UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____.
COMMISSION FILE NUMBER 333-84486
LAND O'LAKES, INC.
(Exact name of Registrant as specified in its charter)
MINNESOTA 41-0365145
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
4001 LEXINGTON AVENUE NORTH
ARDEN HILLS, MINNESOTA 55126
(Address of principal executive offices and zip code)
(651) 481-2222
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--------- ---------
The number of shares of the registrant's common stock outstanding as of October
31, 2002: 1,146 shares of Class A common stock, 5,338 shares of Class B common
stock, 197 shares of Class C common stock, and 1,112 shares of Class D common
stock.
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION............................................................................ 3
ITEM I. FINANCIAL STATEMENTS............................................................................. 3
LAND O'LAKES, INC.
Financial Statements (unaudited) for the three and nine months ended September 30, 2002 and 2001
Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001............................... 3
Consolidated Statements of Operations for the three and nine months ended September 30, 2002 and 2001.... 4
Consolidated Statements of Cash Flows for the nine months ended September 30, 2002 and 2001............. 5
Notes to Consolidated Financial Statements............................................................... 6
LAND O'LAKES FARMLAND FEED LLC
Financial Statements (unaudited) for the three and nine months ended September 30, 2002 and 2001
Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001.............................. 20
Consolidated Statements of Operations for the three and nine months ended September 30, 2002 and 2001... 21
Consolidated Statements of Cash Flows for the nine months ended September 30, 2002 and 2001.............. 22
Notes to Consolidated Financial Statements............................................................... 23
PURINA MILLS, LLC
Financial Statements (unaudited) for the three and nine months ended September 30, 2002 and 2001
Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001.............................. 35
Consolidated Statements of Operations for the three and nine months ended September 30, 2002 and 2001... 36
Consolidated Statements of Cash Flows for the nine months ended September 30, 2002 and 2001.............. 37
Notes to Consolidated Financial Statements............................................................... 38
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........... 41
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...................................... 71
ITEM 4. CONTROLS AND PROCEDURES......................................................................... 72
PART II. OTHER INFORMATION............................................................................... 72
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................................................ 73
SIGNATURES............................................................................................... 74
CERTIFICATIONS........................................................................................... 75
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LAND O'LAKES, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
($ IN THOUSANDS)
(UNAUDITED)
ASSETS
Current assets:
Cash and short-term investments ........................... $ 37,878 $ 130,169
Receivables, net .......................................... 459,432 574,011
Inventories ............................................... 461,545 450,774
Prepaid expenses .......................................... 96,305 185,490
Other current assets ...................................... 24,352 27,038
---------- ----------
Total current assets ................................. 1,079,512 1,367,482
Investments ................................................... 579,151 568,130
Property, plant and equipment, net ............................ 596,245 675,277
Goodwill, net ................................................. 330,387 255,027
Other intangibles, net ........................................ 104,237 108,987
Other assets .................................................. 107,937 116,475
---------- ----------
Total assets ......................................... $2,797,469 $3,091,378
========== ==========
LIABILITIES AND EQUITIES
Current liabilities:
Notes and short-term obligations .......................... $ 34,245 $ 33,971
Current portion of long-term debt ......................... 55,419 19,546
Accounts payable .......................................... 355,544 652,309
Accrued expenses .......................................... 229,698 187,569
Patronage refunds payable ................................. 5,156 28,900
---------- ----------
Total current liabilities ............................ 680,062 922,295
Long-term debt ................................................ 1,071,284 1,147,465
Employee benefits and other liabilities ....................... 110,969 82,801
Deferred tax liabilities ...................................... 20,109 42,495
Minority interests ............................................ 56,249 59,806
Equities:
Capital stock ............................................. 2,237 2,305
Member equities ........................................... 841,022 805,860
Retained earnings ......................................... 15,537 28,351
---------- ----------
Total equities ....................................... 858,796 836,516
---------- ----------
Commitments and contingencies
Total liabilities and equities ................................ $2,797,469 $3,091,378
========== ==========
See accompanying notes to consolidated financial statements.
3
LAND O'LAKES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ------------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
($ IN THOUSANDS)
(UNAUDITED)
Net sales $ 1,363,292 $ 1,414,532 $ 4,299,545 $ 4,162,732
Cost of sales 1,250,658 1,319,029 3,915,258 3,834,794
----------- ----------- ----------- -----------
Gross profit 112,634 95,503 384,287 327,938
Selling, general and administration 123,497 94,162 374,986 274,671
Restructuring and impairment charges (reversals) 942 (2,433) 8,218 (4,242)
----------- ----------- ----------- -----------
(Loss) earnings from operations (11,805) 3,774 1,083 57,509
Interest expense, net 18,052 12,230 53,000 36,539
Gain on legal settlement (4,136) -- (36,835) --
Gain on sale of intangibles -- -- (4,184) --
Gain on divestiture of businesses (3,730) -- (4,935) (154)
Equity in loss (earnings) of affiliated companies 4,544 (6,436) (29,822) (43,727)
Minority interest in (loss) earnings of subsidiaries (1,365) 1,958 (1,455) 5,711
----------- ----------- ----------- -----------
(Loss) earnings before income taxes (25,170) (3,978) 25,314 59,140
Income tax (benefit) expense (13,182) 437 (10,018) 6,322
----------- ----------- ----------- -----------
Net (loss) earnings $ (11,988) $ (4,415) $ 35,332 $ 52,818
=========== =========== =========== ===========
Applied to:
Members equities
Allocated patronage refunds $ (12,406) $ (3,790) $ 41,390 $ 39,277
Deferred equities (5,613) (6) (16,206) 2,840
----------- ----------- ----------- -----------
(18,019) (3,796) 25,184 42,117
Retained earnings 6,031 (619) 10,148 10,701
----------- ----------- ----------- -----------
$ (11,988) $ (4,415) $ 35,332 $ 52,818
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
4
LAND O'LAKES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2002 2001
--------- ---------
($ IN THOUSANDS)
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 35,332 $ 52,818
Adjustment to reconcile net earnings to cash (used)
provided by operating activities:
Depreciation and amortization 79,569 65,025
Bad debt expense 3,132 1,611
Proceeds from patronage revolvement received 319 480
Non-cash patronage income (530) (2,364)
Increase in other assets (32,120) (13,970)
Increase (decrease) in other liabilities 4,966 (420)
Restructuring and impairment charges (reversals) 8,218 (4,242)
Gain from divestiture of businesses (4,935) (154)
Equity in earnings of affiliated companies (29,822) (43,727)
Minority interests (1,455) 5,711
Other (6,236) (6,296)
Changes in current assets and liabilites, net of acquisitions and
divestitures:
Receivables 104,574 31,864
Inventories (18,982) (31,394)
Other current assets 98,752 124,875
Accounts payable (284,304) (137,656)
Accrued expenses 34,248 (32,239)
--------- ---------
Net cash (used) provided by operating activities (9,274) 9,922
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (57,258) (53,739)
Acquisitions, net of cash acquired -- (13,300)
Payments for investments (5,069) (44,998)
Net proceeds from divestiture of businesses 3,351 --
Proceeds from sale of investments 21,084 4,353
Proceeds from sale of property, plant and equipment 11,655 24,141
Other 12,612 9,684
--------- ---------
Net cash used by investing activities (13,625) (73,859)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in short-term debt 42,407 132,507
Proceeds from issuance of long-term debt 4,773 52,936
Payments on principal of long-term debt (81,775) (69,340)
Payments for redemption for member equities (36,970) (45,842)
Other 2,173 (1,340)
--------- ---------
Net cash (used) provided by financing activities (69,392) 68,921
--------- ---------
Net (decrease) increase in cash (92,291) 4,984
Cash and cash equivalents at beginning of period 130,169 3,994
--------- ---------
Cash and cash equivalents at end of period $ 37,878 $ 8,978
========= =========
Supplementary Disclosure of Cash Flow Information:
Cash paid during periods for:
Interest, net of interest capitalized $ 49,450 $ 45,918
Income taxes (recovered) paid $ (21,654) $ 20,044
See accompanying notes to consolidated financial statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ IN THOUSANDS IN TABLES)
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The unaudited consolidated financial statements reflect, in the opinion of
the management of Land O'Lakes, Inc. (the "Company"), all normal recurring
adjustments necessary for a fair statement of the financial position and results
of operations and cash flows for the interim periods. The statements are
condensed and, therefore do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of
America for complete financial statements. For further information, refer to the
audited consolidated financial statements and footnotes for the year ended
December 31, 2001 included in our Registration Statement on Form S-4, as
amended. The results of operations and cash flows for interim periods are not
necessarily indicative of results for a full year.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." Major provisions of these
statements are as follows: all business combinations must now use the purchase
method of accounting, the pooling of interests method of accounting is now
prohibited; intangible assets acquired in a business combination must be
recorded separately from goodwill if they arise from contractual or other legal
rights or are separable from the acquired entity and can be sold, transferred,
licensed, rented or exchanged, either individually or as a part of a related
contract, asset or liability; goodwill and intangible assets with indefinite
lives are not amortized, but tested for impairment annually, except in certain
circumstances, and whenever there is an impairment indicator; all acquired
goodwill must be assigned to reporting units for purposes of impairment testing
and segment reporting. The Company adopted the provisions of SFAS 141 and
certain provisions of SFAS 142 as of July 1, 2001, and the remaining provisions
of SFAS 142 as of January 1, 2002. As required by SFAS 142, the Company
performed step one of the impairment testing of goodwill by June 30, 2002. For
all segments, the fair market value exceeded the carrying amount. Therefore, the
second step of impairment testing was not required and no impairment has been
recognized in the current year of adoption. The Company will perform impairment
tests annually and whenever events or circumstances occur indicating that
goodwill or other intangible assets might be impaired. As of January 1, 2002,
the Company is no longer amortizing goodwill, except for goodwill related to the
acquisition of cooperatives and the formation of joint ventures.
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- ----------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net (loss) earnings ......................... $(11,988) $ (4,415) $ 35,332 $ 52,818
Add back: Goodwill amortization, net of tax.. -- 1,550 -- 4,462
-------- -------- -------- --------
Adjusted net (loss) earnings ................ $(11,988) $ (2,865) $ 35,332 $ 57,280
======== ======== ======== ========
2001 2000 1999
-------- -------- --------
Net earnings ................................. $ 71,488 $102,932 $ 21,399
Add back: Goodwill amortization, net of tax .. 5,884 7,741 6,721
-------- -------- --------
Adjusted net earnings ........................ $ 77,372 $110,673 $ 28,120
======== ======== ========
The Company adopted Emerging Issues Task Force ("EITF") No. 00-25, "Vendor
Income Statement Characterization of Consideration to a Purchaser of the
Vendor's Products or Services," on January 1, 2002. EITF No. 00-25 deals with
the accounting for consideration paid from a vendor (typically a manufacturer or
distributor) to a retailer, including slotting fees, cooperative advertising
arrangements and buy-downs. The guidance in EITF 00-25 generally requires that
these incentives be classified as a reduction of sales. The impact of the
adoption decreased sales and selling and administration expense for the nine
months ended September 30, 2002 and 2001 by $76.6 million and $72.9 million,
respectively.
6
2. GOODWILL AND OTHER INTANGIBLE ASSETS
A summary of intangible assets follows:
AS OF SEPTEMBER 30, 2002
-----------------------------
GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION
-------------- ------------
Amortized intangible assets
Trademarks.................................. $ 3,618 $ (1,335)
Patents..................................... 16,373 (1,106)
Agreements not to compete................... 6,364 (3,705)
Other....................................... 14,520 (7,455)
--------- -----------
Total....................................... $ 40,875 $ (13,601)
========= ===========
Nonamortized intangible assets
Trademarks.................................. $ 76,963
=========
Aggregate amortization expense:
For nine months ended September 30, 2002.... $ 5,036
Estimated amortization expense:
For three months ended December 31, 2002.... $ 1,649
For year ended December 31, 2003............ 5,607
For year ended December 31, 2004............ 4,609
For year ended December 31, 2005............ 4,287
For year ended December 31, 2006............ 4,083
For year ended December 31, 2007............ 3,708
The changes in the carrying amount of goodwill for the nine months ended
September 30, 2002, are as follows:
DAIRY FOODS FEED SEED SWINE AGRONOMY OTHER TOTAL
----------- ---- ---- ----- -------- ----- -----
Balance as of January 1, 2002 ............. $ 40,285 $ 109,463 $ 15,704 $ 701 $ 74,904 $ 13,970 $ 255,027
Madison Dairy additional purchase price.. 26,461 -- -- -- -- -- 26,461
Agriliance additional purchase price .... -- -- -- -- 1,010 -- 1,010
Reallocation of purchase price .......... -- 56,784 (292) -- -- (60) 56,432
Amortization expense .................... -- (563) (27) (40) (4,568) (694) (5,892)
Goodwill written off
related to sale of business unit ...... -- (2,600) -- -- -- (51) (2,651)
--------- --------- --------- --------- --------- --------- ---------
Balance as of September 30, 2002 .......... $ 66,746 $ 163,084 $ 15,385 $ 661 $ 71,346 $ 13,165 $ 330,387
========= ========= ========= ========= ========= ========= =========
The reallocation of the purchase price in the Feed segment was primarily the
result of finalizing the appraisals related to the acquisition of Purina Mills,
Inc. during the third quarter ended September 30, 2002. The offsetting reduction
to property, plant and equipment resulted in a $3.9 million adjustment to reduce
depreciation expense, which was also recorded in the third quarter ended
September 30, 2002.
3. RECEIVABLES
A summary of receivables is as follows:
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
Trade accounts....................................... $ 268,847 $ 287,229
Notes and contracts.................................. 47,518 50,626
Notes from sale of trade receivables (see Note 4).... 93,498 192,403
Other................................................ 67,160 66,707
----------- -----------
477,023 596,965
Less allowance for doubtful accounts................. 17,591 22,954
----------- -----------
Total receivables, net............................... $ 459,432 $ 574,011
=========== ===========
A substantial portion of Land O'Lakes receivables is concentrated in the
agricultural industry. Collections of these receivables may be dependent upon
economic returns from farm crop and livestock production. The Company's credit
risks are continually reviewed,
7
and management believes that adequate provisions have been made for doubtful
accounts.
4. RECEIVABLES PURCHASE FACILITY
In December 2001, the Company established a $100.0 million receivables
purchase facility with CoBank, ACB (CoBank). A wholly owned unconsolidated
special purpose entity (SPE) was established to purchase certain receivables
from the Company. CoBank has been granted an interest in the pool of receivables
owned by the SPE. The transfers of the receivables from the Company to the SPE
are structured as sales and, accordingly, the receivables transferred to the SPE
are not reflected in the consolidated balance sheet. However, the Company
retains credit risk related to the repayment of the notes receivable with the
SPE, which, in turn, is dependent upon the credit risk of the SPE's receivables
pool. Accordingly, the Company has retained reserves for estimated losses. The
Company expects no significant gains or losses from the facility. At September
30, 2002, $35.0 million was outstanding under this facility and $65.0 million of
borrowing remained available. The total accounts receivable sold during the
three months and nine months ended September 30, 2002 were $498.5 million and
$1,763.3 million, respectively.
5. INVENTORIES
A summary of inventories is as follows:
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
Raw materials...... $ 97,502 $ 81,923
Work in process.... 32,682 37,423
Finished goods..... 331,361 331,428
----------- -----------
Total inventories.. $ 461,545 $ 450,774
=========== ===========
6. INVESTMENTS
A summary of investments is as follows:
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
CF Industries, Inc...................................... $ 249,502 $ 248,502
Agriliance, LLC......................................... 119,366 84,030
Ag Processing Inc....................................... 38,681 38,977
MoArk LLC............................................... 39,841 47,593
Advanced Food Products LLC.............................. 27,254 27,487
CoBank, ACB............................................. 21,973 21,549
Melrose Dairy Proteins, LLC............................. 8,227 8,253
PEC Mark II (Malta Cleyton)............................. - 7,681
Universal Cooperatives.................................. 6,196 6,196
Prairie Farms Dairy, Inc................................ 4,917 4,754
Other -- principally cooperatives and joint ventures.... 63,194 73,108
----------- -----------
Total investments....................................... $ 579,151 $ 568,130
=========== ===========
7. PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment is as follows:
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- -------------
Land and land improvements.................. $ 53,911 $ 51,818
Buildings and building equipment............ 292,195 311,499
Machinery and equipment..................... 551,535 560,244
Software.................................... 43,217 38,438
Construction in progress.................... 37,589 56,769
------------- -------------
Total property, plant and equipment......... 978,447 1,018,768
Less accumulated depreciation............... 382,202 343,491
------------- -------------
Total property, plant and equipment, net.... $ 596,245 $ 675,277
============= =============
8
8. RESTRUCTURING AND IMPAIRMENT CHARGES
For the three months ended September 30, 2002, the Company recorded
restructuring and impairment charges of $0.9 million, compared to a reversal of
a prior-year charge of $2.4 million for the three months ended September 30,
2001. Animal feed recorded a $0.9 million restructuring and impairment charge,
of which $0.7 million was related to the write-down of certain impaired plant
assets to their estimated fair value, and $0.2 million was related to employee
severance and outplacement costs for employees at various locations. The 2001
reversal of $2.4 million was for the sale of certain animal feed assets that had
been written off in December 2000 and to reflect the decision to continue
operating a plant previously scheduled for shutdown.
For the nine months ended September 30, 2002, the Company recorded
restructuring and impairment charges of $8.2 million, compared to a reversal of
a prior-year charge of $4.2 million for the nine months ended September 30,
2001. Animal feed recorded a $5.4 million restructuring and impairment charge,
of which $2.4 million was related to the write-down of certain impaired plant
assets to their estimated fair value, and $3.0 million was related to employee
severance and outplacement costs for 136 employees at the Ft. Dodge, IA office
facility and other feed plant facilities. Dairy foods recorded a $2.8 million
charge, which consisted of $1.5 million for employee severance and outplacement
for 82 employees and $1.3 million for impairment related to the Faribault, MN
dairy plant closure. The 2001 reversal of $4.2 million was for the sale of
certain animal feed assets that had been written off in December 2000 and to
reflect the decision to continue operating a plant previously scheduled for
shutdown.
9. GAIN ON LEGAL SETTLEMENT
Through September 30, 2002, the Company received settlement proceeds equal
to $36.8 million from several vitamin product suppliers against whom the Company
alleged certain price-fixing claims. The Company is currently pursuing similar
claims against several other vitamin product suppliers. The total settlement
proceeds received to date represent less than half of the total vitamin product
purchases under dispute.
10. GAIN ON SALE OF INTANGIBLES
For the nine months ended September 30, 2002, the Company recorded a $4.2
million gain on the sale to Potash Corporation of Saskatchewan of a customer
list pertaining to the feed phosphate distribution business.
11. DEBT OBLIGATIONS
The weighted average interest rate on short-term borrowings and notes
outstanding at September 30, 2002 and December 31, 2001 was 3.87% and 6.52%,
respectively.
As of September 30, 2002, interest rates on the Term A Loan, the Term B
Loan, and the revolving credit facility were 4.73%, 5.73% and 5.75%,
respectively.
12. SEGMENT INFORMATION
The Company operates in five segments: dairy foods, animal feed, crop seed,
swine and agronomy.
The dairy foods segment produces, markets and sells products such as butter,
spreads, cheese, and other dairy related products. Products are sold under
well-recognized national brand names including LAND O LAKES, the Indian Maiden
logo and Alpine Lace, as well as under regional brand names such as New Yorker
and Lake to Lake.
The animal feed segment consists primarily of a 92% ownership position in
Land O'Lakes Farmland Feed LLC. Land O'Lakes Farmland Feed LLC develops,
produces, markets and distributes animal feeds such as ingredient feed, formula
feed, milk replacers, vitamins and additives.
The crop seed segment is a supplier and distributor of crop seed products in
the United States. A variety of crop seed is sold, including alfalfa, soybeans,
corn and forage and turf grasses.
The swine segment has three programs: farrow-to-finish, swine aligned and
cost-plus. The farrow-to-finish program produces and sells market hogs. The
swine aligned program raises feeder pigs which are sold to local member
cooperatives. The cost-plus program provides minimum hog price guarantees to
producers in exchange for swine feed sales and profit participation.
9
The agronomy segment consists primarily of the Company's 50% ownership in
Agriliance, LLC, which is accounted for under the equity method. Agriliance, LLC
markets and sells two primary product lines: crop protection (including
herbicides and pesticides) and crop nutrients (including fertilizers and
micronutrients).
The Company allocates corporate administration expense to all of its
business segments, both directly and indirectly. Corporate staff functions that
are able to determine actual services provided to each segment allocate expense
on a direct and predetermined basis. All other corporate staff functions
allocate expense indirectly based on each segment's percent of total invested
capital. A majority of corporate administration expense is allocated directly.
DAIRY FOODS FEED SEED SWINE AGRONOMY OTHER CONSOLIDATED
----------- ---- ---- ----- -------- ----- ------------
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2002
Net sales $710,519 $596,398 $32,094 $20,881 $ -- $ 3,400 $1,363,292
Cost of sales 671,691 523,862 28,325 24,781 (1) 2,000 1,250,658
Selling, general and administration 42,641 62,054 11,477 1,563 3,748 2,014 123,497
Restructuring and impairment charges -- 942 -- -- -- -- 942
Interest expense, net 5,503 7,446 452 1,329 2,608 714 18,052
Gain on legal settlement (94) (4,042) -- -- -- -- (4,136)
Gain on divestiture of business -- (24) (3,706) -- -- -- (3,730)
Equity in (earnings) loss of affiliated
companies (560) (834) -- 484 2,733 2,721 4,544
Minority interest in (loss) earnings
of subsidiaries (2,506) 1,141 -- -- -- -- (1,365)
-------- -------- ------- ------- ------- ------- ----------
(Loss) earnings before income taxes $ (6,156) $ 5,853 $(4,454) $(7,276) $(9,088) $(4,049) $ (25,170)
======== ======== ======= ======= ======= ======= ==========
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2001
Net sales $954,112 $413,038 $ 14,843 $29,052 $ -- $ 3,487 $1,414,532
Cost of sales 904,504 379,135 10,580 22,914 (8) 1,904 1,319,029
Selling, general and administration 44,592 28,247 13,020 1,747 3,861 2,695 94,162
Restructuring and impairment reversal -- (2,433) -- -- -- -- (2,433)
Interest expense, net 5,079 1,921 821 1,465 2,700 244 12,230
Equity in (earnings) loss of affiliated
companies (1,531) (1,832) 413 (1,197) (4,823) 2,534 (6,436)
Minority interest in (loss) earnings
of subsidiaries (299) 2,288 17 -- -- (48) 1,958
-------- -------- -------- ------- ------- ------- ----------
Earnings (loss) before income taxes $ 1,767 $ 5,712 $(10,008) $ 4,123 $(1,730) $(3,842) $ (3,978)
======== ======== ======== ======= ======= ======= ==========
10
DAIRY FOODS FEED SEED SWINE AGRONOMY OTHER CONSOLIDATED
----------- ---- ---- ----- -------- ----- ------------
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002
Net sales $2,151,949 $1,786,372 $284,986 $ 66,575 $ -- $ 9,663 $ 4,299,545
Cost of sales 2,029,720 1,569,527 241,980 68,409 2 5,620 3,915,258
Selling, general and administration 127,317 188,104 34,634 4,792 13,233 6,906 374,986
Restructuring and impairment charges 2,800 5,418 -- -- -- -- 8,218
Interest expense, net 15,298 22,546 2,168 3,966 6,906 2,116 53,000
Gain on legal settlement (922) (35,913) -- -- -- -- (36,835)
Gain on sale of intangibles -- (4,184) -- -- -- -- (4,184)
(Gain) loss on divestiture of business (1,281) (24) (3,706) -- -- 76 (4,935)
Equity in (earnings) loss of affiliated
companies (497) (1,402) (105) 688 (36,633) 8,127 (29,822)
Minority interest in (loss) earnings
of subsidiaries (5,075) 3,511 -- -- -- 109 (1,455)
---------- ---------- -------- -------- -------- -------- -----------
(Loss) earnings before income taxes $ (15,411) $ 38,789 $ 10,015 $(11,280) $ 16,492 $(13,291) $ 25,314
========== ========== ======== ======== ======== ======== ===========
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2001
Net sales $2,540,492 $1,222,957 $306,249 $82,771 $ -- $10,263 $4,162,732
Cost of sales 2,378,849 1,119,505 258,503 71,618 -- 6,319 3,834,794
Selling, general and administration 129,984 83,359 35,743 5,458 13,431 6,696 274,671
Restructuring and impairment reversals -- (4,242) -- -- -- -- (4,242)
Interest expense, net 14,829 4,748 4,870 4,662 6,845 585 36,539
Gain on divestiture of business -- (154) -- -- -- -- (154)
Equity in (earnings) loss of affiliated
companies (4,586) (1,974) (5) (3,261) (35,885) 1,984 (43,727)
Minority interest in (loss) earnings
of subsidiaries (697) 6,453 15 -- -- (60) 5,711
---------- ---------- -------- ------- -------- ------- ----------
Earnings (loss) before income taxes $ 22,113 $ 15,262 $ 7,123 $ 4,294 $ 15,609 $(5,261) $ 59,140
========== ========== ======== ======= ======== ======= ==========
13. CONSOLIDATING FINANCIAL INFORMATION
The Company issued $350 million in senior notes which are guaranteed by the
Company and certain of its wholly and majority owned subsidiaries (the
"Guarantor Subsidiaries"). Such guarantees are full, unconditional and joint and
several.
The following supplemental financial information sets forth, on an
unconsolidated basis, balance sheet, statement of operations and cash flow
information for the Company, Guarantor Subsidiaries and the Company's other
subsidiaries (the "Non-Guarantor Subsidiaries"). The supplemental financial
information reflects the investments of the Company in the Guarantor and
Non-Guarantor Subsidiaries using the equity method of accounting.
The "Majority Owned Consolidated Guarantor" column in the following
supplemental financial information represents Land O'Lakes Farmland Feed LLC
"LOLFF", excluding certain majority owned non-guarantors of LOLFF.
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 2002
LAND CONSOLIDATED MAJORITY
O'LAKES, INC. WHOLLY OWNED
PARENT OWNED CONSOLIDATED NON-GUARANTOR
COMPANY GUARANTORS GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------- --------------- ------------ ------------
($ IN THOUSANDS)
(UNAUDITED)
ASSETS
Current assets:
Cash and short-term
investments $ 28,509 $ (1,029) $ (2,089) $ 12,487 $ -- $ 37,878
Receivables, net 373,426 45,051 101,076 47,264 (107,385) 459,432
Inventories 287,357 58,176 108,671 7,341 -- 461,545
Prepaid expenses 90,942 2,336 2,663 364 -- 96,305
Other current assets 5,950 141 17,658 603 -- 24,352
----------- ----------- ----------- ----------- ----------- -----------
Total current
assets 786,184 104,675 227,979 68,059 (107,385) 1,079,512
Investments 1,080,974 1,581 28,925 2,496 (534,825) 579,151
Property, plant and
equipment, net 274,625 24,661 246,756 50,203 -- 596,245
Goodwill, net 156,437 11,684 161,344 922 -- 330,387
Other intangibles, net 5,547 1,037 97,354 299 -- 104,237
Other assets 50,717 846 31,800 41,656 (17,082) 107,937
----------- ----------- ----------- ----------- ----------- -----------
Total assets $ 2,354,484 $ 144,484 $ 794,158 $ 163,635 $ (659,292) $ 2,797,469
=========== =========== =========== =========== =========== ===========
LIABILITIES AND EQUITIES
Current liabilities:
Notes and short-term
obligations $ 15,163 $ 2,789 $ 461 $ 70,392 $ (54,560) $ 34,245
Current portion of
long-term debt 60,347 51,830 (12) 60 (56,806) 55,419
Accounts payable 180,466 68,586 91,400 18,591 (3,499) 355,544
Accrued expenses 183,087 1,974 40,202 4,435 -- 229,698
Patronage refunds
payable 5,156 -- -- -- -- 5,156
----------- ----------- ----------- ----------- ----------- -----------
Total current
liabilities 444,219 125,179 132,051 93,478 (114,865) 680,062
Long-term debt 1,004,351 10,153 56,632 19,050 (18,902) 1,071,284
Employee benefits and
other liabilities 77,089 -- 33,450 430 -- 110,969
Deferred tax liabilities 18,829 1,280 -- -- -- 20,109
Minority interests 8,157 -- -- 8,496 39,596 56,249
Equities:
Capital stock 2,237 1,084 505,262 47,320 (553,666) 2,237
Member equities 841,022 -- -- -- -- 841,022
Retained earnings (41,420) 6,788 66,763 (5,139) (11,455) 15,537
----------- ----------- ----------- ----------- ----------- -----------
Total equities 801,839 7,872 572,025 42,181 (565,121) 858,796
----------- ----------- ----------- ----------- ----------- -----------
Total liabilities and
equities $ 2,354,484 $ 144,484 $ 794,158 $ 163,635 $ (659,292) $ 2,797,469
=========== =========== =========== =========== =========== ===========
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002
LAND CONSOLIDATED MAJORITY
O'LAKES, INC. WHOLLY OWNED
PARENT OWNED CONSOLIDATED NON-GUARANTOR
COMPANY GUARANTORS GUARANTOR SUBSIDIARIES CONSOLIDATED
------------- ------------ ----------- -------------- ------------
($ IN THOUSANDS)
(UNAUDITED)
Net sales $ 687,020 $ 63,822 $ 581,423 $ 31,027 $ 1,363,292
Cost of sales 632,011 70,672 511,446 36,529 1,250,658
----------- ----------- ----------- ----------- -----------
Gross profit (loss) 55,009 (6,850) 69,977 (5,502) 112,634
Selling, general and administration 65,561 (5,983) 59,077 4,842 123,497
Restructuring and impairment
charges -- -- 942 -- 942
----------- ----------- ----------- ----------- -----------
(Loss) earnings from operations (10,552) (867) 9,958 (10,344) (11,805)
Interest expense (income), net 18,052 989 (772) (217) 18,052
Gain on legal settlement (4,136) -- -- -- (4,136)
(Gain) loss on divestiture
of businesses (3,078) (3,682) -- 3,030 (3,730)
Equity in loss (earnings) of
affiliated companies 5,147 -- (603) -- 4,544
Minority interest in earnings
(loss) of subsidiaries 3,516 -- (78) (4,803) (1,365)
----------- ----------- ----------- ----------- -----------
(Loss) earnings before income
taxes (30,053) 1,826 11,411 (8,354) (25,170)
Income tax (benefit) expense (14,388) 1,113 (286) 379 (13,182)
----------- ----------- ----------- ----------- -----------
Net (loss) earnings $ (15,665) $ 713 $ 11,697 $ (8,733) $ (11,988)
=========== =========== =========== =========== ===========
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
LAND CONSOLIDATED MAJORITY
O'LAKES, INC. WHOLLY OWNED
PARENT OWNED CONSOLIDATED NON-GUARANTOR
COMPANY GUARANTORS GUARANTOR SUBSIDIARIES CONSOLIDATED
-------------- ------------ ------------ -------------- ------------
($ IN THOUSANDS)
(UNAUDITED)
Net sales $ 2,316,776 $ 167,723 $ 1,734,131 $ 80,915 $ 4,299,545
Cost of sales 2,151,931 150,725 1,523,648 88,954 3,915,258
----------- ----------- ----------- ----------- -----------
Gross profit (loss) 164,845 16,998 210,483 (8,039) 384,287
Selling, general and administration 171,770 16,800 177,964 8,452 374,986
Restructuring and impairment
charges 2,800 -- 5,418 -- 8,218
----------- ----------- ----------- ----------- -----------
(Loss) earnings from operations (9,725) 198 27,101 (16,491) 1,083
Interest expense (income), net 52,625 3,021 (2,211) (435) 53,000
Gain on legal settlement (36,835) -- -- -- (36,835)
Gain on sale of intangibles -- -- (4,184) -- (4,184)
(Gain) loss on divestiture
of businesses (2,714) (3,682) -- 1,461 (4,935)
Equity in earnings of
affiliated companies (28,983) -- (839) -- (29,822)
Minority interest in loss
(earnings) of subsidiaries 2,800 -- 230 (4,485) (1,455)
----------- ----------- ----------- ----------- -----------
Earnings (loss) before
income taxes 3,382 859 34,105 (13,032) 25,314
Income tax (benefit) expense (11,751) 1,526 (782) 989 (10,018)
----------- ----------- ----------- ----------- -----------
Net earnings (loss) $ 15,133 $ (667) $ 34,887 $ (14,021) $ 35,332
=========== =========== =========== =========== ===========
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
LAND CONSOLIDATED MAJORITY
O'LAKES, INC. WHOLLY OWNED
PARENT OWNED CONSOLIDATED NON-GUARANTOR
COMPANY GUARANTORS GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ -------------- ------------ -------------- ------------ ------------
($ IN THOUSANDS)
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 15,133 $ (667) $ 34,887 $ (14,021) $ -- $ 35,332
Adjustment to reconcile net
earnings (loss) to cash provided
(used) by operating activities:
Depreciation and amortization 40,197 2,885 33,963 2,524 -- 79,569
Bad debt expense 957 -- 2,175 -- -- 3,132
Proceeds from patronage revolvement
received 319 -- -- -- -- 319
Non-cash patronage income (530) -- -- -- -- (530)
(Increase) decrease in other assets (31,394) 2,673 (15,334) 6,554 5,381 (32,120)
Decrease (increase) in other liabilities 8,400 (654) (2,928) 148 -- 4,966
Restructuring and impairment charges 2,800 -- 5,418 -- -- 8,218
(Gain) loss on divestiture of businesses (2,714) (3,682) -- 1,461 -- (4,935)
Equity in earnings of affiliated
companies (28,983) -- (839) -- -- (29,822)
Minority interests 2,800 -- 230 (4,485) -- (1,455)
Other (6,988) -- 194 558 -- (6,236)
Changes in current assets and
liabilities, net of acquisitions
and divestitures:
Receivables 189,843 (10,407) 11,201 (6,791) (79,272) 104,574
Inventories (14,402) (2,569) (1,124) (887) -- (18,982)
Other current assets 88,124 7,112 3,530 (14) -- 98,752
Accounts payable (285,348) 2,219 (20,038) 1,730 17,133 (284,304)
Accrued expenses 34,442 (4,847) 3,565 1,088 -- 34,248
--------- --------- --------- --------- --------- ---------
Net cash provided (used) by operating
activities 12,656 (7,937) 54,900 (12,135) (56,758) (9,274)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (39,355) (1,083) (14,338) (2,482) -- (57,258)
Payments for investments (3,315) (4) -- (1,194) (556) (5,069)
Net proceeds from divestiture of business 3,351 -- -- -- -- 3,351
Proceeds from sale of investment 18,620 270 2,044 150 -- 21,084
Proceeds from sale of property, plant and
equipment 5,963 -- 5,692 -- -- 11,655
Other 12,612 -- -- -- -- 12,612
--------- --------- --------- --------- --------- ---------
Net cash used by investing activities (2,124) (817) (6,602) (3,526) (556) (13,625)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term debt 30,603 (7,588) (4,169) 8,391 15,170 42,407
Proceeds from issuance of long-term debt 4,520 229 -- 24 -- 4,773
Payments on principal of long-term debt (87,588) -- (44,610) (2,421) 52,844 (81,775)
Payments for redemption for member
equities (36,970) -- -- -- -- (36,970)
Other (3,642) 5,994 (581) 11,102 (10,700) 2,173
--------- --------- --------- --------- --------- ---------
Net cash (used) provided by financing
activities (93,077) (1,365) (49,360) 17,096 57,314 (69,392)
--------- --------- --------- --------- --------- ---------
Net (decrease) increase in cash (82,545) (10,119) (1,062) 1,435 -- (92,291)
Cash and short-term investments at
beginning of period 111,054 9,090 (1,027) 11,052 -- 130,169
--------- --------- --------- --------- --------- ---------
Cash and short-term investments at end
of period $ 28,509 $ (1,029) $ (2,089) $ 12,487 $ -- $ 37,878
========= ========= ========= ========= ========= =========
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2001
LAND CONSOLIDATED MAJORITY
O'LAKES, INC. WHOLLY OWNED
PARENT OWNED CONSOLIDATED NON-GUARANTOR
COMPANY GUARANTORS GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------- ------------ ------------
($ IN THOUSANDS)
ASSETS
Current assets:
Cash and short-term
investments ....... $ 111,054 $ 9,090 $ (1,027) $ 11,052 $ -- $ 130,169
Receivables, net ..... 552,951 23,659 136,949 47,109 (186,657) 574,011
Inventories .......... 276,115 57,388 107,548 9,723 -- 450,774
Prepaid expenses ..... 168,486 9,625 6,265 1,114 -- 185,490
Other current assets . 27,038 -- -- -- -- 27,038
---------- ---------- ---------- ---------- ---------- ----------
Total current
assets .......... 1,135,644 99,762 249,735 68,998 (186,657) 1,367,482
Investments ............ 1,047,711 3,596 50,751 1,453 (535,381) 568,130
Property, plant and
equipment, net ....... 272,328 29,146 319,164 54,639 -- 675,277
Goodwill, net .......... 138,054 12,224 103,790 959 -- 255,027
Other intangibles, net . 3,484 2,669 102,503 331 -- 108,987
Other assets ........... 73,403 2,111 4,521 48,141 (11,701) 116,475
---------- ---------- ---------- ---------- ---------- ----------
Total assets ...... $2,670,624 $ 149,508 $ 830,464 $ 174,521 $ (733,739) $3,091,378
========== ========== ========== ========== ========== ==========
LIABILITIES AND EQUITIES
Current liabilities:
Notes and short-term
obligations ....... $ 270 $ 2,701 $ 88,902 $ 68,261 $ (126,163) $ 33,971
Current portion of
long-term debt .... 19,995 59,506 23 59 (60,037) 19,546
Accounts payable ..... 436,177 61,786 133,872 20,550 (76) 652,309
Accrued expenses ..... 142,820 6,959 33,769 4,021 -- 187,569
Patronage refunds
payable ........... 28,900 -- -- -- -- 28,900
---------- ---------- ---------- ---------- ---------- ----------
Total current
liabilities ..... 628,162 130,952 256,566 92,891 (186,276) 922,295
Long-term debt ......... 1,125,437 9,924 65 24,121 (12,082) 1,147,465
Employee benefits and
other liabilities .... 45,459 1,434 35,626 282 -- 82,801
Deferred tax liability . 42,495 -- -- -- -- 42,495
Minority interests ..... 5,494 -- 972 13,744 39,596 59,806
Equities:
Capital stock ........ 2,305 1,084 504,916 58,410 (564,410) 2,305
Member equities ...... 805,860 -- -- -- -- 805,860
Retained earnings .... 15,412 6,114 32,319 (14,927) (10,567) 28,351
---------- ---------- ---------- ---------- ---------- ----------
Total equities .... 823,577 7,198 537,235 43,483 (574,977) 836,516
---------- ---------- ---------- ---------- ---------- ----------
Total liabilities and
equities ............. $2,670,624 $ 149,508 $ 830,464 $ 174,521 $ (733,739) $3,091,378
========== ========== ========== ========== ========== ==========
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001
LAND CONSOLIDATED MAJORITY
O'LAKES, INC. WHOLLY OWNED
PARENT OWNED CONSOLIDATED NON-GUARANTOR
COMPANY GUARANTORS GUARANTOR SUBSIDIARIES CONSOLIDATED
------------- ------------- ------------ ------------- ------------
($ IN THOUSANDS)
(UNAUDITED)
Net sales $ 933,615 $ 58,907 $ 385,242 $ 36,768 $ 1,414,532
Cost of sales 868,551 62,784 353,862 33,832 1,319,029
----------- ----------- ----------- ----------- -----------
Gross profit (loss) 65,064 (3,877) 31,380 2,936 95,503
Selling, general and administration 67,157 (1,864) 24,911 3,958 94,162
Restructuring and impairment
(reversals) -- -- (2,433) -- (2,433)
----------- ----------- ----------- ----------- -----------
(Loss) earnings from operations (2,093) (2,013) 8,902 (1,022) 3,774
Interest expense (income), net 10,017 957 1,365 (109) 12,230
Equity in earnings of
affiliated companies (6,031) -- (405) -- (6,436)
Minority interest in earnings
of subsidiaries 1,824 -- 99 35 1,958
----------- ----------- ----------- ----------- -----------
(Loss) earnings before income taxes (7,903) (2,970) 7,843 (948) (3,978)
Income tax expense (benefit) 655 (382) (65) 229 437
----------- ----------- ----------- ----------- -----------
Net (loss) earnings $ (8,558) $ (2,588) $ 7,908 $ (1,177) $ (4,415)
=========== =========== =========== =========== ===========
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
LAND CONSOLIDATED MAJORITY
O'LAKES, INC. WHOLLY OWNED
PARENT OWNED CONSOLIDATED NON-GUARANTOR
COMPANY GUARANTORS GUARANTOR SUBSIDIARIES CONSOLIDATED
------------- ------------ ------------ -------------- ------------
($ IN THOUSANDS)
(UNAUDITED)
Net sales $ 2,747,039 $ 176,195 $ 1,148,091 $ 91,407 $ 4,162,732
Cost of sales 2,545,757 152,765 1,051,873 84,399 3,834,794
----------- ----------- ----------- ----------- -----------
Gross profit 201,282 23,430 96,218 7,008 327,938
Selling, general and administration 171,130 18,246 75,973 9,322 274,671
Restructuring and impairment
(reversals) -- -- (4,242) -- (4,242)
----------- ----------- ----------- ----------- -----------
Earnings (loss) from operations 30,152 5,184 24,487 (2,314) 57,509
Interest expense (income), net 29,259 3,435 4,573 (728) 36,539
Gain on divestiture of business (154) -- -- -- (154)
Equity in earnings of
affiliated companies (42,491) -- (1,236) -- (43,727)
Minority interest in earnings
(loss) of subsidiaries 5,856 -- 249 (394) 5,711
----------- ----------- ----------- ----------- -----------
Earnings (loss) before income
taxes 37,682 1,749 20,901 (1,192) 59,140
Income tax expense (benefit) 4,185 1,805 (65) 397 6,322
----------- ----------- ----------- ----------- -----------
Net earnings (loss) $ 33,497 $ (56) $ 20,966 $ (1,589) $ 52,818
=========== =========== =========== =========== ===========
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
LAND CONSOLIDATED MAJORITY
O'LAKES, INC. WHOLLY OWNED
PARENT OWNED CONSOLIDATED NON-GUARANTOR
COMPANY GUARANTORS GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ -------------- ------------ ------------
($ IN THOUSANDS)
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 33,497 $ (56) $ 20,966 $ (1,589) $ -- $ 52,818
Adjustment to reconcile net
earnings (loss) to cash
provided (used) by operating
activities:
Depreciation and amortization 48,721 2,470 12,062 1,772 -- 65,025
Bad debt expense 1,175 -- 436 -- -- 1,611
Proceeds from patronage
revolvement received 480 -- -- -- -- 480
Non-cash patronage income (2,364) -- -- -- -- (2,364)
(Increase) decrease in other assets (67,563) 1,303 458 (1,463) 53,295 (13,970)
(Decrease) increase in other
liabilities (43,491) (708) (5,068) 82 48,765 (420)
Restructuring and impairment
reversals -- -- (4,242) -- -- (4,242)
Gain on divestiture of businesses (154) -- -- -- -- (154)
Equity in earnings of affiliated
companies (42,491) -- (1,236) -- -- (43,727)
Minority interests 5,856 -- 249 (394) -- 5,711
Other (6,741) -- 531 (86) -- (6,296)
Changes in current assets
and liabilities,
net of acquisitions
and divestitures:
Receivables 80,928 (5,891) (4,426) (14,045) (24,702) 31,864
Inventories (46,536) 4,667 11,277 (802) -- (31,394)
Other current assets 110,548 8,744 5,557 26 -- 124,875
Accounts payable (65,698) (74,951) (14,021) 3,465 13,549 (137,656)
Accrued expenses (4,800) (2,928) (27,211) 2,700 -- (32,239)
--------- --------- --------- --------- --------- ---------
Net cash provided (used) by
operating activities 1,367 (67,350) (4,668) (10,334) 90,907 9,922
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property,
plant and equipment (27,669) (293) (14,280) (11,497) -- (53,739)
Acquisitions, net of cash acquired (13,300) -- -- -- -- (13,300)
Payments for investments (54,870) -- -- (3,103) 12,975 (44,998)
Proceeds from sale of investment 2,365 312 1,676 -- -- 4,353
Proceeds from sale of property,
plant and equipment 20,654 -- 3,301 186 -- 24,141
Other 9,684 -- -- -- -- 9,684
--------- --------- --------- --------- --------- ---------
Net cash (used) provided by
investing activities (63,136) 19 (9,303) (14,414) 12,975 (73,859)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in
short-term debt 105,889 61,963 1,659 6,528 (43,532) 132,507
Proceeds from issuance of
long-term debt 69,571 -- 14,052 16,688 (47,375) 52,936
Payments on principal
of long-term debt (69,160) (112) 860 (928) -- (69,340)
Payments for redemption
for member equities (45,842) -- -- -- -- (45,842)
Other 2,739 5,951 (1,347) 4,292 (12,975) (1,340)
--------- --------- --------- --------- --------- ---------
Net cash provided (used)
by financing activities 63,197 67,802 15,224 26,580 (103,882) 68,921
--------- --------- --------- --------- --------- ---------
Net increase in cash 1,428 471 1,253 1,832 -- 4,984
Cash and short-term investments at
beginning of period (3,957) (545) (2,395) 10,891 -- 3,994
--------- --------- --------- --------- --------- ---------
Cash and short-term investments at
end of period $ (2,529) $ (74) $ (1,142) $ 12,723 $ -- $ 8,978
========= ========= ========= ========= ========= =========
19
LAND O'LAKES FARMLAND FEED LLC
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2002 2001
----------------- ---------------
($ IN THOUSANDS)
(UNAUDITED)
ASSETS
Current assets:
Cash and short-term investments $ - $ 3,019
Receivables, net 109,073 119,063
Inventories 112,684 113,559
Prepaid expenses 2,920 6,472
Notes receivable - Land O'Lakes, Inc. 17,658 -
----------------- ---------------
Total current assets 242,335 242,113
Investments 31,121 31,496
Property, plant and equipment, net 254,138 326,956
Goodwill, net 162,266 104,749
Other intangibles, net 97,653 100,663
Other assets 32,756 27,640
----------------- ---------------
Total assets $ 820,269 $ 833,617
================= ===============
LIABILITIES AND EQUITIES
Current liabilities:
Notes and short-term obligations $ 3,000 $ 5,000
Notes payable - Land O'Lakes, Inc. - 29,210
Accounts payable 95,221 117,074
Accrued expenses 42,087 35,132
----------------- ---------------
Total current liabilities 140,308 186,416
Notes payable - Land O'Lakes, Inc. 59,664 59,664
Employee benefits and other liabilities 33,880 36,656
Minority interests 3,125 2,919
Equities:
Contributed capital 515,379 515,044
Retained earnings 67,913 32,918
----------------- ---------------
Total equities 583,292 547,962
----------------- ---------------
Commitments and contingencies
Total liabilities and equities $ 820,269 $ 833,617
================= ===============
See accompanying notes to consolidated financial statements.
20
LAND O'LAKES FARMLAND FEED LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- -----------------------------
2002 2001 2002 2001
--------------- --------------- -------------- --------------
($ IN THOUSANDS)
(UNAUDITED)
Net sales $ 594,448 $ 406,779 $ 1,774,451 $ 1,203,272
Cost of sales 522,415 374,547 1,559,254 1,104,316
--------------- --------------- -------------- --------------
Gross profit 72,033 32,232 215,197 98,956
Selling, general and administration 60,378 24,845 181,208 77,334
Restructuring and impairment charges (reversals) 942 (2,433) 5,418 (4,242)
--------------- --------------- -------------- --------------
Earnings from operations 10,713 9,820 28,571 25,864
Interest (income) expense, net (737) 1,478 (2,081) 4,932
Gain on sale of intangibles - - (4,184) -
Equity in earnings of affiliated companies (576) (405) (839) (1,236)
Minority interest in earnings of subsidiaries 194 508 680 721
--------------- --------------- -------------- --------------
Net earnings $ 11,832 $ 8,239 $ 34,995 $ 21,447
=============== =============== ============== ==============
See accompanying notes to consolidated financial statements.
21
LAND O'LAKES FARMLAND FEED LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------
2002 2001
--------------- --------------
($ IN THOUSANDS)
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 34,995 $ 21,447
Adjustments to reconcile net earnings to cash provided
by (used in) operating activities:
Depreciation and amortization 34,333 12,707
Bad debt expense 2,175 436
Increase in other assets (15,883) (302)
Decrease in other liabilities (2,776) (4,986)
Restructuring and impairment charges (reversals) 5,418 (4,242)
Equity in earnings of affiliated companies (839) (1,236)
Minority interests 680 721
Changes in current assets and liabilities, net of
acquisitions and divestitures:
Receivables 7,815 (7,914)
Inventories 875 11,753
Other current assets 3,552 5,554
Accounts payable (21,853) (15,005)
Accrued expenses 3,919 (27,787)
--------------- --------------
Net cash provided by (used in) operating activities 52,411 (8,854)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (14,298) (14,482)
Proceeds from investments 2,044 1,676
Proceeds from sale of property, plant and equipment 5,692 3,374
--------------- --------------
Net cash used in investing activities (6,562) (9,432)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in short-term debt (2,000) 1,660
Proceeds from note payable to Land O'Lakes, Inc. 339,982 280,551
Payments on note payable to Land O'Lakes, Inc. (386,850) (263,925)
--------------- --------------
Net cash (used) provided by financing activities (48,868) 18,286
--------------- --------------
Net decrease in cash and short-term investments (3,019) -
Cash and short-term investments at beginning of period 3,019 -
--------------- --------------
Cash and short-term investments at end of period $ - $ -
=============== ==============
Supplementary Disclosure of Cash Flow Information:
Cash paid during periods for:
Interest, net of interest capitalized $ - $ -
See accompanying notes to consolidated financial statements.
22
LAND O'LAKES FARMLAND FEED LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ IN THOUSANDS IN TABLES)
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
The unaudited consolidated financial statements reflect, in the opinion of
the management of Land O'Lakes Farmland Feed LLC (the "Company"), all normal
recurring adjustments necessary for a fair statement of the financial position
and results of operations and cash flows for the interim periods. The statements
are condensed and, therefore do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of
America for complete financial statements. For further information, refer to the
audited consolidated financial statements and footnotes for the year ended
December 31, 2001 included in our Registration Statement on Form S-4, as
amended. The results of operations and cash flows for interim periods are not
necessarily indicative of results for a full year.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." Major provisions of these statements are as follows: all business
combinations must now use the purchase method of accounting, the pooling of
interests method of accounting is now prohibited; intangible assets acquired in
a business combination must be recorded separately from goodwill if they arise
from contractual or other legal rights or are separable from the acquired entity
and can be sold, transferred, licensed, rented or exchanged, either individually
or as a part of a related contract, asset or liability; goodwill and intangible
assets with indefinite lives are not amortized, but tested for impairment
annually, except in certain circumstances, and whenever there is an impairment
indicator; all acquired goodwill must be assigned to reporting units for
purposes of impairment testing and segment reporting. Land O'Lakes Farmland Feed
LLC has adopted the provisions of SFAS 141 and certain provisions of SFAS 142 as
of July 1, 2001, and the remaining provisions of SFAS 142 as of January 1, 2002.
As required by SFAS 142, Land O'Lakes Farmland Feed LLC performed step one of
the impairment testing of goodwill for the balances as of January 1, 2002 by
June 30, 2002. The fair value of goodwill exceeded the carrying amount,
therefore the second step of impairment testing is not required and no
impairment has been recognized in the current year of adoption.
Land O'Lakes Farmland Feed LLC will perform impairment tests annually and
whenever events or circumstances occur indicating that goodwill or other
intangible assets might be impaired. As of January 1, 2002, we are no longer
amortizing goodwill, except for goodwill related to the acquisition of
cooperatives and the formation of joint ventures.
The following table presents a reconciliation of net earnings adjusted for
the exclusion of amortization of goodwill no longer required to be amortized,
net of income taxes:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2002 2001 2002 2001
-------- ------- -------- --------
Net earnings.................................... $ 11,832 $ 8,239 $ 34,995 $ 21,447
Add back: Goodwill amortization, net of tax..... - 210 - 390
-------- ------- -------- --------
Adjusted net earnings........................... $ 11,832 $ 8,449 $ 34,995 $ 21,837
======== ======== ======== ========
THREE
MONTHS ENDED
YEAR ENDED DECEMBER 31,
2001 2000
----------- -------------
Net earnings (loss)............................. $ 39,146 $(6,228)
Add back: Goodwill amortization, net of tax..... 1,041 85
--------- -------
Adjusted net earnings (loss).................... $ 40,187 $(6,143)
========= =======
23
2. GOODWILL AND OTHER INTANGIBLE ASSETS
A summary of intangible assets follows:
AS OF SEPTEMBER 30, 2002
-----------------------------
GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION
-------------- -----------
Amortized intangible assets
Trademarks ................................... $ 882 $ (240)
Patents ...................................... 16,373 (1,106)
Agreements not to compete .................... 1,402 (560)
Other ........................................ 9,930 (5,991)
------- -------
Total ........................................ $28,587 $(7,897)
======= =======
Nonamortized intangible assets
Trademarks ..................................... $76,963
=======
Aggregate amortization expense:
For nine months ended September 30, 2002 ..... $ 3,916
Estimated amortization expense:
For three months ended December 31, 2002 ..... $ 1,026
For year ended December 31, 2003 ............. 4,107
For year ended December 31, 2004 ............. 4,107
For year ended December 31, 2005 ............. 4,107
For year ended December 31, 2006 ............. 3,991
For year ended December 31, 2007 ............. 3,546
The changes in the carrying amount of goodwill for the nine months ended
September 30, 2002, are as follows:
Balance as of January 1, 2002......................... $ 104,749
Reallocation of purchase price...................... 57,866
Amortization expense................................ (349)
-----------
Balance as of September 30, 2002..................... $ 162,266
===========
The reallocation of the purchase price was primarily the result of
finalizing the appraisals during the third quarter ended September 30, 2002. The
offsetting reduction to property, plant and equipment resulted in a $3.9 million
adjustment to reduce depreciation expense, which was also recorded in the third
quarter ended September 30, 2002.
3. RECEIVABLES
A summary of receivables is as follows:
SEPTEMBER 30, DECEMBER 31,
2002 2001
----------- -----------
Trade accounts....................................... $ 23,747 $ 25,320
Notes and contracts.................................. 22,706 18,071
Notes from sale of trade receivables (see Note 4).... 61,247 70,878
Other................................................ 11,337 13,879
----------- -----------
119,037 128,148
Less allowance for doubtful accounts................. 9,964 9,085
----------- -----------
Total receivables, net............................... $ 109,073 $ 119,063
=========== ===========
4. RECEIVABLES PURCHASE FACILITY
In December 2001, Land O'Lakes, Inc., Land O'Lakes Farmland Feed LLC, and
Purina Mills, LLC established a $100.0 million receivables purchase facility
with CoBank, ACB (CoBank). A wholly owned unconsolidated special purpose entity,
Land O'Lakes Farmland Feed SPV, LLC, (SPE), was established to purchase certain
receivables from Land O'Lakes, Inc., Land O'Lakes Farmland Feed LLC, and Purina
Mills, LLC. CoBank has been granted an interest in the receivables owned by the
SPE. The transfers of the receivables from the Company to the SPE are structured
as sales and, accordingly, the receivables transferred to the SPE are not
reflected in the Company's consolidated balance sheet. However, Land O'Lakes,
Inc., Land O'Lakes Farmland Feed LLC, and Purina Mills, LLC retain the credit
risk related to the repayment of the notes receivable with the SPE, which in
turn is dependent upon the
24
credit risk of the SPE's receivables. Accordingly, the Company has retained
reserves for estimated losses. The Company expects no significant gains or
losses from the sale of the receivables. At September 30, 2002 and December 31,
2001, there was $35.0 million and $75.8 million of SPE borrowings outstanding,
respectively. The total accounts receivable sold by the Company during the three
months and nine months ended September 30, 2002 were $561.5 million and $1,686.7
million, respectively.
5. INVENTORIES
A summary of inventories is as follows:
SEPTEMBER 30, DECEMBER 31,
2002 2001
-------- --------
Raw materials ........ $ 79,447 $ 63,435
Finished goods ....... 33,237 50,124
-------- --------
Total inventories .... $112,684 $113,559
======== ========
6. INVESTMENTS
The Company's investments are as follows:
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
Harmony Farms, LLC........................... $ 3,340 $ 3,969
New Feeds, LLC............................... 2,979 3,214
Iowa River Feeds, LLC........................ 2,563 2,648
Agland Farmland Feed, LLC.................... 2,339 2,435
Pro-Pet, LLC................................. 2,132 2,362
Nutri-Tech Feeds, LLC........................ 2,345 2,314
LOLFF SPV, LLC............................... 1,000 1,805
Northern Country Feeds, LLC.................. 1,688 1,652
CalvaAlto Liquid, LLC........................ 1,302 1,302
T-PM Holding Company......................... 1,375 1,290
Northern Colorado Feed, LLC.................. 834 1,210
Strauss Feeds, LLC........................... 1,229 1,073
Nutrikowi, LLC............................... 876 783
Dakotaland Feeds, LLC........................ 669 736
Other........................................ 6,450 4,703
--------- ---------
Total investments............................ $ 31,121 $ 31,496
========= =========
All of the above investments are accounted for under the equity method with the
exception of the unconsolidated LOLFF SPV, LLC and a portion of the investments
under the caption "Other", which are accounted for under the cost method.
7. PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment is as follows:
SEPTEMBER 30, DECEMBER 31,
2002 2001
----------- -----------
Land and land improvements.................. $ 23,894 $ 23,826
Buildings and building equipment............ 106,587 124,205
Machinery and equipment..................... 208,360 247,186
Construction in progress.................... 19,379 13,019
----------- -----------
358,220 408,236
Less accumulated depreciation............... 104,082 81,280
----------- -----------
Total property, plant and equipment, net.... $ 254,138 $ 326,956
=========== ===========
8. RESTRUCTURING AND IMPAIRMENT
For the three months ended September 30, 2002, the Company recorded a $0.9
million restructuring and impairment charge of
25
which $0.7 million was related to the write-down of certain impaired plant
assets to their estimated fair value, and $0.2 million was related to employee
severance and outplacement costs. The 2001 reversal of $2.4 million was for the
sale of certain animal feed assets that had been written off in December 2000,
and to reflect the decision to continue operating a plant previously scheduled
for shutdown.
For the nine months ended September 30, 2002 the Company recorded
restructuring and impairment charges of $5.4 million. Of this amount, $3.0
million represented severance and outplacement costs for employees and $2.4
million represented a write-down of certain impaired plant assets. $2.3 million
of the charges remained accrued as of September 30, 2002. For the nine months
ended September 30, 2001, the Company recorded a restructuring reversal of $4.2
million for the sale of certain assets that had been written off in December
2000, and to reflect the decision to continue to operate plants previously
scheduled for shutdown.
9. GAIN ON SALE OF INTANGIBLES
For the nine months ended September 30, 2002, the Company recorded a gain
of $4.2 million on the sale to Potash Corporation of Saskatchewan of a customer
list pertaining to the feed phosphate distribution business.
10. RELATED PARTY TRANSACTIONS
In accordance with the Management Services Agreement between Land O'Lakes,
Inc. and Farmland Industries, Inc. (Farmland), Land O'Lakes, Inc. charges the
Company for corporate services such as legal, insurance administration, tax
administration, human resources, payroll and benefit administration, leasing,
public relations, credit and collections, accounting, and information technology
support. These costs totaled $5.8 million and $4.8 million for the nine months
ended September 30, 2002 and 2001, respectively.
Payroll and benefit-related costs are paid directly by Land O'Lakes, Inc.
and reimbursed by the Company. These costs totaled $78.7 million and $79.0
million for the nine months ended September 30, 2002 and 2001, respectively.
As part of the acquisition of Purina Mills, Inc. on October 11, 2001, Land
O'Lakes, Inc. assumed certain liabilities, including a $59.7 million deferred
tax liability. The Company has established a noncurrent note payable for this
liability and, as future taxes relating to the deferred tax liability are paid
by Land O'Lakes, Inc., the Company will make a corresponding payment to Land
O'Lakes, Inc. This note is non-interest bearing and $59.7 million was
outstanding at September 30, 2002 and December 31, 2001.
The Company has a $100 million revolving credit facility with Land O'Lakes,
Inc. which bears interest at LIBOR plus 260 basis points. The facility
terminates on October 31, 2003, and is renewable annually. The Company had a
note receivable from Land O' Lakes, Inc. of $17.7 million at September 30, 2002
and a note payable to Land O' Lakes, Inc. of $29.2 million at December 31, 2001.
The Company entered into a Feed Supply Agreement with Farmland whereby
Farmland agreed to purchase all of its feed and ingredients, excluding grain,
from the Company. Such sales are made at prices competitive with those available
from other suppliers. Sales to Farmland under the agreement totaled $1.5 million
and $6.1 million for the nine months ended September 30, 2002 and 2001,
respectively.
Sales with unconsolidated subsidiaries of the Company totaled $39.8 million
and $34.1 million for the nine months ended September 30, 2002 and 2001,
respectively.
11. CONSOLIDATING FINANCIAL INFORMATION
Land O'Lakes, Inc. issued $350 million in senior notes which are guaranteed
by Land O'Lakes, Inc. and certain of its wholly and majority owned subsidiaries,
including the Company, (the "Guarantor Subsidiaries"). Such guarantees are full,
unconditional and joint and several.
The following supplemental financial information sets forth, on an
unconsolidated basis, balance sheet, statement of operations and cash flow
information for the Company, Guarantor Subsidiaries and the Company's other
subsidiaries (the "Non-Guarantor Subsidiaries"). The supplemental financial
information reflects the investments of the Company in the Guarantor and
Non-Guarantor Subsidiaries using the equity method of accounting.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LAND O'LAKES FARMLAND FEED LLC
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 2002
WHOLLY
WHOLLY OWNED
LAND O'LAKES WHOLLY OWNED OWNED SUBSIDIARIES
FARMLAND FEED SUBSIDIARIES OF PURINA MILLS, OF PURINA MILLS,
LLC PARENT LOL FF LLC LLC PARENT LLC PARENT
--------------- ---------------- -------------- -----------------
($ IN THOUSANDS)
(UNAUDITED)
ASSETS
Current assets:
Cash and short-term
investments $ (15,428) $ 7,871 $ 5,542 $ (74)
Receivables, net 126,755 18,487 9,640 12,766
Inventories 49,812 13,681 43,326 1,852
Prepaid expenses 1,316 348 997 2
Note receivable -
Land O'Lakes, Inc. 17,658 - - -
--------------- ---------------- -------------- -----------------
Total current
assets 180,113 40,387 59,505 14,546
Investments 410,871 258 2,674 8,799
Property, plant and
equipment, net 75,882 7,622 162,151 1,101
Goodwill, net 12,951 3,655 144,738 -
Other intangibles, net 1,114 1,550 94,690 -
Other assets 27,979 2,207 20,924 -
--------------- ---------------- -------------- -----------------
Total assets $ 708,910 $ 55,679 $ 484,682 $ 24,446
=============== ================ ============== =================
LIABILITIES AND EQUITIES
Current liabilities:
Notes and short-term
obligations $ 3,000 $ - $ - $ -
Accounts payable 95,446 20,514 32,408 7,053
Accrued expenses 12,647 2,112 25,314 129
--------------- ---------------- -------------- -----------------
Total current
liabilities 111,093 22,626 57,722 7,182
Notes payable -
Land O'Lakes, Inc. 59,664 4,902 11,376 -
Employee benefits and
other liabilities (668) - 34,118 -
Minority interests (16) - 16 -
Equities:
Contributed capital 515,379 16,272 346,125 21,163
Retained earnings 23,458 11,879 35,325 (3,899)
--------------- ---------------- -------------- -----------------
Total equities 538,837 28,151 381,450 17,264
--------------- ---------------- -------------- -----------------
Total liabilities and
equities $ 708,910 $ 55,679 $ 484,682 $ 24,446
=============== ================ ============== =================
NON-
GUARANTOR
SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- -------------- ---------------
($ IN THOUSANDS)
(UNAUDITED)
ASSETS
Current assets:
Cash and short-term
investments $ 2,089 $ - $ -
Receivables, net 7,997 (66,572) 109,073
Inventories 4,013 - 112,684
Prepaid expenses 257 - 2,920
Note receivable -
Land O'Lakes, Inc. - - 17,658
------------- -------------- ---------------
Total current
assets 14,356 (66,572) 242,335
Investments 2,196 (393,677) 31,121
Property, plant and
equipment, net 7,382 - 254,138
Goodwill, net 922 - 162,266
Other intangibles, net 299 - 97,653
Other assets 956 (19,310) 32,756
------------- -------------- ---------------
Total assets $ 26,111 $ (479,559) $ 820,269
============= ============== ===============
LIABILITIES AND EQUITIES
Current liabilities:
Notes and short-term
obligations $ - $ - $ 3,000
Accounts payable 6,372 (66,572) 95,221
Accrued expenses 1,885 - 42,087
------------- -------------- ---------------
Total current
liabilities 8,257 (66,572) 140,308
Notes payable -
Land O'Lakes, Inc. 3,032 (19,310) 59,664
Employee benefits and
other liabilities 430 - 33,880
Minority interests 3,125 - 3,125
Equities:
Contributed capital 10,117 (393,677) 515,379
Retained earnings 1,150 - 67,913
------------- -------------- ---------------
Total equities 11,267 (393,677) 583,292
------------- -------------- ---------------
Total liabilities and
equities $ 26,111 $ (479,559) $ 820,269
============= ============== ===============
27
LAND O'LAKES FARMLAND FEED LLC
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002
WHOLLY
WHOLLY OWNED
LAND O'LAKES WHOLLY OWNED OWNED SUBSIDIARIES
FARMLAND FEED SUBSIDIARIES OF PURINA MILLS, OF PURINA MILLS,
LLC PARENT LOL FF LLC LLC PARENT LLC PARENT
---------------- ---------------- --------------- -----------------
($ IN THOUSANDS)
(UNAUDITED)
Net sales $ 322,648 $ 53,264 $ 198,648 $ 6,863
Cost of sales 294,287 48,720 163,349 5,090
---------------- ---------------- --------------- ----------------
Gross profit 28,361 4,544 35,299 1,773
Selling, general and administration 28,383 3,158 24,709 2,739
Restructuring and impairment
charges 942 - - -
---------------- ---------------- --------------- ----------------
(Loss) earnings from operations (964) 1,386 10,590 (966)
Interest (income) expense, net (548) 98 (317) (5)
Equity in (earnings) loss of
affiliated companies (486) - 101 (191)
Minority interest in (loss)
earnings of subsidiaries (41) 25 (62) -
---------------- ---------------- --------------- ----------------
Net earnings (loss) $ 111 $ 1,263 $ 10,868 $ (770)
================ ================ =============== ================
NON-
GUARANTOR
SUBSIDIARIES CONSOLIDATED
-------------- --------------
($ IN THOUSANDS)
(UNAUDITED)
Net sales $ 13,025 $ 594,448
Cost of sales 10,969 522,415
-------------- --------------
Gross profit 2,056 72,033
Selling, general and administration 1,389 60,378
Restructuring and impairment
charges - 942
-------------- --------------
(Loss) earnings from operations 667 10,713
Interest (income) expense, net 35 (737)
Equity in (earnings) loss of
affiliated companies - (576)
Minority interest in (loss)
earnings of subsidiaries 272 194
-------------- --------------
Net earnings (loss) $ 360 $ 11,832
============== ==============
28
LAND O'LAKES FARMLAND FEED LLC
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
WHOLLY
WHOLLY OWNED
LAND O'LAKES WHOLLY OWNED OWNED SUBSIDIARIES
FARMLAND FEED SUBSIDIARIES OF PURINA MILLS, OF PURINA MILLS,
LLC PARENT LOL FF LLC LLC PARENT LLC PARENT
---------------- --------------- -------------- -----------------
($ IN THOUSANDS)
(UNAUDITED)
Net sales $ 972,246 $ 141,592 $ 599,488 $ 20,805
Cost of sales 884,684 128,452 495,054 15,458
---------------- --------------- -------------- -----------------
Gross profit 87,562 13,140 104,434 5,347
Selling, general and administration 83,818 8,662 77,180 7,822
Restructuring and impairment
charges 5,418 - - -
---------------- --------------- -------------- -----------------
(Loss) earnings from operations (1,674) 4,478 27,254 (2,475)
Interest (income) expense, net (1,664) 339 (876) (10)
Gain on sale of intangibles (4,184) - - -
Equity in (earnings) loss of
affiliated companies (1,326) - 44 443
Minority interest in (loss)
earnings of subsidiaries (8) 231 7 -
---------------- --------------- -------------- -----------------
Net earnings (loss) $ 5,508 $ 3,908 $ 28,079 $ (2,908)
================ =============== ============== =================
NON-
GUARANTOR
SUBSIDIARIES CONSOLIDATED
--------------- ---------------
($ IN THOUSANDS)
(UNAUDITED)
Net sales $ 40,320 $ 1,774,451
Cost of sales 35,606 1,559,254
--------------- ---------------
Gross profit 4,714 215,197
Selling, general and administration 3,726 181,208
Restructuring and impairment
charges - 5,418
--------------- ---------------
(Loss) earnings from operations 988 28,571
Interest (income) expense, net 130 (2,081)
Gain on sale of intangibles - (4,184)
Equity in (earnings) loss of
affiliated companies - (839)
Minority interest in (loss)
earnings of subsidiaries 450 680
--------------- ---------------
Net earnings (loss) $ 408 $ 34,995
=============== ===============
29
LAND O'LAKES FARMLAND FEED LLC
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
LAND WHOLLY
O'LAKES WHOLLY WHOLLY OWNED
FARMLAND OWNED OWNED SUBSIDIARIES
FEED SUBSIDIARIES PURINA MILLS, OF PURINA MILLS,
LLC PARENT OF LOL FF LLC LLC PARENT LLC PARENT
------------- --------------- -------------- -----------------
($ IN THOUSANDS)
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 5,508 $ 3,908 $ 28,079 $ (2,908)
Adjustments to reconcile net earnings
(loss) to cash provided (used) by
operating activities:
Depreciation and amortization 11,676 710 21,234 189
Bad debt expense 2,175 - - -
Decrease (increase) in other assets 30,080 (5) (2,640) (152)
(Decrease) increase in other liabilities (340) (3,624) 1,058 -
Restructuring and impairment charges 5,418 - - -
Equity in (earnings) loss of affiliated
companies (1,326) - 44 443
Minority interests (8) 231 7 -
Changes in current assets and liabilities,
net of acquisitions and divestitures:
Receivables (28,455) (4,346) 2,820 (433)
Inventories (3,594) 1,853 68 550
Other current assets 1,558 539 1,426 (2)
Accounts payable 36,684 5,588 (16,260) 1,933
Accrued expenses 9,528 694 (6,892) 235
------------- --------------- --------------- ----------------
Net cash provided (used) by operating
activities 68,904 5,548 28,944 (145)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and
equipment (7,799) (444) (5,798) (143)
Proceeds from sale of investment 1,592 - 452 -
Proceeds from sale of property, plant
and equipment 5,692 - - -
------------- --------------- --------------- ----------------
Net cash used by investing
activities (515) (444) (5,346) (143)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in short-term debt (2,000) - - -
Proceeds from note payable to
Land O'Lakes, Inc. 339,982 - - -
Payments on note payable to
Land O'Lakes, Inc. (402,025) (1,610) (32,212) -
------------- --------------- --------------- ----------------
Net cash (used) provided by
financing activities (64,043) (1,610) (32,212) -
------------- --------------- --------------- ----------------
Net increase (decrease) in cash 4,346 3,494 (8,614) (288)
Cash and short-term investments at
beginning of period (19,774) 4,377 14,156 214
------------- --------------- --------------- ----------------
Cash and short-term investments at
end of period $ (15,428) $ 7,871 $ 5,542 $ (74)
============= =============== =============== ================
NON-
GUARANTOR
SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------- ------------ ------------
($ IN THOUSANDS)
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 408 $ - $ 34,995
Adjustments to reconcile net earnings
(loss) to cash provided (used) by
operating activities:
Depreciation and amortization 524 - 34,333
Bad debt expense - - 2,175
Decrease (increase) in other assets 536 (43,702) (15,883)
(Decrease) increase in other liabilities 130 - (2,776)
Restructuring and impairment charges - - 5,418
Equity in (earnings) loss of affiliated
companies - - (839)
Minority interests 450 - 680
Changes in current assets and liabilities,
net of acquisitions and divestitures:
Receivables (3,387) 41,616 7,815
Inventories 1,998 - 875
Other current assets 31 - 3,552
Accounts payable (629) (49,169) (21,853)
Accrued expenses 354 - 3,919
-------------- ------------ ------------
Net cash provided (used) by operating
activities 415 (51,255) 52,411
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and
equipment (114) - (14,298)
Proceeds from sale of investment - - 2,044
Proceeds from sale of property, plant
and equipment - - 5,692
-------------- ------------ ------------
Net cash used by investing
activities (114) - (6,562)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in short-term debt - - (2,000)
Proceeds from note payable to
Land O'Lakes, Inc. - - 339,982
Payments on note payable to
Land O'Lakes, Inc. (2,258) 51,255 (386,850)
------------- ------------ ------------
Net cash (used) provided by
financing activities (2,258) 51,255 (48,868)
------------- ------------ ------------
Net increase (decrease) in cash (1,957) - (3,019)
Cash and short-term investments at
beginning of period 4,046 - 3,019
------------- ------------ ------------
Cash and short-term investments at
end of period $ 2,089 $ - $ -
============= ============ ============
30
LAND O'LAKES FARMLAND FEED LLC
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2001
LAND O'
LAKES WHOLLY OWNED
FARMLAND WHOLLY OWNED WHOLLY OWNED SUBSIDIARIES OF
FEED LLC SUBSIDIARIES OF PURINA MILLS, PURINA MILLS, LLC
PARENT LOL FF LLC LLC PARENT PARENT
------ ---------- ---------- ------
($ IN THOUSANDS)
(UNAUDITED)
ASSETS
Current assets:
Cash and short-term
investments ........ $ (19,774) $ 4,377 $ 14,156 $ 214
Receivables, net ...... 103,219 14,147 9,680 12,417
Inventories ........... 46,219 15,534 43,393 2,402
Prepaid expenses ...... 2,883 887 2,423 -
--------- --------- --------- ---------
Total current
assets ........... 132,547 34,945 69,652 15,033
Investments ............. 391,970 258 19,712 11,077
Property, plant and
equipment, net ........ 90,709 7,887 219,421 1,147
Goodwill, net ........... 13,262 3,656 86,872 -
Other intangibles, net .. 1,163 - 99,169 -
Other assets ............ 88,531 3,246 - -
--------- --------- --------- ---------
Total assets ....... $ 718,182 $ 49,992 $ 494,826 $ 27,257
========= ========= ========= =========
LIABILITIES AND EQUITIES
Current liabilities:
Notes and short-term
obligations ........ $ 4,509 $ 23 $ - $ -
Notes payable-Land
O'Lakes, Inc. ...... 29,210 - - -
Accounts payable ...... 78,451 12,211 24,136 14,009
Accrued expenses ...... 13,170 1,418 19,120 (108)
--------- --------- --------- ---------
Total current
liabilities ...... 125,340 13,652 43,256 13,901
Notes payable-Land
O'Lakes, Inc. ....... 59,664 6,512 58,763 -
Employee benefits and
other liabilities ..... 755 2,644 32,980 -
Minority interests ...... (840) 910 28 -
Equities:
Contributed capital ... 515,044 18,300 350,600 16,299
Retained earnings
(accumulated
deficit)............. 18,219 7,974 9,199 (2,943)
--------- --------- --------- ---------
Total equities ..... 533,263 26,274 359,799 13,356
--------- --------- --------- ---------
Total liabilities and
equities .............. $ 718,182 $ 49,992 $ 494,826 $ 27,257
========= ========= ========= =========
NON-
GUARANTOR
SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------
($ IN THOUSANDS)
(UNAUDITED)
ASSETS
Current assets:
Cash and short-term
investments ........ $ 4,046 $ - $ 3,019
Receivables, net ...... 4,556 (24,956) 119,063
Inventories ........... 6,011 - 113,559
Prepaid expenses ...... 279 - 6,472
--------- --------- ---------
Total current
assets ........... 14,892 (24,956) 242,113
Investments ............. 1,303 (392,824) 31,496
Property, plant and
equipment, net ........ 7,792 - 326,956
Goodwill, net ........... 959 - 104,749
Other intangibles, net .. 331 - 100,663
Other assets ............ 1,232 (65,369) 27,640
--------- --------- ---------
Total assets ....... $ 26,509 $(483,149) $ 833,617
========= ========= =========
LIABILITIES AND EQUITIES
Current liabilities:
Notes and short-term
obligations ........ $ 468 $ - $ 5,000
Notes payable-Land
O'Lakes, Inc. ...... - - 29,210
Accounts payable ...... 5,670 (17,403) 117,074
Accrued expenses ...... 1,532 - 35,132
--------- --------- ---------
Total current
liabilities ...... 7,670 (17,403) 186,416
Notes payable-Land
O'Lakes, Inc. ....... 5,290 (70,565) 59,664
Employee benefits and
other liabilities ..... 277 - 36,656
Minority interests ...... 2,821 - 2,919
Equities:
Contributed capital ... 9,982 (395,181) 515,044
Retained earnings
(accumulated
deficit)............. 469 - 32,918
--------- --------- ---------
Total equities ..... 10,451 (395,181) 547,962
--------- --------- ---------
Total liabilities and
equities .............. $ 26,509 $(483,149) $ 833,617
========= ========= =========
31
LAND O'LAKES FARMLAND FEED LLC
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001
LAND O'LAKES WHOLLY OWNED NON-
FARMLAND FEED SUBSIDIARIES OF GUARANTOR
LLC PARENT LOL FF LLC SUBSIDIARIES CONSOLIDATED
------------------ ------------------ ----------------- ---------------
($ IN THOUSANDS)
(UNAUDITED)
Net sales $ 343,150 $ 42,092 $ 21,537 $ 406,779
Cost of sales 315,973 37,889 20,685 374,547
------------------ ------------------ ----------------- ---------------
Gross profit 27,177 4,203 852 32,232
Selling, general and administration 22,450 2,434 (39) 24,845
Restructuring and impairment
(reversals) (2,433) - - (2,433)
------------------ ------------------ ----------------- ---------------
Earnings from operations 7,160 1,769 891 9,820
Interest expense, net 1,138 227 113 1,478
Equity in earnings of
affiliated companies (405) - - (405)
Minority interest in (loss)
earnings of subsidiaries (1) 100 409 508
------------------ ------------------ ----------------- ---------------
Net earnings $ 6,428 $ 1,442 $ 369 $ 8,239
================== ================== ================= ===============
32
LAND O'LAKES FARMLAND FEED LLC
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
LAND O'LAKES WHOLLY OWNED NON-
FARMLAND FEED SUBSIDIARIES OF GUARANTOR
LLC PARENT LOL FF LLC SUBSIDIARIES CONSOLIDATED
----------------- ------------------ ----------------- ---------------
($ IN THOUSANDS)
(UNAUDITED)
Net sales $ 1,032,046 $ 116,045 $ 55,181 $ 1,203,272
Cost of sales 947,013 104,860 52,443 1,104,316
----------------- ------------------ ----------------- ---------------
Gross profit 85,033 11,185 2,738 98,956
Selling, general and administration 69,240 6,667 1,427 77,334
Restructuring and impairment
(reversals) (4,242) - - (4,242)
----------------- ------------------ ----------------- ---------------
Earnings from operations 20,035 4,518 1,311 25,864
Interest expense, net 3,984 589 359 4,932
Equity in earnings of
affiliated companies (1,236) - - (1,236)
Minority interest in earnings
of subsidiaries 2 247 472 721
----------------- ------------------ ----------------- ---------------
Net earnings $ 17,285 $ 3,682 $ 480 $ 21,447
================= ================== ================= ===============
33
LAND O'LAKES FARMLAND FEED LLC
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
LAND O'LAKES WHOLLY OWNED NON-
FARMLAND FEED SUBSIDIARIES OF GUARANTOR
LLC PARENT LOL FF LLC SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------------- -------------- ------------- ------------ ------------
($ IN THOUSANDS)
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 17,285 $ 3,682 $ 480 $ - $ 21,447
Adjustments to reconcile net earnings
to cash provided (used) by operating
activities:
Depreciation and amortization 11,369 669 669 - 12,707
Bad debt expense 436 - - - 436
(Increase) decrease in other assets (5,477) 329 (1,185) 6,031 (302)
(Decrease) increase in other liabilities (3,806) (1,262) 82 - (4,986)
Restructuring and impairment reversals (4,242) - - - (4,242)
Equity in earnings of affiliated
companies (1,236) - - - (1,236)
Minority interests 2 247 472 - 721
Changes in current assets and liabilities,
net of acquisitions and divestitures:
Receivables 14,950 (2,485) (3,485) (16,894) (7,914)
Inventories 8,788 2,489 476 - 11,753
Other current assets 5,964 (407) (3) - 5,554
Accounts payable (17,569) (2,853) 254 5,163 (15,005)
Accrued expenses (26,049) (1,162) (576) - (27,787)
--------------- -------------- ------------- ----------- ------------
Net cash provided (used) by operating
activities 415 (753) (2,816) (5,700) (8,854)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (12,949) (1,381) (152) - (14,482)
Proceeds from sale of investment 1,676 - - - 1,676
Proceeds from sale of property, plant and
equipment 3,374 - - - 3,374
--------------- -------------- ------------- ----------- ------------
Net cash used by investing
activities (7,899) (1,381) (152) - (9,432)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term debt 1,659 (1,500) 1 1,500 1,660
Proceeds from note payable to Land O'
Lakes, Inc. 276,351 - - 4,200 280,551
Payments on note payable to Land O'
Lakes, Inc. (263,158) (2,481) 1,714 - (263,925)
--------------- -------------- ------------- ----------- ------------
Net cash provided (used) by financing
activities 14,852 (3,981) 1,715 5,700 18,286
--------------- -------------- ------------- ----------- ------------
Net increase (decrease) in cash 7,368 (6,115) (1,253) - -
Cash and short-term investments at beginning of
period (9,792) 7,397 2,395 - -
--------------- -------------- ------------- ----------- ------------
Cash and short-term investments at end of period $ (2,424) $ 1,282 $ 1,142 $ - $ -
=============== ============== ============= =========== ============
34
PURINA MILLS, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2002 2001
----------- -----------
($ IN THOUSANDS)
(UNAUDITED)
ASSETS
Current assets:
Cash and short-term investments $ 5,468 $ 14,370
Receivables, net 22,406 22,097
Inventories 45,178 45,795
Prepaid expenses 999 2,423
----------- -----------
Total current assets 74,051 84,685
Investments 11,473 11,105
Property, plant and equipment, net 163,252 220,567
Goodwill, net 144,738 86,872
Other intangibles, net 94,690 99,169
Receivable from Land O'Lakes Farmland Feed LLC - 15,445
Other assets 20,924 19,684
----------- -----------
Total assets $ 509,128 $ 537,527
=========== ===========
LIABILITIES AND EQUITIES
Current liabilities:
Accounts payable $ 39,461 $ 53,591
Accrued expenses 25,443 19,012
----------- -----------
Total current liabilities 64,904 72,603
Notes payable - Land O'Lakes Farmland Feed LLC 11,376 58,763
Employee benefits and other liabilities 34,118 32,980
Minority interests 16 28
Equities:
Contributed capital 367,287 366,897
Retained earnings 31,427 6,256
----------- -----------
Total equities 398,714 373,153
----------- -----------
Commitments and contingencies
Total liabilities and equities $ 509,128 $ 537,527
=========== ===========
See accompanying notes to consolidated financial statements.
35
PURINA MILLS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------- ---------------------
2002 2001 2002 2001
--------- --------- -------- ---------
($ IN THOUSANDS)
(UNAUDITED)
Net sales $ 205,511 $ 198,464 $620,293 $ 611,819
Cost of sales 168,439 160,213 510,512 498,273
--------- --------- -------- ---------
Gross profit 37,072 38,251 109,781 113,546
Selling, general and administration 27,448 31,546 85,002 105,974
--------- --------- -------- ---------
Earnings from operations 9,624 6,705 24,779 7,572
Interest (income) expense, net (322) 2,936 (886) 8,568
Equity in (earnings) loss of affiliated companies (90) 44 487 549
Minority interest in (loss) earnings of subsidiaries (62) (10) 7 92
--------- --------- -------- ---------
Earnings (loss) before income taxes 10,098 3,735 25,171 (1,637)
Income tax expense - 2,430 - 2,253
--------- --------- -------- ---------
Net earnings (loss) $ 10,098 $ 1,305 $ 25,171 $ (3,890)
========= ========= ======== =========
See accompanying notes to consolidated financial statements.
36
PURINA MILLS, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
-------------------
2002 2001
---- ----
($ IN THOUSANDS)
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 25,171 $ (3,890)
Adjustments to reconcile net earnings (loss) to
cash provided by operating activities:
Depreciation and amortization 21,423 35,294
Decrease in other assets (2,792) (2,069)
Increase in other liabilities 1,058 2,297
Equity in loss of affiliated companies 487 549
Minority interests 7 92
Other - 1,660
Changes in current assets and liabilities, net of
acquisitions and divestitures:
Receivables 2,387 7,533
Inventories 618 3,310
Other current assets 1,424 (344)
Accounts payable (14,327) (21,514)
Accrued expenses (6,657) 3,247
-------- ---------
Net cash provided by operating activities 28,799 26,165
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (5,941) (14,396)
Payments for investments (15) (578)
Proceeds from investments 467 1,152
Proceeds from sale of property, plant and equipment - 124
-------- ---------
Net cash used by investing activities (5,489) (13,698)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on note payable to Land O'Lakes
Farmland Feed LLC (31,942) -
Payments on term loan - (42,000)
Other (270) (23)
-------- ---------
Net cash used by financing activities (32,212) (42,023)
-------- ---------
Net decrease in cash and short-term investments (8,902) (29,556)
Cash and short-term investments at beginning of period 14,370 37,664
-------- ---------
Cash and short-term investments at end of period $ 5,468 $ 8,108
======== =========
Supplementary Disclosure of Cash Flow Information:
Cash paid during periods for:
Interest, net of interest capitalized $ - $ 9,493
Income taxes paid $ - $ 2,979
See accompanying notes to consolidated financial statements.
37
PURINA MILLS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ IN THOUSANDS IN TABLES)
(UNAUDITED)
1. BASIS OF PRESENTATION
On October 11, 2001, pursuant to an Agreement and Plan of Merger, LOL
Holdings III, Inc., an indirect wholly-owned subsidiary of Land O'Lakes, Inc.
was merged into Purina Mills, Inc. ("PMI"), with PMI being the surviving
corporation. As a result of the merger, LOL Holdings II, Inc., a wholly-owned
subsidiary of Land O'Lakes, Inc. owned 100% of PMI. Subsequently, PMI was
reorganized as a limited liability company, renamed Purina Mills, LLC ("Purina
Mills") and LOL Holdings II, Inc. contributed the business to Land O'Lakes
Farmland Feed LLC. Upon the formation of Purina Mills, provisions for income
taxes were no longer recorded since the taxable operations pass directly to the
owner.
The merger has been accounted for as a purchase transaction in accordance
with Statement of Financial Accounting Standards No. 141 ("SFAS 141") and,
accordingly, the consolidated financial statements for periods subsequent to
October 11, 2001 reflect the purchase price, including transaction costs,
allocated to tangible and intangible assets acquired and liabilities assumed,
based on their estimated fair value as of October 11, 2001. The consolidated
financial statements for periods prior to October 11, 2001 have been prepared on
the predecessor cost basis of Purina Mills, LLC.
2. SIGNIFICANT ACCOUNTING POLICIES
The unaudited consolidated financial statements reflect, in the opinion of
the management of Purina Mills, LLC (the "Company"), all normal recurring
adjustments necessary for a fair statement of the financial position and results
of operations and cash flows for the interim periods. The statements are
condensed and, therefore do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of
America for complete financial statements. Additionally, certain
reclassifications have been made to prior period consolidated statements to
conform to the consolidated financial statement presentation as of and for the
nine months ended September 30, 2002. The results of operations and cash flows
for interim periods are not necessarily indicative of results for a full year.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." Major provisions of these statements are as follows: all business
combinations must now use the purchase method of accounting, the pooling of
interests method of accounting is now prohibited; intangible assets acquired in
a business combination must be recorded separately from goodwill if they arise
from contractual or other legal rights or are separable from the acquired entity
and can be sold, transferred, licensed, rented or exchanged, either individually
or as a part of a related contract, asset or liability; goodwill and intangible
assets with indefinite lives are not amortized, but tested for impairment
annually, except in certain circumstances, and whenever there is an impairment
indicator; all acquired goodwill must be assigned to reporting units for
purposes of impairment testing and segment reporting. The Company adopted the
provisions of SFAS 141 and certain provisions of SFAS 142 as of July 1, 2001,
and the remaining provisions of SFAS 142 as of January 1, 2002. As required by
SFAS 142, the Company performed step one of the impairment testing of goodwill
by June 30, 2002. The fair value of goodwill exceeded the carrying amount,
therefore the second step of impairment testing was not required and no
impairment has been recognized in the current year of adoption. The Company will
perform impairment tests annually and whenever events or circumstances occur
indicating that goodwill or other intangible assets might be impaired. As of
January 1, 2002, the Company is no longer amortizing goodwill, except for
goodwill related to the acquisition of cooperatives and the formation of joint
ventures.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2002 2001 2002 2001
---- ---- ---- ----
Net earnings (loss) $ 10,098 $ 1,305 $ 25,171 $ (3,890)
Add back: Goodwill amortization, net of tax - - - -
--------- --------- --------- --------
Adjusted net earnings (loss) $ 10,098 $ 1,305 $ 25,171 $ (3,890)
========= ========= ========= =========
38
3. GOODWILL AND OTHER INTANGIBLE ASSETS
A summary of intangible assets follows:
AS OF SEPTEMBER 30, 2002
--------------------------
GROSS
CARRYING ACCUMULATED
AMOUNT AMORTIZATION
------- ------------
Amortized intangible assets
Patents ................................ $16,373 $(1,106)
Other .................................. 5,121 (2,661)
------- -------
Total .................................. $21,494 $(3,767)
======= =======
Nonamortized intangible assets
Trademarks ............................. $76,963
=======
Aggregate amortization expense:
For nine months ended September 30, 2002 $ 2,772
Estimated amortization expense:
For the three months ended December 31,
2002 $ 622
For year ended December 31, 2003 ....... 1,715
For year ended December 31, 2004 ....... 1,715
For year ended December 31, 2005 ....... 1,715
For year ended December 31, 2006 ....... 1,599
For year ended December 31, 2007 ....... 1,154
The changes in the carrying amount of goodwill for the nine months ended
September 30, 2002, are as follows:
Balance as of January 1, 2002......................... $ 86,872
Reallocation of purchase price........................ 57,866
----------
Balance as of September 30, 2002...................... $ 144,738
==========
The reallocation of the purchase price was primarily the result of
finalizing the appraisals during the third quarter ended September 30, 2002. The
offsetting reduction to property, plant and equipment resulted in a $3.9 million
adjustment to reduce depreciation expense, which was also recorded in the third
quarter ended September 30, 2002.
4. RECEIVABLES
A summary of receivables is as follows:
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
Notes from sale of trade receivables (see Note 5) .... $24,712 $16,937
Other ................................................ 3,727 10,809
------- -------
28,439 27,746
Less allowance for doubtful accounts ................. 6,033 5,649
------- -------
Total receivables, net ............................... $22,406 $22,097
======= =======
5. RECEIVABLES PURCHASE FACILITY
In December 2001, Land O'Lakes, Inc., Land O'Lakes Farmland Feed LLC, and
Purina Mills, LLC established a $100.0 million receivables purchase facility
with CoBank, ACB (CoBank). A wholly owned unconsolidated special purpose entity,
Land O'Lakes Farmland Feed SPV, LLC, (SPE), was established to purchase certain
receivables from Land O'Lakes, Inc., Land O'Lakes Farmland Feed LLC, and Purina
Mills, LLC. CoBank has been granted an interest in the receivables owned by the
SPE. The transfers of the receivables from Purina Mills, LLC to the SPE are
structured as sales and, accordingly, the receivables transferred to the SPE are
not
39
reflected in Purina Mills, LLC's consolidated balance sheet. However, Land
O'Lakes, Inc., Land O'Lakes Farmland Feed LLC, and Purina Mills, LLC retain the
credit risk related to the repayment of the notes receivable with the SPE, which
in turn is dependent upon the credit risk of the SPE's receivables. Accordingly,
Purina Mills, LLC has retained reserves for estimated losses. Purina Mills, LLC
expects no significant gains or losses from the sale of the receivables. The
total accounts receivable sold during the three months and nine months ended
September 30, 2002 were $229.0 million and $687.4 million, respectively.
6. INVENTORIES
A summary of inventories is as follows:
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
Raw materials......................... $ 31,250 $ 34,079
Finished goods........................ 13,928 11,716
----------- -----------
Total inventories..................... $ 45,178 $ 45,795
=========== ===========
7. INVESTMENTS
Purina Mills, LLC's investments are as follows:
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
Harmony Farms, LLC........................... $ 3,340 $ 3,969
T-PM Holdings Company........................ 1,375 1,290
Northern Colorado Feed, LLC.................. 834 1,210
ESSV, LLC.................................... 893 -
Alliance Milk Products, LLC.................. - 874
Eastern Block, Inc. ......................... 446 545
Y-Not, LLC................................... 537 560
Eastgate Feed and Grain, LLC................. 214 214
Eslabon Companies............................ 191 225
Other........................................ 3,643 2,218
----------- ---------
Total investments............................ $ 11,473 $ 11,105
=========== =========
8. PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment is as follows:
SEPTEMBER 30, DECEMBER 31,
2002 2001
----------- -----------
Land and land improvements.................. $ 11,430 $ 11,041
Buildings and building equipment............ 50,616 65,745
Machinery and equipment..................... 110,390 140,207
Construction in progress.................... 16,031 10,138
----------- -----------
188,467 227,131
Less accumulated depreciation............... 25,215 6,564
----------- -----------
Total property, plant and equipment, net.... $ 163,252 $ 220,567
=========== ===========
40
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussions of financial condition and results
of operations together with the financial statements and the notes to such
statements included elsewhere in this Form 10-Q. This discussion contains
forward-looking statements based on current expectations, assumptions, estimates
and projections of our management. These forward-looking statements involve
risks and uncertainties. Actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
as more fully described in the "Risk Factors" section and elsewhere in this Form
10-Q. We undertake no obligation to update publicly any forward-looking
statements.
LAND O'LAKES
OVERVIEW
GENERAL
Segments
We operate our business predominantly in the United States in five segments:
dairy foods, animal feed, crop seed, swine and agronomy. We have limited
international operations, certain of which have recently been sold or are in the
process of being sold. Our dairy foods segment produces, markets and sells
butter, spreads, cheese and other dairy products. We operate our animal feed
segment principally through Land O'Lakes Farmland Feed LLC, our 92% owned joint
venture with Farmland Industries, Inc. ("Farmland Industries"). Our animal feed
segment develops, produces, markets and distributes animal feed to both
commercial and lifestyle customers. The results of the animal feed business are
consolidated in our financial statements and the minority interest is
eliminated. As a result of the Purina Mills acquisition in October 2001, animal
feed results for the nine months ended September 30, 2002 include Purina Mills
swine marketing activities since Purina Mills historically reported results of
its swine business together with its feed business. Our crop seed segment sells
seed for a variety of crops, including alfalfa, corn, soybeans and forage and
turf grasses. Our swine segment produces and markets both young feeder pigs and
mature market hogs. Our agronomy segment distributes crop nutrient and crop
protection products. Historically, our agronomy segment consisted primarily of
the assets we contributed to Agriliance, LLC ("Agriliance"), our unconsolidated
joint venture. Since the contribution of those assets to Agriliance at the end
of July 2000, our investment has been accounted for on the equity method through
our agronomy segment, along with the agronomy assets we retained. Our membership
interest in CF Industries, Inc. ("CF Industries"), an interregional plant food
manufacturing cooperative, is accounted for through this segment on a cost
basis. We also derive a portion of revenues and income from other related
businesses, which are insignificant to our overall results. We allocate
corporate administration expense to all five of our business segments using two
methodologies; direct usage for services for which we are able to track this
usage, such as payroll and legal, and invested capital for all other expenses. A
majority of these costs is allocated based on direct usage. We allocate these
costs to segments whether or not they are solely composed of investments and
joint ventures.
Unconsolidated Businesses
We have investments in certain entities that are not consolidated in our
financial statements. For the nine months ended September 30, 2002, income from
our unconsolidated businesses amounted to $29.8 million, compared to income of
$43.7 million for the nine months ended September 30, 2001. Our investment in
unconsolidated businesses amounted to $579.2 million on September 30, 2002, and
$568.1 million on December 31, 2001. Cash flow from our investment in
unconsolidated businesses for the nine months ended September 30, 2002 was $4.4
million, compared to $2.1 million for the nine months ended September 30, 2001.
Agriliance and CF Industries constitute the most significant of our
investments in unconsolidated businesses, both of which are reflected in our
agronomy results. Our investment in, and earnings from, Agriliance and CF
Industries were as follows as of and for the nine months ended:
SEPTEMBER 30,
--------------
2002 2001
---- ----
(IN MILLIONS)
AGRILIANCE:
Investment........... $ 119.4 $ 79.6
Equity in earnings .. 35.3 34.7
CF INDUSTRIES:
Investment........... $ 249.5 $ 248.5
41
Patronage income..... -- --
We did not receive cash distributions from Agriliance or CF Industries
during these periods.
Land O'Lakes, Cenex Harvest States Cooperatives ("CHS") and Farmland
Industries contributed substantially all of their agronomy marketing assets to
Agriliance in July 2000. The agronomy marketing operations of Land O'Lakes, CHS
and Farmland Industries were previously managed through various operating
entities. Land O'Lakes has a 50 percent equity ownership in Agriliance. The
other 50 percent ownership interest in Agriliance is owned by United Country
Brands (jointly owned by CHS and Farmland Industries). Land O'Lakes provides
certain support services to Agriliance at competitive market prices. Agriliance
was billed $6.1 million and $5.8 million, respectively, for the nine months
ended September 30, 2002 and 2001 for the support services. In addition, Land
O'Lakes purchases insignificant amounts of product from Agriliance. The fiscal
year of Agriliance ends on August 31. Unless otherwise indicated, references in
this Form 10-Q to the annual or quarterly results of Agriliance are presented on
a calendar year basis to conform to Land O'Lakes' presentation. Agriliance funds
its operations from operating cash flows, an initial working capital
contribution on formation and borrowings from unaffiliated third parties.
Agriliance has entered into syndicated secured term and revolving credit
arrangements in an aggregate amount of $407 million as of August 31, 2001. Since
then, credit arrangements were renegotiated and as of September 30, 2002
amounted to $325 million. In addition, Agriliance has entered into a $200
million receivables securitization with CoBank. Neither Land O'Lakes nor any of
the restricted subsidiaries guarantee these obligations. Land O'Lakes does not
have an obligation to contribute additional capital to finance Agriliance's
operations.
CF Industries is an inter-regional cooperative involved in the
manufacture of crop nutrients, in which we have a 38% ownership interest based
on our product purchases. As a member, we are allowed to elect one board member
out of a total of nine. Agriliance is one of CF Industries' most significant
customers. CF Industries operates in a highly cyclical industry. The oversupply
of nitrogen in the industry since 1998 has resulted in depressed prices and,
consequently, depressed earnings. Studies are currently under way to determine
strategic steps to address the negative earnings situation. Since CF Industries
is a cooperative, we only receive earnings from our investment when the
cooperative allocates and distributes patronage to us. No patronage was
allocated and distributed to us in the last three years because CF Industries
realized losses in those years. We anticipate that no patronage allocations will
occur until these losses have been recouped. Our $249.5 million investment in CF
Industries consists of approximately $150 million in noncash patronage income
from prior periods (not distributed to us) and approximately $100 million that
was acquired as part of our Countrymark acquisition in 1998 based on
Countrymark's prior business with CF Industries. Prior to the contribution of
our agronomy assets to Agriliance, our agronomy business earned patronage income
on the business it conducted with CF Industries. Since July 29, 2000, Land
O'Lakes has been entitled to receive patronage income for business that
Agriliance transacts with CF Industries on behalf of our members, primarily
fertilizer purchases. We believe that these sales are on terms comparable to
those available to unaffiliated third parties.
We have an investment in CoBank, an agricultural cooperative bank, which
amounted to $22.0 million on September 30, 2002, and $21.5 million on December
31, 2001. This investment constitutes less than one percent of CoBank's total
shareholder equity. We account for our investment in CoBank under the cost basis
method of accounting. The investment consists of an initial nominal cash amount
of $1,000 and equity additions based on a percentage (currently 11.5%) of our
five-year average loan volume. Since CoBank operates as a cooperative, we
receive patronage income from CoBank based on our annual loan volume with
CoBank. This patronage income reduces our interest expense. We believe that
these loan transactions are on terms comparable to those available to
unaffiliated third parties.
Critical Accounting Policies
We utilize certain accounting measurements under applicable generally
accepted accounting principles, which involve the exercise of management's
judgment about subjective factors and estimates about the effect of matters
which are inherently uncertain. The following is a summary of those accounting
measurements which we believe are most critical to our reported results of
operations and financial condition.
Inventory Valuation. Inventories are valued at the lower of cost or market.
Cost is determined on a first-in, first-out or average cost basis. Many of our
products, particularly in our dairy foods, animal feed and swine segments, use
dairy or agricultural commodities as inputs or constitute dairy or agricultural
commodity outputs. Consequently, our results are affected by the cost of
commodity inputs and the market price of outputs. Government regulation of the
dairy industry and industry practices in animal feed tend to stabilize margins
in those segments but do not protect against large movements in either input
costs or output prices. Such large movements in commodity prices could result in
significant write-downs to our inventories, which could have a significant
negative impact on our operating results.
42
We use derivative commodity instruments, primarily futures contracts, in our
operations to lock in our ingredient input prices, primarily for our product
inputs such as milk, butter and soybean oil for dairy foods, soybean meal and
corn for animal feed, and soybeans for crop seed. The degree of our hedging
position varies from less than one percent for butter to nearly 100% for soybean
oil. In addition, purchase agreements with various vendors are used to varying
degrees to lock in input prices. This decreases our exposure to changes in
commodity prices. We do not use derivative commodity instruments for speculative
purposes. The futures contracts are not designated as hedges under Statement of
Financial Accounting Standards "(SFAS)" No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Accordingly, since the adoption of SFAS No.
133, effective January 1, 2001, the futures contracts are marked to market
(either Chicago Mercantile Exchange or Chicago Board of Trade) on the last day
of each month and unrealized gains and losses are recognized as an adjustment to
cost of sales. Prior to 2001, we did not mark our derivative commodity
instruments to market; instead, we recorded losses or gains only when realized.
Allowance for Doubtful Accounts. We estimate our allowance for doubtful
accounts based on an analysis of specific accounts, an analysis of historical
trends, payment and write-off histories, current sales levels and the state of
the economy. Our credit risks are continually reviewed and management believes
that adequate provisions have been made for doubtful accounts. However,
unexpected changes in the financial strength of customers or changes in the
state of the economy could result in write-offs which exceed estimates and
negatively impact our financial results.
Recoverability of Long-Lived Assets. We assess the recoverability of
goodwill and other long-lived assets annually or whenever events or changes in
circumstances indicate that expected future undiscounted cash flows might not be
sufficient to support the carrying amount of an asset. We deem an asset to be
impaired if a forecast of undiscounted future operating cash flows is less than
an asset's carrying amount. If an asset is determined to be impaired, the loss
is measured as the amount by which the carrying value of the asset exceeds its
fair value. Changes in our business strategies and/or changes in the economic
environment in which we operate may result in future impairment charges.
Cooperative Structure
Land O'Lakes is incorporated in Minnesota as a cooperative corporation.
Cooperatives resemble traditional corporations in most respects, but with two
primary distinctions. First, a cooperative's common shareholders, its "members,"
either supply the cooperative with raw materials or purchase its goods and
services. Second, to the extent a cooperative allocates its earnings from member
business to its members and meets certain other requirements, it is allowed to
deduct this "qualified patronage income" or "patronage income" from its taxable
income. Patronage income is allocated in accordance with the amount of business
each member conducts with the cooperative.
Cooperatives typically derive a majority of their business from members,
although they are allowed by the Internal Revenue Code to conduct non-member
business. Earnings from non-member business are retained as permanent equity by
the cooperative and taxed as corporate income in the same manner as a typical
corporation. Earnings from member business are either allocated to patronage
income or retained as permanent equity (in which case it is taxed as corporate
income) or some combination thereof.
In order to obtain favorable tax treatment on allocated patronage income,
the Internal Revenue Code requires that at least 20% of each member's annual
allocated patronage income be distributed in cash. The portion of patronage
income that is not distributed in cash is retained by the cooperative and
allocated to member equities. Member equities may be distributed to members at a
later time as a "revolvement" as determined by our board of directors. The
cooperative's members must recognize the amount of allocated patronage income
(whether distributed to members or retained by the cooperative) in the
computation of their individual taxable income.
Cooperatives are also allowed to designate patronage income as
"nonqualified" patronage income and allocate it to member equities. Unlike
qualified patronage income, the cooperative pays taxes on this nonqualified
patronage income as if it was derived from non-member business. The cooperative
may revolve the nonqualified patronage equity to members at some later date and
is allowed to deduct those amounts from its taxable income at that time. When
nonqualified patronage income is revolved to the cooperative's members, the
revolvement must be included in the members' taxable income.
Wholesaling and Brokerage Activities
Our dairy foods segment operates a wholesale milk marketing program. We
purchase excess raw milk over our production needs from our members and sell it
directly to other dairy processors. We generate losses or insignificant earnings
on these transactions;
43
however, there are three principal reasons for doing this: first, we need to
sell a certain percentage of our raw milk to fluid dairy processors in order to
participate in the Federal market order system, which lowers our input cost of
milk for the manufacture of dairy products; second, it reduces our need to
purchase raw milk from sources other than members during periods of low milk
production in the United States (typically August, September and October) and
third, it ensures that our members have a market for the milk that they produce
during periods of high milk production. In the nine months ended September 30,
2002, we sold 4,437.7 million pounds of milk, which resulted in $646.1 million
of net sales or 30.0% of our dairy foods segment's net sales for that period,
with cost of sales exceeding net sales by $1.3 million.
Our animal feed segment, in addition to selling its own products, buys and
sells or brokers for a fee soybean meal and other feed ingredients. We market
these ingredients to our local member cooperatives and to other feed
manufacturers, which use them to produce their own feed. Although this activity
generates substantial revenues, it is a very low-margin business. We are
generally able to obtain feed inputs at a lower cost as a result of our
ingredient merchandising business because of lower per unit shipping costs
associated with larger purchases and volume discounts. For the nine months ended
September 30, 2002, ingredient merchandising generated net sales of $362.6
million, or 20.3% of total animal feed segment net sales, and a gross profit of
$9.8 million, or 4.5% of total animal feed segment gross profit.
Seasonality
Certain segments of our business are subject to seasonal fluctuations in
demand. In our dairy foods segment, butter sales typically increase in the fall
and winter months due to increased demand during holiday periods. Animal feed
sales tend to increase in the fourth and first quarter of each year because
cattle are less able to graze during cooler months. Most crop seed sales used to
occur in the first and second quarter of each year. However, we have seen a
trend toward selling more crop seed in the fourth and first quarter of each year
as a result of lower sales of proprietary brands and increased sales of
partnered seed brands. Agronomy product sales tend to be much higher in the
first and second quarter of each year, as farmers buy crop nutrients and crop
protection products to meet their seasonal needs.
FACTORS AFFECTING COMPARABILITY
Dairy and Agricultural Commodity Inputs and Outputs
Many of our products, particularly in our dairy foods, animal feed and
swine segments, use dairy or agricultural commodities as inputs or constitute
dairy or agricultural commodity outputs. Consequently, our results are affected
by the cost of commodity inputs and the market price of commodity outputs.
Government regulation of the dairy industry and industry practices in animal
feed tend to stabilize margins in those segments but do not protect against
large movements in either input costs or output prices.
Dairy Foods. Raw milk is the major commodity input for our dairy foods
segment. For the nine months ended September 30, 2002, our raw milk input cost
was $1,224.4 million, or 60.3% of the cost of sales for our dairy foods segment.
Cream, butter and bulk cheese are also significant dairy foods commodity inputs.
Cost of sales for these inputs was $151.0 million for cream, $63.5 million for
butter and $253.1 million for bulk cheese for the nine months ended September
30, 2002. Our dairy foods outputs, namely butter, cheese and nonfat dry milk,
are also commodities.
The minimum price of raw milk and cream is set monthly by Federal regulators
based on regional prices of dairy foods products produced. These prices provide
the basis for our raw milk and cream input costs. As a result, those dairy foods
products for which the sales price is fixed shortly after production, such as
most bulk cheese, are not usually subject to significant commodity price risk as
the price received for the output usually varies with the cost of the
significant inputs. For the nine months ended September 30, 2002, bulk cheese,
which is generally sold the day made, represented $193.5 million, or 9.0% of our
dairy foods segment's net sales. Other products, such as private label butter,
which have significant net sales, are also generally sold shortly after they are
made.
We also maintain significant inventories of butter and cheese for sale to
our retail and food service customers, which are subject to commodity price
risk. Because production of raw milk and demand for butter varies seasonally, we
inventory significant amounts of butter. Demand for butter is highest during the
fall and winter, when milk supply is lowest. As a result, we produce and store
excess quantities of butter during the spring when milk supply is highest. In
addition, we maintain some inventories of cheese for aging. For the nine months
ended September 30, 2002, branded and private label retail, deli and foodservice
net sales of cheese and butter represented $701.1 million, or 32.6% of our dairy
foods segment's net sales.
44
For the nine months ended September 30, 2001, commodity butter and cheese
prices were increasing due to a short supply of milk. For the nine months ended
September 30, 2002, we saw declines in pricing due to larger supplies and a
slowing economy, with butter and cheese pricing slightly above government
support prices. However, the net impact on operating results was somewhat
mitigated due to the use of pricing practices, inventory policies and risk
management.
We maintain a sizable dairy manufacturing presence in the Upper Midwest.
This region has seen significant declines in cow numbers. Since 1990, cow
numbers declined 16% in Minnesota and 14% in Wisconsin. Over the same period,
the Minnesota/Wisconsin share of nationwide dairy manufacturing volume has
declined from 40% to 28%. This decline has put pressure on our Upper Midwest
milk input costs and has resulted in significant losses for the nine months
ended September 30, 2002. We have adjusted production at our Perham and Melrose,
Minnesota, plants to increase efficiency at both plants and will continue to
explore additional initiatives to improve our Upper Midwest dairy infrastructure
in an effort to increase efficiencies and reduce costs. Based on the initiatives
we have completed to date and those we expect to complete by year-end, we expect
to incur approximately $6 million of restructuring related costs in 2002, of
which $2.8 million has been incurred through September 30, 2002.
Reduced margins on our mozzarella and whey products also have had a
negative impact not only on our Upper Midwest operations but also on our Cheese
& Protein International LLC ("CPI") operations. Demand for mozzarella and whey
has softened which, together with slower than expected customer acceptance of
CPI's mozzarella output and anticipated increases in mozzarella capacity in the
industry, has placed downward pressure on the margins these products generate.
We expect that the reduced margins will continue at least into 2003.
Animal Feed. The animal feed segment follows industry standards for feed
pricing. The feed industry generally prices products based on income over
ingredient cost ("IOIC") per ton of feed. This practice tends to mitigate the
impact of volatility in commodity ingredient markets on our animal feed profits.
As ingredient costs fluctuate, the changes are generally passed on to customers
through weekly or monthly changes in prices. Thus, the key indicator of business
performance in the animal feed segment is IOIC rather than net sales. Net sales
are considered to be a poor indicator of performance since large fluctuations
can occur from period-to-period due to volatility in the underlying commodity
ingredient prices.
We also enter into forward contracts to supply feed, which currently
represent approximately 20% of our feed output. When we enter into these
contracts, we also generally enter into forward input supply contracts to "lock
in" our IOIC.
Changes in commodity grain prices also have an impact on the mix of products
we sell. When grain prices are relatively high, the demand for complete feed
rises since many livestock producers are also grain growers and will sell their
grain in the market and purchase complete feed as needed. When grain prices are
relatively low, these producers will feed their grain to their livestock and
purchase premixes and supplements to provide complete nutrition to their
animals. These fluctuations in product mix generally have minimal effects on our
operating results. Complete feed has a far lower margin per ton than supplements
and premixes. Thus, during periods of relatively high grain prices, although our
margins per ton are lower, we sell substantially more tonnage because the grain
portion of complete feed makes up the majority of its weight.
As dairy production shifted from the Upper Midwest to the western United
States, we have seen a change in our feed product mix, with lower sales of
complete feed and increased sales of simple blends. Complete feed is
manufactured feed which meets the complete nutritional requirements of animals,
whereas a simple blend is a blending of unprocessed commodities to which the
producer then adds vitamins to supply the animal's nutritional needs. The shift
to simple blends is driven by the difference in nutritional requirements in
dairy cows as a result of less severe winters in the western United States. In
addition to lower margins as a result of the change in our feed product mix, we
have also experienced increased sales of lower-margin feed products due to the
increase in vertical integration of swine and poultry producers.
Swine. We produce and market both young feeder pigs (approximately 45
pounds) and mature market hogs (approximately 260 pounds) under three primary
programs: swine aligned, farrow-to-finish and cost-plus.
Under the swine aligned program, we own sows and raise feeder pigs that we
sell to our local member cooperatives under ten-year contracts. For the first
five years, we receive a fixed base price for our feeder pigs and are reimbursed
for feed costs. In years six through ten, the price is based on the cost of
production, plus a margin designed to achieve a target return on invested
capital. Since the price for the duration of the contract is not tied to the
live hog market, we do not have market risk on feeder pig prices. In addition,
there is no risk on corn or soybean meal prices since we are reimbursed for
actual feed costs. We do incur production risk if we do not produce enough
feeder pigs or if we do not produce them at a competitive cost.
Under the farrow-to-finish program, we produce and sell market hogs.
Historically, market hog price fluctuations have resulted in
45
volatility in our net sales and earnings. In order to mitigate this risk, we
have committed to sell substantially all of the market hogs we produce annually
through 2005 to IBP, inc. under a packer agreement. Under this packer agreement,
we are paid market prices for our hogs with a settlement based on the sales
price of the pork products produced from those hogs. This approach mitigates
some of the volatility under this program because market hog and pork product
margins do not tend to move together. We sell the balance of our market hogs on
the open market. We sell feeder pigs on the open market, as well, depending on
sow farm performance and finishing space limitations. Through September 2002, we
have sold approximately 20% of the feeder pigs we produced in the
farrow-to-finish program on the open market.
Under the cost-plus program, we provide minimum hog price guarantees to
producers in exchange for swine feed sales and profit participation. We are in
the process of phasing out our existing cost-plus contracts and will not be
entering into new ones under the current structure. The majority of the
cost-plus contracts will expire in late 2003 and early 2004, and the last
cost-plus contracts will expire in early 2005. The program incurred pretax
losses of $3.1 million for the nine months ended September 30, 2002 and no
earnings or losses for the nine months ended September 30, 2001.
Historically, Purina Mills reported results of its swine business together
with its feed business. Accordingly, the portion of our swine business which we
acquired from Purina Mills in October 2001 is reported within our feed segment
in the nine months ended September 30, 2002. For the nine months ended September
30, 2002, the Purina Mills swine business generated a loss of $2.5 million
compared to earnings of $0.5 million for the nine months ended September 30,
2001, primarily due to a decline in hog market prices.
ACQUISITIONS/JOINT VENTURES/DIVESTITURES
We have engaged in various significant acquisitions, joint ventures and
divestitures since January 1, 1999. Each of the acquisitions was accounted for
as a purchase transaction. The Land O'Lakes Farmland Feed and Agriliance joint
ventures, our most significant joint ventures, involved the combination of
existing Land O'Lakes business units with those of our joint venture partners to
create new entities. Since its formation on October 1, 2000, we have
consolidated Land O'Lakes Farmland Feed. However, because we do not control
Agriliance, it is accounted for under the equity method.
The following table lists each acquisition, joint venture and divestiture in
excess of $50 million in asset value since 1999.
YEAR NAME TRANSACTION TOTAL ASSETS
2001 Purina Mills........................ Acquisition for cash of $540.5 million
stock of commercial and
lifestyle feed company
(October 2001)
2000 Madison Dairy Produce Co............ Acquisition for cash of $59.3 million
private label butter
company (January 2000)
Fluid dairy assets.................. Divestiture for cash of $112.2 million
fluid dairy assets (July
2000)
Land O'Lakes Farmland Feed.......... Joint venture with $91.7 million
Farmland Industries (our
involving transfer contribution)
of existing Land O'Lakes
animal feed business
(October 2000)
Agriliance.......................... Joint venture with $79.5 million
United Country Brands (our
involving transfer contribution)
of certain Land O'Lakes
agronomy assets (July
2000)
1999 Terra Industries.................... Acquisition for cash of $70.7 million
selected agronomy retail
distribution assets in
the eastern United
States (June 1999)
Agro Distribution................... Investment in joint $50.0 million
venture with CHS
Cooperatives (June 1999)
formed to acquire
selected northern and
southern ag retail
distribution assets from
Terra Industries
46
In June 1999, certain of the northern and southern retail agronomy assets of
Terra Industries were acquired by Agro Distribution, our unconsolidated joint
venture with CHS Cooperatives, which was subsequently contributed to Agriliance.
The objective of this acquisition was to sell each retail agronomy location to
one or more of our local cooperative members. Nearly all of the northern
locations have been sold. We were unable to sell most of the southern locations
and decided in the fall of 2001 to continue to operate these southern retail
agronomy assets. Operation of these locations resulted in significant losses for
the nine months ended September 30, 2001. These losses were recorded through our
investment in Agriliance as equity in earnings or loss from affiliated
companies. Agro Distribution's losses on operation of these locations aggregated
$22.4 million for the nine months ended September 30, 2001, with Land O'Lakes
recording 50% of these losses in equity in loss of affiliated companies.
In October 2001, we acquired Purina Mills, Inc. The total purchase price of
the Purina Mills acquisition was $358.6 million. The acquisition added $86.9
million of goodwill and $98.9 million of other intangible assets to our balance
sheet. This acquisition resulted in a substantial increase in our leverage
(long-term debt, including Capital Securities, to capital) from 43.5% at
December 31, 2000 to 53.9% at September 30, 2002 and increased interest costs by
approximately $40 million annually. Given the nature of products sold by Purina
Mills and its distribution network, the Purina Mills business has a higher gross
margin rate and a higher rate of selling, general and administration expense as
a percent of sales than the Land O'Lakes Farmland Feed business. By the end of
2002, we expect to have implemented programs that would enable us to generate
recurring annual cost savings of approximately $50 million as a result of the
acquisition, relative to costs that would have been incurred separately. In
2002, we expect to generate approximately $25 million in savings, which are
expected to be partially offset by plant closing, severance, employee relocation
and information technology integration costs of approximately $20 million.
RESULTS OF OPERATIONS
Three Months Ended
September 30,
------------------------------------------
2002 2001
----------------- --------------------
% of % of
$ Amount Total $ Amount Total
-------- ----- -------- -----
(Dollars in millions)
Net sales
Dairy foods..... $ 710.5 52.1 $ 954.1 67.5
Animal feed..... 596.4 43.7 413.0 29.2
Crop seed....... 32.1 2.4 14.8 1.0
Swine........... 20.9 1.5 29.1 2.1
Other........... 3.4 0.3 3.5 0.2
-------- ---- -------- ----
Total net sales $1,363.3 $1,414.5
======== ========
% of % of
Net Net
$ Amount Sales $ Amount Sales
-------- ----- -------- -----
Cost of sales
Dairy foods..................... $ 671.7 94.5 $ 904.5 94.8
Animal feed..................... 523.9 87.8 379.1 91.8
Crop seed....................... 28.3 88.2 10.6 71.6
Swine........................... 24.8 118.7 22.9 78.7
Other........................... 2.0 58.8 1.9 54.3
-------- ---- -------- ----
Total cost of sales......... 1,250.7 91.7 1,319.0 93.2
Selling, general and
administration expense
Dairy foods..................... 42.6 6.0 44.6 4.7
Animal feed..................... 62.1 10.4 28.2 6.8
Crop seed....................... 11.5 35.8 13.0 87.8
Swine........................... 1.6 7.7 1.7 5.8
Agronomy........................ 3.7 -- 3.9 --
Other........................... 2.0 58.8 2.7 77.1
-------- ---- -------- ----
Total selling, general and
administration
expense................... 123.5 9.1 94.1 6.7
Restructuring and impairment
charges (reversals)........... 0.9 0.1 (2.4) 0.2
-------- ---- -------- ----
(Loss) earnings from operations (11.8) 0.9 3.8 0.3
Interest expense, net........... 18.1 1.3 12.2 0.9
Gain on legal settlement........ (4.1) 0.3 -- --
Gain on divestiture of
47
businesses................... (3.7) 0.3 -- --
Equity in loss (earnings) of
affiliated companies......... 4.5 0.3 (6.4) 0.5
Minority interest in (loss)
earnings of
subsidiaries................. (1.4) 0.1 2.0 0.1
-------- --------- -------- --------
Loss before
income taxes................. (25.2) 1.8 (4.0) 0.3
Income tax (benefit) expense (13.2) 1.0 0.4 0.0
-------- --------- -------- --------
Net loss....................... $ (12.0) 0.9 $ (4.4) 0.3
========= ========= ========= ========
Nine Months Ended
September 30,
---------------------------------------
2002 2001
----------------- -----------------
% of % of
$ Amount Total $ Amount Total
-------- ----- -------- -----
(Dollars in millions)
Net sales
Dairy foods..... $2,151.9 50.1 $2,540.5 61.0
Animal feed..... 1,786.4 41.5 1,223.0 29.4
Crop seed....... 285.0 6.6 306.2 7.4
Swine........... 66.6 1.5 82.8 2.0
Other........... 9.6 0.3 10.2 0.2
-------- ---- -------- ----
Total net sales $4,299.5 $4,162.7
======== ========
% of % of
Net Net
$ Amount Sales $ Amount Sales
-------- --------- -------- --------
Cost of sales
Dairy foods............... $2,029.7 94.3 $2,378.8 93.6
Animal feed............... 1,569.5 87.9 1,119.5 91.5
Crop seed................. 242.0 84.9 258.5 84.4
Swine..................... 68.4 102.7 71.6 86.5
Other..................... 5.7 59.4 6.4 62.7
-------- --------- -------- --------
Total cost of sales... 3,915.3 91.1 3,834.8 92.1
Selling, general and
administration expense
Dairy foods............... 127.3 5.9 130.0 5.1
Animal feed............... 188.1 10.5 83.4 6.8
Crop seed................. 34.6 12.1 35.7 11.7
Swine..................... 4.8 7.2 5.5 6.6
Agronomy.................. 13.2 -- 13.4 --
Other..................... 6.9 71.9 6.7 65.7
-------- --------- -------- --------
Total selling, general and
administration
expense............. 374.9 8.7 274.7 6.6
Restructuring and impairment
charges (reversals)..... 8.2 0.2 (4.2) 0.1
-------- --------- -------- --------
Earnings from operations.. 1.1 0.0 57.4 1.4
Interest expense, net..... 53.0 1.2 36.5 0.9
Gain on legal settlement.. (36.8) 0.9 -- --
Gain on sale of intangibles (4.2) 0.1 -- --
Gain on divestiture of
Businesses.............. (4.9) 0.1 (0.2) 0.0
Equity in earnings of
affiliated companies.... (29.8) 0.7 (43.7) 1.0
Minority interest in (loss)
earnings of
subsidiaries............ (1.5) 0.0 5.7 0.1
-------- --------- -------- --------
Earnings before
income taxes ........... 25.3 0.6 59.1 1.4
Income tax (benefit) expense (10.0) 0.2 6.3 0.2
-------- --------- -------- --------
Net earnings ............. $ 35.3 0.8 $ 52.8 1.3
======== ========= ======== ========
48
THREE MONTHS ENDED SEPTEMBER 30, 2002 AS COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2001
NET SALES
Net sales for the three months ended September 30, 2002 decreased $51.2
million, or 3.6%, to $1,363.3 million, compared to net sales of $1,414.5 million
for the three months ended September 30, 2001. The decrease was primarily
attributed to declines in dairy foods sales, partially offset by the acquisition
of Purina Mills in October 2001, which contributed $205.5 million in sales in
the third quarter.
Dairy Foods. Net sales for the three months ended September 30, 2002
decreased $243.6 million, or 25.5%, to $710.5 million, compared to net sales of
$954.1 million for the three months ended September 30, 2001. During the three
months ended September 30, 2002, average commodity prices for butter decreased
$1.04 per pound, while average commodity prices for cheese decreased $0.56 per
pound compared to the same period in 2001. The impact of these commodity price
changes decreased net sales of butter by $81.7 million and cheese by $48.4
million. The prices retailers set for branded butter did not follow trends in
the commodity butter markets. Retail prices for branded butter have declined
overall; however, high retail prices earlier in the year caused consumers to
shift to substitute products or to reduce consumption which resulted in
continued sales volume declines. Retail branded butter volumes for the three
months ended September 30, 2002 decreased 1.5 million pounds with a
corresponding net sales decrease of $3.9 million compared with the same period
in 2001. Cheese, private label butter and nonfat dry milk powder sales in the
Western region decreased $12.0 million, $11.3 million and $5.3 million,
respectively. The decline in powder sales was due to changes in production
schedules at our dairy plants, which resulted in reduced powder byproduct
availability, while the decline in cheese and butter sales was due to a
combination of decreased market prices and volume declines. Bulk cheese sales
decrease $18.7 million due to market declines and restructuring that shifted
$14.3 million to a joint venture which is reported on the equity method and is
no longer consolidated. Cheese & Protein International LLC, a cheese and whey
joint venture, began production in May 2002 and added sales of $3.1 million.
Sales for the three months ended September 30, 2002 under our wholesale milk
marketing program decreased $57.1 million, or 21.2%, to $212.9 million, compared
to $270.0 million for the three months ended September 30, 2001. This decrease
was primarily due to a decrease in the market price of milk. Changes in other
product categories accounted for a sales decrease of $8.3 million.
Animal Feed. Net sales for the three months ended September 30, 2002
increased $183.4 million, or 44.4%, to $596.4 million, compared to net sales of
$413.0 million for the three months ended September 30, 2001. The acquisition of
Purina Mills contributed $205.5 million in incremental sales. This increase was
partially offset by declines in Land O'Lakes Farmland Feed branded sales. Sales
of Land O'Lakes Farmland Feed branded beef feeds decreased $1.6 million,
primarily due to the economic effect of drought conditions in the central United
States and excess food proteins in the U.S. market. Swine feed sales of our Land
O'Lakes Farmland Feed branded products decreased $6.0 million as a result of
decreased volumes and depressed market prices for hog producers caused, in part,
by excess food proteins in the U.S. market. Sales in our International division
decreased $4.4 million from $6.3 million for the three months ended September
30, 2001 to $1.9 million for the three months ended September 30, 2002 as we
exited our Mexico and Poland operations. Sales of bulk phosphates decreased $5.2
million due to the sale of this business to a third party in the first quarter
of 2002. Sales of animal health products decreased $3.8 million as a result of a
realigned marketing arrangement with a large vendor whereby the vendor sells
product directly to our customers in exchange for a margin-based fee. On the
other hand, sales increased $2.8 million in our Land O'Lakes Farmland Feed
branded lifestyle product lines, reflecting a delayed start to the beginning of
the aquaculture feeding season. Sales in our dairy feeds area increased $1.8
million, driven by strong sales of simple blends in our Western feed division as
a result of dairy farming growth in the western United States. Changes in other
feed categories amounted to a decrease of $2.8 million. Finally, sales from
ingredient merchandising decreased $2.9 million, or 2.3%, from $127.5 million
for the three months ended September 30, 2001 to $124.6 million for the three
months ended September 30, 2002.
Crop Seed. Net sales for the three months ended September 30, 2002 increased
$17.3 million, or 116.9%, to $32.1 million, compared to net sales of $14.8
million for the three months ended September 30, 2001. The third quarter is the
end of the crop year, with low sales volumes, marketing program adjustments and
seed product returns. Corn sales increased $12.0 million due to lower than
expected product returns. Alfalfa sales increased $2.4 million due to volume
increases as a result of marketing program adjustments. Volume increases and
marketing program adjustments in other seed categories resulted in a sales
increase of $2.9 million.
Swine. Net sales for the three months ended September 30, 2002 decreased
$8.2 million, or 28.2%, to $20.9 million, compared to $29.1 million for the
three months ended September 30, 2001. The number of market hogs sold decreased
by 16,268 and the average weight per market hog sold decreased 4.7 pounds, with
a corresponding sales decrease of $2.5 million. Reduced consumer demand, caused,
in part, by a protein glut in the U.S. markets, decreased the average market
price for the three months ended September 30, 2002 to $34.67 per hundredweight
versus an average market price of $51.84 for the three months ended September
30, 2001. The
49
decrease in average market hog prices of $17.17 per hundredweight decreased
sales by $5.5 million. We signed a packer agreement with IBP, inc. effective
September 25, 2000, which ties the price we receive for market hogs to the price
that the packer receives for pork products. For the three months ended September
30, 2002, this agreement increased our sales by $1.3 million compared to the
three months ended September 30, 2001. The number of feeder pigs sold under
contract increased by 7,589, with a corresponding sales increase of $0.3
million. The average price per feeder pig sold under contract decreased $3.20
from $49.60 for the three months ended September 30, 2001 to $46.40 for the
three months ended September 30, 2002, which decreased sales by $0.5 million.
This decrease was due primarily to the fact that some contracts are based on
futures markets. The average price per feeder pig sold on the open market
decreased $25.47, from $46.49 for the three months ended September 30, 2001 to
$21.02 for the three months ended September 30, 2002, which decreased sales by
$1.3 million.
COST OF SALES
Cost of sales for the three months ended September 30, 2002 decreased $68.3
million, or 5.2%, to $1,250.7 million, compared to cost of sales of $1,319.0
million for the three months ended September 30, 2001. Cost of sales as a
percent of net sales decreased 1.5 percentage points to 91.7% for 2002, compared
to 93.2% for the prior year. The acquisition of Purina Mills added significantly
to our cost of sales, resulting in an increase of $168.4 million. This increase
was partially offset by lower cost of sales in dairy foods. For the three months
ended September 30, 2002, patronage income from other cooperatives that was
directly attributable to product purchases amounted to $0.5 million, compared to
$0.9 million for the three months ended September 30, 2001. Our cost of sales
was reduced by these amounts.
Dairy Foods. Cost of sales for the three months ended September 30, 2002
decreased $232.8 million, or 25.7%, to $671.7 million, compared to cost of sales
of $904.5 million for the three months ended September 30, 2001. During the
three months ended September 30, 2002, average commodity butter prices decreased
$1.04 per pound, while average commodity cheese prices decreased $0.56 per pound
compared to the same period in 2001. The impact of these commodity price changes
decreased cost of sales of butter by $81.7 million and cheese by $48.4 million.
Cost of sales for cheese, private label butter and nonfat dry milk powder in the
Western region decreased $11.5 million, $8.7 million and $6.8 million,
respectively. The decline in powder cost of sales was due to changes in
production schedules at our dairy plants, which resulted in reduced powder
byproducts availability, while the decline in cheese and butter cost of sales
was due to a combination of decreased market prices and volume declines. Bulk
cheese cost of sales decreased $15.8 million due to market declines and
restructuring that shifted $13.5 million to a joint venture which is reported on
the equity method and is no longer consolidated. Lower milk input costs in the
Upper Midwest resulted in decreased cost of sales of $5.0 million. Cost of sales
for the three months ended September 30, 2002 under our wholesale milk marketing
program decreased $57.7 million, or 21.7%, to $208.7 million, compared to $266.4
million for the three months ended September 30, 2001. This decrease was due
primarily to the lower market price of milk. Cost of sales included a $11.7
million loss from the start-up of our cheese and whey plant in Tulare,
California, that we operate as a joint venture with Mitsui of Japan. Finally,
cost of sales for exports, foodservice cheese and other products decreased $8.9
million over the prior-year period. Cost of sales as a percent of net sales
decreased 0.3 percentage points from 94.8% for the three months ended September
30, 2001 to 94.5% for the three months ended September 30, 2002.
Animal Feed. Cost of sales for the three months ended September 30, 2002
increased $144.8 million, or 38.2%, to $523.9 million compared to $379.1 million
for the three months ended September 30, 2001. The acquisition of Purina Mills
added $168.4 million in cost of sales for the three months ended September 30,
2002. This increase was partially offset by a decrease in Land O'Lakes Farmland
Feed branded product lines. Land O'Lakes Farmland Feed branded swine cost of
sales decreased by $5.0 million. Cost of sales of bulk phosphates decreased $4.7
million as we sold this business during the first quarter of 2002. Cost of sales
of animal heath products decreased $3.5 million driven by a realigned marketing
arrangement whereby we no longer record cost of sales dollars, but rather a
margin-based fee. Cost of sales in our International division decreased $3.2
million from $4.7 million in the third quarter of 2001 to $1.5 million in the
third quarter of 2002 primarily due to the exit of our Mexico and Poland
operations in 2002. Land O'Lakes Farmland Feed branded beef feeds cost of sales
decreased $0.7 million, due to slower sales as a result of weak economic
conditions caused by drought in the central United States and depressed market
prices due to excess protein sources in the marketplace. Cost reductions from
the integration efforts related to Purina Mills reduced our cost of sales by
$1.7 million. Land O'Lakes Farmland Feed branded lifestyle cost of sales
increased $2.3 million as a result of the beginning of the aquaculture feeding
season. Cost of sales in our dairy feed area increased $0.9 million, primarily
as a result of strong sales in our Western region. Patronage income, which is
recorded as a reduction of cost of sales, decreased $0.4 million from earnings
of $0.5 million in the third quarter of 2001 to earnings of $0.1 million in the
third quarter of 2002. An unrealized hedging loss in the third quarter of 2002
related to corn and soybean meal futures contracts increased cost of sales by
$1.6 million, compared to a loss of $0.1 million in the third quarter of 2001.
Cost of sales decreased $2.9 million as a result of the decrease in ingredient
merchandising sales. Cost of sales as a percent of net sales decreased 4.0
percentage points, from 91.8% in the third quarter of 2001 to 87.8% in the same
period of 2002. The decrease was due primarily to certain Purina Mills products,
which carry a comparatively higher margin than our traditional product lines.
IOIC as a percent of cost
50
of sales increased to 25.6% in the third quarter of 2002 from 16.2% in the same
period of 2001 due to the change in product mix.
Crop Seed. Cost of sales for the three months ended September 30, 2002
increased $17.7 million, or 167.0%, to $28.3 million, compared to cost of sales
of $10.6 million for the three months ended September 30, 2001. The third
quarter is the end of the crop year, with low sales volumes, marketing program
adjustments and seed product returns. Cost of sales for corn increased $8.7
million due to lower than expected product returns. Cost of sales for soybeans
and alfalfa increased $4.3 million and $4.0 million, respectively, due to crop
year-end inventory disposals. Volume increases and marketing program adjustments
in other seed categories resulted in a cost of sales increase of $2.0 million.
An unrealized hedging gain of $0.3 million for the three months ended September
30, 2002 was related to soybean futures contracts, compared to an unrealized
hedging loss of $1.0 million for the three months ended September 30, 2001,
which reduced cost of sales by $1.3 million. Cost of sales as a percent of net
sales increased 16.6 percentage points, from 71.6% for the three months ended
September 30, 2001 to 88.2% for the three months ended September 30, 2002.
Swine. Cost of sales for the three months ended September 30, 2002 increased
$1.9 million, or 8.3%, to $24.8 million, compared to $22.9 million for the three
months ended September 30, 2001. Reduced unit sales decreased cost of sales by
$1.7 million. In our cost-plus program, the decreased market price fell below
the program's floor price to independent producers, which increased cost of
sales by $1.9 million. An unrealized hedging loss increased cost of sales by
$0.1 million for the three months ended September 30, 2002, compared to an
unrealized hedging gain of $1.6 million for the three months ended September 30,
2001, resulting in a net increase in cost of sales of $1.7 million. Cost of
sales as a percent of net sales increased 40.0 percentage points from 78.7% to
118.7% of sales, primarily due to the decrease in hog market prices which
lowered swine net sales.
SELLING, GENERAL AND ADMINISTRATION EXPENSE
Selling, general and administration expense for the three months ended
September 30, 2002 increased $29.4 million, or 31.2%, to $123.5 million,
compared to selling, general and administration expense of $94.1 million for the
three months ended September 30, 2001. Selling, general and administration
expense as a percent of net sales increased 2.4 percentage points from 6.7% for
the three months ended September 30, 2001 to 9.1% for the three months ended
September 30, 2002. The acquisition of Purina Mills in October 2001 contributed
$27.4 million to the increase.
Dairy Foods. Selling, general and administration expense for the three
months ended September 30, 2002 decreased $2.0 million, or 4.5%, to $42.6
million, compared to $44.6 million for the three months ended September 30,
2001. This decrease was primarily due to a reduction in advertising and
promotion spending of $1.8 million and goodwill amortization of $0.7 million,
partially offset by an increase in administration expense. Selling, general and
administration expense as a percent of net sales increased 1.3 percentage points
from 4.7% for the three months ended September 30, 2001 to 6.0% for the three
months ended September 30, 2002 due to lower sales volumes.
Animal Feed. Selling, general and administration expense for the three
months ended September 30, 2002 increased $33.9 million, or 120.2%, to $62.1
million, compared to $28.2 million for the three months ended September 30,
2001. The majority of this increase was related to the acquisition of Purina
Mills, which contributed $27.4 million in increased selling, general and
administration expense. In addition, we incurred one-time integration costs of
$5.0 million related to the Purina Mills acquisition, including $2.1 million in
information systems integration costs and $1.3 million in relocation expense.
Selling, general and administration expense as a percent of net sales increased
3.6 percentage points from 6.8% for the three months ended September 30, 2001 to
10.4% for the three months ended September 30, 2002.
Crop Seed. Selling, general and administration expense for the three months
ended September 30, 2002 decreased $1.5 million, or 11.5%, to $11.5 million,
compared to $13.0 million for the three months ended September 30, 2001. Cost
reduction efforts and decreased information systems spending are the primary
reasons for the decrease. Selling, general and administration expense as a
percent of net sales decreased 52.0 percentage points, from 87.8% for the three
months ended September 30, 2001 to 35.8% for the three months ended September
30, 2002.
Swine. Selling, general and administration expense for the three months
ended September 30, 2002 decreased $0.1 million, or 5.9%, to $1.6 million,
compared to $1.7 million for the three months ended September 30, 2001 due
mostly to reduced staffing. Selling, general and administration expense as a
percent of net sales increased 1.9 percentage points, from 5.8% for the three
months ended September 30, 2001 to 7.7% for the three months ended September 30,
2002.
Agronomy. Selling, general and administration expense for the three months
ended September 30, 2002 decreased $0.2 million, or 5.1%, to $3.7 million,
compared to $3.9 million for the three months ended September 30, 2001.
51
RESTRUCTURING AND IMPAIRMENT CHARGES
For the three months ended September 30, 2002, Land O'Lakes recorded
restructuring and impairment charges of $0.9 million, compared to a reversal of
a prior-year charge of $2.4 million for the three months ended September 30,
2001. Animal feed recorded a $0.9 million restructuring and impairment charge,
of which $0.7 million was related to the write-down of certain impaired plant
assets to their estimated fair value, and $0.2 million was related to employee
severance and outplacement costs for employees at various locations. The 2001
reversal of $2.4 million was for the sale of certain animal feed assets that had
been written off in December 2000 and to reflect the decision to continue
operating a plant previously scheduled for shutdown.
We anticipate restructuring and impairment charges of approximately $7
million in 2002 related to the integration of Purina Mills into Land O'Lakes
Farmland Feed. In addition, we anticipate restructuring charges of approximately
$9 million in 2002 related to the consolidation of dairy operations in the Upper
Midwest and California.
INTEREST EXPENSE
Interest expense for the three months ended September 30, 2002 was $18.1
million, compared to $12.2 million for the three months ended September 30,
2001. The $5.9 million, or 48.4%, increase primarily resulted from increased
borrowing to finance the Purina Mills acquisition. Average debt balances
increased by $226.1 million over the three months ended September 30, 2001.
CoBank patronage reduced interest expense by $0.1 million for the three months
ended September 30, 2002, compared to $0.2 million for the three months ended
September 30, 2001. Combined interest rates for borrowings, excluding CoBank
patronage, averaged 7.11% for the three months ended September 30, 2002,
compared to 6.04% for the three months ended September 30, 2001.
GAIN ON LEGAL SETTLEMENT
In the fourth quarter of 1999, a class action lawsuit, alleging illegal
price fixing, was filed against various vitamin product suppliers. Initially,
the Company was a party to this action as a member of the class. In February
2000, however the Company decided to pursue its claims against the defendant
outside the class action. As of November 14, 2002, the Company has received
settlement proceeds of approximately $50 million from several of the defendants.
These settlements were reached with defendants who represent less than half of
the Company's total vitamin product purchases in dispute. The Company is
currently pursuing similar claims against the remaining defendants. With respect
to the pending claims, the factual discovery phase has ended and the original
January 2003 trial date has been re-scheduled to March 2003.
GAIN ON DIVESTITURE OF BUSINESSES
For the three months ended September 30, 2002, we recorded a gain of $3.7
million on divestiture of a crop seed business, compared to no divestitures for
the three months ended September 30, 2001.
EQUITY IN LOSS OR EARNINGS OF AFFILIATED COMPANIES
For the three months ended September 30, 2002, equity in the loss of
affiliated companies was $4.5 million, compared to earnings of $6.4 million for
the three months ended September 30, 2001. Results for the three months ended
September 30, 2002 included a loss from Agriliance of $3.8 million, a loss from
MoArk of $2.6 million and a loss from our Melrose Dairy Proteins LLC joint
venture of $1.0 million, partially offset by earnings from our Advanced Food
Products joint venture of $1.5 million and other affiliated companies. Results
for the three months ended September 30, 2001 included earnings from Agriliance
of $3.4 million, a loss from MoArk of $2.4 million and earnings from other
affiliated companies of $5.4 million.
MINORITY INTEREST IN LOSS OR EARNINGS OF SUBSIDIARIES
For the three months ended September 30, 2002, we recorded minority interest
in loss of subsidiaries of $1.4 million, compared to earnings of $2.0 million
for the three months ended September 30, 2001. Minority interest in earnings of
animal feed related subsidiaries was more than offset by minority interest in
the loss of dairy foods and other consolidated subsidiaries.
52
INCOME TAXES
We recorded an income tax benefit of $13.2 million for the three months
ended September 30, 2002, compared to income tax expense of $0.4 million for the
three months ended September 30, 2001. The income tax benefit resulted from
non-member losses in MoArk, an affiliated company, and our swine business, which
more than offset the tax expense related to the gain on legal settlement.
NET EARNINGS
The reported net loss increased $7.6 million to a net loss of $12.0 million
for the three months ended September 30, 2002, compared to a net loss of $4.4
million for the three months ended September 30, 2001. Lower dairy foods sales,
higher selling, general and administration expense and higher interest expense
contributed to the increase in net loss.
NINE MONTHS ENDED SEPTEMBER 30, 2002 AS COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 2001
NET SALES
Net sales for the nine months ended September 30, 2002 increased $136.8
million, or 3.3%, to $4,299.5 million, compared to net sales of $4,162.7 million
for the nine months ended September 30, 2001. Excluding the effects of the
formation of the Advanced Food Products joint venture in March 2001, net sales
increased $150.5 million, or 3.6%, from $4,149.0 million for the nine months
ended September 30, 2001 to $4,299.5 million for the nine months ended September
30, 2002. The increase was primarily attributed to the acquisition of Purina
Mills in October 2001 which contributed $620.3 million in incremental sales,
partially offset by declines in dairy foods sales, the impact of early shipments
of crop seed products in the fourth quarter of 2001 that historically occurred
in the first quarter of each year, and lower swine sales.
Dairy Foods. Net sales for the nine months ended September 30, 2002
decreased $388.6 million, or 15.3%, to $2,151.9 million, compared to net sales
of $2,540.5 million for the nine months ended September 30, 2001. Excluding the
effects of the Advanced Food Products joint venture, net sales for the nine
months ended September 30, 2002 decreased $374.9 million, or 14.8%, from the
nine months ended September 30, 2001. For the nine months ended September 30,
2002, average commodity prices for butter decreased $0.63 per pound, while
average commodity prices for cheese decreased $0.28 per pound compared to the
same period in 2001. The impact of these market price changes decreased net
sales of butter by $139.7 million and decreased net sales of cheese by $66.8
million. The prices retailers set for branded butter did not follow trends in
the commodity butter markets. Retail prices for branded butter have declined
somewhat; however, high retail prices earlier in the year caused consumers to
shift to substitute products or to reduce consumption which resulted in
continued sales volume declines. Retail branded butter and spreads volumes
decreased 7.9 million pounds and 6.1 million pounds, respectively, representing
a decrease in net sales of $18.9 million and $4.6 million, respectively, from
the same period last year. Bulk cheese sales decreased $44.9 million for the
period ended September 30, 2002 compared to the prior year period due to market
declines and restructuring that shifted $39.9 million to a joint venture which
is reported on the equity method and is no longer consolidated. Nonfat dry milk
powder, private label butter and cheese sales in the Western Region decreased
$32.7 million, $25.9 million and $13.1 million, respectively. The decline in
powder sales was due to changes in production schedules at our dairy plants,
which resulted in reduced powder byproduct availability, while the decline in
butter and cheese sales was due to a combination of decreased market prices and
volume declines. Cheese & Protein International LLC, a cheese and whey joint
venture, began production in May 2002 and added sales of $6.8 million. Sales for
the nine months ended September 30, 2002 under our wholesale milk marketing
program decreased $47.8 million, or 6.9%, to $646.1 million, compared to $693.9
million for the nine months ended September 30, 2001. Volume changes in exports,
deli cheese, foodservice cheese and other product categories accounted for the
remaining sales increase of $12.7 million.
Animal Feed. Net sales for the nine months ended September 30, 2002
increased $563.4 million, or 46.1%, to $1,786.4 million, compared to net sales
of $1,223.0 million for the nine months ended September 30, 2001. The
acquisition of Purina Mills contributed $620.3 million in incremental sales.
This increase was partially offset by declines in Land O'Lakes Farmland Feed
branded sales. Sales of animal health products decreased $14.0 million as a
result of a realigned marketing arrangement with a large vendor whereby the
vendor sells product directly to our customers in exchange for a margin-based
fee. Sales of bulk phosphates decreased $13.5 million due to the sale of this
business to a third party. Sales in our Land O'Lakes Farmland Feed branded swine
products decreased $13.0 million as a result of decreased volumes and depressed
market prices for hog producers caused, in part, by excess food proteins in the
U.S. market. Sales of Land O'Lakes Farmland Feed branded beef feeds decreased
$8.4 million, primarily due to the effect of warmer than average winter weather
and excess food proteins in the U.S. market. International sales decreased by
$7.8 million from $19.7 million for the nine months ended September 30, 2001 to
$11.9 million for the same period in 2002 as a result of our exit of operations
in Mexico and Poland earlier in the year. Sales also decreased $2.5 million in
our Land O'Lakes Farmland Feed branded lifestyle
53
product lines, reflecting a delayed start to the aquaculture feeding season and
slower sales in our pet food area earlier in the year as we launched a new
product line. Sales in our dairy feeds area increased $6.1 million, driven by
strong sales of simple blends in our Western region. We also experienced an
increase of $3.5 million in sales of our animal milk products as a result of
strong volumes. Changes in other feed categories amounted to a decrease of $3.4
million. Finally, sales from ingredient merchandising decreased $3.9 million
from $366.5 million for the nine months ended September 30, 2001 to $362.6
million for the nine months ended September 30, 2002.
Crop Seed. Net sales for the nine months ended September 30, 2002 decreased
$21.2 million, or 6.9%, to $285.0 million, compared to net sales of $306.2
million for the nine months ended September 30, 2001. We shipped $42.0 million
in sales in the fourth quarter of 2001 that historically would have occurred
during the first quarter of 2002. These $42.0 million of shipments included
$28.5 million for soybeans and $11.0 million for corn. An early fall harvest and
mild winter allowed us to ship product early in the season, and third-party
suppliers also provided incentives to customers to take seed product early. We
expect a similar trend in the fourth quarter of 2002. The discontinuance of a
partnered soybean brand contributed to decreased volumes and a sales decrease of
$12.5 million or 11.7%. Strong volume growth resulted in increased sales of corn
of $29.4 million, or 41.9%, due to early placement of product in the retail
channels because of the mild winter season, while sales of alfalfa decreased by
$5.1 million, or 13.2%, due to the continued glut in the alfalfa market. A
change in billing for technology fees collected on behalf of one of our
third-party suppliers added $10.8 million to sales and cost of sales. Weak turf
markets decreased turf sales by $2.7 million or 8.9%. Increases in other seed
categories accounted for the remaining increase of $0.9 million.
Swine. Net sales for the nine months ended September 30, 2002 decreased
$16.2 million, or 19.6%, to $66.6 million, compared to $82.8 million for the
nine months ended September 30, 2001. Reduced consumer demand, caused, in part,
by a protein glut in the U.S. market, decreased the average market price for the
nine months ended September 30, 2002 to $37.15 per hundredweight versus an
average market price of $49.41 for the nine months ended September 30, 2001. The
decrease in average market hog prices of $12.26 per hundredweight decreased
sales by $10.3 million. The number of market hogs sold decreased by 49,059, with
a corresponding sales decrease of $6.6 million, and the total number of feeder
pigs sold decreased by 7,807 with a corresponding sales decrease of $0.5
million, resulting in a total decrease in sales of $7.1 million. The average
price per feeder pig sold on the open market decreased $20.94, from $49.83 for
the nine months ended September 30, 2001 to $28.89 for the nine months ended
September 30, 2002, which decreased sales by $2.6 million. The decrease in
feeder pig sales price was due mainly to lower hog markets, since producers
utilize hog market futures prices to determine how much they can profitably pay
for feeder pigs which they raise into market hogs. We signed a packer agreement
with IBP, inc., effective September 25, 2000, which ties the price we receive
for market hogs to the price that the packer receives for pork products. For the
nine months ended September 30, 2002, this agreement increased our sales by $4.3
million, compared to the nine months ended September 30, 2001. The average price
per feeder pig sold under contract decreased $1.07 from $48.11 for the nine
months ended September 30, 2001 to $47.04 for the nine months ended September
30, 2002, which decreased sales by $0.5 million. This decrease was due primarily
to the fact that some contracts are based on futures markets.
COST OF SALES
Cost of sales for the nine months ended September 30, 2002 increased $80.5
million, or 2.1%, to $3,915.3 million, compared to cost of sales of $3,834.8
million for the nine months ended September 30, 2001. Cost of sales as a percent
of net sales decreased 1.0 percentage points to 91.1% for 2002, compared to
92.1% for the prior year. The formation of the Advanced Food Products joint
venture impacted our reported results because we no longer consolidate its
results in our financial statements. Adjusting for the effects of this
transaction, cost of sales increased $93.0 million, or 2.4%, to $3,915.3 million
for the nine months ended September 30, 2002, compared to cost of sales of
$3,822.3 million for the nine months ended September 30, 2001. Cost of sales as
a percentage of net sales adjusted for the effects of this transaction decreased
1.0 percentage points from 92.1% for the nine months ended September 30, 2001 to
91.1% for the nine months ended September 30, 2002. The acquisition of Purina
Mills added significantly to our cost of sales, resulting in an increase of
$510.5 million. This increase was partially offset by lower cost of sales in
dairy foods, crop seed and swine. For the nine months ended September 30, 2002,
patronage income from other cooperatives that was directly attributable to
product purchases amounted to $3.8 million, compared to $2.9 million for the
nine months ended September 30, 2001. Our cost of sales was reduced by these
amounts.
Dairy Foods. Cost of sales for the nine months ended September 30, 2002
decreased $349.1 million, or 14.7%, to $2,029.7 million, compared to cost of
sales of $2,378.8 million for the nine months ended September 30, 2001.
Excluding the effects of the formation of the Advanced Food Products joint
venture, cost of sales decreased $336.6 million to $2,029.7 million for the nine
months ended September 30, 2002, compared to $2,366.3 million for the nine
months ended September 30, 2001. For the nine months ended September 30, 2002,
average butter market prices decreased $0.63 per pound, while average cheese
market prices decreased $0.28 per pound compared to the same period in 2001. The
impact of these market price changes decreased cost of sales of butter by $139.7
54
million and decreased cost of sales of cheese by $66.8 million. Increased sales
of foodservice cheese resulted in a cost of sales increase of $18.4 million.
Cost of sales for nonfat dry milk powder, private label butter and cheese in the
Western region decreased $35.3 million, $22.8 million, and $13.5 million,
respectively. The decline in powder cost of sales was due to changes in
production schedules at our dairy plants, which resulted in reduced powder
byproduct availability, while the decline in cheese and butter cost of sales was
due to a combination of decreased market prices and volume declines. Bulk cheese
cost of sales decreased $41.3 million due to market declines and restructuring
that shifted $38.5 million to a joint venture which is reported on the equity
method and is no longer consolidated. Higher milk input costs in the Upper
Midwest resulted in increased cost of sales of $3.1 million. Cow numbers and
milk production have declined in both Minnesota and Wisconsin, resulting in
competitive pressures for milk. Cost of sales for the nine months ended
September 30, 2002 under our wholesale milk marketing program decreased $43.7
million, or 6.3%, to $647.4 million, compared to $691.1 million for the nine
months ended September 30, 2001. Cost of sales included $23.4 million from the
start-up of our cheese and whey plant in Tulare, California, that we operate as
a joint venture with Mitsui of Japan. Finally, cost of sales for other products
increased $18.4 million over the prior-year period. Cost of sales as a percent
of net sales increased 0.7 percentage points from 93.6% for the nine months
ended September 30, 2001 to 94.3% for the nine months ended September 30, 2002,
primarily due to lower sales volumes and decreased commodity prices for butter
and cheese.
Animal Feed. Cost of sales for the nine months ended September 30, 2002
increased $450.0 million, or 40.2%, to $1,569.5 million compared to $1,119.5
million for the nine months ended September 30, 2001. The acquisition of Purina
Mills added $510.5 million in cost of sales for the nine months ended September
30, 2002. This increase was slightly offset by a decrease in Land O'Lakes
Farmland Feed branded product lines. Land O'Lakes Farmland Feed branded beef
feeds cost of sales decreased $4.9 million, due to slower sales as a result of
warm winter weather. Cost of sales of animal health products decreased $13.6
million driven by a realigned marketing arrangement whereby we no longer record
cost of sales dollars, but rather a margin-based fee. Land O'Lakes Farmland Feed
branded lifestyle cost of sales declined $4.3 million as result of improved risk
management in our aquaculture area and slower sales in our pet food area as we
launched a new product line earlier in the year. Cost of sales of bulk
phosphates decreased $12.1 million as we sold this business during the first
quarter of 2002. Land O'Lakes Farmland Feed branded swine feed cost of sales
decreased by $7.7 million due to decreased volumes caused, in part, by a protein
glut in the United States. Cost of sales in our dairy feed area increased $7.4
million, primarily as a result of strong sales in our Western region. Cost of
sales for animal health products increased $0.9 million primarily due to
increased volumes. Cost of sales in our International division decreased $6.3
million from $16.2 million in the first nine months of 2001 to $9.9 million in
the first nine months of 2002 primarily due to the exit of our Mexico and Poland
operations earlier in the year. Cost reductions from the integration efforts
related to Purina Mills reduced our cost of sales by $5.0 million. Patronage
income, which is recorded as a reduction of cost of sales, decreased $2.1
million. An unrealized hedging gain in the first nine months of 2002 related to
corn and soybean meal futures contracts decreased cost of sales by $2.3 million,
compared to an increase from an unrealized hedging loss of $1.3 million in the
first nine months of 2001. Finally, cost of sales decreased $3.7 million as a
result of the decline in ingredient merchandising sales. Cost of sales as a
percent of net sales decreased 3.6 percentage points, from 91.5% for the nine
months ended September 30, 2001 to 87.9% for the nine months ended September 30,
2002. The decrease was due primarily to higher margins on certain Purina Mills
products, which carry a comparatively higher margin than our traditional product
lines, stronger margins in our aquaculture area and strong sales in our Animal
Milk Products area. IOIC as a percent of cost of sales increased to 25.7% in the
first half of 2002 from 17.5% in the same period of 2001 due to the change in
product mix and the change in unrealized hedging gains and losses as noted
above.
Crop Seed. Cost of sales for the nine months ended September 30, 2002
decreased $16.5 million, or 6.4%, to $242.0 million, compared to cost of sales
of $258.5 million for the nine months ended September 30, 2001. Volume declines
due to early shipment of $42.0 million of product in the fourth quarter of 2001
that historically would have occurred in the first quarter of 2002 accounted for
$36.1 million of cost of sales and included $24.5 million for soybeans, $9.5
million for corn and $2.1 million for alfalfa. We expect a similar trend in the
fourth quarter of 2002. Incremental sales growth of corn of $29.4 million and,
consequently, an increase in cost of sales of $24.7 million partially offset the
impact of this loss of volume. In addition, a change in billing for technology
fees collected on behalf of one of our third-party suppliers increased sales and
cost of sales by $10.8 million. The discontinuance of a partnered soybean brand
resulted in decreased cost of sales of $13.5 million. An unrealized hedging gain
of $2.3 million for the nine months ended September 30, 2002 related to soybean
futures contracts, compared to an unrealized hedging loss of $1.1 million for
the nine months ended September 30, 2001, reduced cost of sales by $3.4 million.
Cost of sales as a percent of net sales increased 0.5 percentage points, from
84.4% for the nine months ended September 30, 2001 to 84.9% for the nine months
ended September 30, 2002, due to the change in product mix.
Swine. Cost of sales for the nine months ended September 30, 2002 decreased
$3.2 million, or 4.5%, to $68.4 million, compared to $71.6 million for the nine
months ended September 30, 2001. Reduced unit sales decreased cost of sales by
$5.3 million and slightly lower cost of production decreased cost of sales by
$0.2 million. Cost of sales in our cost plus program increased by $3.2 million.
An unrealized hedging gain decreased cost of sales by $0.6 million for the nine
months ended September 30, 2002, compared
55
to an unrealized hedging loss of $0.3 million for the nine months ended
September 30, 2001, resulting in a net decrease in cost of sales of $0.9
million. Cost of sales as a percent of net sales increased 16.2 percentage
points from 86.5% to 102.7% of sales, primarily as a result of lower hog market
prices which decreased swine sales for the nine months ended September 30, 2002.
SELLING, GENERAL AND ADMINISTRATION EXPENSE
Selling, general and administration expense for the nine months ended
September 30, 2002 increased $100.2 million, or 36.5%, to $374.9 million,
compared to selling, general and administration expense of $274.7 million for
the nine months ended September 30, 2001. Selling, general and administration
expense as a percent of net sales increased 2.1 percentage points from 6.6% for
the nine months ended September 30, 2001 to 8.7% for the nine months ended
September 30, 2002. The acquisition of Purina Mills in October 2001 contributed
$85.0 million to the increase.
Dairy Foods. Selling, general and administration expense for the nine months
ended September 30, 2002 decreased $2.7 million, or 2.1%, to $127.3 million,
compared to $130.0 million for the nine months ended September 30, 2001.
Increased research and development spending and selling expenses were offset by
a reduction in advertising and promotion expenses. Selling, general and
administration expense as a percent of net sales increased 0.8 percentage points
from 5.1% for the nine months ended September 30, 2001 to 5.9% for the nine
months ended September 30, 2002.
Animal Feed. Selling, general and administration expense for the nine months
ended September 30, 2002 increased $104.7 million, or 125.5%, to $188.1 million,
compared to $83.4 million for the nine months ended September 30, 2001. The
majority of this increase was related to the acquisition of Purina Mills, which
added $85.0 million in increased selling, general and administration expense. We
also incurred one-time integration costs of $15.0 million, including $5.2
million in information systems integration costs, and $2.2 million in relocation
expense, and an additional $1.7 million of bad debt expense. Selling, general
and administration expense as a percent of net sales increased 3.7 percentage
points from 6.8% for the nine months ended September 30, 2001 to 10.5% for the
nine months ended September 30, 2002.
Crop Seed. Selling, general and administration expense for the nine months
ended September 30, 2002 decreased $1.1 million, or 3.1%, to $34.6 million,
compared to $35.7 million for the nine months ended September 30, 2001. The
decrease was primarily due to a decline in information technology expenditures.
Selling, general and administration expense as a percent of net sales increased
0.4 percentage points, from 11.7% for the nine months ended September 30, 2001
to 12.1% for the nine months ended September 30, 2002.
Swine. Selling, general and administration expense for the nine months ended
September 30, 2002 decreased $0.7 million, or 12.7%, to $4.8 million, compared
to $5.5 million for the nine months ended September 30, 2001 due to reduced
staffing and support. Selling, general and administration expense as a percent
of net sales increased from 6.6% for the nine months ended September 30, 2001 to
7.2% for the nine months ended September 30, 2002.
Agronomy. Selling, general and administration expense for the nine months
ended September 30, 2002 decreased $0.2 million, or 1.5%, to $13.2 million,
compared to $13.4 million for the nine months ended September 30, 2001. Selling,
general and administration expense for the nine months ended September 30, 2002
included $0.2 million in losses recorded for Eastern agronomy assets held for
sale, compared to losses of $2.7 million recorded for the nine months ended
September 30, 2001. The decrease in losses was due to the fact that most of the
Eastern agronomy assets have been sold. In June 2002, we also recorded a $2.1
million charge for environmental liabilities related to pre-Agriliance
operations.
RESTRUCTURING AND IMPAIRMENT CHARGES
For the nine months ended September 30, 2002, Land O'Lakes recorded
restructuring and impairment charges of $8.2 million, compared to a reversal of
a prior-year charge of $4.2 million for the nine months ended September 30,
2001. Animal feed recorded a $5.4 million restructuring and impairment charge,
of which $2.4 million was related to the write-down of certain impaired plant
assets to their estimated fair value, and $3.0 million was related to employee
severance and outplacement costs for 136 employees at the Ft. Dodge, IA office
facility and other feed plant facilities. Dairy foods recorded a $2.8 million
charge, which consisted of $1.5 million for employee severance and outplacement
for 82 employees and $1.3 million for impairment related to the Faribault, MN
dairy plant closure. The 2001 reversal of $4.2 million was for the sale of
certain animal feed assets that had been written off in December 2000 and to
reflect the decision to continue operating a plant previously scheduled for
shutdown.
We anticipate restructuring and impairment charges of approximately $7
million in 2002 related to the integration of Purina Mills
56
into Land O'Lakes Farmland Feed. In addition, we anticipate restructuring
charges of approximately $9 million in 2002 related to the consolidation of
dairy operations in the Upper Midwest and California.
INTEREST EXPENSE
Interest expense for the nine months ended September 30, 2002 was $53.0
million, compared to $36.5 million for the nine months ended September 30, 2001.
The $16.5 million, or 45.2%, increase primarily resulted from increased
borrowing to finance the Purina Mills acquisition. Average debt balances
increased by $226.1 million over the nine months ended September 30, 2001.
CoBank patronage reduced interest expense by $0.8 million for the nine months
ended September 30, 2002, compared to $1.0 million for the nine months ended
September 30, 2001. Combined interest rates for borrowings, excluding CoBank
patronage, averaged 7.02% for the nine months ended September 30, 2002, compared
to 6.45% for the nine months ended September 30, 2001.
GAIN ON LEGAL SETTLEMENT
In the fourth quarter of 1999, a class action lawsuit, alleging illegal
price fixing, was filed against various vitamin product suppliers. Initially,
the Company was a party to this action as a member of the class. In February
2000, however the Company decided to pursue its claims against the defendant
outside the class action. As of November 14, 2002, the Company has received
settlement proceeds of approximately $50 million from several of the defendants.
These settlements were reached with defendants who represent less than half of
the Company's total vitamin product purchases in dispute. The Company is
currently pursuing similar claims against the remaining defendants. With respect
to the pending claims, the factual discovery phase has ended and the original
January 2003 trial date has been re-scheduled to March 2003.
GAIN ON SALE OF INTANGIBLE
For the nine months ended September 30, 2002, we recorded a gain of $4.2
million on the sale to Potash Corporation of Saskatchewan of a customer list
pertaining to the feed phosphate distribution business.
GAIN ON DIVESTITURE OF BUSINESSES
For the nine months ended September 30, 2002, we recorded a gain of $3.7
million on the divestiture of a seed business and a gain of $1.2 million on the
divestiture of our dairy foods Poland business, resulting in a total gain of
$4.9 million. For the nine months ended September 30, 2001, we recorded a gain
of $0.2 million on the divestiture of a feed business.
EQUITY IN EARNINGS OF AFFILIATED COMPANIES
For the nine months ended September 30, 2002, equity in earnings of
affiliated companies was $29.8 million, compared to earnings of $43.7 million
for the nine months ended September 30, 2001. Results for the nine months ended
September 30, 2002 included earnings from Agriliance of $35.3 million, earning
from Advanced Food Products of $3.5 million, a loss from MoArk of $7.8 million
and a loss from Melrose Dairy Proteins of $3.5 million. The loss in MoArk was
driven by low market prices due to an oversupply of eggs, and we expect
significant improvements in market prices for the fourth quarter of 2002, as
result of declining chick hatch and anticipated changes in response to new
animal welfare guidelines. Results for the nine months ended September 30, 2001
primarily reflected earnings from Agriliance of $34.7 million, earnings from
Gold Kist of $2.0 million, a loss from MoArk of $1.7 million and earnings from
other affiliated companies.
MINORITY INTEREST IN LOSS OR EARNINGS OF SUBSIDIARIES
For the nine months ended September 30, 2002, we recorded minority interest
in loss of subsidiaries of $1.5 million, compared to earnings of $5.7 million
for the nine months ended September 30, 2001. Minority interest in earnings of
animal feed related subsidiaries was $3.5 million, offset by minority interest
in the loss of dairy foods related subsidiaries. Results for the nine months
ended September 30, 2001 included minority interest in earnings of animal feed
related subsidiaries of $6.5 million, slightly offset by minority interest in
loss of other consolidated subsidiaries.
57
INCOME TAXES
We recorded an income tax benefit of $10.0 million for the nine months ended
September 30, 2002, compared to an income tax expense of $6.3 million for the
nine months ended September 30, 2001. The income tax benefit resulted from
non-member losses in MoArk, an affiliated company, and our swine business, which
more than offset the tax expense related to the gain on legal settlement.
NET EARNINGS
Net earnings decreased $17.5 million to net earnings of $35.3 million for
the nine months ended September 30, 2002, compared to net earnings of $52.8
million for the nine months ended September 30, 2001. Improved margins in animal
feed due to the addition of Purina Mills lifestyle feed products, in addition to
a gain on legal settlement, were more than offset by higher selling, general and
administration expense, and higher interest expense.
LIQUIDITY AND CAPITAL RESOURCES
We rely on cash from operations, borrowings under our bank facilities and
bank term debt and other institutionally placed funded debt as the main sources
for financing working capital requirements, additions to property, plant and
equipment and to complete acquisitions and joint ventures. Other sources of
funding consist of leasing arrangements, a receivables securitization and the
sale of non-strategic assets. Total long-term debt was $1,071.3 million,
including $190.7 million in Capital Securities, as of September 30, 2002, and
$1,147.5 million, including $190.7 million in Capital Securities, as of December
31, 2001.
Net cash used by operating activities was $9.3 million for the nine months
ended September 30, 2002 and net cash provided was $9.9 million for the nine
months ended September 30, 2001. For the nine months ended September 30, 2002,
net cash used by operating activities was $19.2 million more than for the nine
months ended September 30, 2001. Excluding the cash proceeds from the legal
settlement, net cash used by operating activities for the nine months ended
September 30, 2002, would have been $36.8 million greater, resulting in cash
used by operating activities of $46.1 million.
Net cash flows used by investing activities was $13.6 million for the nine
months ended September 30, 2002 and $73.9 million for the nine months ended
September 30, 2001. The change was primarily due to a decrease in acquisition
and investment spending subsequent to the Purina Mills acquisition in October
2001 and to sales of selected assets.
Net cash flows (used) provided by financing activities was ($69.4)
million for the nine months ended September 30, 2002 and $68.9 million for the
nine months ended September 30, 2001. For the nine months ended September 30,
2002, we made payments of $81.8 million on existing long-term debt and payments
of $37.0 million for redemption of member equities. At the same time, we
increased short-term debt by $42.4 million to cover seasonal working capital
needs. For the nine months ended September 30, 2001, we borrowed $132.5 million
in short-term debt and made payments of $45.8 million for redemption of member
equities.
Our principal liquidity requirements are to service our debt and meet
our working capital and capital expenditure needs. Following the Purina Mills
acquisition, we have significantly increased our leverage. As of September 30,
2002 we had $1,071.3 million outstanding in long-term debt, including $190.7
million of Capital Securities, and $89.7 million outstanding in short-term debt.
In addition, as of September 30, 2002, $215.7 million was available under a $250
million revolving credit facility for working capital and general corporate
purposes, after giving effect to $8.5 million in borrowings on the credit line
and $25.8 million of outstanding letters of credit, which reduce availability.
Total equity as of September 30, 2002 was $858.8 million.
The principal term loans consist of a $325.0 million syndicated Term Loan A
Facility with a remaining balance of $291.2 million and a final maturity of five
years, (expiration October 10, 2006), and a syndicated Term Loan B Facility with
a remaining balance of $233.8 million and a final maturity of seven years,
(expiration October 10, 2008). Our $250.0 million revolving credit facility
terminates on June 28, 2004.
Borrowings under the term loans and the revolving credit facility bear
interest at variable rates (either LIBOR or an Alternative Base Rate) plus
applicable margins. The margins are dependent upon Land O'Lakes credit ratings.
In October, Moody's Investors Service ("Moody's") and Standard & Poor's
("S&P") lowered their respective ratings of our secured and unsecured debt as
follows:
58
FACILITY (MATURITY) MOODY'S S&P
$250 million senior secured (2004) Ba2 to B1 BBB- to BB
$291 million senior secured (2006) Ba2 to B1 BBB- to BB
$234 million senior secured (2008) Ba2 to B1 BBB- to BB
$350 8.75% senior unsecured (2011) Ba3 to B2 BB to B+
$191 million 7.45% Trust preferred Ba3 to B3 B+ to B-
These rating downgrades increase, by one-quarter of one percent (.25%) the
interest that we pay on our $291 million senior secured facility and the amount
drawn on our $250 million 364-Day Credit Agreement, which was approximately $8
million as of September 30, 2002. The increase in interest rates affecting these
two facilities will increase our interest cost by approximately $0.7 million per
year. Finally, Moody's outlook for our company is stable while S&P's outlook is
negative.
The Term Loan A Facility is prepayable at any time without penalty. The Term
Loan B Facility is prepayable with a penalty of 3% through October 10, 2002, 2%
from October 11, 2002 through October 10, 2003, 1% from October 11, 2003 through
October 10, 2004 and no penalty thereafter. The term loans are subject to
mandatory prepayments, subject to certain limited exceptions, in an amount equal
to (1) 50% of excess cash flow of Land O'Lakes and the restricted subsidiaries,
(2) 100% of the net cash proceeds of asset sales and dispositions of property of
Land O'Lakes and the restricted subsidiaries, to the extent not reinvested, (3)
100% of any casualty or condemnation receipts by Land O'Lakes and the restricted
subsidiaries, to the extent not used to repair or replace assets, (4) 100% of
joint venture dividends or distributions received by Land O'Lakes or the
restricted subsidiaries, to the extent that they relate to the sale of property,
casualty or condemnation receipts, or the issuance of any equity interest in the
joint venture, (5) 100% of net cash proceeds from the sale of inventory or
accounts receivable in a securitization transaction to the extent cumulative
proceeds from such transactions exceed $100.0 million and (6) 100% of net cash
proceeds from the issuance of unsecured senior or subordinated indebtedness
issued by Land O'Lakes. In February 2002, we made a $33.8 million prepayment on
Term Loan A Facility and a $16.2 million prepayment on Term Loan B Facility, of
which 75% was mandatory and 25% was optional.
The amortization schedules for the Term Loan A and Term Loan B Facilities
are provided below.
TERM LOAN A TERM LOAN B
2002 (paid 2/22/02)........... $ 33,782,609 $ 16,217,391
2003.......................... 54,337,200 2,116,744
2004.......................... 71,064,057 2,822,325
2005.......................... 94,752,077 2,822,325
2006.......................... 71,064,057 2,822,325
2007.......................... -- 2,822,325
2008.......................... -- 220,376,564
------------ ------------
Total.................... $325,000,000 $250,000,000
============ ============
In November 2001, we issued $350 million of senior notes. These notes bear
interest at a fixed rate of 8 3/4% and mature on November 15, 2011. The notes
are callable beginning in year six at a redemption price of 104.375%. In years
seven and eight, the redemption price is 102.917% and 101.458%, respectively.
The notes are callable at par beginning in year nine.
In 1998, Capital Securities in an amount of $200 million were issued by our
trust subsidiary, and the net proceeds were used to acquire a junior
subordinated note of Land O'Lakes. The holders of these securities are entitled
to receive dividends at an annual rate of 7.45% until the securities mature in
2028 and correspond to the payment terms of the junior subordinated debentures
which are the sole asset of the trust subsidiary. Interest payments on the
debentures can be deferred for up to five years, and the obligations under the
debentures are junior to all of our debt. As of September 30, 2002, the
outstanding balance of Capital Securities was $190.7 million.
The credit agreements relating to the term loans and revolving credit
facility and the indenture relating to the 8 3/4% senior notes impose certain
restrictions on us, including restrictions on our ability to incur indebtedness,
make payments to members, make investments, grant liens, sell our assets and
engage in certain other activities. In addition, the credit agreements relating
to the term loans and revolving credit facility require us to maintain an
interest coverage ratio of at least 2.50 to 1. Our ratio was 3.83 to 1 as of
December 31, 2001 and 3.60 to 1 as of September 30, 2002. We are also required
to maintain a leverage ratio of no greater than 4.75 to 1. The actual leverage
ratio as of December 31, 2001 was 3.77 to 1 and 3.84 to 1 as of September 30,
2002. The required leverage ratio steps down to 4.25 to 1 as of October 11, 2002
and 3.75 to 1 as of October 11, 2003 and remains constant thereafter.
Indebtedness under the term loans and revolving credit facility is
secured by substantially all of the material assets of Land
59
O'Lakes and its wholly-owned domestic subsidiaries (other than LOL Finance Co.
and LOLFC, LLC) and Land O'Lakes Farmland Feed and its wholly-owned domestic
subsidiaries (other than LOL Farmland Feed SPV, LLC), including real and
personal property, inventory, accounts receivable, intellectual property and
other intangibles, other than those receivables which have been sold in
connection with our receivables securitization. Indebtedness under the term
loans and revolving credit facility is also guaranteed by our wholly-owned
domestic subsidiaries (other than LOL Finance Co. and LOLFC, LLC) and Land
O'Lakes Farmland Feed and its wholly-owned domestic subsidiaries (other than LOL
Farmland Feed SPV, LLC). The 8 3/4% senior notes are unsecured but are
guaranteed by the same entities that guaranty the obligations under the term
loans and revolving credit facility.
As of November 14, 2002, our defined pension plan assets had a lower market
value than the plan's estimated liabilities. While we are not required to make
any immediate cash contributions to the plan, we expect to make a voluntary
contribution of approximately $30 million, net of any tax benefits, on or before
December 31, 2002. We may also be required to take a non-cash other
comprehensive income charge to equity of approximately $90 million during this
calendar year. The non-cash charge to equity will not affect our calculation of
earnings before interest, taxes, depreciation and amortization for purposes of
the covenants under our credit agreements and senior note indenture.
OFF-BALANCE SHEET ARRANGEMENTS
In order to reduce overall financing costs, Land O'Lakes entered into a
revolving receivables securitization program with CoBank in December 2001 for up
to $100 million in advances against eligible receivables. Under this program,
Land O'Lakes, Land O'Lakes Farmland Feed LLC and Purina Mills, LLC sell feed,
seed and certain swine receivables to LOL Farmland Feed SPV, LLC, a limited
purpose wholly-owned subsidiary of Land O'Lakes Farmland Feed LLC. This
subsidiary is a qualifying special purpose entity (QSPE) under applicable
accounting rules. The QSPE was established for the limited purpose of purchasing
and obtaining financing for these receivables. The transfers of the receivables
to the QSPE are structured as sales and, in accordance with applicable
accounting rules, these receivables are not reflected in the consolidated
balance sheets of Land O'Lakes Farmland Feed LLC or Land O'Lakes. The QSPE
purchases the receivables with a combination of cash initially received from
CoBank, equal to the present value of eligible receivables multiplied by the
agreed advance rate; and notes, equal to the unadvanced present value of the
receivables. Land O'Lakes and the other receivables sellers are subject to
credit risk related to the repayment of the QSPE notes, which in turn is
dependent upon the ultimate collection on the QSPE's receivables pool.
Accordingly, we have retained reserves for estimated losses. As of September 30,
2002, $35.0 million was drawn under this securitization.
In addition, we lease various equipment and real properties under
long-term operating leases. Total consolidated rental expense was $21.7 million
for the nine months ended September 30, 2002, and $21.2 million for the nine
months ended September 30, 2001. Most of the leases require payment of operating
expenses applicable to the leased assets. We expect that in the normal course of
business most leases that expire will be renewed or replaced by other leases. We
are also contingently liable for a $114 million synthetic lease entered into by
Cheese & Protein International, LLC, ("CPI"), a consolidated joint venture 70%
owned by Land O'Lakes, for the construction of a cheese and whey plant. The
construction of the plant has been financed by a special purpose entity. The
special purpose entity is not consolidated in Land O'Lakes financial statements
and we have accounted for this arrangement as an operating lease in accordance
with Statement of Financial Accounting Standards No. 13, "Accounting for
Leases," as amended. The base term of the lease commenced on April 30, 2002 and
expires on the fifth anniversary, unless we request, and the lessor approves,
one or more one-year base term extensions, which could extend the base term by
no more than five additional years. The interest rate on the lease is
LIBOR-based and actual lease payments will vary with short-term interest rate
fluctuations. Future minimum lease payments under this lease are included in the
table below. Lease expense since the start-up of the plant in May 2002 was $5.4
million; this expense is in addition to the rental expense of $21.7 million
noted above. At the conclusion of the lease term, CPI is obligated to pay the
remaining lease balance. In the event CPI defaults on its obligations under the
lease, Land O'Lakes could elect one of the following options: (i) assume the
lease obligations of CPI, (ii) purchase the leased assets, (iii) fully cash
collateralize the lease or (iv) nominate a replacement lessee to be approved by
the lessor.
Cheese & Protein International, LLC, our 70%-owned consolidated joint
venture has experienced higher than anticipated losses during its start-up
phase. The higher than expected losses are attributable to lower than expected
demand for mozzarella, slower than expected customer acceptance of CPI's
products, an unanticipated decrease in the prices of mozzarella and whey, and
higher than anticipated operating costs. In the event that these factors
continue to impact CPI's operations, CPI's management believes that it will be
unable to meet its fixed charge coverage ratio covenant at year end, which would
constitute an event of default under its synthetic lease. CPI's management has
initiated discussion with the participants to the synthetic lease for an
appropriate amendment with respect to said covenant. If CPI's management does
not successfully obtain the amendment they will work to arrange a replacement
financing for the facility. In the event that either an amendment or a
replacement financing cannot be arranged, the Company, as
60
Support Provider to the lease, would be required to take action as more
specifically detailed in the Risk Factor, "If Cheese & Protein International,
LLC defaults on its synthetic lease, the Company may be required to assume CPI's
obligation under the lease."
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
At September 30, 2002, we had certain contractual obligations, which
required us to make payments as follows:
PAYMENTS DUE BY PERIOD (AS OF SEPTEMBER 30, 2002)
CONTRACTUAL CASH OBLIGATIONS TOTAL 1 YEAR 2-3 YEARS 4-5 YEARS AFTER 5 YEARS
---------------------------- ---------- -------- --------- --------- -------------
(IN THOUSANDS)
Revolving Credit
Facility(1)............... $ 8,500 $ 8,500 $ -- $ -- $ --
Long-Term Debt(2)........... 1,118,203 46,919 174,023 108,535 788,726
Operating Leases(3)......... 225,036 25,905 49,374 43,936 105,821
---------- -------- --------- --------- ---------
Total Contractual
Obligations.......... $1,351,739 $ 81,324 $ 223,397 $ 152,471 $ 894,547
========== ======== ========= ========= =========
- -------------
(1) Maximum $250 million facility, of which $215.7 million was available as of
September 30, 2002. A total of $25.8 million of this commitment was
unavailable due to outstanding letters of credit and $8.5 million of this
commitment was unavailable due to borrowings from the revolving credit
facility.
(2) Term Loan A and Term Loan B Facilities are subject to certain mandatory
prepayment obligations in certain events as explained above. See
"Off-balance Sheet Arrangements" for information concerning our receivables
securitization program.
(3) Includes lease payments under the synthetic lease identified above, which is
an off-balance sheet contingent liability. See "Off-balance Sheet
Arrangements."
We expect that our total capital expenditures will be approximately $80
million to $90 million in 2002 and approximately $100 million in 2003. Of such
amounts, we currently estimate that a minimum range of $35 million to $45
million of ongoing maintenance capital expenditures is required each year. We
had $57.3 million in capital expenditures for the nine months ended September
30, 2002, compared to $53.7 million in capital expenditures for the nine months
ended September 30, 2001. We estimate that our total depreciation and
amortization expense will be approximately $100 million to $110 million in 2002
and 2003. We had $79.6 million in depreciation and amortization expense for the
nine months ended September 30, 2002, compared to $65.0 million for the nine
months ended September 30, 2001.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." Major provisions of these statements are as follows: all business
combinations must now use the purchase method of accounting, the pooling of
interests method of accounting is now prohibited; intangible assets acquired in
a business combination must be recorded separately from goodwill if they arise
from contractual or other legal rights or are separable from the acquired entity
and can be sold, transferred, licensed, rented or exchanged, either individually
or as a part of a related contract, asset or liability; goodwill and intangible
assets with indefinite lives are not amortized, but tested for impairment
annually, except in certain circumstances, and whenever there is an impairment
indicator; all acquired goodwill must be assigned to reporting units for
purposes of impairment testing and segment reporting. We adopted the provisions
of SFAS 141 and certain provisions of SFAS 142 as of July 1, 2001, and the
remaining provisions of SFAS 142 as of January 1, 2002. As required by SFAS 142,
we performed step one of the impairment testing of goodwill by June 30, 2002.
For all segments the fair market value exceeded the carrying amount. Therefore,
the second step of impairment testing is not required and no impairment has been
recognized in the current year of adoption. We will perform impairment tests
annually and whenever events or circumstances occur indicating that goodwill or
other intangible assets might be impaired. As of January 1, 2002, we are no
longer amortizing goodwill, except for goodwill related to the acquisition of
cooperatives and the formation of joint ventures.
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
2002 2001 2002 2001
---- ---- ---- ----
Net (loss) earnings............................. $ (11,988) $ (4,415) $ 35,332 $ 52,818
Add back: Goodwill amortization, net of tax..... - 1,550 - 4,462
----------- --------- --------- ---------
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Adjusted net (loss) earnings.................... $ (11,988) $ (2,865) $ 35,332 $ 57,280
============= ========== ========= =========
2001 2000 1999
---- ---- ----
Net earnings......................................... $ 71,488 $ 102,932 $ 21,399
Add back: Goodwill amortization, net of tax.......... 5,884 7,741 6,721
---------- ------------ ----------
Adjusted net earnings................................ $ 77,372 $ 110,673 $ 28,120
========== ============ ==========
We adopted Emerging Issues Task Force "EITF" No. 00-25, "Vendor Income
Statement Characterization of Consideration to a Purchaser of the Vendor's
Products or Services," on January 1, 2002. EITF No. 00-25 deals with the
accounting for consideration paid from a vendor (typically a manufacturer or
distributor) to a retailer, including slotting fees, cooperative advertising
arrangements and buy-downs. The guidance in EITF 00-25 generally requires that
these incentives be classified as a reduction of sales. The impact of the
adoption decreased sales and selling and administration expense for the nine
months ended September 30, 2002 and 2001 by $76.6 million and $72.9 million,
respectively.
FORWARD LOOKING STATEMENTS
This Form 10-Q for the nine months ended September 30, 2002 includes
"forward-looking statements" within the meaning of the safe harbor provisions of
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements can be identified by the use of forward-looking
terminology such as "believes," "expects," "may," "will," "could," "should,"
"seeks," "pro forma," "as adjusted," "anticipates," "intends," or other
variations thereof, including their use in the negative, or by discussions of
strategies, plans or intentions. Although we believe that our plans, intentions
and expectations reflected in, or suggested by, such forward-looking statements
are reasonable, you should be aware that actual results could differ materially
from those projected by the forward-looking statements. For a discussion of
factors that could cause actual results to differ materially from the
anticipated results or other expectations expressed in our forward-looking
statements, see the discussion of risk factors set forth below. Because actual
results may differ, readers are cautioned not to place undue reliance on
forward-looking statements. We assume no obligation to update such
forward-looking statements or to update the reasons that actual results could
differ materially from those anticipated in such forward-looking statements.
RISK FACTORS
SUBSTANTIAL LEVERAGE -- OUR SUBSTANTIAL LEVERAGE COULD ADVERSELY AFFECT OUR
ABILITY TO FULFILL OUR OBLIGATIONS UNDER OUR DEBT OBLIGATIONS AND OPERATE OUR
BUSINESS.
We are highly leveraged and have significant debt service obligations. As of
September 30, 2002, after eliminating intercompany activity, our aggregate
outstanding indebtedness was $1,071.3 million, excluding unused commitments, and
our total equity was $858.8 million. For the year ended December 31, 2001,
giving pro forma effect to the acquisition of Purina Mills as of January 1,
2001, our interest expense would have been $73.3 million. We may incur
additional debt from time to time to finance strategic acquisitions, investments
and alliances, capital expenditures or for other purposes, subject to the
restrictions contained in our debt agreements.
Our substantial debt could have important consequences to persons holding
our outstanding indebtedness, including the following:
- - we will be required to use a substantial portion of our cash flow from
operations to pay principal and interest on our debt, thereby reducing the
availability of our cash flow to fund working capital, capital
expenditures, strategic acquisitions, investments and alliances and other
general corporate requirements;
- - our interest expense could increase if interest rates in general increase
because a substantial portion of our debt bears interest at floating rates;
- - our substantial leverage will increase our vulnerability to general
economic downturns and adverse competitive and industry conditions and
could place us at a competitive disadvantage compared to those of our
competitors which are less leveraged;
- - our debt service obligations could limit our flexibility to plan for, or
react to, changes in our business and the dairy and agricultural
industries;
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- - our level of debt may restrict us from raising additional financing on
satisfactory terms to fund working capital, capital expenditures, strategic
acquisitions, investments and joint ventures and other general corporate
requirements;
- - our level of debt may prevent us from raising the funds necessary to
repurchase all of our 8 3/4% senior notes due 2011 tendered to us upon the
occurrence of a change of control, which would constitute an event of
default under the senior notes; and
- - our failure to comply with the financial and other restrictive covenants in
our debt instruments could result in an event of default that, if not cured
or waived, could cause our debt to become due immediately and permit our
lenders to enforce their remedies. See "Item 3. Quantitative and
Qualitative Disclosures about Market Risk."
ABILITY TO SERVICE DEBT -- SERVICING OUR INDEBTEDNESS REQUIRES A SIGNIFICANT
AMOUNT OF CASH, AND OUR ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS BEYOND
OUR CONTROL.
We expect to obtain the cash to make payments on our debt and to fund
working capital, capital expenditures, strategic acquisitions, investments and
joint ventures and other general corporate requirements from our operations. Our
ability to generate cash is subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond our control. We cannot
assure investors that our business will generate sufficient cash flow from
operations, that we will realize currently anticipated cost savings, net sales
growth and operating improvements on schedule, or at all, or that future
borrowings will be available to us under our credit facilities, in each case, in
amounts sufficient to enable us to service our indebtedness or to fund our other
liquidity needs. If we cannot service our indebtedness, we will have to take
actions such as reducing or delaying capital expenditures, strategic
acquisitions, investments and joint ventures, selling assets, restructuring or
refinancing our indebtedness or seeking additional equity capital, which may
adversely affect our membership and affect their willingness to remain members.
These remedies may not be effected on commercially reasonable terms, or at all.
In addition, the terms of existing or future indebtedness agreements, including
the credit agreements relating to our bank facilities and bank term debt and the
indenture for our 8 3/4% senior notes, may restrict us from adopting any of
these alternatives. See "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations."
ADDITIONAL BORROWING CAPACITY -- DESPITE OUR SUBSTANTIAL LEVERAGE, WE WILL BE
ABLE TO INCUR MORE DEBT, WHICH MAY INTENSIFY THE RISKS ASSOCIATED WITH OUR
SUBSTANTIAL LEVERAGE.
The agreements governing our debt will permit us, subject to certain
conditions, to incur a significant amount of additional indebtedness. In
addition, we may incur additional debt under our $250.0 million revolving credit
facility, of which approximately $215.7 million was available to us as of
September 30, 2002. If we incur additional debt, the risks associated with our
substantial leverage, including our ability to service our debt, could
intensify.
RESTRICTIVE COVENANTS IN OUR DEBT INSTRUMENTS -- RESTRICTIONS IMPOSED BY OUR
DEBT AGREEMENTS LIMIT OUR ABILITY TO FINANCE FUTURE OPERATIONS OR CAPITAL NEEDS
OR ENGAGE IN OTHER BUSINESS ACTIVITIES THAT MAY BE IN OUR INTEREST.
The terms of our current debt agreements impose, and the terms of any future
debt may impose, operating and other restrictions on us and certain of our
subsidiaries. In addition, the agreements governing our outstanding credit
facilities also require us to achieve specified financial and operating results
and maintain compliance with specified financial ratios.
The restrictions contained in our debt agreements could:
- - limit our ability to plan for or react to market conditions or meet capital
needs or otherwise restrict our activities or business plans; and
- - adversely affect our ability to finance our operations, strategic
acquisitions, investments or alliances or other capital needs or to engage
in other business activities that would be in our interest.
A breach of any of these restrictive covenants or our inability to comply
with the required financial ratios could trigger cross default provisions in the
agreements governing our other debt. If a default occurs, certain of our debt
agreements allow the lenders to declare all borrowings outstanding, together
with accrued interest and other fees, to be immediately due and payable which
would result in an event of default under the indenture governing our senior
notes and a termination event under the agreements governing our receivables
securitization. Lenders will also have the right in these circumstances to
terminate any commitments they have to provide further borrowings. If we are
unable to repay outstanding borrowings when due, those lenders will also have
the right to
63
proceed against the collateral, including our available cash, granted to them to
secure the indebtedness. If this debt was to be accelerated, our assets may not
be sufficient to repay in full that indebtedness and our other indebtedness. If
not cured or waived, such default could give our lenders the right to enforce
other remedies that would interrupt the operation of our business.
IF CHEESE & PROTEIN INTERNATIONAL, LLC DEFAULTS ON ITS SYNTHETIC LEASE, THE
COMPANY MAY BE REQUIRED TO ASSUME CPI'S OBLIGATION UNDER THE LEASE.
Upon the occurrence of an uncured event of default under CPI's lease, and a
failure by CPI to either obtain a waiver of the event of default, or to obtain
alternative financing to replace the lease, the Company would be required to do
one of the following: 1) assume the obligations of CPI, 2) buy out the lease by
purchasing the leased property at the remaining lease balance amount, 3) fully
cash collateralize the lease, or 4) nominate a replacement Lessee, which
replacement Lessee would be subject to the credit approval of 100% of the
participants to the lease.
If such an event was to occur, and the Company is unable to nominate a
replacement Lessee, the Company may be required to expend a substantial amount
of capital in order to fulfill its obligations to the lease participants. In
addition to the capital outlay, if the Company is required to assume CPI's
obligations, buy out the lease or cash collateralize the lease, such actions
would likely count against the Company's financial covenants.
CHANGES IN CONSUMER PREFERENCES AND DISTRIBUTION CHANNELS COULD DECREASE OUR
REVENUES AND CASH FLOW.
We are subject to the risks of:
- - evolving consumer preferences and nutritional and health-related concerns;
and
- - changes in food distribution channels, such as consolidation of the
supermarket industry and other retail outlets that result in a smaller
customer base and intensify the competition for fewer customers.
To the extent that consumer preference evolves away from products that we
produce for health or other reasons, and we are unable to create new products
that satisfy new consumer preferences, there will be a decreased demand for our
products. There has been a recent trend toward consolidation among food
retailers which we expect to continue. As a result, these food retailers are
selecting product suppliers who can meet their needs nationwide. If our
products, including those licensed to Dean Foods, are not selected by these food
retailers for one or more of our products, our sales volumes could be
significantly reduced. In addition, national distributors or regional food
brokers could choose not to carry our products. Because of the high degree of
consolidation of national food distributors, the decision of a single such
distributor not to carry our products could have a serious impact on our
revenues. Any shift in consumer preferences away from our products could
decrease our revenues and cash flow and impair our ability to fulfill our
obligations under our debt obligations and operate our business.
In the first quarter of 2002, we launched our brand repositioning campaign
in our dairy foods business to further strengthen the LAND O LAKES brand. The
success of our brand repositioning campaign in increased demand for, and sales
of, our products depends on consumer preferences and consumer reaction to our
emphasis on "Simple Goodness Living."
Our animal feed business relies on the sale of animal feed products to
consumers who own animals for recreational purposes or hobbies. The impact of an
extended economic downturn in the U.S. economy could cause some of these owners
to sell their animals or to seek alternative, less expensive products.
COMPETITION IN THE INDUSTRY MAY REDUCE OUR SALES AND MARGINS.
Our business segments operate in highly competitive industries. In addition,
some of our business segments compete with companies that have greater capital
resources, research and development staffs, facilities, diversity of product
lines and brand recognition than ours. Increased competition as to any of our
products could result in reduced prices which would reduce our sales and
margins.
Our competitors may succeed in developing new or enhanced products which are
better than ours. These companies may also prove to be more successful in
marketing and selling their products than we are with ours.
OUR OPERATING RESULTS FLUCTUATE BY SEASON AND ARE AFFECTED BY EXTREME WEATHER
CONDITIONS.
64
Our operating results within many of our segments are affected by seasonal
fluctuations of our sales and operating profits. There is significantly
increased demand for butter in the months prior to Thanksgiving and Christmas.
Because our supply of milk is lowest at this time, we produce and store surplus
quantities of butter in the months preceding the increase in demand for butter.
As a result, we are subject both to the risk that butter prices may decrease and
that increased demand for butter may never materialize, resulting in decreased
net sales.
Our animal feed sales are seasonal, with a higher percentage of sales
generated during the fourth and first quarters of the year. This seasonality is
driven largely by weather conditions affecting sales of our beef cattle
products. If the weather is particularly warm during the winter, then sales of
feed for beef cattle may decrease because the cattle may be better able to graze
under warmer conditions.
The sales of crop seed and crop nutrient and crop protection products are
dependent upon the planting and growing season, which varies from year to year,
resulting in both highly seasonal patterns and substantial fluctuations in our
quarterly sales and operating profits. Most sales of our seed products and of
Agriliance's agronomy products are in the first half of the year during the
spring planting season in the United States. If the spring is particularly wet,
farmers will not apply crop nutrient and crop protection products because they
will be washed away and may be ineffective if applied. We experienced volume
shift in crop seed volume from the first quarter of 2002 to the fourth quarter
of 2001, compared to historical results. This crop seed volume shift resulted
from third-party seed suppliers' incentives to customers to take seed product
early.
Live hog and wholesale pork prices are also affected by seasonal factors.
Because of production times for hogs, there are generally fewer hogs available
in the second quarter, causing live hog and wholesale pork prices to be higher
at these times. Conversely, there are generally more hogs available in the
fourth quarter, which generally causes live hog and wholesale pork prices to be
lower on average during these months.
In addition, severe weather conditions and natural disasters, such as
floods, droughts, frosts or earthquakes, or adverse growing conditions, diseases
and insect-infestation problems may reduce the quantity and quality of
commodities available for processing by us. For example, dairy cows produce less
milk when subjected to extreme weather conditions, including hot and cold
temperatures. A significant reduction in the quantity or quality of commodities
harvested or produced due to adverse weather conditions, disease, insect
problems or other factors could result in increased processing costs and
decreased production, with adverse financial consequences to us.
INCREASED ENERGY AND GAS COSTS COULD INCREASE OUR EXPENSES AND REDUCE OUR
PROFITABILITY.
We require a substantial amount of electricity, natural gas and gasoline to
manufacture, store and transport our products. The prices of electricity,
natural gas and gasoline fluctuate significantly over time. Many of our products
compete based on price and we may not be able to pass on increased costs of
production, storage or transportation to our customers. As a result, increases
in the cost of electricity, natural gas or gasoline could substantially harm our
business and results of operations. For instance, prices for natural gas, a key
component in the manufacture of fertilizer, increased from approximately $2.50
per million Btu in January 2000 to approximately $10.00 per million Btu in
January 2001. Depending upon the type of fertilizer produced, a one dollar
increase in the price of gas can result in increased fertilizer costs ranging
from $11.70 to $33.50 per ton. Agriliance was not able to pass on the entire
increase in fertilizer costs to customers, therefore Agriliance's margins on
fertilizer products were lower than they would have been had natural gas and
fertilizer costs remained constant. The higher sales price of fertilizer
resulted in a reduction of expected sales volume. Increases in natural gas
prices may not occur to the same degree in countries where natural gas does not
have as many other uses, such as countries with temperate climates where natural
gas in not used as a heating fuel. As a result of these demand differences,
fertilizer producers in the United States may be at a competitive disadvantage
to some international competitors during natural gas price increases.
Our dairy business requires a continuous supply of energy to refrigerate raw
materials and finished products. Our largest dairy processing facility is
located in California, which experienced an energy crisis that disrupted our
dairy processing operations and increased our expenses. As a result of blackouts
at our Tulare, California plant, we have added electrical generating capacity.
Future blackouts at this or other plants, however, may result in the
interruption of our processing operations and the loss of perishable ingredients
and products which could result in substantial financial losses.
AN OVERSUPPLY OF FOOD PROTEIN IN THE U.S. MARKET COULD CONTINUE TO REDUCE OUR
NET SALES AND CASH FLOWS.
65
Our animal feed segment supplies feed to farmers and specialized livestock
producers for use in their commercial production of livestock. When the price
that these producers receive for their livestock declines as a result of an
oversupply of food proteins (such as beef cattle, swine and chicken) in the
market, such producers may decide to lower their production levels or to seek
alternative, lower margin products, resulting in lower net sales and cash flows
for us.
OUTBREAKS OF DISEASE CAN REDUCE OUR NET SALES AND OPERATING MARGINS.
The productivity and profitability of our businesses depend on animal and
crop health and on disease control.
We face the risk of outbreaks of mad cow disease, which could lead to the
destruction of beef cattle and dairy cows and decreased demand for dairy and
beef products. If this occurs, we would also face reduced milk supply and
increased cost to produce our dairy products, which could reduce our sales and
operating margins. In addition, we could have decreased demand for our feed
products as dairy and beef producers decrease their herd sizes due to decreased
demand for dairy and beef products.
We face the risk of outbreaks of foot-and-mouth disease, which could lead to
a massive destruction of cloven-hoofed animals such as dairy cattle, beef
cattle, swine, sheep and goats and significantly reduce the demand for meat
products. Because foot-and-mouth disease is highly contagious and destructive to
susceptible livestock, any outbreak of foot-and-mouth disease could result in
the widespread destruction of all potentially infected livestock. Our feed
operations could suffer as a result of decreased demand for feed products. If
this happens, we could also have difficulty procuring the milk we need for our
dairy operations and incur increased cost to produce our dairy products, which
could reduce our sales and operating margins. In addition, we may be prevented
from selling or transporting hogs.
Outbreaks of plant diseases and pests could destroy entire crops of plants
for which we sell crop seed. If this occurs, the crops grown to produce seed
could also be destroyed, resulting in a shortage of crop seed available for us
to sell for the next planting season. In addition, there may be decreased demand
for our crop seed from farmers who choose not to plant those species of crops
affected by these diseases or pests. These shortages and decreased demand could
reduce our sales.
THE SHIFT IN SEED SALES VOLUME FROM THE FIRST QUARTER INTO THE FOURTH QUARTER
MAY NOT RECUR.
In the fourth quarter of 2001, we offered incentive programs to our
customers which encouraged them to purchase seed in the fourth quarter rather
than waiting until the first quarter of 2002. Although we are offering similar
incentive programs in the fourth quarter of 2002, if our customers do not find
the incentive programs as appealing as the ones we offered last year, our
customers may wait until the first quarter of 2003 to make their seed purchases.
CHANGES IN THE MARKET PRICES OF THE DAIRY AND AGRICULTURAL COMMODITIES THAT WE
USE AS INPUTS AS WELL AS THE PRODUCTS WE MARKET MAY CAUSE OUR OPERATING PROFIT
AND THE LIKELIHOOD OF RECEIVING DIVIDENDS FROM OUR JOINT VENTURES TO DECREASE.
Many of our products, particularly in our dairy foods, animal feed and swine
segments, use dairy or agricultural commodities as inputs or constitute dairy or
agricultural commodity outputs. Consequently, increased cost of commodity inputs
and decreased market price of commodity outputs may reduce our operating profit.
We are major purchasers of commodities used as inputs in our dairy foods
segment, namely milk, cream, butter and bulk cheese. Our dairy food outputs,
namely butter, cheese and nonfat dry milk, are also commodities. We inventory a
significant amount of the cheese and butter products we produce for sale to our
customers at a later date and at the market price on that date. For example, we
build significant butter inventories in the spring when milk supply is highest
for sale to our retail customers in the fall when butter demand is highest. If
the market price we receive at the time we sell our products is less than the
market price on the day we made the products, we will have lower (or negative)
margins which may have a material adverse impact on our results of operations.
In addition, we maintain significant inventories of cheese for aging and face
the same risk with respect to these products.
In 1999, our earnings were significantly impacted by the dramatic declines
in the price of cheese and butter, which caused significant devaluations of our
inventory of cheese products and, to a lesser extent, butter. Based on data from
the Chicago Mercantile Exchange, commodity block cheese prices began the year at
$1.90 per pound and finished at $1.20 per pound, and commodity butter prices
began at $1.43 per pound and finished at $0.88 per pound. These declining
commodity prices occurred throughout the year as we were building our inventory
necessary during the peak sales periods of fall and winter. The resulting $62.1
million inventory write-down partially accounted for the decrease in earnings of
the dairy foods segment, as compared with 1998.
The animal feed segment follows industry standards for feed pricing. The
feed industry generally prices products on the basis of income over ingredient
cost ("IOIC") per ton of feed. This practice mitigates the impact of volatility
in commodity ingredient markets on our animal feed margins. However, if our
commodity input prices were to increase dramatically, we may be unable to pass
these prices on to our customers, who may find alternative feed sources at lower
prices or may exit the market entirely. This increased expense could reduce our
profitability.
We have ownership interests in swine. In recent years, the market for hogs and
wholesale pork has been the subject of extreme
66
market fluctuations as a result of a number of factors, including industry
expansion, processor capacity and consumer demand. In December 1998, the price
of hogs hit its lowest point in nearly forty years, resulting in the price we
received for a finished hog being substantially less than the cost to produce
the hog. The prices for weanling and feeder pigs also decreased dramatically. As
a result, in the fiscal years ended December 31, 2000 and 1999, on a pro forma
basis, we experienced operating losses in the swine production business of
approximately $8.3 million and $42.0 million, respectively. The Purina Mills
portion of these losses was largely responsible for Purina Mills filing for
bankruptcy.
During the fiscal years ended December 31, 2000 and 1999, a large portion of
these losses were attributable to our cost-plus contracts (or comparable
contracts of Purina Mills), which guarantee swine producers certain minimum
prices for feeder pigs and market hogs. Although we do not intend to renew or
extend these contracts, we may continue to incur losses under these contracts
until the last ones expire in 2004.
Our MoArk joint venture produces and markets eggs. Recently, the price of
eggs has been negatively impacted by an oversupply of eggs in the market. An
expected decrease in chick hatch and other changes expected to occur as a result
of the new animal welfare guidelines may not materialize. If these changes do
not occur, the supply of eggs may not materially decrease, and the price of eggs
may not significantly increase. To the extent the price of eggs remains low,
MoArk's ability to make a dividend distribution to the Company will be
diminished.
DECREASE IN MILK SUPPLY COULD DECREASE OUR SALES AND INCREASE OUR COST OF
PRODUCTION.
We operate 14 dairy facilities which are located in different regions of the
United States. Milk production in certain regions, including the Midwest and
Northeast is decreasing as smaller producers in these regions have ceased milk
production and larger producers in the West have increased milk production.
Since 1990, cow numbers have declined 16% in Minnesota and 14% in Wisconsin and
the Minnesota/Wisconsin share of nationwide dairy manufacturing volume has
declined from 40% to 28%. In addition, a producer, whether a member or a
non-member, may decide not to supply milk to us or may decide to stop supplying
milk to us when the term of its contractual obligation expires. Where milk
production is not sufficient to fully support our operations, or where producers
decide not to supply us with milk, we may not be able to operate our plants at a
capacity that is profitable, may be forced to transport milk from a distance or
may be forced to pay higher prices for our milk supply. This could decrease our
operating margins and could decrease our net sales as a result of our inability
to meet customer demand.
In response to decreased milk production in the Upper Midwest, we are
restructuring our dairy facility infrastructure to increase production
efficiencies and reduce costs. The success and cost of this restructuring will
be negatively affected if the demand for cheese and dairy products decreases,
our competitors increase the volume of dairy products they produce or the milk
supply in the Upper Midwest continues to decrease.
WE OPERATE THROUGH JOINT VENTURES IN WHICH OUR RIGHTS TO EARNINGS AND TO CONTROL
THE JOINT VENTURE ARE LIMITED.
We produce, market and sell products through numerous joint ventures with
unaffiliated third parties. Our feed and agronomy businesses are primarily
operated through joint ventures.
The terms of each joint venture are different, but our joint venture
agreements generally contain:
- - restrictions on our ability to transfer our ownership interest in the joint
venture;
- - no right to receive distributions without the unanimous consent of the
members of the joint venture; and
- - noncompetition arrangements restricting our ability to engage independently
in the same line of business as the joint venture.
67
In addition to these restrictions, in connection with the formation of some of
our joint ventures, we have entered into purchase or supply agreements which
require us to purchase a minimum amount of the products produced by the joint
venture or supply a minimum amount of the raw materials used by the joint
venture. The day-to-day operations of some of our joint ventures are managed by
us through a management contract and others are managed by other joint venture
members. As a result, we do not have day-to-day control over certain of these
companies. See "Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a discussion of our material joint
ventures.
AGRILIANCE'S BUSINESS MAY BE ADVERSELY AFFECTED BY AGRILIANCE'S DEPENDENCE UPON
ITS SUPPLIERS.
Agriliance relies on a limited number of suppliers for the agronomy products
it sells. In 2002, approximately 58% of Agriliance's crop protection products
were sourced from three suppliers. In the event Agriliance is unable to purchase
its agronomy products on favorable terms from these suppliers, Agriliance may be
unable to find suitable alternatives to meet its product needs. In addition,
Agriliance procures approximately 80% of its fertilizer needs from CF Industries
and Farmland Industries. Farmland Industries initiated Chapter 11 bankruptcy
proceeding on May 31, 2002. As of September 30, 2002, Farmland Industries was
continuing to run its fertilizer plants and was meeting its delivery obligation
to Agriliance. Agriliance may be unable to meet its fertilizer supply needs on
suitable terms for future planting seasons if it is unable to purchase its
fertilizer needs on favorable terms from both CF Industries and Farmland.
A LOSS OF OUR COOPERATIVE TAX STATUS COULD INCREASE OUR TAX LIABILITY.
Subchapter T of the Internal Revenue Code sets forth rules for the tax
treatment of cooperatives. As a cooperative, we are not taxed on earnings from
member business that we deem to be patronage income allocated to our members.
However, we are taxed as a typical corporation on the remainder of our earnings
from our member business (those earnings which we have not deemed to be
patronage income) and on earnings from nonmember business. If we were not
entitled to be taxed as a cooperative, our tax liability would be significantly
increased.
OUR LIMITED ACCESS TO EQUITY MARKETS COULD ADVERSELY AFFECT OUR ABILITY TO
OBTAIN ADDITIONAL EQUITY CAPITAL.
As a cooperative, we may not sell our common stock in the traditional equity
markets. In addition, our articles of incorporation and by-laws contain
limitations on dividends and liquidation preferences of any preferred stock we
issue. These limitations restrict our ability to raise equity capital and may
adversely affect our ability to compete with entities that do not face similar
restrictions.
WE MAY NOT SUCCESSFULLY IMPLEMENT THE STRATEGIES RELATING TO OUR RECENT
ACQUISITIONS OR ACHIEVE THE ANTICIPATED BENEFITS FROM THESE ACQUISITIONS.
In addition to the acquisition of Purina Mills, we have added more than 20
joint ventures and acquisitions over the past five years. However, Purina Mills
represents our largest acquisition to date. The integration and consolidation of
Purina Mills as well as the other acquisitions into our business require
substantial management, financial and other resources. Such integration involves
a number of significant risks, including:
- - unforeseen liabilities;
- - unanticipated problems with the quality of the assets of the acquired
businesses;
- - loss of customers;
- - personnel turnover;
- - loss of relationships with suppliers or service providers; and
- - diversion of management's attention from other aspects of our business.
The effects of these risks and our inability to integrate and manage Purina
Mills and the other acquired businesses successfully or to achieve a substantial
portion of the anticipated cost savings from these acquisitions in the timeframe
we anticipate, could have a material adverse effect on our business, financial
condition or results of operations. See "Item 2. Management's Discussion and
68
Analysis of Financial Condition and Results of Operations."
OUR OPERATIONS ARE SUBJECT TO NUMEROUS LAWS AND REGULATIONS, EXPOSING US TO
POTENTIAL CLAIMS AND COMPLIANCE COSTS THAT COULD ADVERSELY AFFECT OUR BUSINESS.
We are subject to Federal, state and local laws and regulations relating to
the manufacturing, labeling, packaging, health and safety, sanitation, quality
control, fair trade practices, and other aspects of our business. In addition,
zoning, construction and operating permits are required from governmental
agencies which focus on issues such as land use, environmental protection, waste
management, and the movement of animals across state lines. These laws and
regulations may, in certain instances, affect our ability to develop and market
new products and to utilize technological innovations in our business. In
addition, changes in these rules might increase the cost of operating our
facilities or conducting our business which would adversely affect our finances.
Our dairy business is affected by Federal price support programs and federal
and state pooling and pricing programs to support the prices of certain products
we sell. Federal and certain state regulations help ensure that the supply of
raw milk flows in priority to fluid milk and soft cream producers before
producers of hard products such as cheese and butter. In addition, as a producer
of dairy products, we participate in the Federal market order system and pay
into regional "pools" for the milk we use based on the amount of each class of
dairy product we produce and the price of those products. If any of these
programs was no longer available to us, the prices we pay for milk could
increase and reduce our profitability.
In addition, as a manufacturer of food and animal feed products, we are
subject to the Federal Food, Drug and Cosmetic Act and regulations issued
thereunder by the Food and Drug Administration ("FDA"). The pasteurization of
our milk and milk products is also subject to inspection by the United States
Department of Agriculture. Several states also have laws that protect feed
distributors or restrict the ability of corporations to engage in farming
activities. These regulations may require us to alter or restrict our operations
or cause us to incur additional costs in order to comply with the regulations.
INABILITY TO PROTECT OUR TRADEMARKS AND OTHER PROPRIETARY RIGHTS COULD DAMAGE
OUR COMPETITIVE POSITION.
We rely on patents, copyrights, trademarks, trade secrets, confidentiality
provisions and licensing arrangements to establish and protect our intellectual
property. Any infringement or misappropriation of our intellectual property
could damage its value and could limit our ability to compete. We may have to
engage in litigation to protect our rights to our intellectual property, which
could result in significant litigation costs and require a significant amount of
management's time.
We license our LAND O LAKES and the Indian Maiden logo trademarks to certain
of our joint ventures and other third parties for use in marketing certain of
their products. We have invested substantially in the promotion and development
of our trademarked brands and establishing their reputation as high-quality
products. Actions taken by these parties may damage our reputation and our
trademarks' value.
We believe that the recipes and production methods for our dairy and spread
products and formulas for our feed products are trade secrets. In addition, we
have amassed a large body of knowledge regarding animal nutrition and feed
formulation which we believe to be proprietary. Because most of this proprietary
information is not patented, it may be more difficult to protect. We rely on
security procedures and confidentiality agreements to protect this proprietary
information, however such agreements and security procedures may be insufficient
to keep others from acquiring this information. Any such dissemination or
misappropriation of this information could deprive us of the value of our
proprietary information.
Purina Mills, LLC, a wholly-owned subsidiary of Land O'Lakes Farmland Feed
LLC licenses the trademarks Purina, Chow and the "Checkerboard" Nine Square Logo
under a perpetual, royalty-free license from Nestle Purina PetCare Company.
Under the terms of the license agreement, Nestle Purina PetCare Company retains
primary responsibility for protecting the licensed trademarks from infringement.
If Nestle Purina PetCare Company fails to assert its rights to the licensed
trademarks, Purina Mills may be unable to stop such infringement or cause them
to do so. Any such infringement of the licensed trademarks, or of similar
trademarks of Nestle Purina PetCare Company, could result in a dilution in the
value of the licensed trademarks.
OUR BRAND NAMES COULD BE CONFUSED WITH NAMES OF OTHER COMPANIES WHO, BY THEIR
ACT OR OMISSION, COULD ADVERSELY AFFECT THE VALUE OF OUR BRAND NAMES.
Purina Mills' products are generally marketed under the trademarks Purina, Chow
and the "Checkerboard" Nine Square Logo under a perpetual, royalty-free license
from Nestle Purina PetCare Company. Nestle Purina PetCare Company markets widely
69
recognized products under the same trademarks and has given other unaffiliated
companies the right to market products under these trademarks. A competitor of
ours, Cargill, licenses from Nestle Purina PetCare Company the right to market
the same types of products which Purina Mills sells under these trademarks in
countries other than the United States. Acts or omissions by Nestle Purina
PetCare Company or other unaffiliated companies may adversely affect the value
of the Purina, Chow and the "Checkerboard" Nine Square Logo trademarks and the
demand for Purina Mills' products. Third-party announcements or rumors about
these unaffiliated companies could also have these negative effects.
PRODUCT LIABILITY CLAIMS OR PRODUCT RECALLS COULD ADVERSELY AFFECT OUR BUSINESS
REPUTATION AND EXPOSE US TO INCREASED SCRUTINY BY FEDERAL AND STATE REGULATORS.
The sale of food products for human consumption involves the risk of injury
to consumers and the sale of animal feed products involves the risk of injury to
those animals as well as human consumers of those animals. Such hazards could
result from:
- - tampering by unauthorized third parties;
- - product contamination (such as listeria, E. coli. and salmonella) or
spoilage;
- - the presence of foreign objects, substances, chemicals, and other agents;
- - residues introduced during the growing, storage, handling or transportation
phases; or
- - improperly formulated products which either do not contain the proper
mixture of ingredients or which otherwise do not have the proper attributes.
Some of the products we sell are produced for us by third parties, or
contain inputs manufactured by third parties, and such third parties may not
have adequate quality control standards to assure that such products are not
adulterated, misbranded, contaminated or otherwise defective. In addition, we
license our LAND O LAKES brand for use on products produced and marketed by
third parties, for which we receive royalties. We may be subject to claims made
by consumers as a result of products manufactured by these third parties which
are marketed under our brand names.
Consumption of our products may cause serious health-related illnesses and
we may be subject to claims or lawsuits relating to such matters. Even an
inadvertent shipment of adulterated products is a violation of law and may lead
to an increased risk of exposure to product liability claims, product recalls
and increased scrutiny by federal and state regulatory agencies. Such claims or
liabilities may not be covered by our insurance or by any rights of indemnity or
contribution which we may have against others in the case of products which are
produced by third parties. In addition, even if a product liability claim is not
successful or is not fully pursued, the negative publicity surrounding any
assertion that our products caused illness or injury could have a material
adverse effect on our reputation with existing and potential customers and on
our brand image. In the past, we have voluntarily recalled certain of our
products in response to reported or suspected contamination. If we determine to
recall any of our products, we may face material consumer claims.
OUR BUSINESS IS SUBJECT TO THE RISK OF ENVIRONMENTAL LIABILITY AND WE COULD BE
NAMED AS A RESPONSIBLE OR POTENTIALLY RESPONSIBLE PARTY.
Many of our current and former facilities have been in operation for many
years and, over that time, we and other operators of those facilities have
generated, used, stored, or disposed of substances or wastes that are or might
be considered hazardous under applicable environmental laws, including chemicals
and fuel stored in underground and above-ground tanks, animal wastes and large
volumes of wastewater discharges. As a result, the soil and groundwater at or
under certain of our current and former facilities may have been contaminated,
and we may be required to make material expenditures to investigate, control and
remediate such contamination.
We have been identified as a potentially responsible party under the federal
Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA")
at several national priority list sites and currently have unresolved liability
with respect to the past disposal of hazardous substances at several of our
current and former facilities and waste disposal facilities operated by third
parties. CERCLA may impose joint and several liability on owners, operators and
users of a facility for the costs of investigation and remediation of
contaminated properties, regardless of fault or the legality of the original
disposal.
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In addition, federal and state environmental authorities have proposed new
regulations and attempted to apply certain existing regulations for the first
time to agricultural operations. These regulations could result in significant
restraints on some of our operations, particularly our swine operations, and
could require us to spend significant amounts of money to bring these operations
into compliance.
STRIKES OR WORK STOPPAGES BY OUR UNIONIZED WORKERS COULD DISRUPT OUR BUSINESS.
As of September 30, 2002, approximately 26% of our employees were covered by
collective bargaining agreements, some of which are due to expire within the
year. Our inability to negotiate acceptable contracts with the unions upon
expiration of these contracts could result in strikes or work stoppages and
increased operating costs as a result of higher wages or benefits paid to union
members or replacement workers. If the unionized workers were to engage in a
strike or work stoppage, or other non-unionized operations were to become
unionized, we could experience a significant disruption of our operations or
higher ongoing labor costs.
THERE IS NO ASSURANCE THAT OUR SENIOR MANAGEMENT TEAM OR OTHER KEY EMPLOYEES
WILL REMAIN WITH US.
We believe that our ability to successfully implement our business strategy
and to operate profitably depends on the continued employment of our senior
management team and other key employees. If members of the management team or
other key employees become unable or unwilling to continue in their present
positions, the operation of our business would be disrupted and we may not be
able to replace their skills and leadership in a timely manner to continue our
operations as currently anticipated. We operate generally without employment
agreements with, or key person life insurance on the lives of, our key
personnel.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
COMMODITY RISK
In the ordinary course of business, we are subject to market risk resulting
from changes in commodity prices associated with dairy and other agricultural
markets. See "Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview -- Factors Affecting
Comparability -- Dairy and Agricultural Commodity Inputs and Outputs." To manage
the potential negative impact of price fluctuations, we engage in various
hedging and other risk management activities.
As part of our trading activity, we utilize futures and option contracts
offered through regulated commodity exchanges to reduce risk on the market value
of our inventories and our fixed or partially fixed purchase and sale contracts.
We do not utilize hedging instruments for speculative purposes.
Certain commodities cannot be hedged with futures or option contracts
because such contracts are not offered for these commodities by regulated
commodity exchanges. Inventories and purchase contracts for those commodities
are hedged with forward sales contracts to the extent practical so as to arrive
at a net commodity position within the formal position limits set by us and
deemed prudent for each of those commodities. Commodities for which futures
contracts and options are available are also typically hedged first in this
manner, with futures and options used to hedge within position limits that
portion not covered by forward contracts.
The notional or contractual amount of futures contracts provides an
indication of the extent of our involvement in such instruments for the dates
and the periods provided below, but does not represent exposure to market risk
or future cash requirements under certain of these instruments. A summary of our
futures contracts follows:
AT SEPTEMBER 30,
-----------------------------------------------
2002 2001
---------------------- ----------------------
NOTIONAL FAIR NOTIONAL FAIR
AMOUNT VALUE AMOUNT VALUE
--------- --------- --------- ---------
(IN THOUSANDS)
Commodity futures contracts
Commitments to purchase ... $ 114,978 $ 880 $ 68,279 $ (2,418)
Commitments to sell ....... (63,098) 215 (36,709) 160
--------- --------- --------- ---------
Total outstanding
Derivatives ........... $ 51,880 $ 1,095 $ 31,570 $ (2,258)
========= ========= ========= =========
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THREE MONTHS ENDED SEPTEMBER 30,
------------------------------------------
2002 2001
-------------------- ------------------
REALIZED REALIZED
NOTIONAL GAINS NOTIONAL GAINS
AMOUNT (LOSSES) AMOUNT (LOSSES)
--------- -------- -------- --------
(IN THOUSANDS)
Commodity futures contracts
Total volume of exchange
traded contracts:
Commitments to purchase ........... $38,714 $ 1,650 $20,374 $ 2,294
Commitments to sell ............... $ 1,341 $ 1,672 $ 5,332 $ 3,162
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------
2002 2001
--------------------- --------------------
REALIZED REALIZED
NOTIONAL GAINS NOTIONAL GAINS
AMOUNT (LOSSES) AMOUNT (LOSSES)
-------- -------- -------- --------
(IN THOUSANDS)
Commodity futures contracts
Total volume of exchange
traded contracts:
Commitments to purchase ..... $ 189,412 $ 1,324 $ 114,087 $ 2,189
Commitments to sell ......... $(155,441) $ 2,554 $(136,028) $ (4,280)
INTEREST RATE RISK
We are exposed to changes in interest rates. As of December 31, 2001 and
September 30, 2002, we had $575 million and $534 million, respectively, in debt
outstanding under the credit agreements relating to the term loans and revolving
credit facility, all of which is variable rate debt. Interest rate changes
generally do not affect the market value of this debt but do impact the amount
of our interest payments and, therefore, our future earnings and cash flows,
assuming other factors are held constant. Holding other variables constant,
including levels of indebtedness as of September 30, 2002, a one-percentage
point increase in interest rates would have an estimated negative impact on
pretax earnings and cash flows for the next twelve months of approximately $5.3
million.
INFLATION RISK
Inflation is not expected to have a significant impact on our business,
financial condition or results of operations. We generally have been able to
offset the impact of inflation through a combination of productivity
improvements and price increases.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
The Company's Chief Executive Officer and Chief Financial Officer
evaluated the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in rule 13a-14(c) under
the Exchange Act) as of a date (the "Evaluation Date") within 90 days
prior to the filing date of this quarterly report on Form 10-Q. Based
upon their evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that, as of the Evaluation Date, our disclosure
controls and procedures were effective in timely alerting them to the
material information relating to us (or our consolidated subsidiaries)
required to be included in our periodic SEC filings.
(b) Changes in internal controls.
There were no significant changes made in our internal controls during
the period covered by this report or in other factors that could significantly
affect these controls subsequent to the date of their evaluation and there were
no corrective actions with regard to significant deficiencies and material
weaknesses.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
72
EXHIBIT
NO. DESCRIPTION
--- -----------
3.1 Restated Articles of Incorporation of Land O'Lakes, Inc., as
amended, August 1998. (1)
3.2 By-Laws of Land O'Lakes Inc., as amended, December 2000. (1)
4.1 Credit Agreement among Land O'Lakes, Inc., the Lenders party
thereto and The Chase Manhattan Bank, dated as of October 11,
2001. (1)
4.2 First Amendment dated November 6, 2001 to the Credit Agreement
dated October 11, 2001. (1)
4.3 Second Amendment dated February 15, 2002 to the Credit
Agreement dated October 11, 2001. (1)
4.4 Guarantee and Collateral Agreement among Land O'Lakes, Inc.
and certain of its subsidiaries and The Chase Manhattan Bank,
dated as of October 11, 2001. (1)
4.5 Indenture dated as of November 14, 2001, among Land O'Lakes,
Inc. and certain of its subsidiaries, and U.S. Bank, including
Form of 8 3/4% Senior Notes due 2011 and Form of 8 3/4% Senior
Notes due 2011. (1)
4.6 Registration Rights Agreement dated November 14, 2001 by and
among Land O'Lakes, Inc. and certain of its subsidiaries, J.P.
Morgan Securities Inc., SPP Capital Partners, LLC, SunTrust
Robinson Capital Markets, Inc., Tokyo-Mitsubishi International
plc and U.S. Bancorp Piper Jaffray, Inc. (1)
4.7 Purchase Agreement by and between Land O'Lakes, Inc., and
certain of its subsidiaries, J.P. Morgan Securities Inc., SPP
Capital Partners, LLC, SunTrust Robinson Capital Markets,
Inc., Tokyo-Mitsubishi International plc and U.S. Bancorp
Piper Jaffray, Inc., dated as of November 8, 2001. (1)
4.8 Form of Old Note (included in Exhibit 4.5). (1)
4.9 Form of New Note (included in Exhibit 4.5). (1)
10.1 License Agreement, by and between Land O'Lakes, Inc., Dean
Foods Company, Morningstar Foods, Inc. and Dairy Marketing
Alliance, LLC, dated July 24, 2002.
99.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(1) Incorporated by reference to the identical exhibit to the Company's
Registration Statement on Form S-4 filed March 18, 2002 (Registration
No. 333-84486).
(b) REPORTS ON FORM 8-K
There were no reports filed on Form 8-K for Land O'Lakes, Inc. for the
three months ended September 30, 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Arden Hills,
State of Minnesota, on the 14th day of November, 2002.
LAND O'LAKES, INC.
By /s/ DANIEL KNUTSON
------------------------------------------
Daniel Knutson
Senior Vice President
and Chief Financial Officer
(Principal Financial and Accounting Officer)
74
CERTIFICATIONS
I, John E. Gherty, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Land O'Lakes, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in the
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
By /s/ John E. Gherty
---------------------------------------
John E. Gherty
President and
Chief Executive Officer
75
I, Daniel Knutson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Land O'Lakes, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in the
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
By /s/ Daniel Knutson
--------------------------------
Daniel Knutson
Senior Vice President
and Chief Financial Officer
76