize the Ralcorp Post Cereals Forecasts for purposes of its analyses. With respect to the Ralcorp Post Cereals Forecasts and the Ralcorp Forecasts, Banc of America Securities assumed, at the direction of Ralcorp, that they were reasonably prepared on bases reflecting the best currently available estimates and good faith judgments of the management of Ralcorp as to the future financial performance of Ralcorp and the Post cereals business. Banc of America Securities did not make any independent valuation or appraisal of the assets or liabilities (contingent or otherwise) of Ralcorp, the Post cereals business or Splitco, nor was it furnished with any such valuations or appraisals. Banc of America Securities also assumed, at the direction of Ralcorp, that the Transactions (other than the internal debt exchange and the external debt exchange) will qualify for federal income tax purposes as a reorganization under the provisions of Sections 368(a) and 355 of the Internal Revenue Code of 1986, as amended, and that the Transactions will qualify for tax-free treatment. Banc of America Securities also assumed, with the consent of Ralcorp, that the Transactions will be consummated as provided in the Transaction Agreement, with full satisfaction of all covenants and conditions set forth in the Transaction Agreement (including, without limitation, Section 10.8 of the Transaction Agreement with respect to Ralcorp’s receipt of audited financial statements for the Post cereals business) and without any waivers thereof, in each case in all respects material to Banc of America Securities’ analysis. Banc of America Securities further assumed, with the consent of Ralcorp, that all governmental and third-party consents and approvals necessary for the consummation of the Transactions will be obtained without any material adverse effect on Ralcorp, the Post cereals business, Splitco or the contemplated benefits of the Merger to Ralcorp.

Banc of America Securities expressed no view or opinion as to any terms or aspects of the Merger (other than the Exchange Ratio to the extent expressly specified in its opinion) or the Transactions, including, without limitation, the form or structure of the Transactions, or tax or accounting aspects thereof. Banc of America Securities was not requested to, and it did not, solicit indications of interest or proposals from third parties regarding the acquisition of all or any portion of Ralcorp. In addition, no opinion was expressed as to the relative merits of the Merger in comparison to other transactions available to Ralcorp or in which Ralcorp might engage or as to whether any transaction might be more favorable to Ralcorp as an alternative to the Merger, nor did Banc of America Securities express any opinion as to the underlying business decision of the board of directors of Ralcorp to proceed with or effect the Merger. Banc of America Securities did not express any opinion as to what the value of Ralcorp common stock actually will be when issued or the prices at which Ralcorp common stock may trade at any time.

Banc of America Securities’ opinion was necessarily based on economic, market and other conditions as in effect on, and the information made available to Banc of America Securities as of, the date of its opinion. It should be understood that subsequent developments may affect Banc of America Securities’ opinion, and Banc of America Securities does not have any obligation to update, revise or reaffirm its opinion.

The following represents a brief summary of the material financial analyses presented by Banc of America Securities to the board of directors of Ralcorp in connection with its opinion. The financial analyses summarized below include information presented in tabular format. In order to fully understand the financial analyses performed by Banc of America Securities, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses

 

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performed by Banc of America Securities. Considering the data set forth in the tables below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of the financial analyses performed by Banc of America Securities.

Transaction Overview

For purposes of its analyses described below, Banc of America Securities calculated an implied equity value of the consideration to be paid in the Merger as of November 9, 2007 of approximately $1.695 billion, referred to below as the “implied equity value of merger consideration,” which was based on the closing price of Ralcorp Common Stock as of that date of $55.89, and the issuance of a number of shares of Ralcorp Common Stock equal to the Exchange Ratio multiplied by the approximately 26.1 million diluted shares of Ralcorp common stock outstanding (calculated using the treasury stock method).

Post Cereals Business Financial Analyses

Selected Publicly Traded Companies Analysis. Banc of America Securities reviewed publicly available financial and stock market information for the Post cereals business and the following eighteen publicly traded companies in the processed and packaged foods industry:

 

   

Campbell Soup Company

 

   

ConAgra Foods, Inc.

 

   

Dean Foods Company

 

   

Del Monte Foods Company

 

   

Flowers Foods, Inc.

 

   

General Mills, Inc.

 

   

H. J. Heinz Company

 

   

Hormel Foods Corporation

 

   

Kellogg Company

 

   

Kraft

 

   

Lance, Inc.

 

   

McCormick & Company, Incorporated

 

   

PepsiCo, Inc.

 

   

Ralcorp

 

   

The Hershey Company

 

   

The J.M. Smucker Company

 

   

TreeHouse Foods, Inc.

 

   

Wm. Wrigley Jr. Company

Banc of America Securities reviewed, among other things, enterprise values, calculated as equity values for outstanding shares plus in-the-money options calculated using the treasury stock method and based on closing stock prices on November 9, 2007, plus total debt, minority interests and preferred stock, less cash and cash

 

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equivalents, as a multiple of calendar year 2008 projected earnings before interest, taxes, depreciation and amortization, which this document refers to as “EBITDA,” of the selected publicly traded companies, which is referred to below as “Enterprise Value/2008P EBITDA.”

The analysis showed the following:

Selected Publicly Traded Companies

 

     Mean*    Median*

Enterprise Value/2008P EBITDA

   9.8x    9.7x

 

* Excludes Ralcorp

Banc of America Securities then applied a range of selected multiples of calendar year 2008 projected EBITDA derived from the selected publicly traded companies of 9.0x to 10.0x, to corresponding data of the Post cereals business. Projected financial data of the selected publicly traded companies were based on SEC filings and publicly available research analysts’ estimates, and equity values were based upon closing stock prices on November 9, 2007. Projected financial data of the Post cereals business were based on the Ralcorp Post Cereals Forecasts, including net debt of $962 million. This analysis indicated the following approximate implied equity value reference range for the Post cereals business, as compared to the implied equity value of the merger consideration:

 

Implied Equity Value
Reference Range
for
Post cereals business
(in billions)

  

Implied Equity Value

of Merger Consideration
as of November 9, 2007
(in billions)

$1.648 – $1.938

   $1.695

No company used in this analysis is identical or directly comparable to the Post cereals business. Accordingly, an evaluation of the results of this analysis is not entirely mathematical. Rather, this analysis involves complex considerations and judgments concerning differences in financial and operating characteristics and other factors that could affect the public trading or other values of the companies to which the Post cereals business was compared.

Selected Precedent Transactions Analysis. Banc of America Securities reviewed, to the extent publicly available, financial information relating to the following nine selected transactions involving companies in the processed and packaged foods industry:

 

Announcement
Month and Year

  

Acquiror

  

Target

July 2007

   Kraft    Groupe Danone (Biscuits)

February 2007

   The Blackstone Group    Crunch Holding Corp.
(Pinnacle Foods Group, Inc.)

December 2006

   Premier Foods plc    RHM plc

October 2006

   The Blackstone Group
and PAI Partners
   United Biscuits

July 2006

   Premier Foods plc    Campbell Soup Company
(Irish and UK Businesses)

March 2006

   Del Monte Foods Company    Meow Mix Holdings, Inc.

June 2005

   H. J. Heinz Company    Group Danone (HP Foods Group)

March 2004

   The J.M. Smucker Company    International Multifoods Corporation

November 2003

   Hicks, Muse, Tate & Furst    Weetabix Limited

 

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Banc of America Securities reviewed transaction values, calculated as the enterprise value implied for the target company based on the consideration payable in the selected transaction, plus total debt, minority interests and preferred stock, less cash and cash equivalents, as a multiple of latest twelve months, or LTM EBITDA, which is referred to below as “Enterprise Value/LTM EBITDA.”

This analysis showed the following:

Selected Transaction Multiples

 

     Mean    Median

Enterprise Value/LTM EBITDA

   10.3x    10.3x

Banc of America Securities then applied a range of selected multiples of LTM EBITDA derived from the selected transactions of 9.0x to 11.0x, to the projected 2007 EBITDA of the Post cereals business. Financial data of the selected transactions were based on publicly available information. Projected financial data of the Post cereals business were provided by the Ralcorp Post Cereals Forecasts, including net debt of $962 million. This analysis indicated the following approximate implied equity value reference range for the Post cereals business, as compared to the implied equity value of the merger consideration:

 

Implied Equity Value
Reference Range
for
Post cereals business
(in billions)

  

Implied Equity Value

of Merger Consideration
as of November 9, 2007
(in billions)

$1.648 – $2.228

   $1.695

No company, business or transaction used in this analysis is identical or directly comparable to the Post cereals business or the Merger. Accordingly, an evaluation of the results of this analysis is not entirely mathematical. Rather, this analysis involves complex considerations and judgments concerning differences in financial and operating characteristics and other factors that could affect the acquisition or other values of the companies, business segments or transactions to which the Post cereals business and the Merger were compared.

Discounted Cash Flow Analysis. Banc of America Securities performed a discounted cash flow analysis of the Post cereals business to calculate the estimated present value of the standalone unlevered, after-tax free cash flows that the Post cereals business could generate during fiscal years 2008 through 2012 based on the Ralcorp Post Cereals Forecasts. Banc of America Securities calculated terminal values for the Post cereals business by applying terminal multiples of 9.5x to 10.5x to fiscal year 2012 estimated EBITDA. The cash flows and terminal values were then discounted to present value as of December 31, 2007 using discount rates ranging from 7.5% to 8.5% to generate an implied enterprise value from which the Post cereals business’s projected net debt of $962 million was subtracted to generate the implied value of equity of the Post cereals business. This analysis indicated the following approximate implied equity value reference range for the Post cereals business, as compared to the implied equity value of the merger consideration:

 

Implied Equity Value

Reference Range

for Post cereals business

(in billions)

  

Implied Equity Value

of Merger Consideration
as of November 9, 2007
(in billions)

$1.666 – $1.993

   $1.695

Ralcorp Financial Analyses

Selected Publicly Traded Companies Analysis. Banc of America Securities reviewed publicly available financial and stock market information for Ralcorp and the following eight publicly traded companies in the processed and packaged foods industry:

 

   

Dean Foods Company

 

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Del Monte Foods Company

 

   

Flowers Foods, Inc.

 

   

Hormel Foods Corporation

 

   

Lance, Inc.

 

   

McCormick & Company, Incorporated

 

   

The J.M. Smucker Company

 

   

TreeHouse Foods, Inc.

Banc of America Securities reviewed and compared multiples for Ralcorp and the selected publicly traded companies, calculated as follows:

 

   

the ratio of enterprise value to calendar year 2008 projected EBITDA, which is referred to below as “Enterprise Value/2008P EBITDA;” and

 

   

the ratio of the per share equity values, based on closing stock prices on November 9, 2007, to calendar year 2008 projected earnings per share, commonly referred