FILED PURSUANT TO RULE 424(b)(3)
FILE NO. 333-114966
PROSPECTUS
LAND O'LAKES, INC.
EXCHANGE OFFER FOR $175,000,000
OF
9% SENIOR SECURED NOTES DUE 2010
---------------------
Material Terms of the Exchange Offer:
- We are offering to exchange the notes we sold on December 23, 2003 in a
private offering (the "Old Notes") for new registered notes (the "New
Notes").
- The exchange offer expires at 12:01 a.m., New York City time, on
September 28, 2004 (which is the 21st business day following the date of
this prospectus), unless extended up to 10 additional business days.
- The terms of the New Notes are substantially identical to the Old Notes,
except that the transfer restrictions and registration rights relating to
the Old Notes do not apply to the New Notes.
- As of June 30, 2004, we had indebtedness subordinate to the New Notes
aggregating $190.7 million.
- The exchange of Old Notes for New Notes will not be a taxable transaction
for U.S. Federal income tax purposes, but you should see the discussion
under the caption "Material federal income tax considerations" beginning
on page 166 for more information.
- Tenders of Old Notes may be withdrawn at any time prior to 12:01 a.m.,
New York City time, on the expiration date of the exchange offer.
- We will not receive any cash proceeds from the exchange offer.
- We will exchange all Old Notes that are properly tendered and not validly
withdrawn.
YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS BEGINNING ON PAGE 18 OF THIS
PROSPECTUS
---------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
There is no established trading market for the New Notes or the Old Notes.
However, you may trade the Old Notes in the PORTAL market.
Each broker-dealer that receives New Notes for its own account pursuant to
the exchange offer must acknowledge that it will deliver a prospectus in
connection with resale of such New Notes. The letter of transmittal states that
by so acknowledging and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act. This prospectus, as it may be amended or supplemented from time to time,
may be used by a broker-dealer in connection with resales of New Notes received
in exchange for Old Notes where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities. We have agreed that, for a period of 180 days after the Expiration
Date (as defined herein), we will make this prospectus available to any
broker-dealer for use in connection with any such resale. See "Plan of
Distribution."
This prospectus is dated August 27, 2004
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
Summary............................... 1
Risk factors.......................... 18
Forward looking statements............ 34
Use of proceeds....................... 35
Capitalization........................ 36
Selected financial data............... 38
Management's discussion and analysis
of financial condition and results
of operations....................... 43
Business.............................. 80
Management............................ 99
Description of certain other
indebtedness........................ 109
</Table>
<Table>
<Caption>
PAGE
----
Description of capital securities..... 114
The exchange offer.................... 116
Description of the New Notes.......... 123
Book-entry settlement and clearance... 163
Material federal income tax
considerations...................... 166
Plan of distribution.................. 170
Legal matters......................... 170
Experts............................... 171
Available information................. 171
Index to consolidated financial
statements.......................... F-1
</Table>
Unless the context requires otherwise, in this prospectus, the term the
"Issuer" refers to Land O'Lakes, Inc. on an unconsolidated basis and the terms
"Land O'Lakes," the "Company," "we," "us," and "our" refer to Land O'Lakes
together with its consolidated subsidiaries. References to our animal feed
segment shall mean Land O'Lakes Farmland Feed LLC and its consolidated
subsidiaries except for references to certain insignificant international and
domestic investments which are reported as part of the animal feed segment.
Unless the context requires otherwise, references to Land O'Lakes Farmland Feed
shall mean Land O'Lakes Farmland Feed LLC and its consolidated subsidiaries.
Unless the context requires otherwise, references to Purina Mills refer to
Purina Mills, Inc. prior to the acquisition of Purina Mills, Inc. by Land
O'Lakes and refer to Purina Mills, LLC after that acquisition.
LAND O LAKES, the Indian Maiden logo, Alpine Lace, New Yorker, Extra Melt,
CROPLAN GENETICS, Maxi Care, Amplifier Max, Cow's Match, RALLY and Omolene are
trademarks of Land O'Lakes or its subsidiaries. Purina, Chow and the
"Checkerboard" Nine Square logo, are trademarks of Nestle Purina PetCare Company
and are utilized by us, pursuant to an exclusive, perpetual royalty-free license
from Nestle Purina PetCare Company for use in the United States for marketing
and selling products related to agriculture, animals or animal production. We do
not have the right to use these licensed trademarks outside of the United
States, or in conjunction with any products designed for use with cats, dogs or
humans. We do not have the right to assign any of these licensed trademarks
without the written consent of Nestle Purina PetCare Company.
SUMMARY
This summary highlights some of the information in this prospectus. Because
this is only a summary, it may not contain all of the information that may be
important to you. Therefore, you should read this entire prospectus, especially
"Risk factors" and the financial information contained elsewhere in this
prospectus before making an investment decision.
THE COMPANY
We produce dairy products, animal feed and crop seed in the United States.
In 1921, we were formed as a cooperative designed to meet the needs of dairy
farmers located in the Midwestern United States. We have expanded our business
through acquisitions and joint ventures to diversify our product portfolio, to
leverage our strong portfolio of brand names, to achieve economies of scale and
to extend our geographic coverage. We operate our business through three primary
segments: dairy foods, animal feed and crop seed. In addition, we generate
operational and financial benefits from our three other segments, consisting of
swine, agronomy and layers. We also have additional operations and interests in
a group of joint ventures and investments that are not consolidated in our six
operating segments. Our principal executive offices are located at 4001
Lexington Avenue North, Arden Hills, Minnesota 55112, and our telephone number
is (651) 481-2222.
Dairy Foods. We produce, market and sell butter, spreads, cheese and other
related dairy products. We sell our products under our well-recognized national
brand names and trademarks, including LAND O LAKES, the Indian Maiden logo and
Alpine Lace, as well as under our regional brands such as New Yorker. Our
customer base includes national supermarket and supercenter chains, industrial
customers, including major food processors, and major foodservice customers,
including restaurants, schools, hotels and airlines.
Animal Feed. Through our wholly-owned subsidiary, Land O'Lakes Farmland
Feed, we produce animal feed for both the commercial and lifestyle sectors of
the animal feed market in the United States. Our commercial feed products are
used by farmers and specialized livestock producers who derive income from the
sale of milk, eggs, poultry and livestock. Our lifestyle feed products are used
by customers who own animals, such as horses, rabbits, goats and birds,
principally for non-commercial purposes, as well as laboratory and zoo animals.
Margins on our lifestyle feed products are significantly higher than those on
our commercial feed products. We market our lifestyle animal feed products,
other than dog and cat food, under the Purina and Chow brands and the
"Checkerboard" Nine Square logo. We also market our animal feed products under
the LAND O LAKES Feed label.
Crop Seed. We sell seed for a variety of crops, including alfalfa,
soybeans, corn and forage and turf grasses, under our CROPLAN GENETICS brand. We
also distribute certain crop seed products under third-party brands.
OTHER SEGMENTS, JOINT VENTURES AND INVESTMENTS
Other Segments and Operations. We report three additional segments in our
financial results. The first is comprised of our ownership of certain swine
production activities along with various marketing relationships we have with
other swine producers. The second represents our agronomy business which
consists solely of several unconsolidated joint ventures and investments. The
third is our egg business which is operated through our consolidated joint
venture, MoArk, LLC. We have other immaterial operations that are not included
in any particular segment.
- Swine. We own approximately 64,000 sows which produce pigs we sell as
feeder pigs (which weigh approximately 45 pounds when sold) and market
hogs (approximately 260 pounds). We also purchase and resell feeder pigs.
Our customers are our cooperative members, independent swine processors
and swine producers. Swine sales are made in connection with various
marketing programs. We are in the process of phasing out the cost plus
program, a program which has historically exhibited a high degree of
volatility.
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- Agronomy. Our agronomy segment consists solely of joint ventures and
investments that are not consolidated in our financial results. The two
most significant of these are Agriliance and CF Industries, described
below. For a discussion of our agronomy accounting and results see
"Management's discussion and analysis of financial condition and results
of operations."
- Layers. Our layers segment consists solely of our consolidated joint
venture, MoArk, LLC, discussed below.
- Other. Our remaining operations include various other businesses such as
LOL Finance Co., which provides financing to farmers and livestock
producers.
Joint Ventures and Investments. In addition to the segments already
described, we have multiple joint ventures and investments. Certain of our
significant joint ventures and investments are described below. Other than
Cheese & Protein International and MoArk, which are consolidated unrestricted
subsidiaries, these joint ventures and investments are unconsolidated.
- Agriliance (50% ownership). Agriliance, our joint venture with United
Country Brands, which is wholly owned by CHS Inc., distributes crop
nutrients (including fertilizers and micronutrients) and crop protection
products (including herbicides, pesticides, fungicides and adjuvants) in
the United States. Most of the products distributed by Agriliance are
manufactured by third-party suppliers and are marketed under the
suppliers' brand names. For the year ended December 31, 2003, Agriliance
generated $3,470.5 million in net sales.
- Cheese & Protein International (97.0% ownership). Cheese & Protein
International ("CPI") is a joint venture with a subsidiary of Mitsui &
Co. (USA), which produces mozzarella cheese and whey in its manufacturing
facility in California. The facility began production in May 2002, under
its Phase I installation, with an initial processing capacity of 3.0
million pounds of milk per day. CPI's Phase II installation was completed
in June 2004, which increased its processing capacity to 6.0 million
pounds of milk per day. For the year ended December 31, 2003, CPI
generated $117.4 million in net sales. CPI has been included in our
consolidated results of operation since its inception.
- MoArk. MoArk is a joint venture with Osborne Investments which markets
shell eggs and egg products from approximately 26 million layers (hens)
or approximately 520 million dozen eggs annually. MoArk produces
approximately 50% of the eggs it markets. For the year ended December 31,
2003, MoArk generated $552.4 million in net sales. Since October 1, 2001,
we have been allocated 100% of the income and loss generated by MoArk.
MoArk was consolidated into our financial statements as of July 1, 2003.
We have presumed for accounting purposes that we will acquire the
remaining 42.5% of MoArk from our joint venture partner in 2007 since our
joint venture partner has the right to put its interest to us and we have
the right to purchase its interest. As a result, we do not record a
minority interest in MoArk in our financial statements.
- Advanced Food Products (35% ownership). Advanced Food Products is a
joint venture with a subsidiary of Bongrain, S.A., formed to manufacture
aseptically packaged cheese sauces, snack dips, snack puddings, and ready
to drink dietary beverages. For the year ended December 31, 2003,
Advanced Food Products generated $194.3 million in net sales.
- CF Industries (variable ownership based on allocated member
equities). CF Industries is an eight member cooperative which
manufactures crop nutrients, including nitrogen and phosphate products,
that are distributed by its members or their affiliates. CF Industries
has manufacturing facilities in Florida, Louisiana, and Alberta, Canada.
For the year ended December 31, 2003, CF Industries generated $1,287.3
million in net sales.
- Other Joint Ventures and Investments. We have various other joint
ventures and investments. Our other joint ventures and investments
include, among others, Ag Processing Inc (a cooperative of which we are a
member and from which we purchase soybean meal and soybean oil) and
CoBank (a cooperative bank of which we are a member and a debtor).
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HISTORY
Land O'Lakes. We were formed as a Minnesota dairy cooperative corporation
in 1921 and entered the animal feed business in 1928. Since our formation, we
have expanded our business through acquisitions and joint ventures. In 1997, we
merged with Atlantic Dairy Cooperative, a Pennsylvania-based cooperative,
providing us with increased butter production and access to raw milk near our
largest butter markets. In 1998, we merged with Dairyman's Cooperative Creamery
Association of Tulare, California, which increased our access to milk production
in the western United States. Also in 1998, we acquired many of the agricultural
service assets of Countrymark Cooperative, expanding our presence to the eastern
Corn Belt in feed, seed and agronomy.
Land O'Lakes Farmland Feed. In October, 2000, we formed Land O'Lakes
Farmland Feed, an animal feed joint venture with Farmland Industries. Land
O'Lakes and Farmland Industries each contributed substantially all of the assets
of each of their North American animal feed businesses to form the joint
venture. On October 11, 2001, Land O'Lakes acquired Purina Mills, Inc. and
subsequently contributed Purina Mills, Inc. to Land O'Lakes Farmland Feed. In
June 2004, we purchased the remaining 8% of the joint venture held by Farmland
Industries, making it a wholly-owned subsidiary at that time.
COOPERATIVE STRUCTURE
Land O'Lakes was incorporated in Minnesota as a cooperative corporation.
Our cooperative structure resembles that of a typical corporation in most
respects, but with two primary distinctions. First, our common shareholders, or
"members," either supply us with raw materials or purchase our goods and
services. We transact business with our members on an arms-length basis. Second,
to the extent we allocate earnings from member business to our members, we are
allowed to deduct this "patronage income" from our taxable income. Earnings from
non-member business are retained as permanent equity and taxed as corporate
income in the same manner as a typical corporation. In order to obtain this
favorable tax treatment, we must distribute at least 20% of each member's
allocated patronage in cash annually. The portion of patronage not distributed
in cash is retained and allocated to member equities. This equity is distributed
to our members at the discretion of our board of directors through a variety of
programs. These distributions are referred to as "revolvement."
RECENT DEVELOPMENTS
On January 13, 2004, we completed amendments to our senior credit
facilities. Under the amendment to the revolving facility, the lenders committed
to make advances and issue letters of credit until January 2007 in an aggregate
amount not to exceed $185 million, subject to a borrowing base limitation. In
July 2004, the revolving facility was expanded by $15 million to $200 million.
In addition, the amendment to the revolving facility:
- increased the amount available for the issuance of letters of credit
under the revolving facility from $50 million to $75 million;
- increased the spreads used to determine interest rates on the revolving
facility;
- changed the basis on which those spreads and commitment fees for the
revolving facility are determined from our senior secured long-term debt
ratings to the Company's leverage ratio;
- adjusted the leverage ratio covenant contained in the revolving facility;
and
- allows the facility to be increased to up to $250 million. Under the
amendment to the term facility, the lenders also made the same leverage
ratio covenant modification and changed the allocation of certain
mandatory prepayments to the term facility. Under the amendments to the
facilities, we are required to maintain a leverage ratio of initially no
greater than 4.75 to 1, with the maximum leverage ratio decreasing in
increments to 3.75 to 1 by December 16, 2006.
3
On March 31, 2004, we completed an amendment to our receivables
securitization facility. Under the amendment, the facility was increased from
$100 million to $200 million. The amendment incorporates receivables generated
in our dairy segment. The facility already included receivables generated in our
feed, seed and swine segments. In addition, the amendment increases the
facility's term from one year to three years. Concurrently with the amendment,
we sold additional receivables and applied the proceeds from the expansion to
our outstanding senior bank facilities, which included the mandatory payment in
full of our term loan A facility. The amendment did not include any further
material modifications to the receivables securitization facility.
On April 12, 2004, the Company and Osborne Investments, LLC announced that
an investment banker had been retained to assist the companies in exploring
strategic growth opportunities for MoArk, LLC. While no method for growth has
yet been identified, several alternatives are being considered, including
financing at the joint venture level, partnerships or divestiture.
In June 2004, we completed the purchase of the remaining 8% of Land O'Lakes
Farmland Feed LLC from Farmland Industries, which now gives us 100% ownership of
Land O'Lakes Farmland Feed LLC. The Company paid $12.2 million to acquire the
minority interest. As a result of this acquisition, a minority interest of $55
million for this joint venture is now eliminated from our consolidated balance
sheet.
In June 2004, we announced that we formalized our effort to explore
strategic opportunities for the swine division. We have been in the process of
repositioning this business and have been evaluating several alternatives. We
retained an investment banker to assist in exploring strategic options.
In August 2004, we restated our financial results for certain periods to
reflect the adjustments necessary to correct our consolidated financial
statements due to accounting errors we identified at our Carlisle, PA dairy
facility and reported in our dairy foods segment. The adjustments relate
primarily to the manner in which the Company's Carlisle facility estimated and
recorded monthly financial information. Because all information required to be
recorded was not known at month-end, the Carlisle facility used an accounting
model to estimate certain sales and cost of sales and the related accounts
receivable, accounts payable and inventory and recorded financial information in
accordance with the model. The accounts were not properly reconciled in
subsequent periods to reflect the actual results. Other adjustments relate to
accrual cutoffs and mathematical errors in inventory calculations. These errors
and other adjustments affect periods beginning with the year ended December 31,
1997. The cumulative impact of these adjustments on net earnings through March
31, 2004 was an overstatement of $18.7 million. We have filed amendments to our
quarterly reports on Form 10-Q for the quarters ended March 31, 2003, June 30,
2003, September 30, 2003 and March 31, 2004, and to our annual report on Form
10-K for the year ended December 31, 2003 to furnish restatements of the
financial statements or financial data as of and for the periods included in
such filings. All financial statements and financial data included in this
prospectus have also been restated to reflect adjustments necessary to correct
these errors. See Note 2 of Notes to Consolidated Financial Statements of Land
O'Lakes, Inc. included elsewhere in this prospectus for further information
concerning the restatement.
RISK FACTORS
Prospective purchasers of our New Notes should carefully consider the
information set forth under the heading "Risk factors," together with all of the
other information in this prospectus before making an investment in the New
Notes offered by this prospectus.
4
THE EXCHANGE OFFER
The following summary contains basic information about the exchange offer.
It does not contain all the information that may be important to you. For a more
complete description of the New Notes, please refer to the section of this
prospectus entitled "Description of the New Notes."
Issuer........................ Land O'Lakes, Inc.
Old Notes..................... 9% Senior Secured Notes due 2010, which we
issued on December 23, 2003.
New Notes..................... 9% Senior Secured Notes due 2010, the issuance
of which has been registered under the
Securities Act of 1933. The form and terms of
the New Notes are identical in all material
respects to those of the Old Notes, except that
the transfer restrictions and registration
rights relating to the Old Notes do not apply
to the New Notes.
Exchange Offer................ We are offering to issue up to $175,000,000
aggregate principal amount of the New Notes in
exchange for a like principal amount of the Old
Notes to satisfy our obligations under the
registration rights agreement that we entered
into when the Old Notes were issued in
transactions in reliance upon the exemption
from registration provided by Rule 144A under
the Securities Act.
Expiration Date; Tenders...... The exchange offer will expire at 12:01 a.m.,
New York City time, on September 28, 2004,
unless extended in our sole and absolute
discretion. By tendering your Old Notes, you
represent to us that:
- you are not our "affiliate," as defined in
Rule 405 under the Securities Act;
- any New Notes you receive in the exchange
offer are being acquired by you in the
ordinary course of your business;
- at the time of commencement of the exchange
offer, neither you nor, to your knowledge,
anyone receiving New Notes from you, has any
arrangement or understanding with any person
to participate in the distribution, as
defined in the Securities Act, of the New
Notes in violation of the Securities Act;
- if you are not a participating broker-dealer,
you are not engaged in, and do not intend to
engage in, the distribution of the New Notes,
as defined in the Securities Act;
- if you are a broker dealer, you will receive
the New Notes for your own account in
exchange for Old Notes that were acquired by
you as a result of your market making or
other trading activities and that you will
deliver a prospectus in connection with any
resale of the New Notes you receive. For
further information regarding resales of the
New Notes by participating broker-dealers,
see the discussion under the caption "Plan of
Distribution" beginning on page 170.
Withdrawal; Non-Acceptance.... You may withdraw any Old Notes tendered in the
exchange offer at any time prior to 12:01 a.m.,
New York City time, on September 28, 2004. If
we decide for any reason not to accept
5
any Old Notes tendered for exchange, the Old
Notes will be returned to the registered holder
at our expense promptly after the expiration or
termination of the exchange offer. In the case
of Old Notes tendered by book-entry transfer
into the exchange agent's account at the
Depository Trust Company, any withdrawn or
unaccepted Old Notes will be credited to the
tendering holder's account at DTC. For further
information regarding the withdrawal of
tendered Old Notes, see "The Exchange
Offer -- Terms of the Exchange Offer; Period
for Tendering Old Notes" beginning on page 116
and "The Exchange Offer -- Withdrawal Rights"
beginning on page 119.
Conditions to the Exchange
Offer......................... The exchange offer is subject to customary
conditions, which we may waive. See the
discussion below under the caption "The
Exchange Offer -- Conditions to the Exchange
Offer" beginning on page 120 for more
information regarding the conditions to the
exchange offer.
Procedures for Tendering the
Old Notes..................... Unless you comply with the procedures described
below under the caption "The Exchange
Offer -- Guaranteed Delivery Procedures"
beginning on page 119, you must do one of the
following on or prior to the expiration or
termination of the exchange offer to
participate in the exchange offer:
- tender your Old Notes by sending the
certificates for your Old Notes, in proper
form for transfer, a properly completed and
duly executed letter of transmittal, with any
required signature guarantees, and all other
documents required by the letter of
transmittal, to U.S. Bank National
Association, as exchange agent, at the
address listed below under the caption "The
Exchange Offer -- Exchange Agent" beginning
on page 120, or
- tender your Old Notes by using the book-entry
transfer procedures described below and
transmitting a properly completed and duly
executed letter of transmittal, with any
required guarantees, or an agent's message
instead of the letter of transmittal, to the
exchange agent. In order for a book-entry
transfer to constitute a valid tender of your
Old Notes in the exchange offer, U.S. Bank,
National Association, as exchange agent, must
receive a confirmation of book-entry transfer
of your Old Notes into the exchange agent's
account at DTC prior to the expiration or
termination of the exchange offer. For more
information regarding the use of book-entry
transfer procedures, including a description
of the required agent's message, see the
discussion below under the caption "The
Exchange Offer -- Book-Entry Transfers"
beginning on page 119.
Guaranteed Delivery
Procedures.................... If you are a registered holder of Old Notes and
wish to tender your Old Notes in the exchange
offer, but
- the Old Notes are not immediately available,
6
- time will not permit your Old Notes or other
required documents to reach the exchange
agent before the expiration or termination of
the exchange offer, or
- the procedure for book-entry transfer cannot
be completed prior to the expiration or
termination of the exchange offer,
then you may tender Old Notes by following the
procedures described below under the caption
"The Exchange Offer -- Guaranteed Delivery
Procedures" on page 119.
Special Procedures for
Beneficial Owners............. If you are a beneficial owner whose Old Notes
are registered in the name of the broker,
dealer, commercial bank, trust company or other
nominee and you wish to tender your Old Notes
in the exchange offer, you should promptly
contact the person in whose name the Old Notes
are registered and instruct that person to
tender on your behalf. If you wish to tender in
the exchange offer on your behalf, prior to
completing and executing the letter of
transmittal and delivering your Old Notes, you
must either make appropriate arrangements to
register ownership of the Old Notes in your
name, or obtain a properly completed bond power
from the person in whose name the Old Notes are
registered.
Regulatory Approvals.......... We do not believe that the receipt of any
material federal or state approvals will be
necessary in connection with the exchange
offer, other than the effectiveness of the
Registration Statement of which this prospectus
constitutes a part.
Material Federal Tax
Considerations................ The exchange of the Old Notes for New Notes in
the exchange offer will not be a taxable
transaction for United States Federal income
tax purposes. See the discussion below under
the caption "Material federal income tax
considerations" beginning on page 166 for more
information regarding the tax consequences to
you of the exchange offer.
Use of Proceeds............... We will not receive any cash proceeds from the
exchange offer.
Exchange Agent................ U.S. Bank National Association is the exchange
agent for the exchange offer. You can find the
address and telephone number of the exchange
agent below under the caption "The Exchange
Offer -- Exchange Agent" beginning on page 120.
CONSEQUENCES OF NOT EXCHANGING THE OLD NOTES
If you do not exchange your Old Notes in the exchange offer, your Old Notes
will continue to be subject to the restrictions on transfer described in the
legend on the certificate for your Old Notes. In general, you may offer to sell
your Old Notes only:
- if they are registered under the Securities Act and applicable state
securities laws;
- if they are offered or sold under an exemption from registration under
the Securities Act and applicable state securities laws; or
- if they are offered or sold in a transaction not subject to the
Securities Act and applicable state securities laws.
7
We do not currently intend to register the Old Notes under the Securities
Act. Under some circumstances, however, holders of the Old Notes, including
holders who are not permitted to participate in the exchange offer or who may
not freely resell New Notes received in the exchange offer, may require us to
file, and to cause to become effective, a shelf registration statement covering
resales of Old Notes by these holders. For more information regarding the
consequences of not tendering your Old Notes, see "The Exchange
Offer -- Consequences of Exchanging or Failing to Exchange Old Notes" beginning
on page 116.
SUMMARY DESCRIPTION OF THE NEW NOTES
The terms of the New Notes and those of the outstanding Old Notes are
substantially identical, except that the transfer restrictions, registration
rights and special redemption terms relating to the Old Notes do not apply to
the New Notes. If the exchange offer is not complete within 225 days after the
issuance of the Old Notes on December 23, 2003, we will be required to pay
additional interest to the holders of the Old Notes until the exchange offer is
complete.
ISSUER........................ Land O'Lakes, Inc.
NOTES OFFERED................. $175,000,000 aggregate principal amount of 9%
Senior Secured Notes due 2010.
MATURITY...................... December 15, 2010.
INTEREST PAYMENT DATES........ June 15 and December 15 of each year,
commencing June 15, 2004.
OPTIONAL REDEMPTION........... On or after December 15, 2007, we may redeem
some or all of the New Notes at the redemption
prices listed in the section entitled
"Description of the New Notes -- Optional
redemption." Prior to that date, we may not
redeem the New Notes.
SUBSIDIARY GUARANTEES......... The New Notes will be fully and unconditionally
guaranteed (each such guarantee, a "Subsidiary
Guarantee") on a senior secured basis, jointly
and severally, by each of our domestic
wholly-owned restricted subsidiaries, by each
domestic wholly-owned restricted subsidiary of
Land O'Lakes Farmland Feed LLC (other than LOL
Farmland Feed SPV, LLC), and in the future by
any of our direct or indirect subsidiaries that
incurs any indebtedness or provides a guarantee
under the senior bank facilities while
indebtedness thereunder remains outstanding or
any domestic and, to the extent no material
adverse tax consequences would result
therefrom, foreign restricted subsidiary that
incurs any debt if indebtedness under the
senior bank facilities is not outstanding
(collectively, the "Subsidiary Guarantors").
The New Notes will not initially be guaranteed
by any of our other subsidiaries, including any
of our foreign subsidiaries (the
"Non-Guarantors").
After eliminating intercompany activity, the
Non-Guarantors (excluding LOL Farmland Feed
SPV, LLC) had:
- assets of $588.4 million or 19.8% of our
total assets as of June 30, 2004;
- liabilities of $362.1 million or 19.4% of our
total liabilities as of June 30, 2004
(excluding the $190.7 million of Capital
Securities, see "Description of capital
securities"); and
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- net sales of $483.7 million or 12.0% of our
consolidated net sales for the six months
ended June 30, 2004.
UNRESTRICTED SUBSIDIARIES..... The unrestricted subsidiaries are our
non-wholly owned subsidiaries and LOL Finance
Co. and its subsidiaries. The unrestricted
subsidiaries include Cheese & Protein
International, LOL Finance Co., MoArk, LLC,
certain immaterial feed subsidiaries and the
trust issuer of the Capital Securities. An
unrestricted subsidiary will not be subject to
the restrictive covenants of the indenture. We
will also be able to sell the assets or capital
stock of an unrestricted subsidiary without
restriction and will be allowed to dividend or
distribute the proceeds of these sales on the
terms and subject to the conditions in the
indenture. Under circumstances specified in the
indenture, we will be able to designate other
subsidiaries as unrestricted subsidiaries. As
of the date of this prospectus, all of the
Non-Guarantors are unrestricted subsidiaries,
except LOL Farmland Feed SPV, LLC and certain
of our immaterial foreign subsidiaries.
After eliminating intercompany activity, the
unrestricted subsidiaries had:
- assets of $588.4 million or 19.8% of our
total assets as of June 30, 2004;
- liabilities of $362.1 million or 19.4% of our
total liabilities as of June 30, 2004
(excluding the $190.7 million of Capital
Securities, see "Description of capital
securities"); and
- net sales of $483.7 million or 12.0% of our
total net sales for the six months ended June
30, 2004.
COLLATERAL.................... Our obligations under the New Notes and the
Guarantors' obligations under the Subsidiary
Guarantees will be secured by liens on the
collateral that rank immediately junior in
priority (subject to certain liens permitted by
the indenture) to the liens securing the senior
bank facilities and any other indebtedness
designated by us from time to time (and in
accordance with the indenture governing the New
Notes) to be prior lien indebtedness. The
collateral will initially consist of:
- all of the capital stock of, or other equity
interests in, each wholly-owned restricted
subsidiary of the Issuer and each
wholly-owned restricted subsidiary of Land
O'Lakes Farmland Feed LLC (other than LOL
Farmland Feed SPV, LLC) owned directly by us
or any of the Subsidiary Guarantors (except
that the collateral shall not include more
than 65% of the voting stock of, or other
voting equity interests in, any foreign
subsidiary), but in each case only to the
extent that the aggregate principal amount,
par value, book value as carried by us or
market value (which ever is greatest) of any
pledged securities of any such subsidiary is
not greater than 19.99% of the aggregate
principal amount of the New Notes
outstanding, and
- substantially all of the other assets, in
each case, that are held by us or any of the
Subsidiary Guarantors to the extent that a
9
junior security interest is able to be
granted or perfected therein (but, in each
case, only to the extent that prior lien
indebtedness is secured by a priority lien
thereon).
Due to the limitation described above, pledged
securities of Land O'Lakes Farmland Feed LLC
will be limited to $35.0 million.
INTERCREDITOR AGREEMENT....... Pursuant to an intercreditor agreement, the
liens securing the New Notes will be expressly
junior in priority to all liens that secure (1)
obligations under our senior bank credit
facilities, (2) any future indebtedness
permitted to be incurred under the indenture
governing the New Notes that we designate from
time to time in accordance with the indenture
as prior lien indebtedness and (3) any future
obligations under interest rate protection and
other hedging agreements permitted to be
incurred under the indenture. Pursuant to the
intercreditor agreement, the liens securing the
New Notes and the obligations under the
Subsidiary Guarantees may not be enforced at
any time when obligations secured by prior
liens are outstanding, except for certain
limited exceptions. Any release of all prior
liens and equal liens (subject to certain
limited exceptions) upon any collateral
approved by holders of the liens will also
release the liens securing the New Notes on the
same collateral; provided, that after giving
effect to the release, at least $100.0 million
of obligations secured by such prior liens on
the remaining collateral remain outstanding or
committed and no default or event of default
shall have occurred and be continuing under the
indenture. Amendments or waivers of the prior
lien collateral documents approved by the
holders of the prior liens will also be
effective as to the lien collateral documents
securing the New Notes and the obligations
under the Subsidiary Guarantees. The holders of
the prior liens will receive all proceeds from
any realization on the collateral until the
obligations secured by the prior liens are paid
in full in cash and the commitments with
respect thereto are terminated.
SHARING OF LIENS.............. In addition to the additional indebtedness that
may be secured by the prior liens on the
collateral as described above, certain future
indebtedness permitted to be incurred under the
indenture governing the New Notes may be
secured by liens upon any or all of the
collateral securing the New Notes and the
Subsidiary Guarantees, on an equal and ratable
basis with the liens securing the New Notes and
the Subsidiary Guarantees.
RANKING....................... The New Notes will rank:
- equally in right of payment with all our
existing and future senior indebtedness,
including borrowings under our senior bank
facilities;
- senior in right of payment with any of our
existing and future subordinated
indebtedness;
- effectively junior to (i) our obligations
under the senior bank facilities and all of
our existing and future obligations secured
by a prior lien on the collateral securing
the New Notes, to the extent of the value of
such collateral, and (ii) our
10
obligations under our senior bank facilities
and any other existing and future obligations
that are secured by a lien on assets that are
not part of the collateral securing the New
Notes, to the extent of the value of such
assets; and
- effectively subordinated to all liabilities
(including trade payables) and preferred
stock of each of our subsidiaries that is not
a Subsidiary Guarantor.
Similarly, the Subsidiary Guarantee of each
Subsidiary Guarantor will rank:
- equally in right of payment to all of such
Subsidiary Guarantor's existing and future
senior indebtedness, including its guarantee
of borrowings under the senior bank
facilities;
- senior in right of payment with any of the
Subsidiary Guarantor's existing and future
subordinated indebtedness;
- effectively junior to (i) such Subsidiary
Guarantor's obligations under the senior bank
facilities and all of such Subsidiary
Guarantor's existing and future obligations
secured by a prior lien on the collateral
securing such Subsidiary Guarantee to the
extent of the value of such collateral, and
(ii) such Subsidiary Guarantor's obligations
under our senior bank facilities and any
other existing and future obligations that
are secured by a lien on assets that are not
part of the collateral securing such
Subsidiary Guarantee, to the extent of the
value of such assets; and
- effectively subordinated to all liabilities
(including trade payables) and preferred
stock of each of our subsidiaries that is not
a Subsidiary Guarantor.
After eliminating intercompany activity, as of
June 30, 2004:
- the Issuer had $490.6 million of senior
indebtedness, excluding the Old Notes, unused
commitments under our senior bank facilities
and undrawn letters of credit, $123.3 million
of which was secured by prior liens on the
collateral;
- the Subsidiary Guarantors had $0.8 million of
senior indebtedness, excluding their
guarantees under our senior bank facilities
and the Old Notes, none of which was secured
by prior liens on the collateral; and
- the Issuer and the Subsidiary Guarantors had
no subordinated indebtedness (not including
the Issuer's subordinated guarantee of the
Capital Securities).
Subject to certain conditions, the indenture
relating to the New Notes permits us to incur
additional debt, including debt that may be
secured by prior liens and liens equal to the
liens securing the New Notes on the collateral.
CHANGE OF CONTROL............. Upon the occurrence of a change of control, you
will have the right to require us to purchase
all or a portion of your New Notes at a
purchase price in cash equal to 101% of the
principal amount thereof plus the accrued and
unpaid interest, if any, to
11
the date of redemption. See "Description of the
New Notes -- Change of control."
MATERIAL COVENANTS............ The indenture, among other things, restricts
our ability and the ability of our restricted
subsidiaries to:
- incur additional debt;
- issue redeemable equity interests and
preferred equity interests;
- pay dividends or make other distributions;
- repurchase equity interests;
- make other restricted payments including,
without limitation, investments;
- create liens;
- redeem debt that is junior in right of
payment to the New Notes;
- sell or otherwise dispose of assets,
including capital stock of subsidiaries;
- enter into agreements that restrict dividends
from subsidiaries;
- enter into sale/leaseback transactions;
- enter into mergers or consolidations; and
- enter into transactions with affiliates.
These covenants are subject to a number of
important exceptions and qualifications. See
"Description of the New Notes -- Material
covenants" and "-- Merger and consolidation."
In addition, if we achieve certain debt ratings
from Standard & Poor's and Moody's Investors
Service and meet certain other requirements,
certain of these covenants will no longer apply
and we may elect to release all or any portion
of the collateral.
12
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table sets forth summary consolidated financial information
of Land O'Lakes as of the dates and for the periods indicated.
The consolidated financial information for the years ended December 31,
2003, 2002 and 2001 has been derived from, and should be read together with, the
audited consolidated financial statements of Land O'Lakes and the related notes
included elsewhere in this prospectus. The consolidated financial information as
of and for the six months ended June 30, 2004 and for the six months ended June
30, 2003, has been derived from the unaudited financial statements of Land
O'Lakes and the related notes included elsewhere in this prospectus, which in
our opinion include all adjustments which we consider necessary for the fair
representation of our financial position and results of operations for these
periods. Interim results are not necessarily indicative of the results that can
be expected for a full year.
We acquired Purina Mills on October 11, 2001 and Purina Mills operating
results since October 11, 2001 are included in our consolidated financial
information. See "Management's discussion and analysis of financial condition
and results of operations."
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
------------------- ------------------------------
2004 2003 2003 2002 2001
-------- -------- -------- -------- --------
(DOLLARS IN MILLIONS)
STATEMENT OF OPERATIONS DATA:
Net sales.................................. $4,027.9 $2,851.6 $6,326.1 $5,842.5 $5,857.7
Cost of sales.............................. 3,719.4 2,600.7 5,742.9 5,350.2 5,376.1
-------- -------- -------- -------- --------
Gross profit............................... 308.5 250.9 583.2 492.3 481.6
Selling, general and administrative........ 259.9 225.4 468.3 470.6 382.3
Restructuring and impairment charges(1).... 2.5 2.9 7.5 31.4 3.7
-------- -------- -------- -------- --------
Earnings (loss) from operations.......... 46.1 22.6 107.4 (9.7) 95.6
Interest expense, net...................... 44.0 39.1 82.9 78.7 55.7
Gain on legal settlements(2)............... (4.5) (19.2) (22.8) (155.5) (3.0)
Other (income) expense, net(3)............. (1.5) (0.7) (1.6) (8.2) 23.1
Equity in earnings of affiliated
companies................................ (66.5) (50.4) (57.1) (22.7) (48.6)
Minority interest in earnings of
subsidiaries............................. 1.0 2.9 6.4 5.4 6.9
-------- -------- -------- -------- --------
Earnings before income taxes............. 73.6 50.9 99.6 92.6 61.5
Income tax expense (benefit)............... 11.7 6.3 17.6 (3.8) (6.6)
-------- -------- -------- -------- --------
Net earnings............................. $ 61.9 $ 44.6 $ 82.0 $ 96.4 $ 68.1
======== ======== ======== ======== ========
OTHER FINANCIAL DATA:
Cash flows provided (used) by:
Operating activities..................... $ 176.7 $ 153.4 $ 227.5 $ 22.0 $ 274.3
Investing activities..................... (21.7) (47.4) (35.2) (4.2) (461.2)
Financing activities..................... (195.5) (84.8) (146.3) (83.6) 313.1
Depreciation and amortization.............. 58.2 55.9 120.8 106.8 97.3
Capital expenditures....................... 41.4 35.0 74.1 87.4 83.9
Cash patronage paid to members(4).......... 11.4 4.2 4.2 20.2 30.7
Equity revolvement paid to members(5)...... 21.2 19.5 20.2 17.7 16.2
Ratio of earnings to fixed charges(6)...... 1.4x 1.1x 1.8x 2.0x 1.3x
</Table>
See accompanying Notes to summary consolidated financial data.
13
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
------------------- ------------------------------
2004 2003 2003 2002 2001
-------- -------- -------- -------- --------
(DOLLARS IN MILLIONS)
SELECTED SEGMENT FINANCIAL INFORMATION
DAIRY FOODS
Net sales.................................. $1,942.2 $1,303.8 $2,975.0 $2,898.8 $3,462.1
Earnings (loss) from operations............ 0.5 (6.8) 26.3 (20.5) 60.2
Depreciation and amortization.............. 19.9 21.7 43.0 36.8 42.5
Capital expenditures....................... 23.7 14.1 28.2 32.3 37.7
ANIMAL FEED(7)(8)
Net sales.................................. 1,357.5 1,196.2 2,467.2 2,444.7 1,864.0
Earnings from operations................... 4.9 22.9 56.1 41.7 39.0
Depreciation and amortization.............. 20.3 22.4 44.9 46.6 31.7
Capital expenditures....................... 7.3 9.6 24.0 26.0 24.9
CROP SEED
Net sales.................................. 374.4 303.0 479.3 406.9 413.6
Earnings from operations................... 19.9 17.9 15.0 8.7 10.3
Depreciation and amortization.............. 1.0 1.2 2.2 3.0 5.0
Capital expenditures....................... 1.1 0.3 0.5 0.6 2.7
SWINE(8)
Net sales.................................. 46.0 43.7 91.2 83.2 109.9
(Loss) earnings from operations............ (5.3) (2.2) (3.8) (16.0) 6.0
Depreciation and amortization.............. 1.8 1.7 3.5 3.8 5.6
Capital expenditures....................... 2.4 2.5 5.1 3.1 7.3
AGRONOMY
Net sales.................................. -- -- -- -- --
Loss from operations....................... (7.1) (6.7) (14.0) (18.9) (16.5)
Depreciation and amortization.............. 3.1 3.1 6.1 6.1 6.3
Capital expenditures....................... -- -- -- -- --
LAYERS(9)
Net sales.................................. 318.6 -- 317.8 -- --
Earnings (loss) from operations............ 33.6 (1.0) 28.5 (2.1) (0.3)
Depreciation and amortization.............. 5.4 0.4 6.3 0.9 0.3
Capital expenditures....................... 4.9 -- 3.8 -- --
OTHER/ELIMINATIONS
Net sales.................................. (10.8) 4.9 (4.4) 8.9 8.1
Loss from operations....................... (0.4) (1.5) (0.7) (2.6) (3.1)
Depreciation and amortization.............. 6.7 5.4 14.8 9.6 5.9
Capital expenditures....................... 2.0 8.5 12.5 25.4 11.3
</Table>
See accompanying Notes to summary consolidated financial data.
14
<Table>
<Caption>
JUNE 30, 2004
----------------
(IN MILLIONS)
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and short-term investments............................. $ 69.8
Restricted cash(10)......................................... 20.2
Working capital(11)......................................... 284.9
Property, plant and equipment, net.......................... 613.8
Property under capital leases, net.......................... 105.0
Total assets................................................ 2,972.1
Total debt(12).............................................. 804.1
Capital securities of trust subsidiary...................... 190.7
Obligations under capital lease............................. 106.0
Minority interests.......................................... 8.9
Total equities.............................................. 914.8
</Table>
See accompanying Notes to summary consolidated financial data.
15
NOTES TO SUMMARY CONSOLIDATED FINANCIAL DATA
(1) The following table summarizes restructuring and impairment charges
(reversals):
<Table>
<Caption>
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
-------------- -------------------------
2004 2003 2003 2002 2001
----- ----- ----- ------ ------
(IN MILLIONS)
Restructuring charges (reversals)........... $0.8 $2.5 $3.5 $13.2 $(4.1)
Impairment of assets........................ 1.7 0.4 4.0 18.2 7.8
---- ---- ---- ----- -----
Total..................................... $2.5 $2.9 $7.5 $31.4 $ 3.7
==== ==== ==== ===== =====
</Table>
The restructuring charge of $0.8 million for the six months ended June 30,
2004 resulted from the closing of manufacturing facilities in dairy foods
and the restructuring charge of $2.5 million for the six months ended June
30, 2003 resulted primarily from the closing of facilities in dairy foods
and feed. The restructuring charges of $3.5 million, $13.2 million and
reversal of ($4.1) million for the years ended December 31, 2003, 2002 and
2001, respectively, primarily resulted from initiatives to consolidate
facilities and reduce personnel in our feed segment and the closing of
manufacturing facilities in the dairy foods segment.
The impairment charge of $1.7 million for the six months ended June 30,
2004 related mainly to the write-down of goodwill in the seed segment. The
impairment charge of $0.4 million for the six months ended June 30, 2003
related to the write-down of certain impaired plant assets in the seed and
feed segments. The impairment charge of $4.0 million for the year ended
December 31, 2003 related to the write-down of various assets to their
estimated fair value and goodwill impairments. The impairment charge of
$18.2 million for the year ended December 31, 2002 related to the write-
down of certain impaired plant assets in the dairy foods and animal feed
segments to their estimated fair value. The impairment charge of $7.8
million for the year ended December 31, 2001 related to write-downs of a
feed operation in Mexico and certain swine assets to their estimated fair
value.
(2) We recognized net gains on legal settlements of $4.5 million, $19.2
million, $22.8 million, $155.5 million and $3.0 million for the six months
ended June 30, 2004 and 2003 and the years ended December 31, 2003, 2002
and 2001, respectively. In the six months ended June 30, 2004, we settled a
case for a loss of $0.5 million. The gains represent cash received from
product suppliers against whom we alleged certain price-fixing claims.
(3) The following table summarizes other (income) expense, net:
<Table>
<Caption>
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
--------------- ------------------------
2004 2003 2003 2002 2001
------ ------ ------ ------ ------
(IN MILLIONS)
Loss (gain) on sale of investments........... $ 0.1 $(0.8) $(0.9) $ 0.9 $(0.3)
(Gain) loss on divestitures of businesses.... (1.6) 0.7 (0.7) (4.9) --
Gain on sale of intangibles.................. -- (0.6) (0.5) (4.2) --
Loss on extinguishment of debt............... -- -- 0.5 -- 23.4
----- ----- ----- ----- -----
Total...................................... $(1.5) $(0.7) $(1.6) $(8.2) $23.1
===== ===== ===== ===== =====
</Table>
16
(4) Reflects the portion of earnings allocated to members for the prior fiscal
year distributed in cash in the current fiscal year.
<Table>
<Caption>
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
--------------- -------------------------
2004 2003 2003 2002 2001
------ ----- ----- ------ ------
(IN MILLIONS)
20% required for tax deduction............. $ 7.9 $2.8 $2.8 $14.1 $28.5
Discretionary.............................. 3.5 1.4 1.4 6.1 2.2
----- ---- ---- ----- -----
Total.................................... $11.4 $4.2 $4.2 $20.2 $30.7
===== ==== ==== ===== =====
</Table>
(5) Reflects the distribution of earnings previously allocated to members and
not paid out as cash patronage. Includes the distribution of a portion of
the equity issued in connection with the acquisition of Dairyman's
Cooperative Creamery Association and acquisition of certain assets of
Countrymark Cooperative.
<Table>
<Caption>
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
-------------- --------------------------
2004 2003 2003 2002 2001
----- ----- ------ ------ ------
(IN MILLIONS)
Revolvement
Dairy Foods............................ $19.0 $17.7 $18.0 $15.2 $14.0
Ag Services............................ 2.2(a) 1.8(a) 2.2(a) 2.5(a) 2.2(a)
----- ----- ----- ----- -----
Total............................... $21.2 $19.5 $20.2 $17.7 $16.2
===== ===== ===== ===== =====
</Table>
-----------------------
(a) Included equity revolvements to deceased members of local
cooperatives.
(6) For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as earnings before income taxes, less equity in
earnings of affiliated companies plus minority interest in earnings of
subsidiaries, plus distributed income of equity investees and fixed
charges. Fixed charges include interest on all indebtedness and one- third
of rental expense on operating leases representing that portion of rental
expense deemed to be attributable to interest. Our ratio of earnings to
fixed charges was 2.6x for the year ended December 31, 2000 and was 1.2x
for the year ended December 31, 1999.
(7) In October 2001, we acquired Purina Mills, Inc. and since then we have
consolidated its operating activities in the feed segment.
(8) 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 is reported in our animal feed segment
results for the six months ended June 30, 2004 and 2003 and the years ended
December 31, 2003, 2002 and 2001.
(9) Through June 30, 2003, our layers business, MoArk, was unconsolidated and
accounted for under the equity method. Effective July 1, 2003, MoArk was
consolidated in our financial statements. Financial statements for periods
prior to July 1, 2003 have not been restated for the effects of
consolidation.
(10) Cash held in a restricted account required to support the CPI property and
equipment lease.
(11) Working capital is defined as current assets (less cash and short-term
investments and restricted cash) minus current liabilities (less notes and
short-term obligations, current maturities of long-term debt and
obligations under capital leases).
(12) Total debt excludes the 7.45% Capital Securities due on March 15, 2028, of
our trust subsidiary.
17
RISK FACTORS
You should carefully consider all the information in this prospectus,
including the following risk factors, before tendering your Old Notes in the
exchange offer.
RISK FACTORS RELATING TO OUR FINANCIAL CONDITION
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 June 30, 2004, after eliminating intercompany activity, our aggregate
outstanding consolidated indebtedness was $994.8 million, excluding unused
commitments and including our 7.45% Capital Securities, and our total equity was
$914.8 million. For the six months ended June 30, 2004 our interest expense
(net) was $44.0 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 large 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;
- 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 and the New Notes tendered to
us upon the occurrence of a change of control, which would constitute an
event of default under the 8 3/4% senior notes and the New 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 "Description of the New Notes -- Material covenants" and "-- Defaults"
and "Description of certain other indebtedness -- Description of senior bank
facilities," "-- Description of 8 3/4% senior notes" and "-- Description of
receivables securitization."
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
18
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
senior bank 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,
deferring revolvements and other member payments 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 financing
agreements, including the credit agreements relating to our senior bank
facilities, the agreements relating to our receivables securitization and the
indentures for our 8 3/4% senior notes and the New Notes may restrict us from
adopting any of these alternatives. See "Management's discussion and analysis of
financial condition and results of operations -- Liquidity and capital
resources," "Description of the New Notes -- Material covenants," "Description
of certain other indebtedness -- Description of senior bank facilities,"
"-- Description of 8 3/4% senior notes" and "-- Description of receivables
securitization."
DESPITE OUR SUBSTANTIAL LEVERAGE, WE WILL BE ABLE TO INCUR MORE DEBT, WHICH
MAY INTENSIFY THE RISKS ASSOCIATED WITH OUR SUBSTANTIAL LEVERAGE, INCLUDING
OUR ABILITY TO SERVICE OUR DEBT.
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 $200 million revolving credit
facility, of which $135.0 million was available to us as of June 30, 2004. See
"Description of certain other indebtedness." If we incur additional debt, the
risks associated with our substantial leverage, including our ability to service
our debt, could intensify.
IF CREDITORS OF OUR SUBSIDIARIES AND JOINT VENTURES MAKE CLAIMS WITH RESPECT
TO THE ASSETS AND EARNINGS OF THESE COMPANIES, SUFFICIENT FUNDS MAY NOT BE
AVAILABLE TO REPAY THE NEW NOTES AND WE MAY NOT RECEIVE THE CASH WE EXPECT
FROM INTERCOMPANY TRANSFERS.
We conduct a substantial portion of our operations through our subsidiaries
and joint ventures. Land O'Lakes will therefore be dependent in part upon
dividends or other intercompany transfers of funds from these companies in order
to pay the principal of and interest on the New Notes and to meet its other
obligations. Generally, creditors of these companies will have claims to the
assets and earnings of these companies that are superior to the claims of
creditors of Land O'Lakes, except to the extent the claims of Land O'Lakes
creditors are guaranteed by these entities.
Although the Subsidiary Guarantees and the second-priority liens of the
Subsidiary Guarantors will provide the holders of the New Notes with a direct
claim against the assets of the Subsidiary Guarantors, enforcement of the
Subsidiary Guarantees and the second-priority liens of the Subsidiary Guarantors
against any Subsidiary Guarantor may be challenged in a bankruptcy or
reorganization case or a lawsuit by or on behalf of creditors of the Subsidiary
Guarantor and could be subject to defenses. To the extent that the Subsidiary
Guarantees and the second-priority liens are not enforceable, the New Notes
would be effectively subordinated to all liabilities of the Subsidiary
Guarantors, including trade payables and contingent liabilities, and preferred
stock of the Subsidiary Guarantors. In any event, the New Notes will be
effectively subordinated to all liabilities of the Non-Guarantors. After
eliminating intercompany activity the Non-Guarantors (excluding LOL Farmland
Feed SPV, LLC):
- had assets of $588.4 million or 19.8% of our total assets as of June 30,
2004;
- had liabilities of $362.1 million or 19.4% of our total liabilities as of
June 30, 2004 (excluding the $190.7 million of Capital Securities, see
"Description of capital securities"); and
- generated net sales of $483.7 million or 12.0% of our consolidated net
sales for the six months ended June 30, 2004.
See "Description of the New Notes" and "Description of certain other
indebtedness."
19
Accordingly, in the event of Land O'Lakes dissolution, bankruptcy,
liquidation or reorganization, the holders of the New Notes may not receive any
amounts with respect to the New Notes until after the payment in full of the
claims of creditors of its subsidiaries.
Although the indenture will limit the ability of our subsidiaries to enter
into consensual restrictions on their ability to pay dividends and make other
payments, these limitations have a number of significant qualifications and
exceptions. See "Description of the New Notes -- Material
covenants -- Limitation on restrictions on distributions from restricted
subsidiaries."
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 indentures for our 8 3/4% senior notes and the New Notes impose, and
the terms of any future debt may impose, operating and other restrictions on us
and our restricted subsidiaries. In addition, our senior bank facilities include
other and more restrictive covenants and prohibit us from prepaying our other
debt, including the 8 3/4% senior notes and the New Notes, while debt under our
senior bank facilities is outstanding. The agreements governing our senior bank
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 result in a default under our senior
bank facilities and could trigger cross default provisions in the agreements
governing our other debt. If a default occurs, certain of our debt agreements,
including our senior bank facilities, 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
indentures governing our 8 3/4% senior notes and the New 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 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.
See "Description of the New Notes -- Ranking" and "-- Material covenants"
and "Description of certain other indebtedness -- Description of senior bank
facilities," "-- Description of 8 3/4% senior notes," "-- Description of
receivables securitization" and "Management's discussion and analysis of
financial condition and results of operations -- Liquidity and capital
resources."
THE COLLATERAL SECURING THE NEW NOTES IS SUBJECT TO PRIORITY LIENS HELD BY
OTHERS. IF THERE IS A DEFAULT, SUCH COLLATERAL MAY NOT BE SUFFICIENT TO REPAY
THOSE CREDITORS AND THE HOLDERS OF THE NEW NOTES.
All indebtedness under our senior bank facilities is secured by priority
liens on the same collateral securing the New Notes. As a result, the New Notes
will be effectively junior to all of that indebtedness, to the extent of the
value of such collateral. In addition, under the terms of the indenture
governing the New Notes, we will be permitted in the future to incur additional
debt up to a specific amount that will be secured by priority liens on the same
collateral securing the New Notes. We will also be permitted to incur additional
debt that is secured by the collateral on an equal and ratable basis with the
New Notes in certain circumstances.
20
The lenders under our senior bank facilities will be entitled to receive
proceeds from any realization of the collateral securing those facilities to
repay outstanding indebtedness under those facilities in full before the holders
of the New Notes and other obligations secured by junior liens will be entitled
to any recovery from such collateral.
Our ability to enable the holders future debt to share in the collateral on
either a priority basis or a pari passu basis with the New Notes may have the
effect of diluting the ratio of the aggregate amount of the obligations secured
by the collateral to the value of such collateral.
WE MAY NOT BE ABLE TO REPURCHASE THE NEW NOTES UPON A CHANGE OF CONTROL.
If we experience certain changes of control, you will have the right to
require us to repurchase your New Notes at a purchase price in cash equal to
101% of the principal amount of your New Notes plus accrued and unpaid interest
to the repurchase date. We may not be able to repurchase the New Notes upon a
change of control because we may not have sufficient funds. Further, our ability
to repurchase the New Notes upon a change of control will be limited by the
terms of the senior bank facilities. Upon a change of control, we may be
required immediately to repay the outstanding principal, any accrued interest
and any other amounts owed by us under the senior bank facilities. We cannot
assure you that we would be able to repay amounts outstanding under the senior
bank facilities or obtain necessary consents under the senior bank facilities to
repurchase the New Notes. The senior bank facilities provide that certain change
of control events with respect to us constitute a default thereunder. Any future
credit agreement or other agreements relating to senior indebtedness to which we
become a party may contain similar provisions. Our failure to repurchase
tendered New Notes at a time when the repurchase is required by the indenture
would constitute an event of default under the indenture, which, in turn, would
constitute a default under the senior bank facilities and may constitute an
event of default under other, future senior indebtedness. See "Description of
the New Notes -- Change of control" and "-- Material covenants" and "Description
of certain other indebtedness -- Description senior bank facilities,"
"-- Description of 8 3/4% senior notes" and "-- Description of receivables
securitization."
In addition, the change of control provision which will be contained in the
indenture will not necessarily afford you protection in the event of a highly
leveraged transaction that may adversely affect you, including a reorganization,
restructuring, merger or other similar transaction involving us. These
transactions may not involve a change in voting power or beneficial ownership,
or, even if they do, may not involve a change of the magnitude required under
the definition of change of control in the indenture to trigger these
provisions. Except as described under "Description of the New Notes -- Change of
control," the indenture does not contain provisions that permit the holders of
the New Notes to require us to repurchase or redeem the New Notes in the event
of a takeover, recapitalization or similar transaction.
THE COLLATERAL MAY NOT BE VALUABLE ENOUGH TO SATISFY ALL THE OBLIGATIONS
SECURED BY THE COLLATERAL.
The value of the collateral in the event of a liquidation will depend upon
market and economic conditions, the availability of buyers and similar factors.
No independent appraisals of any of the collateral have been prepared by or on
behalf of us in connection with this exchange of New Notes for Old Notes.
Accordingly, we cannot assure you that the proceeds of any sale of the
collateral following an acceleration of maturity with respect to the New Notes
or under our senior bank facilities would be sufficient to satisfy, or would not
be substantially less than, amounts due on the New Notes and the senior bank
facilities secured thereby.
If the proceeds of any sale of the collateral are not sufficient to repay
all amounts due on any of the New Notes, noteholders will have only an unsecured
claim against our remaining assets. Some or all of the collateral may be
illiquid and may have no readily ascertainable market value. Likewise, we cannot
assure you that the collateral will be saleable or, if saleable, that there will
not be substantial delay in its liquidation. To the extent that liens, rights
and easements granted to third parties encumber assets located on property owned
by us or constitute subordinate liens on the collateral, those third parties
have or may exercise rights and remedies with respect to the property subject to
such encumbrances (including rights
21
to require marshalling of assets) that could adversely affect the value of that
collateral and the ability of the collateral trustee to realize or foreclose on
that collateral.
The indenture governing the New Notes also permits us to issue additional
secured debt, including debt secured equally and ratably by the same assets
pledged to you. This would reduce amounts payable to you from the proceeds of
any sale of collateral.
BANKRUPTCY LAWS MAY LIMIT YOUR ABILITY TO REALIZE VALUE FROM THE COLLATERAL.
The right of the collateral trustee to repossess and dispose of the
collateral upon the occurrence of an event of default under the senior bank
facilities or the indenture governing the New Notes is likely to be
significantly impaired by applicable bankruptcy law if a bankruptcy case were to
be commenced by or against us before the collateral trustee repossessed and
disposed of the collateral. Upon the commencement of a case for relief under
Title 11 of the United States Code, a secured creditor such as the collateral
trustee is prohibited from repossessing its security from a debtor in a
bankruptcy case, or from disposing of security repossessed from such debtor,
without bankruptcy court approval. Moreover, the bankruptcy code permits the
debtor to continue to retain and use collateral even though the debtor is in
default under the applicable debt instruments, provided that the secured
creditor is given "adequate protection." The meaning of the term "adequate
protection" may vary according to circumstances, but it is intended in general
to protect the value of the secured creditor's interest in the collateral and
may include cash payments or the granting of additional security if and at such
times as the court in its discretion determines that the value of the secured
creditor's interest in the collateral is declining during the pendency of the
bankruptcy case. A bankruptcy court may determine that a secured creditor may
not require compensation for a diminution in the value of its collateral if the
value of the collateral exceeds the debt it secures.
In view of the lack of a precise definition of the term "adequate
protection" and the broad discretionary power of a bankruptcy court, it is
impossible to predict:
- how long payments under the New Notes could be delayed following
commencement of a bankruptcy case;
- whether or when the collateral trustee could repossess or dispose of the
collateral;
- the value of the collateral at the time of the bankruptcy petition; or
- whether or to what extent holders of the New Notes would be compensated
for any delay in payment or loss of value of the collateral through the
requirement of "adequate protection."
In addition, the indenture requires that, in the event of a bankruptcy, the
collateral trustee not object to a number of important matters following the
filing of a bankruptcy petition. After such a filing, the value of the
collateral could materially deteriorate and you would be unable to raise an
objection.
YOUR INTEREST IN THE COLLATERAL MAY BE ADVERSELY AFFECTED BY THE FAILURE TO
RECORD AND/OR PERFECT SECURITY INTERESTS IN CERTAIN COLLATERAL ACQUIRED IN THE
FUTURE.
The security interest in the collateral securing the New Notes includes
substantially all of our personal property and substantially all of the personal
property of the Subsidiary Guarantors, a pledge of certain stock and other
equity interests and the proceeds of the foregoing, whether now owned or
acquired or arising in the future. Applicable law requires that certain property
and rights acquired after the grant of a general security interest can only be
perfected at the time such property and rights are acquired and identified.
Although the indenture will contain customary further assurances and covenants,
the trustee will not monitor the future acquisition of property and rights that
constitute collateral, or take any action to perfect the security interest in
such acquired collateral.
22
THE COLLATERAL IS SUBJECT TO CASUALTY RISKS.
We are obligated under the senior bank facilities to maintain adequate
insurance to the same extent as companies of established reputation engaged in
the same or similar businesses in the same or similar localities insure
themselves, except to the extent any such failure would have a material adverse
effect on us or our lenders' rights or benefits. There are, however, certain
losses that may be either uninsurable or not economically insurable, in whole or
in part. As a result, we cannot assure you that the insurance proceeds will
compensate us fully for our losses. If there is a total or partial loss of any
of the pledged collateral, we cannot assure you that any insurance proceeds
received by us will be sufficient to satisfy all the secured obligations,
including the New Notes.
THE LIEN-RANKING PROVISIONS SET FORTH IN THE INDENTURE LIMIT THE RIGHTS OF THE
HOLDERS OF THE NEW NOTES WITH RESPECT TO THE COLLATERAL SECURING THE NEW
NOTES.
The rights of the holders of the New Notes with respect to the collateral
securing the New Notes are substantially limited pursuant to the terms of the
lien-ranking provisions set forth in the indenture. Under those lien-ranking
provisions, at any time that obligations that have the benefit of the
first-priority liens are outstanding, any actions that may be taken in respect
of the collateral, including the ability to cause the commencement of
enforcement proceedings against the collateral and to control the conduct of
such proceedings, and the approval of amendments to, releases of collateral from
the lien of, and waivers of past default under, the collateral documents, will
be at the direction of holders of the obligations secured by senior liens, and
the trustee, on behalf of the holders of the New Notes, will not have the
ability to control or direct such actions, even if the rights of the holders of
the New Notes are adversely affected. Additional releases of collateral from the
liens securing the New Notes are permitted under some circumstances. See
"Description of the New Notes -- Security -- Release of collateral."
THE ASSETS OF OUR NON-GUARANTORS WILL BE SUBJECT TO PRIOR CLAIMS BY CREDITORS
OF THOSE SUBSIDIARIES.
Holders of New Notes will not have any claim as a creditor against our
subsidiaries that are not guarantors of the New Notes. Therefore, in the event
of any bankruptcy, liquidation or reorganization of a Non-Guarantor, the rights
of the holders of New Notes to participate in the assets of such Non-Guarantor
will rank behind the claims of that subsidiary's creditors, including trade
creditors (except to the extent we have a claim as a creditor of such
subsidiary). For the six months ended June 30, 2004, Non-Guarantors represented
approximately 12.0% of our net sales and had operating earnings of $32.1 million
and net earnings of $32.3 million. At June 30, 2004, Non-Guarantors represented
approximately 19.8% of our total assets.
UNDER UNITED STATES FEDERAL AND STATE FRAUDULENT TRANSFER OR CONVEYANCE
STATUTES, A COURT COULD VOID THE OBLIGATIONS OF LAND O'LAKES AND THE
SUBSIDIARY GUARANTORS OR TAKE OTHER ACTIONS DETRIMENTAL TO HOLDERS OF THE NEW
NOTES.
Under United States Federal or state fraudulent transfer or conveyance
laws, a court could take actions detrimental to you if it found that, at the
time the New Notes or the Subsidiary Guarantees were issued or the
second-priority liens were incurred, Land O'Lakes or a Subsidiary Guarantor:
(1) issued the New Notes or a Subsidiary Guarantee or incurred the
second-priority liens with the intent of hindering, delaying or defrauding
current or future creditors; or
(2) received less than fair consideration or reasonably equivalent
value for incurring the debt represented by the New Notes or a Subsidiary
Guarantee or the second-priority liens; and
- was insolvent or rendered insolvent by issuing the New Notes or a
Subsidiary Guarantee or incurring the second-priority liens;
- was engaged, or about to engage, in a business or transaction for
which the assets remaining with Land O'Lakes or the Subsidiary
Guarantor would constitute unreasonably small capital to carry on Land
O'Lakes or the Subsidiary Guarantor's business; or
23
- intended to incur, believed that it would incur or did incur,
indebtedness beyond Land O'Lakes or the Subsidiary Guarantor's ability
to pay.
If a court made this finding, it could:
- void all or part of Land O'Lakes or the Subsidiary Guarantor's
obligations to the holders of the New Notes and the second-priority
liens and direct the repayment of any amounts thereunder to Land
O'Lakes and the Subsidiary Guarantor's other creditors;
- subordinate Land O'Lakes or the Subsidiary Guarantor's obligations to
the holders of the New Notes and the second-priority liens to Land
O'Lakes or the Subsidiary Guarantor's other indebtedness; or
- take other actions detrimental to the holders of the New Notes or the
second-priority liens.
In that event, Land O'Lakes cannot assure you that it could pay amounts due
on the New Notes. Under fraudulent transfer statutes, it is not certain whether
a court would determine that Land O'Lakes or the Subsidiary Guarantor were
insolvent on the date that the New Notes and Subsidiary Guarantee were issued
and the second-priority liens were incurred.
To the extent a court voids a Subsidiary Guarantee or a second-priority
lien as a fraudulent transfer or conveyance or holds it unenforceable for any
other reason, holders of New Notes would cease to have any claim against the
Subsidiary Guarantor. If a court were to take this action, the Subsidiary
Guarantor's assets would be applied to the Subsidiary Guarantor's liabilities
and preferred stock claims. Land O'Lakes cannot assure you that a Subsidiary
Guarantor's assets would be sufficient to satisfy the claims of the holders of
New Notes relating to any voided portions of any of the Subsidiary Guarantees or
second-priority liens.
Land O'Lakes counsel has not expressed any opinion as to the applicability
of United States Federal bankruptcy or state fraudulent transfer and conveyance
laws.
Based upon financial and other information available to us, we believe that
we and our Subsidiary Guarantors are issuing the New Notes and the Subsidiary
Guarantees and incurring the second-priority liens for proper purposes and in
good faith and that, at the time the New Notes and the Subsidiary Guarantees are
issued and the second-priority liens are incurred, Land O'Lakes and the
Subsidiary Guarantors:
- will not be insolvent or rendered insolvent by the issuance or
incurrence;
- will have sufficient capital to run their businesses; and
- will be able to pay their debts as they mature or become due.
In reaching these conclusions, Land O'Lakes has relied on various
valuations and estimates of future cash flow that necessarily involve a number
of assumptions and choices of methodology. However, if the New Notes, the
second-priority liens or the Subsidiary Guarantees were to be subject to any of
these kinds of claims, a court may not adopt the assumptions and methodologies
that it has chosen or concur with its conclusion as to its solvency and the
solvency of its subsidiaries.
Additionally, under United States Federal bankruptcy or applicable state
insolvency law, if certain bankruptcy or insolvency proceedings were initiated
by or against Land O'Lakes or the Subsidiary Guarantors within 90 days after any
payment by Land O'Lakes with respect to the New Notes, the second-priority liens
or by the Subsidiary Guarantors under their Subsidiary Guarantees, or if Land
O'Lakes or the Subsidiary Guarantors anticipated becoming insolvent at the time
of the payment, all or a portion of the payment could be avoided as a
preferential transfer and the recipient of the payment could be required to
return the payment. In the event there are any additional Subsidiary Guarantors
in the future, the foregoing would also apply to their guarantees.
24
THERE IS CURRENTLY NO MARKET FOR THE NEW NOTES, AND AN ACTIVE TRADING MARKET
MAY NOT DEVELOP FOR THE NEW NOTES.
The New Notes are new securities for which there currently is no, and on
issuance there will not be any, established trading market. If any of the New
Notes are traded after their initial issuance, they may trade at a discount from
their initial offering price, depending upon:
- prevailing interest rates;
- the market for similar securities; and
- other factors, including general economic conditions and our financial
condition, performance and prospects.
Land O'Lakes does not intend to apply for listing of the New Notes on any
securities exchange or on any automated dealer quotation system. The liquidity
of, and trading market for, the New Notes also may be adversely affected by
general declines in the market for similar securities. A decline may adversely
affect the liquidity and trading markets independent of Land O'Lakes prospects
or financial performance.
IF YOU DO NOT PARTICIPATE IN THIS EXCHANGE OFFER, YOU WILL CONTINUE TO HOLD
UNREGISTERED OLD NOTES THAT ARE SUBJECT TO TRANSFER RESTRICTIONS.
We will only issue New Notes in exchange for Old Notes that are timely
received by the exchange agent together with all required documents, including a
properly completed and signed letter of transmittal. Therefore, you should allow
sufficient time to ensure timely delivery of the Old Notes and you should
carefully follow the instructions on how to tender your Old Notes. Neither we
nor the exchange agent are required to tell you of any defects or irregularities
with respect to your tender of the Old Notes. If you are eligible to participate
in this exchange offer and do not tender your Old Notes or if we do not accept
your Old Notes because you did not tender your Old Notes properly, then, after
we consummate this exchange offer, you will continue to hold Old Notes that are
subject to the existing transfer restrictions and you will no longer have any
registration rights or be entitled to any additional interest with respect to
the Old Notes. In addition:
- if you tender your Old Notes for the purpose of participating in a
distribution of the New Notes, you will be required to comply with the
registration and prospectus delivery requirements of the Securities Act
in connection with any resale of the New Notes; and
- if you are broker-dealer that receives New Notes for your own account in
exchange for Old Notes that you acquired as a result of market-making
activities or any other trading activities, you will be required to
acknowledge that you will deliver a prospectus in connection with any
resale of those New Notes.
After this exchange offer is consummated, if you continue to hold any Old
Notes, you may have difficulty selling them because there will be fewer Old
Notes outstanding.
RISK FACTORS RELATING TO OUR BUSINESS
AN OVERSUPPLY OF FOOD PROTEIN IN THE UNITED STATES MARKET HAS REDUCED, AND
COULD CONTINUE TO REDUCE, OUR SALES AND MARGINS.
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 protein (such as beef, pork and chicken), such producers may
decide to lower their production levels or seek alternative, lower margin
products, resulting in lower sales and margins for us. Since 1998, in the case
of swine feed, and since 2001, in the case of dairy feed, we have experienced
erosion of commodity feed volumes. This erosion has primarily resulted from low
prices for market hogs and milk, which has led to a liquidation of herds,
decreased demand for feed and a shift to lower margin feed. In 2003, dairy feed
volumes were down 9% compared to 2002, and there were also
25
reductions of 10% and 14%, respectively, in poultry and swine feed volumes. We
expect lower volumes in dairy, poultry and swine feed to continue in 2004.
Currently, several countries have banned the import of U.S. fed beef as a result
of the discovery of bovine spongiform encephalopathy ("BSE"), also known as mad
cow disease, in one dairy cow in Washington State. Beef supplies in the U.S.
have been reduced recently due to a cutoff of Canadian cattle imports as a
result of contamination concerns which have temporarily increased beef prices.
Bans by other countries on imports of U.S. beef, as well as the existing ban on
the import of Canadian cattle and beef products into the U.S., have introduced
volatility in the cattle and beef-related markets. If the various bans by other
countries on the import of U.S. fed beef continue or expand or if the import ban
on Canadian beef is lifted, the oversupply of food protein in the U.S. may
increase resulting in reduced sales and margin for us.
GEOGRAPHIC SHIFT IN DAIRY PRODUCTION HAS DECREASED AND COULD CONTINUE TO
DECREASE OUR SALES AND MARGINS.
We operate 12 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 1993, cow numbers have declined 27% in Minnesota and 17% in Wisconsin and
the Minnesota/Wisconsin share of nationwide dairy manufacturing volume has
declined from 41% to 33%. 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, such as the
Midwest and Northeast, we are not able to operate our plants at a capacity that
is profitable, are forced to transport milk from a distance or are forced to pay
higher prices for our milk supply. These conditions have decreased, and could
continue to decrease, operating sales and margins.
In response to decreased milk production in the Upper Midwest, we are
restructuring our dairy facility infrastructure to increase production
efficiencies and reduce costs. There can be no assurance that this restructuring
will be successful in increasing production efficiencies or reducing costs.
In addition, as dairy production has 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. Dairy producers in
the western United States tend to purchase feed components and mix them at the
farm location rather than purchase higher margin mixed feed product delivered to
the farm. If this shift continues, we will continue to have decreased volumes of
animal feed in the Midwest and increased costs of production as we are unable to
operate certain of our Midwestern plants at a capacity that is profitable.
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
are not selected by these food retailers, 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.
26
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.
Our lifestyle 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 we have. 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.
Sectors of the dairy industry are highly fragmented, with the bulk of the
industry consisting of national and regional competitors. However, consolidation
among food retailers is leading to increased competition for fewer customers. If
we are unable to meet our customers' needs, we may lose major customers, which
could materially adversely affect our business and financial condition.
The animal feed industry is highly fragmented, with the bulk of the
industry consisting of many small local manufacturers, several regional
manufacturers and a limited number of national manufacturers. However, as meat
processors and livestock producers become larger they tend to integrate their
business by acquiring or constructing their own feed production facilities. As a
result, the available market for commercial feed may become smaller and
competition may increase, which could materially adversely affect our business
and financial condition. In addition, purchasers of commercial feed tend to
select products based on price and performance. Furthermore, some of our feed
products are purchased from third parties without further processing by us. As a
result of this price competition and the lack of processing for some of our
products, the barriers to entry for competing feed products are low.
The crop seed industry consists of large companies such as Pioneer,
Monsanto and Syngenta which possess large genetic databases and produce and
distribute a wide range of seeds, as well as niche companies which distribute
seed products for only one or a few crops. Because approximately 85% of our crop
seed sales come from sales of alfalfa, soybeans, corn and forage and turf
grasses, technological developments by our competitors in these areas could
result in significantly decreased sales and could materially adversely affect
our business and financial condition.
The swine industry is highly fragmented with the bulk of the industry
consisting of many regional producers. However, as pork processors become larger
they tend to integrate their businesses by acquiring their own swine production
facilities. As a result, the demand for feeder pigs and market hogs produced by
independent producers may decrease and competition among independent producers
may increase.
The wholesale agronomy industry consists of a few national crop protection
product distributors such as UAP, Helena and Wilbur-Ellis, a few national crop
nutrient product distributors such as Koch, Cargill, IMC, PCS, Agrium and
Royster-Clark, as well as smaller regional brokers and distributors. Competition
in the industry may intensify as distributors consolidate to increase
distribution capabilities and efficiencies, which could materially adversely
affect Agriliance's business and our financial condition.
MoArk competes with other egg processors, including Cal-Maine Foods, Rose
Acre Farms, Inc. and Michael Foods. MoArk competes with these companies based
upon its low cost production system and its diversified product line.
Competition in the egg industry may intensify as distributors consolidate to
increase efficiencies, which could materially adversely affect MoArk's business
and financial condition.
27
OUR OPERATING RESULTS FLUCTUATE BY SEASON AND ARE AFFECTED BY WEATHER
CONDITIONS.
Operating results within many of our segments are affected by seasonal
fluctuations in 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 ineffective if applied. Over the past two years, our
customers have purchased more crop seed in the fourth quarter rather than
waiting until the first quarter of the following year. This crop seed volume
shift has resulted from incentives third-party seed suppliers have provided 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. Due to price competition in the marketplace,
Agriliance may not be able to pass on the entire increase in crop nutrient costs
to customers (approximately 80% of nitrogen-based crop nutrient input cost is
natural gas), therefore Agriliance's margins on crop nutrient products could be
lower than they would be if natural gas and fertilizer costs remain constant. In
addition, a higher sales price of fertilizer could result in a reduction of
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 is not used as a heating
fuel. As a result of these demand differences, crop nutrient producers in the
United States may be at a competitive disadvantage to some international
competitors during periods of natural gas price increases.
28
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 BSE, which could lead to decreased feed
and dairy sales and increased costs to produce feed and dairy products. In
December 2003, a single cow in Washington State was confirmed as having BSE.
Various countries have halted the import of U.S. fed beef in response to the
discovery of BSE in the U.S. marketplace. In response to the discovery of BSE in
the U.S. marketplace, the USDA has increased testing requirements for cows and
is exploring additional inspection requirements which could increase the cost of
production of beef and dairy products. The discovery of additional cases of BSE
could lead to widespread destruction of beef cattle and dairy cows, could cause
consumer demand for beef and dairy products to decrease and could result in
increased inspection costs and procedures. If this occurs, we could have
decreased feed sales for beef cattle and dairy cows as a result of animal
destruction or producers lowering their herd sizes in response to decreased
consumer demand. In addition, we could have decreased sales of our dairy
products due to decreased consumer demand or decreased milk supply and decreased
operating margins as a result of increased dairy production costs.
We face the risk of outbreaks of foot-and-mouth disease, which could lead
to a significant 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.
We face the risk of outbreaks of poultry diseases, such as Newcastle
disease and avian influenza, which could lead to the destruction of poultry
flocks. Because these diseases can be highly contagious and destructive, any
such outbreak of disease could result in the widespread destruction of infected
flocks. If this happens, we could experience a decreased demand for our poultry
feed which could reduce our sales and operating margins. In addition, if such
diseases spread to flocks owned by MoArk, MoArk could experience a decreased
supply of layers and eggs, which could reduce MoArk's sales and operating
margins.
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.
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, swine
segments and layers, 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 foods 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
29
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 a $62.1 million write-down 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 that
year at $1.90 per pound and finished at $1.20 per pound, and decreased commodity
prices occurred throughout the year as we were building our inventory necessary
during the peak sales periods of fall and winter.
The animal feed segment follows industry standards for feed pricing. The
feed industry generally prices products on the basis of income over ingredient
cost per ton of feed. This practice tends to mitigate 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 market fluctuations as a
result of a number of factors, including industry expansion, increased processor
capacity, changes in consumer demand and an oversupply of food proteins (such as
beef, pork and chicken). 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. These conditions persisted
into 1999 resulting in operating losses in the swine production business.
Continued volatility in market prices contributed to modest operating profits in
our swine segment in 2000 and 2001 and losses in 2002 and 2003. In 2001, the
average price per hundred weight for market hogs was $46.52 compared to $35.86
in 2002. In 2003, the average price per hundred weight for market hogs was
$40.59. We are vulnerable to adverse price movements in our cost plus contracts
and market risk sharing program, which guarantee swine producers certain minimum
prices for market hogs and feeder pigs.
Our MoArk joint venture produces and markets eggs. For the six months ended
June 30, 2004, egg prices averaged $1.06 per dozen as measured by the Urner
Barry South Central Large compared to egg prices of $0.83 for the six months end
June 30, 2003. Although recent market prices for eggs have improved, in part,
from a declining chick hatch, changes in response to new animal welfare
guidelines, and changing consumer dietary trends, July market prices decreased
to $0.78 per dozen. If these market dynamics change, the supply of eggs may
materially increase, and the price of eggs may decrease. To the extent the price
of eggs decreases, MoArk's ability to make dividend distributions to the Company
could be diminished.
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 agronomy business is primarily operated through
a joint venture.
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.
30
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 "Business" and "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 2003, approximately 55% 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 32% of its fertilizer
needs from CF Industries.
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. For additional information regarding our cooperative structure and
the taxation of cooperatives, see the section in this prospectus entitled
"Business -- Description of the cooperative."
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.
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.
31
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 and negatively affect our results.
We license 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, we 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.
Many of our branded feed products are 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 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 we sell 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 our products. Third-party announcements or rumors about these
unaffiliated companies could also have these negative effects.
32
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.
WE COULD INCUR SIGNIFICANT COSTS FOR VIOLATIONS OF OR LIABILITIES UNDER
ENVIRONMENTAL LAWS AND REGULATIONS APPLICABLE TO OUR OPERATIONS.
We are subject to various Federal, state, local, and foreign environmental
laws and regulations, including those governing the use, storage, discharge and
disposal of solid and hazardous materials and wastes. Violations of these laws
and regulations (or of the permits required for our operations) may lead to
civil and criminal fines and penalties or other sanctions. For example, we have
been paying monthly surcharges to the City of Tulare, California because we have
been exceeding the applicable wastewater discharge limits since that plant was
brought into production. We expect that we will incur approximately $1.25
million in surcharges before this issue is resolved.
These laws and regulations may also impose liability for the clean-up of
environmental contamination. Many of our current and former facilities have been
in operation for many years and, over time, we and other operators of those
facilities have generated, used, stored, or disposed of substances or wastes
that are or might be defined as 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 is or
may be contaminated, and we may be required in the future to make material
expenditures to investigate, control and remediate such contamination.
33
We have been identified as a potentially responsible party under the
Federal Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA") or similar state statutes and currently have unresolved liability
with respect to the past disposal of hazardous substances at several of our
former facilities and at waste disposal facilities operated by third parties.
Under CERCLA, any current or former owner, operator or user of a contaminated
site may be held responsible for the entire cost of investigating and
remediating such contamination, regardless of fault or the legality of the
original disposal.
Although compliance and clean-up costs have not been material in the past,
the imposition of additional or more stringent environmental laws or unexpected
remediation obligations could result in significant costs and have a material
adverse effect on our business, financial condition, or results of operations.
STRIKES OR WORK STOPPAGES BY OUR UNIONIZED WORKERS COULD DISRUPT OUR BUSINESS.
As of June 30, 2004, approximately 25% of our employees were covered by
collective bargaining agreements, some of which are due to expire within the
next twelve months. 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. See "Business -- Employees" for additional
information.
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.
FORWARD-LOOKING STATEMENTS
This prospectus includes "forward-looking statements" that can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "could," "should," "seeks," "as adjusted,"
"anticipates," or other variations thereof, including their use in the negative,
or by discussions of strategies, plans or intentions. Forward-looking statements
contained in this prospectus include, in particular, the statements about the
Company's plans, strategies, and prospects under the headings "Summary," "Risk
factors," "Use of proceeds," "Capitalization," "Management's discussion and
analysis of financial condition and results of operations" and "Business."
Although we believe that our plans, intentions and expectations reflected in or
suggested by such forward-looking statements are reasonable, we can give no
assurance that such plans, intentions or expectations will be achieved.
Important factors that could cause actual results to differ materially from the
forward-looking statements we make in this prospectus are set forth in this
prospectus, including under the heading "Risk Factors." The cautionary
statements made in this prospectus are intended to be applicable to all related
forward-looking statements wherever they appear in this prospectus. 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.
34
USE OF PROCEEDS
We will not receive any cash proceeds from the exchange offer. Any Old
Notes that are properly tendered and exchanged pursuant to the exchange offer
will be retired and cancelled. The Old Notes and the New Notes bear interest at
9% annually and mature on December 15, 2010.
We received gross proceeds of $175 million from the issuance of the Old
Notes. Of this amount $122.5 million was used to make prepayments on our Term
loan A facility and $52.5 million was used to make prepayments on our Term loan
B facility. We used cash on hand to pay the initial purchasers' fees and
transaction expenses related to the offering of the Old Notes. The terms and
effect of our repayment of outstanding amounts under our term loan facilities
are described under the heading "Management's Discussion and analysis of
financial condition and results of operations -- Liquidity and Capital
Resources" in this prospectus.
35
CAPITALIZATION
Set forth below as of June 30, 2004 is our actual cash and capitalization
and our cash and capitalization on an as adjusted basis after giving effect to
the exchange offer. The information set forth below should be read in
conjunction with "Selected financial data," "Management's discussion and
analysis of financial condition and results of operations," "Description of the
new notes," "Description of certain other indebtedness," "Description of capital
securities" and the Land O'Lakes financial statements and the related notes and
other financial information included elsewhere in this prospectus.
<Table>
<Caption>
AS OF JUNE 30, 2004
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN MILLIONS)
Cash and short-term investments............................. $ 69.8 $ 69.8
Total debt:
Senior bank facilities
Revolving credit facility(1)........................... -- --
Term loan B facility................................... 118.4 118.4
Old Notes................................................. 175.0 --
New Notes offered hereby.................................. -- 175.0
8 3/4% senior notes due 2011(2)........................... 350.0 350.0
Debt of unrestricted subsidiaries(3)...................... 137.8 137.8
Other debt................................................ 22.9 22.9
-------- --------
Total debt before Capital Securities........................ 804.1 804.1
7.45% Capital Securities due 2028(4)...................... 190.7 190.7
-------- --------
Total debt........................................... 994.8 994.8
Obligations under capital leases(5)......................... 106.0 106.0
Minority interests.......................................... 8.9 8.9
Equities:
Capital stock............................................. 2.1 2.1
Member equities........................................... 875.4 875.4
Accumulated other comprehensive loss...................... (65.6) (65.6)
Retained earnings......................................... 102.9 102.9
-------- --------
Total equities....................................... 914.8 914.8
-------- --------
Total capitalization................................. $2,024.5 $2,024.5
======== ========
</Table>
- ---------------
(1) As of June 30, 2004 we had no outstanding borrowings under our revolving
credit facility and $135.0 million was available to us, after giving effect
to $50.0 million of outstanding letters of credit. See "Description of
certain other indebtedness -- Description of senior bank facilities" for
further information. In July 2004, we expanded our revolving credit facility
to $200 million.
(2) In April and May, 2004, the Company entered into three $50 million
fixed-to-floating interest rate swap agreements, designated as fair value
hedges, in an effort to return to historical exposure levels for floating
interest rate debt. These swaps mirror the terms of the 8.75% senior
unsecured notes and effectively convert $150 million of such notes from a
fixed 8.75% rate to an effective rate of LIBOR plus 385 basis points. At
June 30, 2004, the notional amount of the swaps was $150 million in
aggregate and the fair value was negative $4.0 million.
(3) Debt of unrestricted subsidiaries includes MoArk debt of $76.2 million, LOL
Finance Co. debt of $51.3 million, CPI debt of $10.0 million, and others of
$0.3 million.
36
(4) The Capital Securities represent undivided interests in the assets of Land
O'Lakes Capital Trust I, our trust subsidiary, the sole assets of which are
7.45% subordinated debentures due March 15, 2028, issued by us. We may defer
interest on the Capital Securities for up to ten semi-annual periods;
provided that interest will continue to accrue, and we may not defer
interest payments past the maturity date of the Capital Securities.
(5) The obligations under capital leases consist of lease of CPI, which had a
lease balance of $94.8 million at June 30, 2004 and MoArk, which had a lease
balance of $11.2 million at June 30, 2004. CPI, a consolidated joint
venture, leases real property and certain equipment relating to its cheese
manufacturing and whey processing plant in Tulare, California. MoArk has
capital leases for land, building, machinery and equipment at various
locations.
37
SELECTED FINANCIAL DATA
The historical consolidated financial information presented below as of
December 31, 2003 and 2002 and for each of the years ended December 31, 2003,
2002 and 2001 has been derived from, and should be read together with, the
audited consolidated financial statements of Land O'Lakes and the related notes
included elsewhere in this prospectus. The historical consolidated financial
information as of December 31, 2001, 2000, and 1999 and for each of the years
ended December 31, 2000 and 1999 has been derived from the consolidated
financial statements of Land O'Lakes and the related notes, which have not been
included in this prospectus. The historical consolidated financial information
presented as of June 30, 2004 and for the six months ended June 30, 2004 and
2003, has been derived from the unaudited consolidated financial statements of
Land O'Lakes and the related notes included elsewhere in this prospectus. The
historical consolidated financial information presented as of June 30, 2003, has
been derived from the unaudited consolidated financial statements of Land
O'Lakes and the related notes, which have not been included in this prospectus.
Interim results are not necessarily indicative of the results that can be
expected for a full year. You should read this selected financial information
along with "Management's discussion and analysis of financial condition and
results of operations" and the consolidated financial statements of Land O'Lakes
included in this prospectus.
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
------------------- ----------------------------------------------------
2004 2003 2003 2002 2001 2000 1999(4)
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN MILLIONS)
STATEMENT OF OPERATIONS DATA:
Net sales.................................... $4,027.9 $2,851.6 $6,326.1 $5,842.5 $5,857.7 $5,666.8 $5,614.5
Cost of sales................................ 3,719.4 2,600.7 5,742.9 5,350.2 5,376.1 5,147.0 5,100.4
-------- -------- -------- -------- -------- -------- --------
Gross profit................................. 308.5 250.9 583.2 492.3 481.6 519.8 514.1
Selling, general and administrative.......... 259.9 225.4 468.3 470.6 382.3 391.7 507.7
Restructuring and impairment charges(1)...... 2.5 2.9 7.5 31.4 3.7 54.2 3.9
-------- -------- -------- -------- -------- -------- --------
Earnings (loss) from operations............ 46.1 22.6 107.4 (9.7) 95.6 73.9 2.5
Interest expense, net........................ 44.0 39.1 82.9 78.7 55.7 52.4 44.7
Gain on legal settlements(2)................. (4.5) (19.2) (22.8) (155.5) (3.0) -- --
Other (income) expense, net(3)............... (1.5) (0.7) (1.6) (8.2) 23.1 (95.8) (55.0)
Equity in (earnings) loss of affiliated
companies.................................. (66.5) (50.4) (57.1) (22.7) (48.6) 35.6 (7.3)
Minority interest in earnings (loss) of
subsidiaries............................... 1.0 2.9 6.4 5.4 6.9 (1.4) (0.1)
-------- -------- -------- -------- -------- -------- --------
Earnings before income taxes............... 73.6 50.9 99.6 92.6 61.5 83.1 20.2
Income tax expense (benefit)................. 11.7 6.3 17.6 (3.8) (6.6) (14.6) (0.4)
-------- -------- -------- -------- -------- -------- --------
Net earnings............................... $ 61.9 $ 44.6 $ 82.0 $ 96.4 $ 68.1 $ 97.7 $ 20.6
======== ======== ======== ======== ======== ======== ========
OTHER FINANCIAL DATA:
Depreciation and amortization................ $ 58.2 $ 55.9 $ 120.8 $ 106.8 $ 97.3 $ 83.6 $ 81.7
Capital expenditures......................... 41.4 35.0 74.1 87.4 83.9 104.3 109.3
Cash patronage paid to members(5)............ 11.4 4.2 4.2 20.2 30.7 10.6 20.0
Equity revolvement paid to members(6)........ 21.2 19.5 20.2 17.7 16.2 43.6 28.7
Ratio of earnings to fixed charges(7)........ 1.4x 1.1x 1.8x 2.0x 1.3x 2.6x 1.2x
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and short-term investments.............. $ 69.8 $ 85.5 $ 110.3 $ 64.3 $ 130.2 $ 4.0 $ 197.8
Restricted cash(8)........................... 20.2 20.0 20.1 -- -- -- --
Working capital(9)........................... 284.9 305.8 401.2 370.9 311.0 463.7 457.8
Property, plant and equipment, net........... 613.8 563.1 624.6 579.9 675.3 467.8 461.8
Property under capital leases, net........... 105.0 101.4 109.1 105.7 -- -- --
Total assets................................. 2,972.1 2,934.5 3,389.1 3,232.6 3,073.3 2,464.2 2,696.3
Total debt(10)............................... 804.1 900.2 963.2 959.0 1,010.3 628.8 783.9
Capital securities of trust subsidiary....... 190.7 190.7 190.7 190.7 190.7 190.7 200.0
Obligations under capital leases............. 106.0 103.7 110.0 108.3 -- -- --
Minority interests........................... 8.9 60.1 62.7 53.7 59.8 55.1 14.9
Total equities............................... 914.8 918.4 879.4 895.8 823.3 795.1 764.2
</Table>
See accompanying Notes to selected financial data.
38
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
------------------- ----------------------------------------------------
2004 2003 2003 2002 2001 2000 1999
-------- -------- -------- -------- -------- -------- --------
(IN MILLIONS)
SELECTED SEGMENT FINANCIAL INFORMATION
DAIRY FOODS
Net sales.................................... $1,942.2 $1,303.8 $2,975.0 $2,898.8 $3,462.1 $3,092.2 $3,289.8
Earnings (loss) from operations.............. 0.5 (6.8) 26.3 (20.5) 60.2 20.2 (16.5)
Depreciation and amortization................ 19.9 21.7 43.0 36.8 42.5 42.8 47.4
Capital expenditures......................... 23.7 14.1 28.2 32.3 37.7 60.3 63.3
ANIMAL FEED(11)(12)(13)
Net sales.................................... 1,357.5 1,196.2 2,467.2 2,444.7 1,864.0 1,182.2 931.2
Earnings from operations..................... 4.9 22.9 56.1 41.7 39.0 23.0 21.4
Depreciation and amortization................ 20.3 22.4 44.9 46.6 31.7 18.6 14.7
Capital expenditures......................... 7.3 9.6 24.0 26.0 24.9 21.5 17.4
CROP SEED
Net sales.................................... 374.4 303.0 479.3 406.9 413.6 365.5 190.8
Earnings from operations..................... 19.9 17.9 15.0 8.7 10.3 12.7 5.7
Depreciation and amortization................ 1.0 1.2 2.2 3.0 5.0 5.6 2.7
Capital expenditures......................... 1.1 0.3 0.5 0.6 2.7 3.5 4.8
SWINE(13)
Net sales.................................... 46.0 43.7 91.2 83.2 109.9 102.0 82.7
(Loss) earnings from operations.............. (5.3) (2.2) (3.8) (16.0) 6.0 0.3 (20.4)
Depreciation and amortization................ 1.8 1.7 3.5 3.8 5.6 6.2 7.9
Capital expenditures......................... 2.4 2.5 5.1 3.1 7.3 9.6 14.0
AGRONOMY(14)
Net sales.................................... -- -- -- -- -- 857.0 1,023.3
(Loss) earnings from operations.............. (7.1) (6.7) (14.0) (18.9) (16.5) 22.4 14.2
Depreciation and amortization................ 3.1 3.1 6.1 6.1 6.3 4.6 3.4
Capital expenditures......................... -- -- -- -- -- -- --
LAYERS(15)
Net sales.................................... 318.6 -- 317.8 -- -- -- --
Earnings (loss) from operations.............. 33.6 (1.0) 28.5 (2.1) (0.3) -- --
Depreciation and amortization................ 5.4 0.4 6.3 0.9 0.3 -- --
Capital expenditures......................... 4.9 -- 3.8 -- -- -- --
OTHER/ELIMINATIONS
Net sales.................................... (10.8) 4.9 (4.4) 8.9 8.1 67.9 96.7
Loss from operations......................... (0.4) (1.5) (0.7) (2.6) (3.1) (4.7) (1.9)
Depreciation and amortization................ 6.7 5.4 14.8 9.6 5.9 5.8 5.6
Capital expenditures......................... 2.0 8.5 12.5 25.4 11.3 9.4 9.8
</Table>
See accompanying Notes to selected financial data.
39
NOTES TO SELECTED FINANCIAL DATA
(1) The following table summarizes restructuring and impairment charges
(reversals):
<Table>
<Caption>
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
-------------- -----------------------------------
2004 2003 2003 2002 2001 2000 1999
----- ----- ---- ----- ----- ----- ----
(IN MILLIONS)
Restructuring charges (reversals).......... $0.8 $2.5 $3.5 $13.2 $(4.1) $ 9.7 $ --
Impairment of assets....................... 1.7 0.4 4.0 18.2 7.8 44.5 3.9
---- ---- ---- ----- ----- ----- ----
Total.................................... $2.5 $2.9 $7.5 $31.4 $ 3.7 $54.2 $3.9
==== ==== ==== ===== ===== ===== ====
</Table>
The restructuring charge of $0.8 million for the six months ended June 30,
2004 resulted from the closing of manufacturing facilities in dairy foods
and the restructuring charge of $2.5 million for the six months ended June
30, 2003 resulted primarily from the closing of facilities in dairy foods
and feed. The restructuring charges of $3.5 million, $13.2 million,
reversal of ($4.1) million and charge of $9.7 million for the years ended
December 31, 2003, 2002, 2001 and 2000, respectively, primarily resulted
from initiatives to consolidate facilities and reduce personnel in our feed
segment and the closing of manufacturing facilities in the dairy foods
segment.
The impairment charge of $1.7 million for the six months ended June 30,
2004 related to the write-down of goodwill in the seed segment. The
impairment charge of $0.4 million for the six months ended June 30, 2003
related to the write-down of certain impaired plant assets in the feed
segment. The impairment charge of $4.0 million for the year ended December
31, 2003 related to the write-down of various assets to their estimated
fair value and goodwill impairments. The impairment charge of $18.2 million
for the year ended December 31, 2002 related to the write-down of certain
impaired plant assets in the dairy foods and animal feed segments to their
estimated fair value. The impairment charge of $7.8 million for the year
ended December 31, 2001 related to write-downs of a feed operation in
Mexico and certain swine assets to their estimated fair value. The
impairment charge of $44.5 million for the year ended December 31, 2000
resulted primarily from a write-down of goodwill related to a previous
acquisition in our dairy foods segment. The impairment charge of $3.9
million for the year ended December 31, 1999 was related to
under-utilization of the Land O'Lakes cheese production assets in Poland.
(2) We recognized net gains on legal settlements of $4.5 million, $19.2
million, $22.8 million, $155.5 million and $3.0 million for the six months
ended June 30, 2004 and 2003 and the years ended December 31, 2003, 2002
and 2001, respectively. In the six months ended June 30, 2004, we settled a
case for a loss of $0.5 million. The gains represent cash received from
product suppliers against whom we alleged certain price-fixing claims.
(3) The following table summarizes other (income) expense, net:
<Table>
<Caption>
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
--------------- ---------------------------------------
2004 2003 2003 2002 2001 2000 1999
------ ------ ----- ----- ----- ------ ------
(IN MILLIONS)
Loss (gain) on sale of investments.... $ 0.1 $(0.8) $(0.9) $ 0.9 $(0.3) $ (2.4) $ (0.8)
(Gain) loss on divestitures of
businesses.......................... (1.6) 0.7 (0.7) (4.9) -- (89.0) (54.2)
Gain on sale of intangibles........... -- (0.6) (0.5) (4.2) -- -- --
Loss (gain) on extinguishment of
debt................................ -- -- 0.5 -- 23.4 (4.4) --
----- ----- ----- ----- ----- ------ ------
Total............................... $(1.5) $(0.7) $(1.6) $(8.2) $23.1 $(95.8) $(55.0)
===== ===== ===== ===== ===== ====== ======
</Table>
(4) Period results include an inventory write-down of $62.1 million for cheese
and butter due to lower of cost or market adjustments.
40
NOTES TO SELECTED FINANCIAL DATA -- (CONTINUED)
(5) Reflects the portion of earnings allocated to members for the prior fiscal
year distributed in cash in the current fiscal year.
<Table>
<Caption>
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
-------------- ------------------------------------
2004 2003 2003 2002 2001 2000 1999
------ ----- ---- ----- ----- ----- -----
(IN MILLIONS)
20% required for tax deduction............ $ 7.9 $2.8 $2.8 $14.1 $28.5 $ 7.0 $15.0
Discretionary............................. 3.5 1.4 1.4 6.1 2.2 3.6 5.0
----- ---- ---- ----- ----- ----- -----
Total................................... $11.4 $4.2 $4.2 $20.2 $30.7 $10.6 $20.0
===== ==== ==== ===== ===== ===== =====
</Table>
(6) Reflects the distribution of earnings previously allocated to members and
not paid out as cash patronage. Includes the distribution of a portion of
the equity issued in connection with the acquisition of Dairyman's
Cooperative Creamery Association and acquisition of certain assets of
Countrymark Cooperative.
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
---------------- -----------------------------------------
2004 2003 2003 2002 2001 2000 1999
------ ------ ----- ----- ----- ----- -----
(IN MILLIONS)
Revolvement
Dairy Foods..................... $19.0 $17.7 $18.0 $15.2 $14.0 $13.8 $15.6
Ag Services..................... 2.2(a) 1.8(a) 2.2(a) 2.5(a) 2.2(a) 29.8(a) 13.1(a)
----- ----- ----- ----- ----- ----- -----
Total......................... $21.2 $19.5 $20.2 $17.7 $16.2 $43.6 $28.7
===== ===== ===== ===== ===== ===== =====
</Table>
-----------------------
(a) Included equity revolvements to deceased members of local
cooperatives.
(7) For purposes of determining the ratio of earnings to fixed charges, earning
are determined as earnings before income taxes, less equity in earnings of
affiliated companies plus minority interest in earnings of subsidiaries,
plus distributed income of equity investees and fixed charges. Fixed
charges include interest on all indebtedness and one-third of rental
expense on operating leases representing that portion of rental expense
deemed to be attributable to interest.
(8) Cash held in a restricted account required to support the CPI property and
equipment lease.
(9) Working capital is defined as current assets (less cash and short-term
investments and restricted cash) minus current liabilities (less notes and
short-term obligations, current maturities of long-term debt and
obligations under capital leases).
(10) Total debt excludes the 7.45% Capital Securities due on March 15, 2028, of
our trust subsidiary.
(11) On October 1, 2000, we combined our feed assets with those of Farmland
Industries to form Land O'Lakes Farmland Feed. We consolidate the operating
activities of Land O'Lakes Farmland Feed.
(12) In October 2001, we acquired Purina Mills, Inc. and since then we have
consolidated its operating activities in the feed segment.
(13) 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 is reported in our animal feed segment
results for the six months ended June 30, 2004 and 2003 and the years ended
December 31, 2003, 2002 and 2001.
41
NOTES TO SELECTED FINANCIAL DATA -- (CONTINUED)
(14) On July 28, 2000, we contributed all of our revenue generating agronomy
assets to Agriliance, a joint venture with United Country Brands and paid
$57 million in cash, in exchange for a 50% interest in Agriliance.
Beginning July 29, 2000, our share of earnings or losses in Agriliance was
reported under the equity method of accounting.
(15) Through June 30, 2003, our layers business, MoArk, was unconsolidated and
accounted for under the equity method. Effective July 1, 2003, MoArk was
consolidated in our financial statements. Financial statements for periods
prior to July 1, 2003 have not been restated for the effects of
consolidation.
42
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 consolidated financial statements and
the notes to such statements included elsewhere in this prospectus. This
discussion contains forward-looking statements based on current expectations,
assumptions, estimates and projections of 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 prospectus. We undertake no obligation to update publicly
any forward-looking statements.
OVERVIEW
GENERAL
Segments
We operate our business predominantly in the United States in six segments:
dairy foods, feed, seed, swine, agronomy and layers. We have limited
international operations.
- Our dairy foods segment produces, markets and sells butter, spreads,
cheese and other dairy products.
- We operate our feed segment principally through Land O'Lakes Farmland
Feed LLC, our wholly-owned consolidated subsidiary. Our feed segment
develops, produces, markets and distributes animal feeds such as
ingredient feed, formula feed, milk replacers, vitamins and additives to
both commercial and lifestyle customers. As a result of the Purina Mills
acquisition in October 2001, feed results include Purina Mills swine
marketing activities since Purina Mills historically reported results of
its swine business together with its feed business.
- Our 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 consists primarily of our 50% ownership in
Agriliance LLC which is accounted for under the equity method and our 38%
interest in CF Industries, Inc. which is accounted for on a cost basis.
Agriliance markets and sells two primary products lines: crop protection
(including herbicides and pesticides) and crop nutrients (including
fertilizer and micronutrients). CF Industries is an inter-regional crop
nutrient manufacturing cooperative.
- Our layers segment consists of our joint venture in MoArk, LLC, which was
consolidated as of July 1, 2003. MoArk produces and markets shell eggs
and egg products that are sold to retail and wholesale customers for
consumer and industrial use throughout the United States.
- We also derive a portion of revenues and income from other related
businesses, which are insignificant to our overall results.
We allocate corporate administrative expense to all six of our business
segments using the following two methodologies: direct usage for services for
which we are able to track 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 all segments, including segments
composed solely of investments and joint ventures.
Unconsolidated Businesses
We have investments in certain entities that are not consolidated in our
financial statements. For the six months ended June 30, 2004, earnings from our
unconsolidated businesses amounted to $66.5 million,
43
compared to $50.4 million for the six months ended June 30, 2003. For the year
ended December 31, 2003, income from our unconsolidated businesses amounted to
$57.1 million, compared to income of $22.7 million in 2002 and $48.6 million in
2001. Our investment in unconsolidated businesses amounted to $557.3 million as
of June 30, 2004, $506.6 million as of December 31, 2003, $545.6 million as of
December 31, 2002 and $568.1 million as of December 31, 2001. Cash flow from our
investment in unconsolidated businesses for the six months ended June 30, 2004
was $14.5 million, compared to $2.8 million for the six months ended June 30,
2003. Cash flow from our investment in unconsolidated businesses for the year
ended December 31, 2003 was $39.9 million, compared to $30.4 million in 2002 and
$6.0 million in 2001.
Agriliance and CF Industries constitute the most significant of our
investments in unconsolidated businesses, both of which are reflected in our
agronomy segment results. Our investment in, and earnings from, Agriliance and
CF Industries were as follows as of and for the six months ended June 30 and as
of and for the years ended December 31:
<Table>
<Caption>
SIX MONTHS ENDED YEARS ENDED
------------------- ------------------------------------------
JUNE 30, JUNE 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2004 2003 2003 2002 2001
-------- -------- ------------ ------------ ------------
(IN MILLIONS)
AGRILIANCE:
Investment.................. $141.8 $135.6 $ 92.1 $ 91.6 $ 84.0
Equity in earnings.......... 49.7 43.9 33.9 25.1 34.2
CF INDUSTRIES:
Investment.................. $249.5 $249.5 $249.5 $249.5 $248.5
Patronage income............ -- -- -- -- --
</Table>
In the years ended December 31, 2003, 2002 and 2001, we received cash
distributions of $25.8 million, $17.5 million and $0.0 million, respectively,
from Agriliance. We did not receive cash distributions from Agriliance during
the six months ended June 30, 2004 and 2003. We did not receive any cash
distributions from CF Industries during these periods.
Land O'Lakes, CHS, Inc. ("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 (wholly owned by CHS).
Land O'Lakes provides certain support services to Agriliance at competitive
market prices. Agriliance was billed $4.6 million in the six months ended June
30, 2004, $4.5 million in the six months ended June 30, 2003, and $9.2 million,
$8.3 million and $7.1 million for the years ended December 31, 2003, 2002, and
2001, respectively. 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 to the annual results of Agriliance in this
prospectus 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. On December 4, 2003, Agriliance restructured its
credit arrangements to include a $225 million three-year revolving syndicated
credit facility, a three year $200 million receivables securitization with
CoBank and sold $100 million of senior secured notes in a private placement.
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. Agriliance's performance reflects
the seasonal nature of its business. Most of its annual sales and earnings,
which are principally derived from the distribution of crop nutrients and crop
protection products manufactured by others, including CF Industries, occur in
the second quarter of each calendar year, with off-season losses in the first,
third and fourth quarter.
44
For the six months ended June 30, 2004, net earnings for Agriliance were
$99.4 million, up $11.2 million versus the same period for 2003. This increase
is the result of a $16.8 million increase in earnings from the crop protection
business. The increased crop protection earnings were primarily the result of
timing of vendor rebates. Offsetting these increases was a $6.5 million decline
in crop nutrient earnings due to a 0.5 million ton decrease in volume resulting
from competitive market conditions.
For the year ended December 31, 2003 net earnings for Agriliance were $68.1
million, up $18.9 million versus 2002. This increase is the result of a $15.7
million increase in earnings from Agro Distribution, LLC, Agriliance's Southern
retail business. A $5.9 million increase in the wholesale crop nutrients
business also contributed to the improved earnings performance. The increased
earnings for both Agro Distribution and crop nutrients were the result of
improved margin performance. Agro Distribution's gross margin increased $25.9
million to $136.2 million for the year ended December 31, 2003. This increase
was the result of increased sales of $57.2 million due to increased market share
and favorable weather patterns particularly in the Southwest. Agro
Distribution's gross margins also increased due to strong sales of higher-margin
branded crop protection products. Wholesale crop nutrient gross margins
increased by $9.0 million to $53.8 million. Increased crop nutrient gross margin
per ton of $2.54, resulting from higher average crop nutrient prices,
contributed to an increase in gross margins of $19.6 million. This increase was
partially offset by a 2.4 million ton decrease in crop nutrient volume resulting
from increased competition and lower application rates of key crop nutrient
products. A slight increase in wholesale crop protection margins was offset by
lower margins in Agriliance's other businesses. Increased margin performance was
partially offset by an increase of $22.3 million for bad debt, restructuring and
incentive expenses.
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 eight. 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 had resulted in depressed prices and,
consequently, depressed margins. 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 four years because CF Industries realized losses in those years. We
anticipate that no patronage allocations will occur until prior losses have been
recouped. Our $249.5 million investment in CF Industries primarily 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. We have performed impairment tests of our investment and based on
those tests we believe that the investment is not impaired. We will continue to
perform such tests to determine whether or not a future impairment is warranted.
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 crop nutrient 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 $16.7 million at June 30, 2004, $18.6 million at December 31, 2003,
$22.1 million at December 31, 2002 and $21.5 million at December 31, 2001. This
investment constitutes less than one percent of CoBank's total shareholders'
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 net equity contributions based on a percentage (currently 10.0%) 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.
45
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 and/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. 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.
For the year ended December 31, 2003, our net earnings from member business
were $39.7 million, excluding the portion (10% holdback) added to permanent
equity. Of this amount, $40.0 million was applied to allocated patronage refunds
and ($0.3) million was applied to deferred equities. The $40.0 million of
allocated patronage refunds consisted of an estimated $11.6 million to be paid
in cash in 2004 and $28.4 million to be retained as allocated member equities
and revolved at a later time, subject to approval by the board of directors. The
($0.3) million of deferred equities represents earnings from member businesses
that are held in an equity reserve account rather than being allocated to
members. For the year ended December 31, 2003 we had net earnings of $42.3
million applied to retained earnings, which represents permanent equity derived
from non-member business, the 10% holdback of member earnings and income taxes.
In 2003, we made payments of $24.4 million for the redemption of member
equities. This included $4.2 million for the cash patronage portion of the 2002
earnings allocated to members. It also included $20.2 million for the
revolvement of member equities previously allocated to members, and not paid as
cash patronage, and the revolvement of a portion of equities issued in
connection with the 1998 acquisitions of Dairyman's Cooperative Creamery
Association and certain assets of Countrymark Cooperative.
Wholesaling and Brokerage Activities
Our dairy foods segment operates a wholesale milk marketing program. We
purchase excess raw milk over our manufacturing needs from our members and sell
it directly to other dairy processors. We generate losses or insignificant
earnings on these transactions. 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;
46
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 six
months ended June 30, 2004, we sold 2,707.9 million pounds of milk, which
resulted in $666.0 million of net sales or 34.3% of our dairy foods segment's
net sales for that period, with cost of sales exceeding net sales by $9.9
million. For the year ended December 31, 2003, we sold 5,744.0 million pounds of
milk, which resulted in $939.4 million of net sales or 31.6% of our dairy foods
segment's net sales for that period, with cost of sales exceeding net sales by
$12.3 million.
Our 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. In the six months ended June 30, 2004,
ingredient merchandising generated net sales of $367.1 million, or 27.0% of
total feed segment net sales, and a gross profit of $13.2 million, or 10.4% of
total animal feed segment gross profit. For the year ended December 31, 2003,
ingredient merchandising generated net sales of $521.9 million, or 21.2% of
total feed segment net sales, and a gross profit of $15.5 million, or 5.4% 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. Feed sales
tend to increase in the fourth and first quarter of each year because cattle are
less able to graze during cooler months. Previously, most crop seed sales
occurred 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, feed, swine and
layers 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. In the six months ended June 30, 2004, our raw milk input cost was
$1,076.5 million, or 57.9% of the cost of sales for our dairy foods segment. For
the year ended December 31, 2003, our raw milk input cost was $1,621.1 million,
or 57.8% 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 in
the six months ended June 30, 2004 for these inputs was $122.3 million for
cream, $70.4 million for butter and $235.6 million for bulk cheese. Cost of
sales for the year ended December 31, 2003 for these inputs was $155.2 million
for cream, $108.5 million for butter and $262.1 million for bulk cheese. 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 the regional prices of dairy food products manufactured.
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
47
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. In the six months ended June 30, 2004, bulk
cheese, which is generally priced the date of make, represented $164.8 million,
or 8.5% of our dairy foods segment's net sales. For the year ended December 31,
2003, bulk cheese, represented $246.9 million, or 8.3% of our dairy foods
segment's net sales.
We also maintain significant inventories of butter and cheese for sale to
our retail and foodservice 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. In the six months
ended June 30, 2004, branded and private label retail, deli and foodservice net
sales of cheese and butter represented $672.9 million, or 34.7%, of our dairy
foods segment's net sales. For the year ended December 31 2003, branded and
private label retail, deli and foodservice net sales of cheese and butter
represented $1,116.7 million, or 37.6%, of our dairy foods segment's net sales.
Market prices for commodities such as butter and cheese can have a
significant impact on both the cost of products produced and the price for which
products are sold. The per pound market price of butter averaged $1.91 for the
six months ended June 30, 2004 compared to $1.09 for the six months ended June
30, 2003. The per pound market price of butter averaged $1.14 for the year ended
December 31, 2003, $1.11 in 2002 and $1.66 in 2001. The per pound market price
for butter on December 31, 2003 was $1.25. In the past three years, the lowest
monthly market price for butter was $0.96 in September 2002, and the highest
monthly market price was $2.21 in April 2004. The per-pound market price for
block cheese averaged $1.74 for the six months ended June 30, 2004 compared to
$1.13 for the six months ended June 30, 2003. The per pound market price for
block cheese averaged $1.32 for the year ended December 31, 2003, $1.18 in 2002
and $1.44 in 2001. In the past three years, the lowest monthly market price for
block cheese was $1.07 in March 2003 and the highest monthly market price was
$2.14 in April 2004. The per pound market price for block cheese on December 31,
2003 was $1.31.
We maintain a sizable dairy manufacturing presence in the Upper Midwest.
This region has seen significant declines in cow numbers. Since 1993, cow
numbers declined 27% in Minnesota and 17% in Wisconsin. Over the same period,
the Minnesota/Wisconsin share of nationwide dairy manufacturing volume has
declined from 41% to 33%. This decline has put pressure on our Upper Midwest
milk input costs and has resulted in significant losses to our company in 2003
and 2002. We closed our Volga, South Dakota plant in May 2004 and our Perham,
Minnesota plant in January 2003. We 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 started in 2002, we
incurred $0.8 million for the six months ended June 30, 2004, $1.6 million for
the six months ended June 30, 2003, and $2.6 million and $9.5 million for the
years ended December 31, 2003 and 2002, respectively, for restructuring and
impairment charges related to the Upper Midwest.
Margins on our mozzarella and whey products, primarily in our western
cheese operations, remained weak for the year ended December 31, 2003. Soft
demand for mozzarella and whey and over-capacity in the mozzarella industry
continued to place pressure on the margins these products generate. However,
margins improved for the six months ended June 30, 2004 compared to the same
period for 2003 due to the effect of higher cheese and whey prices. Market
softness and other factors have contributed to start-up losses at our Tulare,
California mozzarella and whey manufacturing facility. As of June 30, 2004, we
completed the phase II expansion at CPI which doubled the plant capacity to
approximately 6 million pounds of milk per day. Our total investment in the CPI
facility is approximately $175 million in property, plant and equipment. Since
CPI's inception in 1999 through June 30, 2004, we incurred pre-tax losses
related to CPI aggregating $81.8 million. We expect pretax losses at CPI to
continue through 2005 as we ramp up production toward the rated capacity.
48
Feed. The feed segment follows industry standards for feed pricing. The
feed industry generally prices products based on income over ingredient cost 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. Accordingly, net sales are less of an indicator of
performance since large fluctuations can occur from period-to-period due to
volatility in the underlying commodity ingredient prices.
We enter into forward contracts to supply feed, which currently represent
approximately 35% of our feed output. When we enter into these contracts, we
also generally enter into forward input supply contracts to lock in our
operating margins.
Changes in commodity grain prices 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 has 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. Simple
blends tend to have lower margins than complete feeds. This change in product
mix is a result of differences in industry practices. Dairy producers in the
western United States tend to purchase feed components and mix them at the farm
location rather than purchasing a complete feed product delivered to the farm.
Producers purchase grain blends and concentrated premixes from separate
suppliers. This shift is reflected in increased sales of simple blends in our
western feed region and increases in our subsidiaries that manufacture premixes
in the western area.
We have seen continued erosion of commodity feed volumes, as well as a
product mix shift, mainly related to regional swine and dairy herd liquidations
and the continued consolidation of these market segments. In 2003, dairy feed
volumes were down 9% compared to 2002, and there were also reductions of 10% and
14%, respectively, in poultry and swine feed volumes. Some of this volume
reduction was deliberate due to plant closings and an increased focus on
value-added sales opportunities. Beef feedlot occupancies have also declined due
to a 20-year low in brood cow numbers. Competition within the industry has grown
stronger as these volumes decline. Further integration and consolidation in the
swine and dairy industries is expected to place pressures on volumes and result
in a product mix shift to lower margin products in the second half of 2004.
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.
49
We 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 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
Tyson, 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. In the six months ended June 30,
2004, we sold approximately 22% of our feeder pig volume on the open market. For
the year ended December 31, 2003, we sold approximately 21% of our feeder pig
volume 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. During the second quarter of
2003, we reduced our hog exposure by offering our cost plus producers an early
exit option. During 2003, producers representing about 100,000 hogs elected the
early exit option, leaving 60,000 hogs on the cost plus program. During the six
months ended June 30, 2004, additional contracts expired and we now have
approximately 9,000 hogs remaining in this program. The last cost plus contracts
will expire in August 2005. The program incurred pre-tax losses of $0.3 million
in the six months ended June 30, 2004 and $1.9 million in the six months ended
June 30, 2003. The program incurred pre-tax losses of $2.4 million in the year
ended December 31, 2003, $5.7 million in 2002 and had minimal earnings in 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.
We operate this portion of our swine business through two contract programs, the
pass-through program and the market risk sharing program. Under the pass-through
program, we enter into commitments to purchase weanling and feeder pigs from
producers and generally have commitments to immediately resell the animals to
swine producers. The market risk sharing program provides minimum price floors
to producers for market hogs. The price floor in our market risk sharing program
floats with the market price of hogs and the cost of swine feed. For the year
ended December 31, 2003, this portion of our swine business generated a loss of
$0.7 million compared to losses of $3.9 million in 2002 and $0.1 million in
2001. The improvement in 2003 versus 2002 was primarily due to an improvement in
hog market prices as well as exiting some contracts.
Layers. MoArk produces and markets shell eggs and egg products. MoArk's
sales and earnings fluctuate depending on egg prices. For the six months ended
June 30, 2004, egg prices averaged $1.06 per dozen as measured by Urner Barry
South Central Large compared to egg prices of $0.83 for the six months ended
June 30, 2003. For the year ended December 31, 2003, egg prices averaged $0.93
per dozen, as compared to egg prices of $0.72 for 2002. Improved market prices
for eggs resulted, in part, from a declining chick hatch, changes in response to
new animal welfare guidelines and changing consumer dietary trends. In July
2004, egg prices averaged $0.78 per dozen.
Through June 30, 2003, MoArk was unconsolidated and our ownership interest
was recorded only as equity in earnings or loss from affiliated companies.
Effective July 1, 2003, MoArk was consolidated in our financial statements as
required by Financial Accounting Standards Board Interpretation No. 46 ("FIN
46") and we did not restate for prior periods. Accordingly, the 2003 and 2002
financial statements are not comparable for several categories, including sales
and cost of sales in this segment. Sales of $318.6 million and cost of sales of
$266.8 million were recorded for the six months ended June 30, 2004 in this
segment. Sales of $317.8 million and cost of sales of $264.7 million were
recorded for the six months ended December 31, 2003 in this segment. There were
no sales and cost of sales recorded for the first six
50
months of the year ended December 31, 2003 and for the years ended December 31,
2002 and 2001 as MoArk was accounted for under the equity method during these
periods.
Acquisitions/Joint Ventures/Divestitures
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 as
long-term debt to capital increased from 43.5% at December 31, 2000, prior to
the acquisition, to 56.1% at December 31, 2001, subsequent to the acquisition.
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 administrative expense as a percent of sales when compared
with our rates and percentages prior to this acquisition.
Litigation Settlements
Our net earnings and cash flow in 2003 and 2002 were significantly and
positively affected by proceeds of settlements from certain litigation.
Substantially all these gains have been recorded in our feed segment. In the
fourth quarter of 1999, a class action lawsuit, alleging illegal price fixing,
was filed against various vitamin product suppliers. Initially, we were a party
to this action as a member of the class. In February 2000, however, we decided
to pursue our claims against the defendants outside the class action. In the
year ended December 31, 2002, we reached settlements with several defendants. As
a result of these settlements, we recorded during that period gains on legal
settlements aggregating $153.8 million. During the year ended December 31, 2001,
we recorded a gain of $3.0 million from this litigation. We settled with
additional defendants and received approximately $12.4 million in 2003. In the
six months ended June 30, 2004, we settled with additional defendants and
received $4.9 million. Cumulatively, we have received approximately $177 million
from the settling defendants, which represents the vast majority of our vitamin
purchases.
During the first quarter of 2003, we also settled a claim against certain
suppliers of methionine, an amino acid that we purchase and use in certain of
our products. We alleged that certain methionine suppliers had illegally engaged
in price fixing. For 2003, we received $10.4 million from the settling
defendants. Cumulatively, we have received $12.1 million from the settling
defendants. We do not expect to receive additional settlements based on this
claim.
The following table summarizes our gains on legal settlements for the last
three years:
<Table>
<Caption>
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
-------------- ------------------------
2004 2003 2003 2002 2001
----- ------ ------ ------- -----
(IN MILLIONS)
Vitamin settlement.............................. $4.9 $19.2 $12.4 $153.8 $3.0
Methionine settlement........................... -- -- 10.4 1.7 --
---- ----- ----- ------ ----
Total......................................... $4.9 $19.2 $22.8 $155.5 $3.0
==== ===== ===== ====== ====
</Table>
Recording of Minimum Pension Liability
Statement of Financial Accounting Standards No. 87, "Employers' Accounting
for Pensions", requires recognition of a minimum liability when the accumulated
benefit obligation exceeds the fair value of plan assets at the measurement
date. As of our November 30, 2003 measurement date, our defined benefit pension
plan assets had a lower market value than the plan's accumulated benefit
obligation. While we are not required to make any immediate cash contributions
to the plan, we recorded a required non-cash other comprehensive income charge
to equity of $60.9 million, net of an income tax benefit, in December 2003. In
2003, we also recorded a charge to equity of $4.7 million, net of income tax
benefit, for our portion of
51
the minimum pension liability adjustment of Agriliance. For the year ended
December 31, 2002, we incurred no comparable charges. These non-cash charges to
equity do not affect net earnings.
Derivative Commodity Instruments
We use derivative commodity instruments, primarily futures contracts, to
reduce our exposure to changes in commodity prices. These contracts are not
designated as hedges under Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The futures
contracts are marked to market each month and gains or losses ("unrealized
hedging gains and losses") are recognized in our earnings. We recorded
unrealized hedging (losses) gains of ($8.4) million, $6.0 million, $19.5
million, $1.1 million and ($6.6) million for the six months ended June 30, 2004
and 2003, and years ended December 31, 2003, 2002 and 2001, respectively.
RESULTS OF OPERATIONS
<Table>
<Caption>
FOR THE SIX MONTHS ENDED JUNE 30, FOR THE YEARS ENDED DECEMBER 31,
----------------------------------- ------------------------------------------------------
2004 2003 2003 2002 2001
---------------- ---------------- ---------------- ---------------- ----------------
% OF
% OF NET % OF % OF % OF
$ AMOUNT TOTAL $ AMOUNT SALES $ AMOUNT TOTAL $ AMOUNT TOTAL $ AMOUNT TOTAL
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
(IN MILLIONS)
NET SALES
Dairy foods.......... $1,942.2 48.2 $1,303.8 45.7 $2,975.0 47.0 $2,898.8 49.6 $3,462.1 59.1
Feed................. 1,357.5 33.7 1,196.2 41.9 2,467.2 39.0 2,444.7 41.8 1,864.0 31.8
Seed................. 374.4 9.3 303.0 10.6 479.3 7.6 406.9 7.0 413.6 7.1
Swine................ 46.0 1.1 43.7 1.5 91.2 1.4 83.2 1.4 109.9 1.9
Layers............... 318.6 7.9 -- -- 317.8 5.0 -- -- -- --
Other/Eliminations... (10.8) (0.2) 4.9 0.3 (4.4) 0.0 8.9 0.2 8.1 0.1
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Total net sales.... $4,027.9 $2,851.6 $6,326.1 $5,842.5 $5,857.7
======== ======== ======== ======== ========
</Table>
<Table>
<Caption>
FOR THE SIX MONTHS ENDED JUNE 30, FOR THE YEARS ENDED DECEMBER 31,
----------------------------------- ------------------------------------------------------
2004 2003 2003 2002 2001
---------------- ---------------- ---------------- ---------------- ----------------
% OF % OF % OF % OF % OF
NET NET NET NET NET
$ AMOUNT SALES $ AMOUNT SALES $ AMOUNT SALES $ AMOUNT SALES $ AMOUNT SALES
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
(IN MILLIONS)
COST OF SALES
Dairy foods.......... $1,856.9 95.6 $1,236.5 94.8 $2,804.8 94.3 $2,743.7 94.6 $3,231.3 93.3
Feed................. 1,231.5 90.7 1,056.6 88.3 2,179.1 88.3 2,155.3 88.2 1,691.3 90.7
Seed................. 326.3 87.2 262.3 86.6 416.2 86.8 353.9 87.0 354.2 85.6
Swine................ 48.5 105.4 43.3 99.1 88.6 97.1 93.5 112.4 97.0 88.3
Layers............... 266.8 83.7 -- -- 264.7 83.3 -- -- -- --
Other/Eliminations... (10.6) -- 2.0 40.8 (10.5) -- 3.8 42.2 2.3 28.4
-------- ----- -------- ---- -------- ---- -------- ----- -------- ----
Total cost of
sales............ 3,719.4 92.3 2,600.7 91.2 5,742.9 90.8 5,350.2 91.6 5,376.1 91.8
Selling, general and
administrative..... 259.9 6.5 225.4 7.9 468.3 7.4 470.6 8.1 382.3 6.5
Restructuring and
impairment
charges............ 2.5 0.1 2.9 0.1 7.5 0.1 31.4 0.5 3.7 0.1
-------- ----- -------- ---- -------- ---- -------- ----- -------- ----
Earnings (loss) from
operations......... 46.1 1.1 22.6 0.8 107.4 1.7 (9.7) 0.2 95.6 1.6
Interest expense,
net................ 44.0 1.1 39.1 1.4 82.9 1.3 78.7 1.3 55.7 1.0
Gain on legal
settlements........ (4.5) 0.1 (19.2) 0.7 (22.8) 0.4 (155.5) 2.7 (3.0) 0.1
</Table>
52
<Table>
<Caption>
FOR THE SIX MONTHS ENDED JUNE 30, FOR THE YEARS ENDED DECEMBER 31,
----------------------------------- ------------------------------------------------------
2004 2003 2003 2002 2001
---------------- ---------------- ---------------- ---------------- ----------------
% OF % OF % OF % OF % OF
NET NET NET NET NET
$ AMOUNT SALES $ AMOUNT SALES $ AMOUNT SALES $ AMOUNT SALES $ AMOUNT SALES
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
(IN MILLIONS)
Other (income)
expense, net....... (1.5) 0.0 (0.7) 0.0 (1.6) 0.0 (8.2) 0.1 23.1 0.4
Equity in earnings of
affiliated
companies.......... (66.5) 1.7 (50.4) 1.8 (57.1) 0.9 (22.7) 0.4 (48.6) 0.8
Minority interest in
earnings of
subsidiaries....... 1.0 0.0 2.9 0.1 6.4 0.1 5.4 0.1 6.9 0.1
-------- ----- -------- ---- -------- ---- -------- ----- -------- ----
Earnings before
income taxes....... 73.6 1.8 50.9 1.8 99.6 1.6 92.6 1.6 61.5 1.1
Income tax expense
(benefit).......... 11.7 0.3 6.3 0.2 17.6 0.3 (3.8) 0.1 (6.6) 0.1
-------- ----- -------- ---- -------- ---- -------- ----- -------- ----
Net earnings......... 61.9 1.5 44.6 1.6 82.0 1.3 96.4 1.6 68.1 1.2
======== ===== ======== ==== ======== ==== ======== ===== ======== ====
</Table>
SIX MONTHS ENDED JUNE 30, 2004 AS COMPARED TO SIX MONTHS ENDED JUNE 30, 2003
OVERVIEW OF RESULTS
Our net earnings were $61.9 million for the six months ended June 30, 2004
compared to $44.6 million for the six months ended June 30, 2003. Net earnings
included income tax expense of $11.7 million compared to $6.3 million for the
six months ended June 30, 2004 and 2003, respectively. Earnings increased
primarily due to the effects of higher market prices for egg products and volume
growth in the dairy foods and seed segments. Earnings also improved through
operating efficiencies, particularly in dairy foods and layers segments,
increased earnings from our investment in Agriliance and a $1.7 million gain on
a divestiture of a business in the dairy foods segment. Partially offsetting
these increases was an after-tax decrease in gain on legal settlements of $9.5
million in the feed segment. Feed also experienced weaker margins in 2004
compared to 2003 stemming from continued industry competition, rising ingredient
prices and increased distribution costs. In addition, earnings were reduced by
after-tax unrealized hedging losses totaling $5.2 million for the six months
ended June 30, 2004 compared to gains of $3.7 million for 2003.
NET SALES
Net sales for the six months ended June 30, 2004 increased $1,176.3
million, or 41.3%, to $4,027.9 million compared to the same period in 2003. The
increase was partly attributed to the consolidation of MoArk effective July 1,
2003, which increased sales by $318.6 million, or 11%. Increases in dairy foods,
feed, and seed sales contributed $871 million of increased sales, or 30%,
compared to the six months ended June 30, 2003. A discussion of net sales by
business segment is found below under the caption "Net Sales and Gross Profit by
Business Segment."
GROSS PROFIT
Gross profit for the six months ended June 30, 2004 increased $57.6
million, or 23%, to $308.5 million compared to $250.9 million for the six months
ended June 30, 2003. The consolidation of MoArk increased gross profit by $51.8
million. Volume increases in the dairy foods and seed segments also contributed
to the increase. Gross profit as a percent of net sales decreased 1.1 percentage
points to 7.7% for the six months ended June 30, 2004 compared to 8.8% for the
same period in 2003. The primary reason for the decline was due to unrealized
hedging losses of $8.5 million for the six months ended June 30, 2004 versus
unrealized hedging gains of $6.0 million in the same period in 2003. The
consolidation of MoArk, which has a higher-margin product mix, partly offset
this decrease. A discussion
53
of gross profit by business segment is found below under the caption "Net Sales
and Gross Profit by Business Segment."
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense for the six months ended June
30, 2004 increased $34.5 million, or 15%, to $259.9 million compared to $225.4
million for the six months ended June 30, 2003. The increase was primarily due
to the consolidation of MoArk, effective July 1, 2003, which added $18.2 million
of selling, general and administrative expense for the six months ended June 30,
2004. Increased spending of $5.0 million in the dairy foods segment related to
advertising and promotion costs and higher personnel costs contributed to the
higher expenses. Also contributing to the increase was a $3.6 million gain on
sale of a dairy facility in 2003 compared to no gain recorded in the same period
for 2004. Selling, general and administrative expense as a percent of net sales
decreased 1.4 percentage points to 6.5% for the six months ended June 30, 2004
from 7.9% for the same period in 2003. The decline as a percent of net sales is
partially due to the consolidation of MoArk, which has a lower percentage of
selling, general and administrative expense to net sales than our other
segments, and also due to increased sales prices in dairy foods and feed due to
rising commodity markets.
RESTRUCTURING AND IMPAIRMENT CHARGES
For the six months ended June 30, 2004, we had restructuring and impairment
charges of $2.5 million compared to $2.9 million for the same period in 2003. In
2004, we incurred $0.8 million of restructuring charges for employee severance
in our dairy foods segment related to the closure of our Volga, South Dakota
cheese facility. We also incurred $1.5 million for goodwill impairment in our
seed segment related to assets held for sale. For the six months ended June 30,
2003, the $2.9 million of restructuring and impairment charges related to
closures of certain manufacturing facilities within various business segments.
INTEREST EXPENSE, NET
Interest expense, net of interest income, was $44.0 million for the six
months ended June 30, 2004 compared to $39.1 million for the six months ended
June 30, 2003. Changes in our debt structure resulted in additional interest
expense of $1.0 million for the six months ended June 30, 2004 compared to the
same period for the prior year. The consolidation of MoArk effective July 1,
2003, resulted in additional interest expense of $3.0 million. Also, for 2004 we
accelerated $1.5 million of deferred financing cost amortization as a result of
prepayments made on our term loans with proceeds from an expansion of our
receivables securitization facility. Combined interest rates for borrowings,
excluding CoBank patronage, averaged 7.05% for the six months ended June 30,
2004 compared to 6.77% for the six months ended June 30, 2003.
GAIN ON LEGAL SETTLEMENTS
As a result of settled litigation, we recorded a gain on legal settlements
of $4.5 million for the six months ended June 30, 2004 compared to a gain on
legal settlements of $19.2 million for the six months ended June 30, 2003. These
gains represent cash received from product suppliers against whom we alleged
certain price-fixing claims.
EQUITY IN EARNINGS OF AFFILIATED COMPANIES
For the six months ended June 30, 2004, equity in earnings of affiliated
companies was $66.5 million compared to $50.4 million for the six months ended
June 30, 2003. Equity in earnings from Agriliance was $49.7 million for the six
months ended June 30, 2004, which was a $5.8 million increase from the equity
earnings of $43.9 million for the six months ended June 30, 2003. This increase
was primarily driven by improved crop protection product margins and was
partially offset by a decline in crop nutrient volumes. A discussion of net
earnings for Agriliance can be found under the caption
"-- Overview -- Unconsolidated Businesses." MoArk equity in earnings from joint
venture investments was $10.4 million for the six months
54
ended June 30, 2004 compared to $1.1 million for the six months ended June 30,
2003. The increase in MoArk equity in earnings was driven primarily by improved
market prices for eggs, in part as a result of a declining chick hatch, changes
in response to new animal welfare guidelines and changing consumer dietary
trends.
INCOME TAXES
We recorded income tax expense of $11.7 million for the six months ended
June 30, 2004 compared to $6.3 million for the six months ended June 30, 2003.
The increase in income tax expense primarily resulted from improved earnings
from MoArk.
NET SALES AND GROSS PROFIT BY BUSINESS SEGMENT
Our reportable segments consist of business units that offer similar
products and services and/or similar customers. We have six segments: Dairy
Foods, Feed, Seed, Swine, Agronomy and Layers. Our Agronomy segment consists
primarily of our 50% ownership in Agriliance, which is accounted for under the
equity method and our 38% interest in CF Industries which is accounted for on a
cost basis. Accordingly, no sales, cost of sales or gross profit are recorded in
the Agronomy segment. A discussion of earnings results for Agriliance can be
found under the caption "Overview -- General -- Unconsolidated Businesses."
Dairy Foods
<Table>
<Caption>
FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------
2004 2003 % CHANGE
--------- --------- ---------
(DOLLARS IN MILLIONS)
Net sales.............................................. $1,942.2 $1,303.8 49.0%
Gross profit........................................... 85.2 67.4 26.4%
Gross profit % of net sales.......................... 4.4% 5.2%
</Table>
NET SALES. Net sales for the six months ended June 30, 2004 increased
$638.4 million, or 49.0%, compared to the six months ended June 30, 2003. Butter
and value-added cheese (retail, deli, and foodservice cheese) sales prices
increased for the six months ended June 30, 2004 compared to the same period in
2003 due primarily to higher commodity prices, which resulted in increased sales
of $124.0 million and $59.2 million, respectively. Bulk cheese sales increased
$119.9 million due to the increase in the average commodity market price of
cheese, up $0.61 per pound compared to the same period in 2003. Volume increases
in value-added cheese for the six months ended June 30, 2004 also contributed to
the increase in sales by $31.6 million. Value-added cheese volume increases were
due to strong consumer demand, especially for foodservice cheese. Sales through
our wholesale milk marketing program increased $264.4 million compared to the
same period in 2003 due primarily to increases in milk market prices. Partially
offsetting these increases was a $5.1 million volume decline in sales of butter
and spreads. Declines in private label butter volumes due to consumer and trade
reaction to higher market prices more than offset increases in branded butter
and spread volumes. The branded butter volume increase was impacted by our
spreadable butter with canola oil product, which was introduced in the six
months ended June 30, 2003.
GROSS PROFIT. Gross profit for the six months ended June 30, 2004
increased $17.8 million compared to the six months ended June 30, 2003. Gross
profit for value-added cheese increased $4.1 million due to higher profit
margins as a result of higher commodity market prices. Volume increases for
value-added cheese also increased gross profit by $4.1 million. Gross profit for
bulk cheese increased by $14.5 million for the six months ended June 30, 2004
versus the same period in the prior year due to increased margins on mozzarella
and whey products, product mix adjustments to higher-margin cheese, and
operational efficiencies mainly due to the closures of the Gustine and Perham
facilities in 2003. An unrealized hedging gain of $2.7 million for the six
months ended June 30, 2004 compared to $0.7 million for the six months ended
June 30, 2003 resulted in an additional $2.0 million of gross profit in 2004.
Gross profit for butter
55
and spreads was flat for the six months ended June 30, 2004 compared to 2003.
Partially offsetting these increases was an $8.1 million decrease in gross
profit in our wholesale milk marketing program. Gross profit as a percent of net
sales declined 0.8 percentage points for the six months ended June 30, 2004
versus 2003 primarily due to product mix in butter and spreads as a result of
high retail prices.
Feed
<Table>
<Caption>
FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------
2004 2003 % CHANGE
--------- --------- ---------
(DOLLARS IN MILLIONS)
Net sales.............................................. $1,357.5 $1,196.2 13.5%
Gross profit........................................... 126.0 139.6 (9.7)%
Gross profit % of net sales.......................... 9.3% 11.7%
</Table>
NET SALES. Net sales for the six months ended June 30, 2004 increased
$161.3 million, or 13.5%, compared to the six months ended June 30, 2003.
Ingredients sales increased $71.3 million due to higher commodity prices in the
six months ended June 30, 2004 compared to the same period in 2003. Formula feed
sales, which includes both lifestyle and livestock feeds, increased $47.0
million due to increased volumes, particularly in horse and companion lifestyle
animal feed, as well as higher commodity prices. Although livestock feed sales
increased due to higher commodity prices, some of this increase was offset by
slightly lower volumes for dairy, beef, and swine feed. Continued producer
integration and exiting of a swine joint venture, as well as a geographic shift
in livestock numbers are the primary causes for this volume decline. Sales of
animal health, farm and ranch products were $11.1 million higher than in the six
months ended June 30, 2003 due to the creation of Heritage Trading Company, a
consolidated joint venture formed in March of 2003. Sales at other Land O'Lakes
Farmland Feed LLC subsidiaries increased $34.5 million mainly due to increased
sales of premix products.
GROSS PROFIT. Gross profit for the six months ended June 30, 2004
decreased $13.6 million, or 9.7%, compared to the six months ended June 30,
2003. Formula feed gross profit declined $11.6 million due primarily to volume
declines in livestock feeds, product mix changes, continued industry
competition, increased freight subsidies resulting from higher fuel costs, and
increased ingredient prices. An unrealized hedging loss of $4.2 million for the
six months ended June 30, 2004 compared to a gain of $3.6 million for the six
months ended June 30, 2003 resulted in a reduction to gross profit of $7.8
million. Partially offsetting these declines was additional sales of
ingredients, resulting in $4.1 million of additional gross profit due to focused
purchasing opportunities in rising and volatile commodity markets. Gross profit
for animal health, farm and ranch products was $1.0 million higher than for the
six months ended June 30, 2003 due to the creation of Heritage Trading Company
in March of 2003. Increased sales at a premix subsidiary resulted in increased
gross profit of $1.3 million. Gross profit as a percent of net sales declined
from 11.7% to 9.3% for the six months ended June 30, 2003 versus 2004,
respectively. The decline is primarily due to product mix changes to
lower-margin formula feed products and increased packaging, supplies and fuel
costs, as well as the unrealized hedging loss.
Seed
<Table>
<Caption>
FOR THE SIX MONTHS ENDED JUNE 30,
----------------------------------
2004 2003 % CHANGE
-------- -------- ----------
(DOLLARS IN MILLIONS)
Net sales............................................... $374.4 $303.0 23.6%
Gross profit............................................ 48.0 40.7 17.9%
Gross profit % of net sales........................... 12.8% 13.4%
</Table>
56
NET SALES. Net sales for the six months ended June 30, 2004 increased
$71.4 million to $374.4 million compared to net sales of $303.0 million for the
six months ended June 30, 2003. Product mix in proprietary brands and volume
growth from partnered sales resulted in increased corn sales of $39.4 million,
or 33.5%. Soybean sales increased $21.2 million in 2004, or 21.7%, as a result
of increased volumes in both proprietary and partnered brands. Alfalfa sales
increased $3.8 million, or 13.1%, due to increased volumes related to good
domestic and strong international markets. Cotton volumes increased $4.0 million
as a result of a new partnership in 2004.
GROSS PROFIT. Gross profit for the six months ended June 30, 2004
increased $7.3 million to $48.0 million compared to gross profit of $40.7
million for the same period ended June 30, 2003. Gross profit for alfalfa
increased $4.8 million, due to increased volumes and a lower inventory costs.
Continued volume growth in partnered corn and proprietary product mix resulted
in increased gross profit of $3.8 million, or 27.7%, over 2003. Gross profits
for soybeans increased $1.8 million, or 13.7%, due to an increase in sales
volumes. An unrealized hedging loss on soybean futures contracts of $3.3 million
for the six months ended June 30, 2004 compared to an unrealized hedging gain of
$0.3 million for the same period in 2003 decreased gross profit by $3.6 million.
Gross profit as a percent of net sales declined 0.6 percentage points for the
six months ended June 30, 2004 compared to 2003. The decline is primarily due to
the unrealized hedging loss.
Swine
<Table>
<Caption>
FOR THE SIX MONTHS ENDED JUNE 30,
----------------------------------
2004 2003 % CHANGE
------- ------- ----------
(DOLLARS IN MILLIONS)
Net sales............................................... $46.0 $43.7 5.3%
Gross (loss) profit..................................... (2.5) 0.4 n/a
Gross profit % of net sales........................... (5.4)% 0.9%
</Table>
NET SALES. Net sales for the six months ended June 30, 2004 increased $2.3
million, or 5.3%, compared to the same period for 2003. Average market hog
prices increased from $40.06 to $50.12 per hundredweight for the six months
ended June 30, 2004 compared to the six months ended June 30, 2003 as a result
of strong consumer demand, which resulted in a sales increase of $4.3 million.
Partially offsetting this increase was a decrease in the number of market hogs
sold, which reduced sales by $1.3 million. In addition, sales under our packer
agreement, which ties the price we receive for market hogs to the price that the
packer receives for pork products, decreased by $0.7 million.
GROSS PROFIT. Gross profit for the six months ended June 30, 2004
decreased $2.9 million compared to the six months ended June 30, 2003. Higher
corn and soybean meal costs resulted in a $2.9 million decline in gross profit.
A $0.7 million decline related to the packer agreement and an unrealized hedging
loss of $3.9 million for the six months ended June 30, 2004 compared to an
unrealized hedging gain of $1.4 million for the six months ended June 30, 2003
also reduced gross profit. Partially offsetting these decreases was an increase
in average market hog prices which resulted in a gross profit improvement of
$4.3 million. Gross profit also increased by $1.6 million due to reduced
expenses for our cost-plus program which ties producer payments we make under
the program to market hog prices. Gross profit as a percent of net sales
declined 6.3 percentage points for the six months ended June 30, 2004 compared
to 2003. The decline is primarily due to the unrealized hedging loss for 2004.
Layers
Effective July 1, 2003, we consolidated MoArk as required by FIN 46 and
presented the business as our layers segment in our financial statements. Prior
periods were not restated. Prior to July 1, 2003, MoArk was accounted for under
the equity method; accordingly, sales and gross profit for the six months
57
ended June 30, 2003 were not included in our layers segment which is comprised
solely of our ownership of MoArk.
NET SALES. Net sales for the six months ended June 30, 2004 were $318.6
million compared to no net sales for the six months ended June 30, 2003 due to
the consolidation of MoArk under FIN 46 on July 1, 2003. On a stand-alone basis,
MoArk had net sales of $234.5 million for the six months ended June 30, 2003.
The increase in net sales was driven primarily by higher egg market prices. For
the six months ended June 30, 2004, the average market price of eggs per dozen
was $1.06 versus $0.83 for the six months ended June 30, 2003. Total volume of
shell eggs (in dozens) declined by approximately 2% for the six months ended
June 30, 2004 compared to the same period in the prior year.
GROSS PROFIT. Gross profit for the six months ended June 30, 2004 was
$51.8 million compared to no gross profit for the six months ended June 30,
2003, due to the consolidation of MoArk under FIN 46 on July 1, 2003. On a
stand-alone basis, MoArk had gross profit of $19.4 million for the six months
ended June 30, 2003. Increased egg prices and operational efficiencies resulted
in MoArk's gross profit increase.
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
OVERVIEW OF RESULTS
Our net earnings decreased $14.4 million to $82.0 million in 2003, compared
to $96.4 million in 2002. Net earnings in 2003 were impacted by a reduction in
gain on legal settlements, net of income taxes, of $113.0 million. Excluding
this reduction, net earnings increased $98.6 million over the year ended
December 31, 2002. Net earnings were favorably impacted by the effects of higher
market prices for dairy and egg products, higher prices for market hogs and
volume growth in the seed and layers segments. Earnings were also improved
through cost reduction initiatives, increased earnings from equity in affiliated
companies, reduced one-time costs related to the integration of Purina Mills,
gains on the sale of manufacturing facilities and reduced restructuring and
impairment charges. An increase in unrealized hedging gains of $10.7 million
also contributed to the increased earnings in 2003.
NET SALES
Net sales in 2003 increased $483.6 million, or 8.3%, to $6,326.1 million,
compared to 2002. The increase was primarily attributed to the consolidation of
MoArk effective July 1, 2003 which increased sales by $317.8 million. Increases
in dairy foods, feed, seed and swine sales contributed a $179.1 million increase
in sales. A discussion of net sales by business segment is found below under the
caption "Net Sales and Gross Profit by Business Segment."
GROSS PROFIT
Gross profit in 2003 increased $90.9 million, or 18.5%, to $583.2 million
compared to 2002. The consolidation of MoArk increased gross profit by $53.1
million. Dairy foods, feed and seed contributed to an increase in gross profit
due to higher average prices for certain commodities. Gross profit as a percent
of net sales increased 0.8 percentage points to 9.2% for 2003, compared to 8.4%
for the prior year. The consolidation of MoArk was the primary reason for the
increase in our gross profit as a percent of net sales due to its higher-margin
product mix. A discussion of gross profit by business segment is found below
under the caption "Net Sales and Gross Profit by Business Segment."
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense for the year ended December 31,
2003 decreased $2.3 million, or 0.5%, to $468.3 million, compared to 2002. The
decrease was primarily due to gains on the sale of two dairy facilities, which
totaled $9.5 million, and spending reductions associated with our ongoing cost
control efforts. These reductions were partially offset by the consolidation of
MoArk, effective July 1, 2003, which added $23.4 million of selling, general and
administrative expenses in 2003. Selling, general
58
and administrative expense as a percent of net sales decreased 0.7 percentage
points to 7.4% for the year ended December 31, 2003 from 8.1% for the year ended
December 31, 2002.
RESTRUCTURING AND IMPAIRMENT CHARGES
In 2003, we had restructuring and impairment charges of $7.5 million
compared to $31.4 million in 2002. In 2003, we closed two dairy facilities,
three feed plants, and a seed facility as we continued to rationalize our
operations, resulting in $3.5 million of restructuring charges. In 2002,
restructuring charges were $13.2 million related to severance costs at dairy and
feed facilities. Impairment charges of $4.0 million were recorded in 2003 due to
write-downs of certain assets to their estimated values and the recording of
goodwill impairments. In 2002, impairment charges totaled $18.2 million for the
write-down of assets held for sale in the dairy foods and feed segments.
INTEREST EXPENSE, NET
Interest expense, net of interest income, in 2003 was $82.9 million,
compared to $78.7 million in 2002. The increase is partly due to $4.4 million of
interest expense in 2003 relating to CPI's capital lease obligation, which was
recorded in selling, general, and administrative expense as operating lease rent
expense in the 2002 consolidated financial statements. The consolidation of
MoArk effective July 1, 2003 resulted in additional interest expense of $3.3
million. Also, in 2003 we accelerated $3.7 million of deferred financing cost
amortization as a result of prepayments made on our term loans with proceeds
from the issuance of $175 million 9% senior secured bonds in December 2003.
Offsetting these increases was reduced interest expense on our variable rate
term loans of $7.0 million which was due to lower debt levels and favorable
LIBOR rates compared to 2002. Combined interest rates for borrowings, excluding
CoBank patronage, averaged 7.2% in 2003, compared to 7.0% in 2002.
GAIN ON LEGAL SETTLEMENTS
As a result of settled litigation, we recorded a gain on legal settlements
of $22.8 million for the year ended December 31, 2003 compared to a gain on
legal settlements of $155.5 million for the year ended December 31, 2002. See
"-- Overview -- Factors Affecting Comparability -- Litigation Settlements."
EQUITY IN EARNINGS OF AFFILIATED COMPANIES
For the year ended December 31, 2003, equity in earnings of affiliated
companies was $57.1 million, compared to equity in earnings of $22.7 million in
2002. Results for 2003 included equity in earnings from Agriliance of $33.9
million compared to equity in earnings of $25.1 million for 2002. This increase
was primarily driven by improved crop protection product and crop nutrient
product margins, partially offset by increased selling, general and
administrative expense. A discussion of net earnings for Agriliance can be found
under the caption "Overview -- General -- Unconsolidated Businesses." We
recorded earnings from MoArk of $4.3 million, prior to the consolidation,
effective July 1, 2003, compared to a loss of $2.9 million for the year ended
December 31, 2002. In addition, MoArk equity investments had equity earnings of
$10.2 million for the six months ended December 31, 2003. The increase in
MoArk-related earnings was driven by improved market prices for eggs, in part as
a result of a declining chick hatch, changes in response to new animal welfare
guidelines and changing consumer dietary trends.
INCOME TAXES
We recorded income tax expense of $17.6 million in 2003, compared to a tax
benefit of $3.8 million in 2002. The increase in tax expense resulted from
improved earnings from MoArk and other non-member business, including unrealized
hedging gains. The effect of allocated patronage refunds reduced our statutory
tax rate from 35.0% to a tax expense of 20.9% for 2003, compared to a tax
benefit of 1.6% in 2002. The effect of taxes not previously benefited and other
factors further reduced our tax rate, resulting in an effective tax rate of
17.7% for 2003, compared to an effective tax rate of (4.1)% in 2002.
59
ALLOCATION OF NET EARNINGS
In 2003, net earnings of $39.7 million from member business were allocated
to member equities, and retained earnings increased by $42.3 million, primarily
due to the increased earnings in Layers, which is non-member business, increased
earnings from unrealized hedging gains and the portion of the gain on legal
settlements that pertains to non-member business. This increase is partially
offset by non-member losses in Swine and Dairy Foods industrial operations. In
2002, net earnings of $83.8 million were allocated to member equities, and
retained earnings were increased by $12.6 million, reflecting the portion of the
gain on legal settlements that pertains to non-member business, partially offset
by losses in non-member business.
NET SALES AND GROSS PROFIT BY BUSINESS SEGMENT
Dairy Foods
<Table>
<Caption>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
2003 2002 % CHANGE
--------- --------- ---------
(DOLLARS IN MILLIONS)
Net sales.............................................. $2,975.0 $2,898.8 2.6%
Gross profit........................................... 170.2 155.1 9.7%
Gross profit % of net sales.......................... 5.7% 5.4%
</Table>
NET SALES. Net sales for the year ended December 31, 2003 increased $76.2
million, or 2.6%, to $2,975.0 million, compared to 2002. For the year ended
December 31, 2003, average commodity prices for butter increased $0.03 per
pound, while average commodity prices for cheese increased $0.13 per pound
compared to 2002. The impact of these market price changes increased net sales
of butter by $15.2 million and increased net sales of cheese by $16.1 million
compared to 2002. Retail and foodservice butter volumes increased 9.5 million
pounds resulting in a $5.9 million increase in net sales versus 2002. Retail
butter volume increased as a result of the introduction of a new spreadable
butter product that increased volume by 5.9 million pounds. Foodservice butter
volumes increased due to an increased focus on school programs and growth in
buying groups. Foodservice cheese sales increased 17.9 million pounds which
resulted in an increase in sales of $25.7 million for 2003 compared to 2002 as a
result of the strong performance within schools and buying groups. Sales in 2003
for our wholesale milk marketing program increased $90.5 million compared to
2002 primarily resulting from the increased market price of milk of
approximately $1.00 per hundredweight. Offsetting these increases was a $7.1
million decline in bulk cheese sales for 2003 compared to 2002 as the result of
closing the Perham, Minnesota cheese plant. The cheese production of Perham was
shifted to the Melrose Dairy Plant which is an unconsolidated joint venture,
which further led to the decline in bulk cheese sales. Retail cheese volumes
decreased 11.3 million pounds compared to 2002 due to competitive pricing
pressures and the grocer strikes on the West Coast. This resulted in a decrease
in sales of $21.0 million. Deli cheese volumes decreased 8.7 million pounds
resulting in a decrease in sales of $15.5 million versus 2002. This decrease was
primarily due to increased average market prices, competitive pricing pressures
and an increased focus on higher-margin branded deli cheese products.
International sales decreased $16.5 million primarily due to the sale of the
Poland cheese plant in June 2002. Volume changes in other product categories
accounted for the remaining sales decrease of $17.1 million.
GROSS PROFIT. Gross profit for the year ended December 31, 2003 increased
$15.1 million, or 9.7%, compared to 2002. Higher commodity prices in butter and
value-added cheese (retail, deli and foodservice cheese) increased gross profit
by $4.6 million. Volume increases in butter and foodservice cheese also
increased gross profit by $3.0 million compared to 2002. Gross profit in bulk
cheese increased $13.1 million as a result of reducing sales of unprofitable
business. Gross profit in 2003 under our wholesale milk marketing program also
increased $12.0 million compared to 2002. These increases were offset by reduced
volumes of retail cheese and deli cheese resulting in decreased gross profit of
$3.2 million and $3.0 million, respectively. Gross profit in our International
business decreased $4.1 million
60
primarily due to the sale of our Poland cheese plant in June 2002. Gross profit
of other product areas had a combined decrease of $7.3 million.
Feed
<Table>
<Caption>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
2003 2002 % CHANGE
--------- --------- ---------
(DOLLARS IN MILLIONS)
Net sales.............................................. $2,467.2 $2,444.7 0.9%
Gross profit........................................... 288.1 289.4 (0.4)%
Gross profit % of net sales.......................... 11.7% 11.8%
</Table>
NET SALES. Net sales for the year ended December 31, 2003 increased $22.5
million to $2,467.2 million, compared to 2002. Sales of lifestyle feed products
increased $36.9 million, primarily due to volume increases in horse, lab, and
zoo feeds and increases in commodity prices, offset by declines in our pet food
sales volumes. Ingredient sales increased $36.6 million, as a result of strong
sales later in the year, increasing commodity prices during the second half of
the year and product mix changes. Sales of animal health, farm and ranch
products increased $39.4 million due to the creation of Heritage Trading
Company, a consolidated joint venture formed in 2003. An increase in sales
prices due to increased commodity prices for livestock feed during the latter
part of the year also contributed to the sales increase. Offsetting these
increases was a $61.8 million decline in livestock feeds, as volume decreased in
our dairy, feedlot, grass cattle and swine areas due to unfavorable producer
economics for the majority of the year. Volumes continued to be under pressure
due to the effects of an excess supply of animal protein in the market, the
impact of depressed commodity prices in dairy, swine and poultry, integration
efforts in the industry, an increase in competitive pressures and a geographic
shift in dairy production from the Upper Midwest to the western United States.
We also experienced a decrease of $2.1 million in animal milk product sales, as
volumes returned to historical levels compared to record volumes in 2002. Sales
in our feed additive business decreased $4.9 million, as feed industry economics
continued to be unfavorable. Sales declines of $13.7 million were attributed to
exiting businesses in 2002.
GROSS PROFIT. Gross profit for the year ended December 31, 2003 decreased
$1.3 million, or 0.4%, compared to 2002. Gross profit declined $36.1 million for
livestock feeds primarily due to volume decreases in dairy, feedlot, cattle and
swine feed sales. Producer economics in the dairy and swine industries have
pressured margins in these industries and affected feed purchasing decisions.
Volumes declined due to the effects of an excess supply of animal protein in the
market, the impact of depressed commodity prices in dairy, swine and poultry,
integration efforts in the industry, competitive pressures and a geographic
shift in dairy production. We also experienced a decrease of $1.5 million in our
feed additives business, as this business has also been impacted by unfavorable
industry economics. In addition, gross profit declined $4.7 million due to
businesses exited in 2002. Offsetting these decreases was a $17.7 million
increase in gross profit for lifestyle feed products due to volume increases for
horse, lab and zoo feeds, somewhat offset by volume declines in pet food.
Ingredient gross profit increased $6.9 million as a result of strong volumes
late in 2003, increased commodity prices during the second half of 2003, and
changes in product mix. Gross profit for animal health, farm and ranch products
increased by $1.4 million due to the creation of Heritage Trading Company in
2003. Cost reductions in our manufacturing and distribution increased gross
profit by $9.5 million in 2003 versus 2002, as we continued integration efforts.
Unrealized hedging gains increased gross profit by $11.6 million as commodity
markets moved higher at year-ended 2003 when we had more derivatives in place to
manage risk on increased feed volumes sold during the winter months.
61
Seed
<Table>
<Caption>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
2003 2002 % CHANGE
-------- -------- ----------
(DOLLARS IN MILLIONS)
Net sales............................................... $479.3 $406.9 17.8%
Gross profit............................................ 63.1 53.0 19.1%
Gross profit % of net sales........................... 13.2% 13.0%
</Table>
NET SALES. Net sales for the year ended December 31, 2003 increased $72.4
million, or 17.8%, to $479.3 million compared to 2002. Volume growth and product
mix in both proprietary and partnered categories resulted in increased corn
sales of $47.6 million, or 35.7% compared to 2002. Soybean sales increased $38.9
million in 2003, or 29.6%, as a result of increased volumes and sales price.
Alfalfa sales increased $2.6 million, or 6.7%, due to increased volumes related
to selling off excess inventory. Weak markets and lower volumes decreased forage
and turf sales by $4.4 million and $0.5 million respectively. Sales of
inoculation/coatings decreased $2.8 million, mainly as a result of the sale of a
wholesale business in 2002. Cotton volumes decreased, resulting in a $1.9
million sales decrease. Volume decreases in other seed categories resulted in a
sales decrease of $7.1 million.
GROSS PROFIT. Gross profit for the year ended December 31, 2003 increased
$10.1 million, or 19.1%, compared to 2002. Continued volume growth in both
proprietary and partnered corn seed products resulted in increased gross profit
of $6.8 million over 2002. Gross profit for soybeans increased $11.9 million due
to an increase in sales volume. Gross profit for forage, turf and cotton seed
increased by $0.2 million for 2003 compared to 2002. Offsetting these increases
was a $5.5 million decrease in gross profit for alfalfa due to write-downs of
excess inventory. Also, gross profit decreased $2.3 million as a result of
selling a wholesale inoculants business in 2002.
Swine
<Table>
<Caption>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
2003 2002 % CHANGE
------- ------- ----------
(DOLLARS IN MILLIONS)
Net sales............................................... $91.2 $83.2 9.6%
Gross profit............................................ 2.6 (10.3) n/a
Gross profit % of net sales........................... 2.9% (12.4)%
</Table>
NET SALES. Net sales for the year ended December 31, 2003 increased $8.0
million, or 9.6%, to $91.2 million, compared to 2002. Reduced supply, caused in
part by a reduction in the U.S. breeding herd, increased the average market hog
price for the year ended December 31, 2003 to $40.59 per hundredweight versus an
average market price of $35.86 for the year ended December 31, 2002. The average
price per feeder pigs sold on the open market increased $4.62, from $34.33 for
the year ended December 31, 2002 to $38.95 for the year ended December 31, 2003.
The increase in average market hog prices along with the increase in feeder pig
prices increased sales by $10.1 million for 2003 compared to 2002. We signed a
packer agreement, effective September 25, 2000, which ties the price we receive
for market hogs to the price that the packer receives for pork products. For
2003, this agreement decreased our sales by $1.3 million, compared to 2002. The
number of market hogs sold decreased by 8,873 and the number of feeder pigs sold
decreased by 25,405, with a corresponding sales decrease of $1.8 million.
GROSS PROFIT. Gross profit for the year ended December 31, 2003 increased
$12.9 million compared to the year ended December 31, 2002. Increased market hog
prices along with the increase in feeder pig prices and lower costs under our
Cost Plus program increased gross profit by $12.8 million. An unrealized hedging
gain increased gross profit by $2.9 million for the year ended December 31, 2003
compared to the year ended December 31, 2002. Partially offsetting this increase
were higher input costs which decreased gross profit by $2.8 million.
62
Layers
Effective July 1, 2003, we consolidated MoArk under FIN 46 and presented
the business as our Layers segment in our financial statements. Prior periods
were not restated. Prior to July 1, MoArk was accounted for under the equity
method; hence, sales, cost of sales and gross profit for 2002 and the first six
months of 2003 were not included in our Layers segment.
NET SALES. Net sales in our layers segment for the year ended December 31,
2003 were $317.8 million compared to no net sales in 2002 due to the
consolidation of MoArk under FIN 46 on July 1, 2003. MoArk had net sales of
$234.6 million for the six months ended June 30, 2003. For the year ended
December 31, 2002, MoArk had net sales of $441.8 million. During 2003, the
average market price of eggs per dozen was $0.93 as compared to $0.73 in 2002.
During the year ended December 31, 2003, LAND O LAKES-branded egg sales
increased to 4.9 million dozen, up 43% compared to 2002. Total volume of shell
eggs (in dozens) increased by 62 million, which increased sales by nearly $57.7
million.
GROSS PROFIT. Gross profit for the year ended December 31, 2003 was $53.1
million compared to no gross profit in 2002 due to the consolidation of MoArk
under FIN 46 on July 1, 2003. MoArk had gross profit of $19.4 million for the
six months ended June 30, 2003. For the year ended December 31, 2002, MoArk had
gross profit of $34.2 million. For 2003, the average cost of eggs (all egg sizes
and types) per dozen was $0.63 as compared to $0.53 in 2002 due to increased
feed and bird costs. Total volume of shell eggs (in dozens) increased by 62
million, which increased gross profit by nearly $18.7 million.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
OVERVIEW OF RESULTS
Our net earnings increased $28.3 million to $96.4 million in 2002, compared
to $68.1 million in 2001. Net earnings in 2002 include a gain on legal
settlements of $129.3 million, net of income tax expense of $26.2 million, while
net earnings in 2001 include a gain on legal settlements of $2.7 million, net of
income tax expense of $0.3 million.
Net earnings in 2002, excluding the impact of legal settlements, were
adversely affected by lower market prices and volume declines for dairy, feed
and swine commodity products, reduced earnings from equity in affiliated
companies, start-up expenses associated with CPI and restructuring and
impairment charges in the Feed and Dairy segments.
NET SALES
Net sales in 2002 decreased $15.2 million, or 0.3%, to $5,842.5 million,
compared to net sales of $5,857.7 million in 2001. The decrease was primarily
attributed to declines in dairy foods, feed and swine sales, partially offset by
the acquisition of Purina Mills in October 2001, which contributed $694.3
million in incremental sales in 2002.
GROSS PROFIT
Gross profit in 2002 increased $10.7 million, or 2.2%, to $492.3 million
compared to 2001. The acquisition of Purina Mills contributed $116.5 million in
incremental gross profit. This was partially offset by the effect of lower
average market prices and volume declines for dairy, feed and swine commodity
products. Gross profit as a percent of net sales increased 0.2 percentage points
to 8.4% for 2002, compared to 8.2% for the prior year. The acquisition of Purina
Mills was the primary reason for the increase in our gross profit as a percent
of net sales due to its higher-margin product mix. A discussion of gross profit
by business segment is found below under the caption "Net Sales and Gross Profit
by Business Segment."
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense in 2002 increased $88.3
million, or 23.0%, to $470.6 million, compared to 2001. Selling, general and
administration expense as a percent of net sales
63
increased 160 basis points from 6.5% in 2001 to 8.1% in 2002. The acquisition of
Purina Mills in October 2001 contributed $81.4 million in incremental selling,
general and administration expense and increased our selling, general and
administrative expense as a percent of net sales by 140 basis points.
RESTRUCTURING AND IMPAIRMENT CHARGES
In 2002, Land O'Lakes recorded restructuring and impairment charges of
$31.4 million, compared to $3.7 million in 2001. Dairy Foods recorded a $19.5
million restructuring and impairment charge in 2002, of which $15.1 million was
related primarily to the write-down of certain impaired plant assets to their
estimated fair value in anticipation of plant closings, and $4.4 million was
related to employee severance and outplacement costs for 374 employees at
various locations. Animal feed recorded an $11.9 million restructuring and
impairment charge, of which $3.1 million primarily was related to the write-down
of certain impaired plant assets to their estimated fair value, and $8.8 million
was related to employee severance and outplacement costs for 375 employees at
various locations. Restructuring and impairment charges in 2001 included a $1.7
million restructuring charge by Dairy Foods for employee severance and
outplacement costs for 63 employees at a manufacturing facility, a $6.0 million
impairment charge related to a feed operation in Mexico, a $1.8 million
impairment charge related to the write-down of Swine assets to their estimated
fair value and a $5.8 million reversal of charges taken in 2000. The 2001
reversal 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.
INTEREST EXPENSE
Interest expense in 2002 was $78.7 million, compared to $55.7 million in
2001. The $23.0 million, or 41.3%, increase primarily resulted from increased
borrowing to finance the Purina Mills acquisition in October 2001. Average debt
balances increased by $150.6 million over 2001.
GAIN ON LEGAL SETTLEMENTS
In the fourth quarter of 1999, a class action lawsuit, alleging illegal
price fixing, was filed against various vitamin product suppliers. Initially, we
were a party to this action as a member of the class. In February 2000, however
we decided to pursue our claims against the defendants outside the class action.
During the period commencing January 2002 through December 2002, we recorded a
gain of $155.5 million on vitamin settlements. These settlements were with those
defendants who supplied the vast majority of the vitamin purchases under
dispute. In 2001, we recorded a gain on legal settlements of $3.0 million.
OTHER (INCOME) EXPENSE, NET
In 2002, we recorded $8.2 million of other income. This was composed of a
$5 million gain on divestitures of seed businesses and the gain on the sale of a
customer list pertaining to a feed phosphate distribution business for $4.2
million. In 2001, we recorded a loss on the extinguishment of debt of $23.5
million due to refinancing related to the Purina acquisition.
EQUITY IN LOSS OR EARNINGS OF AFFILIATED COMPANIES
In 2002, equity in earnings of affiliated companies was $22.7 million,
compared to earnings of $48.6 million in 2001. Results in 2002 included earnings
from Agriliance of $25.1 million, a loss from our Melrose Dairy Proteins LLC
joint venture of $5.2 million and a loss from MoArk of $2.9 million, partially
offset by earnings from our Advanced Food Products joint venture of $4.0 million
and earnings from other affiliated companies. Results in 2001 included earnings
from Agriliance of $34.2 million, earnings from various dairy, feed and swine
joint ventures of $12.6 million and earnings from MoArk of $1.8 million.
64
INCOME TAXES
We recorded an income tax benefit of $3.8 million in 2002, compared with a
tax benefit of $6.6 million in 2001. The tax benefit resulted from losses in our
dairy foods industrial operations and Cheese & Protein International LLC joint
venture, as well as non-member losses in our swine business and in MoArk, an
affiliated company, which more than offset the tax expense related to the
unallocated gain on legal settlements. The effect of allocated patronage refunds
reduced our statutory tax rate from 35.0% to a tax credit of 1.6% for 2002,
compared to a tax credit of 5.2% in 2001. The effect of foreign operations and
other factors further reduced our tax rate, resulting in an effective tax rate
of (4.1)% for 2002, compared to an effective tax rate of (10.7)% in 2001.
ALLOCATION OF NET EARNINGS
In 2002, net earnings of $83.8 million from member business were allocated
to member equities, and retained earnings increased by $12.6 million, reflecting
primarily the portion of the gain on legal settlements that pertains to
non-member business, partially offset by non-member losses in Swine and Dairy
Foods industrial operations. In 2001, net earnings of $70.3 million were
allocated to member equities, and retained earnings were reduced by $2.2
million, reflecting minor losses in non-member business.
NET SALES AND GROSS PROFIT BY BUSINESS SEGMENT
Dairy Foods
<Table>
<Caption>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
2002 2001 % CHANGE
--------- --------- ---------
(DOLLARS IN MILLIONS)
Net sales.............................................. $2,898.8 $3,462.1 (16.3)%
Gross profit........................................... 155.1 230.8 (32.8)%
Gross profit % of net sales.......................... 5.4% 6.7%
</Table>
NET SALES. Net sales in 2002 decreased $563.3 million to $2,898.8 million,
compared to net sales of $3,462.1 million in 2001. In 2002, average commodity
prices for butter decreased $0.55 or 33.3% per pound, while average commodity
prices for cheese decreased $0.25 or 17.5% per pound compared to the same period
in 2001. The impact of these market price changes decreased net sales of butter
by $205.0 million and decreased net sales of cheese by $52.5 million. However,
the prices retailers set for branded butter did not follow trends in the
commodity butter markets. Retail prices for branded butter remained high, which
resulted in declines in sales volumes as consumers shifted to substitute
products or reduced consumption. Retail branded butter and spreads volumes
decreased 3.5 million pounds and 5.9 million pounds, respectively, representing
a decrease in net sales of $8.1 million and $4.5 million, respectively, from
2001. On the other hand, private label butter volumes increased 15.1 million
pounds and increased sales $25.6 million over the prior year. Foodservice butter
volumes decreased 3.8 million pounds over the prior year and decreased sales by
$7.4 million. Bulk cheese sales decreased $56.6 million for the period ended
December 31, 2002 compared to the year ended December 31, 2001. Deli cheese
volumes decreased 4.6 million pounds from the prior year, which resulted in a
reduction of sales of $8.8 million. Nonfat dry milk powder, private label butter
and cheese sales in the Western Region decreased $35.7 million, $33.6 million
and $23.2 million, respectively, from the prior year. 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. Sales decreased $14.5 million as a result of exiting our cheese
manufacturing business in Poland. Sales also decreased $13.7 million due to the
formation of our Advanced Food Products joint venture. Sales in 2002 under our
wholesale milk marketing program decreased $109.0 million, or 11.7%, to $821.9
million, compared to $930.9 million in 2001. Volume changes in exports,
foodservice cheese and other product categories accounted for the remaining
sales decrease of $16.4 million.
65
GROSS PROFIT. Gross profit for the year ended December 31, 2002 decreased
$75.7 million, or 32.8%, compared to 2001. Lower commodity prices in butter and
value-added cheese (retail, deli and foodservice cheese) decreased gross profit
by $23.3 million. Volume decreases in butter, spreads and deli cheese also
decreased gross profit by $12.9 million compared to 2001. Nonfat dry milk
powder, private label butter and cheese gross profit in our Western region
decreased $13.9 million due to a combination of decreased market prices and
volume declines. Gross profit in bulk cheese decreased $3.3 million. Gross
profit decreased $25.1 million in 2002 due to the start-up of Cheese & Protein
International's cheese and whey plant in Tulare, California. Higher milk input
costs in the Upper Midwest driven, in part, by lower federal order pool returns
resulted in decreased gross profit of $7.4 million. Also, gross profit in 2002
under our wholesale milk marketing program decreased $2.6 million compared to
2001. The formation of our Advanced Food Products joint venture in 2002
decreased gross profit by $1.1 million. Gross profit in our international
business decreased $0.6 million primarily due to the sale of the Poland cheese
plant in June 2002. These decreases were partially offset by reduced energy
costs, which increased gross profit by $9.8 million.
Feed
<Table>
<Caption>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
2002 2001 % CHANGE
--------- --------- ---------
(DOLLARS IN MILLIONS)
Net sales.............................................. $2,444.7 $1,864.0 31.2%
Gross profit........................................... 289.4 172.7 67.6%
Gross profit % of net sales.......................... 11.8% 9.3%
</Table>
NET SALES. Net sales in 2002 increased $580.7 million, or 31.2%, to
$2,444.7 million, compared to net sales of $1,864.0 million in 2001. The
acquisition of Purina Mills contributed $686.8 million in incremental sales.
This increase was partially offset by declines in Land O'Lakes Farmland Feed
branded sales. Sales of bulk phosphates decreased $19.2 million due to the sale
of this business to a third party in the first quarter of 2002. Sales in our
Land O'Lakes Farmland Feed animal health products decreased $17.5 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. Swine feed sales of our Land O'Lakes Farmland Feed branded products
decreased $16.3 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 wholly and majority owned subsidiaries declined $15.7
million primarily as the result of exiting a joint venture operation
manufacturing catfish feeds early in 2002. Sales in our International division
decreased $12.4 million, primarily as a result of exiting our Poland operations.
Sales in our medicated feed additives business declined $5.1 million due to
lower volumes. Sales of Land O'Lakes Farmland Feed branded beef feeds decreased
$4.8 million, primarily due to the effect of warmer than average winter weather
in early 2002 and excess food proteins in the U.S. market. Sales in our
warehouse ingredient area declined by $3.1 million due to lower volumes. On the
other hand, sales in our animal milk products area increased $2.3 million as a
result of strong volumes. Sales in our dairy feeds area increased $1.5 million,
driven by strong sales of simple blends in our Western region. Changes in other
feed categories amounted to a decrease of $12.7 million. Finally, sales from
ingredient merchandising decreased $10.5 million, or 2.1%, from $500.2 million
in 2001 to $489.7 million in 2002.
GROSS PROFIT. Gross profit for the year ended December 31, 2002 increased
$116.7 million, or 67.6%, compared to 2001. The acquisition of Purina Mills
added $116.5 million in gross profit in 2002. Cost reductions from the
integration efforts related to Purina Mills increased our gross profit by $7.8
million. Gross profit in our wholly and majority owned subsidiaries increased
$2.8 million, primarily the result of exiting a joint venture manufacturing
catfish feed in early 2002. Gross profit in our animal milk products increased
$2.3 million as a result of strong volumes. In addition, unrealized hedging
gains related to corn and soybean meal futures contracts increased gross profit
by $3.9 million. Offsetting these increases was a $6.7 million decrease in gross
profit for Land O'Lakes Farmland Feed branded swine feeds 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. Land O'Lakes Farmland Feed branded
beef feeds gross profit decreased $2.5 million,
66
due to slower sales as a result of warm winter weather early in 2002. Gross
profit in our medicated feed additives and warehouse ingredients areas declined
$2.5 million and $1.2 million, respectively, due to lower volumes. Gross profit
of bulk phosphates decreased $2.2 million as we sold this business during the
first quarter of 2002. Gross profit in our international business decreased $1.9
million primarily due to the exit of our Mexico and Poland operations in 2002.
Gross profit in our dairy feed area decreased $1.5 million, primarily as a
result of a shift to lower margin products, primarily in our Western region.
Gross profit for Land O'Lakes Farmland Feed animal health products decreased
$0.9 million as a result of a realigned marketing arrangement with a large
vendor whereby the vendor sells product directly to our customer in exchange for
a margin-based fee. Lower patronage income in 2002 versus 2001 caused gross
profit to decrease by $2.9 million.
Seed
<Table>
<Caption>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
2002 2001 % CHANGE
-------- -------- ----------
(DOLLARS IN MILLIONS)
Net sales............................................... $406.9 $413.6 (1.6)%
Gross profit............................................ 53.0 59.4 (10.8)%
Gross profit % of net sales........................... 13.0% 14.4%
</Table>
NET SALES. Net sales in 2002 decreased $6.7 million, or 1.6%, to $406.9
million, compared to net sales of $413.6 million in 2001. Continued volume
growth in both proprietary and partnered categories resulted in increased sales
of corn of $21.9 million, or 21.4%. As in 2001, we shipped product early in the
fourth quarter of 2002 which resulted in incremental sales of $12.4 million,
primarily in partnered corn and soybean seed. 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. However, these sales increases were more than offset
by volume declines in other seed categories, such as soybeans and turf seed.
Soybean sales declined $36.8 million in 2002, or 23.8%, mainly as the result of
less acres planted, the discontinuance of a partnered soybean brand and smaller
seed sizes. Turf sales declined $9.6 million, or 23.9%, primarily due to
decreased volumes as a result of weak turf markets. Volume declines in other
seed categories resulted in a sales decrease of $5.4 million.
GROSS PROFIT. Gross profit for the year ended December 31, 2002 decreased
$6.4 million, or 10.8%, compared to 2001. Gross profit for soybeans declined
$5.7 million in 2002 mainly as the result of less acres planted, the
discontinuance of a partnered soybean brand and smaller seed sizes. Changes in
product mix, particularly in alfalfa, accounted for a decrease in gross profit
of $4.3 million. As in 2001, we shipped product early in the fourth quarter of
2002 which resulted in a decrease in gross profit of $1.4 million, primarily in
partnered corn and soybean seed. Volume declines in other seed categories
resulted in a gross profit decrease of $5.4 million. Offsetting these decreases
was a $5.8 million increase in gross profit for corn due to continued volume
growth in both proprietary and partnered seed categories. Also, unrealized
hedging gains on soybean futures contracts increased gross profit by $4.6
million for the year ended December 31, 2002 compared to the year ended December
31, 2001.
Swine
<Table>
<Caption>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
2002 2001 % CHANGE
------- ------- ---------
(DOLLARS IN MILLIONS)
Net sales............................................. $ 83.2 $109.9 (24.3)%
Gross profit.......................................... (10.3) 12.9 (179.8)%
Gross profit % of net sales......................... (12.4)% 11.7%
</Table>
NET SALES. Net sales in 2002 decreased $26.7 million, or 24.3%, to $83.2
million, compared to $109.9 million in 2001. The number of market hogs sold
decreased by 91,807 and the average weight per market hog sold decreased 1.8
pounds, with a corresponding sales decrease of $11.7 million. Reduced
67
consumer demand, caused, in part, by a protein glut in the U.S. markets,
decreased the average market price in 2002 to $35.86 per hundredweight versus an
average market price of $46.52 in 2001. The decrease in average market hog
prices of $10.46 per hundredweight decreased sales by $14.5 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. In 2002, this agreement increased our sales by $2.9 million compared
to 2001. The number of feeder pigs sold under contract increased by 9,216, with
a corresponding sales increase of $0.5 million. The average price per feeder pig
sold under contract decreased $0.48 from $48.04 in 2001 to $47.56 in 2002, which
decreased sales by $0.3 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 $14.84, from $49.17 in 2001 to $34.33 in
2002, which decreased sales by $2.6 million.
GROSS PROFIT. Gross profit for the year ended December 31, 2002 decreased
$23.2 million compared to the year ended December 31, 2001. Decreased unit sales
and market hog prices along with a decrease in feeder pig prices and higher
costs under our Cost Plus program decreased gross profit by $23.2 million. An
unrealized hedging loss decreased gross profit by $0.5 million for the year
ended December 31, 2002 compared to the year ended December 31, 2001. Partially
offsetting these decreases was a $0.5 million increase in gross profit due to
improved productivity which decreased the cost per unit.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
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 as well as acquisitions and investments in joint ventures. Other
sources of funding consist of leasing arrangements, a receivables securitization
and the sale of non-strategic assets.
Total long-term debt, including the current portion, was $943.2 million as
of June 30, 2004, $1,073.2 million as of December 31, 2003 and $1,111.9 million
as of December 31, 2002. The decrease in debt of $130.0 million at June 30, 2004
compared to December 31, 2003 was due to term debt repayments of $126.5 million
($100 million of proceeds from the expansion of our receivables securitization
facility was used to pay the term debt) and also a mark-to-market valuation of
the unsecured notes related to our interest rate swaps of $4.0 million. The
decrease in debt of $38.7 million at December 31, 2003 compared to December 31,
2002 was due to debt repayments of $304.9 million, somewhat offset by the
issuance of $175 million in secured notes and the consolidation of MoArk which
had long-term debt of $75.8 million as of December 31, 2003.
Our primary sources of debt at June 30, 2004 included a $185 million
revolving credit facility (which was amended in January, 2004 and expanded to
$200 million in July 2004) and an $118.4 million institutional Term B loan, both
of which are secured by the majority of our assets. In addition, we have $175
million in secured notes, $350 million in unsecured notes and $191 million of
capital securities. Our primary sources of debt at December 31, 2003 included a
$250 million revolving credit facility (of which $205.2 million was available),
a $92 million bank Term A loan (which was paid off in March 2004) and a $152
million institutional Term B loan, all of which are secured by the majority of
the Company's assets. In addition, as of December 31, 2003 we had $175 million
in second lien notes, $350 million in unsecured notes, and $191 million of
capital securities. For more information, please see the caption below entitled
"Principal Debt Facilities."
At June 30, 2004, we also had long and short-term debt related to MoArk of
$76.2 million. Land O'Lakes does not provide any guarantees or support for
MoArk's debt. In addition, we had $36.9 million of other miscellaneous long-term
debt at June 30, 2004. At December 31, 2003, we had long and short-term debt
related to MoArk of $101 million. Other debt at December 31, 2003 included
approximately $15 million of Industrial Development Bonds, and $98 million of
miscellaneous other debt obligations.
68
During the fourth quarter of 2001, we entered into a $100 million
receivables securitization program to reduce overall financing costs. On March
31, 2004, we amended and expanded the facility to $200 million. At June 30,
2004, $200 million was outstanding under this facility. At December 31, 2003,
$20 million was outstanding under this facility. In accordance with generally
accepted accounting principles, this facility was not reflected as debt on our
consolidated balance sheets. A more complete description of this accounts
receivable securitization program is found below under the caption, "Off-
balance Sheet Arrangements."
Our principal liquidity requirements are to service our debt and meet our
working capital and capital expenditure needs. As of June 30, 2004, $135.0
million was available under our $185 million revolving credit facility for
working capital and general corporate purposes, after giving effect to $50.0
million of outstanding letters of credit, which reduce availability. There was
no outstanding balance on the facility as of June 30, 2004. The revolving credit
facility commitment was increased by $15 million in July 2004, to $200 million.
In addition, at June 30, 2004, we had available cash on hand of $69.8 million,
excluding an additional $20 million in cash held in escrow to support the
capital lease financing of Cheese and Protein International. Total equities as
of June 30, 2004 were $914.8 million. As of December 31, 2003, $205.2 million
was available under a $250 million revolving credit facility (which was amended
in January 2004) for working capital and general corporate purposes, after
giving effect to $44.8 million of outstanding letters of credit, which reduce
availability. There were no draws on the facility as of December 31, 2003. Our
peak borrowing on the revolving credit facility in 2003 was $43.5 million in
April. For more information regarding the amended credit facility, please see
the caption below entitled "Principal Debt Facilities." In addition, the Company
had excess availability under the receivables securitization program of $67.8
million as of December 31, 2003, and available cash on hand of $110.3 million.
We expect that funds from operations and available borrowings under our
revolving credit facility and receivables securitization facility will provide
sufficient working capital to operate our business, to make expected capital
expenditures and to meet liquidity requirements for at least the next twelve
months, including debt service on our term debt, the revolving credit
facilities, the 9% senior secured notes, and our 8 3/4% senior unsecured notes.
Concurrently with the March 31, 2004 amendment of the receivables
securitization program, we sold additional receivables and applied the proceeds
from the expansion to our outstanding senior bank facilities, which included the
mandatory payment in full of our term loan A facility and prepayment of $24.0
million of the term loan B facility.
CASH FLOWS
The following table summarizes the key elements for our cash flows for the
following periods:
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
---------------- --------------------------
2004 2003 2003 2002 2001
------- ------ ------- ------ -------
(IN MILLIONS)
Net cash provided by operating
activities........................... $ 176.7 $153.4 $ 227.5 $ 22.0 $ 274.3
Net cash used by investing
activities........................... (21.7) (47.4) (35.2) (4.2) (461.2)
Net cash (used by) provided by
financing activities................. (195.5) (84.8) (146.3) (83.6) 313.1
</Table>
Operating Activities. Net cash provided by operating activities increased
by $23.3 million for the six months ended June 30, 2004 compared to the same
period for 2003. Working capital requirements increased cash flow by $127.4
million primarily due to increased borrowings on our receivables securitization
program. Partially offsetting this increase was a decrease in legal settlement
proceeds of $111.4 million for the six months ended June 30, 2004 compared to
the six months ended June 30, 2003. Legal settlement proceeds totaled $4.5
million for the six months ended June 30, 2004 compared to $115.9 million for
the same period in 2003.
69
Net cash provided by operating activities increased $205.5 million in the
year ended December 31, 2003 compared to the same period in 2002. The increase
was largely due to the $117.0 million increase in earnings (loss) from
operations as well as an increase of $60.4 million in cash proceeds from legal
settlements. In the year ended December 31, 2003, no contributions were made to
our pension plan compared to a $67.9 million discretionary contribution made in
the same period in 2002. The increase was partially offset by a $32 million
increase in working capital requirements. The $252.3 million decrease in cash
from operating activities in the year ended December 31, 2002 as compared to
same period in 2001 was primarily a result of $105.3 million reduction in
earnings from operations and changes in working capital.
Investing Activities. Net cash used by investing activities decreased
$25.7 million for the six months ended June 30, 2004 compared to the six months
ended June 30, 2003. The decrease was due primarily to $20 million addition to
restricted cash in 2003 compared to $0.1 million addition in 2004. Proceeds from
the divestiture of a business of $7.5 million received in the six months ended
June 30, 2004 and an $11.7 million increase in dividends received from
affiliates, primarily MoArk, also contributed to the reduction in investment
activities. These were partially offset by the $12.2 million acquisition of
minority interest in Land O'Lakes Farmland Feed LLC during the six months ended
June 30, 2004.
Net cash used by investing activities was $35.2 million for the year ended
December 31, 2003 compared to $4.2 million for the same period in 2002. The
increased use in the year ended December 31, 2003 was primarily due to the
establishment of a $20.0 million restricted cash account to support the CPI
capital lease. For more information regarding the CPI capital lease, see the
subheading "Capital Leases" below. Also, the cash used by investing activities
was offset by proceeds from sales of investments and business divestitures
totaling $4.8 million in the year ended December 31, 2003 as compared to $43.4
million in the same period in 2002. Partly offsetting the increase in cash used
by investing activities was $10.8 million increase in dividends received
primarily from our equity investment in Agriliance LLC and equity investments
held by our MoArk joint venture. In the year ended December 31, 2001 the primary
use of cash for investing activities related to the Purina Mills acquisition in
October of that year.
Financing Activities. During the six months ended June 30, 2004, our
financing activities resulted in a decrease in cash flow of $110.7 million
compared to the same period in 2003. Payments on Term A and Term B loans were
$54.9 million higher for the six months ended June 30, 2004 compared 2003. MoArk
debt payments, net of debt acquired, for the six months ended June 30, 2004 were
$19.5 million. Moark was not consolidated in our financial statements for the
six months ended June 30, 2003. In 2004, we also paid $4.2 million for debt
issuance costs related to senior secured notes issued December of 2003 and for
an amendment of our senior bank facilities in January of 2004.
During the year ended December 31, 2003, our financing activities resulted
in a cash outflow of $146.3 million compared to our outflow of $83.6 million in
the year ended December 31, 2002. We issued $175 million senior secured notes in
December 2003 which were used entirely to make prepayments on Term A and Term B
loans. Additional payments in the year ended December 31, 2003 on Term A and
Term B loans were $99.8 million. Other long-term debt principal payments for the
year ended December 31, 2003 were $30.1 million. In the year ended December 31,
2003, we also paid $24.4 million in cash for redemption of member equities. For
the year ended December 31, 2002, we made payments of $62.0 million on existing
long-term debt and payments of $37.9 million for redemption of member equities.
For the year ended December 31, 2001, proceeds of $1,369.5 million resulted from
new financing related to the Purina Mills acquisition offset by the payment of
$935.1 million on existing long-term debt and the payment of $53.8 million on
short-term debt.
70
CASH REQUIREMENTS
At June 30, 2004, we had certain contractual obligations, which require us
to make payments as follows:
<Table>
<Caption>
PAYMENTS DUE BY YEAR (AS OF JUNE 30, 2004)
-----------------------------------------------------------------
LESS THAN MORE THAN
CONTRACTUAL COMMITMENTS TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
- ----------------------- ---------- ---------- ------------ ------------ ---------
(IN THOUSANDS)
Debt and leases:
Revolving credit facility(1)....... $ -- $ -- $ -- $ -- $ --
Long-term debt..................... 943,174 8,986 21,915 137,247 775,026
Obligations under capital lease.... 106,027 10,318 20,928 20,571 54,210
Operating leases................... 116,273 30,741 47,231 26,832 11,469
Other:
Madison Dairy purchase
payment(2)...................... 26,461 26,461 -- -- --
MoArk minimum payment
obligation(3)................... 33,831 -- -- 33,831 --
Swine contract payments(4)......... 157,933 32,686 44,508 34,638 46,101
Non-cancelable purchase
commitments(5).................. 1,328,000 1,328,000 -- -- --
Other obligations(6)............... 19,883 13,717 4,715 387 1,064
---------- ---------- -------- -------- --------
Total contractual
obligations(7)................ $2,731,582 $1,450,909 $139,297 $253,506 $887,870
========== ========== ======== ======== ========
</Table>
- ---------------
(1) As of June 30, 2004, $135.0 million was available under our $185 million
revolving credit facility for working capital and general corporate
purposes, after giving effect to $50.0 million of outstanding letters of
credit, which reduce availability. There was no outstanding balances on the
facility as of June 30, 2004. The revolving credit facility commitment was
increased by $15 million in July 2004, to $200 million. For more information
regarding the amended credit facility, please see the caption below entitled
"Principal Debt Facilities."
(2) Amount represents the remaining amount to be paid for the acquisition of
Madison Dairy Produce Company.
(3) Amount represents the present value of future minimum payment for the 42.5%
interest in MoArk owned by our joint venture partner. See "Summary -- The
Company -- other segments, joint ventures and investments -- MoArk, LLC" for
a discussion of this payment obligation.
(4) Amounts include contractual commitments to purchase feeder pigs and producer
services related to our swine segment and similar commitments in Purina
Mills, accounted for in the Feed segment.
(5) Amounts primarily for raw materials in our dairy foods, feed and seed
segments. These purchase commitments, estimated for this table, are
contracted on an annual basis.
(6) Amounts primarily represent contractual commitments to purchase marketing
and consulting services and capital equipment.
(7) Does not include contingent obligations under our pension and postretirement
plans. For accounting disclosures of our pension and postretirement
obligations see Note 15 in the annual consolidated financial statements of
Land O'Lakes.
We expect total capital expenditures to be approximately $100 million in
2004, of which approximately $30 million relates to the Phase II installation at
CPI's Tulare, California facility and $19.4 million is contractually obligated
and included in the table above. Of such amounts, we currently estimate that a
minimum range of $35 million to $45 million of ongoing maintenance capital
expenditures will be required. We had $41.4 million in capital expenditures for
the six months ended June 30, 2004 compared to $35.0 million for the six months
ended June 30, 2003. We had $74.1 million in capital
71
expenditures for the year ended December 31, 2003 compared to $87.4 million in
capital expenditures for the year ended December 31, 2002.
In 2004, we expect our total cash payments to members to be at least $32
million for revolvement, cash patronage and estates and age retirements.
In 2004, we anticipate our total cash payments for interest on our
short-term and long-term debt obligations to be approximately $75 million, which
amount is not included in the table above.
PRINCIPAL DEBT FACILITIES
At December 31, 2003, the principal term loans consisted of a syndicated
Term A loan facility with a final maturity date of October 10, 2006, and a
syndicated Term B loan facility with a final maturity of October 10, 2008.
During December 2003, we completed a $175 million bond offering of 9% senior
secured notes due 2010. The proceeds of the offering were used to make
prepayments on the Term A loan of $122.5 million and on the Term B loan of $52.5
million, decreasing the outstanding balance of the Term A loan to $92.5 million,
as of December 31, 2003, and the outstanding balance of the Term B loan facility
to $152.4 million as of December 31, 2003. During the six months ended June 30,
2004, we made prepayments of $92.5 million on the Term A loan and $34.0 million
on the Term B loan. The Term A loan was prepayable at any time without penalty
and completely paid off with these prepayments. At June 30, 2004, the Term B
loan had a remaining balance of $118.4 million.
The amortization schedule for the Term B loan facility, after giving effect
to the 2004 prepayments, is provided below.
<Table>
<Caption>
TERM LOAN B
----------------
($ IN THOUSANDS)
2004 (remaining as of 6/30/04).............................. $ --
2005........................................................ 1,100
2006........................................................ 1,466
2007........................................................ 1,466
2008........................................................ 114,341
--------
Total..................................................... $118,373
========
</Table>
As of December 31, 2003, our $250.0 million revolving credit facility was
scheduled to terminate on June 28, 2004. In January 2004, we completed an
amendment to this credit facility. Under the amendment, the lenders committed to
make advances and issue letters of credit until January 2007, in the aggregate
amount not to exceed $185 million, subject to a borrowing base limitation. The
amendment also increased the amount available for the issuance of letters of
credit under the revolving facility from $50 million to $75 million. In July
2004, we obtained an additional $15 million in commitments to our revolving
credit facility, increasing the total commitments under this facility to $200
million.
Borrowings under the Term B loan 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 leverage ratio
in the case of the revolving credit facility. The margin on the Term B loan is
fixed. As of June 30, 2004, the interest rate on the Term B loan was 4.73%.
The Term B loan facility is prepayable with a penalty of 1% through October
10, 2004 and no penalty thereafter. The facility is subject to mandatory
prepayments, subject to certain limited exceptions, in an amount equal to (1)
50% of excess cash flow, as defined in the facility agreement, of Land O'Lakes
and the restricted subsidiaries measured annually following year end, (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
72
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 2003, we made $195.8 million of
prepayments on the Term A loan and $79.0 million of prepayments on the Term B
loan, of which $224.8 million was mandatory and $50.0 million was optional. In
February 2004, we made a mandatory prepayment of $26.5 million on Term A and
Term B loans based on the excess cash flow calculation for December 31, 2003. In
March 2004, we made a mandatory prepayment of $100 million on Term A and Term B
loans due to additional cash received from drawing down the amount of the
expansion of our accounts receivable securitization.
In December 2003, we issued $175 million of senior secured notes that
mature on December 15, 2010. Proceeds from the issuance were used to make
payments on the Term A loan of $122.5 million and on the Term B loan of $52.5
million. These notes bear interest at a fixed rate of 9%, payable on June 15 and
December 15 each year. The notes are callable beginning in year four at a
redemption price of 104.5%. In year five, the redemption price is 102.25%. The
notes are callable at par beginning in year six.
In November 2001, we issued $350 million of senior unsecured notes that
mature on November 15, 2011. Proceeds from the issuance were used to refinance
the Company in connection with the acquisition of Purina Mills. These notes bear
interest at a fixed rate of 8 3/4%, payable on May 15 and November 15 each year.
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 the securities are entitled to
receive dividends at an annual rate of 7.45% until the securities mature in
2028. The payment terms of the Capital Securities 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 June 30, 2004 and December 31, 2003, the outstanding balance of
Capital Securities was $190.7 million.
The credit agreements relating to the term loan and revolving credit
facility and the indentures relating to the 8.75% senior unsecured notes and the
9.0% senior secured 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 and
a leverage ratio. Theses actual and required ratios for the periods indicated
below are as follows:
<Table>
<Caption>
AS OF AND FOR
THE TWELVE MONTHS AS OF AND FOR AS OF AND FOR
ENDED THE YEAR ENDED THE YEAR ENDED
JUNE 30, 2004 DECEMBER 31, 2003 DECEMBER 31, 2002
------------------- ----------------- -----------------
Actual Interest Coverage Ratio..... 3.19 to 1 4.51 to 1 3.12 to 1
Required Interest Coverage Ratio:
Must be at least................. 2.50 to 1 2.50 to 1 2.50 to 1
Actual Leverage Ratio.............. 3.17 to 1 2.63 to 1 3.76 to 1
Required Leverage Ratio:
Must be no greater than.......... 4.75 to 1 3.75 to 1 4.25 to 1
</Table>
An amendment to the credit agreements in January 2004 increased the
required maximum leverage ratio from 3.75 to 1 to 4.75 to 1. The ratio steps
down to 4.5 to 1 for the December 31, 2004 calculation, 4.0 to 1 for the
December 31, 2005 calculation and to 3.75 to 1 for the December 31, 2006
calculation and thereafter.
73
Indebtedness under the term loan and revolving credit facility is secured
by substantially all of the material assets of Land O'Lakes and its wholly-owned
domestic subsidiaries (other than LOL Finance Co. and LOLFC, LLC) and the wholly
owned subsidiaries of Land O'Lakes Farmland Feed (other than LOL Farmland Feed
SPV, LLC), including real and personal property, inventory, accounts receivable
(other than those receivables which have been sold in connection with our
receivables securitization), intellectual property and other intangibles.
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 the wholly-owned domestic subsidiaries of Land O'Lakes
Farmland Feed (other than LOL Farmland Feed SPV, LLC). The 9% senior notes are
secured by a second lien on essentially all of the assets which secure the term
loan and the revolving credit agreement, and are guaranteed by the same
entities. The 8.75% senior notes are unsecured but are guaranteed by the same
entities that guarantee the obligations under the term loans and revolving
credit facility.
OFF-BALANCE SHEET ARRANGEMENTS
In order to reduce overall financing costs, we 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.
On March 31, 2004, we completed an amendment to our receivables
securitization facility. Under the amendment, the facility was increased from
$100 million to $200 million. The amendment incorporates receivables generated
in our dairy foods segment. In addition, the amendment increases the facility's
term from one year to three years. Concurrently with the amendment, we applied
the incremental proceeds from the expansion to our outstanding senior bank
facilities, which included the mandatory payment in full of our Term A loan
facility and a partial repayment on our Term B loan facility. The amendment also
reduced the effective cost of the facility from LIBOR plus 175 basis points to
LIBOR plus 137.5 basis points. As of June 30, 2004 and December 31, 2003, $200.0
million and $20.0 million, respectively, was drawn under this securitization.
In addition, we lease various equipment and real properties under long-term
operating leases. Total consolidated rental expense was $24.9 million for the
six months ended June 30, 2004, $24.7 million for the six months ended June 30,
2003, $51.7 million for the year ended December 31, 2003, $44.4 million for the
year ended December 31, 2002 and $34.8 million for the year ended December 31,
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.
CAPITAL LEASES
Cheese and Protein International (CPI), a consolidated joint venture of
Land O'Lakes, leases the real property, certain equipment and the buildings
relating to its cheese manufacturing and whey processing plant in Tulare,
California. The CPI lease is accounted for as a capital lease in our
consolidated financial statements, and as of June 30, 2004 and December 31, 2003
the lease balance was $94.8 million and $99.2 million, respectively. The lease
base term commenced on April 30, 2002 and expires on the fifth anniversary,
unless CPI requests, and the lessor approves, one or more one-year base term
extensions,
74
which could extend the base term to no more than ten years. We have entered into
a Support Agreement in connection with the lease. Pursuant to this agreement, we
can elect one of the following options in the event CPI defaults on its
obligations under the lease: (i) assume the 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. The lease agreement requires
among other things, that CPI maintain certain financial ratios including minimum
tangible net worth and a minimum fixed charge coverage ratio. In addition, CPI
is restricted as to borrowings and changes in ownership.
On March 28, 2003, the CPI lease agreement was amended. The amendment
postponed the measurement of the fixed charge coverage ratio until March 2005.
In addition, Land O'Lakes established a $20 million restricted cash account
(which may be replaced with a letter of credit, at our option) which supports
the lease. The restricted cash account or letter of credit would only be drawn
upon in the event of a CPI default, and would reduce amounts otherwise due under
the lease. This support requirement will be lifted when certain financial
targets are achieved by CPI.
The annual lease payments are disclosed below based on an assumed interest
rate of 6% and a five-year lease term. The actual lease payments will vary with
short-term interest rate fluctuations, as interest per the lease agreement is
based on LIBOR. At the conclusion of the lease term, CPI is obligated to pay the
remaining lease balance.
The minimum CPI capital lease payments are as follows:
<Table>
<Caption>
YEARS ENDED DECEMBER 31: PAYMENTS
- ------------------------ --------------
(IN THOUSANDS)
2004........................................................ $ 14,579
2005........................................................ 14,050
2006........................................................ 13,514
2007........................................................ 74,052
2008........................................................ --
--------
Total minimum lease payments.............................. 116,195
Less amount representing interest........................... 16,956
--------
Present value of minimum capital lease payments........... $ 99,239
========
</Table>
Our joint venture partner, Mitsui, has a put option for its remaining
interest, which can be exercised beginning on December 31, 2004 and which takes
effect up to nine months following such notice. The put allows Mitsui to sell
its entire remaining interest to us for $3.2 million, which we have reflected as
a liability in the accompanying consolidated financial statements, plus any
future contributions which Mitsui may make. Mitsui may exercise the option
earlier, but only if certain specified actions are deliberately taken by CPI or
Land O'Lakes to Mitsui's material disadvantage. We do not expect that such a
scenario will occur. If we acquire Mitsui's remaining equity interest, and if we
do not replace Mitsui with another partner, CPI would become a restricted
subsidiary under the senior bank facilities at that time. As a restricted
subsidiary under the senior bank facilities, CPI's on-balance sheet debt and
income or loss would be included in the covenant calculations for our senior
bank facilities. Further, as a restricted subsidiary under the senior bank
facilities, CPI would be required to guarantee our senior bank facilities, the
8.75% senior unsecured notes and the 9% senior secured notes.
MoArk, a consolidated joint venture of Land O'Lakes, had capital leases at
June 30, 2004 and December 31, 2003 of $11.2 million and $10.8 million,
respectively, for land, buildings, machinery and equipment at various locations.
The interest rates on the capital leases range from 5.22% to 7.93% with the
weighted average rate being 6.94%. The weighted average term until maturity is
four years. Land O'Lakes does not provide any guarantees or support for any of
MoArk's capital leases.
75
CRITICAL ACCOUNTING ESTIMATES
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.
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." The futures contracts are marked to market
(either Chicago Mercantile Exchange or Chicago Board of Trade) on the last day
of each month and gains and losses are recognized as an adjustment to inventory
and cost of sales.
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. In addition, we estimate losses and retain reserves for the credit
risk related to the repayment of the notes receivable with the qualifying
special purpose entity ("QSPE") (See "Off-balance sheet arrangements"). 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. Our test for goodwill impairment is a
two-step process and is performed on at least an annual basis. The first step is
a comparison of the fair value of the reporting unit with its carrying amount,
including goodwill. If this step reflects impairment, then the loss would be
measured as the excess of recorded goodwill over its implied fair value. Implied
fair value is the excess of fair value of the reporting unit over the fair value
of all identified assets and liabilities. We assess the recoverability of 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.
RECENT ACCOUNTING PRONOUNCEMENTS
On January 17, 2003, the Financial Accounting Standards Board ("FASB")
issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB 51," ("FIN 46"). The primary objectives of FIN 46 are to
provide guidance on the identification and consolidation of variable
76
interest entities, or VIEs, which are entities for which control is achieved
through means other than through voting rights. As permitted by the
Interpretation, we early-adopted FIN 46 as of July 1, 2003 and began
consolidating our joint venture interest in MoArk LLC ("MoArk"), an egg
production and marketing company. FIN 46 was revised in December 2003 and is
effective for us on January 1, 2005. The revision did not have a significant
impact on our consolidated financial statements.
In May, 2003, the FASB issued Statement of Financial Accounting Standards
150, "Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity." The statement establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). The statement is effective for us as of January 1, 2004. We have
evaluated the standard and have determined that it will not have an impact on
our consolidated financial statements.
In December 2003, the FASB revised Statement of Financial Accounting
Standards 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits." The statement revises the disclosures about pension and other
postretirement benefit plans. It requires additional disclosure regarding
changes in benefit obligations and fair value of plan assets. The statement was
effective for us as of December 31, 2003 and applicable disclosures are included
in our financial statements.
In May 2004, the FASB issued FASB Staff Position 106-2, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003" (the "Position"). The Position applies to
sponsors of single-employer defined benefit postretirement health care plans
that are impacted by the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the "Act"). In general, the Act introduces a federal
subsidy to sponsors that conclude that prescription drug benefits available
under such plans are actuarially equivalent to the prescription drug benefit now
provided under Medicare pursuant to the Act. The Position is effective for the
Company as of July 1, 2004, and the Company expects that the Act will result in
a modest reduction in postretirement health care costs. The effects of the Act
have not yet been included in the Company's measurement of its accumulated
benefit obligation.
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 "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 trading 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 future
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
77
exposure to market risk or future cash requirements under certain of these
instruments. A summary of our futures contracts follows:
<Table>
<Caption>
AT JUNE 30,
------------------------------------
2004 2003
----------------- ----------------
NOTIONAL FAIR NOTIONAL FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------ -------- -----
(IN THOUSANDS)
Commodity futures contracts
Commitments to purchase...................... $165,835 $3,565 $102,481 $(916)
Commitments to sell.......................... (74,072) 556 (4,733) 568
-------- ------ -------- -----
Total outstanding derivatives............. $ 91,763 $4,121 $ 97,748 $(348)
======== ====== ======== =====
</Table>
<Table>
<Caption>
AT DECEMBER 31,
---------------------------------------
2003 2002
------------------ ------------------
NOTIONAL FAIR NOTIONAL FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
(IN THOUSANDS)
Commodity futures contracts
Commitments to purchase.................... $179,004 $13,384 $108,359 $(4,543)
Commitments to sell........................ (43,052) (517) (56,969) (615)
-------- ------- -------- -------
Total outstanding derivatives........... $135,952 $12,867 $ 51,390 $(5,158)
======== ======= ======== =======
</Table>
<Table>
<Caption>
SIX MONTHS ENDED JUNE 30,
-------------------------------------------
2004 2003
-------------------- --------------------
REALIZED REALIZED
NOTIONAL GAINS NOTIONAL GAINS
AMOUNT (LOSSES) AMOUNT (LOSSES)
--------- -------- --------- --------
(IN THOUSANDS)
Commodity futures contracts
Total volume of exchange traded
contracts:
Commitments to purchase.................. $ 700,605 $26,711 $ 294,486 $(998)
Commitments to sell...................... $(522,538) $(5,567) $(192,691) $(523)
</Table>
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-------------------------------------------
2003 2002
-------------------- --------------------
REALIZED REALIZED
NOTIONAL GAINS NOTIONAL GAINS
AMOUNT (LOSSES) AMOUNT (LOSSES)
--------- -------- --------- --------
(IN THOUSANDS)
Commodity futures contracts
Total volume of exchange traded
contracts:
Commitments to purchase.................. $ 769,218 $4,652 $ 185,564 $(3,874)
Commitments to sell...................... $(535,935) $1,479 $(167,410) $ 1,093
</Table>
INTEREST RATE RISK
We are exposed to market risk from fluctuations in interest rates. We
manage interest expense using a mix of floating and fixed rate debt. As of June
30, 2004 and December 31, 2003, we had $118.4 million and $244.8 million,
respectively, in floating rate debt outstanding under the credit agreements
relating to the term loans and revolving credit facility. Also at June 30, 2004
and December 31, 2003 we had $106.0 million and $110 million, respectively, for
obligations under capital lease which have lease payments that fluctuate with
short-term interest rates. Interest rate changes generally do not affect the
market value of floating rate debt but do impact the amount of our interest
payments and, therefore, our
78
future earnings and cash flows. Holding other variables constant, including
levels of indebtedness, a one-percentage point increase in interest rates would
have an estimated negative impact on pretax earnings and cash flows for 2004 of
approximately $3.5 million.
During the six months ended June 30, 2004, we entered into three $50
million fixed-to-floating interest rate swap agreements, in an effort to return
to historical exposure levels for floating interest rate debt. The swaps mirror
the terms of the 8.75% notes and effectively convert $150 million of such notes
from a fixed 8.75% rate to an effective rate of LIBOR plus 385 basis points. The
interest rate swaps are designated as fair value hedges of our fixed rate debt.
As the critical terms of the swaps and the debt are the same, the swap is
assumed to be 100 percent effective and the fair value gains on the swaps are
completely offset by the fair value adjustment to the underlying debt. At June
30, 2004, the notional amount of the swaps was $150 million in aggregate and the
fair value was negative $4.0 million.
The fixed rate debt as of June 30, 2004 and December 31, 2003 totaled
$758.2 million and $762.6 million, respectively. A 10% adverse change in market
rates would potentially impact the fair value of our fixed rate debt by $13
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.
79
BUSINESS
OVERVIEW
We produce dairy products, animal feed and crop seed in the United States.
In 1921, we were formed as a cooperative designed to meet the needs of dairy
farmers located in the Midwestern United States. We have expanded our business
through acquisitions and joint ventures to diversify our product portfolio, to
leverage our portfolio of brand names, to achieve economies of scale and to
extend our geographic coverage. We operate our business through three primary
segments: dairy foods, animal feed and crop seed. In addition, we generate
operational and financial benefits from our three other segments, consisting of
swine, agronomy and layers. We also have additional operations and interests in
a group of joint ventures and investments that are not consolidated in our six
operating segments.
BUSINESS SEGMENTS
DAIRY FOODS
Overview. We produce, market and sell butter, spreads, cheese and other
related dairy products. We sell our products under our national brand names and
trademarks, including LAND O LAKES, the Indian Maiden logo and Alpine Lace, as
well as under our regional brands such as New Yorker. Our network of 12 dairy
manufacturing facilities is geographically diverse and allows us to support our
customers on a national scale. Our customer base includes national supermarket
and supercenter chains, industrial customers, including major food processors,
and major foodservice customers, including restaurants, schools, hotels and
airlines.
Products. We manufacture over 300 dairy-based food products. Our principal
dairy products and activities include:
Butter. We produce and market branded butter under our proprietary LAND O
LAKES brand name for retail and foodservice customers. In addition, we produce
nonbranded butter for our private label and industrial customers. Our butter
products include salted butter, unsalted butter, light butter, whipped butter
and flavored butter.
Spreads. We produce and market a variety of spreads, including margarine,
nonbutter spreads and butter blends. These products are primarily marketed under
the LAND O LAKES brand and are sold to our retail, foodservice and industrial
customers.
Cheese. We produce and sell cheese for retail sale in deli and dairy
cases, to foodservice businesses and to industrial customers. Our deli case
cheese products are marketed under the LAND O LAKES, Alpine Lace and New Yorker
brand names. Our dairy case cheese products are sold under the LAND O LAKES
brand name. We also sell cheese products to private label customers. We offer a
broad selection of cheese products including cheddar, monterey jack, mozzarella,
provolone, American and other processed cheeses.
Other. We manufacture nonfat dry milk and whey for sale to our industrial
customers. We produce nonfat dry milk by drying the nonfat milk byproduct of our
butter manufacturing process. It is used in processed foods, such as instant
chocolate milk. Whey is a valued protein-rich byproduct of the cheesemaking
process which is used in processed foods, sports drinks and other nutritional
supplements.
Raw Milk Wholesaling. We purchase raw milk from our members and sell it
directly to other dairy manufacturers, particularly fluid milk processors. We
generate substantial revenues but negligible margins on these sales. See
"Management's discussion and analysis of financial condition and results of
operations -- Overview -- General -- Wholesaling and brokerage activities."
New Products. In May 2002 we introduced Fresh Buttery Taste, a buttery
tasting spread with a touch of sweet cream. In June 2003, we introduced two new
dairy case products, LAND O LAKES Soft Baking Butter with Canola Oil and LAND O
LAKES Spreadable Butter with Canola Oil.
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Sales, Marketing and Advertising. In order to meet the needs of our
retail, foodservice and industrial customers we have sales efforts designed to
service each of these customer bases. Our retail customers are serviced through
direct sales employees and independent national food brokers. Our retail sales
force consists of approximately 65 employees that service our larger retail
customers, such as supermarket and supercenter chains, and manage our national
food broker relationship.
We market our products to our industrial customers through six dedicated
salespeople. Our industrial customers generally maintain a direct relationship
with our facility managers in order to coordinate delivery and ensure that our
products meet their specifications.
Our foodservice products are primarily sold through independent regional
food brokers and food distributors. In addition, we employ approximately 25
salespeople who are responsible for maintaining these regional food broker
relationships and marketing to our large foodservice customers directly.
Distribution. We contract with third-party trucking companies to
distribute our dairy products throughout the United States in refrigerated
trucks. Our dairy products are shipped to our customers either directly from the
manufacturing facilities or from one of our five regional distribution centers
located in New Jersey, Georgia, Illinois, California and Ohio. As most of our
dairy products are perishable, our distribution facilities are designed to
provide necessary temperature controls in order to ensure quality and freshness
of our products. The combination of our strategically located manufacturing and
distribution facilities and our logistics capabilities enables us to provide our
customers with a highly efficient distribution system.
Production. We produce our dairy products at 12 manufacturing facilities
strategically located throughout the United States. We also have contractual
arrangements whereby we engage other dairy processors to produce some of our
products. We believe the geographic distribution of our plants allows us to
service our customers in a timely and efficient manner. In 2003, we processed
approximately 7.6 billion pounds of milk, primarily into butter and cheese.
Butter is produced by separating the cream from milk, pasteurizing it and
churning the cream until it hardens into butter. Butter production levels
fluctuate due to the seasonal availability of milk and butterfat. The cheese
manufacturing process involves adding a culture and a coagulant to milk. Over a
period of hours, the milk mixture hardens to form cheese. At that point, whey is
removed and separately processed. Finally, the cheese is salted, shaped and
aged.
Supply and Raw Materials. Our principal raw material for production of
dairy products is milk. During 2003, we sourced approximately 93% of our raw
milk from our members. We enter into milk supply agreements with all of our
dairy members to ensure our milk supply. These contracts typically provide that
we will pay the producer an advance for the milk during the month of delivery,
and then will settle the final price in the following month for an amount
determined by us, which typically includes a premium over Federal market order
prices. These contracts provide that we will purchase all of the milk produced
by our members for a fixed period of time, generally one year or less. As a
result, we often purchase more milk from our members than we require for our
production operations. There are three principal reasons for doing this: first,
we need to sell a certain percentage (which is not less than 10% of the amount
procured and depends on which Federal market order the milk is subject to) of
our raw milk to fluid dairy processors in order to participate in the Federal
market order system, which enables us to have a lower input cost for our milk;
second, it decreases our need to purchase additional supply 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 they
produce during periods of high milk production. We enter into fixed-price
forward sales contracts with some of our large industrial cheese customers which
historically represented 10-15% of our processed milk volume. We simultaneously
enter into milk supply agreements with a fixed price in order to ensure our
margins on these contracts. We also purchase cream, bulk cheese and bulk butter
as raw materials for production of our dairy products. We typically enter into
annual agreements with fluid processors to purchase all of their cream
production. We typically purchase bulk cheese and butter pursuant to annual
contracts. These cheese and butter contracts provide for annual targets and
delivery schedules and are based on market prices. In isolated instances, we
81
purchase these commodities on the open market at current market prices. We refer
to this type of transaction as a spot market purchase.
Customers. We sell our dairy products directly and indirectly to over 500
customers. Our products are sold in over 5,000 retail locations, including
supermarkets and supercenters, convenience stores, warehouse club stores and
military commissaries. In addition, we sell our products through food brokers
and distributors to foodservice providers such as major restaurant chains,
schools, hotels and airlines.
Research and Development. We seek to offer our customers product
innovations designed to meet their needs. In addition, we work on product and
packaging innovations to increase overall demand for our products and improve
product convenience. In 2003, we spent $10.2 million on dairy research and
development, and we employ approximately 65 individuals in research capacities
at our dedicated dairy foods research facility.
Competition. The bulk of the dairy industry consists of national and
regional competitors. Our branded cheese products compete with products from
national competitors such as Kraft, Borden and Sargento as well as several
regional competitors. For butter, our competition comes primarily from regional
brands, such as Challenge and Kellers, and from private label products. We face
increased competitive pressures because our retail customers are consolidating.
We rely on the strength of our brands to help differentiate our products from
our competition. We believe our branded products compete on the basis of brand
name recognition, product quality and reputation and customer support. Products
in the private label and industrial markets compete primarily based on price. We
believe our product quality and consistency of supply distinguishes our products
in these markets.
ANIMAL FEED
Overview. Through Land O'Lakes Farmland Feed, we manufacture and market
feed for both the commercial and lifestyle sectors of the animal feed market in
the United States. Our commercial feed products are used by farmers and
specialized livestock producers who derive income from the sale of milk, eggs,
poultry and livestock. Our lifestyle feed products are used by customers who own
animals principally for non-commercial purposes. Margins on our lifestyle feed
products are significantly higher than those on our commercial feed products. We
market our lifestyle animal feed products, other than dog and cat food, under
the brands Purina, Chow and the "Checkerboard" Nine Square logo. We also market
our animal feed products under the LAND O LAKES Feed label. We operate a
geographically diverse network of 81 feed mills, which permits us to distribute
our animal feed nationally through our network of approximately 1,300 local
member cooperatives, approximately 3,550 independent dealers operating under the
Purina brand name and directly to customers. We believe we are a leader among
feed companies in animal feed research and development with a focus on enhancing
animal performance, productive capacity and early stage development. For
example, we developed and introduced milk replacer products for young animals,
and our patented product formulations make us the only supplier of certain milk
replacer products. These products allow dairy cows to return to production
sooner after birthing and increase the annual production capacity of cows. Other
than certain insignificant foreign investments and sales, we operate our feed
business entirely through our Land O'Lakes Farmland Feed subsidiary.
Products. We sell commercial and lifestyle animal feed which are based
upon proprietary formulas. We also produce commercial animal feed to meet our
customers' specifications. We sell feed for a wide variety of animals, such as
dairy cattle, beef cattle, swine, poultry, horses and other specialty animals
such as laboratory and zoo animals. Our principal feed products and activities
include:
Complete Feed. These products provide a balanced mixture of grains,
proteins, nutrients and vitamins which meet the entire nutritional requirement
of an animal. They are sold as ground meal, in pellets or in extruded pieces.
Sales of complete feeds typically represent the majority of net sales. We
generally sell our lifestyle animal feed as complete feed. We market our
lifestyle animal feed through the use of our trademarks, namely, Purina, Chow
and the "Checkerboard" Nine Square logo.
82
Supplements. These products provide a substantial part of a complete
ration for an animal, and typically are distinguished from complete feed
products by their lack of the bulk grain portion of the feed. Commercial
livestock producers typically mix our supplements with their own grain to
provide complete animal nutrition.
Premixes. These products are concentrated additives for use in combination
with bulk grain and a protein source, such as soybean meal. Premixes consist of
a combination of vitamins and minerals that are sold to commercial animal
producers and to other feed mill operators for mixing with bulk grains and
proteins.
Simple Blends. These products are a blend of processed commodities,
generally steam-rolled corn or barley, that are mixed at the producer's location
with a feed supplement to meet the animal's nutritional requirements. These
products are highly price competitive and generally have low margins. These
products are primarily used by large dairies in the western United States.
Milk Replacers. Milk replacers are sold to commercial livestock producers
to meet the nutritional requirements of their young animals while increasing
their overall production capability by returning the parent animal to production
faster. We market these products primarily under our Maxi Care, Cow's Match and
Amplifier Max brand names. We have patents that cover certain aspects of our
milk replacer products and processes. Our two principal milk replacer patents
expire in April 2015 and April 2020.
Ingredient Merchandising. In addition to selling our own products, we buy
and sell or broker 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 with a minimal
capital investment. 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
costs associated with larger purchases and volume discounts.
Sales, Marketing and Advertising. We employ approximately 350 direct
salespeople in regional territories. In our commercial feed business, we provide
our customers with information and technical assistance through trained animal
nutritionists whom we either employ or have placed with our local member
cooperatives. Our advertising and promotional expenditures are focused on higher
margin products, specifically our lifestyle animal feed and milk replacers. We
advertise in recreational magazines to promote our lifestyle animal feed
products. To promote our horse feed products, we have dedicated promoters who
travel to rodeos and other horse related events. We promote our milk replacers
with print advertising in trade magazines. We spent $21.2 million on advertising
and promotion for the year ended December 31, 2003.
Distribution. We distribute our animal feed nationally primarily through
our network of approximately 1,300 local member cooperatives and approximately
3,550 Purina-branded dealers or directly to customers. We deliver our products
primarily by truck using independent carriers, supplemented by our own fleet.
Deliveries are made directly from our feed mills to delivery locations within
each feed mill's geographic area.
Production. The basic feed manufacturing process consists of grinding
various grains and protein sources into meal and then mixing these materials
with certain nutritional additives, such as vitamins and minerals. The resulting
products are sold in a variety of forms, including meal, pellets, blocks and
liquids. Our products are formulated based upon proprietary research pertaining
to nutrient content. As of December 31, 2003 we operated 81 feed mills across
the United States. We have reduced the number of feed mills we operate by
eliminating the overlap between our existing facilities and those we acquired as
part of our Purina Mills acquisition. Consistent with current industry capacity
utilization, our facilities operate below their capacity.
Supply and Raw Materials. We purchase the bulk components of our products
from various suppliers. These bulk components include corn, soybean meal and
grain byproducts. In order to reduce transportation costs, we arrange for
delivery of these products to occur at our feed mill operations
83
throughout the United States. We purchase vitamins and minerals from multiple
vendors, including vitamin, pharmaceutical and chemical companies.
Customers. Our customers primarily include large commercial corporations,
local cooperatives, private feed dealers and individual producers. In the case
of local cooperatives, the cooperative either uses these products in their own
feed manufacturing operations or resells them to their customers. Our customers
purchase our animal feed products for a variety of reasons, including our
ability to provide products that fulfill some or all of their animals'
nutritional needs, our knowledge of animal nutrition, our ability to maintain
quality control and our available capacity.
Research and Development. Our animal feed research and development focuses
on enhancing animal performance, productive capacity and early stage
development. Additionally, we dedicate significant resources to developing
proprietary formulas that allow us to offer our commercial customers alternative
feed formulations using lower cost ingredients. We employ approximately 90
people in various animal feed research and development functions at our research
and development facilities. In 2003, we spent $9.7 million on research and
development.
Competition. The animal feed industry is highly fragmented. Our
competitors consist of many small local manufacturers, several regional
manufacturers and a limited number of national manufacturers. The available
market for commercial feed may become smaller and competition may increase as
meat processors and livestock producers become larger and integrate their
business by acquiring or constructing their own feed production facilities. In
addition, purchasers of commercial feed tend to select products based on price
and performance and some of our feed products are purchased from third parties
without further processing by us. As a result of these factors, the barriers to
entry in the feed industry are low. Distribution for lifestyle feed is also
consolidating as major national chain retailers enter this market. We believe we
distinguish ourselves from our competitors through our high-performance,
value-added products, which we research, develop and distribute on a national
basis. Our brands, Purina, Chow and the "Checkerboard" Nine Square logo, provide
us with a competitive advantage, as they are well-recognized, national brands
for lifestyle animal feed. We also compete on the basis of service by providing
training programs, using animal nutritionists with advanced technical
qualifications to consult with local member cooperatives, independent dealers
and livestock producers and by developing and manufacturing customized products
to meet customer needs.
CROP SEED
Overview. We sell seed for a variety of crops, including alfalfa,
soybeans, corn and forage and turf grasses, under our CROPLAN GENETICS brand. We
also distribute certain crop seed products under third-party brands, including
Northrop King, Asgrow and Dekalb, and under private labels. We distribute our
seed products through our network of local member cooperatives, to other seed
companies, to retail distribution outlets and under private labels. We have
strategic relationships with Syngenta and Monsanto, two crop seed producers in
the United States, to which we provide distribution and research and development
services.
Products. We develop, produce and distribute seed products including seed
for alfalfa, soybeans, corn and forage and turf grasses. We also market and
distribute seed products produced by other crop seed companies, including seed
for corn, soybeans, sunflowers, canola, sorghum and sugarbeets. Seed products
are often genetically engineered through selective breeding or gene splicing to
produce crops with specific traits. These traits include resistance to
herbicides and pesticides and enhanced tolerance to adverse environmental
conditions. As a result of our relationships with certain life science
companies, we believe we have access to one of the most diverse genetic
databases of any seed company in the industry. We also license some of our
proprietary alfalfa seed traits to other seed companies for use in their seed
products.
Sales, Marketing and Advertising. We have a sales force of approximately
150 employees who promote the sale of our seed products throughout the country,
particularly in the Midwest. Our sales and marketing strategy is built upon the
relationships we have established with our local member cooperatives and our
ability to purchase and distribute quality seed products at a low cost due to
our size and scale. We
84
market our crop seed products under our brand name CROPLAN GENETICS. We also
distribute certain crop seed products under third-party brands, including
Northrop King, Asgrow and DeKalb, and under private labels. We engage in a
limited amount of advertising, primarily utilizing marketing brochures and field
signs. We are a leader in online customer communications and order processing.
We also participate in the Total Farm Solutions program with our affiliate
Agriliance. Through this program, trained agronomists are placed at local
cooperatives to provide advisory services regarding crop seed and agronomy
products. In 2003, we spent approximately $0.9 million in connection with the
Total Farm Solutions program. We do not have any long-term commitments
associated with this program.
Distribution. We distribute our seed products through our network of local
member cooperatives, to other seed companies and to retail distribution outlets.
We have strategic relationships with Syngenta and Monsanto, two leading crop
seed producers in the United States, to which we provide distribution and
research and development services. We also sell our proprietary products under
private labels to other seed companies for sale through their distribution
channels. Additionally, several of our product lines (particularly turf grasses)
are sold to farm supply retailers and home and garden centers. We use third-
party trucking companies for the nationwide distribution of our seed products.
Supply and Production. Our alfalfa, soybeans, corn and forage and turf
grass seed are produced to our specifications and under our supervision on farms
owned by us and by geographically diverse third-party producers. We maintain a
significant inventory of corn and alfalfa seed products in order to mitigate
negative effects caused by weather or pests. Our alfalfa and corn seed products
can be stored for up to four years after harvesting. Our crop seed segment has
foreign operations in Argentina and Canada.
Customers. We sell our seed products to over 6,500 customers, none of
which represented more than 3% of our crop seed net sales in 2003. Our customers
consist primarily of our local member cooperatives and other seed companies
across the United States and internationally. Our customer base also includes
retail distribution outlets.
Research and Development. We focus our research efforts on crop seed
products for which we have a significant market position, particularly alfalfa
seed. We also work with other seed companies to jointly develop beneficial crop
seed traits. In 2003, we spent $5.4 million on crop seed research and
development. As of December 31, 2003, we employed approximately 20 individuals
in research and development capacities and had four research and development
facilities.
Competition. Our competitors include Pioneer, Monsanto and Syngenta as
well as many small niche seed companies. We differentiate our seed business by
supplying a branded, technologically advanced, high quality product, and by
providing farmers with access to agronomists through our joint Total Farm
Solutions program with Agriliance. These services are increasingly important as
the seed industry becomes more dependent upon biotechnology and crop production
becomes more sophisticated. Due to the added cost involved, our competitors,
with the exception of Pioneer, generally do not provide such services. We can
provide these services at a relatively low cost because we often share the costs
of an agronomist with Agriliance or with a local cooperative.
SWINE
We market 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 for sale to our local member cooperatives. Under the
farrow-to-finish program, we raise market hogs for sale to pork processors. The
cost plus program provides minimum price floors to producers for market hogs.
The price floor fluctuates based on the cost of corn and soybean meal. There are
9,000 hogs remaining in the cost plus program. The last cost plus contracts will
expire in August 2005. We are not entering into new cost plus contracts.
We own approximately 64,000 sows producing approximately 623,000 feeder
pigs and 568,000 market hogs annually at facilities we own or lease and at
facilities owned by approximately 130 contract producers. The dramatic
volatility in the live hog market in the past several years, where selling
prices were well
85
below cost, resulted in our swine operations generating losses primarily in
connection with our cost plus and our farrow-to-finish programs. In 2003,
however, the average price per hundred weight for market hogs was $40.59
compared to $35.86 in 2002.
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 animal feed
segment. We operate this portion of our swine business under the pass-through
program and the market risk sharing program. Under the pass-through program, we
enter into commitments to purchase weanling and feeder pigs from producers and
generally have commitments to immediately resell the animals to swine producers.
The market risk sharing program provides minimum price floors to producers for
market hogs. The price floor in our market risk sharing program floats with the
market price of hogs and the cost of swine feed. For a discussion of our swine
accounting and results see "Management's discussion and analysis of financial
condition and results of operations."
AGRONOMY
Our agronomy segment consists solely of joint ventures and investments that
are not consolidated in our financial results. The two most significant of these
are Agriliance and CF Industries. As a result, our agronomy segment has no net
sales, but we allocate overhead to selling and administrative expense and may
recognize patronage as a reduction in cost of sales. Additional information
regarding Agriliance is provided in "-- Joint Ventures and
Investments -- Agriliance LLC." For a discussion of our agronomy accounting and
results, see "Management's discussion and analysis of financial condition and
results of operations -- Land O'Lakes -- Overview -- General -- Unconsolidated
Businesses."
LAYERS
Our layers segment consists solely of our MoArk joint venture, which was
consolidated in our financial statements beginning July 1, 2003. Additional
information regarding MoArk is provided below under the caption "-- Joint
Ventures and Investments -- MoArk, LLC". For a discussion of our layers segment
accounting and results see "Management's discussion and analysis of financial
condition and results of operations -- Land O'Lakes -- Results of Operations."
OTHER
We also operate various other wholly-owned businesses such as LOL Finance
Co., which provides financing to farmers and livestock producers.
JOINT VENTURES AND INVESTMENTS
Other than Cheese and Protein International and MoArk, each of which is a
consolidated unrestricted subsidiary, the joint ventures and investments
described below are unconsolidated.
Agriliance LLC. Agriliance, a 50/50 joint venture with United Country
Brands (wholly owned by CHS) was formed for the purposes of distributing and
manufacturing agronomy products. Prior to the contribution of our agronomy
assets to Agriliance in July 2000, the financial results of these assets were
consolidated for financial reporting purposes.
Products. Agriliance markets and sells two primary product lines:
crop nutrients (including fertilizers and micronutrients) and crop
protection products (including herbicides, pesticides, fungicides and
adjuvants). For Agriliance's fiscal year ended August 31, 2003,
approximately 89% of these products were manufactured by third-party
suppliers and marketed under the suppliers' brand names. The remaining 11%
was either manufactured by Agriliance or by a third-party supplier and
marketed under the brand names AgriSolutions (for herbicides, pesticides
and related products) and Origin (for micronutrients).
Sales and Marketing. Agriliance has an internal sales force of
approximately 140 employees. Agriliance's sales and marketing efforts serve
the entire United States and focus on areas in the
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Midwest, the Southeast, and the eastern Corn Belt. Agriliance's strategy is
built upon strong relationships with local cooperatives and Agriliance's
ability to purchase and distribute quality agronomy products at a low cost.
Agriliance engages in a limited amount of advertising in trade journals and
produces marketing brochures and advertisements utilized by local
cooperatives. In addition, Agriliance assists local member cooperatives and
independent farmers by identifying, recruiting and training agronomists who
provide advice relating to agronomy products. In the Midwest, Agriliance
has implemented the Total Farm Solutions program, an effort to utilize the
expertise of the agronomists to bundle Agriliance products with our seed
products.
Production, Source of Supply and Raw Materials. Agriliance operates
primarily as a wholesale distributor of products purchased from other
manufacturers. Agriliance's primary suppliers of crop protection products
are Syngenta, Monsanto, BASF, Dow Chemical, DuPont and Bayer. Agriliance
enters into annual distribution agreements with these manufacturers.
However, Agriliance manufactures approximately 9% of its proprietary crop
protection products. Agriliance's production facilities are located in
Iowa, Arkansas and Missouri. Agriliance procures approximately 32% of its
fertilizer needs from CF Industries, of which we are a member. Agriliance
sources its remaining fertilizer supply needs from a variety of suppliers
including PCS, IMC, Terra Nitrogen, Koch and Agrium. Agriliance also
produces micronutrient products. In 2003, approximately 45% of Agriliance's
agronomy products were sourced from three suppliers.
Customers and Distribution. Agriliance's customer base consists
primarily of farmers, many of whom are members of our cooperative.
Agriliance distributes its products through our local member cooperatives
and also through retail agronomy centers owned by Agriliance. Agriliance
stores inventory at a number of strategically positioned locations,
including leased warehouses and storage space at local cooperatives.
Agriliance serves most of the key agricultural areas of the United States,
with its customers and distribution concentrated in the Midwest.
Competition. Agriliance's primary competitors are national crop
nutrient distributors, such as Cargill, IMC, PCS, Agrium and Royster Clark,
and national crop protection product distributors, such as Helena and
Wilbur-Ellis, as well as smaller regional brokers and distributors. The
wholesale agronomy industry is consolidating as distributors attempt to
expand their distribution capabilities and efficiencies. Wholesale agronomy
customers tend to purchase products based upon a distributor's ability to
provide ready access to product at critical times prior to and during the
growing season. In addition, certain customers purchase on the basis of
price. We believe Agriliance distinguishes itself from its competitors as a
result of its distribution network, which enables it to efficiently
distribute product to customers. In addition, Agriliance provides access to
trained agronomists who give advice to farmers on both agronomy and crop
seed products to optimize their crop production.
Governance. Agriliance is managed by a four member board of managers.
We and United Country Brands, each with 50% ownership positions, have the
right to appoint two of the managers. Certain actions require the unanimous
approval of the board, including (1) adopting or amending the annual
business plan; (2) distributing products produced by Agriliance to anyone
other than the members or patrons of Agriliance's members; (3) approving
capital expenditures related to the expansion of Agriliance's production
capabilities, purchasing additional inventory or changing the types of
products produced by Agriliance; (4) incurring indebtedness other than in
the ordinary course of business; (5) appointing, replacing, or discharging
an executive officer; (6) making distributions to members; and (7) changing
income tax or special accounting elections. Pursuant to the terms of
Agriliance's operating agreement, Land O'Lakes and CHS have each agreed to
refrain from directly or indirectly engaging in the wholesale marketing of
fertilizer and agricultural chemicals in North America, except through
Agriliance, for so long as they, or an entity in which they are a material
owner, remain a member of Agriliance, and for a period of four years
following termination of their membership.
Cheese and Protein International LLC. Cheese and Protein International LLC
("CPI"), our 97.0% owned consolidated joint venture with a subsidiary of Mitsui
& Co. (USA), consists of a mozzarella
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cheese and whey plant in Tulare, California. Commercial production commenced in
May 2002. We are party to a marketing agreement with Mitsui and CPI which gives
us the right to distribute the products produced by the venture in North America
and Central America and gives Mitsui the right to distribute the whey outside of
North America and Central America. The purchase price for all products will be
based upon the market prices for such product. We have also contracted with CPI
to provide no less than 70% of their milk requirements at prices based upon
market prices for milk. In addition, we have agreed to purchase no less than 70%
of CPI's estimated production of mozzarella cheese, based upon market prices.
This venture is governed by an eight member committee. We have the right to
appoint seven members to the committee. The remaining member is appointed by our
joint venture partner. On November 25, 2002, Mitsui provided notice of its
intent to exercise a put option which, if exercised, would have required us to
purchase its then 30% equity interest in CPI. Before the exercise date, however,
Mitsui elected to maintain a 5% ownership stake and we purchased the remaining
25%. In June 2003, we entered into an agreement which provides for Mitsui's
continued participation in CPI. Under the agreement, Mitsui contributed an
additional $1.4 million to the venture in cash. Mitsui's participation interest
as of June 30, 2004 was approximately 3.0% due to our additional cash
contributions to CPI. Mitsui will not have significant control of the joint
venture going forward, but will retain a put option for its remaining interest
which can be exercised beginning on December 31, 2004 and which takes effect up
to nine months following notice of exercise. The put option allows Mitsui to
sell its entire remaining interest to us at original cost, with no interest
thereon. This equates to $3.2 million plus any future equity contributions which
Mitsui may make. Mitsui may exercise the option earlier, but only if certain
specified actions are deliberately taken by CPI or Land O'Lakes to Mitsui's
material disadvantage. We do not expect that such a scenario will occur.
However, if we acquire Mitsui's remaining equity interest, and if we do not
replace Mitsui with another partner, CPI would become a restricted subsidiary
under the senior bank facilities. As a restricted subsidiary under the senior
bank facilities, CPI's on-balance sheet debt and income or loss would be
included in the covenant calculations for our senior bank facilities. Further,
as a restricted subsidiary, CPI would be required to guarantee our senior bank
facilities, the 8 3/4% senior notes and the New Notes. However, for as long as
CPI remains non-wholly owned, it will continue to be unrestricted for purposes
of the senior bank facilities, and will not be required to guarantee the senior
bank facilities, 8 3/4 senior notes or the New Notes.
MoArk, LLC. In January 2000, we formed MoArk, LLC, a joint venture of
which we currently own 57.5% with Osborne Investments, LLC, to produce and
market eggs and egg products. We increased our ownership percentage from 50% to
57.5% in February 2003 in exchange for a payment of $7.8 million to Osborne, but
maintained our 50% voting rights. We have the right to purchase from Osborne
(and Osborne has the right to cause us to buy from them) its interest in MoArk
for a minimum purchase price of $42.2 million (adjusted for tax benefits
received by Osborne and purchase price already paid) or a greater amount based
upon MoArk's performance over time. These rights are exercisable in 2007.
Although Osborne has a 42.5% interest in MoArk, since October 1, 2001 we have
been allocated 100% of the income or loss of MoArk (other than on capital
transactions involving realized gain or loss on intangible assets, which are
allocated 50/50). In accordance with the provisions of Financial Accounting
Standards Board Interpretation 46, effective July 1, 2003, we began
consolidating MoArk into our financial statements. In addition to consolidating
MoArk, we presumed for accounting purposes that we will acquire the remaining
42.5% of MoArk from Osborne in 2007. Effective July 1, 2003, the Company
recorded this presumed $42.2 million payment as a long-term liability at a
present value of $31.6 million using an effective interest rate of 7%. As a
result, we do not record a minority interest in MoArk in our financial
statements. Additionally, MoArk is obligated to make four guaranteed payments to
Osborne in 2004, 2005, 2006 and 2007, each in the amount of $1,445,000.
Products. MoArk produces and markets shell eggs and egg products that
are sold at retail and wholesale for consumer and industrial use throughout
the United States. MoArk markets and processes eggs from approximately 26
million layers (hens) which produce approximately 520 million dozen eggs
annually. Approximately 50% of the eggs and egg products marketed are
produced by layers owned by MoArk. The remaining 50% are purchased on the
spot market or from third-party producers. Shell eggs represent
approximately 78% of eggs MoArk sells annually, and the balance
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are broken for use in egg products such as refrigerated liquid, frozen,
dried and extended shelf life liquid. MoArk recently launched a high
quality, all natural shell egg product marketed under the LAND O LAKES
brand name in a Northeast market. Through MoArk's acquisition of Cutler Egg
Products in April 2001, MoArk acquired a patented process that extends the
shelf life of a refrigerated liquid egg product utilizing an
ultra-pasteurization process.
Customers and Distribution. MoArk has approximately 950 retail
grocery, industrial, foodservice and institutional customers. While supply
contracts exist with a number of the larger retail organizations, the terms
are typically market based, annual contracts and allow early cancellation
by either party. MoArk primarily delivers directly to its customer (store
to door delivery). Alternatively, some customers pick up product at one of
MoArk's facilities.
Sales and Marketing. MoArk's internal sales force maintains direct
relationships with customers. MoArk also uses food brokers to maintain
select accounts and for niche and "spot" activity in situations where MoArk
cannot effectively support the customer or needs to locate a customer or
customers for excess products. With the exception of the advertising
activity associated with the launch of the LAND O LAKES brand eggs, amounts
spent for advertising are insignificant.
Competition. MoArk competes with other egg processors, including
Cal-Maine Foods, Rose Acre Farms, Inc. and Michael Foods. MoArk competes
with these companies based upon its low cost production system, its high
margin regional markets and its diversified product line.
Governance. We are entitled to appoint three managers to the board of
managers of MoArk, and Osborne has the right to appoint the remaining three
managers until its governance interest has been transferred to us.
According to the terms of MoArk's operating agreement, two managers elected
by us and two managers elected by Osborne constitute a quorum. Actions of
the board of managers require a unanimous vote of a quorum of the board of
managers. MoArk is required to maintain at all times a net worth in excess
of $40.0 million. If MoArk's net worth were to decline below $40.0 million,
we would be required to contribute the necessary funds in order to maintain
the $40.0 million net worth. As of December 31, 2003, MoArk's net worth was
approximately $116.6 million. In the event we decide to sell or transfer
any or part of our economic and governance interest in MoArk, including our
right to cause the transfer of the governance interest owned by Osborne, we
must first offer to sell or transfer to Osborne all of the rights and
interests to be sold or transferred at a similar price and under similar
material terms and conditions.
Advanced Food Products, LLC. We own a 35% interest in Advanced Food
Products, a joint venture which manufactures and markets a variety of custom and
noncustom aseptic products. Aseptic products are manufactured to have extended
shelf life through specialized production and packaging processes, enabling food
to be stored without refrigeration until opened. We formed Advanced Food
Products in 2001, with a subsidiary of Bongrain, S.A., a French food company,
for the purpose of manufacturing and marketing aseptically packaged cheese
sauces, snack dips, snack puddings, and ready to drink dietary beverages. The
venture is governed by a six member board of managers, and we have the right to
appoint two members. Bongrain manages the day-to-day operations of the venture.
CF Industries, Inc. CF Industries is one of North America's largest
interregional cooperatives, and is owned by eight cooperatives. CF Industries
manufactures fertilizer products, which are distributed by its members or their
affiliates. CF Industries has manufacturing facilities in Louisiana, Florida and
Alberta, Canada. For the year ended December 31, 2003, CF Industries generated
$1,287.3 million in net sales. As of December 31, 2003, our equity interest in
CF Industries, which represents allocated but unpaid patronage, had a book value
of approximately $250 million. For the year ended December 31, 2003, our
percentage of ownership of allocated equity of CF Industries was 38%. Each of
the members has the right to elect one director to the board of directors. The
day-to-day operations of the cooperative are managed by the officers of CF
Industries who are elected by its board of directors.
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CoBank. CoBank is a cooperative lender of which we are a member. Our
equity interest in CoBank and the amount of patronage we receive is dependent
upon our outstanding borrowings from CoBank. As of December 31, 2003, our
investment in CoBank had a book value of $18.6 million.
Ag Processing Inc. Ag Processing is a cooperative that produces soybean
meal and soybean oil. As a member of Ag Processing, we are entitled to patronage
based upon our purchases of these products. We use soybean meal as an ingredient
in our feed products. Soybean oil is an ingredient used to produce our dairy
spread products.
DESCRIPTION OF THE COOPERATIVE
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",
supply the cooperative with raw materials, and/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 "patronage income," known as "qualified" 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, allocated
to member equities and distributed to the member at a later time as a
"revolvement" of equity. 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.
At their discretion, 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's members do not include undistributed nonqualified patronage income
in their current taxable income. However, the cooperative may revolve the equity
representing the nonqualified patronage income 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.
OUR STRUCTURE AND MEMBERSHIP
We have both voting and nonvoting members, with differing membership
requirements for cooperative and individual members. We also separate our
members into two categories: "dairy members" supply our dairy foods segment with
dairy products, primarily milk, cream, cheese and butter, and "ag members"
purchase agricultural products, primarily agronomy products, feed and seed from
our other operations or joint ventures. We further divide our dairy and ag
members by region. There are eight dairy regions and five ag regions.
All of our members must acquire stock and comply with uniform conditions
prescribed by our board of directors and by-laws. The board of directors may
terminate a membership if it determines that the member has failed to adequately
patronize us or has become our competitor.
A cooperative voting member (a "Class A" member) must be an association of
producers of agricultural products operating on a cooperative basis engaged in
either the processing, handling, or marketing of its members' products or the
purchasing, producing, or distributing of farm supplies or
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services. Class A members are entitled to a number of votes based on the amount
of business done with the Company. Class A members tend to be ag members,
although a Class A member may be both an ag and dairy member if they both supply
us with dairy products and purchase agricultural products from us or our joint
ventures.
An individual voting member (a "Class B" member) is an individual,
partnership, corporation or other entity other than a cooperative engaged in the
production of agricultural commodities. Class B members are entitled to one
vote. Class B members tend to be dairy members. Class B members may be both an
ag and dairy member if they both provide us with dairy products and purchase
agricultural products from us or our joint ventures.
Our nonvoting cooperative members ("Class C" members) are associations
operating on a cooperative basis but whose members are not necessarily engaged
in the production or marketing of agricultural products. Such members are not
given the right to vote, because doing so may jeopardize our antitrust exemption
under the Capper-Volstead Act (the exemption requires all our voting members be
engaged in the production or marketing of agricultural products). Class C
members also include cooperatives which are in direct competition with us.
Nonvoting individual members ("Class D" members) generally do a low volume of
business with us and are not interested in our governance.
GOVERNANCE
Our board is made up of 24 directors. Our dairy members nominate 12
directors from among the dairy members and our ag members nominate 12 directors
from among the ag members. The nomination of directors is conducted within each
group by region. The number of directors nominated from each region is based on
the total amount of business conducted with the cooperative by that region's
members. Directors are elected to four year terms at our annual meeting by
voting members in a manner similar to a typical corporation. Our by-laws require
that, at least every five years, we evaluate both the boundaries of our regions
and the number of directors from each region, so that the number of directors
reflects the proportion of patronage income from each region.
The board may also choose to elect up to three non-voting advisory members.
Currently, we have one such member. The board governs our affairs in the same
manner as the boards of typical corporations that are not organized as
cooperatives.
EARNINGS
As described above, we divide our earnings between member and non-member
business and then allocate member earnings to dairy foods operations or
agricultural operations (primarily our feed, seed and agronomy segments). For
our dairy foods operations, the amount of member business is based on the amount
of dairy products supplied to us by our dairy members. In 2003, 70.6% of our
dairy input requirements came from our dairy members. For our agricultural
operations, the amount of member business is based on the dollar-amount of
products sold to our agricultural members. In 2003, 34.7% of our agricultural
product net sales, and 36.0% of our agricultural operating income, was derived
from sales to agricultural members.
PATRONAGE INCOME AND EQUITY
To acquire and maintain adequate capital to finance our business, our
by-laws allow us to retain up to 15% of our earnings from member business as
additions to permanent equity. We currently retain 10% and allocate the
remainder of our earnings from member business to patronage income.
We have two plans through which we revolve patronage income to our members:
the Equity Target Program for our dairy foods operations and the Revolvement
Program for our agriculture businesses.
The Equity Target Program provides a mechanism for determining the capital
requirements of our dairy foods operations and each dairy member's share of
those requirements. The board of directors has established an equity target
investment of $2.75 per hundred pounds of milk (or milk equivalent) delivered
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per year by that member to us. We distribute 20% of allocated patronage income
to a dairy member annually until the investment target is reached by that
member. The remaining 80% of allocated patronage income is retained and
allocated to member equities and revolved in the twelve years after the member
becomes inactive. When the member's equity investment reaches the target, and
for as long as the member's equity target investment is maintained, we
distribute 100% of the member's future allocated patronage income. The equity
target as well as the revolvement period may be changed at the discretion of the
board.
In 2002, we did not allocate any of our earnings to dairy members. For
2003, we allocated $9.4 million of our earnings to our dairy members, with $2.4
million of this amount to be paid in cash in 2004. We also revolved $16.9
million of equities to dairy members in 2003.
In the Revolvement Program for our agricultural businesses, we currently
distribute 30% of allocated patronage income in cash and retain and allocate the
remaining 70% to member equity. This equity is currently revolved 12 1/2 years
later. Both the amount distributed in cash and the revolvement period are
subject to change by our board. For 2002, we allocated $97.9 million of our
member earnings to our agricultural members. Of this amount, $4.2 million was
paid in cash in 2003, $9.7 million was designated and issued as qualified
patronage equities, and $84.0 million was designated and issued as nonqualified
patronage equities in connection with legal settlement proceeds. We paid income
tax on the amount designated as nonqualified patronage, however, we will be able
to deduct these earnings from our taxable income if we choose to revolve the
earnings to our members in the future. Revolvement of the equity representing
this nonqualified patronage income is also subject to board approval. In 2003,
2002 and 2001 our board suspended revolvement of agriculture member equities. In
2003, we allocated $30.7 million of our member earnings to our agricultural
members, with $9.2 million of this to be paid in cash in 2004.
Our estate redemption policy provides that we will redeem equity holdings
of deceased natural persons upon the demise of the owner. The Company's age
retirement policy provides that we will redeem in full equity holdings of dairy
members who are natural persons when the member reaches age 75 or older and
becomes inactive. Subject to various requirements, we may redeem the equity
holdings of members in bankruptcy or liquidation. All proposed equity
redemptions must be presented to, and are subject to the approval of, our board
of directors before payment. In connection with these programs, we redeemed $3.3
million in 2003.
EMPLOYEES
At June 30, 2004, we had approximately 8,000 employees, approximately 25%
of whom were represented by unions having national affiliations. Our contracts
with these unions expire at various times throughout the next several years. We
consider our relationship with employees to be generally satisfactory. We have
had no labor strikes or work stoppages within the last five years.
PROPERTIES
We own the land underlying our corporate headquarters in Arden Hills,
Minnesota and lease the buildings. Our corporate headquarters, consisting of a
main office building and a research and development facility, has an aggregate
of approximately 275,000 gross square feet. In addition, we own offices,
manufacturing plants, storage warehouses and facilities for use in our various
business segments.
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Thirty-two of our owned properties are mortgaged to secure our indebtedness. The
following table provides summary information about our principal facilities:
<Table>
<Caption>
TOTAL TOTAL
NUMBER NUMBER
OF FACILITIES OF FACILITIES REGIONAL LOCATION
BUSINESS SEGMENT OWNED LEASED OF FACILITIES
- ---------------- ------------- ------------- -----------------
Dairy Foods................................. 12(1) 10 Midwest (2) - 13
West (3) - 4
East (4) - 2
South (5) - 3
Animal Feed................................. 95(6) 59 Midwest - 85
West - 38
East - 9
South - 22
Crop Seed................................... 16(7) 10 Midwest - 15
West - 10
East - 1
Swine....................................... 6 1 Midwest - 7
Agronomy.................................... 5 0 Midwest - 5
Layers...................................... 22 61 Midwest - 20
West - 47
East - 13
South - 3
</Table>
- ---------------
(1) Includes a facility utilized for feed manufacturing which is accounted for
in the dairy foods segment.
(2) The Midwest region includes the states of Ohio, Michigan, Indiana, Illinois,
Wisconsin, Minnesota, Iowa, Missouri, Oklahoma, Kansas, Nebraska, South
Dakota and North Dakota and Ontario, Canada.
(3) The West region includes the states of Montana, Wyoming, Colorado, Texas,
New Mexico, Arizona, Utah, Idaho, Washington, Oregon, Nevada, California,
Alaska and Hawaii.
(4) The East region includes the states of Maine, New Hampshire, Vermont, New
York, Massachusetts, Rhode Island, Connecticut, Pennsylvania, New Jersey,
Delaware and Maryland.
(5) The South region includes the states of West Virginia, Virginia, North
Carolina, Kentucky, Tennessee, South Carolina, Georgia, Florida, Alabama,
Mississippi, Louisiana and Arkansas.
(6) Includes 15 closed facilities and one research and development facility.
(7) Includes 2 closed facilities.
We do not believe that we will have difficulty in renewing the leases we
currently have or in finding alternative space in the event those leases are not
renewed. We consider our properties suitable and adequate for the conduct of our
business.
PATENTS, TRADEMARKS AND INTELLECTUAL PROPERTY
We rely on patents, copyrights, trademarks, trade secrets, confidentiality
provisions and licensing arrangements to establish and protect our intellectual
property. We believe that in addition to certain patented processes, the
formulas and production methods of our dairy foods products are trade secrets.
We also have patented formulations and processes for our milk replacer products
and deem our feed product formulations to be proprietary.
We own a number of registered and unregistered trademarks used in
connection with the marketing and sale of our food products as well as our feed
and seed products including LAND O LAKES, the Indian
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Maiden logo, Alpine Lace, New Yorker, Extra Melt, CROPLAN GENETICS, Maxi Care,
Amplifier Max, Cow's Match and Omolene. Land O'Lakes Farmland Feed licenses
certain trademarks from Land O'Lakes, including LAND O LAKES, the Indian Maiden
logo, Maxi Care, Cow's Match and Amplifier Max, for use in connection with its
animal feed and milk replacer products. We license the trademarks Purina, Chow
and the "Checkerboard" Nine Square logo from Nestle Purina PetCare Company under
a perpetual, royalty-free license. This license only gives us the right to use
these trademarks for particular products that we currently market with these
trademarks. We do not have the right to use these trademarks outside of the
United States, or in conjunction with any products designed primarily for use
with cats, dogs or humans. We do not have the right to assign any of these
trademarks without the written consent of Nestle Purina PetCare Company. These
trademarks are important to us because brand name recognition is a key factor to
our success in marketing and selling our feed products. The registrations of
these trademarks in the United States and foreign countries are effective for
varying periods of time, and may be renewed periodically, provided that we, as
the registered owner, or our licensees, where applicable, comply with all
pertinent renewal requirements including, where necessary, the continued use of
the trademarks in connection with similar goods.
In 2002, we expanded our licensing agreement with Dean Foods. Under the
expanded agreement, Dean Foods is granted exclusive rights to use the LAND O
LAKES brand and the Indian Maiden logo in connection with the manufacturing,
marketing, promotion, distribution and sale of certain products, including, but
not limited to, basic dairy products (milk, yogurt, cottage cheese, ice cream,
eggnog, juices and dips), creams, small bottle milk, infant formula products and
soy beverage products. Dean Foods is also granted the right to use the Company's
patented Grip n Go bottle and the Company's formula to fat-free half & half.
With respect to the basic dairy products and the small bottle milk, the license
is granted on a royalty-free basis. With respect to the remaining products
covered by the license agreement, Dean Foods pays a sales-based royalty, subject
to a guaranteed minimum annual royalty payment. In addition, the license
agreement is terminable by either party in the event that certain minimum
thresholds are not met on an annual basis.
We have patented formulations and processes for our milk replacer products.
Our two principal milk replacer patents expire in April 2015 and April 2020.
We have also entered into other license agreements with other affiliated
and unaffiliated companies, such as MoArk, which permit these companies to
utilize our trademarks in connection with the marketing and sale of certain
products.
ENVIRONMENTAL MATTERS
We are subject to various Federal, state, local, and foreign environmental
laws and regulations, including those governing discharges of pollutants into
the air or water and the use, storage and disposal of hazardous materials or
wastes. Violations of these laws and regulations, or of the permits required for
our operations, may lead to civil and criminal fines and penalties or other
sanctions. For example, we are currently exceeding certain wastewater discharge
limitations at one of our new facilities in California and, as a result, have
paid repeated penalties or surcharges, to the City of Tulare. We estimate that
we will have expenditures of $400,000 to $800,000 relating to engineering
controls needed to achieve compliance with the applicable limits, and we will
incur cumulatively approximately $1.25 million in surcharges before this issue
is corrected.
Environmental laws and regulations may also impose liability for the
cleanup of environmental contamination. We generate large volumes of waste
water, we use regulated substances in operating our manufacturing equipment, and
we use and store other chemicals on site (including acids, caustics, fuels, oils
and refrigeration chemicals). Agriliance stores petroleum products and other
chemicals on-site (including fertilizers, pesticides and herbicides). Spills or
releases resulting in significant contamination, or changes in environmental
regulations governing the handling or disposal of these materials, could result
in
94
us incurring significant costs that could have an impact on our business,
financial condition or results of operations.
Many of our current and former facilities have been in operation for many
years, and over time, we and other operators of those facilities have generated,
used, stored, or disposed of substances or wastes that are or might be deemed
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 (and/or in the vicinity of such facilities)
is or may be contaminated, and we may be required in the future to make
significant expenditures to investigate, control and remediate such
contamination.
We are also potentially responsible for environmental conditions at a
number of former facilities and at waste disposal facilities operated by third
parties. We have been identified as a Potentially Responsible Party ("PRP")
under the federal Comprehensive Environmental Response, Compensation, and
Liability Act ("CERCLA" or "Superfund") or similar state laws and have
unresolved liability with respect to the past disposal of hazardous substances
at several such sites. CERCLA imposes strict, joint and several liability on
certain statutory classes of persons, meaning that one party may be held
responsible for the entire cost of investigating and remediating contaminated
properties, regardless of fault or the legality of the original disposal. These
persons include the present and former owners or operators of a contaminated
property, and companies that generated, disposed of, or arranged for the
disposal of hazardous substances found at the property. We have contested our
liability at one Superfund site, as to which we have declined to pay past
response costs associated with ongoing site study, and we have received a notice
of potential liability regarding two other waste disposal sites under
investigation by the EPA, as to which we are disputing our responsibility.
We have, on average, paid less than $500,000 in each of the last five years
for investigation and remediation of environmental matters, including Superfund
and related matters. Expenditures for such activities could rise materially if
substantial additional contamination is discovered at any of our current or
former facilities or if other PRPs fail or refuse to participate in cost sharing
at any Superfund site, or similar disposal site, at which we are implicated.
REGULATORY MATTERS
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. Since 1949, the Federal
government has maintained price supports for cheese, butter and nonfat dry milk.
The government stands as a ready purchaser of these products at their price
support levels. Historically, when the product price reached 110% of its price
support level, the government would sell its inventory into the market,
effectively limiting the price of these products. Because prices for these
products have generally been higher than their support level for a number of
years, the government currently has minimal inventories of cheese and butter. As
a result, these commodity prices have been able to be greater than 110% of their
price support levels for several years. The Farm Security and Rural Investment
Act of 2002 extends the dairy price support program through December 31, 2007.
Federal and certain similar state regulations attempt to 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. This is
accomplished in two ways. First, the Federal market order system sets minimum
prices for raw milk. The minimum price of raw milk for use in fluid milk and
soft cream production is set as a
95
premium to the minimum price of raw milk used to produce hard products. The
minimum price of raw milk used to produce hard products is, in turn, set based
upon USDA survey data which includes market pricing of butter and cheese.
Second, the Federal market order system establishes a pooling program under
which participants are required to send at least some of their raw milk to fluid
milk producers. The specific amount varies based on region, but is at least 10%
of the raw milk a participant handles. Certain areas in the country, such as
California, have adopted systems which supersede the Federal market order system
but are similar to it. In addition, because the Federal market order system is
not intended as an exclusive regulation of the price of raw milk, certain states
have, and others could, adopt regulations which could increase the price we pay
for raw milk, which could have an adverse effect on our financial results. We
also pay a premium above the market order price based on competitive conditions
in different regions.
Producers of dairy products which are participants in the Federal market
order system pay into regional "pools" for the milk they use based on the amount
of each class of dairy product produced and the price of those products. As
described above, only producers of dairy products who send the required minimum
amount of raw milk to fluid milk producers may participate in the pool. The
amounts paid into the pool for raw milk used to make fluid milk and soft creams
are set at a premium to the amounts paid into the pool for raw milk used to make
cheese or butter. The pool then returns to each dairy product producer for raw
milk it handled the weighted average price for all raw milk (including that used
for fluid milk and soft creams, whose producers must pay into the pool) sold in
that region. The dairy product producer pays at least this pool price to the
dairy farmer for milk received. This pooling system provides an incentive for
hard product producers to participate in the pool (and therefore supply the
required minimum for fluid milk production), because the average price for raw
milk received by these producers from the pool is more than the average price
they pay into the pool.
As a cooperative, we are exempt from the requirement that we pay pool
prices to our members for raw milk supplied to us. However, as a practical
matter, we must pay a competitive price to our members in order to ensure
adequate supply of raw milk for our production needs, and therefore our
operations are affected by these regulations.
If we did not participate in the pool, we would not receive the advantage
of the average pool payment and we would not be able to pay our milk producers
as much as participating processors without incurring higher costs for our raw
milk. To maintain our participation in the Federal market order program and
avoid this competitive disadvantage, we must procure at least 110% of our raw
milk requirements to meet our production needs. If we are unable to procure at
least 110% of our requirements, we would have lower production which could have
a material adverse affect on our results of operations. In addition, if the pool
was eliminated we would be subject to additional market forces when procuring
raw milk, which could result in increased milk costs and decreased supply, which
could materially affect our business.
As a manufacturer and distributor 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"). This regulatory scheme
governs the manufacture (including composition and ingredients), labeling,
packaging, and safety of food. The FDA regulates manufacturing practices for
foods through its good manufacturing practices regulations, specifies the
standards of identity for certain foods and animal feed and prescribes the
format and content of certain information required to appear on food and animal
feed product labels. In addition, the FDA enforces the Public Health Service Act
and regulations issued thereunder, which authorize regulatory activity necessary
to prevent the introduction, transmission or spread of communicable diseases. We
and our products are also subject to state and local regulation through
mechanisms such as the licensing of dairy manufacturing facilities, enforcement
by state and local health agencies of state standards for food products,
inspection of facilities and regulation of trade practices. Modification of
these Federal, state and local laws and regulations could increase our costs of
sales or prevent us from marketing foods in the way we currently do and could
have a material adverse effect on our business prospects, results of operations
and financial condition.
Pasteurization of milk and milk products is also subject to inspection by
the United States Department of Agriculture. We and our products are also
subject to state and local regulation through
96
mechanisms such as the licensing of dairy manufacturing facilities, enforcement
by state and local health agencies of state standards for food products,
inspection of facilities, and regulation of trade practices in connection with
the sale of food products. Modification of these Federal, state and local laws
and regulations could increase our costs of sales or prevent us from marketing
foods in the way we currently do and could have a material adverse effect on our
business prospects, results of operations and financial condition.
Land O'Lakes Farmland Feed distributes animal feed products through a
network of independent dealers. Various states in which these dealers are
located have enacted dealer protection laws which could have the effect of
limiting our rights to terminate dealers. In addition, failure to comply with
such laws could result in awards of damages or statutory sanctions. As a result,
it may be difficult to modify the way we distribute our feed products, which may
put us at a competitive disadvantage.
Several states have enacted "corporate farming laws" that restrict the
ability of corporations to engage in farming activities. Minnesota, North
Dakota, South Dakota, Nebraska, Kansas, Oklahoma, Missouri, Iowa and Wisconsin,
states in which we conduct business, have corporate farming laws. We believe
that our operations currently comply with the corporate farming laws in these
states and their exemptions, but these laws could change in the future and
additional states could enact corporate farming laws that regulate our
businesses. Even with the exemptions, these corporate farming laws restrict our
ability to expand or alter our operations in these states.
LITIGATION
We are currently and from time to time involved in litigation incidental to
the conduct of our business. The damages claimed against us in some of these
cases are substantial. On February 24, 2004, Cache La Poudre Feeds, LLC
("Cache") filed a lawsuit in the United States District Court for the District
of Colorado against the Company, Land O'Lakes Farmland Feed LLC and certain
named officers thereof claiming trademark infringement with respect to certain
animal feed sales under the Profile trade name. Cache seeks damages of at least
$132.8 million, which, it claims, is the amount the named entities generated in
gains, profits and advantages from using the Profile trade name. In response to
Cache's complaint, the Company denied any wrongdoing and pursued certain
counterclaims against Cache relating to, among other things, trademark
infringement, and other claims against Cache for, among other things, defamation
and libel. In addition, the Company believes that Cache's calculation of the
Company's gains, profits and advantages allegedly generated from the use of the
Profile trade name is grossly overstated. The Company believes that sales
revenue generated from the sale of products carrying the Profile trade name are
immaterial. Although the amount of any loss that may result from this matter
cannot be ascertained with certainty, we do not currently believe that it will
result in a loss material to our consolidated financial condition, future
results of operations or cash flow.
Since July 2003, several lawsuits have been filed against the Company by
Ohio alpaca producers in which it is alleged that the Company manufactured and
sold animal feed that caused the death of, or damage to, certain of the
producers' alpacas. It is possible that additional lawsuits or claims relating
to this matter could be brought against the Company. Although the amount of any
loss that may result from these matters cannot be ascertained with certainty, we
do not currently believe that, in the aggregate, they will result in losses
material to our consolidated financial condition, future results of operations
or cash flow.
In December 2002, we reached settlements with defendants against whom we
claimed had illegally fixed the prices for various vitamin and methionine
products we purchased. As a result of the settlements, we received proceeds of
approximately $119.5 million in 2003. In February 2004, we received an
additional $4.5 million of proceeds. When combined with the settlement proceeds
received from similar claims settled since the commencement of these actions, we
have received cumulatively approximately $188 million from the settling
defendants. These claims that have been settled represent the vast majority of
our vitamin and methionine purchases.
97
In a letter dated January 18, 2001, we were identified by the United States
Environmental Protection Agency ("EPA") as a potentially responsible party for
clean-up costs in connection with hazardous substances and wastes at the Hudson
Refinery Superfund Site in Cushing, Oklahoma. The letter invited us to enter
into negotiations with the EPA for the performance of a remedial investigation
and feasibility study at the site and also demanded that we reimburse the EPA
approximately $8.9 million for remediation expenses already incurred at the
site. In March 2001, we responded to the EPA denying any responsibility. No
further communication has been received from the EPA.
98
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to Land
O'Lakes directors and executive officers as of June 30, 2004:
<Table>
<Caption>
NAME AGE TITLE
- ---- --- -----
John E. Gherty............................ 60 President and Chief Executive Officer
Daniel Knutson............................ 47 Senior Vice President and Chief Financial
Officer
Robert DeGregorio......................... 47 President, Land O'Lakes Farmland Feed
Chris Policinski.......................... 46 Executive Vice President and Chief
Operating Officer, Dairy Foods
Fernando Palacios......................... 44 Vice President Operations and Supply Chain,
Dairy Foods
Peter Simonse............................. 45 Vice President, Treasurer
Don Berg.................................. 58 Vice President, Public Affairs
Peter Janzen.............................. 45 Vice President, General Counsel
Karen Grabow.............................. 54 Vice President, Human Resources
Lynn Boadwine............................. 40 Director
Harley Buys............................... 51 Director
Ben Curti................................. 53 Director
Kelly Davidson............................ 52 Director
Richard Epard............................. 64 Director
Gordon Hoover............................. 47 Director
Peter Kappelman........................... 41 Director, Chairman of the Board
Cornell Kasbergen......................... 46 Director
Paul Kent, Jr. ........................... 54 Director
Kevin Kepler.............................. 49 Director
Larry Kulp................................ 61 Director
Charles Lindner........................... 52 Director
John Long................................. 54 Director
Manuel Maciel, Jr. ....................... 59 Director, Second Vice Chairman of the Board
Robert Marley............................. 52 Director
Jim Miller................................ 62 Director
Ronnie Mohr............................... 55 Director
Art Perdue................................ 60 Director
Don Ranck................................. 57 Director
Douglas Reimer............................ 53 Director, Secretary
Richard Richey............................ 56 Director
Thomas Wakefield.......................... 55 Director
Larry Wojchik............................. 52 Director, First Vice Chairman of the Board
John Zonneveld, Jr........................ 50 Director
Bobby Moser............................... 60 Nonvoting Advisory Member
</Table>
Unless otherwise indicated, each officer of Land O'Lakes is elected by and
serves at the pleasure of the Board of Directors and each director and officer
of Land O'Lakes has been in his current profession for at least the past five
years.
99
John E. Gherty, President and Chief Executive Officer since 1989. Mr.
Gherty began his career at Land O'Lakes in 1970 after completing graduate
degrees in law and industrial relations at the University of Wisconsin. In the
1980s, he served as group vice president and chief administrative officer. He
was appointed to his present position in 1989.
Daniel Knutson, Senior Vice President and Chief Financial Officer of Land
O'Lakes and Chief Financial Officer of Land O'Lakes Farmland Feed since 2000.
Mr. Knutson began his career at the Company in 1978. He received his BS Degree
in Accounting in 1977 and MBA with emphasis in Finance in 1991, both from
Mankato State University, and has earned his CPA and CMA certifications.
Robert DeGregorio, President of Land O'Lakes Farmland Feed LLC since 2000
and Manager of Land O'Lakes Farmland Feed since 2002. Mr. DeGregorio began his
career at Land O'Lakes in 1982 in the Agriculture Research Department and became
Vice President of Land O'Lakes Feed Division in 1997. He became President of
Land O'Lakes Farmland Feed LLC at the formation of the joint venture in 2000.
Chris Policinski, Executive Vice President and Chief Operating Officer of
the Dairy Foods division, was appointed to this office in March, 2002. From 1999
to 2002, Mr. Policinski served as our Executive Vice President of the Dairy
Foods division's Value Added Group. Mr. Policinski joined Land O'Lakes in 1997
with more than 21 years of management experience in the food industry. Prior to
his current position, he was Vice President of Strategy, Business Development
and International Development. Before joining Land O'Lakes, Chris spent four
years with The Pillsbury Company in leadership roles in Marketing/ General
Management as Vice President of their Pizza and Mexican Food Groups.
Fernando Palacios, Vice President Operations and Supply Chain of Dairy
Foods since 2000. Before joining Land O'Lakes, Mr. Palacios served as the
Director of Consumer Goods Consulting at KPMG LLP from 1997 to 2000. Mr.
Palacios also serves as the Chief Operating Officer of Melrose Dairy Proteins.
Peter Simonse, Vice President and Treasurer since December 2002. Prior to
his appointment to this position Mr. Simonse served as Treasurer since 2000,
when he joined the Company. Before joining Land O'Lakes, Peter spent 14 years
with the Amoco Corporation in various finance roles, his last being Vice
President of Finance, Exploration Business Group.
Don Berg, Vice President of Public Affairs since December, 2000. Prior to
his appointment to this position Mr. Berg served as Vice President of Milk
Procurement for 15 years. Don has been employed with our company for
approximately 30 years.
Peter Janzen, Vice President and General Counsel since February 2004. Mr.
Janzen joined our company as an attorney in 1984. He holds a Juris Doctor degree
from Hamline University.
Karen Grabow, Vice President of Human Resources since September, 2001.
Prior to joining our company, Karen was employed as the Vice President, Human
Resources of Target Corporation. She held that position since 1993.
Lynn Boadwine, has held his position as director since 1999 and his present
term of office as a director will end in February 2008. Mr. Boadwine operates
Boadwine Farms, Inc., a farm in South Dakota.
Harley Buys has held his position as director since 2003 and his present
term of office as a director will end in February 2008. Mr. Buys farms corn,
soybeans and alfalfa and operates a dairy farm in partnership with his son in
Edgerton, Minnesota.
Ben Curti has held his position as director since February 2003 and his
present term of office as a director will end in February 2005. Mr. Curti
maintains a dairy operation and farms field crops and pistachios in Tulare,
California.
Kelly Davidson has held his position as director since February 2003 and
his present term of office as a director will end in February 2005. Mr. Davidson
is the general manager of Andale Co-op, Andale, Kansas, and the chief operating
officer of Field Solutions, LLC, of Halstead, Kansas.
100
Richard Epard has held his position as director since February 2003 and his
present term of office as a director will end in February 2007. Mr. Epard farms
wheat, corn, soybeans and sunflowers in Colby, Kansas.
Gordon Hoover has held his position as director since 1997 and his present
term of office as a director will end in February 2006. Mr. Hoover operates a
dairy farm in Pennsylvania.
Peter Kappelman has held his position as director since 1996 and has served
as Chairman of the Board since February 2004. His present term of office as a
director will end in February 2007. Mr. Kappelman is co-owner of Meadow Brook
Dairy Farms, LLC, a dairy farm in Wisconsin.
Cornell Kasbergen has held his position as director since 1998 and his
present term of office as a director will end in February 2005. Mr. Kasbergen
operates a dairy in California.
Paul Kent, Jr. has held his position as director since 1990 and his present
term of office as a director will end in February 2006. Mr. Kent operates a
dairy farm in Minnesota.
Kevin Kepler has held his position as director since February 2003 and his
present term of office as a director will end in February 2005. Mr. Kepler is
the president of his family farm corporation, Junlyn Farms, Inc., located in
Hillsboro, Wisconsin. Mr. Kepler operates a dairy farm and farms alfalfa, corn
and soybeans.
Larry Kulp has held his position as director since February 2003 and his
present term of office as a director will end in February 2007. Mr. Kulp is a
partner in his family dairy farm, Kulp Family Dairy, LLC, located in
Martinsburg, Pennsylvania.
Charles Lindner has held his position as director since 1996 and his
present term of office as a director will end in February 2005. Mr. Lindner
operates a dairy farm in Wisconsin.
John Long has held his position as director since 1991 and his present term
of office as a director will end in February 2006. Mr. Long operates a ranch in
North Dakota.
Manuel Maciel, Jr. has held his position as director since 1998 and his
present term of office as a director will end in February 2005. Mr. Maciel
operates Macy L Holsteins, a dairy farm in California.
Robert Marley has held his position as director since 2000 and his present
term of office as a director will end in February 2007. Mr. Marley is Chief
Executive Officer of Jackson Jennings Farm Bureau Co-operative Association, a
local cooperative located in Seymour, Indiana.
Jim Miller has held his position as director since February 27, 2003 and
his present term of office as a director will end in February 2006. Mr. Miller
farms grain and raises beef cattle in Hardy, Nebraska.
Ronnie Mohr has held his position as director since 1998 and his present
term of office as a director will end in February 2005. Mr. Mohr operates a
farm, hog finishing operation and grain bin and equipment sales business in
Indiana. Mr. Mohr has served as a director of Holiday Gulf Homes Inc. since
1996.
Art Perdue has held his position since February 26, 2004 and his present
term of office as a director will end in February 2008. Mr. Perdue manages
Farmers Union Oil Company, a diversified cooperative with sales of $40 million.
Don Ranck has held his position since February 26, 2004 and his present
term of office as a director will end in February 2005. Mr. Ranck owns and
manages Verdant View Farm, an 82-cow, 115 acres operation.
Douglas Reimer has held his position as director since 2001 and his present
term of office as a director will end in February 2007. Mr. Reimer is the
managing partner of Deer Ridge S.E.W. Feeder Pig LLC, located in Iowa.
Richard Richey has held his position since February 26, 2004 and his
present term of office as a director will end in February 2008. Mr. Richey is
the general manager of Husker Co-Op in Columbus, Nebraska, a full-service
cooperative with 10 locations and sales of $43 million.
101
Thomas Wakefield was appointed to the board in May 2004. He will serve the
remainder of the term vacated by Ken Schoenberg, and will be up for re-election
during the February 2005 annual meeting. Mr. Wakefield farms 400 acres (corn,
alfalfa and grass hay) and milks 120 cows as part of his family farm
corporation -- JTJ Wakefield Farms, Inc. He has 30 years of cooperative
leadership experience with Atlantic Dairy Cooperative (ADC), Interstate Milk
Producers and Land O'Lakes, including four years on the ADC Board of Directors.
Larry Wojchik has held his position as director since 1986 and his present
term of office as a director will end in February 2006. Mr. Wojchik has served
as general manager of Goldstar Cooperative since 2000. From 1978-2000, he served
as general manager of Equity Cooperative. Goldstar Cooperative and Equity
Cooperative are cooperatives focused on feed, energy and agronomy.
John Zonneveld, Jr. has held his position as director since 2000 and his
present term of office as a director will end in February 2005. Mr. Zonneveld
operates a dairy farm in California.
Bobby Moser is a nonvoting advisory member of the board. He is appointed by
the Board of Directors annually and has held his position since 2002. Mr. Moser
is Vice President for Agricultural Administration at The Ohio State University
in Columbus, Ohio.
We transact business in the ordinary course with our directors and with our
local cooperative members with which the directors are associated. Such
transactions are on terms no more favorable than those available to our other
members.
The Land O'Lakes board is made up of 24 directors. Twelve directors are
chosen by our dairy members and 12 by our Ag members. Each board member must
also be a member of the group of members, dairy or Ag, which elects him or her.
The board may also choose to elect up to 3 nonvoting advisory members.
Currently, there is one such advisory board member. Our board of directors
governs our affairs in virtually the same manner as any other corporation. See
"Business -- Description of the cooperative -- Governance" for more information
regarding the election of our directors.
Land O'Lakes has seven committees of its board of directors: the Executive
Committee, the Advisory Committee, the Audit Committee, the Governance
Committee, the Expense Committee, the PAC Committee and the Board
Performance/Operations Committee.
Land O'Lakes' Board of Directors passed a resolution, for 2004, stating
that Land O'Lakes will not designate an audit committee financial expert, as
such term is defined in Item 401(h) of Regulation S-K promulgated by the
Securities and Exchange Commission. Similar to other cooperative corporations,
Land O'Lakes' Board of Directors is comprised of cooperative members who become
members by virtue of purchases they make of cooperative products or sales they
make to the cooperative. Accordingly, while each Board member possesses a strong
agricultural background, no current member possesses, in the Board's present
estimation, the requisite experience to qualify as audit committee financial
expert.
Land O'Lakes adopted a code of ethics applicable to it senior financial
officers, which include, the chief executive officer, the chief financial
officer, the chief operating officers of each operating division, the treasurer,
the controller and any person serving in a similar capacity. The code is a "code
of ethics" as defined by applicable rules promulgated by the Securities and
Exchange Commission. The code is publicly available on Land O'Lakes' website at
www.landolakesinc.com. If Land O'Lakes makes any amendments to the code other
than technical, administrative or other non-substantive amendments, or grants
any waivers from a provision of this code to a senior financial officer, Land
O'Lakes will disclose, on its website, the nature of the amendment or waiver,
its effective date and to whom it applies.
102
EXECUTIVE OFFICER COMPENSATION
The following table shows, for the Chief Executive Officer of Land O'Lakes
and each of our four other most highly compensated executive officers,
information concerning compensation earned for services in all capacities during
the year ended December 31, 2003.
SUMMARY COMPENSATION TABLE
<Table>
<Caption>
LONG-TERM COMPENSATION
------------------------------
AWARDS PAYOUTS
---------------- -----------
ANNUAL COMPENSATION SECURITIES
---------------------- UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS/SARS (#) PAYOUTS ($) COMPENSATION ($)(1)
- --------------------------- ---- ---------- --------- ---------------- ----------- -------------------
John E. Gherty..................... 2003 $700,000 $307,440 16,000 $ -- $56,828
President and Chief 2002 698,620 -- 16,000 -- 13,700
Executive Officer 2001 653,935 199,833 16,000 101,696 28,074
Chris Policinski................... 2003 $453,269 $251,515 $7,000 $ -- $32,504
Executive Vice President 2002 431,115 -- 7,000 -- 8,575
and Chief Operating 2001 352,209 255,696 7,000 44,000 13,141
Officer, Dairy Foods Group
Duane Halverson.................... 2003 $460,000 $159,183 7,000 $ -- $36,453
Executive Vice President 2002 446,923 -- 9,500 -- 14,436
and Chief Operating 2001 429,212 174,107 7,000 56,400 21,277
Officer, Ag Services(2)
Robert DeGregorio.................. 2003 $367,539 $125,333 5,000 $ -- $28,764
President, Land O'Lakes 2002 359,847 50,000 10,000 -- 9,500
Farmland Feed LLC(3) 2001 302,412 109,782 5,000 22,800 11,683
Dan Knutson........................ 2003 $402,115 $176,965 7,000 $ -- $27,380
Senior Vice President 2002 357,692 -- 7,000 -- 17,847
and Chief Financial Officer 2001 289,903 113,208 7,000 28,267 15,054
</Table>
- ---------------
(1) The amounts shown in the table for 2003 reflect life insurance premiums paid
by Land O'Lakes in the amount of $8,600 for Mr. Gherty, $3,475 for Mr.
Policinski, $8,400 for Mr. Halverson, $3,800 for Mr. DeGregorio, and $3,900
for Mr. Knutson. The amount for Mr. Gherty also includes a car allowance in
the amount of $9,154. The amounts also include contributions made by Land
O'Lakes on behalf of the named individuals under the qualified and
non-qualified defined contribution plans of Land O'Lakes as follows:
<Table>
<Caption>
COMPANY MATCHING
CONTRIBUTION COMPANY CONTRIBUTION
NAME (QUALIFIED PLAN) (NON-QUALIFIED PLAN)
- ---- ---------------- --------------------
Mr. Gherty....................................... $6,000 $22,252
Mr. Policinski................................... 6,000 13,452
Mr. Halverson.................................... 6,000 11,355
Mr. DeGregorio................................... 6,000 9,355
Mr. Knutson...................................... 6,000 7,951
</Table>
(2) Mr. Halverson retired on January 1, 2004.
(3) Mr. DeGregorio is the President of Land O'Lakes Farmland Feed and also
performs policy making functions for Land O'Lakes.
103
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<Table>
<Caption>
INDIVIDUAL GRANTS
---------------------------------------------------------
PERCENT OF AT ASSUMED ANNUAL RATES
NUMBER OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS/SARS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO EXERCISE OF TERM(2)
OPTIONS/SARS EMPLOYEES IN BASE EXPIRATION -----------------------
NAME GRANTED (#)(1) FISCAL YEAR PRICE ($/SH) DATE 5% ($) 10% ($)
- ---- -------------- ------------ ------------ ---------- ---------- ----------
John E. Gherty.......... 16,000 12.5% $27.69 3-31-2013 $278,625 $706,092
Chris Policinski........ 7,000 5.5 27.69 3-31-2013 121,899 308,915
Duane Halverson(3)(4)... 7,000 5.5 27.69 3-31-2013 121,899 308,915
Robert DeGregorio(3).... 5,000 3.9 27.69 3-31-2013 87,070 220,654
Daniel Knutson.......... 7,000 5.5 27.69 3-31-2013 121,899 308,915
</Table>
- ---------------
(1) Options granted are to purchase "Units" described below under the Land
O'Lakes Long-Term Incentive Plan. The vesting schedule for all grants of
Units is set forth below in the plan descriptions.
(2) The dollar amounts under these columns are the results of calculations at
the 5% and 10% annual appreciation rates set by the Securities and Exchange
Commission for illustrative purposes, and, therefore, are not intended to
forecast future financial performance. Accordingly, these calculations
assume 5% and 10% appreciation in the value of the Units.
(3) As a result of Purina Mills synergies targets being achieved as of December
31, 2003, 1,250 options in the name of Mr. Halverson and 2,500 options in
the name of Mr. DeGregorio were partially vested at 50% based on an original
issue date of January 1, 2002. This number of shares is not reflected in the
number of securities granted column in the table above.
(4) Mr. Halverson retired on January 1, 2004.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The purpose of the following table is to report exercises of options to
purchase Units by the named executive officers of Land O'Lakes during the fiscal
year ended December 31, 2003 and any value of their unexercised options as of
December 31, 2003. The named executive officers did not exercise options in
fiscal 2003. Land O'Lakes has not issued any stock appreciation rights to the
named executive officers.
<Table>
<Caption>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS/SARS
OPTIONS AT FY-END (#) AT FY-END ($)(1)
SHARES ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ---------------- ------------ ----------- ------------- ----------- -------------
John E. Gherty......... -- -- 24,000 24,000 -- --
Chris Policinski....... -- -- 10,500 10,500 -- --
Duane Halverson(2)..... -- -- 11,750 11,750 -- --
Robert DeGregorio...... -- -- 10,000 10,000 -- --
Daniel Knutson......... -- -- 10,500 10,500 -- --
</Table>
- ---------------
(1) Value is based on a Unit value of $27.11, which was the value of the Units
on December 31, 2003, minus the purchase price.
(2) Mr. Halverson retired on January 1, 2004.
LAND O'LAKES EMPLOYEES SAVINGS AND SUPPLEMENTAL RETIREMENT PLAN
The Land O'Lakes Employee Savings and Supplemental Retirement Plan is a
qualified defined contribution 401(k) plan which permits employees to make both
pre-tax and after-tax contributions. All full-time, non-union Land O'Lakes
employees are eligible to participate. Union employees may participate if their
participation is specified by their collective bargaining agreement. Subject in
all cases to maximum
104
contribution limits established by law, the maximum total contribution for
non-highly compensated employees is 60% of compensation; the maximum pre-tax
contribution for such employees is 50%. For highly compensated employees, the
maximum total contribution is 12% of compensation and the maximum pre-tax
contribution is 8%. The Company matches 50% of the first 6% of pre-tax
contributions made by employees. Employees are immediately 100% vested in their
full account balance, including the Company match.
EXECUTIVE ANNUAL VARIABLE COMPENSATION PLAN
The Executive Annual Variable Pay Compensation Plan is a plan for executive
officers of Land O'Lakes. During 2003, the target award opportunity varies by
the participant's position up to a maximum target award of 45% of base pay.
Awards from this plan are dependent on a combination of three elements of
performance: 1) company overall results (20%); 2) targets for business
performance (65%); and 3) individual performance commitments (15%). A minimum of
6% after-tax return on equity is the threshold performance level required to
trigger any payments from the plan. Targets for company results, business
performance, and individual performance commitments are established annually.
Once maximum results from all of these components are achieved, the maximum
award of 79-102% of base salary may be granted.
For 2004, the target award opportunity varies by the participant's position
up to a maximum target award of 45% of base pay. Awards from this plan are
dependent on a combination of three elements of performance: 1) company overall
results (20%); 2) targets for business performance (65%); and 3) individual
performance commitments (15%). Company net earnings of $0 dollars (breakeven)
are required to trigger payments from this plan. Targets for company results,
business performance, and individual performance commitments are established
annually. Once maximum results from all of these components are achieved, the
maximum award of 79-102% of base salary may be granted.
LAND O'LAKES, INC. EXECUTIVE LONG-TERM VARIABLE COMPENSATION PLAN (2004-2006)
The Land O'Lakes, Inc. Executive Long-Term Variable Compensation Plan is
effective for years 2004-2006. The President and all officers of Land O'Lakes
who were not otherwise participating in a long-term variable plan are eligible.
The target award is 50-60% of base salary and the maximum award is 62.5-75% of
base salary at the end of the performance period. Corporate staff officers
awards are made based on total Land O'Lakes return on invested capital and
pretax earnings and business unit officers awards are made based on business
unit return on invested capital and pretax earnings for the period between
January 1, 2004 and December 31, 2006. The awards are payable in cash or
eligible to be deferred at the option of the award recipient.
LAND O'LAKES LONG-TERM INCENTIVE PLAN
The Land O'Lakes Long-Term Incentive Plan, initiated in 2001, is a phantom
stock plan which allows certain employees to purchase "Units" under the plan.
Neither options granted nor Units may be transferred, assigned, pledged,
encumbered, or otherwise alienated from the grantee. Officers are eligible to
participate, as are selected non-officers identified by the Chief Executive
Officer. Participants are granted an annual award of options. One quarter of the
options vest on December 31 of the year in which they are granted, with the rest
vesting ratably on December 31 of the succeeding three years. These Units are
not traditional stock, and do not provide the purchaser with any voting rights
or rights to receive assets of Land O'Lakes.
The purchase price of the option is established as of December 31 of the
year prior to the grant of the option, based on a formula reflecting the value
of the enterprise at the close of the fiscal year preceding the grant of the
option. Participants may elect to exercise vested options to purchase Units only
during the period between January 1 and March 31 of any year. Units are valued
each year on December 31, and are valued by the same formula by which the
purchase price of the option is determined. Participants in the plan may
purchase Units using cash or amounts in their deferred compensation accounts. In
addition, the
105
options have a net exercise provision which allows participants to use the value
of appreciated options to buy Units.
Participants' ability to redeem owned Units while employed is limited to
50% of the appreciated value of the cumulative total of Units previously
purchased by such participant, until the value of the owned Units reaches an
established ratio to the participant's annual base pay. These ratios are
established based on the level of the participant. Following death, inability to
work due to disability, retirement or other termination, the participant has a
limited period of time during which to exercise remaining vested options and/or
redeem purchased units, which varies according to the circumstances of the
participant's cessation of employment.
LAND O'LAKES NON-QUALIFIED DEFERRED COMPENSATION PLAN
The Land O'Lakes Non-Qualified Deferred Compensation Plan provides a select
group of employees with base salaries equal to or in excess of $95,000 an
opportunity to elect to defer a portion of their compensation for later payment
at the earlier of their death, disability, retirement or other termination.
Eligible employees may elect to defer a minimum of $1,000 up to a maximum 30% of
base compensation and 100% of variable pay. The default distribution is monthly
installments over a five year period. Deferred compensation is included as
compensation for purposes of the company's qualified retirement plan, but is
excluded from the company's qualified savings plan. The Company adds an
additional amount equal to three percent (3%) of the participant's elective
deferrals to this plan. In addition, at the end of each calendar quarter, the
Company credits the participant's account balance with modest interest at a rate
announced in advance of each calendar year. Benefits of this plan are paid out
of the general assets of the corporation.
Land O'Lakes maintains three non-qualified excess benefit plans for its
officers. Benefits for all three of these plans are paid out of the general
assets of the corporation.
NON-QUALIFIED EXECUTIVE EXCESS BENEFIT SAVINGS PLAN
The Non-Qualified Executive Excess Benefit Savings Plan provides a benefit
to officers who participate in this savings plan by crediting an amount to a
deferred compensation account which represents 3% of total compensation, net of
any deferred compensation, less the amount of the Company match contributed to
the qualified savings plan. Account balances are credited with a modest rate of
interest quarterly. Distributions are made under the same circumstances and on
the same terms as the individual has elected under the Land O'Lakes
Non-Qualified Deferred Compensation Plan, or according to the default provisions
of the Land O'Lakes Non-Qualified Deferred Compensation Plan in the absence of
an election.
CALIFORNIA COOPERATIVE VALUE INCENTIVE PLAN
The California Cooperative Value Incentive Plan is similar to the Land
O'Lakes Long-Term Incentive Plan. The primary difference is that participants
may not actually purchase the phantom stock "Units" under this plan. Instead,
plan participants who "exercise" options granted to them receive a cash
distribution equal to the difference between the Unit value and the exercise
price.
NON-QUALIFIED EXECUTIVE EXCESS BENEFIT PLAN (IRS LIMITS)
The Non-Qualified Executive Excess Benefit Plan (IRS Limits) provides a
non-qualified benefit to officers which is the equivalent of the difference
between the benefit that would have been payable to the executive if the Land
O'Lakes Employee Retirement Plan benefit formula were applied to the executive's
actual compensation, without regard for limitations on compensation or benefits
imposed by the Internal Revenue Code, and the benefit actually payable under the
Land O'Lakes Employee Retirement Plan with IRS compensation limits in place.
106
NON-QUALIFIED EXECUTIVE EXCESS BENEFIT PLAN (1989 FORMULA)
The Non-Qualified Executive Excess Benefit Plan (1989 Formula) provides a
non-qualified benefit to individuals who were officers as of January 1, 1989 at
the time the defined benefit formula was changed. This excess benefit plan
provides a benefit representing the difference between the accrued benefit using
the 1989 Formula to the executive's actual compensation, without regard for
limitations on compensation or benefits imposed by the Internal Revenue Code,
and the benefit actually payable under the Land O'Lakes Employee Retirement Plan
with IRS compensation limits in place.
LAND O'LAKES EMPLOYEE RETIREMENT PLAN
The Land O'Lakes Employee Retirement Plan is a qualified defined benefit
pension plan. All full-time, non-union Land O'Lakes employees are eligible to
participate. Union employees may participate if their participation is specified
by their collective bargaining agreement. An employee is fully vested in the
plan after five years of vesting service. For most employees, the plan provides
for a monthly benefit for the employee's lifetime beginning at normal retirement
age (social security retirement age), calculated according to the following
formula: I[1.08% X Final Average Pay]+[.52% X (Final Average Pay - Covered
Compensation)]J X years of credited service (up to a maximum of 30 years). These
estimated benefit amounts are illustrated by Table A below. Due to provisions of
this plan providing that certain benefits existing in a previous version of the
plan will not be reduced, certain employees, including Messrs. Gherty and
Halverson, will instead receive the compensation at levels previously in effect
for the retirement plan under the 1989 Formula. These approximate benefit
amounts are described in Table B below.
Final Average Pay is average monthly compensation for the highest paid 60
consecutive months of employment out of the last 132 months worked. Covered
Compensation is an amount used to coordinate pension benefits with Social
Security benefits. It is adjusted annually to reflect changes in the Social
Security Taxable Wage Base, and varies with the employee's year of birth and the
year in which employment ends. The normal form of benefit for a single employee
is a life-only annuity; for a married employee, the normal form is a 50% joint
and survivor annuity. There are other optional annuity forms available.
Terminated or retired employees who are at least 55 with 10 years of vesting
service may elect a reduced early retirement benefit.
As of January 1, 2004, Mr. Gherty has 33 years of service, Mr. Halverson
had 33 years of service (he retired January 1, 2004), Mr. DeGregorio has 22
years of service, Mr. Policinski has 7 years of service and Mr. Knutson has 26
years of service. (The maximum credited service allowed under the Land O'Lakes
Employee Retirement Plan is 30 years.)
107
SAMPLE PENSION PLAN TABLE
<Table>
<Caption>
FINAL
AVERAGE PAY YEARS OF SERVICE AT RETIREMENT
----------- -----------------------------------------
(ANNUAL) 10 15 20 25 30
---------- ----------- -------- -------- -------- --------
TABLE A.............. $ 200,000 $ 30,100 $ 45,100 $ 60,100 $ 75,200 $ 90,200
400,000 62,100 93,100 124,100 155,200 186,200
600,000 94,100 141,100 188,100 235,200 282,200
800,000 126,100 189,100 252,100 315,200 378,200
1,000,000 158,100 237,100 316,100 395,200 474,200
1,200,000 190,100 285,100 380,100 475,200 570,200
TABLE B.............. $ 200,000 $ 34,700 $ 52,000 $ 69,400 $ 86,700 $104,100
400,000 76,000 114,000 152,100 190,100 228,100
600,000 117,400 176,000 234,700 293,400 352,100
800,000 158,700 238,000 317,400 396,700 476,100
1,000,000 200,000 300,000 400,100 500,100 600,100
1,200,000 241,400 362,000 482,700 603,400 724,100
</Table>
COMPENSATION OF DIRECTORS AND MANAGERS
The Chairman of the Board of Land O'Lakes is paid $30,000 annually; all
other directors are paid $10,000 annually. In addition, all directors receive a
$300 per diem and are reimbursed for their reasonable expenses incurred in
attending board of directors meetings.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
At June 30, 2004 no person, either individually or as a member of a group,
beneficially owned in excess of five percent of any class of our voting
securities, and our directors and executive officers did not, either
individually or as a member of a group, beneficially own in excess of one
percent of any class of our voting securities.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Land O'Lakes transacts business in the ordinary course with our directors
and with our local cooperative members with which the directors are associated
on terms no more favorable than those available to our other members.
Pursuant to an agreement dated September 25, 2000, Land O'Lakes Farmland
Feed licenses certain trademarks from Land O'Lakes on a royalty free basis,
including LAND O LAKES, the Indian Maiden logo, Maxi Care, and Amplifier Max,
for use in connection with its animal feed and milk replacer products. Land
O'Lakes Farmland Feed also licenses certain trademarks of Farmland Industries,
including Farmland, for use with its feed products.
Pursuant to a Management Services Agreement dated September 1, 2000 between
Land O'Lakes and Land O'Lakes Farmland Feed, Land O'Lakes provides certain
management, operational and ancillary services to Land O'Lakes Farmland Feed.
Land O'Lakes charges Land O'Lakes Farmland Feed for these services on an at-cost
basis using methodologies approved by Land O'Lakes and the board of managers of
Land O'Lakes Farmland Feed. For the year ended December 31, 2003, Land O'Lakes
Farmland Feed paid Land O'Lakes $221.1 million for payroll and benefit related
costs and $9.0 million for corporate services such as legal, insurance
administration, tax administration, human resources, payroll and benefit
administration, leasing, public relations, credit and collections, accounting
and IT support.
108
DESCRIPTION OF CERTAIN OTHER INDEBTEDNESS
DESCRIPTION OF SENIOR BANK FACILITIES
The following is a summary of the material terms of our senior bank
facilities with a syndicate of banks, financial institutions and other entities
("Lenders"), including JPMorgan Chase Bank (formerly, The Chase Manhattan Bank),
an affiliate of J.P. Morgan Securities Inc. ("JPMorgan"), as administrative
agent and collateral agent ("Agent"). The following is a summary of the material
provisions of our senior bank facilities. Additional details can be found in the
credit agreements that are filed as exhibits to the registration statement of
which this prospectus is a part.
GENERAL
Our senior bank facilities consist of:
- a $250.0 million seven year amortizing term loan B facility with $118.4
million outstanding as of June 30, 2004; and
- a $200.0 million revolving credit facility with up to $75.0 million
available in the form of letters of credit.
TERM FACILITY
The term loan B facility bears interest, at our election, at a rate per
annum equal to Adjusted LIBOR plus 3.5% or ABR plus 2.5%. We may elect interest
periods of one, two, three or six months for Adjusted LIBOR borrowings. "ABR" is
the alternate base rate, which is the higher of the Agent's Prime Rate and the
Federal Funds Effective Rate plus one-half of one percent. The loans under the
term loan B facility will amortize under a schedule providing for quarterly
installments in an aggregate annual amount of $1.5 million and a final
installment at maturity on October 11, 2008 of $113.6 million.
REVOLVING CREDIT FACILITY
The revolving credit facility requires the prepayment of borrowings if the
aggregate amount of outstanding borrowings and letters of credit exceed the
borrowing base. The revolving credit facility bears interest, at our election,
at a rate per annum equal to either Adjusted LIBOR plus a spread ranging from
2.00% to 2.75%, depending upon the debt leverage ratio as of the end of the most
recent quarter for which financial statements have been delivered to the Lenders
("Leverage Ratio"), or ABR plus a spread ranging from 1.00% to 1.75% depending
on the Leverage Ratio. The revolving credit facility has a sublimit of $75.0
million for letters of credit. As of March 31, 2004, we had approximately $48.4
million of letters of credit outstanding which reduced availability under the
revolving credit facility to approximately $136.6 million. The revolving credit
facility matures on January 13, 2007.
USE OF FACILITIES
The proceeds of loans under the revolving credit facility may be used by us
for working capital and other general corporate purposes, including the issuance
of letters of credit. Amounts repaid under the revolving credit facility may be
reborrowed to the extent of the available commitments.
FEES
We will pay certain fees, including (1) commitment fees payable to the
Lenders on the undrawn portions of their commitments in respect of the revolving
credit facility at rates depending upon the Leverage Ratio payable quarterly in
arrears, and (2) customary fronting fees to the issuing bank in connection with
the issuance of letters of credit. The commitment fees payable in respect of the
revolving credit facility range from 0.25% to 0.50%.
109
PREPAYMENTS
Subject to certain limited exceptions, loans under the term facilities are
required to be prepaid with (a) 50% of Excess Cash Flow (as defined), (b) 100%
of the net cash proceeds of sales or other dispositions of property or assets in
excess of $5 million during any fiscal year, to the extent not reinvested, (c)
100% of the net cash proceeds of casualty or condemnation receipts, to the
extent not used to repair or replace assets, (d) 100% of joint venture dividends
or distributions, to the extent they related to the sale of property, casualty
or condemnation receipts, or the issuance to any third party of equity interests
in the joint venture, (e) 100% of the net cash proceeds from inventory or
accounts receivable securitization transactions, and (f) 100% of the net cash
proceeds from the issuance by Land O'Lakes of unsecured senior or subordinated
indebtedness.
Voluntary prepayments of borrowings under the senior bank facilities, and
voluntary reductions of the unutilized portion of the revolving credit facility
commitment, are permitted at any time.
A prepayment penalty must be paid to term loan B Lenders in an amount equal
to 1.0% of the amount prepaid if any term loan B facility loans are prepaid
after October 11, 2003, but on or before October 11, 2004.
GUARANTEES
All of our obligations under the senior bank facilities and under any
interest protection or other hedging arrangements entered into with the Lenders
(or affiliates thereof) are unconditionally guaranteed by the domestic
wholly-owned subsidiaries of Land O'Lakes, other than LOL Finance Co. (and its
wholly-owned subsidiaries), and by the domestic wholly-owned subsidiaries of
Land O'Lakes Farmland Feed LLC (other than LOL Farmland Feed SPV, LLC) (the
"Bank Guarantors").
SECURITY
Our obligations under the financing documents governing the senior bank
facilities are secured by perfected first priority pledges and security
interests in (a) 100% of the equity interests and indebtedness of any Restricted
Subsidiary owned directly by us or any of the Bank Guarantors (which pledge, in
the case of voting equity interests issued by any foreign subsidiary, is limited
to 65% of the voting equity interests of such foreign subsidiary) and (b)
substantially all of our and each of the Bank Guarantors' other tangible and
intangible assets, including without limitation real property and fixtures,
accounts receivable, inventory, contract rights, equipment, intellectual
property, general intangibles, investment property and proceeds of the foregoing
other than the dairy and seed receivables and certain swine receivables of Land
O'Lakes, all receivables of Land O'Lakes Farmland Feed and Purina Mills and
related assets.
COVENANTS
The financing documents governing the senior bank facilities contain
financial covenants, including maximum total debt leverage ratio and minimum
interest coverage ratio.
The agreements for the senior bank facilities (the "Credit Agreements")
contain restrictive covenants pertaining to our management and operations,
including, among others, limitations on (1) indebtedness, (2) liens and
sale-leaseback transactions, (3) investments, (4) cash payments of patronage and
other restricted payments, (5) mergers and acquisitions, (6) asset dispositions,
(7) hedging activities, (8) amendments to or prepayments or redemptions of other
indebtedness, (9) changes in business conducted, (10) transactions with
affiliates, and (11) restrictions on the ability of subsidiaries to pay
dividends or to make or repay loans.
EVENTS OF DEFAULT
The Credit Agreements provide for events of default customary to facilities
of this type, including nonpayment of principal, interest or other amounts,
violation of covenants, incorrectness of representations
110
and warranties in any material respect, cross-default and cross-acceleration,
certain events of bankruptcy or insolvency, certain material judgments, certain
ERISA events, actual or asserted invalidity of guarantee or security documents,
and Change in Control (as defined).
INDEMNIFICATION
Under the senior bank facilities, we agree to indemnify the Agent and the
Lenders and their affiliates and hold them harmless from and against all costs,
expenses (including reasonable fees, disbursements and other charges of counsel)
and liabilities arising out of or relating to the transactions contemplated
thereby, provided that no person will be indemnified for its own gross
negligence or willful misconduct.
DESCRIPTION OF 8 3/4% SENIOR NOTES
GENERAL
On November 4, 2001 we sold $350 million aggregate principal amount of
8 3/4% senior notes. The net proceeds from these notes was used to repay a
portion of the loans under our senior bank facilities used to finance the
acquisition of Purina Mills, refinance the then existing debt of Purina Mills
and refinance certain of our then existing debt.
MATURITY AND INTEREST
The 8 3/4% senior notes will mature on November 15, 2011. Interest on the
8 3/4% senior notes is payable at the rate of 8 3/4% per annum and is payable
semi-annually in cash on each May 15 and November 15.
RANKING
The 8 3/4% senior notes are senior unsecured obligations ranking equal in
right of payment to all of our existing and future senior debt and senior in
right of payment to all of our existing and future subordinated debt. The 8 3/4%
senior notes effectively rank junior in right of payment to liabilities of our
subsidiaries that do not guarantee the 8 3/4% senior notes. In the event of
liquidation, bankruptcy, insolvency or similar events, holders of the New Notes
are entitled to receive payment in full in cash or cash equivalents, to the
extent of the value of the assets securing such debt, before holders of the
8 3/4% senior notes are entitled to receive any payments.
GUARANTEES
The 8 3/4% senior notes are unconditionally guaranteed by the domestic
wholly-owned subsidiaries of Land O'Lakes, other than LOL Finance Co. (and its
wholly-owned subsidiaries), and by each domestic wholly-owned subsidiary of Land
O'Lakes Farmland Feed LLC, other than LOL Farmland Feed SPV, LLC.
OPTIONAL REDEMPTION
We may not redeem the 8 3/4% senior notes prior to November 15, 2006. After
this date, we may redeem the 8 3/4% senior notes, in whole or from time to time
in part, at the following redemption prices (expressed as percentages of
principal amount), plus accrued and unpaid interest, if any, to the redemption
date, if redeemed during the 12-month period commencing on November 15 of the
years set forth below:
<Table>
<Caption>
REDEMPTION
YEAR PRICE
- ---- ----------
2006........................................................ 104.375%
2007........................................................ 102.917%
2008........................................................ 101.458%
2009 and thereafter......................................... 100.000%
</Table>
111
COVENANTS
The indenture governing the 8 3/4% senior notes contains covenants that
restrict our ability and the ability of our restricted subsidiaries to:
- incur more indebtedness, including guarantees;
- pay dividends and make distributions in respect of capital stock or
similar payments;
- redeem or repurchase capital stock;
- make investments or other restricted payments;
- enter into any agreements that restrict our subsidiaries' ability to pay
dividends or make distributions;
- sell assets;
- enter into transactions with affiliates;
- issue or sell capital stock of restricted subsidiaries;
- create liens;
- change our cooperative status;
- engage in any business other than a permitted business;
- enter into any sale/leaseback transactions; and
- merge or consolidate.
Note, however, that these covenants are subject to a number of important
exceptions.
EVENTS OF DEFAULT
The indenture governing the 8 3/4% senior notes contains events of default
that are substantially similar to those that will be contained in the indenture
governing the New Notes.
FUTURE ISSUANCES UNDER THE INDENTURE
We may issue additional notes having identical terms and conditions to the
8 3/4% senior notes we offered. We will only be permitted to issue such
additional notes if at the time of such issuance we are in compliance with the
covenants contained in the indenture. Any additional notes will be part of the
same issue as the 8 3/4% senior notes and will vote on all matters with such
8 3/4% senior notes.
DESCRIPTION OF RECEIVABLES SECURITIZATION
On December 18, 2001, we entered into a $100 million receivables
securitization pursuant to which all or substantially all existing and future
feed, seed and certain swine receivables of Land O'Lakes, Inc., Land O'Lakes
Farmland Feed LLC and Purina Mills, LLC (the "Securitized Receivables") and
related assets were or will be sold to LOL Farmland Feed SPV, LLC, a special
purpose entity owned by Land O'Lakes Farmland Feed. The special purpose entity
sold to CoBank an undivided 100% ownership interest ("Securitized Interest") in
all of the Securitized Receivables. CoBank also has a first priority security
interest in the Securitized Receivables and related assets. The transfers of the
receivables to the special purpose entity 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 or Land
O'Lakes. The special purpose entity purchases the receivables with a combination
of cash initially received from CoBank, and notes equal to the unadvanced
present value of the receivables. The purchase price paid by CoBank is equal to
the net balance of the eligible Securitized Receivables sold from time to time
less a discount based upon present value and historical write-off, delinquency
and dilution experience. Land O'Lakes Farmland Feed serves as the servicer and
in this capacity assists CoBank in collecting proceeds of
112
the Securitized Receivables. Land O'Lakes and the other receivables sellers are
subject to credit risk related to the repayment of the special purpose entity
notes, which in turn is dependent upon the ultimate collection on the special
purpose entity's receivables pool. Accordingly, we have retained reserves for
estimated losses. The initial term of the receivables securitization was one
year with an expiration date of April 28, 2004. On March 31, 2004 we completed
an amendment to our receivables securitization facility. Under the amendment,
the receivables securitization was increased from $100 million to $200 million.
The amendment also incorporated receivables generated in our dairy segment into
the Securitized Receivables. In addition, the amendment increased the
receivables securitization term from one year to three years. Concurrently with
the amendment, we sold additional receivables and applied the proceeds to the
outstanding senior bank facilities, which included the mandatory payment in full
of our term loan A facility. In connection with this sale the lenders under our
senior bank facilities and the trustee under the indenture released their
respective security interests in the additional receivables sold. The amendment
did not include any further material modifications to the receivables
securitization facility.
FEES
We have paid or will pay CoBank certain fees, including arrangement fees.
COVENANTS
The securitization provides for standard covenants as to (1) compliance
with laws, (2) preservations of corporate existence, (3) audits, (4) keeping
books of account, (5) performance and compliance with receivables and contracts,
(6) location of records, (7) compliance with credit and collection policy, and
(8) collection and reporting of termination events and material litigation.
EVENTS OF TERMINATION
The securitization provides for termination events customary to
transactions of this type, including non-payment, violation of covenants,
incorrectness of representations and warranties in any material respect,
cross-default and cross-acceleration, certain events of bankruptcy or
insolvency, certain material judgments, certain ERISA events, material adverse
change in the financial condition of Land O'Lakes, Land O'Lakes Farmland Feed,
Purina Mills or of the special purpose entity, material adverse change in the
collectibility of the eligible receivables, certain lien notices by the Internal
Revenue Service or the Pension Benefit Guaranty Corporation, termination of the
term loan portions of the senior bank facilities without replacement, breach of
certain portfolio triggers, and change in control (as defined).
INDEMNIFICATION
Land O'Lakes, Land O'Lakes Farmland Feed and Purina Mills are obligated to
indemnify CoBank against all liability arising from the ownership of the
Securitized Interest which does not arise out of gross negligence or willful
misconduct of CoBank. Furthermore, the same entities will indemnify CoBank for
yield protection including for capital adequacy, illegality, required reserves
and certain taxes.
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DESCRIPTION OF CAPITAL SECURITIES
GENERAL
On September 15, 1998, our subsidiary, Land O'Lakes Capital Trust I, a
statutory business trust (the "Trust"), sold 7.45% capital securities (the
"Capital Securities"). The Capital Securities represent undivided preferred
beneficial interests in the assets of the Trust. We own all of the common
securities representing undivided beneficial interests in the assets of the
Trust (together with the Capital Securities, the "Trust Securities"). The Trust
exists for the sole purpose of investing the proceeds of the common securities
and the Capital Securities in an equivalent amount of 7.45% Subordinated
Deferrable Interest Debentures due March 15, 2028 (the "Junior Subordinated
Debentures") issued by us.
MATURITY
The Junior Subordinated Debentures will mature on March 15, 2028. Upon the
maturity of the Junior Subordinated Debentures, the Trust will redeem the
Capital Securities at their maturity value of $1,000 per Capital Security.
RANKING
Our obligations under the Junior Subordinated Debentures are unsecured and
are subordinate and junior in right of payment to all of our present and future
senior debt and will rank on par with any of our trust related securities. Upon
an event of default, the holders of Capital Securities will have a preference
over holders of the common equities with respect to payments of distributions
and payments upon redemption, liquidation, and otherwise.
INTEREST PAYMENTS
Holders of the Capital Securities are entitled to receive cumulative cash
distributions at an annual distribution rate of 7.45% of the liquidation amount
of $1,000 per Capital Security, accruing from the date of original issuance and
payable semi-annually in arrears on March 15 and September 15 of each year,
beginning September 15, 1998.
The distribution rate and the distribution payment dates and other payment
dates for the Capital Securities correspond to the interest rate and interest
payment dates and other payment dates on the Junior Subordinated Debentures,
which are the sole assets of the Trust. As a result, if principal and interest
are not paid on the Junior Subordinated Debentures, no amounts will be paid on
the Capital Securities. If we do not make principal or interest payments on the
Junior Subordinated Debentures, the Trust will not have sufficient funds to make
distributions on the Capital Securities, in which case the guarantee will not
apply to distributions until the Trust has sufficient funds legally available
therefor.
GUARANTEES
The payment of distributions out of moneys held by the Trust or payments
upon the redemption of Capital Securities and payments on liquidation of the
Trust are guaranteed by us pursuant to a guarantee. The guarantee covers
distributions and other payments on the Capital Securities only if and to the
extent that we have made a payment of interest or principal on the Junior
Subordinated Debentures. The guarantee, when taken together with our obligations
under the Junior Subordinated Debentures and its obligations under the
declaration, including its obligations to pay costs, expenses, and certain
liabilities of the Trust, provides a full and unconditional guarantee of amounts
due on the Capital Securities. Our obligations under the guarantee are
subordinate and junior in right of payment to all of our present and future
senior debt and on par with our guarantee of trust related securities and the
most senior preferred stock issued, if any, from time to time by us.
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INTEREST DEFERRAL
We have the right to defer payments of interest on the Junior Subordinated
Debentures by extending the interest payment period on them at any time for up
to ten consecutive semi-annual periods, provided that no extension may continue
beyond the stated maturity of the Junior Subordinated Debentures. If we defer
interest payments, the trust will also defer distributions on the Capital
Securities. During a deferral period, distributions will continue to accrue with
interest at 7.45% per annum. There could be multiple deferral periods of varying
lengths throughout the term of the Junior Subordinated Debentures.
REDEMPTION
We may redeem the Junior Subordinated Debentures, in whole or in part, upon
not less than 30 days notice, at any time after March 15, 2008. Upon the
repayment of the Junior Subordinated Debentures, whether at maturity or upon
redemption, the proceeds will simultaneously be applied to redeem Trust
Securities having an aggregate liquidation amount equal to the aggregate
principal amount of the Junior Subordinated Debentures. If we redeem Junior
Subordinated Debentures other than in connection with a tax event, the
redemption price shall be the greater of $1,000 per Trust Security or an amount
equal to the discounted value of the remaining scheduled distributions (the
"Make-Whole Value"), plus accrued and unpaid distributions. The discount rate
for determination of the Make-Whole Value shall be determined by the yield of
the appropriate United States Treasury security plus 25 basis points. The Trust
will redeem the Capital Securities upon redemption of the Junior Subordinated
Debentures.
We may also redeem the Junior Subordinated Debentures prior to March 15,
2008 upon the occurrence of a tax event. If we redeem the Junior Subordinated
Debentures in connection with a tax event, the redemption price shall be $1,000
per Trust Security plus accrued and unpaid distributions. In addition, upon the
occurrence of a tax event arising from a change in law or a change in legal
interpretation regarding tax matters, unless the Junior Subordinated Debentures
are redeemed, the Trust will be dissolved, and the Junior Subordinated
Debentures will be distributed to the holders of the Capital Securities, on a
pro rata basis, in lieu of any cash distribution.
In the event of the involuntary or voluntary dissolution, winding up, or
termination of the Trust, the holders of the Capital Securities will be entitled
to receive, for each Capital Security, a liquidation amount of $1,000 plus
accrued and unpaid distributions to the date of payment, unless, in connection
with the dissolution, the Junior Subordinated Debentures are distributed to the
holders of the Capital Securities.
EVENTS OF DEFAULT
The indenture for the Junior Subordinated Debentures provides for events of
default for nonpayment of interest (but permitted interest deferment periods
shall not constitute events of default), certain events of bankruptcy, or the
voluntary or involuntary dissolution or winding up of the Trust, unless the
Junior Subordinated Debentures are redeemed, distributed to the holders of the
Capital Securities or the dissolution is in connection with certain mergers,
consolidations or amalgamations.
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THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD NOTES
Subject to terms and conditions, we will accept for exchange Old Notes
which are properly tendered on or prior to the Expiration Date and not withdrawn
as permitted below. As used herein, the term "Expiration Date" means 12:01 a.m.,
New York City time, September 28, 2004. We may, however, in our sole discretion,
extend the period of time during which the exchange offer is open. While we do
not currently intend to extend the exchange offer, any extension would not
exceed an additional 10 business days of the original Expiration Date. The term
"Expiration Date" means the latest time and date to which the exchange offer is
extended.
As of the date of this prospectus, $175 million principal amount of Old
Notes are outstanding. This prospectus, together with the letter of transmittal,
is being sent to all holders of Old Notes known to us. Our obligation is to
accept Old Notes for exchange pursuant to the exchange offer is subject to
certain obligations as set forth under "-- Conditions to the Exchange Offer."
We expressly reserve the right, at any time, to extend the period of time
during which the exchange offer is open, and delay acceptance for exchange of
any Old Notes, by giving oral or written notice of such extension to the holders
thereof as described below. During any such extension, all Old Notes previously
tendered will remain subject to the exchange offer and may be accepted for
exchange by us. Any Old Notes not accepted for exchange for any reason will be
returned without expense to the tendering holder as promptly as practicable
after the expiration or termination of the exchange offer.
Old Notes tendered in the exchange offer must be in denominations of
principal amount of $1,000 and any integral multiple thereof.
We expressly reserve the right to amend or terminate the exchange offer,
and not to accept for exchange any Old Notes, upon the occurrence of any of the
conditions of the exchange offer specified under "-- Conditions to the Exchange
Offer." We will give oral or written notice of any extension, amendment,
non-acceptance or termination of the holders of the Old Notes as promptly as
practicable. Such notice, in the case of any extension, will be issued by means
of a press release or other public announcement no later than 9:00 a.m., New
York City time, on the next business day after the previously scheduled
Expiration Date.
PROCEDURES FOR TENDERING OLD NOTES
The tender to us of Old Notes by you as set forth below and our acceptance
of the Old Notes will constitute a binding agreement between us and you upon the
terms and subject to the conditions set forth in this prospectus and in any
accompanying letter of transmittal. Except as set forth below, to tender Old
Notes for exchange pursuant to the exchange offer, you must transmit a properly
completed and duly executed letter of transmittal, including all other documents
required by such letter of transmittal or, in the case of a book-entry transfer,
an agent's message in lieu of such letter of transmittal, to U.S. Bank National
Association, as exchange agent, at the address set forth below under "Exchange
Agent" on or prior to the Expiration Date. In addition, either:
- certificates for such Old Notes must be received by the exchange agent
along with the letter of transmittal, or
- a timely confirmation of a book-entry transfer (a "book-entry
confirmation") of such Old Notes, if such procedure is available, into
the exchange agent's account at DTC pursuant to the procedure for
book-entry transfer described beginning on page 135 must be received by
the exchange agent, prior to the Expiration Date, with the letter of
transmittal or an agent's message in lieu of such letter of transmittal,
or the holder must comply with the guaranteed delivery procedures
described below.
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The term "agent's message" means a message, transmitted by DTC to and
received by the exchange agent and forming a part of a book-entry confirmation,
which states that DTC has received an express acknowledgement from the tendering
participant stating that such participant has received and agrees to be bound by
the letter of transmittal and that we may enforce such letter of transmittal
against such participant.
The method of delivery of Old Notes, letters of transmittal and all other
required documents is at your election and risk. If such delivery is by mail, it
is recommended that you use registered mail, properly insured, with return
receipt requested. In all cases, you should allow sufficient time to assure
timely delivery. No letter of transmittal or Old Notes should be sent to us.
Signatures on a letter of transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the Old Notes surrendered for exchange
are tendered:
- by a holder of the Old Notes who has not completed the box entitled
"Special Issuance Instructions" or "Special Delivery Instructions" on the
letter of transmittal, or
- for the account of an Eligible Institution (as defined below).
In the event that signatures on a letter of transmittal or a notice of
withdrawal are required to be guaranteed, such guarantees must be by a firm
which is a member of the Securities Transfer Agent Medallion Program, the Stock
Exchanges Medallion Program or the New York Stock Exchange Medallion Program
(each such entity being hereinafter referred to as an "Eligible Institution").
If Old Notes are registered in the name of a person other than the signer of the
letter of transmittal, the Old Notes surrendered for exchange must be endorsed
by, or be accompanied by a written instrument or instruments of transfer or
exchange, in satisfactory form as we or the exchange agent determine in our sole
discretion, duly executed by the registered holders with the signature thereon
guaranteed by an Eligible Institution.
We or the exchange agent in our sole discretion will make a final and
binding determination on all questions as to the validity, form, eligibility
(including time of receipt) and acceptance of Old Notes tendered for exchange.
We reserve the absolute right to reject any and all tenders of any particular
Old Note not properly tendered or to not accept any particular Old Note which
acceptance might, in our judgment or our counsel's, be unlawful. We also reserve
the absolute right to waive any defects or irregularities or conditions of the
exchange offer as to any particular Old Note either before or after the
Expiration Date (including the right to waive the ineligibility of any holder
who seeks to tender Old Notes in the exchange offer). Our or the exchange
agent's interpretation of the terms and conditions of the exchange offer as to
any particular Old Note either before or after the Expiration Date (including
the letter of transmittal and the instructions thereto) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Notes for exchange must be cured within a
reasonable period of time, as we determine. We are not, nor is the exchange
agent or any other person, under any duty to notify you of any defect or
irregularity with respect to your tender of Old Notes for exchange, and no one
will be liable for failing to provide such notification.
If the letter of transmittal is signed by a person or persons other than
the registered holder or holders of Old Notes, such Old Notes must be endorsed
or accompanied by powers of attorney signed exactly as the name(s) of the
registered holder(s) that appear on the Old Notes.
If the letter of transmittal or any Old Notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing. Unless waived by us or
the exchange agent, proper evidence satisfactory to us of their authority to so
act must be submitted with the letter of transmittal.
By tendering Old Notes, you represent to us that, among other things:
- the New Notes acquired pursuant to the exchange offer are being obtained
in the ordinary course of business of the person receiving such New
Notes, whether or not such person is the holder; and
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- neither the holder nor such other person has any arrangement or
understanding with any person, to participate in the distribution of the
New Notes.
In the case of a holder that is not a broker-dealer, that holder, by
tendering, will also represent to us that the holder is not engaged in or does
not intend to engage in a distribution of the New Notes.
If you are our "affiliate," as defined under Rule 405 under the Securities
Act, and engage in or intend to engage in or have an arrangement or
understanding with any person to participate in a distribution of such New Notes
to be acquired pursuant to the exchange offer, you or any such other person:
- could not rely on the applicable interpretations of the staff of the SEC;
and
- must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with any resale transaction.
Each broker-dealer that receives New Notes for its own account in exchange
for Old Notes, where such Old Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities, must acknowledge
that it will deliver a prospectus in connection with any resale of such New
Notes. See "Plan of Distribution." The letter of transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the exchange offer,
we will accept, promptly after the Expiration Date, all Old Notes properly
tendered and will issue the New Notes promptly after acceptance of the Old
Notes. See "-- Conditions to the Exchange Offer." For purposes of the exchange
offer, we will be deemed to have accepted properly tendered Old Notes for
exchange if and when we give oral (confirmed in writing) or written notice to
the exchange agent.
The holder of each Old Note accepted for exchange will receive a New Note
in the amount equal to the surrendered Old Note. Accordingly, registered holders
of New Notes on the relevant record date for the first interest payment date
following the consummation of the exchange offer will receive interest accruing
from the most recent date to which interest has been paid on the Old Notes.
Holders of New Notes will not receive any payment in respect of accrued interest
on Old Notes otherwise payable on any interest payment date, the record date for
which occurs on or after the consummation of the exchange offer.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange will be made only after timely receipt by the exchange agent of:
- certificates for such Old Notes or a timely book-entry confirmation of
such Old Notes into the exchange agent's account at DTC,
- a properly completed and duly executed letter of transmittal or an
agent's message in lieu thereof, and
- all other required documents.
If any tendered Old Notes are not accepted for any reason set forth in the
terms and conditions of the exchange offer or if Old Notes are submitted for a
greater principal amount than the holder desires to exchange, such unaccepted or
non-exchanged Old Notes will be returned without expense to the tendering holder
(or, in the case of Old Notes tendered by book-entry transfer into the exchange
agent's account at DTC pursuant to the book-entry procedures described below,
such non-exchanged Old Notes will be credited to an account maintained with DTC)
as promptly as practicable after the expiration or termination of the exchange
offer.
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BOOK-ENTRY TRANSFERS
For purposes of the exchange offer, the exchange agent will request that an
account be established with respect to the Old Notes at DTC within two business
days after the date of this prospectus, unless the exchange agent already has
established an account with DTC suitable for the exchange offer. Any financial
institution that is a participant in DTC, including Euroclear and Clearstream,
may make book-entry delivery of Old Notes by causing DTC to transfer such Old
Notes into the exchange agent's account at DTC in accordance with DTC's
procedures for transfer. Although delivery of Old Notes may be effected through
book-entry transfer at DTC, the letter of transmittal or facsimile thereof or an
agent's message in lieu thereof, with any required signature guarantees and any
other required documents, must, in any case, be transmitted to and received by
the exchange agent at the address set forth under "-- Exchange Agent" on or
prior to the Expiration Date or the guaranteed procedures described below must
be complied with.
GUARANTEED DELIVERY PROCEDURES
If you desire to tender your Old Notes and your Old Notes are not
immediately available, or time will not permit your Old Notes or other required
documents to reach the exchange agent before the Expiration Date, a tender may
be effected if:
- the tender is made through an Eligible Institution,
- prior to the Expiration Date, the exchange agent received from such
Eligible Institution a notice of guaranteed delivery, substantially in
the form we provide (by facsimile transmission, mail or hand delivery),
setting forth your name and address, the amount of Old Notes tendered,
stating that the tender is being made thereby and guaranteeing that
within three New York Stock Exchange ("NYSE") trading days after the date
of execution of the notice of guaranteed delivery, the certificates for
all physically tendered Old Notes, in proper form for transfer, or a
book-entry confirmation, as the case may be, together with a properly
completed and duly executed appropriate letter of transmittal or
facsimile thereof or agent's message in lieu thereof, with any required
signature guarantees and any other documents required by the letter of
transmittal will be deposited by such Eligible Institution with the
exchange agent, and
- the certificates for all physically tendered Old Notes, in proper form
for transfer, or a book-entry confirmation, as the case may be, together
with a properly completed and duly executed appropriate letter of
transmittal or facsimile thereof or agent's message in lieu thereof, with
any required signature guarantees and all other documents required by the
letter of transmittal, are received by the exchange agent within three
NYSE trading days after the date of execution of the notice of guaranteed
delivery.
WITHDRAWAL RIGHTS
You may withdraw your tender of Old Notes at any time prior to the
Expiration Date. To be effective, a written notice of withdrawal must be
received by the exchange agent at one of the addresses set forth under
"-- Exchange Agent." This notice must specify:
- the name of the person having tendered Old Notes to be withdrawn,
- the Old Notes to be withdrawn (including the principal amount of such Old
Notes), and
- where certificates for Old Notes have been transmitted, the name in which
such Old Notes are registered, if different from that of the withdrawing
holder.
If certificates for Old Notes have been delivered or otherwise identified
to the exchange agent, then, prior to the release of such certificates, the
withdrawing holder must also submit the serial numbers of the particular
certificates to be withdrawn and a signed notice of withdrawal with signatures
guaranteed by an Eligible Institution, unless such holder is an Eligible
Institution. If Old Notes have been tendered pursuant to the procedure for
book-entry transfer described above, any notice of withdrawal must specify the
name
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and number of the account at DTC to be credited with the withdrawn Old Notes and
otherwise comply with the procedures of DTC.
We or the exchange agent will make a final and binding determination on all
questions as to the validity, form and eligibility (including time or receipt)
of such notices. Any Old Notes so withdrawn will be deemed not to have been
validly tendered for exchange for purposes of the exchange offer. Any Old Notes
tendered for exchange but not exchanged for any reason will be returned to the
holder without cost of such holder (or, in the case of Old Notes tendered by
book-entry transfer into the exchange agent's account at DTC pursuant to the
book-entry transfer procedures described above, such Old Notes will be credited
to an account maintained with DTC for the Old Notes) as soon as practicable
after withdrawal, rejection of tender or termination of the exchange offer.
Properly withdrawn Old Notes may be retendered by following one of the
procedures described under "-- Procedures for Tendering Old Notes" above at any
time on or prior to the Expiration Date.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provisions of the exchange offer, we are not
required to accept for exchange, or to issue New Notes in exchange for, any Old
Notes and may terminate or amend the exchange offer, if any of the following
events occur prior to acceptance of such Old Notes: (i) the exchange offer
violates any applicable law or applicable interpretation of the staff of the
SEC; (ii) an action or proceeding shall have been instituted or threatened in
any court or by any governmental agency that might materially impair our or any
Subsidiary Guarantor's ability to proceed with the exchange offer; (iii) we
shall not have received all governmental approvals that we deem necessary to
consummate the exchange offer; or (iv) there has been proposed, adopted, or
enacted any law, statute, rule or regulation that, in our reasonable judgment,
would materially impair our ability to consummate the exchange offer.
The foregoing conditions are for our sole benefit and may be asserted by us
regardless of the circumstances giving rise to any condition or may be waived by
us in whole or in part at any time in our reasonable discretion. Our failure at
any time to exercise any of the foregoing rights will not be deemed a waiver of
any such right and each such right will be deemed an ongoing right which may be
asserted at any time.
In addition, we will not accept for exchange any Old Notes tendered, and no
New Notes will be issued in exchange for any such Old Notes, if at such time any
stop order is threatened or in effect with respect to the Registration
Statement, of which this prospectus constitutes a part, or the qualification of
the indenture under the Trust Indenture Act.
EXCHANGE AGENT
U.S. Bank National Association has been appointed as the exchange agent for
the exchange offer. All executed letters of transmittal should be directed to
the exchange agent at the address set forth below. Questions and requests for
assistance, requests for additional copies of this prospectus or of the letter
of transmittal and requests for notices of guaranteed delivery should be
directed to the exchange agent addressed as follows:
U.S. Bank National Association
Corporate Trust Department
60 Livingston Avenue
St. Paul, MN 55107-2292
Telephone Number: (651) 495-3913
Facsimile Number: (651) 495-8097
DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF SUCH LETTER OF TRANSMITTAL VIA FACSIMILE OTHER THAN AS
SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY OF THE LETTER OF
TRANSMITTAL.
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FEES AND EXPENSES
The principal solicitation is being made by mail by U.S. Bank National
Association, as exchange agent. We will pay the exchange agent customary fees
for its services, reimburse the exchange agent for its reasonable out-of-pocket
expenses incurred in connection with the provision of these services and pay
other registration expenses, including fees and expenses of the trustee under
the indenture relating to the New Notes, filing fees, blue sky fees and printing
and distribution expenses. We will not make any payment to brokers, dealers or
other soliciting acceptances of the exchange offer.
Additional solicitation may be made by telephone, facsimile or in person by
our and our affiliates' officers and regular employees and by persons so engaged
by the exchange agent.
ACCOUNTING TREATMENT
We will record the New Notes at the same carrying value as the Old Notes,
as reflected in our accounting records on the date of the exchange. Accordingly,
we will not recognize any gain or loss for accounting purposes. The expenses of
the exchange offer will be amortized over the term of the New Notes.
TRANSFER TAXES
You will not be obligated to pay any transfer taxes in connection with the
tender of Old Notes in the exchange offer unless you instruct us to register New
Notes in the name of, or request that Old Notes not tendered or not accepted in
the exchange offer be returned to, a person other than the registered tendering
holder. In those cases, you will be responsible for the payment of any
applicable transfer tax.
CONSEQUENCES OF EXCHANGING OR FAILING TO EXCHANGE OLD NOTES
If you do not exchange your Old Notes for New Notes in the exchange offer,
your Old Notes will continue to be subject to the provisions of the indenture
relating to the Old Notes regarding transfer and exchange of the Old Notes and
the restrictions on transfer of the Old Notes described in the legend on your
certificates. These transfer restrictions are required because the Old Notes
were issued under an exemption from, or in a transaction not subject to, the
registration requirements of the Securities Act and applicable state securities
laws. In general, the Old Notes may not be offered or sold unless registered
under the Securities Act, except under an exemption from, or in a transaction
not subject to, the Securities Act and applicable state securities laws. We do
not plan to register the Old Notes under the Securities Act.
The Old Notes are eligible for trading in the PORTAL market; however, we
cannot assure you that a liquid trading market will develop, that you will be
able to sell your Old Notes at a particular time or that the prices that you
receive when you sell will be favorable. The New Notes sold using this
prospectus will no longer be eligible for trading in the PORTAL market. The
PORTAL market is a screen-based market operated by the National Association of
Securities Dealers. Trading in the PORTAL market is limited to qualified
institutional buyers as defined by Rule 144A of the Securities Act.
Under existing interpretations of the Securities Act by the SEC's staff
contained in several no-action letters to third parties, and subject to the
immediately following sentence, we believe that the New Notes would generally be
freely transferable by holders after the exchange offer without further
registration under the Securities Act, subject to certain representations
required to be made by each holder of New Notes, as set forth below. However,
any purchaser of New Notes who is one of our "affiliates" (as defined in Rule
405 under the Securities Act) or who intends to participate in the exchange
offer for the purpose of distributing the New Notes:
- will not be able to rely on the interpretation of the SEC's staff;
- will not be able to tender its Old Notes in the exchange offer; and
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- must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with any sale or transfer of the New
Notes unless such sale or transfer is made pursuant to an exemption from
such requirements. See "Plan of Distribution."
We do not intend to seek our own interpretation regarding the exchange
offer and there can be no assurance that the SEC's staff would make a similar
determination with respect to the New Notes as it has in other interpretations
to other parties, although we have no reason to believe otherwise.
Each broker-dealer that receives New Notes for its own account in exchange
for Old Notes, where the Old Notes were acquired by it as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus that meets the requirements of the Securities Act in
connection with any resale of the New Notes. The letter of transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. See "Plan of Distribution."
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DESCRIPTION OF THE NEW NOTES
You can find the definitions of certain terms used in this description
under the heading "Material Definitions." In this description, the term "Land
O'Lakes" refers only to Land O'Lakes, Inc. and not to any of its Subsidiaries.
Certain of Land O'Lakes' Subsidiaries will guarantee the New Notes and will be
subject to many of the provisions contained in this description. Each Subsidiary
that guarantees the New Notes is referred to in this section as a "Subsidiary
Guarantor."
We will issue the New Notes under the indenture dated as of December 23,
2003, among Land O'Lakes, the Subsidiary Guarantors and U.S. Bank National
Association, as Trustee. This is the same indenture under which the Old Notes
were issued. The terms of the New Notes include those stated in the indenture
and those made part of the indenture by reference to the Trust Indenture Act.
The following description is a summary of the material provisions of the
indenture. It does not restate the terms of the indenture in their entirety. You
should carefully read the indenture as it, and not this description, governs
your rights as holders of the New Notes. We have filed a copy of the indenture
as an exhibit to the registration statement that includes this prospectus.
OVERVIEW OF THE NEW NOTES AND SUBSIDIARY GUARANTEES
The New Notes:
- are identical to the Old Notes, except that the transfer restrictions,
registration rights and special redemption provisions do not apply to the
New Notes;
- are secured by the Collateral as described under the heading
"-- Security" below;
- rank equally in right of payment with all existing and future Senior
Indebtedness of Land O'Lakes;
- are senior in right of payment to all existing and future Subordinated
Obligations of Land O'Lakes; and
- are effectively subordinated to all liabilities, including trade payables
and preferred stock, of each Land O'Lakes' Subsidiary that is not a
Subsidiary Guarantor.
Even though the New Notes and the Subsidiary Guarantees are secured, the
security interests in the Collateral securing the New Notes and the Subsidiary
Guarantees, subject to Permitted Collateral Liens:
- rank junior in priority to the security interests in the Collateral
granted to secure Priority Lien Obligations, including our outstanding
Bank Indebtedness; and
- rank ratably in priority with the security interests in the Collateral
securing any Other Equal Lien Obligations.
In addition, certain of our Indebtedness is or may be secured by assets
that do not secure the New Notes and the Subsidiary Guarantees. We also have a
revolving receivable securitization program. Receivables sold pursuant to this
program are not included in the Collateral securing the Bank Indebtedness or the
New Notes.
THE GUARANTEES
The New Notes are Guaranteed by:
- each domestic wholly-owned Subsidiary of Land O'Lakes, other than LOL
Finance Co. and its Subsidiaries;
- each domestic wholly-owned Subsidiary of Land O'Lakes Farmland Feed LLC,
other than LOL Farmland Feed SPV, LLC.
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The New Notes are not Guaranteed by any of our other Subsidiaries,
including our foreign Subsidiaries and the Unrestricted Subsidiaries. We refer
to our Subsidiaries that do not guarantee the New Notes as the "Non-Guarantors."
The Subsidiary Guarantees:
- are secured by the Collateral as described under the heading
"-- Security" below;
- rank equally in right of payment with all existing and future Senior
Indebtedness of each Subsidiary Guarantor;
- are senior in right of payment to all existing and future Subordinated
Obligations of each Subsidiary Guarantor; and
The New Notes are not Guaranteed by any of the Non-Guarantors. After
eliminating intercompany activity, the Non-Guarantors:
- had assets of $588.4 million or 19.8% of our total assets as of June 30,
2004;
- had liabilities of $362.1 million or 19.4% of our total liabilities as of
June 30, 2004 (excluding the $190.7 million of Capital Securities); and
- generated net sales of $483.7 million or 12.0% of our consolidated net
sales for the six months ended June 30, 2004.
A Non-Guarantor may become a Guarantor if the Non-Guarantor becomes a
guarantor under our senior bank facilities. A Non-Guarantor may also become a
Guarantor of the New Notes if the senior bank facilities are terminated without
replacement and the Non-Guarantor is a Restricted Subsidiary.
Unrestricted Subsidiaries will not be Subsidiary Guarantors or be subject
to any of the restrictive covenants contained in the indenture. On December 31,
2003, the Unrestricted Subsidiaries were LOL Finance Co. and its wholly-owned
Subsidiaries and all of our non-wholly-owned Subsidiaries. Our board of
directors may, in its discretion, designate other current or future, direct or
indirect, Subsidiaries as Unrestricted Subsidiaries. The board may not make such
a designation if the Subsidiary owns stock in, holds indebtedness of, or has a
lien on the assets of Land O'Lakes or our consolidated Subsidiaries, or if the
designation would cause us to violate the restrictions on investment contained
in the indenture. After eliminating intercompany activity, the Unrestricted
Subsidiaries:
- had assets of $588.4 million or 19.8% of our total assets as of June 30,
2004;
- had liabilities of $362.1 million or 19.4% of our total liabilities as of
June 30, 2004 (in addition to the $190.7 million of Capital Securities);
and
- generated net sales of $483.7 million or 12.0% of our total net sales for
the six months ended June 30, 2004.
PRINCIPAL, MATURITY AND INTEREST
We will issue New Notes in an aggregate principal amount of $175 million in
exchange for Old Notes with an aggregate outstanding principal amount of $175
million. The New Notes will mature on December 15, 2010. We will issue the New
Notes in fully registered form, without coupons, in denominations of $1,000 and
any integral multiple of $1,000.
Each New Note we issue will bear interest at a rate of 9% per annum
beginning on December 23, 2003, or from the date we most recently paid interest
on the Old Notes. We will pay interest semiannually on June 15 and December 15
of each year to holders of record at the close of business on the immediately
preceding June 1 or December 1, as applicable. We will begin paying interest
under the New Notes to holders on the first interest payment date following the
consummation of the exchange offer.
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INDENTURE MAY BE USED FOR FUTURE ISSUANCES
We may issue additional notes having identical terms and conditions to the
New Notes we are currently offering, which we refer to as the "Additional
Notes." We will only issue Additional Notes if at the time of such issuance we
are in compliance with the covenants contained in the indenture. Any Additional
Notes will be part of the same issue as the New Notes that we are currently
offering and will vote on all matters with such New Notes. Additional Notes
would rank equal to the New Notes and would be guaranteed by the Subsidiary
Guarantors and secured by the Collateral to the same extent as the New Notes.
PAYING AGENT AND REGISTRAR
We will pay the principal of, premium, if any, and interest on the New
Notes at any Land O'Lakes office or any agency designated by Land O'Lakes. We
have initially designated the corporate trust office of the Trustee to act as
our agent in such matters. The location of the corporate trust office is 60
Livingston Avenue, St. Paul, Minnesota 55107-2292. We reserve the right to pay
interest by check mailed directly to holders of New Notes at their registered
addresses.
TRANSFER AND EXCHANGE
A holder will be able to transfer or exchange New Notes at the same
location given in "-- Paying agent and registrar" above. No service charge will
be made for the registration of any transfer or exchange of New Notes. Upon any
transfer or exchange, the registrar and the Trustee may require a holder, among
other things, to furnish appropriate endorsements and transfer documents. In
connection with any transfer or exchange, we may require a holder to pay any
transfer tax, fee or other similar governmental charge required by law as
permitted by the indenture. Land O'Lakes will not be required to transfer or
exchange any New Note selected for redemption or to transfer or exchange any New
Note for a period of 15 days prior to a selection of New Notes to be redeemed.
The New Notes will be issued in registered form and the holder will be
treated as the owner of such New Note for all purposes.
OPTIONAL REDEMPTION
We may not redeem the New Notes prior to December 15, 2007. On or after
this date, we may redeem all or a part of the New Notes on not less than 30 nor
more than 60 days' prior notice, at the redemption prices below (expressed as
percentages of principal amount) plus accrued and unpaid interest, if any, to
the redemption date. The redemption prices below apply during the 12-month
period commencing on December 15 of the years opposite the applicable price.
<Table>
<Caption>
REDEMPTION
YEAR PRICE
- ---- ----------
2007........................................................ 104.500%
2008........................................................ 102.250%
2009 and thereafter......................................... 100.000%
</Table>
SELECTION
If we partially redeem New Notes, the Trustee will select the New Notes to
be redeemed on a pro rata basis, by lot or by such other method as the Trustee
deems to be fair and appropriate. No note of $1,000 in original principal amount
or less will be partially redeemed.
If we redeem any New Note in part only, the notice of redemption relating
to such New Note will state the portion of the principal amount to be redeemed.
Upon cancellation of the original note, a New Note in principal amount equal to
the unredeemed portion of the original note will be issued in the name of the
holder. On and after the redemption date, interest will cease to accrue on New
Notes or the
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portions called for redemption so long as we have deposited with the Paying
Agent funds sufficient to pay the principal of, plus accrued and unpaid interest
on, the New Notes to be redeemed.
RANKING
The New Notes:
- are Senior Indebtedness of Land O'Lakes;
- rank equally in right of payment with all existing and future Senior
Indebtedness of Land O'Lakes;
- have the benefit of the Equal Liens on the Collateral described below
under "-- Security;" and
- are senior in right of payment to all existing and future Subordinated
Obligations of Land O'Lakes;
The Subsidiary Guarantees:
- are Senior Indebtedness of each Subsidiary Guarantor;
- rank equally in right of payment with all existing and future Senior
Indebtedness of each Subsidiary Guarantor;
- have the benefit of the Equal Liens on the Collateral described below
under "-- Security;" and
- are senior in right of payment to all existing and future Subordinated
Obligations of each Subsidiary Guarantor;
Pursuant to the Security Documents and the Intercreditor Agreement, the
security interests in the Collateral securing the New Notes and the Subsidiary
Guarantees rank junior in priority (subject to Permitted Collateral Liens) to
the security interests in the Collateral granted to secure Priority Lien
Obligations. The Collateral will also be subject to Liens in favor of holders of
certain other Indebtedness and non-debt obligations as described below under
"-- Security."
We currently conduct a substantial portion of our operations through our
Subsidiaries. The creditors of our Subsidiaries that are not Subsidiary
Guarantors, including trade creditors and holders of preferred stock of such
Subsidiaries, if any, generally will have priority with respect to the assets
and earnings of such Subsidiaries over the claims of our creditors, including
holders of the New Notes. The New Notes, therefore, will be effectively
subordinated to the claims of creditors of our Subsidiaries that are not
Subsidiary Guarantors.
After eliminating intercompany activity, as of June 30, 2004, our
Subsidiaries, other than Subsidiary Guarantors, had total liabilities, including
trade payables, of approximately $362.1 million and no preferred stock
outstanding (excluding the $190.7 million of Capital Securities).
After eliminating intercompany activity, as of June 30, 2004:
- Land O'Lakes had $490.6 million of Senior Indebtedness, excluding the Old
Notes, unused commitments under the Credit Facilities and undrawn letters
of credit, $123.3 million of which was Secured Indebtedness;
- the Subsidiary Guarantors had $0.8 million of Senior Indebtedness,
excluding their guarantees of Bank Indebtedness under the Credit
Agreements and the Old Notes and residuals under the Receivables
Securitization, none of which was Secured Indebtedness; and
- Land O'Lakes and the Subsidiary Guarantors had indebtedness subordinate
to the New Notes aggregating $190.7 million.
Although the indenture will limit the incurrence of Indebtedness by Land
O'Lakes and the Restricted Subsidiaries and the issuance of preferred stock by
the Restricted Subsidiaries, such limitation is subject to a number of
significant qualifications. Land O'Lakes and its Subsidiaries may be able to
incur substantial amounts of Indebtedness in certain circumstances. Such
Indebtedness may be Senior Indebtedness and,
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subject to the limitations described below, may be Prior Lien Obligations or
Equal Lien Obligations. See "-- Material covenants -- Limitation on
indebtedness" below.
SUBSIDIARY GUARANTEES
The Subsidiary Guarantors are:
- each domestic wholly-owned Subsidiary of Land O'Lakes, other than LOL
Finance Co. and its Subsidiaries, and
- each of the domestic wholly-owned Subsidiaries of Land O'Lakes Farmland
Feed LLC, other than LOL Farmland Feed SPV, LLC.
The Subsidiary Guarantors jointly and severally, irrevocably and
unconditionally, Guarantee all obligations of Land O'Lakes under the indenture
and the New Notes. Each Subsidiary Guarantee will be the senior obligation of
the Subsidiary Guarantor. Each Subsidiary Guarantee will be secured by the
Collateral owned by such Subsidiary with an Equal Lien. The Subsidiary
Guarantors are also required to pay any and all costs and expenses, including
reasonable counsel fees and expenses, incurred by the Trustee or the holders in
enforcing any rights under the Subsidiary Guarantees. Each Subsidiary Guarantee
will be limited, as necessary, to prevent the Guarantee from constituting a
fraudulent conveyance or fraudulent transfer under applicable law.
Land O'Lakes will cause:
- at any time that any Bank Indebtedness is outstanding, each Subsidiary
that incurs or enters into a Guarantee of any Bank Indebtedness; and
- at any time that no Bank Indebtedness is outstanding, each domestic and,
to the extent no material adverse tax consequences would result
therefrom, foreign Restricted Subsidiary that incurs any Indebtedness,
to execute and deliver to the Trustee a supplemental indenture pursuant to which
such Subsidiary will Guarantee payment of the New Notes. See "-- Material
covenants -- Future subsidiary guarantors" below.
Each Subsidiary Guarantee is a continuing Guarantee and:
- remains in full force and effect until payment in full of all obligations
under the indenture and the New Notes;
- is binding upon each Subsidiary Guarantor and its successors; and
- inures to the benefit of, and is enforceable by, the Trustee, the holders
and their successors, transferees and assigns.
The Subsidiary Guarantee of a Subsidiary Guarantor is automatically
released:
- upon the sale, including through merger or consolidation, of the Capital
Stock or substantially all of the assets of the Subsidiary if:
(1) the sale is made in compliance with the covenants described under
"-- Material covenants -- Limitation on sales of assets and capital stock"
and, to the extent applicable, "-- Merger and consolidation"; and
(2) after the sale, such Subsidiary is no longer a Subsidiary of Land
O'Lakes.
- upon the Subsidiary being designated an Unrestricted Subsidiary in
compliance with the covenant described under "-- Material
covenants -- Limitation on restricted payments"; or
- upon the Subsidiary ceasing to be a Subsidiary of Land O'Lakes as a
result of any foreclosure on any pledge or security interest securing
Bank Indebtedness or other exercise of remedies in connection with Bank
Indebtedness if the Subsidiary is released from its Guarantee of, and all
pledges and security interests granted in connection with, the Credit
Agreement.
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At the option of Land O'Lakes, unless a Subsidiary remains a guarantor of
our 8 3/4% Senior Notes or any Subordinated Obligations, at any time that Bank
Indebtedness is outstanding, if a Subsidiary is released from its Guarantee of,
and all pledges and security interests granted in connection with, the Credit
Agreement, then the Subsidiary will be released and relieved of any obligations
under its Subsidiary Guarantee.
SECURITY
COLLATERAL DESCRIPTION
The New Notes and the Subsidiary Guarantees are secured by Liens on the
Collateral that rank immediately junior in priority (subject to Permitted
Collateral Liens) to the Liens on the Collateral securing Priority Lien
Obligations and that rank equal in priority (subject to Permitted Collateral
Liens) to the Liens on the Collateral securing Other Equal Lien Obligations.
The Collateral is comprised of substantially all of the material collateral
securing the Bank Indebtedness, including:
(1) all of the Capital Stock of Land O'Lakes Farmland Feed LLC now or
in the future owned by Land O'Lakes, and all of the Capital Stock of each
existing and future wholly-owned Restricted Subsidiary of Land O'Lakes or
Land O'Lakes Farmland Feed LLC (other than LOL Farmland Feed SPV, LLC)
owned directly by Land O'Lakes or any of the Subsidiary Guarantors, subject
in each case to the limitations provided below, and except that the
Collateral shall not include more than 65% of the Voting Stock of any
existing or future Foreign Subsidiary; and
(2) substantially all of the other assets that are held by Land
O'Lakes or any of the Subsidiary Guarantors to the extent that a junior
security interest is able to be granted or perfected therein (but in each
case only to the extent that Priority Lien Obligations are secured by a
Priority Lien thereon).
The Collateral will be subject to Liens in favor of holders of certain of
our other Indebtedness and non-debt obligations as follows:
(1) in addition to the Bank Indebtedness currently secured by the
Collateral, the indenture permits us to incur additional Priority Lien
Obligations, however:
(a) subject to the additional permitted Priority Liens and Equal
Liens noted below, the total principal amount of Priority Lien
Obligations that may be outstanding at any one time does not exceed
$695.0 million; and
(b) we may allocate any portion of this amount to be secured by
Equal Liens rather than Priority Liens. If any Collateral secures
Indebtedness on a Priority Lien basis, the Indebtedness will be
considered a Priority Lien Obligation;
(2) in addition to the New Notes and any other Indebtedness secured by
Equal Liens pursuant (1) and the additional permitted Priority Liens and
Equal Liens noted below, the indenture will permit us to secure Other Equal
Lien Obligations in a principal amount not to exceed $25.0 million.
Pursuant to the Security Documents and the Intercreditor Agreement, the
security interests in the Collateral securing the New Notes and the
Subsidiary Guarantees will rank ratably in priority (subject to Permitted
Collateral Liens) to any and all security interests at any time granted in
the Collateral to secure the Other Equal Lien Obligations.
(3) in the future, certain Hedging Obligations may be secured by
Priority Liens or Equal Liens on the Collateral.
(4) certain administrative expenses of the Credit Facilities
Collateral Agent and the Trustee may be secured by Priority Liens or Equal
Liens on the Collateral.
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(5) certain other Indebtedness and non-debt obligations are and may in
the future be secured by Permitted Collateral Liens, some of which have or
may in the future have priority, as a matter of law, over the security
interests in the Collateral securing the New Notes and the Subsidiary
Guarantees.
As a result, the Equal Liens securing the New Notes, the Subsidiary
Guarantees and the Other Equal Lien Obligations will be subject and subordinate
to the Priority Liens securing Bank Indebtedness and any other Priority Lien
Obligations, as well as certain Permitted Collateral Liens securing other
Indebtedness and non-debt obligations.
Any security interest related to the New Notes in any Capital Stock or
other securities of any Subsidiary is limited at any time to the portion of
Capital Stock or other security the value (defined as the principal amount, par
value, book value as carried by Land O'Lakes or market value, whichever is
greatest) of which, in the aggregate with all other Capital Stock or other
securities of the Subsidiary subject to a security interest under the indenture,
does not exceed 19.99% of the principal amount of the then outstanding New
Notes.
In addition, in the event that Rule 3-16 of Regulation S-X promulgated by
the SEC is amended, modified or interpreted by the SEC to require (or is
replaced with another rule or regulation, or any other law, rule or regulation
is adopted, which would require) the filing with the SEC (or any other
governmental agency) of separate financial statements of any Subsidiary of Land
O'Lakes due to the fact that such Subsidiary's Capital Stock or other securities
secure the New Notes or the Subsidiary Guarantees, then the Capital Stock or
other securities of such Subsidiary (the "Excluded Securities") shall
automatically be deemed to not be part of the Collateral but only for so long as
and to the extent necessary to not be subject to such requirement.
In this event, the Security Documents may be amended or modified, without
the consent of any holder of New Notes, to the extent necessary to release the
security interests in the Excluded Securities that are deemed to no longer
constitute part of the Collateral. Any portion of a Subsidiary's capital stock
or other securities that does not secure the New Notes or the Subsidiary
Guarantees pursuant to this paragraph (including any Excluded Securities) may
continue to secure any Priority Lien Obligations and Other Equal Lien
Obligations.
Additionally, if any Priority Lien Obligation or Other Equal Lien
Obligation is secured by a security interest in any securities that are Excluded
Securities, the obligation is registered under the Securities Act, and, in
connection with the registration, Land O'Lakes is required to file with the SEC
(or any other governmental agency) separate financial statements of the
Subsidiary of Land O'Lakes that is the issuer of the securities, then the
securities will not be considered Excluded Securities and will be pledged to
secure the New Notes and the Subsidiary Guarantees. Due to the limitation
described above, pledged securities of Land O'Lakes Farmland Feed LLC will be
limited to $35.0 million.
If Land O'Lakes or any Subsidiary Guarantor creates any additional security
interest upon any property to secure any Priority Lien Obligation or any Other
Equal Lien Obligations, it must concurrently grant an Equal Lien (subject to
Permitted Collateral Liens) upon that property as security for the New Notes and
the Subsidiary Guarantees.
Land O'Lakes, the Subsidiary Guarantors and the Trustee entered into the
Security Documents on December 23, 2003 which defined the terms of the security
interests that secure the New Notes and the Subsidiary Guarantees. These
security interests secure the payment and performance when due of all of the
obligations of Land O'Lakes and the Subsidiary Guarantors under the New Notes,
the indenture, the Subsidiary Guarantees and the Security Documents as provided
in the Security Documents.
Land O'Lakes may issue Additional Notes of any series under the indenture
as provided under "-- Indenture may be used for future issuances," which, if
issued, would be secured by the Collateral to the same extent as the New Notes.
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INTERCREDITOR AGREEMENT
On December 23, 2003, the Trustee and the Credit Facilities Collateral
Agent entered into the Intercreditor Agreement. If any other Indebtedness is
designated as Priority Lien Obligations or Other Equal Lien Obligations, the
representatives of the holders of the other Indebtedness will also become party
to the Intercreditor Agreement and, in the case of Other Equal Lien Obligations,
will designate the Trustee as collateral agent on their behalf. Pursuant to the
terms of the Intercreditor Agreement, prior to the Discharge of Priority Lien
Obligations, the Credit Facilities Collateral Agent will determine the time and
method by which the security interests in the Collateral will be enforced. The
Trustee will not be permitted to enforce the security interests and certain
other rights related to the New Notes even if an Event of Default has occurred
and the Notes have been accelerated except:
(1) in any insolvency or liquidation proceeding, as necessary to file a
claim or statement of interest with respect to the New Notes or any Subsidiary
Guarantee or (2) as necessary to take any action not adverse to the Priority
Liens in order to preserve or protect its right in the Equal Liens on the
Collateral for the benefit of the Holders and the holders of any Other Equal
Lien Obligations for which the Trustee may be acting.
After the Discharge of Priority Lien Obligations, the Trustee, in
accordance with the provisions of the indenture and the Security Documents, will
determine the time and method by which the security interests in the Collateral
will be enforced and, if applicable, will distribute proceeds (after payment of
the costs of enforcement and collateral administration) of the Collateral
received by it under the Security Documents for the proportionate benefit of the
Holders of the New Notes and the Other Equal Lien Obligations.
The rights of the holders of the New Notes with respect to the Collateral
securing the New Notes and the Subsidiary Guarantees will be limited pursuant to
the terms of the Intercreditor Agreement. Under the terms of the Intercreditor
Agreement, the holders of the New Notes and the holders of Other Equal Lien
Obligations will have security interests in the Collateral that rank immediately
junior to that of the holders of Priority Lien Obligations (subject to Permitted
Collateral Liens). Accordingly, any proceeds received upon a realization of the
Collateral securing the New Notes, Other Equal Lien Obligations and Priority
Lien Obligations will be applied as follows:
- first, to the payment of all costs and expenses incurred by the Credit
Facilities Collateral Agent in connection with the collection of proceeds
or sale of any Collateral or otherwise in connection with the agreements
governing the Priority Lien Obligations, including all court costs and
the fees and expenses of its agents and legal counsel, the repayment of
all advances made by the Credit Facilities Collateral Agent on behalf of
Land O'Lakes or a Subsidiary Guarantor and any other costs or expenses
incurred in connection with the exercise of any right or remedy of the
holders of the Priority Lien Obligations,
- second, to pay amounts due under all Priority Lien Obligations in
accordance with the relative priorities of the Priority Liens securing
the Priority Lien Obligations, as determined among the holders of the
Priority Lien Obligations,
- third, to the payment of all costs and expenses incurred by the Trustee
in connection with the collection of proceeds or sale of any Collateral
or otherwise in connection with the indenture, the Security Documents and
the Intercreditor Agreement, including all court costs and the fees and
expenses of its agents and legal counsel, the repayment of all advances
made by the Trustee on behalf of Land O'Lakes or a Subsidiary Guarantor
and any other costs or expenses incurred in connection with the exercise
of any right or remedy of the holders of the New Notes and the Other
Equal Lien Obligations,
- fourth, to pay the New Notes, any accrued and unpaid interest thereon and
the Other Equal Lien Obligations on a pro rata basis based on the
respective amounts of the New Notes and the Other Equal Lien Obligations
then outstanding, and
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- fifth, to the extent of the balance of such proceeds after application in
accordance the clauses above, to Land O'Lakes or such Subsidiary
Guarantor, as applicable, their successors or assigns, or as a court of
competent jurisdiction may otherwise direct.
No appraisals of any Collateral have been prepared by us or on our behalf
in connection with this offering. The value of the Collateral in the event of
liquidation will depend on market and economic conditions, the availability of
buyers and other factors. The proceeds from the sale or sales of all of the
Collateral may not be sufficient to satisfy the amounts due on the New Notes in
an Event of a Default. If such proceeds were not sufficient to repay amounts due
on the New Notes, then holders (to the extent not repaid from the proceeds of
the sale of the Collateral) would only have an unsecured claim against the
remaining assets of Land O'Lakes and the Subsidiary Guarantors.
In the event a bankruptcy proceeding shall be commenced by or against Land
O'Lakes and Land O'Lakes enters into certain debtor-in-possession financings in
such proceeding, the Liens on the Collateral securing the New Notes and the
Subsidiary Guarantees may, without any further action or consent by the Trustee
or the holders of the New Notes, be made junior and subordinated to Liens
granted to secure such debtor-in-possession financings, subject to the granting
and approval by the applicable bankruptcy court of adequate protection for the
Holders.
FURTHER ASSURANCES
Upon request of the Trustee at any time and from time to time, Land O'Lakes
will, and will cause each of the Subsidiary Guarantors to, promptly execute,
acknowledge and deliver Security Documents, financing statements, instruments,
certificates, notices and other documents and take other actions which the
Trustee may reasonably request to cause the security interests purported to be
created by the Security Documents or required to be created under the terms of
the indenture to constitute valid security interests, perfected in accordance
with the indenture, and to protect, assure or enforce the Liens and benefits
intended to be conferred as contemplated by the indenture, in each case for the
benefit of the holders of the New Notes.
Subject to the limitations described under the heading "-- Security" above,
in the event that Land O'Lakes or any Subsidiary Guarantor directly own any
Capital Stock of any Wholly Owned Subsidiary (other than (1) Capital Stock of
any such Subsidiary with Consolidated assets not greater than $1.0 million as of
the end of the most recent fiscal quarter for which consolidated financial
statements of Land O'Lakes have been filed with the SEC and (2) Capital Stock as
to which the actions required by this paragraph have already been taken), Land
O'Lakes will promptly notify the Trustee. The Trustee will, within 30 days (or a
longer period as may be reasonable under the circumstances) after notification,
cause the Capital Stock to be pledged under the Security Documents and cause to
be delivered to the Trustee (or the Credit Facilities Collateral Agent, acting
on behalf of the Trustee pursuant to the Intercreditor Agreement) any
certificates representing such Capital Stock, together with undated stock powers
or other instruments of transfer endorsed in blank. In addition, neither Land
O'Lakes nor any Subsidiary Guarantor shall be required to pledge more than 65%
of outstanding Voting Stock of any Foreign Subsidiary or to pledge any Capital
Stock of a Securitization Vehicle.
Subject to the limitations described under the heading "-- Security" above,
in the event that Land O'Lakes or any Subsidiary Guarantor directly own any
Capital Stock of any Material Foreign Subsidiary (other than Capital Stock as to
which the actions required by this paragraph have already been taken), Land
O'Lakes will promptly notify the Trustee and will take all such actions as the
Trustee shall reasonably request and as shall be available under applicable law
to cause the Capital Stock of the Material Foreign Subsidiary to be pledged
under a Foreign Pledge Agreement and cause to be delivered to the Trustee (or
the Credit Facilities Collateral Agent, acting on behalf of the Trustee pursuant
to the Intercreditor Agreement) any certificates representing the pledged
Capital Stock, together with undated stock powers or other instruments of
transfer endorsed in blank. In addition, neither Land O'Lakes nor any Subsidiary
Guarantor shall be required to pledge more than 65% of outstanding Voting Stock
of any Foreign Subsidiary or to pledge any Capital Stock of a Securitization
Vehicle.
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If Land O'Lakes or any Subsidiary Guarantor own any Material Intellectual
Property (other than Material Intellectual Property as to which the actions
required by this paragraph have already been taken), Land O'Lakes will promptly
notify the Trustee and will file all Uniform Commercial Code financing
statements and recordations with the United States Patent and Trademark Office
as shall be required by law or reasonably requested by the Trustee to be filed
or recorded to perfect the Liens intended to be created on the Collateral (to
the extent such Liens may be perfected by filings under the Uniform Commercial
Code as in effect in any applicable jurisdiction or by filings with the United
States Patent and Trademark Office). If the consents of Persons other than Land
O'Lakes and the Wholly Owned Subsidiaries would be required under applicable law
or the terms of any agreement in order for a security interest to be created in
any Material Intellectual Property under the Security Documents, a security
interest shall not be required to be created in the Material Intellectual
Property prior to the obtaining of such consents. Land O'Lakes will endeavor in
good faith to obtain any consents required to permit any security interest in
Material Intellectual Property to be created under the Security Documents.
Land O'Lakes will otherwise comply with the provisions of TIA sec. 314(b).
RELEASE OF COLLATERAL
We will be entitled to releases of assets included in the Collateral from
the Liens securing the Notes and the Subsidiary Guarantees under any one or more
of the following circumstances:
(1) if all other Liens (other than Liens described in clause (4) or
(6) of the definition of Permitted Collateral Liens) on that asset securing
Priority Lien Obligations and any Other Equal Lien Obligations then secured
by that asset (including all commitments thereunder) are released;
provided, that after giving effect to the release, at least $100.0 million
of obligations secured by Priority Liens on the remaining Collateral remain
outstanding or committed and no Default or Event of Default shall have
occurred and be continuing under the indenture as of the time of the
proposed release;
(2) to enable us to consummate sales, transfers, leases or other
dispositions of assets (to a Person who is not Land O'Lakes or a Restricted
Subsidiary, or, in the case of the sale of accounts receivable or inventory
in a Securitization, to any Securitization Vehicle whether or not it is a
Restricted Subsidiary), including any such transactions by the Credit
Facilities Collateral Agent in connection with an exercise of remedies
against the Collateral on behalf of holders of any Priority Lien
Obligations secured by such Collateral;
(3) if we provide substitute collateral with at least an equivalent
fair value, as determined in good faith by the board of directors;
(4) if all of the Capital Stock of any of our Subsidiaries that is
pledged to the Trustee is released (except in the case of a release because
such Capital Stock has become part of the Excluded Securities) or if any
Subsidiary that is a Subsidiary Guarantor is released from its Subsidiary
Guarantee, that Subsidiary's assets will also be released; or
(5) as described under the heading "-- Amendments and waivers" below.
The Liens on all Collateral securing the New Notes and the Subsidiary
Guarantees also will be released automatically:
(1) upon payment in full of the principal of, and accrued and unpaid
interest on, the New Notes and all other obligations under the indenture,
the Subsidiary Guarantees the Security Documents and the Intercreditor
Agreement that are due and payable at or prior to the time such principal
and accrued and unpaid interest are paid;
(2) upon a satisfaction and discharge of the indenture;
(3) at our election, after the Fall-Away Date (as defined below under
"-- Certain covenants -- Fall-Away of covenants"); or
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(4) upon a legal defeasance or covenant defeasance as described below
under the heading "-- Defeasance."
The Trustee will, upon Land O'Lakes request accompanied by an Officers'
Certificate or an Opinion of Counsel to the effect that one of the conditions
stated above for terminating the Liens securing the New Notes and Subsidiary
Guarantees has occurred, promptly execute and deliver to Land O'Lakes, at Land
O'Lakes expense, all documents reasonably requested by Land O'Lakes to evidence
such release.
Land O'Lakes will cause TIA sec.314(b), relating to reports, and TIA
sec.314(d), relating to the release of property or securities or relating to the
substitution therefor of any property or securities to be subjected to the Lien
of the Security Documents, to be complied with. Any certificate or opinion
required by TIA sec.314(d) may be made by an Officer of Land O'Lakes except in
cases where TIA sec.314(d) requires that such certificate or opinion be made by
an independent Person, which Person will be an independent engineer, appraiser
or other expert selected or reasonably satisfactory to the Trustee. However,
Land O'Lakes will not be required to comply with all or any portion of TIA
sec.314(d) if it determines, in good faith based on advice of counsel, that the
terms of TIA sec.314(d) or any interpretation or guidance as to the meaning
thereof of the SEC and its staff, including "no action" letters or exemptive
orders, whether or not issued to Land O'Lakes by the SEC, or any portion of TIA
sec.314(d) is inapplicable to one or a series of released Collateral.
CHANGE OF CONTROL
If a Change of Control, as defined below in "-- Material definitions,"
occurs, each holder will have the right to require Land O'Lakes to purchase all
or any part of such holder's New Notes at a purchase price in cash equal to 101%
of the principal amount of New Notes to be purchased plus accrued and unpaid
interest to the date of purchase. Despite the occurrence of a Change of Control,
however, Land O'Lakes will not be obligated to purchase the New Notes pursuant
to this section if it has exercised its right to redeem all the New Notes under
the terms of the section titled "-- Optional Redemption."
Within 30 days following any Change of Control, Land O'Lakes will mail a
notice to each holder with a copy to the Trustee, which we refer to as the
"Change of Control Offer," stating:
- that a Change of Control has occurred and that the holder has the right
to require Land O'Lakes to purchase all or a portion of its New Notes at
a purchase price in cash equal to 101% of the principal amount of New
Notes to be purchased, plus accrued and unpaid interest to the date of
purchase;
- the circumstances, relevant facts and financial information regarding the
Change of Control;
- the purchase date, which may be no earlier than 30 days nor later than 60
days from the date such notice is mailed; and
- instructions, consistent with this covenant, that Land O'Lakes has
determined a holder must follow in order to have its New Notes purchased.
Land O'Lakes will not be required to make a Change of Control Offer upon a
Change of Control if a third party:
- makes the Change of Control Offer in compliance with the requirements set
forth in the indenture; and
- purchases all New Notes validly tendered and not withdrawn under such
Change of Control Offer.
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If at the time of a Change of Control, the terms of the Bank Indebtedness
restrict or prohibit the repurchase of New Notes pursuant to this covenant, then
prior to the mailing of the Change of Control Offer, but in any event within 30
days following any Change of Control, Land O'Lakes is required to:
- repay in full all Bank Indebtedness or, if doing so will allow the
purchase of New Notes, offer to repay in full all Bank Indebtedness and
repay the Bank Indebtedness of each lender who has accepted such offer;
or
- obtain the requisite consent under the agreements governing the Bank
Indebtedness to permit the repurchase of the New Notes.
Land O'Lakes will comply, to the extent applicable, with the requirements
of Sections 13e-4 and 14(e) of the Exchange Act and any other securities laws or
regulations in connection with any offer for or the purchase of New Notes
pursuant to this covenant. To the extent that the provisions of any securities
laws or regulations conflict with provisions of this covenant, Land O'Lakes will
comply with the applicable securities laws and regulations and will not be
deemed to have breached its obligations under this covenant by virtue of such
compliance.
The Change of Control purchase feature is a result of negotiations between
Land O'Lakes and the Initial Purchasers. Management has no present intention to
engage in a transaction involving a Change of Control. In the future, however,
Land O'Lakes may decide to engage in a transaction involving a Change of
Control.
Subject to the limitations discussed below, Land O'Lakes could, in the
future, enter into certain transactions, including acquisitions, refinancings or
recapitalizations, that would not constitute a Change of Control under the
indenture, but that could increase the amount of indebtedness outstanding at
such time or otherwise affect Land O'Lakes' capital structure or credit ratings.
Restrictions on the ability of Land O'Lakes to incur additional Indebtedness are
contained in the covenants described under "-- Material Covenants -- Limitation
on Indebtedness," "-- Limitation on Liens" and "-- Limitation on Sale/Leaseback
Transactions." Such restrictions can only be waived with the consent of the
holders of a majority in principal amount of the New Notes then outstanding.
Except for these limitations, the indenture will not contain any covenants or
provisions that may afford holders protection in the event of a highly leveraged
transaction.
Certain events which would constitute a Change of Control would constitute
a default under the Credit Agreement. Future Senior Indebtedness of Land O'Lakes
may prohibit certain events which would constitute a Change of Control or
require such Senior Indebtedness to be repurchased or repaid upon a Change of
Control. In addition, if the holders exercise their right to require Land
O'Lakes to purchase the New Notes, the financial effect of such repurchase on
Land O'Lakes could cause a default under such Senior Indebtedness, even if the
Change of Control itself does not.
In the event of a Change of Control, Land O'Lakes' ability to pay cash to
the holders upon a purchase of the New Notes may be limited by its financial
resources at such time. Land O'Lakes may not have sufficient funds available
when necessary to make any required purchases.
The provisions under the indenture relative to Land O'Lakes' obligation to
make an offer to purchase the New Notes as a result of a Change of Control may
be waived or modified with the written consent of the holders of a majority in
principal amount of the New Notes.
MATERIAL COVENANTS
The indenture contains covenants including, among others, the following:
Limitation on Indebtedness. (a) Land O'Lakes will not, and will not permit
any Restricted Subsidiary to, incur, directly or indirectly, any Indebtedness;
provided, however, that Land O'Lakes or any Subsidiary Guarantor may incur
Indebtedness if the Consolidated Coverage Ratio would be greater than 2.5:1
after giving effect to the Indebtedness.
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(b) Land O'Lakes and its Restricted Subsidiaries may incur the following
Indebtedness without regard to the preceding paragraph (a):
(1) Bank Indebtedness in an aggregate principal amount not to exceed
$695.0 million less (a) the aggregate amount of all prepayments of
principal applied to permanently reduce any such Indebtedness (other than
prepayments out of the proceeds of the Old Notes issued on December 23,
2003) and (b) Indebtedness incurred pursuant to clause (b)(8)(A) below;
(2) Indebtedness of Land O'Lakes owed to and held by any Restricted
Subsidiary or Indebtedness of a Restricted Subsidiary owed to and held by
Land O'Lakes or any other Restricted Subsidiary; provided, however, that:
- any subsequent issuance or transfer of any Capital Stock or any other
event that results in any Restricted Subsidiary which is the holder of
such Indebtedness ceasing to be a Restricted Subsidiary or any
subsequent transfer of any such Indebtedness (except to Land O'Lakes
or a Restricted Subsidiary) shall be deemed, in each case, to
constitute the incurrence of the Indebtedness by the issuer of the
Indebtedness; and
- if Land O'Lakes or a Restricted Subsidiary that is a Subsidiary
Guarantor is the obligor on the Indebtedness and the Indebtedness is
owed to and held by a Restricted Subsidiary that is not a Subsidiary
Guarantor or by Land O'Lakes, the Indebtedness is expressly
subordinated to the prior payment in full in cash of all obligations
of Land O'Lakes with respect to the New Notes or the Restricted
Subsidiary with respect to its Subsidiary Guarantee, as applicable;
(3) the Capital Securities in an aggregate amount not in excess of
$200 million outstanding at any time;
(4) Indebtedness:
- represented by the 8 3/4% Senior Notes and the 8 3/4% Senior Notes
Guarantees and the New Notes (not including any Additional Notes) and
the Subsidiary Guarantees;
- outstanding on November 14, 2001, which is the date of original
issuance of the 8 3/4% Senior Notes (other than the Indebtedness
described in clauses (1), (2) and (3) above);
- incurred after November 14, 2001 and prior to December 23, 2003 under
the provision of the 8 3/4% Senior Notes Indenture comparable to
paragraph (a) above;
- consisting of Refinancing Indebtedness incurred in respect of any
Indebtedness described in this clause (4) or in paragraph (a) above;
- consisting of Refinancing Indebtedness incurred after November 14,
2001 and prior to December 23, 2003 in respect of any Indebtedness
described in the provision of the 8 3/4% Senior Notes Indenture
comparable to this clause (4) or paragraph (a) above; and
- consisting of Guarantees by Land O'Lakes of Indebtedness of any
Restricted Subsidiary and by any Restricted Subsidiary of Indebtedness
of Land O'Lakes or any other Restricted Subsidiary;
(5) with certain exceptions, Indebtedness of a Restricted Subsidiary
incurred and outstanding on or prior to the date on which such Restricted
Subsidiary was acquired by Land O'Lakes and related Refinancing
Indebtedness;
(6) Indebtedness relating to surety and similar arrangements and
hedging transactions entered into in the ordinary course of business;
(7) purchase money indebtedness, capitalized lease obligations and
Attributable Debt in an aggregate principal amount, when combined with all
such Indebtedness incurred after November 14, 2001 and prior to December
23, 2003 under the provision of the 8 3/4% Senior Notes Indenture
comparable to this clause (7), not in excess of $50 million outstanding at
any time;
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(8) (A) Indebtedness of Restricted Subsidiaries that are
Securitization Vehicles in respect of Third Party Securities in an
aggregate amount, when combined with all such Indebtedness incurred after
November 14, 2001 and prior to December 23, 2003 under the provision of the
8 3/4% Senior Notes Indenture comparable to this clause (A), not to exceed
$200 million at any time outstanding; and (B) Indebtedness consisting
solely of liens on Sellers' Retained Interests in connection with
Securitizations permitted by the indenture securing obligations in respect
of Third Party Securities permitted to be incurred under clause (A) above
or incurred after November 14, 2001 and prior to December 23, 2003 under
the provision of the 8 3/4% Senior Notes Indenture comparable to clause (A)
above;
(9) Indebtedness consisting of loans from Agriliance LLC and MoArk,
LLC in the ordinary course of business for cash management purposes in an
aggregate principal amount, when combined with all such Indebtedness
incurred after November 14, 2001 and prior to December 23, 2003 under the
provision of the 8 3/4% Senior Notes Indenture comparable to this clause
(9), not to exceed $20 million outstanding at any time, which loans shall
not be outstanding for more than 30 days; or
(10) other Indebtedness in an aggregate principal amount on the date
of incurrence that, when added to all other Indebtedness then outstanding
incurred pursuant to this clause and all other Indebtedness then
outstanding incurred after November 14, 2001 and prior to December 23, 2003
under the provision of the 8 3/4% Senior Notes Indenture comparable to this
clause (10), will not exceed $75 million.
Limitation on Restricted Payments. Subject to exceptions set forth in the
indenture, including the payment of Patronage, Land O'Lakes will not, and will
not permit any Restricted Subsidiary to, directly or indirectly, do any of the
following, which we refer to as "Restricted Payments":
(1) declare or pay any dividend, make any distribution on or in
respect of its Capital Stock or make any similar payment (including any
payment of Patronage or any payment in connection with any merger or
consolidation involving Land O'Lakes or any of its Subsidiaries) to the
direct or indirect holders of its Capital Stock, except as set forth in the
indenture:
(2) purchase, redeem, retire, make any revolvement payment or
otherwise acquire for value any Capital Stock of Land O'Lakes or any
Restricted Subsidiary held by Persons other than Land O'Lakes or a
Restricted Subsidiary, provided that amounts owed from members that can be
offset against Patronage payable to such members are not prohibited by this
paragraph (a)(2);
(3) purchase, redeem, retire, defease or otherwise acquire for value,
prior to scheduled maturity, scheduled repayment or scheduled sinking fund
payment any Subordinated Obligations or Indebtedness owed to the trust
entity that has issued the Capital Securities, unless acquired in
anticipation of satisfying a sinking fund obligation, principal installment
or final maturity of any Subordinated Obligations or Indebtedness due
within one year of the date of acquisition;
(4) make any Investment, other than a Permitted Investment, in any
Person, if at the time Land O'Lakes or such Restricted Subsidiary makes
such Restricted Payment:
(A) a Default will have occurred and be continuing or would occur
as a result of the Restricted Payment;
(B) Land O'Lakes could not incur at least $1.00 of additional
Indebtedness under paragraph(a) of the covenant described under
"-- Limitation on indebtedness"; or
(C) the aggregate amount of such Restricted Payment and all other
Restricted Payments declared or made subsequent to the date of the
indenture would exceed the sum, without duplication, of:
(i) 50% of the Consolidated Net Income accrued during the period
from January 1, 2001 to the end of the most recent fiscal quarter for
which consolidated financial statements
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of Land O'Lakes are publicly available prior to the date of such
Restricted Payment (or, if such Consolidated Net Income is a deficit,
minus 100% of such deficit);
(ii) except as set forth in the indenture, the aggregate Net
Cash Proceeds received by Land O'Lakes from the issue or sale of its
Capital Stock subsequent to November 14, 2001;
(iii) the amount by which Indebtedness of Land O'Lakes or its
Restricted Subsidiaries is reduced on Land O'Lakes' balance sheet
upon the conversion or exchange subsequent to November 14, 2001,
other than by a Subsidiary of Land O'Lakes, of any Indebtedness of
Land O'Lakes or its Restricted Subsidiaries issued which is
convertible or exchangeable for Capital Stock of Land O'Lakes, less
the amount of any cash or the fair market value of other property
distributed by Land O'Lakes or any Restricted Subsidiary upon such
conversion or exchange;
(iv) the amount equal to the net reduction in Investments in
Unrestricted Subsidiaries subsequent to November 14, 2001 resulting
from (x) distributions, repayments of the principal of loans or
advances or other transfers of assets to Land O'Lakes or any
Restricted Subsidiary from Unrestricted Subsidiaries or (y) the
redesignation of Unrestricted Subsidiaries as Restricted
Subsidiaries, valued in each case as provided in the definition of
"Investment," not to exceed, in the case of any Unrestricted
Subsidiary, the amount of Investments previously made by Land O'Lakes
or any Restricted Subsidiary in such Unrestricted Subsidiary; and
(v) an amount equal to the cash distributions received by Land
O'Lakes or any of its Restricted Subsidiaries from any other Person
(other than Land O'Lakes or a Restricted Subsidiary) during the
period from October 1, 2001 to the end of the most recent fiscal
quarter for which consolidated financial statements of Land O'Lakes
are publicly available prior to the date of such Restricted Payment.
Limitation on Restrictions on Distributions from Restricted
Subsidiaries. Subject to exceptions set forth in the indenture, including
preexisting liens, restrictions and refinancings, Land O'Lakes will not, and
will not permit any Restricted Subsidiary to, create or otherwise cause or
permit to exist or become effective any consensual encumbrance or restriction on
the ability of any Restricted Subsidiary to:
(1) pay dividends or make any other distributions on its Capital Stock
or pay any Indebtedness or other obligations owed to Land O'Lakes;
(2) make any loans or advances to Land O'Lakes; or
(3) transfer any of its property or assets to Land O'Lakes,
Limitation on Sales of Assets and Subsidiary Stock. (a) Land O'Lakes will
not, and will not permit any Restricted Subsidiary to, make any Asset
Disposition unless:
(1) Land O'Lakes or the Restricted Subsidiary receives consideration,
including assumption of or relief from liabilities, at the time of the
Asset Disposition at least equal to the fair market value of the shares and
assets subject to such Asset Disposition;
(2) Land O'Lakes or the Restricted Subsidiary receives at least 80% of
the consideration for the Asset Disposition in the form of cash; and
(3) Land O'Lakes or the Restricted Subsidiary applies an amount equal
to 100% of the Net Available Cash from the Asset Disposition in the manner
specified in the indenture, including the acquisition of bank indebtedness,
reinvestment in additional assets and repurchases of New Notes.
Land O'Lakes and the Restricted Subsidiaries will not be required to apply
any Net Available Cash in accordance with this covenant except to the extent
that the aggregate Net Available Cash from all Asset Dispositions that is not
applied in accordance with this covenant exceeds $10 million.
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Land O'Lakes will comply, to the extent applicable, with the requirements
of Sections 13e-4 and 14(e) of the Exchange Act and any other securities laws or
regulations in connection with any offer for or the repurchase of New Notes
pursuant to this covenant. To the extent that the provisions of any securities
laws or regulations conflict with provisions of this covenant, Land O'Lakes will
comply with the applicable securities laws and regulations and will not be
deemed to have breached its obligations under this covenant by virtue of such
compliance.
Limitation on Transactions with Affiliates. Subject to exceptions set
forth in the indenture, Land O'Lakes will not, and will not permit any
Restricted Subsidiary to, directly or indirectly, purchase, sell, lease or
exchange any property; render any service; or enter into or conduct any
transaction or series of related transactions with any Land O'Lakes' Affiliate,
which we refer to as an "Affiliate Transaction," unless such transaction is on
terms:
(1) that are no less favorable to Land O'Lakes or the relevant
Restricted Subsidiary than those that could be obtained at the time of such
transaction in arm's-length dealings with a Person who is not an Affiliate;
(2) that, if the Affiliate Transaction involves an aggregate amount in
excess of $10 million;
- are set forth in writing; and
- have been approved by a majority of the members of Land O'Lakes' board
of directors not having a personal stake in the Affiliate Transaction,
other than as a member of Land O'Lakes generally; and
(3) that, if the Affiliate Transaction involves an amount in excess of
$25 million, have been determined by a nationally recognized appraisal or
investment banking firm to be fair, from a financial standpoint, to Land
O'Lakes and its Restricted Subsidiaries.
Limitation on the Sale or Issuance of Capital Stock of Restricted
Subsidiaries. Land O'Lakes will not sell or otherwise dispose of any shares of
Capital Stock of a Restricted Subsidiary, other than in a transaction resulting
in a Permitted Lien, and will not permit any Restricted Subsidiary, directly or
indirectly, to issue or sell or otherwise dispose of any shares of its Capital
Stock except:
(1) to Land O'Lakes or a Restricted Subsidiary;
(2) if, immediately after giving effect to such issuance, sale or
other disposition, neither Land O'Lakes nor any of its Subsidiaries own any
Capital Stock of the Restricted Subsidiary;
(3) if, immediately after giving effect to such issuance or sale;
- the Restricted Subsidiary would no longer constitute a Restricted
Subsidiary; and
- any interest remaining in such Restricted Subsidiary would have been
permitted as an Investment under the covenant described under
"-- Limitation on Restricted Payments" if made on the date of such
issuance, sale or other disposition; or
(4) if, immediately after giving effect to such issuance, sale or
other disposition, the Restricted Subsidiary would continue to constitute a
Restricted Subsidiary.
The proceeds of any sale of Capital Stock permitted above will be treated
as Net Available Cash from an Asset Disposition and must be applied in
accordance with the terms of the covenant described under "-- Limitation on
Sales of Assets and Subsidiary Stock."
Limitation on Liens. Subject to exceptions set forth in the indenture,
Land O'Lakes will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, incur or permit to exist any lien of any nature
whatsoever on any of its property or assets, including Capital Stock of a
Restricted Subsidiary, whether owned at or acquired after December 23, 2003,
other than:
- if the asset does not constitute Collateral, (i) Permitted Liens or (ii)
if not a Permitted Lien, only upon providing for the payments under the
indenture, the New Notes and the Subsidiary
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Guarantees to be secured equally and ratably with, or prior to, the
obligations secured until the time such obligations are no longer secured
by a Lien on the assets; and
- if the asset constitutes Collateral, Permitted Collateral Liens.
SEC Reports. Under applicable law, Land O'Lakes will be required to file
certain periodic information with the SEC following the effectiveness of the
registration statement of which this prospectus forms a part. However, these
reporting obligations will be automatically suspended if, at any time after this
fiscal year, less than 300 persons hold the New Notes of record. Whether or not
required by Section 13 or 15(d) of the Exchange Act, Land O'Lakes will file with
the SEC for public availability its annual report and the information, documents
and other reports that are specified in Sections 13 and 15(d) of the Exchange
Act. Within 15 days of filing such documents, Land O'Lakes will provide copies
of them to the Trustee and holders and, upon request, prospective holders.
At any time that Land O'Lakes is not subject to the reporting requirements
of Section 13 or 15(d) of the Exchange Act and the SEC will not accept filings
from companies not subject to such requirements, Land O'Lakes may satisfy its
obligations under the preceding paragraph by providing the required annual
reports, information, documents and other reports to the Trustee and holders
and, upon request, prospective holders. Land O'Lakes also will comply with the
other provisions of Section 314(a) of the Trust Indenture Act.
Cooperative Status. Land O'Lakes will maintain its status as a cooperative
under both Subchapter T of the Code and Minnesota Law.
Future Subsidiary Guarantors. Land O'Lakes will cause:
- at any time that any Bank Indebtedness is outstanding, each Subsidiary
that incurs or enters into a Guarantee of any Bank Indebtedness; and
- at any time that no Bank Indebtedness is outstanding, each domestic and,
to the extent no material adverse tax consequences would result
therefrom, foreign Restricted Subsidiary that incurs any Indebtedness;
to become a Subsidiary Guarantor, and if applicable, execute and deliver to the
Trustee a supplemental indenture in the form set forth in the indenture pursuant
to which the Subsidiary will Guarantee payment of the New Notes. In that event,
Land O'Lakes will also cause the Subsidiary Guarantor to execute and deliver to
the Trustee Security Documents pursuant to which it assets constituting
Collateral will be pledged to secure its Guarantee of the New Notes. Each
Subsidiary Guarantee will be limited as necessary to prevent the Subsidiary
Guarantee from constituting a fraudulent conveyance or fraudulent transfer under
applicable law.
Limitation on Lines of Business. Land O'Lakes will not, and will not
permit any Restricted Subsidiary to, engage in any business other than a
Permitted Business.
Limitation on Sale/Leaseback Transactions. Land O'Lakes will not, and will
not permit any Restricted Subsidiary to, enter into any Sale/Leaseback
Transaction with respect to any property unless:
(1) Land O'Lakes or the Restricted Subsidiary would be entitled to:
(A) incur Indebtedness in an amount equal to the Attributable Debt
with respect to such Sale/Leaseback Transaction pursuant to the covenant
described under "-- Limitation on Indebtedness"; and
(B) create a lien on such property securing such Attributable Debt
without equally and ratably securing the New Notes pursuant to the
covenant described under "-- Limitation on Liens";
(2) the gross proceeds received by Land O'Lakes or the Restricted
Subsidiary in connection with such Sale/Leaseback Transaction are at least
equal to the fair market value of the property; and
139
(3) the transfer of the property is permitted by, and Land O'Lakes
applies the proceeds of such transaction in compliance with, the covenant
described under "-- Limitation on Sales of Assets and Subsidiary Stock."
After the Fall-Away Date, as defined below, the requirements of clauses
(1)(A) and (3) above will no longer apply.
Fall-Away of Covenants. After the date, which we refer to as the
"Fall-Away Date," on which:
(1) the New Notes have been assigned an investment grade rating by
both rating agencies;
(2) if the investment grade rating is BBB-, in the case of S&P, or
Baa3, in the case of Moody's, it may not be accompanied by either:
(A) in the case of S&P, a negative outlook, creditwatch negative or
the equivalent thereof; or
(B) in the case of Moody's, a negative outlook, a review for
possible downgrade or the equivalent thereof;
(3) no Default or Event of Default under the indenture has occurred
and is continuing; and
(4) Land O'Lakes has delivered an officers' certificate to the Trustee
certifying that the conditions set forth above are satisfied,
Land O'Lakes and the Restricted Subsidiaries will no longer be subject to
the following provisions of the indenture:
- "-- Limitation on Indebtedness";
- "-- Limitation on Restricted Payments";
- "-- Limitation on Restrictions and Distributions from Restricted
Subsidiaries";
- "-- Limitation on Sales of Assets and Subsidiary Stock";
- "-- Limitation on Transactions with Affiliates";
- "-- Limitation on the Sale or Issuance of Capital Stock of Restricted
Subsidiaries";
- "-- Limitation on Lines of Business"; and
- "-- clause (3) of the first paragraph of "Merger and consolidation."
In addition, Land O'Lakes may elect to release any or all of the Collateral
from the Liens securing the New Notes and the Subsidiary Guarantees.
MERGER AND CONSOLIDATION
Land O'Lakes will not (1) consolidate with or merge with or into any
Person, or (2) convey, transfer or lease all or substantially all its assets to,
any Person, unless:
(1) the resulting, surviving or transferee Person, which we refer to
as the "Successor Company" will:
- be a corporation organized and existing under the laws of the United
States of America, any State thereof or the District of Columbia; and
- if not Land O'Lakes, will expressly assume, by a supplemental
indenture, executed and delivered to the Trustee, in form satisfactory
to the Trustee, all the obligations of Land O'Lakes under the New
Notes and the indenture;
(2) immediately after giving effect to the transaction, no Default
will have occurred and be continuing; provided that any Indebtedness which
becomes an obligation of the Successor Company
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or any Restricted Subsidiary as a result of the transaction will be treated
as having been incurred by the Successor Company or such Restricted
Subsidiary at the time of the transaction;
(3) immediately after giving effect to the transaction, the Successor
Company would be able to incur an additional $1.00 of Indebtedness under
paragraph (a) of the covenant described under "-- Material
Covenants -- Limitation on Indebtedness";
(4) immediately after giving effect to the transaction, the Successor
Company will have Consolidated Net Worth in an amount which is not less
than the Consolidated Net Worth of Land O'Lakes immediately prior to such
transaction;
(5) Land O'Lakes will have delivered to the Trustee an officers'
certificate and an opinion of counsel, each stating that such
consolidation, merger or transfer and such supplemental indenture, if any,
comply with the indenture; and
(6) Land O'Lakes will have delivered to the Trustee an opinion of
counsel to the effect that the holders will not recognize income, gain or
loss for Federal income tax purposes as a result of the transaction and
will be subject to Federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such
transaction had not occurred.
The Successor Company will succeed to, and be substituted for, and may
exercise every right and power of, Land O'Lakes under the indenture. In the
event of a conveyance, transfer or lease of all or substantially all of Land
O'Lakes' assets, the obligation to pay the principal of and interest on the New
Notes will remain in full force and effect.
In addition, except in a transaction which results in the Subsidiary
Guarantor being released from its Subsidiary Guarantee as provided in the
indenture, Land O'Lakes will not permit a Subsidiary Guarantor to consolidate
with or merge with or into, or convey, transfer or lease all or substantially
all of its assets to any Person unless:
(1) the resulting, surviving or transferee Person, which we refer to
as the "Successor Guarantor":
- will be a corporation organized and existing under the laws of the
United States of America, any State thereof or the District of
Columbia; and
- if not such Subsidiary Guarantor, will expressly assume, by a
supplemental indenture, executed and delivered to the Trustee, in form
satisfactory to the Trustee, all the obligations of such Subsidiary
Guarantor under its Subsidiary Guarantee;
(2) immediately after giving effect to the transaction, no Default
will have occurred and be continuing; provided that any Indebtedness which
becomes an obligation of the Successor Guarantor or any Restricted
Subsidiary as a result of the transaction will be treated as having been
incurred by the Successor Guarantor or such Restricted Subsidiary at the
time of such transaction; and
(3) Land O'Lakes will have delivered to the Trustee an officers'
certificate and an opinion of counsel, each stating that such
consolidation, merger or transfer and such supplemental indenture, if any,
comply with the indenture.
The preceding provisions of this covenant will not prohibit a Restricted
Subsidiary from consolidating with, merging into or transferring all or part of
its properties and assets to Land O'Lakes or any Subsidiary Guarantor.
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DEFAULTS
Each of the following is an Event of Default:
(1) a default for 30 days in any payment when due of interest on any
New Note;
(2) a default in the payment when due of principal of any New Note at
its stated maturity, upon required redemption or repurchase, upon
declaration or otherwise;
(3) the failure by Land O'Lakes or any Restricted Subsidiary to comply
with its obligations under the covenant described under "-- Merger and
Consolidation" above;
(4) the failure by Land O'Lakes or any Restricted Subsidiary to comply
for 30 days after notice with any of its obligations under the covenants
described under "-- Change of Control" or "-- Material Covenants" above, in
each case, other than a failure to purchase New Notes;
(5) the failure by Land O'Lakes or any Restricted Subsidiary to comply
for 60 days after notice with its other agreements contained in the New
Notes or the indenture;
(6) the failure by Land O'Lakes or any Restricted Subsidiary to pay
any Indebtedness within any applicable grace period after final maturity or
the acceleration of any such Indebtedness by its holders because of a
default, but only if the total amount of such Indebtedness unpaid or
accelerated exceeds $15 million or its foreign currency equivalent, which
we refer to as the "cross acceleration provision";
(7) certain events of bankruptcy, insolvency or reorganization of Land
O'Lakes or a Significant Subsidiary, which we refer to as the "bankruptcy
provisions";
(8) the rendering of any judgment or decree for the payment of money
in excess of $15 million or its foreign currency equivalent against Land
O'Lakes or a Restricted Subsidiary if:
- an enforcement proceeding thereon is commenced by any creditor; or
- such judgment or decree remains outstanding for a period of 60 days
following such judgment and is not discharged, waived or stayed.
We refer to this provision as the "judgment default provision." This
provision does not include judgments which are covered by enforceable
insurance policies issued by reputable and creditworthy insurance companies
for which coverage has been acknowledged in writing; or
(9) any Subsidiary Guarantee by a Subsidiary Guarantor ceases to be in
full force and effect, except as contemplated by its terms, or any
Subsidiary Guarantor or Person acting by or on behalf of such Subsidiary
Guarantor denies or disaffirms such Subsidiary Guarantor's obligations
under the indenture or the Guarantee and such Default continues for 10 days
after receipt of the notice specified in the indenture.
(10) (A) the repudiation or disaffirmation by Land O'Lakes or any
Subsidiary Guarantor of its obligations under any of the Security Documents
or the determination in a judicial proceeding that any of the Security
Documents is unenforceable or invalid against Land O'Lakes or any
Subsidiary Guarantor for any reason with respect to any material portion of
the Collateral, or (B) any Security Document shall cease to be in full
force and effect (other than in accordance with the terms of the applicable
Security Document or the indenture), or cease to be effective in all
material respects to grant the Trustee a perfected Lien on the Collateral
(but only to the extent the applicable Security Documents contemplated
perfection and except as a result of the Trustee's failure to file any
necessary continuation statements or the Trustee's or the Credit Facilities
Collateral Agent's failure to maintain possession of any stock
certificates, notes or other instruments delivered to it) with the priority
purported to be created thereby (other than in accordance with the terms of
the applicable Security Document or the indenture) and, in each case, such
Default continues for 10 days after receipt of the notice specified in the
indenture (the "security default provision").
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The preceding items will constitute Events of Default regardless of the
reason for the Event of Default including whether it is voluntary or involuntary
or is effected by operation of law or pursuant to any judgment, decree or order
of any court or any order, rule or regulation of any administrative or
governmental body.
However, a default under clauses (4), (5), (9) or (10) above will not
constitute an Event of Default until the Trustee notifies Land O'Lakes of the
default or the holders of at least 25% in principal amount of the outstanding
New Notes notify Land O'Lakes and the Trustee of the default and in either case
Land O'Lakes or the Subsidiary Guarantor, as applicable, does not cure the
default within the time specified in clauses (4), (5), (9) or (10) above after
receipt of such notice.
If an Event of Default, other than an Event of Default under the bankruptcy
provisions as they apply to Land O'Lakes, occurs and is continuing, the Trustee
or the holders of at least 25% in principal amount of the outstanding New Notes
may, by notice to Land O'Lakes, declare the principal of and accrued but unpaid
interest on all the New Notes to be due and payable. Upon such a declaration,
the principal and interest will be due and payable immediately. If an Event of
Default under the bankruptcy provisions as they apply to Land O'Lakes occurs,
the principal of and interest on all the New Notes will become immediately due
and payable without any declaration or other act on the part of the Trustee or
any holders. Under certain circumstances, the holders of a majority in principal
amount of the outstanding New Notes may rescind any such acceleration with
respect to the New Notes and its consequences.
Subject to the provisions of the indenture relating to the duties of the
Trustee, if an Event of Default occurs and is continuing, the Trustee will be
under no obligation to exercise any of the rights or powers under the indenture
at the request or direction of any of the holders unless the holders have
offered to the Trustee reasonable indemnity or security against any loss,
liability or expense. Except to enforce the right to receive payment of
principal, premium, if any, or interest when due, no holder may pursue any
remedy with respect to the indenture or the New Notes unless:
- the holder has previously given the Trustee notice that an Event of
Default is continuing;
- holders of at least 25% in principal amount of the outstanding New Notes
have requested the Trustee in writing to pursue the remedy;
- the holders have offered the Trustee reasonable security or indemnity
against any loss, liability or expense;
- the Trustee has not complied with the request within 60 days after the
receipt of the request and the offer of security or indemnity; and
- the holders of a majority in principal amount of the outstanding New
Notes have not given the Trustee a direction inconsistent with the
request within such 60-day period.
Subject to restrictions contained in the indenture, the holders of a
majority in principal amount of the outstanding New Notes will be given the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee or of exercising any trust or power conferred on
the Trustee. The Trustee, however, may refuse to follow any direction that
conflicts with law or the indenture; that the Trustee determines is unduly
prejudicial to the rights of any other holder; or that would involve the Trustee
in personal liability. Prior to taking any action under the indenture, the
Trustee will be entitled to indemnification satisfactory to it in its sole
discretion against all losses and expenses caused by taking or not taking such
action.
If a Default occurs and is continuing and is known to the Trustee, the
Trustee must mail to each holder notice of the Default within the earlier of 90
days after it occurs; 30 days after it is known to a trust officer; or 30 days
after written notice of it is received by the Trustee. Except in the case of a
Default in the payment of principal of, premium, if any, or interest on any New
Note, including payments pursuant to the redemption provisions of a New Note,
the Trustee may withhold notice if and so long as a committee of its trust
officers in good faith determines that withholding notice is in the interests of
the holders. In addition, Land O'Lakes will be required to deliver to the
Trustee, within 120 days after the end
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of each fiscal year, a certificate indicating whether the signers of the
certificate know of any Default that occurred during the previous year. Land
O'Lakes will also be required to deliver to the Trustee written notice of any
event which would constitute certain Events of Default, the status of the event
and what action Land O'Lakes is taking or proposes to take regarding the event.
The notice must be delivered within 30 days of the event.
AMENDMENTS AND WAIVERS
Subject to exceptions contained in the indenture, the New Notes, the
Subsidiary Guarantees, the Security Documents or the provisions of the
Intercreditor Agreement affecting the holder of New Notes may be amended with
the written consent of the holders of a majority in principal amount of the New
Notes then outstanding. Any past default or compliance with any provisions of
the New Notes or indenture may be waived with the consent of the holders of a
majority in principal amount of the New Notes then outstanding. However, without
the written consent of each holder of an outstanding New Note affected, no
amendment may:
(1) reduce the amount of New Notes whose holders must consent to an
amendment;
(2) reduce the rate of or extend the time for payment of interest on
any New Note;
(3) reduce the principal of or extend the stated maturity of any New
Note;
(4) reduce the premium payable upon the redemption of any New Note or
change the time at which any New Note may be redeemed as described under
"-- Optional Redemption" above;
(5) make any New Note payable in money other than that stated in the
New Note;
(6) impair the right of any holder to receive payment of principal of,
and interest on, such holder's New Notes on or after the due dates for such
New Notes or to institute suit for the enforcement of any payment on or
with respect to such holder's New Notes;
(7) make any change in the amendment provisions which require each
holder's consent or in the waiver provisions;
(8) modify the Subsidiary Guarantees in any manner adverse to the
holders; or
(9) except as provided below, make any change to the Security
Documents, the Intercreditor Agreement or the provisions of the indenture
dealing with the Security Documents or the application of proceeds or the
Collateral that would adversely affect the holders of New Notes, in each
case, except as provided in such agreements.
Without the consent of any holder, Land O'Lakes, the Subsidiary Guarantors
and the Trustee may amend the indenture, the New Notes, the Subsidiary
Guarantees, the Security Documents and the Intercreditor Agreement to:
(1) cure any ambiguity, omission, defect or inconsistency;
(2) provide for the assumption by a successor corporation of the
obligations of Land O'Lakes under the indenture or of any Subsidiary
Guarantor under a Subsidiary Guarantee;
(3) provide for uncertificated New Notes in addition to or in place of
certificated New Notes;
(4) add additional Guarantees with respect to the New Notes;
(5) provide for the addition of Collateral permitted under the terms
of the indenture and Security Documents;
(6) add to the covenants of Land O'Lakes for the benefit of the
holders or to surrender any right or power conferred upon Land O'Lakes;
(7) make any change that does not adversely affect the rights of any
holder, subject to the provisions of the indenture;
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(8) provide for the issuance of the Additional Notes; or
(9) comply with any requirement of the SEC in connection with the
qualification of the indenture under the Trust Indenture Act.
DEFEASANCE
Land O'Lakes may at any time terminate all its obligations under the New
Notes, the Security Documents and the indenture, which we refer to as "legal
defeasance," except for obligations with respect to:
(1) the defeasance trust;
(2) the registration of the transfer or exchange of the New Notes;
(3) the replacement of mutilated, destroyed, lost or stolen New Notes;
and
(4) the maintenance of a registrar and paying agent in respect of the
New Notes.
In addition, Land O'Lakes may at any time terminate:
(1) its obligations under the covenants described under "-- Material
Covenants;"
(2) the operation of the cross acceleration provision, the bankruptcy
provisions with respect to Significant Subsidiaries and the judgment
default provision described under "-- Defaults" above;
(3) the limitations contained in clauses (3) and (4) under the first
paragraph of "-- Merger and Consolidation" above; and
(4) its obligations under the Security Documents.
We refer to a termination described above in (1), (2) and (3) as "covenant
defeasance."
In the event that Land O'Lakes exercises its legal defeasance option or its
covenant defeasance option, each Subsidiary Guarantor will be released from all
of its obligations with respect to its Subsidiary Guarantee and from all of its
obligations under the Security Documents.
Land O'Lakes may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If Land O'Lakes exercises its
legal defeasance option, payment of the New Notes may not be accelerated because
of an Event of Default. If Land O'Lakes exercises its covenant defeasance
option, payment of the New Notes may not be accelerated because of an Event of
Default specified in clause (4), (5), with respect to the Security Documents,
(6), (7), with respect only to Significant Subsidiaries, or (8), (9) or (10),
under "-- Defaults" above or because of the failure of Land O'Lakes to comply
with clause (3) or (4) under the first paragraph of "-- Merger and
Consolidation" above.
In order to exercise either defeasance option:
(1) Land O'Lakes must irrevocably deposit in trust with the Trustee,
which we refer to as the "defeasance trust," money, U.S. Government
obligations or a combination thereof in such amounts as will be sufficient
to pay the principal, premium, if any, and interest on the New Notes to
redemption or maturity, as the case may be; and
(2) Land O'Lakes must deliver to the Trustee an opinion of counsel to
the effect that:
- holders will not recognize income, gain or loss for Federal income tax
purposes as a result of such deposit and defeasance; and
- holders will be subject to Federal income tax on the same amounts and
in the same manner and at the same times as would have been the case
if such deposit and defeasance had not occurred.
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In the case of legal defeasance only, the opinion of counsel must be based
on a ruling of the Internal Revenue Service or other change in applicable
Federal income tax law.
CONCERNING THE TRUSTEE
U.S. Bank National Association is the Trustee under the indenture and has
been appointed by Land O'Lakes as Registrar and Paying Agent with regard to the
New Notes.
GOVERNING LAW
The indenture and the New Notes will be governed by, and construed in
accordance with, the laws of the State of New York without giving effect to
applicable principles of conflicts of law to the extent that the application of
the law of another jurisdiction would be required.
MATERIAL DEFINITIONS
Set forth below are the material defined terms used in the indenture.
Reference is made to the indenture for all defined terms.
"Accounts" means all accounts, as defined in the New York Uniform
Commercial Code, and Account Assets with respect to such accounts, including
those related to the dairy businesses of Land O'Lakes and the Restricted
Subsidiaries and payable to such parties, including, but not limited to:
(1) accounts receivable generated from the marketing and sale of milk,
butter, cheese, cream products, dairy and non-dairy spreads, whey, non-fat
dry milk, cocoa, and other dairy or dairy related products sold for
consumer use; and
(2) licensing fees relating to dairy products and dairy related
services, and the proceeds thereof.
For purposes of this definition, CoBank Accounts and the Account Assets
with respect to such CoBank Accounts are specifically excluded.
"Account Assets" means, collectively, with respect to Accounts or CoBank
Accounts, as the case may be, all such Accounts or CoBank Accounts, together
with:
(1) all right, title and interest in and to all contracts that relate
to any of such accounts;
(2) all security interests or liens and property subject to such
security interests or liens from time to time purporting to secure payment
of any of such accounts, whether pursuant to the contracts related to such
accounts or otherwise;
(3) all UCC financing statements covering any collateral securing
payment of any of such accounts;
(4) all Guarantees and other agreements or arrangements of whatever
character from time to time supporting or securing payment of any of such
accounts whether pursuant to the contracts related to any of such accounts
or otherwise;
(5) all interest in the merchandise, goods, products or other
property, including any that is returned, if any, the sale of which gave
rise to any of such accounts; and
(6) all proceeds of (1)-(5) above.
"Additional Assets" means:
(1) any property or assets, other than Indebtedness and Capital Stock,
to be used by Land O'Lakes or a Restricted Subsidiary in a Permitted
Business;
(2) any Investments in Permitted Businesses permitted by the covenant
described under "-- Material Covenants -- Limitation on Restricted
Payments";
146
(3) the Capital Stock of a Person that becomes a Restricted Subsidiary
as a result of the acquisition of such Capital Stock by Land O'Lakes or
another Restricted Subsidiary; or
(4) Capital Stock constituting a minority interest in any Person that
at such time is a Restricted Subsidiary;
provided, however, that any such Restricted Subsidiary described in clause (3)
or (4) above is primarily engaged in a Permitted Business.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to directly or
indirectly direct the management and policies of such Person, whether through
the ownership of voting securities, by contract or otherwise. The terms
"controlling" and "controlled" have correlative meanings. For purposes of the
provisions described under "-- Material Covenants -- Limitation on Transactions
with Affiliates" and "-- Material Covenants -- Limitation on Sales of Assets and
Subsidiary Stock" only, "Affiliate" means any beneficial owner of shares
representing 10% or more of the total voting power of the voting stock, of Land
O'Lakes on a fully diluted basis or of rights or warrants to purchase voting
stock, whether or not currently exercisable, and any Person who would be an
Affiliate of any such beneficial owner pursuant to the first sentence of this
definition.
"Asset Disposition" means any sale, lease, transfer or other disposition,
or series of related sales, leases, transfers or dispositions, by Land O'Lakes
or any Restricted Subsidiary, including any disposition by means of a merger,
consolidation, or similar transaction, of:
(1) any shares of Capital Stock of a Restricted Subsidiary, other than
directors' qualifying shares or shares required by applicable law to be
held by a Person other than Land O'Lakes or a Restricted Subsidiary;
(2) all or substantially all the assets of any division or line of
business of Land O'Lakes or any Restricted Subsidiary; or
(3) any other assets of Land O'Lakes or any Restricted Subsidiary
outside of the ordinary course of its business.
The definition of Asset Disposition does not include:
(1) a disposition by a Restricted Subsidiary to Land O'Lakes or by
Land O'Lakes or a Restricted Subsidiary to a wholly-owned Subsidiary;
(2) for purposes of the provisions described under "-- Material
Covenants -- Limitation on Sales of Assets and Subsidiary Stock" only, a
disposition subject to the covenant described under "-- Material
Covenants -- Limitation on Restricted Payments";
(3) a disposition of assets with a fair market value of less than
$500,000;
(4) the disposition of all or substantially all of the assets of Land
O'Lakes in a manner permitted by the covenant described under "-- Merger
and Consolidation"; and
(5) the sale to one or more Securitization Vehicles of accounts
receivable, including Account Assets, or inventory in Securitizations,
provided that;
- each such Securitization is effected on market terms;
- the aggregate amount of Third Party Securities in respect of all such
Securitizations does not exceed $200 million at any time outstanding;
and
- an amount equal to the Net Available Cash from each Securitization is
applied to the mandatory repayment of Bank Indebtedness even though,
in the case of the Amended and Restated Five-Year Credit Agreement
referred to in the definition of Credit Agreement, the commitment is
not required to be reduced.
147
For the purposes of (5) above, Land O'Lakes and its Restricted
Subsidiaries:
(1) will be deemed at the time of any issuance by the relevant
Securitization Vehicle of Third Party Securities to have received the Net
Available Cash received by the Securitization Vehicle from the issuance of
Third Party Securities; and
(2) will not be deemed to have received Net Available Cash in
connection with ongoing sales of accounts receivable (including Account
Assets) or inventory to such Securitization Vehicle that are purchased by
it with the proceeds from collections of receivables or from ordinary
course sales of inventory, in each case previously purchased by it pursuant
to such Securitization.
"Attributable Debt" in respect of a Sale/Leaseback Transaction means, at
the time of determination, the present value of the total obligations of the
lessee for rental payments during the remaining term of the lease included in
such Sale/Leaseback Transaction, including any period for which such lease has
been extended. The present value of the total obligations will be determined
using as a discount rate the interest rate borne by the New Notes, compounded
annually.
"Bank Indebtedness" means any and all amounts payable under or in respect
of the Credit Agreement and any Refinancing Indebtedness with respect to the
Credit Agreement, as amended from time to time, including principal, premium, if
any, interest, fees, charges, expenses, reimbursement obligations, guarantees
and all other amounts payable in connection with the Credit Agreement. As used
in this definition, "interest" includes interest accruing on or after the filing
of any petition in bankruptcy or for reorganization relating to Land O'Lakes
whether or not a claim for post-filing interest is allowed in such proceedings.
Refinancing Indebtedness in respect of the Credit Agreement may be incurred from
time to time after termination of the Credit Agreement and such Refinancing
Indebtedness will be deemed to constitute Bank Indebtedness.
"Capital Securities" means the trust preferred securities in aggregate face
amount of up to $200 million issued pursuant to an indenture dated as of March
25, 1998, between Land O'Lakes and Wilmington Trust Company.
"Capital Stock" of any Person means any and all shares, membership
interests, limited liability company interests, rights to purchase, warrants,
options, participations or other equivalents of or interests in equity of such
Person, however designated, including any preferred stock and any cooperative
membership interests or accounts, but excluding any debt securities convertible
into such equity.
"Change of Control" means the occurrence of any of the following:
(1) any "person," as such term is used in Sections 13(d) and 14(d) of
the Exchange Act, is or becomes the beneficial owner, directly or
indirectly, of more than 35% of the total voting power of the voting stock
of Land O'Lakes; provided, however, for purposes of this clause (1):
(A) "beneficial owner" has the meaning ascribed to it in Rules
13d-3 and 13d-5 under the Exchange Act, except that a person will be
deemed to have "beneficial ownership" of all shares that the person has
the right to acquire, whether such right is exercisable immediately or
only after the passage of time; and
(B) any person will be deemed to beneficially own any voting stock
of an entity (the "specified entity") held by any other entity (the
"parent entity"), if such other person is the beneficial owner, directly
or indirectly, of more than 35% of the voting power of the voting stock
of such parent entity;
(2) during any period of two consecutive years, individuals who at the
beginning of such period constituted Land O'Lakes' board of directors,
together with any new directors whose election by the board of directors or
whose nomination for election was approved by a vote of 66 2/3% of the
directors of Land O'Lakes then still in office who were either directors at
the beginning of such period or whose election or nomination for election
was previously so approved, cease for any reason to constitute a majority
of the board of directors then in office;
148
(3) the adoption of a plan relating to the liquidation or dissolution
of Land O'Lakes;
(4) the failure of Land O'Lakes to maintain cooperative status under
Subchapter T of the Code or Minnesota law;
(5) the merger or consolidation of Land O'Lakes with or into another
Person or the merger of another Person with or into Land O'Lakes, if the
securities of Land O'Lakes that are outstanding immediately prior to such
transaction and which represent 100% of the aggregate voting power of the
voting stock of Land O'Lakes are changed into or exchanged for cash,
securities or property, unless, in addition to any other consideration,
such securities are changed into or exchanged for securities of the
surviving Person or transferee that represent at least a majority of the
aggregate voting power of the voting stock of the surviving Person or
transferee; or
(6) the sale of all or substantially all the assets of Land O'Lakes to
another Person.
"CoBank Accounts" means:
(1) accounts related to the feed businesses of Land O'Lakes Farmland
Feed LLC and Purina Mills, LLC, its Subsidiaries and their respective
successors, including, but not limited to, accounts receivable generated
from the sale of animal feed and feed ingredients, soybean meal, premixes,
non-grain protein ingredients, grains, vitamins, minerals, branded feed
products, complete feed products, milk replacer products, feed additives,
animal health products, farm supply products, toll milling services and
other feed related services and the proceeds from such accounts;
(2) accounts related to the seed business of Land O'Lakes including,
but not limited to, accounts receivable generated from the sale of seed,
licensing fees and seed related services and the proceeds from such
accounts;
(3) accounts related to the swine businesses of Land O'Lakes, Land
O'Lakes Farmland Feed LLC and Purina Mills, LLC, its Subsidiaries and their
respective successors, including, but not limited to, accounts receivable
generated from the sale of swine and swine related services and the
proceeds from such accounts; and
(4) all Account Assets related to (1), (2) and (3) above.
For purposes of this definition, the CoBank Accounts related to the swine
businesses of Land O'Lakes and Land O'Lakes Farmland Feed LLC will not include
any such right to payment where payments have been sent to a lockbox or lockbox
account other than those specified in the guarantee and collateral agreement
related to the Credit Agreement dated as of October 11, 2001 between Land
O'Lakes and CoBank.
"Code" means the Internal Revenue Code of 1986, as amended.
"Collateral" means all the collateral provided for and described in the
Security Documents.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of:
(1) the aggregate amount of EBITDA for the period of the most recent
four consecutive fiscal quarters ending at least 45 days prior to the date
of such determination, to
(2) Consolidated Interest Expense for such four fiscal quarters.
"Consolidated Interest Expense" means, for any period, the total interest
expense of Land O'Lakes and its consolidated Restricted Subsidiaries, plus, to
the extent incurred by Land O'Lakes and its consolidated Restricted Subsidiaries
in such period but not included in such interest expense:
(1) interest expense attributable to capitalized lease obligations and
to leases constituting part of a Sale/Leaseback Transaction;
(2) amortization of debt discount and debt issuance costs;
(3) capitalized interest;
149
(4) noncash interest expense;
(5) commissions, discounts and other fees and charges attributable to
letters of credit and bankers' acceptance financing;
(6) interest accruing on any Indebtedness of any other Person to the
extent such Indebtedness is Guaranteed by Land O'Lakes or any Restricted
Subsidiary;
(7) net costs associated with Hedging Obligations of interest rate and
foreign currency exposure, including amortization of fees;
(8) dividends in respect of all Disqualified Stock of Land O'Lakes and
all preferred stock of any of its Subsidiaries to the extent held by
Persons other than Land O'Lakes or a wholly-owned Subsidiary;
(9) interest incurred in connection with investments in discontinued
operations;
(10) the cash contributions to any employee stock ownership plan or
similar trust to the extent such contributions are used by such plan or
trust to pay interest or fees to any Person, other than Land O'Lakes, in
connection with Indebtedness incurred by such plan or trust; and
(11) the amount of dividends paid in respect of the Capital
Securities.
The term "Consolidated Interest Expense" specifically includes commissions,
discounts, yield and other fees and charges incurred in connection with any
transaction, including, without limitation, any Securitization, pursuant to
which Land O'Lakes or any Subsidiary of Land O'Lakes may sell, convey or
otherwise transfer or grant a security interest in any accounts receivable or
related assets or inventory or related assets of the type specified in the
definition of "Securitization."
"Consolidated Net Income" means, for any period, the net income of Land
O'Lakes and its consolidated Subsidiaries for such period (plus, to the extent
deducted in determining such net income, any minority interest in the earnings
of any Subsidiary Guarantor, and minus, to the extent added in determining such
net income, any minority interest in the losses of any Subsidiary Guarantor).
For purposes of this definition, Consolidated Net Income does not include:
(1) any net income of any Person, other than Land O'Lakes, if such
Person is not a Restricted Subsidiary (except to the extent of the amount
of dividends or other distributions actually paid by such Person to the
Company or any Restricted Subsidiary during such period);
(2) any net income or loss of any Person acquired by Land O'Lakes or a
Subsidiary in a pooling of interests transaction for any period prior to
the date of such acquisition;
(3) any net income or loss of any Restricted Subsidiary, other than a
Restricted Subsidiary which is a Subsidiary Guarantor on the date of the
indenture, if such Restricted Subsidiary, subject to exceptions set forth
in the indenture, is subject to restrictions, directly or indirectly, on
the payment of dividends or the making of distributions by such Restricted
Subsidiary, directly or indirectly, to Land O'Lakes, except that:
(A) subject to the limitations contained in clause (4) below, Land
O'Lakes' equity in the net income of any such Restricted Subsidiary for
such period will be included in such Consolidated Net Income up to the
aggregate amount of cash actually distributed by such Restricted
Subsidiary during such period to Land O'Lakes or another Restricted
Subsidiary as a dividend or other distribution, subject in the case of a
dividend or other distribution made to another Restricted Subsidiary, to
the limitation contained in this clause, and
(B) Land O'Lakes' equity in a net loss of any such Restricted
Subsidiary for such period will be included in determining such
Consolidated Net Income;
(4) any gain, but not loss, realized upon the sale or other
disposition of any asset of Land O'Lakes or its consolidated Subsidiaries,
including pursuant to any Sale/Leaseback Transaction,
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that is not sold or otherwise disposed of in the ordinary course of
business and any gain, but not loss, realized upon the sale or other
disposition of any Capital Stock of any Person;
(5) any extraordinary gain or loss;
(6) the cumulative effect of a change in accounting principles; and
(7) for the year ended December 31, 2001, charges and expenses
resulting from the acquisition of Purina Mills, Inc. consisting of:
(A) up to $18.5 million of extraordinary expenses related to early
extinguishment of debt;
(B) up to $21.0 million of non-cash accruals for plant writedowns;
and
(C) up to $5.1 million of expenses related to the cancellation of
an interest rate swap of Purina Mills, Inc.
Solely for the purpose of the covenant described under "-- Material
Covenants -- Limitation on Restricted Payments," the definition of Consolidated
Net Income excludes any dividends, repayments of loans or advances or other
transfers or distributions of cash or other assets from Unrestricted
Subsidiaries to Land O'Lakes or a Restricted Subsidiary to the extent such
dividends, repayments or transfers increase the amount of Restricted Payments
permitted under such covenant pursuant to clause (a)(4)(C)(iv) or (v) of such
covenant.
"Consolidated Net Worth" means the total of the amounts shown on the
balance sheet of Land O'Lakes and its Restricted Subsidiaries, determined on a
consolidated basis, as of the end of the most recent fiscal quarter of Land
O'Lakes ending at least 45 days prior to the taking of any action for the
purpose of which the determination is being made, as:
(1) the par or stated value of all outstanding capital stock of Land
O'Lakes, plus
(2) member equity relating to such capital stock, plus
(3) any retained earnings or earned surplus, less
(A) any accumulated deficit, and
(B) any amounts attributable to Disqualified Stock.
"Credit Agreement" means collectively:
(1) the Credit Agreement dated as of October 11, 2001, among Land
O'Lakes, the Chase Manhattan Bank, as administrative agent and the lenders
party to such agreement;
(2) the Amended and Restated Five-Year Credit Agreement dated as of
October 11, 2001, among Land O'Lakes, the lenders party to such agreement,
and The Chase Manhattan Bank, as administrative agent; and
(3) the CoBank Receivables Loan Agreement;
each as amended, restated, supplemented, waived, replaced (whether or not upon
termination, and whether with the original lenders or otherwise), refinanced,
restructured or otherwise modified from time to time, except to the extent that
any such amendment, restatement, supplement, waiver, replacement, refinancing,
restructuring or other modification thereto would be prohibited by the terms of
the indenture, unless otherwise agreed to by the holders of at least a majority
in aggregate principal amount of New Notes at the time outstanding.
"Credit Facilities Collateral Agent" means JPMorgan Chase Bank, in its
capacity as collateral agent for the Lenders party to each of the Credit
Agreements described in clause (1) and (2) of the definition thereof, or any
successor thereto, or any Person otherwise designated the "Credit Facilities
Collateral Agent" pursuant to the Intercreditor Agreement.
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"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Discharge of Priority Lien Obligations" means payment in full in cash of
the principal of and interest and premium, if any, on all Indebtedness
constituting Priority Lien Obligations secured by any Collateral, or, with
respect to Hedging Obligations constituting Priority Lien Obligations secured by
any Collateral, delivery of cash collateral or backstop letters of credit in
respect thereof in compliance with the terms of such Priority Lien Obligation,
in each case after or concurrently with termination of all commitments to extend
credit thereunder, and payment in full of any other obligations in respect of
any Priority Lien Obligation secured by any Collateral that are due and payable
or otherwise accrued and owing at or prior to the time such principal, interest
and premium, if any, are paid.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
which by its terms or by the terms of any security into which it is convertible
or for which it is exchangeable or exercisable, or upon the happening of any
event:
(1) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise;
(2) is convertible or exchangeable for Indebtedness or Disqualified
Stock, excluding Capital Stock convertible or exchangeable solely at the
option of Land O'Lakes or a Restricted Subsidiary; provided, however, that
any such conversion or exchange will be deemed an incurrence of
Indebtedness or Disqualified Stock, as applicable; or
(3) is redeemable at the option of the holder thereof, in whole or in
part, on or prior to 91 days following the stated maturity of the New
Notes. Notwithstanding the previous sentence, any Capital Stock that would
constitute Disqualified Stock solely because holders thereof have the right
to require such Person to repurchase or redeem the Capital Stock upon the
occurrence of an "asset sale" or "change of control" shall not constitute
Disqualified Stock if the "asset sale" or "change of control" provisions
applicable to such Capital Stock are not more favorable to the holders of
such Capital Stock than the provisions of the covenants described under
"-- Change of Control" and "-- Material Covenants -- Limitation on Sale of
Assets and Subsidiary Stock."
"EBITDA" for any period means the Consolidated Net Income for such period,
plus, without duplication, the following to the extent deducted in calculating
such Consolidated Net Income:
(1) income tax expense of Land O'Lakes and its consolidated Restricted
Subsidiaries;
(2) Consolidated Interest Expense;
(3) depreciation expense of Land O'Lakes and its consolidated
Restricted Subsidiaries;
(4) amortization expense of Land O'Lakes and its consolidated
Restricted Subsidiaries, excluding amortization expense attributable to a
prepaid cash item that was paid in a prior period;
(5) all other noncash charges of Land O'Lakes and its consolidated
Restricted Subsidiaries (excluding any such noncash charge to the extent it
represents an accrual of or reserve for cash expenditures in any future
period), less all non-cash items of income of Land O'Lakes and its
consolidated Restricted Subsidiaries; and
(6) up to $20.0 million of cash severance costs incurred in 2001 and
2002 in connection with plant closings resulting from the acquisition of
Purina Mills, Inc.
For purposes of this definition, the provision for taxes based on the
income or profits of, and the depreciation and amortization and noncash charges
of, a Restricted Subsidiary of Land O'Lakes will be added to Consolidated Net
Income to compute EBITDA:
(1) only to the extent, and in the same proportion, that the net
income of such Restricted Subsidiary was included in calculating
Consolidated Net Income; and
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(2) except for Restricted Subsidiaries which are Subsidiary Guarantors
on December 23, 2003, only if a corresponding amount would be permitted at
the date of determination to be distributed as a dividend to Land O'Lakes
by such Restricted Subsidiary without prior approval, which has not been
obtained, pursuant to the terms of its charter and all agreements,
instruments, judgments, decrees, orders, statutes, rules and governmental
regulations applicable to such Restricted Subsidiary or its stockholders.
"8 3/4% Senior Notes" means the Company's 8 3/4% Senior Notes due 2011
issued under the 8 3/4% Senior Notes Indenture and any of the Company's 8 3/4%
Series A Senior Notes due 2011 exchanged therefor.
"8 3/4% Senior Notes Guarantees" means the Guarantees of the 8 3/4% Senior
Notes pursuant to the 8 3/4% Senior Notes Indenture.
"8 3/4% Senior Notes Indenture" means the indenture dated as of November
14, 2001, between the Company, the guarantors party thereto, and U.S. Bank
National Association, as trustee, under which the 8 3/4% Senior Notes were
issued.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Foreign Pledge Agreement" means a pledge agreement securing the New Notes
or the Subsidiary Guarantees or any of them that is governed by the law of a
jurisdiction other than the United States of America and reasonably satisfactory
in form and substance to the Trustee.
"Foreign Subsidiary" means any Restricted Subsidiary of Land O'Lakes that
is not organized under the laws of the United States of America or any State
thereof or the District of Columbia.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of any
other Person and any obligation, direct or indirect, contingent or otherwise, of
such Person:
(1) to purchase or pay, or advance or supply funds for the purchase or
payment of, such Indebtedness or other obligation of such other Person
(whether arising by virtue of partnership arrangements, or by agreement to
keep-well, to purchase assets, goods, securities or services, to take-
or-pay, or to maintain financial statement conditions or otherwise); or
(2) entered into for purposes of assuring, in any other manner,
payment to the obligee of such Indebtedness or other obligation or to
protect such obligee, in whole or in part, against loss in connection with
the Indebtedness or other obligation.
For purposes of this definition, the term "Guarantee" excludes endorsements
for collection or deposit in the ordinary course of business. The term
"Guarantee" used as a verb has a corresponding meaning. The term "Guarantor"
means any Person Guaranteeing any obligation.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under:
(1) currency exchange, interest rate or commodity swap agreements;
(2) currency exchange, interest rate or commodity cap agreements;
(3) currency exchange, interest rate or commodity collar agreements;
and
(4) other agreements or arrangements designed to protect such Person
against fluctuations in currency exchange, interest rates or commodity
prices.
"Indebtedness" means, with respect to any Person on any date of
determination, without duplication:
(1) the principal of and premium, if any, in respect of indebtedness
of such Person for borrowed money;
(2) the principal of and premium, if any, in respect of obligations of
such Person evidenced by bonds, debentures, notes or other similar
instruments;
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(3) all obligations, including reimbursement obligations, of such
Person in respect of letters of credit or other similar instruments;
(4) all obligations of such Person to pay the deferred and unpaid
purchase price of property or services (except trade payables) which
purchase price is due more than six months after the date of placing such
property in service, taking delivery and title to such property or the
completion of such services;
(5) all capitalized lease obligations and all Attributable Debt of
such Person;
(6) the amount of all obligations of such Person with respect to the
redemption, repayment or other repurchase of any Disqualified Stock or,
with respect to any Subsidiary of such Person, any preferred stock, but
excluding in each case, any accrued dividends;
(7) all Indebtedness of other Persons secured by a lien on any asset
of such Person, whether or not such Indebtedness is assumed by such Person;
provided, however, that the amount of Indebtedness of such Person will be
the lesser of:
(A) the fair market value of such asset at such date of
determination; and
(B) the amount of such Indebtedness of such other Persons;
(8) Hedging Obligations of such Person;
(9) all obligations in respect of Third Party Securities issued by
such Person in Securitizations, regardless of whether denominated as equity
or debt securities; and
(10) all obligations of other Persons of the type referred to in
clauses (1)-(9) above and all dividends of other Persons, in either case,
for which the Person is directly or indirectly responsible or liable for
payment of such obligations or dividends, as obligor, guarantor or
otherwise (including by means of any Guarantee).
The amount of Indebtedness of a Person at any date will be:
(1) the outstanding balance at such date of all unconditional
obligations as described above in this definition; and
(2) with respect to contingent obligations, the maximum liability upon
the occurrence of the contingency giving rise to the obligation, at such
date.
"Intercreditor Agreement" means the Lien Subordination and Intercreditor
Agreement, dated December 23, 2003, by and among Land O'Lakes, the Subsidiary
Guarantors, the Credit Facilities Collateral Agent and the Trustee, as amended,
supplemented or otherwise modified from time to time.
"Interest Rate Agreement" means with respect to any Person any interest
rate protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate hedge agreement or other similar agreement
or arrangement to which such Person is a party or of which it is a beneficiary.
"Investment" in any Person means any:
(1) direct or indirect advance, loan, or other extension of credit to
such Person, including by way of Guarantee or similar arrangement, other
than advances to customers in the ordinary course of business that are
recorded as accounts receivable on the balance sheet of the lender;
(2) any capital contribution to such Person, including by means of any
transfer of cash or other property to others or any payment for property or
services for the account or use of others; or
(3) any purchase or acquisition of Capital Stock, Indebtedness or
other similar instruments issued by such Person.
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"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind, including any conditional sale or other title retention
agreement or lease of a similar nature.
"Material Foreign Subsidiary" means, at any time, each Foreign Subsidiary
that is a wholly-owned Subsidiary and that had assets with an aggregate book
value in excess of $15.0 million as of the end of the most recent fiscal quarter
for which financial statements have been filed with the SEC.
"Material Intellectual Property" means all intellectual property of Land
O'Lakes and the Subsidiary Guarantors, other than intellectual property that in
the aggregate is not material to the business of Land O'Lakes and its
Subsidiaries, taken as a whole.
"Minimum Patronage Amount" means the minimum amount required to be paid in
money or by qualified check under Section 1388 of the Code for the allocation to
be a "qualified written notice of allocation." Currently 20% of the Patronage
allocated to a member in a given year would be such member's Minimum Patronage
Amount.
"Net Available Cash" means cash payments received from an Asset
Disposition, net of:
(1) all legal, title and recording tax expenses, commissions and other
fees and expenses incurred, and all Federal, state, provincial, foreign and
local taxes required to be paid or accrued as a liability under generally
accepted accounting principles as a consequence of such Asset Disposition;
(2) all payments made on any Indebtedness:
(A) which is secured by any assets subject to the Asset Disposition
in accordance with the terms of any lien upon or other security
agreement of any kind with respect to the assets; or
(B) which must by its terms, or in order to obtain a necessary
consent to the Asset Disposition, or by applicable law be repaid out of
the proceeds from the Asset Disposition;
(3) all distributions and other payments required to be made to
minority interest holders in Subsidiaries or joint ventures as a result of
the Asset Disposition; and
(4) appropriate amounts to be provided by the seller as a reserve, in
accordance with generally accepted accounting principles, against any
liabilities associated with the property or other assets disposed of in the
Asset Disposition and retained by Land O'Lakes or any Restricted Subsidiary
after the Asset Disposition.
The definition of Net Available Cash includes, when and as received:
(1) any cash payments received by way of deferred payment of principal
pursuant to a note, installment receivable or otherwise; and
(2) proceeds from the sale or other disposition of any securities
received as consideration for the Asset Disposition.
Net Available Cash excludes any other consideration received in the form of
assumption by the acquiring Person of Indebtedness or other obligations relating
to the properties or assets that are the subject of the Asset Disposition or
received in any other non-cash form.
"Net Cash Proceeds" of any issuance or sale of Capital Stock means the cash
proceeds from the issuance or sale net of:
(1) the fees of attorneys, accountants, underwriters or placement
agents; discounts or commissions; and brokerage, consultant and other fees
actually incurred in connection with the issuance or sale; and
(2) taxes paid or payable as a result of the issuance or sale.
"Other Equal Lien Obligations" means any Indebtedness, and any related
premium, interest, fees and expenses, of Land O'Lakes and the Restricted
Subsidiaries (including any Additional Notes) that is
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permitted by the indenture to be secured by Equal Liens (other that the New
Notes and the Subsidiary Guarantees) and which is so designated by Land O'Lakes.
"Equal Lien" means any Lien on Collateral securing the New Notes, a
Subsidiary Guarantee or any Other Equal Lien Obligation that ranks immediately
junior in priority (subject to Permitted Collateral Liens) to the Liens on such
Collateral securing any Priority Lien Obligations.
"Patronage" means any earnings of Land O'Lakes and its Subsidiaries
directly or indirectly returned to members based on business conducted with such
members. Patronage includes any "Patronage Dividends," "Per-Unit Retain
Allocations," "Qualified Per-Unit Retain Certificates," or "Non-Qualified
Per-Unit Retain Certificates," as defined in Subchapter T of the Code, as well
as any other redemptions or revolvement payments to members.
"Permitted Business" means any business engaged in by Land O'Lakes or any
Restricted Subsidiary on November 14, 2001 and any Related Business.
"Permitted Collateral Liens" means:
(1) Liens on the Collateral securing Priority Lien Obligations in a
principal amount which, when taken together with the principal amount of
all other Priority Lien Obligations then outstanding (other than Hedging
Obligations secured by Priority Liens), does not exceed $695.0 million. For
purposes of this definition, and at the election of Land O'Lakes, any
portion or all of the amount of Indebtedness permitted to be secured by
Priority Liens pursuant to this clause (1) may instead be allocated to be
secured by Equal Liens;
(2) (A) Liens on the Collateral outstanding on December 23, 2003
securing the New Notes and the Subsidiary Guarantees; and
(B) Liens on the Collateral securing Other Equal Lien Obligations
(including, without limitation, Additional Notes) in a principal amount
which, when taken together with the principal amount of all other Equal
Lien Obligations then outstanding (other than Hedging Obligations
secured by Equal Liens), does not exceed the sum of any amount of
Indebtedness secured by Equal Liens pursuant to clause (1) above plus
$25.0 million;
(3) Liens on the Collateral existing on the December 23, 2003 (other
than Liens specified in clauses (1) and (2) above);
(4) Liens on the Collateral described in clauses (1) through (5), (9),
(10), (11), (12), (15) and (17) (only in respect of clauses (9) and (10))
of the definition of "Permitted Liens;"
(5) Liens on the Collateral in favor of any collateral agent relating
to such collateral agent's administrative expenses with respect to the
Collateral;
(6) Liens on the Collateral securing Indebtedness Incurred pursuant to
clause (b)(7) of the covenant described under "-- Certain
covenants -- Limitation on indebtedness;" and
(7) Liens on the Collateral securing Hedging Obligations constituting
Priority Lien Obligations or Other Equal Lien Obligations.
For the avoidance of doubt, any Lien on the Collateral securing Bank
Indebtedness outstanding on December 23, 2003 is deemed to be incurred and
outstanding pursuant to clause (1) of this definition.
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"Permitted Investment" means an Investment by Land O'Lakes or any
Restricted Subsidiary in:
(1) Land O'Lakes or a Restricted Subsidiary;
(2) another Person whose primary business is a Permitted Business if
as a result of the Investment the other Person:
(A) becomes a Restricted Subsidiary; or
(B) is merged or consolidated with or into, or transfers or conveys
all or substantially all its assets to, Land O'Lakes or a Restricted
Subsidiary;
(3) temporary cash investments;
(4) receivables owing to Land O'Lakes or any Restricted Subsidiary if
created or acquired in the ordinary course of business and payable or
dischargeable in accordance with customary trade terms;
(5) payroll, travel and similar advances made in the ordinary course
of business to cover matters that are expected at the time of the advance
ultimately to be treated as expenses for accounting purposes;
(6) loans or advances to employees made in the ordinary course of
business consistent with past practices of Land O'Lakes or a Restricted
Subsidiary and not exceeding $5 million in the aggregate outstanding at any
one time. The repayments of such loans or advances may not increase the
amount of Restricted Payments permitted to be made;
(7) any Person to the extent representing the noncash consideration
received for an Asset Disposition made pursuant to and in compliance with
the covenant described under "-- Material Covenants -- Limitations on Sales
of Assets and Subsidiary Stock";
(8) Sellers' Retained Interests in Securitizations permitted by the
covenants described under "-- Material Covenants -- Limitation on
Indebtedness" and "-- Material Covenants -- Limitation on Sales of Assets
and Subsidiary Stock";
(9) Capital Stock of CoBank required to be made in accordance with
CoBank's by-laws and capital plans applicable to cooperative borrowers
generally;
(10) any Person received in the ordinary course of business in
connection with the bankruptcy or reorganization of, or settlement of
delinquent accounts and disputes with, customers and suppliers, or received
in satisfaction of judgments;
(11) loans to Agriliance and MoArk, LLC in the ordinary course of
business for cash management purposes in an aggregate principal amount not
to exceed $20 million outstanding at any time and which are not outstanding
for more than 30 days. The repayments of such loans may not increase the
amount of Restricted Payments permitted to be made;
(12) loans to LOL Finance in an aggregate principal amount not to
exceed $45 million outstanding at any time. The repayments of such loans
may not increase the amount of Restricted Payments permitted to be made;
(13) any Person in an aggregate amount not to exceed $20 million at
any time outstanding.
"Permitted Liens" with respect to any Person means:
(1) if incurred in the ordinary course of business:
(A) pledges or deposits by a Person under worker's compensation
laws, unemployment insurance laws or similar legislation;
(B) good faith deposits in connection with bids, tenders, leases or
contracts, other than for the payment of Indebtedness;
(C) deposits to secure public or statutory obligations;
157
(D) deposits of cash or United States government bonds to secure
surety or appeal bonds; or
(E) deposits as security for contested taxes or import duties or
for the payment of rent;
(2) liens imposed by law and arising in the ordinary course of
business, such as carriers', warehousemen's, mechanics', materialmen's,
repairmen's and other similar liens, in each case for sums not overdue by
more than 30 days or that are being contested in good faith by appropriate
proceedings, and liens arising out of judgments or awards against a Person
for which such Person is seeking an appeal or other proceedings for review;
(3) liens for taxes, assessments or other governmental charges:
(A) not yet due or payable or subject to penalties for non-payment;
or
(B) which are being contested in good faith by appropriate
proceedings;
(4) deposits to secure the performance of bids, trade contracts,
leases, statutory obligations, surety and appeal bonds, performance bonds
and other similar obligations, in each case in the ordinary course of
business;
(5) easements, zoning restrictions, rights-of-way and similar
encumbrances on real property imposed by law or arising in the ordinary
course of business that:
(A) do not secure any monetary obligations;
(B) do not materially adversely affect the value of the property,
taken as a whole; or
(C) do not interfere with the ordinary conduct of business of Land
O'Lakes or any Restricted Subsidiary;
(6) liens securing Indebtedness incurred to finance the construction,
purchase or lease of, or repairs, improvements or additions to, property of
a Person;
(7) liens to secure Bank Indebtedness;
(8) liens existing on December 23, 2003;
(9) liens on property or shares of stock of another Person at the time
it becomes a Subsidiary of such Person;
(10) liens on property at the time such Person or any of its
Subsidiaries acquires the property, including any acquisition by means of a
merger or consolidation with or into such Person or any Subsidiary of such
Person;
(11) liens securing Indebtedness or other obligations of:
(A) a Subsidiary of such Person owing to such Person or a
wholly-owned Subsidiary of such Person; or
(B) such Person owing to a wholly-owned Subsidiary of such Person;
(12) liens securing obligations under Interest Rate Agreements so long
as such obligations relate to Indebtedness that is, and is permitted under
the indenture to be, secured by a lien on the same property securing such
obligations;
(13) liens on Sellers' Retained Interests incurred in connection with
Securitizations permitted by the covenants in the indenture other than the
covenants described under "-- Material Covenants -- Limitation on Liens"
securing obligations in respect of Third Party Securities in an aggregate
amount at any time outstanding not in excess of $200 million less the
aggregate principal amount of Indebtedness under the CoBank Receivables
Loan Agreement. The ratio of the amount of such Sellers' Retained Interests
to the amount of such Third Party Securities will not be significantly
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greater than the ratio of Sellers' Retained Interests to the financed
portion of assets in similar securitization transactions;
(14) liens on assets of Restricted Subsidiaries that are
Securitization Vehicles securing Indebtedness of such Securitization
Vehicles provided that prior to the Fall-Away Date, such Indebtedness is
permitted by clause (b)(8) of the covenant described under "-- Material
Covenants -- Limitation on Indebtedness";
(15) judgment liens in respect of judgments that do not constitute an
Event of Default;
(16) liens of CoBank on investments by Land O'Lakes in the stock,
participation certificates, or allocated reserves of CoBank owned by Land
O'Lakes;
(17) liens to secure any refinancing (or successive refinancings), in
part or as a whole, of any Indebtedness secured by any lien referred to in
the foregoing clauses (6), (8), (9) and (10); provided, however, that:
(A) such new lien will be limited to all or part of the same
property that secured the original lien, plus improvements to or on such
property; and
(B) the Indebtedness secured by such lien at such time is not
increased to any amount greater than the sum of:
(i) the outstanding principal amount or, if greater, committed
amount of the Indebtedness secured by liens described under clauses
(6), (8), (9) or (10) at the time the original lien became a
Permitted Lien under the indenture; and
(ii) an amount necessary to pay any fees and expenses, including
premiums, related to such refinancings; and
(19) liens not expressly permitted by clauses (1) through (18) above;
provided that the aggregate principal amount of Indebtedness secured by
liens permitted by this clause (19), including Attributable Debt permitted
by the covenant described under "-- Material Covenants -- Limitation on
Sale/Leaseback Transactions" and clause (b)(7) of the covenant described
under "-- Material Covenants -- Limitation on Indebtedness," does not at
any time exceed $75 million.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"Priority Lien" means any Lien on any Collateral for the benefit of the
holders of any Indebtedness of Land O'Lakes or any of its Restricted
Subsidiaries that is designated by Land O'Lakes, as permitted by the indenture,
to rank prior to the Liens on such Collateral for the benefit of the holders.
"Priority Lien Obligation" means any Indebtedness, and any related premium,
interest, fees and expenses, that is secured by a Priority Lien. The relative
priorities of the Priority Lien Obligations are determined by agreement among
the holders of the Priority Lien Obligations.
"Refinancing Indebtedness" means Indebtedness that is incurred to refund,
refinance, replace, renew, repay or extend, including pursuant to any defeasance
or discharge mechanism, any Indebtedness of Land O'Lakes or any Restricted
Subsidiary existing on December 23, 2003 or incurred in compliance with the
indenture, including Indebtedness of Land O'Lakes that refinances Refinancing
Indebtedness; provided, however, that:
(1) the Refinancing Indebtedness has a stated maturity either (A) no
earlier than the stated maturity of the Indebtedness being refinanced, or
(B) at least 91 days after the stated maturity of the New Notes;
(2) the Refinancing Indebtedness has an average life at the time such
Refinancing Indebtedness is incurred that is equal to or greater than the
average life of the Indebtedness being refinanced;
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(3) such Refinancing Indebtedness is incurred in an aggregate
principal amount, or if issued with original issue discount, an aggregate
issue price, that is equal to or less than the aggregate principal amount,
or if issued with original issue discount, the aggregate accreted value,
then outstanding of the Indebtedness being refinanced; and
(4) if the Indebtedness being refinanced is subordinated in right of
payment to the New Notes, such Refinancing Indebtedness is subordinated in
right of payment to the New Notes at least to the same extent as the
Indebtedness being refinanced.
For purposes of this definition, Refinancing Indebtedness excludes:
(1) Indebtedness of a Restricted Subsidiary that is not a Subsidiary
Guarantor that refinances Indebtedness of Land O'Lakes; or
(2) Indebtedness of Land O'Lakes or a Restricted Subsidiary that
refinances Indebtedness of an Unrestricted Subsidiary.
"Related Business" means any business related, ancillary or complementary
to the businesses of Land O'Lakes and the Restricted Subsidiaries on December
23, 2003.
"Restricted Subsidiary" means any Subsidiary of Land O'Lakes other than an
Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or acquired in the future by Land O'Lakes or a Restricted Subsidiary
whereby Land O'Lakes or a Restricted Subsidiary transfers the property to a
Person and Land O'Lakes or the Restricted Subsidiary leases it from such Person,
other than leases between Land O'Lakes and a Subsidiary Guarantor or between
Subsidiary Guarantors.
"Secured Indebtedness" means any Indebtedness of Land O'Lakes secured by a
lien. "Secured Indebtedness" of a Subsidiary Guarantor has a correlative
meaning.
"Securitization" means the transfer and sale by Land O'Lakes or a
Restricted Subsidiary of accounts receivable (including Account Assets) or
inventory to a Securitization Vehicle and the financing of the acquisition of
the assets:
(1) with proceeds from the issuance of Third Party Securities;
(2) with Sellers' Retained Interests; and
(3) with proceeds from the sale or collection of accounts receivable
(including Account Assets) or inventory previously purchased by the
Securitization Vehicle.
"Securitization Vehicle" means a special purpose trust, partnership,
limited liability company or similar entity which issues Third Party Securities
and was formed at the direction of Land O'Lakes for the purpose of effecting one
or more Securitizations.
"Security Documents" means one or more security agreements, pledge
agreements, mortgages, deeds of trust and collateral assignments defining the
terms of the security interests that secure the New Notes and the Subsidiary
Guarantees.
"Sellers' Retained Interests" means the debt or equity interests held by
Land O'Lakes or any Restricted Subsidiary in a Securitization Vehicle to which
accounts receivable, including Account Assets, or inventory of Land O'Lakes and
the Restricted Subsidiaries have been transferred in a Securitization, including
any debt or equity received in consideration for the assets transferred.
"Senior Indebtedness" of Land O'Lakes or any Subsidiary Guarantor means the
principal of, premium, if any, and accrued and unpaid interest on, and fees and
other amounts owing in respect of, Bank Indebtedness and all other Indebtedness
of Land O'Lakes or any Subsidiary Guarantor, as applicable, whether outstanding
on, or incurred after, December 23, 2003, including the 8 3/4% Senior Notes,
unless in the instrument creating or evidencing the same or pursuant to which
the same is
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outstanding it is provided that such obligations are subordinated in right of
payment to the New Notes or the Subsidiary Guarantee. For purposes of this
definition, Senior Indebtedness of Land O'Lakes or any Subsidiary Guarantor
excludes:
(1) any obligation of Land O'Lakes to any Subsidiary of Land O'Lakes
or of such Subsidiary Guarantor to Land O'Lakes or any other Subsidiary of
Land O'Lakes;
(2) any liability for Federal, state, local or other taxes owed or
owing by Land O'Lakes or such Subsidiary Guarantor, as applicable;
(3) any accounts payable or other liability to trade creditors arising
in the ordinary course of business including Guarantees of instruments
evidencing such liabilities;
(4) any Indebtedness or obligation of Land O'Lakes or a Subsidiary
Guarantor and any accrued and unpaid interest in connection with such
Indebtedness or obligation that by its terms is subordinate or junior in
any respect to any other Indebtedness or obligation of Land O'Lakes or such
Subsidiary Guarantor, as applicable, including any Subordinated Obligations
of Land O'Lakes or such Subsidiary Guarantor, as applicable;
(5) any obligations with respect to any Capital Stock; or
(6) any Indebtedness incurred in violation of the indenture.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of Land O'Lakes within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Subordinated Obligation" means any Indebtedness of Land O'Lakes, whether
outstanding on or incurred after December 23, 2003, that is subordinate or
junior in right of payment to the New Notes pursuant to a written agreement.
"Subordinated Obligation" of a Subsidiary Guarantor has a correlative meaning.
"Subsidiary" of any Person means any corporation, association, partnership
or other business entity of which more than 50% of the total voting power of
shares of Capital Stock or other interests, including partnership interests,
entitled to vote in the election of directors, managers or trustees, without
regard to the occurrence of any contingency, is at the time owned or controlled,
directly or indirectly, by:
(1) such Person;
(2) such Person and one or more Subsidiaries of such Person; or
(3) one or more Subsidiaries of such Person.
"Third Party Securities" means, with respect to any Securitization, notes,
bonds or other debt instruments, beneficial interests in a trust, undivided
ownership interests or other securities issued for cash consideration by the
relevant Securitization Vehicle to banks, investors or other financing sources,
other than Land O'Lakes and its Subsidiaries, the proceeds of which are used to
finance, in whole or part, the purchase by such Securitization Vehicle of
accounts receivable, including Account Assets, or inventory in a Securitization.
"Unrestricted Subsidiary" means:
(1) any Subsidiary of Land O'Lakes that Land O'Lakes' board of
directors designates an Unrestricted Subsidiary in the manner provided
below so long as such designation is in effect; and
(2) any Subsidiary of an Unrestricted Subsidiary.
Land O'Lakes' board of directors may designate any Land O'Lakes'
Subsidiary, including any newly acquired or newly formed Subsidiary, to be an
Unrestricted Subsidiary. A Subsidiary cannot be an Unrestricted Subsidiary if it
or any of its Subsidiaries owns any Capital Stock or Indebtedness of, or owns or
holds any lien on any property of, Land O'Lakes or any other Land O'Lakes'
Subsidiary that is not a
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Subsidiary of the designated Subsidiary. A Subsidiary may only be designated an
Unrestricted Subsidiary if:
- the Subsidiary to be so designated has total consolidated assets of
$1,000 or less; or
- if such Subsidiary has consolidated assets greater than $1,000, then such
designation would be permitted under the covenant entitled "-- Material
Covenants -- Limitation on Restricted Payments."
Land O'Lakes' board of directors may designate any Unrestricted Subsidiary
to be a Restricted Subsidiary; provided, however, that immediately after giving
effect to such designation:
- Land O'Lakes could incur $1.00 of additional Indebtedness under paragraph
(a) of the covenant described under "-- Material Covenants -- Limitation
on Indebtedness"; and
- no Default has occurred and is continuing.
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BOOK-ENTRY SETTLEMENT AND CLEARANCE
THE GLOBAL NOTES
The New Notes will initially be represented by one or more permanent global
notes in definitive, fully registered book-entry form, without interest coupons
that will be deposited with, or on behalf of, DTC and registered in the name of
DTC or its nominee, on behalf of the acquirers of New Notes represented thereby
for credit to the respective accounts of the acquirers, or to such other
accounts as they may direct, at DTC. See "The exchange offer -- Book entry
transfer."
Except as set forth below, the global notes may be transferred, in whole
and not in part, solely to another nominee of DTC or to a successor of DTC or
its nominee. Beneficial interests in the global notes may not be exchanged for
notes in physical, certificated form except in the limited circumstances
described below.
All interests in the global notes may be subject to the procedures and
requirements of DTC (including, if applicable, those of Euroclear and
Clearstream).
CERTAIN BOOK-ENTRY PROCEDURES FOR THE GLOBAL NOTES
The descriptions of the operations and procedures of DTC set forth below
are provided solely as a matter of convenience. These operations and procedures
are solely within the control of DTC and are subject to change by DTC from time
to time. We will take no responsibility for these operations or procedures, and
investors are urged to contact DTC or its participants directly to discuss these
matters.
DTC has advised us that it is:
- a limited purpose trust company organized under the laws of the State of
New York,
- a "banking organization" within the meaning of the New York Banking Law,
- a member of the Federal Reserve System,
- a "clearing corporation" within the meaning of the Uniform Commercial
Code, as amended, and
- a "clearing agency" registered pursuant to Section 17A of the Exchange
Act.
DTC was created to hold securities for its participants and facilitates the
clearance and settlement of securities transactions between participants through
electronic book-entry changes to the accounts of its participants, thereby
eliminating the need for physical transfer and delivery of certificates. DTC's
participants include securities brokers and dealers, banks and trust companies,
clearing corporations and certain other organizations. Indirect access to DTC's
system is also available to other entities such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly. Investors who are not participants
may beneficially own securities held by or on behalf of DTC only through
participants or indirect participants.
We expect that pursuant to procedures established by DTC ownership of the
New Notes will be shown on, and the transfer of ownership thereof will be
effected only through, records maintained by DTC (with respect to the interests
of participants) and the records of participants and the indirect participants
(with respect to the interests of persons other than participants).
The laws of some jurisdictions may require that certain purchasers of
securities take physical delivery of such securities in definitive form.
Accordingly, the ability to transfer interests in the New Notes represented by a
global note to such persons may be limited. In addition, because DTC can act
only on behalf of its participants, who in turn act on behalf of persons who
hold interests through participants, the ability of a person having an interest
in New Notes represented by a global note to pledge or transfer such interest to
persons or entities that do not participate in DTC's system, or to otherwise
take actions in respect of such interest, may be affected by the lack of a
physical definitive security in respect of such interest.
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So long as DTC or its nominee is the registered owner of a global note, DTC
or such nominee, as the case may be, will be considered the sole owner or holder
of the notes represented by the global note for all purposes under the
indenture. Except as provided below, owners of beneficial interests in a global
note:
- will not be entitled to have New Notes represented by such global note
registered in their names,
- will not receive or be entitled to receive physical delivery of
certificated New Notes, and
- will not be considered the owners or holders thereof under the indenture
for any purpose, including with respect to the giving of any direction,
instruction or approval to the trustee thereunder.
Accordingly, each holder owning a beneficial interest in a global note must
rely on the procedures of DTC and, if such holder is not a participant or an
indirect participant, on the procedures of the participant (including Euroclear
and Clearstream) through which such holder owns its interest, to exercise any
rights of a holder of Notes under the indenture or such global note. We
understand that under existing industry practice, in the event that we request
any action of holders of Notes, or a holder that is an owner of a beneficial
interest in a global note desires to take any action that DTC, as the holder of
such global note, is entitled to take, DTC would authorize the participants to
take such action and the participants would authorize holders owning through
such participants to take such action or would otherwise act upon the
instruction of such holders. Neither we nor the trustee will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of notes by DTC, or for maintaining, supervising or
reviewing any records of DTC relating to such New Notes.
Payments with respect to the principal of, and premium, if any, and
interest on, any New Notes represented by a global note registered in the name
of DTC or its nominee on the applicable record date will be payable by the
trustee to or at the direction of DTC or its nominee in its capacity as the
registered holder of the global note representing the New Notes under the
indenture. Under the terms of the indenture, we and the trustee may treat the
persons in whose names the New Notes, including the global notes, are registered
as the owners thereof for the purpose of receiving payment thereon and for any
and all other purposes whatsoever. Accordingly, neither we nor the trustee has
or will have any responsibility or liability for the payment of such amounts to
owners of beneficial interests in a global note (including principal, premium,
if any, liquidated damages, if any, and interest). Payments by the participants
and the indirect participants to the owners of beneficial interests in a global
note will be governed by standing instructions and customary industry practice
and will be the responsibility of the participants or the indirect participants
and DTC.
Except for trades involving only Euroclear and Clearstream participants,
interests in the global notes will trade in DTC's settlement system, and
secondary market trading activity in such interests will therefore settle in
immediately available funds, subject in all cases to the rules and procedures of
DTC and its participants. Transfers between participants in DTC will be effected
in accordance with DTC's procedures, and will be settled in same-day funds.
Transfers between participants in Euroclear and Clearstream will be effected in
the ordinary way in accordance with their respective rules and operating
procedures.
Cross-market transfers between DTC participants, on the one hand, and
Euroclear or Clearstream participants, on the other hand, will be effected by
DTC in accordance with DTC's rules on behalf of Euroclear or Clearstream, as the
case may be, by its respective depository; however, such cross-market
transactions will require delivery of instructions to Euroclear or Clearstream,
as the case may be, by the counterparty in such system in accordance with the
rules and procedures and within the established deadlines (Brussels time) of
such system. Euroclear or Clearstream, as the case may be, will, if the
transaction meets its settlement requirements, deliver instructions to its
respective depository to take action to effect final settlement on its behalf by
delivering or receiving interests in the relevant New Notes in DTC, and making
or receiving payment in accordance with normal procedures for same-day funds
settlement applicable to DTC. Euroclear participants and Clearstream
participants may not deliver instructions directly to the depositories for
Euroclear or Clearstream.
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Because of time zone differences, the securities account of a Euroclear or
Clearstream participant purchasing an interest in a New Note from a DTC
participant will be credited, and any such crediting will be reported to the
relevant Euroclear or Clearstream participant, during the securities settlement
processing day (which must be a business day for Euroclear and Clearstream)
immediately following the DTC settlement date. Cash received in Euroclear or
Clearstream as a result of sales of interests in a New Note by or through a
Euroclear or Clearstream participant to a DTC participant will be received with
value on the DTC settlement date but will be available in the relevant Euroclear
or Clearstream cash account only as of the business day for Euroclear or
Clearstream following the DTC settlement date.
Although DTC, Euroclear and Clearstream have agreed to the foregoing
procedures in order to facilitate transfers of beneficial ownership interests in
the global notes among participants of DTC, they are under no obligation to
perform or continue to perform such procedures, and such procedures may be
discontinued at any time. None of the Company, the Trustee or any of their
respective agents will have any responsibility for the performance by DTC,
Euroclear and Clearstream, their participants or indirect participants of their
respective obligations under the rules and procedures governing their
operations, including maintaining, supervising or reviewing the records relating
to, or payments made on account of, beneficial ownership interests in global
notes.
CERTIFICATED NOTES
If,
- we notify the trustee in writing that DTC is no longer willing or able to
act as a depositary or DTC ceases to be registered as a clearing agency
under the Exchange Act and a successor depositary is not appointed within
90 days of such notice or cessation,
- we, at our option, notify the trustee in writing that we elect to cause
the issuance of Notes in definitive form under the indenture or
- upon the occurrence of certain other events as provided in the indenture,
then, upon surrender by DTC of the global notes, certificated notes will be
issued to each person that DTC identifies as the beneficial owner of the notes
represented by the global notes. Upon any such issuance, the trustee is required
to register such certificated notes in the name of such person or persons (or
the nominee of any thereof) and cause the same to be delivered thereto.
Neither we nor the trustee shall be liable for any delay by DTC or any
participant or indirect participant in identifying the beneficial owners of the
related notes and each such person may conclusively rely on, and shall be
protected in relying on, instructions from DTC for all purposes.
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MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
The following summary describes the material United States federal income
and certain estate tax consequences of ownership and disposition of the New
Notes. This summary is based on the Internal Revenue Code of 1986, as amended to
the date hereof (the "Code"), existing administrative pronouncements and
judicial decisions, existing and proposed Treasury Regulations currently in
effect, and interpretations of the foregoing, changes to any of which subsequent
to the date of this prospectus may affect the tax consequences described herein,
possibly with retroactive effect.
This summary applies to you only if you:
- acquired the Old Notes in the initial offering at the initial offering
price; and
- hold the Old and New Notes as capital assets within the meaning of
Section 1221 of the Code.
This summary does not discuss all of the tax consequences that may be
relevant to a holder in light of the holder's particular circumstances or to
holders subject to special rules, such as certain financial institutions,
insurance companies, flow-through entities (such as S corporations or
partnerships), tax-exempt organizations, dealers in securities, persons holding
notes in connection with a hedging transaction, "straddle," conversion
transaction or other integrated transaction or persons who have ceased to be
United States citizens or to be taxed as resident aliens or United States
persons whose functional currency (as defined in Section 985 of the Code) is not
the United States dollar. We recommend that you consult with your own tax
advisor as to the particular tax consequences to you of acquiring, holding or
disposing of the New Notes.
TAX CONSEQUENCES TO UNITED STATES PERSONS
For purposes of the following discussion, "United States person" means a
beneficial owner of a New Note that is for United States federal income tax
purposes:
- a citizen or resident of the United States;
- a corporation, or other entity taxable as a corporation, created or
organized in or under the laws of the United States or of any political
subdivision thereof;
- an estate the income of which is subject to United States federal income
taxation regardless of its source; or
- a trust if (a) (1) a court within the United States is able to exercise
primary supervision over the administration of the trust and (2) one or
more United States persons have the authority to control all substantial
decisions of the trust or (b) the trust was in existence on August 20,
1996 and has elected to continue to be treated as a United States person.
If a partnership holds New Notes, the tax treatment of a partner will
generally depend upon the status of the partner and upon the activities of the
partnership. Partners of partnerships holding New Notes should consult their tax
advisors.
PAYMENTS OF INTEREST
Interest on a note will generally be taxable to a United States person as
ordinary interest income at the time it is accrued or is received in accordance
with the United States person's method of accounting for tax purposes.
EXCHANGE OFFER
A United States person who owns an Old Note will not recognize any taxable
gain or loss on the exchange of an Old Note for a New Note, and the owner's tax
basis and holding period in the New Note will be the same as in the Old Note.
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SALE, EXCHANGE, REDEMPTION OR RETIREMENT OF THE NEW NOTES
Upon the sale, exchange, redemption or retirement of a New Note, a United
States person will recognize taxable gain or loss equal to the difference
between the amount realized on the sale, exchange, redemption or retirement and
the United States person's adjusted tax basis in the New Note. For these
purposes, the amount realized does not include any amount attributable to
interest on the New Note that has not previously been included in income, which
will be includable as interest as described under "-- Payments of interest"
above.
In general, gain or loss realized on the sale, exchange, redemption or
retirement of a New Note held for longer than one year will be capital gain or
loss. Prospective investors should consult their tax advisors regarding the
treatment of capital gains (which may be taxed at lower rates than ordinary
income for taxpayers who are individuals, trusts or estates) and losses (the
deductibility of which is subject to limitations).
BACKUP WITHHOLDING AND INFORMATION REPORTING
Backup withholding and information reporting requirements may apply to
certain payments of principal, premium and interest on a New Note, and to
payments of proceeds of the sale or redemption of a New Note, to certain
noncorporate United States persons. We, our agent, a broker, or any paying
agent, as the case may be, will be required to withhold from any payment a
percentage equal to the fourth lowest rate of income tax applicable to unmarried
individuals (currently 28%) from such payment if the United States person fails
to furnish or certify his correct taxpayer identification number to the payor in
the manner required, fails to certify that such United States person is not
subject to backup withholding, or otherwise fails to comply with the applicable
requirements of the backup withholding rules. Any amounts withheld under the
backup withholding rules from a payment to a United States person may be
credited against that United States person's United States federal income tax
and may entitle that United States person to a refund, provided that the
required information is furnished to the United States Internal Revenue Service.
TAX CONSEQUENCES TO NON-UNITED STATES PERSONS
As used herein, the term "non-United States person" means an owner of a New
Note that is, for United States federal income tax purposes:
- a nonresident alien individual;
- a foreign corporation; or
- a nonresident alien fiduciary of a foreign estate or trust.
If a partnership holds New Notes, the tax treatment of a partner will
generally depend upon the status of the partner and upon the activities of the
partnership. Partners of partnerships holding New Notes should consult their tax
advisors.
INCOME, WITHHOLDING, AND ESTATE TAX
Subject to the discussion of backup withholding below:
(a) payments of principal and interest on a New Note that is
beneficially owned by a non-United States person will not be subject to
United States federal withholding tax; provided, that in the case of
interest,
- (1) the beneficial owner does not actually or constructively own 10%
or more of the total combined voting power of all classes of our stock
entitled to vote, (2) the beneficial owner is not a controlled foreign
corporation that is related, directly or indirectly, to us through
stock ownership, and (3) either (A) the beneficial owner of the New
Note certifies (generally on an IRS Form W-8BEN) to the person
otherwise required to withhold United States federal
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income tax from such interest, under penalties of perjury, that it is
not a United States person and provides its name and address or (B) a
securities clearing organization, bank or other financial institution
that holds customers' securities in the ordinary course of its trade
or business (a "financial institution") and holds the New Note
certifies to the person otherwise required to withhold United States
federal income tax from such interest, under penalties of perjury,
that such statement has been received from the beneficial owner by it
or by a financial institution between it and the beneficial owner and
furnishes the payor with a copy thereof;
- the beneficial owner is entitled to the benefits of an income tax
treaty under which the interest is exempt from United States federal
withholding tax and the beneficial owner of the New Note or such
owner's agent provides an IRS Form W-8BEN claiming the exemption; or
- the beneficial owner conducts a trade or business in the United States
to which the interest is effectively connected and the beneficial
owner of the New Note or such owner's agent provides an IRS Form
W-8ECI;
provided that in each such case, the relevant certification or IRS Form is
delivered pursuant to applicable procedures and is properly transmitted to
the person otherwise required to withhold United States federal income tax,
and none of the persons receiving the relevant certification or IRS Form
has actual knowledge that the certification or any statement on the IRS
Form is false.
(b) a non-United States person will not be subject to United States
federal withholding tax on any gain realized on the sale, exchange,
redemption or retirement of a New Note unless the gain is effectively
connected with the beneficial owner's trade or business in the United
States, the gain represents accrued interest, in which case the rules for
interest would apply or, in the case of an individual, the holder is
present in the United States for 183 days or more in the taxable year in
which the sale, exchange or other disposition occurs and certain other
conditions are met; and
(c) a New Note owned by an individual who at the time of death is not,
for United States estate tax purposes, a citizen or resident of the United
States generally will not be subject to United States federal estate tax as
a result of such individual's death if the individual does not actually or
constructively own 10% or more of the total combined voting power of all
classes of our stock entitled to vote and, at the time of such individual's
death the income on the New Note would not have been effectively connected
with a United States trade or business of the individual.
If a non-United States person holding a New Note is engaged in a trade or
business in the United States, and if interest on the New Note (or gain realized
on its sale, exchange or other disposition) is effectively connected with the
conduct of such trade or business, such holder, although exempt from the
withholding tax discussed in the preceding paragraphs, will generally be subject
to United States income tax on such effectively connected income in the same
manner as if it were a United States person. Such a holder may also need to
provide a United States taxpayer identification number on the forms referred to
in paragraph (a) above in order to meet the requirements set forth above. In
addition, if such holder is a foreign corporation, it may be subject to a 30%
branch profits tax (unless reduced or eliminated by an applicable treaty) on its
effectively connected earnings and profits for the taxable year, subject to
certain adjustments. For purposes of the branch profits tax, interest on, and
any gain recognized on the sale, exchange, redemption or retirement of, a New
Note will be included in the effectively connected earnings and profits of such
holder if such interest or gain, as the case may be, is effectively connected
with the conduct by such holder of a trade or business in the United States.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Under current Treasury Regulations, backup withholding (see "-- Tax
consequences to United States persons -- Backup withholding and information
reporting" above) will not apply to payments made by us or a paying agent to a
non-United States person in respect of a New Note if the certifications required
by Sections 871(h) and 881(c) of the Code, which are described above, are
received, provided in each case
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that we or the paying agent, as the case may be, does not have actual knowledge
that the payee is a United States person.
Under current Treasury Regulations, payments of the proceeds from the sale,
exchange or other disposition of a New Note made to or through a foreign office
of a broker (including a custodian, nominee or other agent acting on behalf of
the beneficial owner of a New Note) generally will not be subject to information
reporting or backup withholding. However, if such broker is a United States
person, a controlled foreign corporation for United States federal tax purposes,
a non-United States person 50% or more of whose gross income is effectively
connected with a United States trade or business for a specified three-year
period, or a non-United States partnership with certain connections with the
United States, then information reporting will be required unless the broker has
in its records documentary evidence that the beneficial owner is not a United
States person and certain other conditions are met or the beneficial owner
otherwise establishes an exemption. Backup withholding may apply to any payment
that such broker is required to report if such broker has actual knowledge that
the payee is a United States person. Payments to or through the United States
office of a broker are subject to information reporting and backup withholding
unless the holder or beneficial owner certifies, under penalties of perjury that
it is a non-United States person and that it satisfies certain other conditions
or otherwise establishes an exemption from information reporting and backup
withholding.
Non-United States persons holding New Notes should consult their tax
advisors regarding the application of information reporting and backup
withholding in their particular situations, the availability of an exemption
therefrom, and the procedure for obtaining such an exemption, if available.
Backup withholding is not a separate tax, but is allowed as a refund or credit
against the holder's United States federal income tax, provided the necessary
information is furnished to the Internal Revenue Service.
Interest on a New Note that is beneficially owned by a non-United States
person will be reported annually on IRS Form 1042-S (unless the interest income
is effectively connected and Form W-8ECI is submitted, in which case interest
will be reported on Form 1099), which must be filed with the Internal Revenue
Service and furnished to such beneficial owner.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. We have agreed that, for a period of 180 days after the
expiration of the exchange offer, we will make this prospectus, as amended or
supplemented, available to any broker-dealer for use in connection with any such
resale. In addition, until November 25, 2004, all dealers effecting transactions
in the New Notes may be required to deliver a prospectus.
We will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or at negotiated prices. Any resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such New Notes. Any broker-dealer that
resells New Notes that were received by it for its own account pursuant to the
exchange offer and any broker or dealer that participates in a distribution of
New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit of any such resale of New Notes and any commission
or concessions received by any such persons may be deemed to be underwriting
compensations under the Securities Act. Any broker-dealer that resells New Notes
that were received by it for its own account in the exchange offer and any
broker-dealer that participates in a distribution of those New Notes may be
deemed to be an underwriter within the meaning of the Securities Act and must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction, including the delivery
of a prospectus that contains information with respect to any selling holder
required by the Securities Act in connection with any resale of the New Notes.
The letter of transmittal states that, by acknowledging that it will deliver and
by delivering a prospectus, a broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act.
Furthermore, any broker-dealer that acquired any of the Old Notes directly
from us:
- may not rely on the applicable interpretation of the staff of the SEC's
position contained in Exxon Capital Holdings Corp., SEC no-action letter
(April 13, 1988), Morgan, Stanley & Co. Inc., SEC no-action letter (June
5, 1991) and Shearman & Sterling, SEC no-action letter (July 2, 1983);
and
- must also be named as a selling noteholder in connection with the
registration and prospectus delivery requirements of the Securities Act
relating to any resale transaction.
For a period of 180 days after the expiration of the exchange offer, we
will promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests such documents
in the letter of transmittal. We have agreed to pay all expenses incident to the
exchange offer (including the expenses of one counsel for the holders of the Old
Notes) other than commissions or concessions of any broker-dealer and will
indemnify the holders of the Old Notes (including any broker-dealers) against
certain liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
The validity of the New Notes will be passed upon for us by Faegre & Benson
LLP, Minneapolis, Minnesota and Peter S. Janzen, General Counsel of Land
O'Lakes.
170
EXPERTS
The consolidated financial statements of the entities and for the periods
listed below have been included herein in reliance upon the reports of KPMG LLP,
independent registered public accounting firm, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing:
- LAND O'LAKES, INC. as of December 31, 2003 and 2002, and for each of the
years in the three-year period ended December 31, 2003
- AGRILIANCE LLC as of August 31, 2003 and 2002, and for each of the years
in the three-year period ended August 31, 2003
The audit report covering the December 31, 2003, 2002 and 2001 consolidated
financial statements of Land O'Lakes, Inc. refers to the restatement of the
consolidated financial statements for those years. The audit report covering the
December 31, 2003 consolidated financial statements of Land O'Lakes, Inc. refers
to the report of other auditors related to the financial statements of MoArk
LLC, and refers to the adoption, in 2003, of the provisions of the Financial
Accounting Standards Board's Interpretation No. 46, "Consolidation of Variable
Interest Entities, an Interpretation of ARB 51." The audit report covering the
December 31, 2002 consolidated financial statements of Land O'Lakes, Inc. refers
to the adoption of the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets".
The consolidated financial statements of MoArk, LLC as of December 27, 2003
and February 1, 2003, and for the eleven months ended December 27, 2003 and for
the year ended February 1, 2003 have been included herein in reliance upon the
reports of Moore Stephens Frost, independent accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
AVAILABLE INFORMATION
Pursuant to the indenture under which we issued our 8 3/4% senior notes, we
file annual, quarterly and current reports and other information with the
Securities and Exchange Commission (the "SEC" or the "Commission"). You can
inspect a copy of these materials at the SEC's Public Reference Room at 450
Fifth Street N.W., Washington D.C. 20549. Copies of these materials can also be
obtained by mail at prescribed rates from the SEC's Public Reference Room at the
above address. You can obtain information about the Public Reference Room by
call the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC. The address of the
SEC's Internet site is http://www.sec.gov.
In addition, we and each of the Subsidiary Guarantors have filed with the
SEC a registration statement on Form S-4 under the Securities Act with respect
to the New Notes offered in this prospectus. This prospectus, which forms part
of the registration statement, does not contain all of the information that is
included in the registration statement. You will find additional information
about us, the Subsidiary Guarantors and the New Notes in the registration
statement. Any statements made in this prospectus concerning the provisions of
legal documents are not necessarily complete and you should read the documents
that are filed as exhibits to the registration statement for a more complete
understanding of the document or matter. After the registration statement
becomes effective, Land O'Lakes will be required to file periodic reports with
the SEC. You may read and copy the registration statement and any of the other
documents we file with the SEC as noted above.
171
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<Table>
LAND O'LAKES, INC.
Financial Statements (unaudited) for the six months June 30,
2004 and 2003
Consolidated Balance Sheets as of June 30, 2004 (unaudited)
and December 31, 2003..................................... F-2
Consolidated Statements of Operations for the six months
ended June 30, 2004 and 2003 (unaudited).................. F-3
Consolidated Statements of Cash Flows for the six months
ended June 30, 2004 and 2003 (unaudited).................. F-4
Notes to Consolidated Financial Statements (unaudited)...... F-5
Financial Statements for the years ended December 31, 2003,
2002 and 2001
Report of Independent Registered Public Accounting Firm..... F-20
Consolidated Balance Sheets as of December 31, 2003 and
2002...................................................... F-21
Consolidated Statements of Operations for the years ended
December 31, 2003, 2002 and 2001.......................... F-22
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001.......................... F-23
Consolidated Statements of Equities for the years ended
December 31, 2003, 2002 and 2001.......................... F-24
Notes to Consolidated Financial Statements.................. F-25
MOARK, LLC
Financial Statements for the eleven months ended December
27, 2003 and the year ended February 1, 2003
Report of Independent Registered Public Accounting Firm..... F-56
Consolidated Balance Sheets as of December 27, 2003 and
February 1, 2003.......................................... F-57
Consolidated Statements of Operations for the eleven months
ended December 27, 2003 and the year ended February 1,
2003...................................................... F-58
Consolidated Statements of Members' Equity for the eleven
months ended December 27, 2003 and the year ended February
1, 2003................................................... F-59
Consolidated Statements of Cash Flows for the eleven months
ended December 27, 2003 and the year ended February 1,
2003...................................................... F-60
Notes to Consolidated Financial Statements.................. F-61
AGRILIANCE, LLC
Financial Statements (unaudited) for the nine months ended
May 31, 2004 and 2003
Consolidated Balance Sheets as of May 31, 2004 and August
31, 2003.................................................. F-73
Consolidated Statements of Operations for the nine months
ended May 31, 2004 and 2003............................... F-74
Consolidated Statements of Cash Flows for the nine months
ended May 31, 2004 and 2003............................... F-75
Notes to Consolidated Financial Statements.................. F-76
Financial Statements for the years ended August 31, 2003,
2002 and 2001
Report of Independent Registered Public Accounting Firm..... F-77
Consolidated Balance Sheets as of August 31, 2003 and
2002...................................................... F-78
Consolidated Statements of Operations for the years ended
August 31, 2003, 2002 and 2001............................ F-79
Consolidated Statements of Cash Flows for the years ended
August 31, 2003, 2002 and 2001............................ F-80
Consolidated Statements of Members' Equity for the years
ended August 31, 2003, 2002 and 2001...................... F-81
Notes to Consolidated Financial Statements.................. F-82
</Table>
F-1
LAND O'LAKES, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2004 2003
----------- ---------------
($ IN THOUSANDS)
ASSETS
Current assets:
Cash and short-term investments........................... $ 69,802 $ 110,274
Restricted cash........................................... 20,213 20,118
Receivables, net.......................................... 401,655 623,587
Inventories............................................... 560,657 496,826
Prepaid expenses.......................................... 42,660 246,373
Other current assets...................................... 40,390 42,006
---------- ----------
Total current assets................................... 1,135,377 1,539,184
Investments................................................. 557,250 506,641
Property, plant and equipment, net.......................... 613,813 624,631
Property under capital lease, net........................... 104,975 109,145
Goodwill.................................................... 332,068 373,083
Other intangibles........................................... 101,134 102,938
Other assets................................................ 127,452 133,438
---------- ----------
Total assets........................................... $2,972,069 $3,389,060
========== ==========
LIABILITIES AND EQUITIES
Current liabilities:
Notes and short-term obligations.......................... $ 51,642 $ 80,703
Current portion of long-term debt......................... 8,986 7,841
Current portion of obligations under capital lease........ 10,318 10,399
Accounts payable.......................................... 523,184 761,694
Accrued expenses.......................................... 223,928 226,476
Patronage refunds and other member equities payable....... 13,350 19,449
---------- ----------
Total current liabilities.............................. 831,408 1,106,562
Long-term debt.............................................. 934,188 1,065,382
Obligations under capital lease............................. 95,709 99,650
Employee benefits and other liabilities..................... 187,072 175,363
Minority interests.......................................... 8,941 62,739
Equities:
Capital stock............................................. 2,095 2,125
Member equities........................................... 875,360 866,586
Accumulated other comprehensive loss...................... (65,617) (65,617)
Retained earnings......................................... 102,913 76,270
---------- ----------
Total equities......................................... 914,751 879,364
---------- ----------
Commitments and contingencies
Total liabilities and equities.............................. $2,972,069 $3,389,060
========== ==========
</Table>
See accompanying notes to consolidated financial statements.
F-2
LAND O'LAKES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<Table>
<Caption>
FOR THE SIX MONTHS ENDED
JUNE 30,
-------------------------
2004 2003
----------- -----------
($ IN THOUSANDS)
Net sales................................................... $4,027,908 $2,851,612
Cost of sales............................................... 3,719,410 2,600,741
---------- ----------
Gross profit................................................ 308,498 250,871
Selling, general and administration......................... 259,888 225,395
Restructuring and impairment charges........................ 2,490 2,867
---------- ----------
Earnings from operations.................................... 46,120 22,609
Interest expense, net....................................... 44,037 39,116
Gain on legal settlements................................... (4,547) (19,177)
Other (income) expense, net................................. (1,521) (696)
Equity in earnings of affiliated companies.................. (66,526) (50,431)
Minority interest in earnings of subsidiaries............... 1,120 2,916
---------- ----------
Earnings before income taxes................................ 73,557 50,881
Income tax expense.......................................... 11,688 6,329
---------- ----------
Net earnings................................................ $ 61,869 $ 44,552
========== ==========
Applied to:
Member equities
Allocated patronage refunds............................ $ 44,499 $ 35,864
Deferred equities...................................... (7,978) (14,282)
---------- ----------
36,521 21,582
Retained earnings......................................... 25,348 22,970
---------- ----------
$ 61,869 $ 44,552
========== ==========
</Table>
See accompanying notes to consolidated financial statements.
F-3
LAND O'LAKES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<Table>
<Caption>
FOR THE SIX MONTHS ENDED
JUNE 30,
-------------------------
2004 2003
----------- -----------
($ IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings.............................................. $ 61,869 $ 44,552
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization........................... 54,610 54,004
Amortization of deferred financing charges.............. 3,570 1,846
Bad debt expense........................................ 638 1,760
Proceeds from patronage revolvement received............ 2,043 1,316
Non-cash patronage income............................... (1,023) (1,222)
Receivable from legal settlement........................ -- 96,707
Deferred income tax benefit expense..................... 3,772 4,346
(Increase) decrease in other assets..................... (3,881) 8,302
Decrease in other liabilities........................... (797) (130)
Restructuring and impairment charges.................... 2,490 2,867
(Gain) loss on divestiture of businesses................ (1,664) 700
Equity in earnings of affiliated companies.............. (66,526) (50,431)
Minority interests...................................... 1,120 2,916
Other................................................... (1,213) (8,537)
Changes in current assets and liabilities, net of
acquisitions and divestitures:
Receivables............................................. 216,178 167,126
Inventories............................................. (63,491) (37,355)
Other current assets.................................... 202,427 150,299
Accounts payable........................................ (239,177) (299,903)
Accrued expenses........................................ 5,800 14,191
--------- ---------
Net cash provided by operating activities................. 176,745 153,354
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment................ (41,412) (34,954)
Acquisition of minority interest.......................... (12,150) --
Payments for investments.................................. (170) (9,675)
Proceeds from divestiture of businesses................... 7,500 465
Proceeds from sale of investments......................... 2,199 3,000
Proceeds from sale of property, plant and equipment....... 7,596 8,015
Dividends from investments in affiliated companies........ 14,452 2,798
Increase in restricted cash............................... (95) (20,000)
Other..................................................... 392 2,980
--------- ---------
Net cash used by investing activities..................... (21,668) (47,371)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in short-term debt.................... (28,977) 14,309
Proceeds from issuance of long-term debt.................. 17,712 1,202
Principal payments on long-term debt...................... (142,481) (73,052)
Principal payments on obligations under capital lease..... (5,241) (4,435)
Payments for redemption of member equities................ (32,616) (23,662)
Payments for debt issuance costs.......................... (4,166) --
Other..................................................... 240 808
--------- ---------
Net cash used by financing activities..................... (195,529) (84,830)
--------- ---------
Net (decrease) increase in cash and short-term
investments............................................. (40,472) 21,153
Cash and short-term investments at beginning of period...... 110,274 64,327
--------- ---------
Cash and short-term investments at end of period............ $ 69,802 $ 85,480
========= =========
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during periods for:
Interest.................................................. $ 40,024 $ 35,585
Income taxes paid (recovered)............................. $ 6,631 $ (3,743)
</Table>
See accompanying notes to consolidated financial statements.
F-4
LAND O'LAKES, INC.
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, 2003 included elsewhere in this prospectus. The results of
operations and cash flows for interim periods are not necessarily indicative of
results for a full year.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liability and Equity." The
statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). The
statement was effective for the Company as of January 1, 2004. The adoption of
this standard did not have a material impact on the Company.
In December 2003, the FASB revised Statement of Financial Accounting
Standards 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits." The statement revises the disclosures about pension and other
postretirement benefit plans. It requires additional disclosure regarding
changes in benefit obligations and fair value of plan assets. The statement was
effective for the Company as of December 31, 2003. The Company adopted this
Statement for the year ended December 31, 2003 and has provided the interim
disclosures in Note 13, Pension and Other Postretirement Plans.
In May 2004, the FASB issued FASB Staff Position 106-2, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003" (the "Position"). The Position applies to
sponsors of single-employer defined benefit postretirement health care plans
that are impacted by the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the "Act"). In general, the Act introduces a federal
subsidy to sponsors that conclude that prescription drug benefits available
under such plans are actuarially equivalent to the prescription drug benefit now
provided under Medicare pursuant to the Act. The Position is effective for the
Company as of July 1, 2004, and the Company expects that the Act will result in
a modest reduction in postretirement health care costs. The effects of the Act
have not yet been included in the Company's measurement of its accumulated
benefit obligation.
2. FINANCIAL STATEMENT RESTATEMENT
In June 2004, the Company announced that it planned to restate financial
results for certain periods due to accounting errors it identified at its
Carlisle, PA dairy facility and reported in its dairy foods segment. The
consolidated financial statements for the six month periods ended June 30, 2003
and as of December 31, 2003, have been restated to reflect adjustments necessary
to correct these errors. Such restatements have been fully set forth in
Amendment No. 1 to the Land O'Lakes, Inc. annual report filed on Form 10-K/A for
the year ended December 31, 2003 as filed with the Securities and Exchange
Commission ("Commission") on August 16, 2004 and Amendment No. 2 to the Land
O'Lakes, Inc. quarterly report filed on Form 10-Q/A for the quarterly period
ended June 30, 2003 as filed with the Commission on August 16, 2004.
F-5
LAND O'LAKES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. MOARK LLC CONSOLIDATION AND PLANNED ACQUISITION OF MINORITY INTEREST
At December 31, 2002, the Company carried its 50% ownership interest in
MoArk under the equity method with an investment balance of $44.7 million.
Osborne Investments, LLC ("Osborne") owned the remaining interest in MoArk. In
the three months ended March 31, 2003, the Company increased its ownership from
50% to 57.5% with an additional investment of $7.8 million. In addition, the
Company has the right to acquire (and Osborne has the right to require the
Company to acquire) the remaining 42.5% of MoArk owned by Osborne by making a
$42.2 million minimum payment in 2007.
In accordance with the provisions of FASB Interpretation No. 46, effective
July 1, 2003, the Company consolidated MoArk into its financial statements.
Although Osborne has a 42.5% ownership interest in MoArk, the Company continues
to be allocated 100% of the income or loss from the operations of MoArk (other
than on capital transactions involving a realized gain or loss on intangible
assets, which are allocated 50/50). In addition to consolidating MoArk, the
Company has presumed for accounting purposes that it will acquire the remaining
42.5% in 2007. Effective July 1, 2003, the Company recorded this presumed $42.2
million payment as a long-term liability in the consolidated balance sheet as
"employee benefits and other liabilities" at a present value of $31.6 million
using an effective interest rate of 7%. The present value of this liability is
$33.8 million at June 30, 2004.
4. RESTRICTED CASH
On March 28, 2003, Cheese and Protein International LLC ("CPI"), a
97.0%-owned consolidated subsidiary, amended its lease for property and
equipment relating to its cheese manufacturing and whey processing plant in
Tulare, California. The amendment postponed the measurement of the fixed charge
coverage ratio requirement contained in the lease until March 2005. The
amendment requires Land O'Lakes to maintain a $20 million cash account (which
may be replaced by a letter of credit at the Company's option) to support the
lease. The cash account or letter of credit would only be drawn upon in the
event of a CPI default and would reduce amounts otherwise due under the lease.
The requirement can be lifted pending the achievement of certain financial
targets by CPI.
5. RECEIVABLES
A summary of receivables is as follows:
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2004 2003
----------- ---------------
Trade accounts.............................................. $107,618 $327,913
Notes and contracts......................................... 87,015 63,984
Notes from sale of trade receivables (see Note 6)........... 119,285 155,191
Other....................................................... 105,402 96,051
-------- --------
419,320 643,139
Less allowance for doubtful accounts........................ 17,665 19,552
-------- --------
Total receivables, net...................................... $401,655 $623,587
======== ========
</Table>
A substantial portion of Land O'Lakes receivables is concentrated in
agriculture as well as in wholesale and retail food industries. Collections of
these receivables may be dependent upon economic returns in these industries.
The Company's credit risks are continually reviewed, and management believes
that adequate provisions have been made for doubtful accounts.
F-6
LAND O'LAKES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. RECEIVABLES PURCHASE FACILITY
In December 2001, the Company established a $100 million receivables
purchase facility with CoBank, ACB ("CoBank"). In March 2004, the facility was
expanded to $200 million. A wholly-owned, unconsolidated special purpose entity
("SPE") has been 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 June 30, 2004, $200
million was outstanding under this facility and $20 million was outstanding
under this facility at December 31, 2003. The total accounts receivable sold
during the six months ended June 30, 2004 and 2003 were $2,535 million and
$1,245 million, respectively.
7. INVENTORIES
A summary of inventories is as follows:
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2004 2003
----------- ---------------
Raw materials............................................... $180,661 $159,511
Work in process............................................. 31,504 33,645
Finished goods.............................................. 348,492 303,670
-------- --------
Total inventories........................................... $560,657 $496,826
======== ========
</Table>
8. INVESTMENTS
A summary of investments is as follows:
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2004 2003
----------- ---------------
CF Industries, Inc. ........................................ $249,502 $249,502
Agriliance LLC.............................................. 141,811 92,134
Ag Processing Inc .......................................... 38,230 37,941
Advanced Food Products LLC.................................. 29,352 27,494
CoBank, ACB................................................. 16,705 18,583
Universal Cooperatives...................................... 8,224 8,224
Melrose Dairy Proteins, LLC................................. 8,699 6,623
Agronomy Company of Canada Ltd. ............................ 7,883 7,954
Prairie Farms Dairy, Inc. .................................. 5,653 5,125
MoArk/Fort Recovery Egg Marketing, LLC...................... 777 2,210
Other -- principally cooperatives and joint ventures........ 50,414 48,851
-------- --------
Total investments........................................... $557,250 $506,641
======== ========
</Table>
During the six months ended June 30, 2004, the Company sold its investment
in a swine joint venture for $2.0 million in cash and an investment in the feed
segment for $0.2 million in cash.
F-7
LAND O'LAKES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. GOODWILL AND OTHER INTANGIBLE ASSETS
GOODWILL
The carrying amount of goodwill is as follows:
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2004 2003
----------- ---------------
Dairy Foods................................................. $ 66,259 $ 66,259
Feed........................................................ 114,450 150,922
Seed........................................................ 10,907 12,405
Agronomy.................................................... 60,687 63,733
Layers...................................................... 79,765 79,764
-------- --------
Total goodwill.............................................. $332,068 $373,083
======== ========
</Table>
The decrease in goodwill of $41.0 million resulted from a $36.1 million
reduction related to the acquisition of the minority interest of Land O'Lakes
Farmland Feed LLC, amortization associated with investments in joint ventures
and cooperatives of $3.4 million, and an impairment of $1.5 million in the seed
segment.
OTHER INTANGIBLE ASSETS
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2004 2003
-------- ------------
Amortized other intangible assets:
Patents, less accumulated amortization of $3,222 and $2,622,
respectively.............................................. $ 13,547 $ 14,147
Trademarks, less accumulated amortization of $2,234 and
$2,044, respectively...................................... 2,106 2,296
Other intangible assets, less accumulated amortization of
$13,903 and $12,783, respectively......................... 8,856 9,870
-------- --------
Total amortized other intangible assets..................... 24,509 26,313
Total non-amortized other intangible assets -- trademarks... 76,625 76,625
-------- --------
Total other intangible assets............................... $101,134 $102,938
======== ========
</Table>
Amortization expense for the six months ended June 30, 2004 and 2003 was
$1.9 million and $2.3 million, respectively. The estimated amortization expense
related to other intangible assets subject to amortization for the next five
years will approximate $2.5 million annually. The weighted-average life of the
intangible assets subject to amortization is approximately 10 years.
10. DEBT OBLIGATIONS
The Company had notes and short-term obligations of $51.6 million at June
30, 2004 and $80.7 million at December 31, 2003. The Company also has a $185
million revolving credit facility due January, 2007, with variable interest
based on LIBOR. In July, 2004, the revolving credit facility was expanded by $15
million to $200 million. There were no borrowings under this facility as of June
30, 2004.
F-8
LAND O'LAKES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of long-term debt is as follows:
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2004 2003
----------- ---------------
Term A loan -- quarterly installments through 2006 (variable
rate based on LIBOR)...................................... $ -- $ 92,473
Term B loan -- quarterly installments through 2008 (variable
rate based on LIBOR)...................................... 118,373 152,374
Senior unsecured notes -- due 2011 (8.75%).................. 350,000 350,000
Senior secured notes -- due 2010 (9.00%).................... 175,000 175,000
MoArk LLC debt -- due 2004 through 2023 (5.77% weighted
average).................................................. 76,224 75,785
Industrial development revenue bonds and other secured notes
payable -- due 2004 through 2016 (1.1% to 5.5%)........... 14,929 14,940
Capital Securities of Trust Subsidiary -- due 2028
(7.45%)................................................... 190,700 190,700
Other debt.................................................. 17,948 21,951
-------- ----------
943,174 1,073,223
Less current portion........................................ 8,986 7,841
-------- ----------
Total long-term debt........................................ $934,188 $1,065,382
======== ==========
</Table>
During the six months ended June 30, 2004, the Company amended its
receivables securitization facility which expanded the facility from $100
million to $200 million. The incremental proceeds from the expansion were used
to make prepayments on the term loans. A mandatory $76.0 million payment in full
was made for Term A loan and a $24.0 million partial repayment was made for Term
B loan. Additional mandatory prepayments made during the six months ended June
30, 2004 were $16.5 million for Term A loan and $10.0 million for Term B loan.
The weighted average interest rates on short-term borrowings and notes
outstanding at June 30, 2004 and December 31, 2003 were 3.52% and 3.56%,
respectively.
Borrowings under the revolving credit facility and the term loan bear
interest at variable rates (either LIBOR or an Alternative Base Rate) plus
applicable margins. The margins depend on Land O'Lakes leverage ratio in the
case of the revolving credit facility. The margin on the Term B loan is fixed at
350 basis points over LIBOR. Based upon Land O'Lakes leverage ratio as of June
30, 2004, the LIBOR margin for the revolving credit facility is 250 basis
points. Spreads for the Alternative Base Rate are 100 basis points lower than
the applicable LIBOR spreads. LIBOR may be set for one, two, three or six month
periods at the election of Land O'Lakes. As of June 30, 2004, the interest rate
on the Term B loan was 4.73%.
Other debt includes a negative $4.0 million mark-to-market valuation for
the 8.75% senior unsecured notes related to the Company's interest rate swap
agreements. These swaps mirror the terms of the 8.75% senior unsecured notes and
effectively convert $150 million of such notes from a fixed 8.75% rate to an
effective rate of LIBOR plus 385 basis points.
11. PURCHASE OF MINORITY INTEREST
In June 2004, the Company completed the purchase of the remaining 8% of
Land O' Lakes Farmland Feed LLC from Farmland Industries, which now gives the
Company 100% ownership of Land O'Lakes Farmland Feed LLC. The Company paid $12.2
million to purchase the minority interest. As a result of this acquisition, a
minority interest of $55 million for this joint venture was eliminated from the
consolidated balance sheet.
F-9
LAND O'LAKES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. DERIVATIVE FINANCIAL INSTRUMENTS
In April and May 2004, the Company entered into three $50 million
fixed-to-floating interest rate swap agreements, designated as fair value
hedges, in an effort to return to historical exposure levels for floating
interest rate debt. These swaps mirror the terms of the 8.75% senior unsecured
notes and effectively convert $150 million of such notes from a fixed 8.75% rate
to an effective rate of LIBOR plus 385 basis points. As the critical terms of
the swaps and the debt are the same, the swap is assumed to be 100 percent
effective and the fair value gains on the swaps are completely offset by the
fair value adjustment of the underlying debt. At June 30, 2004, the notional
amount of the swaps was $150 million in aggregate and the fair value was
negative $4.0 million.
13. PENSION AND OTHER POSTRETIREMENT PLANS
The following tables present the components of net periodic benefit cost
for pension benefits and other postretirement benefits for the six months ended
June 30:
<Table>
<Caption>
OTHER
POSTRETIREMENT
PENSION BENEFITS BENEFITS
------------------- -----------------
2004 2003 2004 2003
-------- -------- ------ --------
Service cost................................... $ 10,500 $ 8,294 $ 500 $ 402
Interest cost.................................. 14,100 13,584 2,100 2,176
Expected return on assets...................... (16,350) (16,404) -- --
Amortization of actuarial loss................. 3,750 886 1,300 1,084
Amortization of prior service cost............. 400 422 150 134
Amortization of transition obligation.......... -- -- 300 322
-------- -------- ------ ------
Net periodic benefit cost...................... $ 12,400 $ 6,782 $4,350 $4,118
======== ======== ====== ======
</Table>
The Company expects to contribute approximately $12 million to its defined
benefit pension plans and $7 million to its other postretirement benefits plans
in 2004. During the six months ended June 30, 2004, the Company contributed $1.2
million to its defined benefit pension plans and $2.9 million to its other
postretirement benefits plans.
14. RESTRUCTURING AND IMPAIRMENT CHARGES
RESTRUCTURING CHARGES
For the six months ended June 30, 2004, the dairy foods segment recorded a
restructuring charge of $0.8 million for employees' severance related to the
closure of a facility in Volga, South Dakota. For the six months ended June 30,
2003, the Company recorded restructuring charges of $2.5 million. Of this
amount, dairy foods recorded a restructuring charge of $1.6 million, feed
recorded a restructuring charge of $0.6 million, and seed recorded a
restructuring charge of $0.3 million for costs related to closing facilities.
IMPAIRMENT CHARGES
For the six months ended June 30, 2004, the seed segment recorded goodwill
impairment charges of $1.5 million and the feed segment recorded an impairment
of $0.2 million for assets held for sale. For the six months ended June 30,
2003, the Company recorded impairment charges of $0.3 million in the seed
segment and $0.1 million in the feed segment for write-downs of certain plant
assets to their estimated fair values.
F-10
LAND O'LAKES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. GAIN ON LEGAL SETTLEMENTS
During the six months ended June 30, 2004 and 2003, the Company recognized
gains on legal settlements of $4.5 million and $19.2 million, respectively.
These gains primarily represent cash received from product suppliers against
whom the Company alleged certain price-fixing claims.
16. OTHER (INCOME) EXPENSE, NET
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30,
-----------------
2004 2003
-------- ------
Loss (gain) on sale of investments.......................... $ 143 $(846)
Gain on sale of intangible.................................. -- (550)
(Gain) loss on divestiture of businesses.................... (1,664) 700
------- -----
Total other (income) expense, net........................... $(1,521) $(696)
======= =====
</Table>
During the six months ended June 30, 2004, the Company recorded a $0.1
million loss on the sale of investments and the divestiture of QC, Inc., an
environmental, dairy and food testing company, which resulted in a gain of $1.7
million. During the six months ended June 30, 2003, the Company recorded a $0.8
million gain on sale of an investment in a swine joint venture within the feed
segment, a $0.6 million gain on the sale of a customer list, and $0.7 million
loss on divestiture of a business within the feed segment.
17. SEGMENT INFORMATION
The Company operates in six segments: Dairy Foods, Feed, Seed, Swine,
Agronomy and Layers.
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.
The feed segment is largely comprised of the operations of Land O'Lakes
Farmland Feed LLC ("Land O'Lakes Farmland Feed"), the Company's wholly owned
subsidiary. Land O'Lakes Farmland Feed develops, produces, markets and
distributes animal feeds such as ingredient feed, formula feed, milk replacers,
vitamins and additives.
The 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, 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.
The agronomy segment consists primarily of the Company's 50% ownership in
Agriliance LLC ("Agriliance"), which is accounted for under the equity method.
Agriliance markets and sells two primary product lines: crop protection
(including herbicides and pesticides) and crop nutrients (including fertilizers
and micronutrients).
The layers segment consists of the Company's MoArk joint venture, which was
consolidated as of July 1, 2003. MoArk produces and markets shell eggs and egg
products that are sold at retail and wholesale for consumer and industrial use
throughout the United States.
F-11
LAND O'LAKES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
<Table>
<Caption>
OTHER/
DAIRY FOODS FEED SEED SWINE AGRONOMY LAYERS ELIMINATION CONSOLIDATED
----------- ---------- -------- ------- --------- -------- ----------- ------------
FOR THE SIX MONTHS ENDED JUNE
30, 2004
Net sales................... $1,942,154 $1,357,469 $374,359 $45,981 $ -- $318,647 $(10,702) $4,027,908
Cost of sales(1)............ 1,856,947 1,231,476 326,334 48,534 -- 266,821 (10,702) 3,719,410
Selling, general and
administrative............ 83,869 120,882 26,689 2,761 7,119 18,204 364 259,888
Restructuring and impairment
charges................... 800 210 1,480 -- -- -- -- 2,490
Interest expense (income),
net....................... 14,727 13,157 2,719 2,990 4,403 7,489 (1,448) 44,037
Loss (gain) on legal
settlements............... 334 (4,433) -- -- -- (448) -- (4,547)
Other (income) expense,
net....................... (1,664) 66 (1) 78 -- -- -- (1,521)
Equity in (earnings) loss of
affiliated companies...... (4,958) (996) -- (619) (49,606) (10,355) 8 (66,526)
Minority interest in
earnings of
subsidiaries.............. -- 1,120 -- -- -- -- -- 1,120
---------- ---------- -------- ------- -------- -------- -------- ----------
(Loss) earnings before
income taxes.............. $ (7,901) $ (4,013) $ 17,138 $(7,763) $ 38,084 $ 36,936 $ 1,076 $ 73,557
========== ========== ======== ======= ======== ======== ======== ==========
FOR THE SIX MONTHS ENDED JUNE
30, 2003
Net sales................... $1,303,833 $1,196,153 $302,992 $43,666 $ -- $ -- $ 4,968 $2,851,612
Cost of sales(1)............ 1,236,451 1,056,570 262,269 43,281 -- -- 2,170 2,600,741
Selling, general and
administrative............ 72,583 116,023 22,271 2,600 6,683 978 4,257 225,395
Restructuring and impairment
charges................... 1,600 707 560 -- -- -- -- 2,867
Interest expense (income),
net....................... 14,049 13,842 2,251 2,713 4,742 2,646 (1,127) 39,116
Gain on legal settlements... (38) (19,139) -- -- -- -- -- (19,177)
Other (income) expense,
net....................... -- (696) -- -- -- -- -- (696)
Equity in (earnings) loss of
affiliated companies...... (1,130) (732) -- 290 (44,637) (4,253) 31 (50,431)
Minority interest in
earnings of
subsidiaries.............. -- 2,916 -- -- -- -- -- 2,916
---------- ---------- -------- ------- -------- -------- -------- ----------
(Loss) earnings before
income taxes.............. $ (19,682) $ 26,662 $ 15,641 $(5,218) $ 33,212 $ 629 $ (363) $ 50,881
========== ========== ======== ======= ======== ======== ======== ==========
(1) Cost of sales includes unrealized hedging losses (gains) of:
For the six months ended
June 30, 2004............. (2,706) 4,235 3,339 3,854 -- (246) -- 8,476
For the six months ended
June 30, 2003............. (696) (3,553) (305) (1,420) -- -- -- (5,974)
</Table>
18. CONSOLIDATING FINANCIAL INFORMATION
The Company has entered into financing arrangements which are guaranteed by
the Company and certain of its wholly-owned subsidiaries (the "Guarantor
Subsidiaries"). Such guarantees are full, unconditional and joint and several.
In June 2004, the Company completed the purchase of the remaining 8% of
Land O'Lakes Farmland Feed LLC from Farmland Industries, which now gives the
Company 100% ownership of Land O'Lakes Farmland Feed LLC. Accordingly, the Land
O'Lakes Farmland Feed LLC financial information, except for its majority-owned
subsidiaries which are excluded from the guarantee, has been combined with the
wholly-owned consolidated guarantors in the following supplemental financial
information.
F-12
LAND O'LAKES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following supplemental financial information sets forth, on an
unconsolidated basis, balance sheet, statement of operations and cash flow
information for Land O'Lakes, Guarantor Subsidiaries and Land O'Lakes 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.
F-13
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET
JUNE 30, 2004
<Table>
<Caption>
LAND WHOLLY-
O'LAKES, INC. OWNED
PARENT CONSOLIDATED NON-GUARANTOR
COMPANY GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- -------------- ------------- ------------ ------------
ASSETS
Current assets:
Cash and short-term investments...... $ 47,233 $ 7,470 $ 15,099 $ -- $ 69,802
Restricted cash...................... 20,213 -- -- -- 20,213
Receivables, net..................... 293,169 249,798 115,043 (256,355) 401,655
Inventories.......................... 332,862 172,110 55,685 -- 560,657
Prepaid expenses..................... 29,739 8,549 4,372 -- 42,660
Other current assets................. 20,288 11,102 9,000 -- 40,390
---------- -------- -------- ----------- ----------
Total current assets............... 743,504 449,029 199,199 (256,355) 1,135,377
Investments............................ 1,373,242 19,369 10,366 (845,727) 557,250
Property, plant and equipment, net..... 227,950 234,756 151,107 -- 613,813
Property under capital lease, net...... -- -- 104,975 -- 104,975
Goodwill............................... 185,711 82,112 64,245 -- 322,068
Other intangibles...................... 3,401 94,412 3,321 -- 101,134
Other assets........................... 57,183 34,495 55,232 (19,458) 127,452
---------- -------- -------- ----------- ----------
Total assets....................... $2,590,991 $914,173 $588,445 $(1,121,540) $2,972,069
========== ======== ======== =========== ==========
LIABILITIES AND EQUITIES
Current liabilities:
Notes and short-term obligations..... $ 123,356 $ 3,281 $ 96,119 $ (171,114) $ 51,642
Current portion of long-term debt.... 1,773 45,213 6,920 (44,920) 8,986
Current portion of obligations under
capital lease...................... -- -- 10,318 -- 10,318
Accounts payable..................... 394,378 147,295 32,290 (50,779) 523,184
Accrued expenses..................... 150,110 55,546 18,272 -- 223,928
Patronage refunds and other member
equities payable................... 13,350 -- -- -- 13,350
---------- -------- -------- ----------- ----------
Total current liabilities.......... 682,967 251,335 163,919 (266,813) 831,408
Long-term debt......................... 853,581 10,093 79,514 (9,000) 934,188
Obligations under capital lease........ -- -- 95,709 -- 95,709
Employee benefits and other
liabilities.......................... 139,692 30,339 17,041 -- 187,072
Minority interests..................... -- 3,004 5,937 -- 8,941
Equities:
Capital stock........................ 2,095 463,823 120,536 (584,359) 2,095
Member equities...................... 875,360 -- -- -- 875,360
Accumulated other comprehensive
loss............................... (65,617) (1,692) -- 1,692 (65,617)
Retained earnings.................... 102,913 157,271 105,789 (263,060) 102,913
---------- -------- -------- ----------- ----------
Total equities..................... 914,751 619,402 226,325 (845,727) 914,751
---------- -------- -------- ----------- ----------
Commitments and contingencies
Total liabilities and equities..... $2,590,991 $914,173 $588,445 $(1,121,540) $2,972,069
========== ======== ======== =========== ==========
</Table>
F-14
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2004
<Table>
<Caption>
LAND WHOLLY-
O'LAKES, INC. OWNED
PARENT CONSOLIDATED NON-GUARANTOR
COMPANY GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------- ------------ ------------
Net sales...................... $2,090,832 $1,453,363 $483,713 $ -- $4,027,908
Cost of sales.................. 1,970,543 1,318,896 429,971 -- 3,719,410
---------- ---------- -------- -------- ----------
Gross profit................... 120,289 134,467 53,742 -- 308,498
Selling, general and
administrative............... 112,892 125,307 21,689 -- 259,888
Restructuring and impairment
charges...................... 2,280 210 -- -- 2,490
---------- ---------- -------- -------- ----------
Earnings from operations....... 5,117 8,950 32,053 -- 46,120
Interest expense, net.......... 40,030 69 3,938 -- 44,037
Gain on legal settlements...... (3,810) (289) (448) -- (4,547)
Other (income) expense, net.... (1,587) 66 -- -- (1,521)
Equity in (earnings) loss of
affiliated companies......... (97,483) (856) (10,355) 42,168 (66,526)
Minority interest in earnings
of subsidiaries.............. 459 -- 661 -- 1,120
---------- ---------- -------- -------- ----------
Earnings (loss) before income
taxes........................ 67,508 9,960 38,257 (42,168) 73,557
Income tax expense............. 5,639 115 5,934 -- 11,688
---------- ---------- -------- -------- ----------
Net earnings (loss)............ $ 61,869 $ 9,845 $ 32,323 $(42,168) $ 61,869
========== ========== ======== ======== ==========
</Table>
F-15
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2004
<Table>
<Caption>
LAND WHOLLY-
O'LAKES, INC. OWNED
PARENT CONSOLIDATED NON-GUARANTOR
COMPANY GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)............................. $ 61,869 $ 9,845 $ 32,323 $(42,168) $ 61,869
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities:
Depreciation and amortization................. 25,118 17,997 11,495 -- 54,610
Amortization of deferred financing costs...... 3,272 -- 298 -- 3,570
Bad debt expense.............................. 638 -- -- -- 638
Proceeds from patronage revolvement
received.................................... 2,043 -- -- -- 2,043
Non-cash patronage income..................... (1,023) -- -- -- (1,023)
Deferred income tax expense................... 3,772 -- -- -- 3,772
(Increase) decrease in other assets........... (11,821) 6,806 955 179 (3,881)
Increase (decrease) in other liabilities...... 4,380 (4,795) (1,014) 632 (797)
Restructuring and impairment charges.......... 2,280 210 -- -- 2,490
Gain on divestiture of business............... (1,664) -- -- -- (1,664)
Equity in (earnings) loss of affiliated
companies................................... (97,483) (856) (10,355) 42,168 (66,526)
Minority interests............................ 459 -- 661 -- 1,120
Other......................................... (1,213) -- -- -- (1,213)
Changes in current assets and liabilities, net
of acquisitions and divestitures:
Receivables................................... 92,490 22,174 4,413 97,101 216,178
Inventories................................... (66,598) 5,898 (2,791) -- (63,491)
Other current assets.......................... 212,950 (7,721) (2,802) -- 202,427
Accounts payable.............................. (172,149) (22,905) (6,416) (37,707) (239,177)
Accrued expenses.............................. 11,994 (6,259) 65 -- 5,800
--------- -------- -------- -------- ---------
Net cash provided by operating activities....... 69,314 20,394 26,832 60,205 176,745
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment...... (12,224) (7,170) (22,018) -- (41,412)
Acquisition of minority interest................ (12,150) -- -- -- (12,150)
Payments for investments........................ (24,670) -- -- 24,500 (170)
Net proceeds from divestiture of businesses..... 7,500 -- -- -- 7,500
Proceeds from sale of investments............... 1,983 216 -- -- 2,199
Proceeds from sale of property, plant and
equipment..................................... 6,574 486 536 -- 7,596
Dividends from investments in affiliated
companies..................................... 13,346 444 11,262 (10,600) 14,452
Increase in restricted cash..................... (95) -- -- -- (95)
Other........................................... 392 -- -- -- 392
--------- -------- -------- -------- ---------
Net cash (used) provided by investing
activities.................................... (19,344) (6,024) (10,220) 13,900 (21,688)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term debt.......... 60,345 (10,028) (18,089) (60,205) (28,977)
Proceeds from issuance of long-term debt........ 766 14 16,932 -- 17,712
Principal payments on long-term debt............ (127,059) (93) (15,329) -- (142,481)
Principal payments on obligations under capital
lease......................................... -- -- (5,241) -- (5,241)
Payments for redemption of member equities...... (32,616) -- -- -- (32,616)
Payments for debt issuance costs................ (4,166) -- -- -- (4,166)
Other........................................... 240 -- 13,900 (13,900) 240
--------- -------- -------- -------- ---------
Net cash used by financing activities........... (102,490) (11,107) (7,827) (74,105) (195,529)
--------- -------- -------- -------- ---------
Net (decrease) increase in cash................. (52,520) 3,263 8,785 -- (40,472)
Cash and short-term investments at beginning of
period.......................................... 99,753 4,207 6,314 -- 110,274
--------- -------- -------- -------- ---------
Cash and short-term investments at end of
period.......................................... $ 47,233 $ 7,470 $ 15,099 $ -- $ 69,802
========= ======== ======== ======== =========
</Table>
F-16
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2003
<Table>
<Caption>
LAND WHOLLY- MAJORITY-
O'LAKES, INC. OWNED OWNED
PARENT CONSOLIDATED CONSOLIDATED NON-GUARANTOR
COMPANY GUARANTORS GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------- ------------ ------------
ASSETS
Current assets:
Cash and short-term investments.... $ 99,753 $ 4,207 $ -- $ 6,314 $ -- $ 110,274
Restricted cash.................... 20,118 -- -- -- -- 20,118
Receivables, net................... 386,678 82,097 194,002 120,064 (159,254) 623,587
Inventories........................ 265,924 45,981 132,027 52,894 -- 496,826
Prepaid expenses................... 227,495 3,053 10,975 4,850 -- 246,373
Other current assets............... 33,968 2,318 -- 5,720 -- 42,006
---------- -------- -------- -------- ----------- ----------
Total current assets............. 1,033,936 137,656 337,004 189,842 (159,254) 1,539,184
Investments.......................... 1,311,131 223 18,587 11,227 (834,527) 506,641
Property, plant and equipment, net... 246,803 13,357 228,100 136,371 -- 624,631
Property under capital lease, net.... -- -- 31 109,114 -- 109,145
Goodwill............................. 183,665 3,224 121,993 64,201 -- 373,083
Other intangibles.................... 1,140 3,041 95,241 3,516 -- 102,938
Other assets......................... 65,734 4,464 26,483 56,036 (19,279) 133,438
---------- -------- -------- -------- ----------- ----------
Total assets..................... $2,842,409 $161,965 $827,439 $570,307 $(1,013,060) $3,389,060
========== ======== ======== ======== =========== ==========
LIABILITIES AND EQUITIES
Current liabilities:
Notes and short-term obligations... $ 62,802 $ 2,927 $ 165 $114,208 $ (99,399) $ 80,703
Current portion of long-term
debt............................. 1,786 56,430 -- 6,055 (56,430) 7,841
Current portion of obligations
under capital lease.............. -- -- -- 10,399 -- 10,399
Accounts payable................... 566,201 59,621 110,238 38,706 (13,072) 761,694
Accrued expenses................... 145,705 23,740 38,824 18,207 -- 226,476
Patronage refunds and other member
equities payable................. 19,449 -- -- -- -- 19,449
---------- -------- -------- -------- ----------- ----------
Total current liabilities........ 795,943 142,718 149,227 187,575 (168,901) 1,106,562
Long-term debt....................... 984,884 9,769 -- 79,729 (9,000) 1,065,382
Obligations under capital lease...... -- -- 14 99,636 -- 99,650
Employee benefits and other
liabilities........................ 127,881 1,256 28,803 18,055 (632) 175,363
Minority interests................... 54,337 -- 2,561 5,841 -- 62,739
Equities:
Capital stock...................... 2,125 1,216 502,506 95,745 (599,467) 2,125
Member equities.................... 866,586 -- -- -- -- 866,586
Accumulated other comprehensive
loss............................. (65,617) -- -- -- -- (65,617)
Retained earnings.................. 76,270 7,006 144,328 83,726 (235,060) 76,270
---------- -------- -------- -------- ----------- ----------
Total equities................... 879,364 8,222 646,834 179,471 (834,527) 879,364
---------- -------- -------- -------- ----------- ----------
Commitments and contingencies
Total liabilities and equities... $2,842,409 $161,965 $827,439 $570,307 $(1,013,060) $3,389,060
========== ======== ======== ======== =========== ==========
</Table>
F-17
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2003
<Table>
<Caption>
LAND WHOLLY- MAJORITY-
O'LAKES, INC. OWNED OWNED
PARENT CONSOLIDATED CONSOLIDATED NON-GUARANTOR
COMPANY GUARANTORS GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------- ------------ ------------
Net sales................ $1,515,189 $98,702 $1,169,051 $ 68,670 $ -- $2,851,612
Cost of sales............ 1,397,510 93,326 1,033,781 76,124 -- 2,600,741
---------- ------- ---------- -------- -------- ----------
Gross profit............. 117,679 5,376 135,270 (7,454) -- 250,871
Selling, general and
administrative......... 104,297 6,449 111,673 2,976 -- 225,395
Restructuring and
impairment charges..... 1,600 560 707 -- -- 2,867
---------- ------- ---------- -------- -------- ----------
Earnings (loss) from
operations............. 11,782 (1,633) 22,890 (10,430) -- 22,609
Interest expense
(income), net.......... 36,533 1,341 597 645 -- 39,116
Gain on legal
settlements............ (16,175) -- (3,002) -- -- (19,177)
Other (income) expense,
net.................... 700 -- (846) (550) -- (696)
Equity in (earnings) loss
of affiliated
companies.............. (66,650) -- (556) -- 16,775 (50,431)
Minority interest in
earnings of
subsidiaries........... 2,177 -- 371 368 -- 2,916
---------- ------- ---------- -------- -------- ----------
Earnings (loss) before
income taxes........... 55,197 (2,974) 26,326 (10,893) (16,775) 50,881
Income tax expense
(benefit).............. 10,645 79 -- (4,395) -- 6,329
---------- ------- ---------- -------- -------- ----------
Net earnings (loss)...... $ 44,552 $(3,053) $ 26,326 $ (6,498) $(16,775) $ 44,552
========== ======= ========== ======== ======== ==========
</Table>
F-18
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2003
<Table>
<Caption>
LAND WHOLLY- MAJORITY-
O'LAKES, INC. OWNED OWNED
PARENT CONSOLIDATED CONSOLIDATED NON-GUARANTOR
COMPANY GUARANTORS GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)................. $ 44,552 $ (3,053) $ 26,326 $ (6,498) $(16,775) $ 44,552
Adjustments to reconcile net
earnings (loss) to net cash
provided (used) by operating
activities:
Depreciation and amortization..... 28,749 1,502 19,881 3,872 -- 54,004
Amortization of deferred financing
charges......................... 1,846 -- -- -- -- 1,846
Bad debt expense.................. 621 -- 1,139 -- -- 1,760
Proceeds from patronage
revolvement received............ 1,316 -- -- -- -- 1,316
Non-cash patronage income......... (1,222) -- -- -- -- (1,222)
Receivable from legal
settlement...................... 90,707 -- 6,000 -- -- 96,707
Deferred income tax expense....... 4,346 -- -- -- -- 4,346
Decrease (increase) in other
assets.......................... 33,665 11,514 (520) (2,566) (33,791) 8,302
Increase (decrease) in other
liabilities..................... 1,974 (11) (1,810) (283) -- (130)
Restructuring and impairment
charges......................... 1,600 560 707 -- -- 2,867
Loss on divestiture of business... 700 -- -- -- -- 700
Equity in (earnings) loss of
affiliated companies............ (66,650) -- (556) -- 16,775 (50,431)
Minority interest................. 2,177 -- 371 368 -- 2,916
Other............................. (9,135) 879 (1,606) 1,325 -- (8,537)
Changes in current assets and
liabilities, net of acquisitions
and divestitures:
Receivables....................... 34,062 12,573 66,772 (3,583) 57,302 167,126
Inventories....................... (53,508) 19,052 (1,658) (1,241) -- (37,355)
Other current assets.............. 148,872 724 1,263 (560) -- 150,299
Accounts payable.................. (113,679) (51,709) (39,242) (5,038) (90,235) (299,903)
Accrued expenses.................. 34,810 936 (16,033) (1,455) (4,067) 14,191
--------- -------- -------- -------- -------- ---------
Net cash provided (used) by
operating activities.............. 185,803 (7,033) 61,034 (15,659) (70,791) 153,354
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and
equipment......................... (23,517) (499) (9,257) (1,681) -- (34,954)
Payments for investments............ (9,675) -- -- -- -- (9,675)
Proceeds from divestiture of
business.......................... 465 -- -- -- -- 465
Proceeds from sale of investments... -- -- 3,000 -- -- 3,000
Proceeds from sale of property,
plant and equipment............... 3,081 1,069 2,157 1,708 -- 8,015
Dividends from investments in
affiliated companies.............. 2,798 -- -- -- -- 2,798
Increase in restricted cash......... (20,000) -- -- -- -- (20,000)
Other............................... 440 -- 2,540 -- -- 2,980
--------- -------- -------- -------- -------- ---------
Net cash (used) provided by
investing activities.............. (46,408) 570 (1,560) 27 -- (47,371)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in short-term
debt.............................. (26,417) (3,574) 963 11,488 31,849 14,309
Proceeds from issuance of long-term
debt.............................. 1,202 -- -- -- -- 1,202
Payments on principal of long-term
debt.............................. (70,345) (37) (59,588) (2,658) 59,576 (73,052)
Payments on principal of capital
lease obligation.................. -- -- -- (4,435) -- (4,435)
Payments for redemption of member
equities.......................... (23,662) -- -- -- -- (23,662)
Other............................... 808 10,314 (8) 10,328 (20,634) 808
--------- -------- -------- -------- -------- ---------
Net cash (used) provided by
financing activities.............. (118,414) 6,703 (58,633) 14,723 70,791 (84,830)
--------- -------- -------- -------- -------- ---------
Net increase (decrease) in cash and
short-term investment............. 20,981 240 841 (909) -- 21,153
Cash and short-term investments at
beginning of period................. 58,334 2,584 (1,461) 4,870 -- 64,327
--------- -------- -------- -------- -------- ---------
Cash and short-term investments at end
of period........................... $ 79,315 $ 2,824 $ (620) $ 3,961 $ -- $ 85,480
========= ======== ======== ======== ======== =========
</Table>
F-19
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Land O'Lakes, Inc.:
We have audited the accompanying consolidated balance sheets of Land
O'Lakes, Inc. and subsidiaries as of December 31, 2003 and 2002, and the related
consolidated statements of operations, cash flows and equities for each of the
years in the three-year period ended December 31, 2003. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. We did not audit the consolidated financial
statements of MoArk LLC, a majority-owned subsidiary, as of and for the eleven
months ended December 27, 2003, which statements reflect total assets and
revenues constituting eight percent and five percent, respectively, of the
related consolidated totals. Those statements were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it relates to
the amounts included for MoArk LLC, is based solely on the report of the other
auditors.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Land O'Lakes, Inc. and subsidiaries
as of December 31, 2003 and 2002, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
2003 in conformity with U.S. generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, the
Company has restated the consolidated financial statements for the years ended
December 31, 2003, 2002 and 2001.
As discussed in Note 1 to the consolidated financial statements, in 2003,
the Company adopted the provisions of the Financial Accounting Standards Board's
Interpretation No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB 51." In 2002, the Company adopted the provisions of the
Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets."
/s/ KPMG LLP
Minneapolis, Minnesota
January 30, 2004, except as to the seventh paragraph of Note 21, which is as of
February 24, 2004,
and except as to Note 2, which is as of August 12, 2004
F-20
LAND O'LAKES, INC.
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
RESTATED
DECEMBER 31,
-----------------------
2003 2002
---------- ----------
($ IN THOUSANDS)
ASSETS
Current assets:
Cash and short-term investments........................... $ 110,274 $ 64,327
Restricted cash........................................... 20,118 --
Receivables, net.......................................... 623,587 545,378
Receivable from legal settlement.......................... -- 96,707
Inventories............................................... 496,826 446,600
Prepaid expenses.......................................... 246,373 189,246
Other current assets...................................... 42,006 13,878
---------- ----------
Total current assets................................... 1,539,184 1,356,136
Investments................................................. 506,641 545,592
Property, plant and equipment, net.......................... 624,631 579,860
Property under capital lease, net........................... 109,145 105,736
Goodwill.................................................... 373,083 323,413
Other intangibles........................................... 102,938 101,770
Other assets................................................ 133,438 220,124
---------- ----------
Total assets........................................... $3,389,060 $3,232,631
========== ==========
LIABILITIES AND EQUITIES
Current liabilities:
Notes and short-term obligations.......................... $ 80,703 $ 37,829
Current portion of long-term debt......................... 7,841 104,563
Current portion of obligations under capital lease........ 10,399 108,279
Accounts payable.......................................... 761,694 701,445
Accrued expenses.......................................... 226,476 207,027
Patronage refunds payable and other member equities
payable................................................ 19,449 12,388
---------- ----------
Total current liabilities.............................. 1,106,562 1,171,531
Long-term debt.............................................. 1,065,382 1,007,308
Obligations under capital lease............................. 99,650 --
Employee benefits and other liabilities..................... 175,363 104,340
Minority interests.......................................... 62,739 53,687
Equities:
Capital stock............................................. 2,125 2,190
Member equities........................................... 866,586 858,996
Accumulated other comprehensive loss...................... (65,617) --
Retained earnings......................................... 76,270 34,579
---------- ----------
Total equities......................................... 879,364 895,765
---------- ----------
Commitments and contingencies
Total liabilities and equities......................... $3,389,060 $3,232,631
========== ==========
</Table>
See accompanying notes to consolidated financial statements.
F-21
LAND O'LAKES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
RESTATED
YEARS ENDED DECEMBER 31,
------------------------------------
2003 2002 2001
---------- ---------- ----------
($ IN THOUSANDS)
Net sales................................................ $6,326,103 $5,842,535 $5,857,718
Cost of sales............................................ 5,742,938 5,350,209 5,376,082
---------- ---------- ----------
Gross profit............................................. 583,165 492,326 481,636
Selling, general and administrative...................... 468,341 470,648 382,329
Restructuring and impairment charges..................... 7,486 31,412 3,733
---------- ---------- ----------
Earnings (loss) from operations.......................... 107,338 (9,734) 95,574
Interest expense, net.................................... 82,948 78,671 55,684
Gain on legal settlements................................ (22,842) (155,544) (2,996)
Other (income) expense, net.............................. (1,586) (8,243) 23,117
Equity in earnings of affiliated companies............... (57,145) (22,675) (48,583)
Minority interest in earnings of subsidiaries............ 6,366 5,487 6,882
---------- ---------- ----------
Earnings before income taxes............................. 99,597 92,570 61,470
Income tax expense (benefit)............................. 17,603 (3,802) (6,601)
---------- ---------- ----------
Net earnings............................................. $ 81,994 $ 96,372 $ 68,071
========== ========== ==========
Applied to:
Member equities
Allocated patronage refunds......................... $ 40,045 $ 96,900 $ 70,552
Deferred equities................................... (312) (13,128) (258)
---------- ---------- ----------
39,733 83,772 70,294
Retained earnings...................................... 42,261 12,600 (2,223)
---------- ---------- ----------
$ 81,994 $ 96,372 $ 68,071
========== ========== ==========
</Table>
See accompanying notes to consolidated financial statements.
F-22
LAND O'LAKES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
RESTATED
YEARS ENDED DECEMBER 31
-----------------------------------
2003 2002 2001
--------- -------- ----------
($ IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings.............................................. $ 81,994 $ 96,372 $ 68,071
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization........................... 113,032 103,699 96,327
Amortization of deferred financing costs................ 7,736 3,063 961
Bad debt expense........................................ 5,222 5,094 1,871
Proceeds from patronage revolvement received............ 5,000 2,061 2,895
Non-cash patronage income............................... (3,578) (1,921) (4,999)
Receivable from legal settlement........................ 96,707 (96,707) --
Deferred income tax expense (benefit)................... 11,674 (8,810) 18,962
Decrease (increase) in other assets..................... 5,865 (85,843) (12,543)
Decrease in other liabilities........................... (2,216) (2,301) (4,527)
Restructuring and impairment charges.................... 7,486 31,412 3,733
Gain from divestitures of businesses.................... (684) (4,992) --
Equity in earnings of affiliated companies.............. (57,145) (22,675) (48,583)
Minority interests...................................... 6,366 5,487 6,882
Other................................................... (12,124) (74) (6,153)
Changes in current assets and liabilities, net of
acquisitions and divestitures:
Receivables............................................. (51,080) (21,757) 42,641
Inventories............................................. (13,778) (4,624) 21,355
Other current assets.................................... (58,252) (22,216) (200)
Accounts payable........................................ 41,921 62,711 123,625
Accrued expenses........................................ 43,357 (15,971) (36,014)
--------- -------- ----------
Net cash provided by operating activities................. 227,503 22,008 274,304
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment................ (74,052) (87,437) (83,936)
Acquisitions, net of cash acquired........................ -- -- (371,858)
Payments for investments.................................. (10,297) (16,226) (46,189)
Net proceeds from divestiture of businesses............... 1,815 16,070 --
Proceeds from sale of investments......................... 3,000 27,371 5,264
Proceeds from sale of property, plant and equipment....... 22,969 24,313 30,224
Dividends from investments in affiliated companies........ 37,356 26,558 3,548
Increase in restricted cash............................... (20,118) -- --
Other..................................................... 4,105 5,116 1,745
--------- -------- ----------
Net cash used by investing activities..................... (35,222) (4,235) (461,202)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term debt.................... 11,683 10,118 (53,812)
Proceeds from issuance of long-term debt.................. 185,037 6,057 1,369,528
Principal payments on long-term debt...................... (304,910) (62,040) (935,104)
Principal payments on obligations under capital lease..... (9,590) -- --
Payments for debt issuance costs.......................... (3,486) -- (20,265)
Payments for redemption of member equities................ (24,380) (37,878) (46,896)
Other..................................................... (688) 128 (378)
--------- -------- ----------
Net cash (used) provided by financing activities.......... (146,334) (83,615) 313,073
--------- -------- ----------
Net increase (decrease) in cash........................... 45,947 (65,842) 126,175
Cash and short-term investments at beginning of year........ 64,327 130,169 3,994
--------- -------- ----------
Cash and short-term investments at end of year.............. $ 110,274 $ 64,327 $ 130,169
========= ======== ==========
</Table>
See accompanying notes to consolidated financial statements.
F-23
LAND O'LAKES, INC.
CONSOLIDATED STATEMENTS OF EQUITIES
<Table>
<Caption>
RESTATED
-------------------------------------------------------------------------------
ACCUMULATED
MEMBER EQUITIES OTHER
CAPITAL ------------------------------- COMPREHENSIVE RETAINED TOTAL
STOCK ALLOCATED DEFERRED NET LOSS EARNINGS EQUITIES
------- --------- -------- -------- ------------- -------- --------
Balance, December 31, 2000 as previously
reported..................................... $2,345 $774,921 $ (5,980) $768,941 $ -- $33,668 $804,954
Prior period adjustments (See Note 2).......... -- -- (8,905) (8,905) -- (911) (9,816)
------ -------- -------- -------- -------- ------- --------
Balance, December 31, 2000..................... 2,345 774,921 (14,885) 760,036 -- 32,757 795,138
Capital stock issued........................... 65 -- -- -- -- -- 65
Capital stock redeemed......................... (105) -- -- -- -- -- (105)
2001 earnings, as applied...................... -- 70,552 (258) 70,294 -- (2,223) 68,071
Less portion stated as current liability..... -- (19,900) -- (19,900) -- -- (19,900)
Portion of member equities stated as current
liability.................................... -- (9,000) -- (9,000) -- -- (9,000)
Cash patronage and redemption of member
equities..................................... -- (46,896) -- (46,896) -- -- (46,896)
Redemption included in prior year's
liabilities.................................. -- 37,493 -- 37,493 -- -- 37,493
Other.......................................... -- (608) 2,570 1,962 -- (3,545) (1,583)
------ -------- -------- -------- -------- ------- --------
Balance, December 31, 2001..................... 2,305 806,562 (12,573) 793,989 -- 26,989 823,283
Capital stock issued........................... 5 -- -- -- -- -- 5
Capital stock redeemed......................... (120) -- -- -- -- -- (120)
2002 earnings, as applied...................... -- 96,900 (13,128) 83,772 -- 12,600 96,372
Less portion stated as current liability..... -- (4,178) -- (4,178) -- -- (4,178)
Portion of member equities stated as current
liability.................................... -- (8,210) -- (8,210) -- -- (8,210)
Cash patronage and redemption of member
equities..................................... -- (37,878) -- (37,878) -- -- (37,878)
Redemption included in prior year's
liabilities.................................. -- 28,900 -- 28,900 -- -- 28,900
Other.......................................... -- 2,601 -- 2,601 -- (5,010) (2,409)
------ -------- -------- -------- -------- ------- --------
Balance, December 31, 2002..................... 2,190 884,697 (25,701) 858,996 -- 34,579 895,765
Capital stock issued........................... 3 -- -- -- -- -- 3
Capital stock redeemed......................... (68) -- -- -- -- -- (68)
2003 earnings, as applied...................... -- 40,045 (312) 39,733 -- 42,261 81,994
Less portion stated as current liability..... -- (11,640) -- (11,640) -- -- (11,640)
Portion of member equities stated as current
liability.................................... -- (7,809) -- (7,809) -- -- (7,809)
Cash patronage and redemption of member
equities..................................... -- (24,380) -- (24,380) -- -- (24,380)
Redemption included in prior year's
liabilities.................................. -- 12,388 -- 12,388 -- -- 12,388
Minimum pension liability adjustment, net of
income tax................................... -- -- -- -- (65,617) -- (65,617)
Other.......................................... -- (702) -- (702) -- (570) (1,272)
------ -------- -------- -------- -------- ------- --------
Balance, December 31, 2003..................... $2,125 $892,599 $(26,013) $866,586 $(65,617) $76,270 $879,364
====== ======== ======== ======== ======== ======= ========
</Table>
See accompanying notes to consolidated financial statements.
F-24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ IN THOUSANDS IN TABLES)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Land O'Lakes, Inc. is a diversified, farmer-owned food and agricultural
cooperative serving agricultural producers throughout the United States. Land
O'Lakes procures 13 billion pounds of member milk annually, markets more than
300 dairy products and provides member cooperatives, farmers and ranchers with
an extensive line of agricultural supplies (including feed, seed, crop nutrients
and crop protection products) and services.
REVENUE RECOGNITION
The Company recognizes revenue when products are shipped and the customer
takes ownership and assumes risk of loss, collection of the relevant receivables
is probable, persuasive evidence of an arrangement exists and sales price is
fixed or determinable.
STATEMENT PRESENTATION
The consolidated financial statements include the accounts of Land O'Lakes,
Inc. and wholly-owned and majority-owned subsidiaries and limited liability
companies ("Land O'Lakes" or the "Company"). Intercompany transactions and
balances have been eliminated. Certain reclassifications have been made to the
2002 and 2001 consolidated financial statements to conform to the 2003
presentation.
CASH AND SHORT-TERM INVESTMENTS
Cash and short-term investments include short-term, highly liquid
investments with original maturities of three months or less.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined
on a first-in, first-out or average cost basis.
DERIVATIVE COMMODITY INSTRUMENTS
The Company uses derivative commodity instruments, primarily futures
contracts, to reduce the exposure to changes in commodity prices. These
contracts are not designated as hedges under Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities." The futures contracts are marked to market each month and gains and
losses ("unrealized hedging gains and losses") are recognized in earnings.
INVESTMENTS
Investments in other cooperatives are stated at cost plus unredeemed
patronage refunds received, or estimated to be received, in the form of capital
stock and other equities. Estimated patronage refunds are not recognized for tax
purposes until notices of allocation are received. The equity method of
accounting is used for investments in other companies in which Land O'Lakes
voting interest is 20 to 50 percent. Investments in less than 20 percent-owned
companies are stated at cost, as the Company does not have the ability to exert
significant influence.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is
calculated using the straight-line method over the estimated useful life (10 to
30 years for land improvements and buildings and building
F-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
equipment, 5 to 10 years for machinery and equipment and 3 to 5 years for
software) of the respective assets in accordance with the straight-line method.
Accelerated methods of depreciation are used for income tax purposes.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of the purchase price of an acquired entity
over the amounts assigned to assets acquired and liabilities assumed. Upon
adoption of the remaining provisions of SFAS No. 142, "Goodwill and Other
Intangible Assets," on January 1, 2002, the Company no longer amortizes goodwill
except for goodwill related to the acquisition of cooperatives and the formation
of joint ventures.
Other intangible assets consist primarily of trademarks, patents, and
agreements not to compete. Certain trademarks are not amortized because they
have indefinite lives. The remaining other intangible assets are amortized using
the straight-line method over the estimated useful lives, ranging from 2 to 15
years.
RECOVERABILITY OF LONG-LIVED ASSETS
The test for goodwill impairment is a two-step process and is performed on
at least an annual basis. The first step is a comparison of the fair value of
the reporting unit with its carrying amount, including goodwill. If this step
reflects impairment, then the loss would be measured as the excess of recorded
goodwill over its implied fair value. Implied fair value is the excess of fair
value of the reporting unit over the fair value of all identified assets and
liabilities. The Company assesses the recoverability of other long-lived assets
annually or whenever events or changes in circumstance indicate that expected
future undiscounted cash flows might not be sufficient to support the carrying
amount of an asset. The Company deems an asset to be impaired if a forecast of
undiscounted future operating cash flows is less than its 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.
INCOME TAXES
Land O'Lakes is a non-exempt agricultural cooperative and is taxed on all
non-member earnings and any member earnings not paid or allocated to members by
qualified written notices of allocation as that term is used in section 1388(c)
of the Internal Revenue Code. The Company files a consolidated tax return with
its fully taxable subsidiaries.
The Company establishes deferred income tax assets and liabilities based on
the difference between the financial and income tax carrying values of assets
and liabilities using existing tax rates.
ADVERTISING AND PROMOTION
Advertising and promotion costs are expensed as incurred. Advertising and
promotion costs were $52.1 million, $53.9 million and $48.8 million in 2003,
2002 and 2001, respectively.
RESEARCH AND DEVELOPMENT
Expenditures for research and development are charged to administrative
expense in the year incurred. Total research and development expenses were $29.0
million, $33.3 million and $23.8 million in 2003, 2002 and 2001, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
On January 17, 2003, the Financial Accounting Standards Board ("FASB")
issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB 51," ("FIN 46"). The primary objectives of FIN 46 are to
provide guidance on the identification and consolidation of variable interest
entities, or VIEs, which are entities for which control is achieved through
means other than through voting
F-26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
rights. As permitted by the Interpretation, the Company early-adopted FIN 46 as
of July 1, 2003 and began consolidating its joint venture interest in MoArk LLC
("MoArk"), an egg production and marketing company. FIN 46 was revised in
December 2003 and is effective for us on January 1, 2005. The revision is not
expected to have a significant impact on the Company.
In May, 2003, the FASB issued Statement of Financial Accounting Standards
150, "Accounting for Certain Financial Instruments with Characteristics of Both
Liability and Equity." The statement establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). The statement is effective for us as of January 1, 2004. The
Company has evaluated the standard and has determined that it will not have an
impact on its consolidated financial statements.
In December 2003, the FASB revised Statement of Financial Accounting
Standards 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits." The statement revises the disclosures about pension and other
postretirement benefit plans. It requires additional disclosure regarding
changes in benefit obligations and fair value of plan assets. The statement was
effective for the Company as of December 31, 2003.
On January 12, 2004, the FASB issued FASB Staff Position 106-1, "Accounting
and Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003" (the "Act"). The position permits a
sponsor of a postretirement health care plan that provides a prescription drug
benefit to make a one-time election to defer accounting for the effects of the
Act. Regardless of whether a sponsor elects that deferral, the position requires
certain disclosures pending further consideration of the underlying accounting
issues. The position is effective for the Company as of December 31, 2003, and
the Company made the one-time election to defer accounting for the effects of
the Act.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
2. FINANCIAL STATEMENT RESTATEMENT
The Company announced in June 2004 that it planned to restate financial
results for certain periods due to accounting errors it identified at its
Carlisle, PA dairy facility and reported in its dairy foods segment. The
consolidated financial statements as of and for the years ended December 31,
2003 and 2002 and for the year ended December 31, 2001, have been restated to
reflect adjustments necessary to correct these errors. The adjustments relate
primarily to the manner in which its Carlisle facility estimated and recorded
monthly financial information. Because all information required to be recorded
was not known at month-end, the Carlisle facility used an accounting model to
estimate certain sales and cost of sales and the related accounts receivable,
accounts payable and inventory and recorded financial information in accordance
with the model. The accounts were not properly reconciled in subsequent periods
to reflect the actual results. Other adjustments relate to accrual cutoffs and
mathematical errors in inventory calculations. The financial statement line
items impacted thereby include net sales, cost of sales, gross profit, earnings
(loss) from operations, earnings before income taxes, income tax expense
(benefit), net earnings, receivables, inventories, accounts payable, accrued
expenses, deferred income taxes (included in other assets and employee benefits
and other liabilities), member equities, and retained earnings. The consolidated
financial statements as of and
F-27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for the years ended December 31, 2003 and 2002 and for the year ended December
31, 2001 and notes thereto included in this prospectus have been restated to
include the effects of the corrections as follows:
<Table>
<Caption>
AS PREVIOUSLY AS PREVIOUSLY AS PREVIOUSLY
REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
CONSOLIDATED STATEMENTS DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
OF OPERATIONS 2003 2003 2002 2002 2001 2001
- ----------------------- ------------- ------------ ------------- ------------ ------------- ------------
Net sales.................... $6,320,456 $6,326,103 $5,846,864 $5,842,535 $5,864,858 $5,857,718
Cost of sales................ 5,735,247 5,742,938 5,350,423 5,350,209 5,378,605 5,376,082
Gross profit................. 585,209 583,165 496,441 492,326 486,253 481,636
Earnings (loss) from
operations................. 109,382 107,338 (5,619) (9,734) 100,191 95,574
Earnings before income
taxes...................... 101,641 99,597 96,685 92,570 66,087 61,470
Income tax expense
(benefit).................. 18,103 17,603 (2,202) (3,802) (5,401) (6,601)
Net earnings................. $ 83,538 $ 81,994 $ 98,887 $ 96,372 $ 71,488 $ 68,071
Applied to:
Member equities
Allocated patronage
refunds................ $ 40,045 $ 40,045 $ 96,900 $ 96,900 $ 70,552 $ 70,552
Deferred equities........ 986 (312) (10,336) (13,128) 2,708 (258)
---------- ---------- ---------- ---------- ---------- ----------
41,031 39,733 86,564 83,772 73,260 70,294
Retained earnings.......... 42,507 42,261 12,323 12,600 (1,772) (2,223)
---------- ---------- ---------- ---------- ---------- ----------
$ 83,538 $ 81,994 $ 98,887 $ 96,372 $ 71,488 $ 68,071
========== ========== ========== ========== ========== ==========
</Table>
<Table>
<Caption>
AS PREVIOUSLY AS PREVIOUSLY
REPORTED RESTATED REPORTED RESTATED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
CONSOLIDATED BALANCE SHEETS 2003 2003 2002 2002
- --------------------------- ------------- ------------ ------------- ------------
Total current assets....................... $1,555,693 $1,539,184 $1,378,128 $1,356,136
Other assets............................... 126,025 133,438 211,823 220,124
Total assets............................... 3,398,156 3,389,060 3,246,322 3,232,631
Total current liabilities.................. 1,096,641 1,106,562 1,169,474 1,171,531
Employee benefits and other liabilities.... 177,088 175,363 104,340 104,340
Total equities............................. 896,656 879,364 911,513 895,765
Total liabilities and equities............. 3,398,156 3,389,060 3,246,322 3,232,631
</Table>
3. MOARK LLC CONSOLIDATION AND PLANNED ACQUISITION OF MINORITY INTEREST
At December 31, 2002, the Company carried its 50% ownership interest in
MoArk under the equity method with an investment balance of $44.7 million.
Osborne Investments, LLC ("Osborne") owned the remaining interest in MoArk. In
2003, the Company increased its ownership from 50% to 57.5% with an additional
investment of $7.8 million. In addition, the Company has the right to acquire
(and Osborne has the right to require the Company to acquire) the remaining
42.5% of MoArk owned by Osborne for a $42.2 million minimum payment in 2007.
In accordance with the provisions of FIN 46, effective July 1, 2003, the
Company consolidated MoArk into its financial statements. Although Osborne has a
42.5% ownership interest in MoArk, the Company continues to be allocated 100% of
the income or loss from the operations of MoArk. In addition to consolidating
MoArk for accounting purposes, the Company has presumed that it will acquire the
remaining 42.5% in 2007. Effective July 1, 2003, the Company recorded this
presumed $42.2 million payment as a long-term liability in the consolidated
balance sheet as employee benefits and other liabilities at a present value of
$31.6 million using an effective interest rate of 7%. The present value of this
liability is $32.7 million at
F-28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 2003. During 2003, MoArk changed its year end to the last Saturday
in December. In previous years, MoArk's year end was the Saturday closest to
January 31.
The consolidation of MoArk impacted the comparability of several categories
in the consolidated balance sheets. Summarized, selected balance sheet items for
MoArk are as follows:
<Table>
<Caption>
AT DECEMBER 31,
2003
---------------
Receivables, net............................................ $59,999
Inventory................................................... 39,286
Property, plant and equipment, net.......................... 82,680
Property under capital lease, net........................... 12,245
Goodwill.................................................... 63,985
Notes and short-term obligations............................ 19,978
Accounts payable and accrued expenses....................... 44,504
Long-term debt (including current portion).................. 75,785
Obligations under capital lease (including current
portion).................................................. 10,797
</Table>
4. RESTRICTED CASH
On March 28, 2003, Cheese and Protein International LLC ("CPI"), a
96%-owned consolidated subsidiary, amended its lease for property and equipment
relating to its cheese manufacturing and whey processing plant in Tulare,
California. The amendment postponed the measurement of the fixed charge coverage
ratio requirement contained in the lease until March 2005. The amendment
requires Land O'Lakes to maintain a $20 million cash account (which may be
replaced by a letter of credit at the Company's option) to support the lease.
The cash account or letter of credit would only be drawn upon in the event of a
CPI default and would reduce amounts otherwise due under the lease. The
requirement would be lifted pending the achievement of certain financial targets
by CPI.
5. RECEIVABLES
A summary of receivables at December 31 is as follows:
<Table>
<Caption>
RESTATED
-------------------
2003 2002
-------- --------
Trade accounts.............................................. $327,913 $225,589
Notes and contracts......................................... 63,984 44,565
Notes from sale of trade receivables (see Note 6)........... 155,191 194,476
Other....................................................... 96,051 99,003
-------- --------
643,139 563,633
Less allowance for doubtful accounts........................ 19,552 18,255
-------- --------
Total receivables, net...................................... $623,587 $545,378
======== ========
</Table>
A substantial portion of Land O'Lakes receivables is concentrated in
agriculture, as well as in the wholesale and retail food industries. Collections
of these receivables may be dependent upon economic returns in these industries.
The Company's credit risks are continually reviewed, and management believes
that adequate provisions have been made for doubtful accounts.
F-29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. 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 December
31, 2003, $20.0 million was outstanding under this facility and no amounts were
outstanding under this facility at December 31, 2002. The total accounts
receivable sold were $2,630.0 million and $2,653.0 million in 2003 and 2002,
respectively.
7. INVENTORIES
A summary of inventories at December 31 is as follows:
<Table>
<Caption>
RESTATED
-------------------
2003 2002
-------- --------
Raw materials............................................... $159,511 $141,915
Work in process............................................. 33,645 33,982
Finished goods.............................................. 303,670 270,703
-------- --------
Total inventories........................................... $496,826 $446,600
======== ========
</Table>
8. INVESTMENTS
A summary of investments at December 31 is as follows:
<Table>
<Caption>
2003 2002
-------- --------
CF Industries, Inc. ........................................ $249,502 $249,502
Agriliance LLC.............................................. 92,134 91,629
Ag Processing Inc .......................................... 37,941 37,854
Advanced Food Products LLC.................................. 29,494 27,418
CoBank, ACB................................................. 18,583 22,061
Universal Cooperatives...................................... 8,224 6,473
Agronomy Company of Canada Ltd. ............................ 7,954 5,660
Melrose Dairy Proteins, LLC................................. 6,623 6,579
Prairie Farms Dairy, Inc. .................................. 5,125 5,092
MoArk/Fort Recovery Egg Marketing, LLC...................... 2,210 --
MoArk LLC................................................... -- 44,678
Other -- principally cooperatives and joint ventures........ 48,851 48,646
-------- --------
Total investments........................................... $506,641 $545,592
======== ========
</Table>
On July 1, 2003, the Company began consolidating MoArk LLC, which prior to
that date was accounted for as an equity investment. See Note 3 for additional
information. Also in 2003, the Company sold its investment in a swine joint
venture within the Feed segment for $3.0 million in cash.
During 2002, the Company sold its interest in PEC Mark II (Malta Cleyton),
a Mexican feed joint venture, for $5.6 million in cash and a $2.0 million note
receivable.
F-30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Land O'Lakes largest equity investments, based on each investee's total
assets or earnings, are Agriliance LLC, Advanced Food Products LLC, Melrose
Dairy Proteins, LLC and MoArk/Fort Recovery Egg Marketing, LLC at December 31,
2003 and Agriliance LLC, Advanced Food Products LLC, Melrose Dairy Proteins, LLC
and MoArk LLC at December 31, 2002. Summarized financial information, in
aggregate, for the four largest equity investments, which comprise most of the
equity investments, is as follows:
<Table>
<Caption>
2003 2002
---------- ----------
Net sales................................................... $3,907,460 $4,289,667
Gross profit................................................ 446,402 418,650
Net earnings................................................ 92,456 45,839
Current assets.............................................. 1,410,931 1,511,267
Non-current assets.......................................... 192,313 362,352
Current liabilities......................................... 1,116,937 1,307,462
Non-current liabilities..................................... 201,469 201,321
Total equity................................................ 284,838 364,836
</Table>
9. PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment at December 31 is as follows:
Owned property, plant and equipment:
<Table>
<Caption>
2003 2002
---------- --------
Machinery and equipment..................................... $ 610,312 $554,926
Buildings and building equipment............................ 309,004 294,032
Land and land improvements.................................. 63,930 59,396
Software.................................................... 59,346 38,689
Construction in progress.................................... 29,136 40,771
---------- --------
1,071,728 987,814
Less accumulated depreciation............................... 447,097 407,954
---------- --------
Total property, plant and equipment, net.................... $ 624,631 $579,860
========== ========
</Table>
Property under capital lease:
<Table>
<Caption>
2003 2002
-------- --------
Machinery and equipment..................................... $ 80,039 $ 78,868
Buildings and building equipment............................ 35,581 26,868
Land and land improvements.................................. 2,318 --
-------- --------
117,938 105,736
Less accumulated depreciation............................... 8,793 --
-------- --------
Total property under capital lease, net..................... $109,145 $105,736
======== ========
</Table>
F-31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill: The Company adopted the remaining provisions of SFAS No. 142 on
January 1, 2002. Had SFAS No. 142 been effective January 1, 2001, net earnings
for 2001 would have been reported as follows:
<Table>
<Caption>
RESTATED
---------------------------
2003 2002 2001
------- ------- -------
Net earnings............................................ $81,994 $96,372 $68,071
Add back: goodwill amortization, net of tax............. -- -- 4,940
------- ------- -------
Adjusted net earnings................................... $81,994 $96,372 $73,011
======= ======= =======
</Table>
The carrying amount of goodwill at December 31 is as follows:
<Table>
<Caption>
2003 2002
-------- --------
Dairy Foods................................................. $ 66,259 $ 66,718
Feed........................................................ 150,922 156,839
Seed........................................................ 12,405 16,948
Swine....................................................... -- 647
Agronomy.................................................... 63,733 69,823
Layers...................................................... 79,764 11,897
Other....................................................... -- 541
-------- --------
Total goodwill.............................................. $373,083 $323,413
======== ========
</Table>
Goodwill in the Layers segment increased by $67.9 million, primarily due to
the consolidation of MoArk and the presumed minority interest acquisition of the
remaining interest in MoArk. The decreases in Seed and Swine segment goodwill
were due to impairments of $1.0 million and $0.6 million, respectively,
amortization and certain reclassifications. Goodwill decreases in the Dairy
Foods, Feed, and Agronomy segments resulted from amortization associated with
investments in joint ventures and cooperatives.
Other Intangible Assets: A summary of other intangible assets at December
31 is as follows:
<Table>
<Caption>
2003 2002
-------- --------
Amortized other intangible assets:
Patents, less accumulated amortization of $2,622 and $1,394,
respectively.............................................. $ 14,147 $ 15,318
Trademarks, less accumulated amortization of $2,044 and
$1,615, respectively...................................... 2,296 2,725
Other intangible assets, less accumulated amortization of
$12,783 and $9,667, respectively.......................... 9,870 7,102
-------- --------
Total amortized other intangible assets..................... 26,313 25,145
Total non-amortized other intangible assets -- trademarks... 76,625 76,625
-------- --------
Total other intangible assets............................... $102,938 $101,770
======== ========
</Table>
Amortization expense for the years ended December 31, 2003, 2002 and 2001
was $5.3 million, $6.6 million and $4.6 million, respectively. The estimated
amortization expense related to other intangible assets subject to amortization
for the next five years will approximate $3.0 million annually. The weighted-
average life of the intangible assets subject to amortization is approximately
10 years.
F-32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. DEBT OBLIGATIONS
The Company had notes and short-term obligations at December 31, 2003 and
2002 of $80.7 million and $37.8 million, respectively. The weighted average
interest rates on short-term borrowings at December 31, 2003 and 2002 were 3.56%
and 3.51%, respectively.
A summary of long-term debt at December 31 is as follows:
<Table>
<Caption>
2003 2002
---------- ----------
Term A loan -- quarterly installments through 2006 (variable
rate based on LIBOR)...................................... $ 92,473 $ 288,270
Term B loan -- quarterly installments through 2008 (variable
rate based on LIBOR)...................................... 152,374 231,417
Senior unsecured notes -- due 2011 (8.75%).................. 350,000 350,000
Senior secured notes -- due 2010 (9.00%).................... 175,000 --
MoArk LLC debt -- due 2004 through 2023 (5.97% weighted
average................................................... 75,785 --
Industrial development revenue bonds and other secured notes
payable -- due 2004 through 2016 (.90% to 6.00%).......... 14,940 26,268
Capital Securities of Trust Subsidiary -- due 2028
(7.45%)................................................... 190,700 190,700
Other debt.................................................. 21,951 25,216
---------- ----------
1,073,223 1,111,871
Less current portion........................................ 7,841 104,563
---------- ----------
Total long-term debt........................................ $1,065,382 $1,007,308
========== ==========
</Table>
During 2003, the Company completed a $175 million long-term bond offering
due 2010. The proceeds of the offering were used to make payments on Term A loan
of $122.5 million and on Term B loan of $52.5 million. Additional payments made
in 2003 on Term A loan were $73.3 million and Term B loan were $26.5 million.
Debt covenants include certain minimum financial ratios that were all satisfied.
In 2002, the Company made payments on Term A loan of $36.7 million and on Term B
loan of $18.6 million.
Land O'Lakes Capital Trust I (the "Trust") was created for the sole purpose
of issuing $200.0 million of Capital Securities and investing the proceeds
thereof in an equivalent amount of debentures of the Company. The sole assets of
the Trust, $206.2 million principal amount Junior Subordinated Deferrable
Interest Debentures (the "Debentures") of the Company, bearing interest at 7.45%
and maturing on March 15, 2028, are eliminated upon consolidation. The Capital
Securities are guaranteed to the extent set forth in the Offering Memorandum of
the Capital Securities by the Company and bear the same interest rate and
maturity date as the Debentures.
Interest paid on debt obligations was $82.0 million, $80.0 million and
$55.7 million in 2003, 2002 and 2001, respectively.
At December 31, 2003, the Company had a $250 million 5-year revolving
credit facility with a variable interest rate based on LIBOR. As of December 31,
2003, $205.2 million was available under the revolving credit facility, after
giving effect to $44.8 million of outstanding letters of credit, which reduce
availability. There were no borrowings on the facility as of December 31, 2003.
Borrowings under the revolving credit facility and the term loans bear
interest at variable rates (either LIBOR or an Alternative Base Rate) plus
applicable margins. The margins depend on Land O'Lakes credit ratings in the
case of the Term A loan, and on the Company's leverage ratio in the case of the
revolving credit facility. The margin on the Term B loan is fixed. Based upon
Land O'Lakes existing credit ratings and leverage ratio, the current LIBOR
margins are 275 basis points for the Term A loan, 275 basis points for the
revolving credit facility and 350 basis points for the Term B Loan. Spreads for
the Alternative Base Rate are 100 basis
F-33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
points lower than the applicable LIBOR spreads. LIBOR may be set for one, two,
three or six month periods at the election of Land O'Lakes. As of December 31,
2003, interest rates on the Term A loan and Term B loan were 3.93% and 4.68%,
respectively.
In January 2004, the Company completed amendments to its existing senior
credit facilities. Under the amendment to the revolving credit facility, the
lenders have committed to make advances and issue letters of credit until
January 2007 in an aggregate amount not to exceed $185 million, subject to a
borrowing base limitation. In addition, the amendment to the revolving facility
increases the amount of that facility available for the issuance of letters of
credit from $50 million to $75 million, increases the spreads used to determine
interest rates on that facility, changes the basis on which those spreads and
commitment fees for that facility are determined from the Company's senior
secured long-term debt ratings to the Company's leverage ratio, and favorably
adjusts the leverage ratio covenant contained in that facility. An amendment
providing for the same leverage ratio covenant modification and for a change in
the allocation of certain mandatory prepayments was also secured with respect to
the Company's Term A loan and Term B loan. Under the amendments, the Company is
required to maintain a leverage ratio of initially no greater than 4.75 to 1,
with the maximum leverage ratio decreasing in increments to 3.75 to 1 on
December 16, 2006.
Substantially all of the Company's assets have been pledged to its lenders
under the terms of its financing arrangements including, but not limited to,
Term A loan, Term B loan, the revolving credit facility and the senior secured
notes due 2010.
The maturity of long-term debt for the next five years and thereafter is
summarized in the table below.
<Table>
<Caption>
YEAR AMOUNT
- ---- --------
2004........................................................ $ 7,841
2005........................................................ 45,802
2006........................................................ 73,657
2007........................................................ 14,044
2008........................................................ 153,504
2009 and thereafter......................................... 778,375
</Table>
12. OTHER COMPREHENSIVE INCOME
<Table>
<Caption>
RESTATED
----------------------------
2003 2002 2001
-------- ------- -------
Net earnings........................................... $ 81,994 $96,372 $68,071
Minimum pension liability adjustment (net of tax of
$40,645)............................................. (65,617) -- --
-------- ------- -------
Total comprehensive income............................. $ 16,377 $96,372 $68,071
======== ======= =======
</Table>
The minimum pension liability adjustment reflects $60.9 million, net of
tax, for Land O'Lakes defined benefit pension plans and $4.7 million, net of
tax, for the Company's portion of the minimum pension liability adjustment for
its joint venture investment in Agriliance LLC.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following tables provide information of the carrying amount, notional
amount and fair value of financial instruments, including derivative financial
instruments. The Company believes it is not practical to estimate the fair value
of investments in other cooperatives due to the excessive cost involved as there
is no established market for these investments. The carrying value of financial
instruments classified as current assets and current liabilities, such as cash
and short-term investments, receivables, accounts payable, notes and short-term
obligations, approximate fair value due to the short-term maturity of the
instruments. The carrying value of LIBOR-based debt, including the revolving
credit facility, Term A loan and Term B loan,
F-34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
also approximates fair market value since the interest rate automatically
adjusts every one to three months and credit spreads are not believed to have
changed materially since the facilities were established. The fair value of
fixed rate long-term debt was established through a present value calculation,
based on available information on prevailing market interest rates for similar
securities on the respective reporting dates, and is summarized at December 31
as follows:
<Table>
<Caption>
2003 2002
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
Senior unsecured notes due 2011............ $350,000 $295,820 $350,000 $275,170
Senior secured notes due 2010.............. 175,000 177,048 -- --
MoArk fixed rate debt...................... 46,950 46,950 -- --
Capital Securities of Trust Subsidiary due
2028..................................... 190,700 68,026 190,700 103,302
</Table>
The Company enters into futures and options contract derivatives to reduce
risk on the market value of inventory and fixed or partially fixed purchase and
sale contracts. The notional or contractual amount of derivatives provides an
indication of the extent of the Company's involvement in such instruments at
that time but does not represent exposure to market risk or future cash
requirements under certain of these instruments. A summary of the notional or
contractual amounts of these instruments at December 31 is as follows:
<Table>
<Caption>
2003 2002
------------------ ------------------
NOTIONAL FAIR NOTIONAL FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
Derivative financial instruments:
Commodity futures contracts
Commitments to purchase................. $179,004 $13,384 $108,359 $(4,543)
Commitments to sell..................... (43,052) (517) (56,969) (615)
</Table>
14. INCOME TAXES
The components of the income tax provision are summarized as follows:
<Table>
<Caption>
RESTATED
----------------------------
2003 2002 2001
------- ------- --------
Current expense (benefit)
Federal.............................................. $ 5,300 $ 4,537 $(22,281)
State................................................ 629 471 (3,282)
------- ------- --------
5,929 5,008 (25,563)
Deferred expense (benefit)............................. 11,674 (8,810) 18,962
------- ------- --------
Income tax expense (benefit)........................... $17,603 $(3,802) $ (6,601)
======= ======= ========
</Table>
F-35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The effective tax rate differs from the statutory rate primarily as a
result of the following:
<Table>
<Caption>
RESTATED
---------------------
2003 2002 2001
----- ----- -----
Statutory rate.............................................. 35.0% 35.0% 35.0%
Patronage refunds........................................... (14.1) (36.6) (40.2)
State income tax, net of federal benefit.................... 2.0 (0.4) (0.8)
Amortization of goodwill.................................... 0.3 0.5 0.4
Effect of foreign operations................................ (1.5) (4.3) 1.7
Disposal of investment...................................... -- -- (5.5)
Taxes previously not benefited.............................. (5.5) -- (1.0)
Other, net.................................................. 1.5 1.7 (0.3)
----- ----- -----
Effective tax rate.......................................... 17.7% (4.1)% (10.7)%
===== ===== =====
</Table>
The significant components of the deferred tax assets and liabilities at
December 31 are as follows:
<Table>
<Caption>
RESTATED
-------------------
2003 2002
-------- --------
Deferred tax assets related to:
Deferred patronage........................................ $ 44,074 $ 4,323
Accrued expenses.......................................... 65,729 25,160
Allowance for doubtful accounts........................... 7,246 9,012
Inventories............................................... -- 2,252
Asset impairments......................................... 4,038 10,232
Joint ventures............................................ 15,041 --
Net operating loss carryforward........................... 15,641 56,614
Deferred tax credits...................................... 6,796 --
-------- --------
Total deferred tax assets................................... 158,565 107,593
-------- --------
Deferred tax liabilities related to:
Property, plant and equipment............................. 80,190 65,157
Inventories............................................... 13,191 --
Intangibles............................................... 6,786 17,800
Joint ventures............................................ -- 1,292
Deferred revenue.......................................... 20,693 --
Other, net................................................ 3,493 347
-------- --------
Total deferred tax liabilities............................ 124,353 84,596
-------- --------
Net deferred tax assets..................................... $ 34,212 $ 22,997
======== ========
</Table>
SFAS No. 109 "Accounting for Income Taxes" requires consideration of a
valuation allowance if it is "more likely than not" that benefits of deferred
tax assets will not be realized. Management has determined, based on prior
earnings history and anticipated earnings, that no valuation allowance is
necessary.
Income taxes (recovered) paid in 2003, 2002, and 2001 were $(6.6) million,
$(21.7) million and $22.3 million, respectively.
F-36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. PENSION AND OTHER POSTRETIREMENT PLANS
The Company has a qualified, defined benefit pension plan which generally
covers all eligible employees not participating in a labor negotiated plan. Plan
benefits are generally based on years of service and employees' highest
compensation during five consecutive years of employment. Annual payments to the
pension trust fund are determined in compliance with the Employee Retirement
Income Security Act ("ERISA"). In addition, the Company has a noncontributory,
supplemental executive retirement plan ("SERP") and a discretionary capital
accumulation plan ("CAP"), both of which are non-qualified, defined benefit
pension plans and are unfunded.
The Company also sponsors plans that provide certain health care benefits
for retired employees. Generally, employees hired by Land O'Lakes prior to
October 1, 2002 become eligible for these benefits upon meeting certain age and
service requirements; employees hired by Land O'Lakes after September 30, 2002
are eligible for access-only retirement health care benefits at their expense.
The Company funds only the plans' annual cash requirements.
As permitted by FASB Staff Position 106-1, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003," the Company has elected to defer recognizing in its
2003 consolidated financial statements the effect of the Act. Accordingly, any
measures of the accumulated postretirement benefit obligation or net periodic
postretirement benefit cost do not reflect the effect of the Act. Specific
authoritative guidance on accounting for the federal subsidy is pending, and the
issued guidance could require the Company to change previously reported
information.
The Company uses a November 30 measurement date for its plans.
OBLIGATION AND FUNDED STATUS AT DECEMBER 31
<Table>
<Caption>
PENSION BENEFITS
----------------------------------------- OTHER
QUALIFIED PLAN NON-QUALIFIED PLANS POSTRETIREMENT BENEFITS
------------------- ------------------- -----------------------
2003 2002 2003 2002 2003 2002
-------- -------- -------- -------- ---------- ----------
Change in benefit obligation:
Benefit obligation at beginning
of year....................... $351,823 $313,680 $ 42,068 $ 39,217 $ 60,923 $ 59,295
Service cost..................... 16,209 11,537 377 366 803 802
Interest cost.................... 24,253 23,588 2,916 2,759 4,353 4,048
Plan participant's
contributions................. -- -- -- -- 1,586 1,214
Plan amendments.................. -- 3,377 -- (3,152) -- --
Transfer to other plans.......... -- (3,062) -- -- -- --
Business combinations............ -- 26,389 -- -- -- --
Actuarial loss (gain)............ 41,167 (5,517) 4,476 4,833 8,149 2,828
Benefits paid.................... (18,054) (18,169) (2,105) (1,955) (7,891) (7,264)
-------- -------- -------- -------- -------- --------
Benefit obligation at end of
year.......................... $415,398 $351,823 $ 47,732 $ 42,068 $ 67,923 $ 60,923
======== ======== ======== ======== ======== ========
</Table>
F-37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
PENSION BENEFITS
----------------------------------------- OTHER
QUALIFIED PLAN NON-QUALIFIED PLANS POSTRETIREMENT BENEFITS
------------------- ------------------- -----------------------
2003 2002 2003 2002 2003 2002
-------- -------- -------- -------- ---------- ----------
Change in plan assets:
Fair value of plan assets at
beginning of year............. $334,137 $283,983 $ -- $ -- $ -- $ --
Actual gain (loss) on plan
assets........................ 45,182 (17,810) -- -- -- --
Company contributions............ -- 67,936 2,105 1,955 6,305 6,050
Transfer to other plans.......... -- (3,062) -- -- -- --
Business combinations............ -- 21,259 -- -- -- --
Plan participants'
contributions................. -- -- -- -- 1,586 1,214
Benefits paid.................... (18,054) (18,169) (2,105) (1,955) (7,891) (7,264)
-------- -------- -------- -------- -------- --------
Fair value of plan assets at end
of year....................... $361,265 $334,137 $ -- $ -- $ -- $ --
======== ======== ======== ======== ======== ========
Funded status.................... $(54,133) $(17,686) $(47,732) $(42,068) $(67,923) $(60,923)
Unrecognized net actuarial
loss.......................... 135,129 107,545 10,486 6,573 34,927 28,946
Unrecognized prior service
cost.......................... 4,652 5,927 (2,778) (3,209) 2,660 2,926
Unrecognized transition
obligation.................... -- -- -- 5,785 6,429
-------- -------- -------- -------- -------- --------
Net amount recognized............ $ 85,648 $ 95,786 $(40,024) $(38,704) $(24,551) $(26,622)
======== ======== ======== ======== ======== ========
Amounts recognized in consolidated
balance sheets consist of:
Prepaid benefit cost............. $ -- $ 95,786 $ -- $ -- $ -- $ --
Accrued benefit liability........ (15,909) -- (41,176) (38,704) (24,551) (22,622)
Intangible asset................. 4,652 -- -- -- -- --
Accumulated other comprehensive
income before tax............. 96,905 -- 1,692 -- -- --
-------- -------- -------- -------- -------- --------
Net amount recognized............ $ 85,648 $ 95,786 $(40,024) $(38,704) $(24,551) $(22,622)
======== ======== ======== ======== ======== ========
</Table>
The accumulated benefit obligation for the Company's qualified, defined
benefit pension plan was $377.2 million and $330.5 million at December 31, 2003
and 2002, respectively. The accumulated benefit obligation for the Company's
non-qualified defined benefit plans was $42.2 million and $38.7 million at
December 31, 2003 and 2002, respectively.
Information for pension plans with an accumulated benefit obligation in
excess of plan assets:
<Table>
<Caption>
PENSION BENEFITS
-------------------------------------
QUALIFIED PLAN NON-QUALIFIED PLANS
--------------- -------------------
2003 2002 2003 2002
-------- ---- -------- --------
Projected benefit obligation.................... $415,398 N/A $47,732 $42,068
Accumulated benefit obligation.................. 377,175 N/A 42,235 38,736
Fair value of plan assets....................... 361,265 N/A -- --
</Table>
F-38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Components of net periodic benefit cost are as follows:
<Table>
<Caption>
PENSION BENEFITS OTHER POSTRETIREMENT BENEFITS
------------------------------ ------------------------------
2003 2002 2001 2003 2002 2001
-------- -------- -------- -------- -------- --------
Service cost................ $ 16,586 $ 11,903 $ 9,678 $ 803 $ 802 $ 818
Interest cost............... 27,169 26,347 22,001 4,353 4,048 3,917
Expected return on assets... (32,806) (30,301) (28,428) -- -- --
Amortization of actuarial
loss...................... 1,771 905 -- 2,169 1,615 1,327
Amortization of prior
service cost.............. 844 848 877 266 266 266
Amortization of transition
obligation................ -- -- -- 643 643 643
-------- -------- -------- ------ ------ ------
Net periodic benefit cost... $ 13,564 $ 9,702 $ 4,128 $8,234 $7,374 $6,971
======== ======== ======== ====== ====== ======
</Table>
ADDITIONAL INFORMATION
<Table>
<Caption>
PENSION BENEFITS
-------------------------------------
NON-QUALIFIED
QUALIFIED PLAN PLANS
------------------ ----------------
2003 2002 2003 2002
-------- ------- ------ -------
Increase in intangible asset........................ $ 4,652 $ -- $ -- $ --
Increase in additional minimum liability............ 101,557 -- 1,692 --
-------- ------- ------ -------
Decrease in other comprehensive income, before
tax............................................... $ 96,905 $ -- $1,692 $ --
======== ======= ====== =======
</Table>
Weighted-average assumptions used to determine benefit obligations at
December 31:
<Table>
<Caption>
OTHER
POSTRETIREMENT
PENSION BENEFITS BENEFITS
----------------- ---------------
2003 2002 2003 2002
------ ------ ----- -----
Discount rate....................................... 6.25% 7.00% 6.25% 7.00%
Rate of compensation increase....................... 4.25% 4.25% N/A N/A
</Table>
Weighted-average assumptions used to determine net periodic benefit cost
for years ended December 31:
<Table>
<Caption>
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------ ------------------------
2003 2002 2001 2003 2002 2001
---- ---- ---- ------ ------ ------
Discount rate................................. 7.00% 7.25% 7.50% 7.00% 7.25% 7.50%
Rate of long-term return on plan assets....... 8.50% 9.50% 9.50% N/A N/A N/A
Rate of compensation increase................. 4.25% 4.75% 4.75% N/A N/A N/A
</Table>
The Company employs a building block approach in determining the long-term
rate of return for the assets in the qualified, defined benefit pension plan.
Historical markets are studied and long-term historical relationships between
equities and fixed income are preserved consistent with the widely-accepted
capital market principle that assets with higher volatility generate a greater
return over the long run. Current market factors, such as inflation and interest
rates, are evaluated before long-term capital market assumptions are determined.
Diversification and rebalancing of the plan assets are properly considered as
part of establishing the long-term portfolio return. Peer data and historical
returns are reviewed to check for reasonability and appropriateness.
F-39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Assumed health care cost trend rates at December 31:
<Table>
<Caption>
2003 2002
---- ----
Health care cost trend rate assumed for next year........... 9.0% 10.0%
Rate of which the cost trend is assumed to decline (ultimate
trend rate)............................................... 5.50% 5.50%
Year that rate reaches ultimate trend rate.................. 2008 2008
</Table>
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage point change in the
assumed health care cost trend rate at December 31, 2003 would have the
following effects:
<Table>
<Caption>
1-PERCENTAGE 1-PERCENTAGE
POINT POINT
INCREASE DECREASE
------------ ------------
Effect on total of service and interest cost................ $ 256 $ (241)
Effect on postretirement benefit obligation................. 4,088 (3,856)
</Table>
PLAN ASSETS
The Company's qualified, defined benefit pension plan weighted-average
asset allocations at December 31, 2003 and December 31, 2002, by asset category,
are as follows:
<Table>
<Caption>
2003 2002 TARGET
---- ---- ------
Asset category
U.S. equity securities...................................... 60% 54% 55%
International equity securities............................. 10% 9% 10%
Fixed income securities and bonds........................... 30% 37% 35%
---- ---- ----
Total....................................................... 100% 100% 100%
==== ==== ====
</Table>
The Company has a Statement of Pension Investment Policies and Objectives
(the "Statement") that guides the retirement plan committee in its mission to
effectively monitor and supervise the pension plan assets. Two general
investment goals are reflected in the Statement: 1) the investment program for
the pension plan should provide returns which improve the funded status of the
plan over time and reduce the Company's pension costs; and 2) the Company
expects to receive above-average performance from the pension portfolio's
managers in exchange for the fees paid to them. As a result, the total fund's
annualized return before fees should, over a five year horizon, exceed the
annualized, weighted total rate of return of the following customized index by
one percentage point: S&P 500 (weighted 55%), EAFE Index (weighted 10%), and
Lehman Brothers Aggregate Bond Index (weighted 35%) and rank in the top 35
percent on the Hewitt Associates' pension fund universe.
CASH FLOW
The Company expects to contribute approximately $12 million to its defined
benefit pension plans and $7 million to its other postretirement benefits plans
in 2004.
OTHER BENEFIT PLANS
Certain eligible employees are covered by defined contribution plans. The
expense for these plans was $12.7 million, $14.6 million and $11.0 million for
2003, 2002 and 2001, respectively.
16. EQUITIES
The authorized capital stock at December 31, 2003 consists of 2,000 shares
of Class A Common, $1,000 par value; 50,000 shares of Class B Common, $1 par
value; 500 shares of nonvoting Class C Common,
F-40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$1,000 par value; 10,000 shares of nonvoting Class D Common, $1 par value; and
1,000,000 shares of nonvoting, 8% non-cumulative Preferred, $10 par value.
The following details the activity in membership shares during the three
years ended December 31, 2003:
<Table>
<Caption>
NUMBER OF SHARES
---------------------------------------
COMMON
---------------------------
A B C D PREFERRED
----- ----- --- ----- ---------
December 31, 2000.............................. 1,166 5,890 197 1,500 97,434
New Members.................................. 47 716 18 364 --
Redemptions.................................. (41) (739) (15) (426) (4,865)
----- ----- --- ----- ------
December 31, 2001.............................. 1,172 5,867 200 1,438 92,569
New Members.................................. 3 321 2 137 --
Redemptions.................................. (48) (981) (8) (470) (6,289)
----- ----- --- ----- ------
December 31, 2002.............................. 1,127 5,207 194 1,105 86,280
New Members.................................. 3 247 -- 156 --
Redemptions.................................. (36) (540) (4) (119) (2,762)
----- ----- --- ----- ------
December 31, 2003.............................. 1,094 4,914 190 1,142 83,518
===== ===== === ===== ======
</Table>
Patronage refunds to members of $40.0 million, $96.9 million and $70.6
million for the years ended December 31, 2003, 2002 and 2001, respectively, are
based on earnings in specific patronage or product categories and in proportion
to the business each member does within each category. For 2003, Land O'Lakes
will issue qualified patronage refunds in the amount of $40.0 million. Qualified
patronage refunds are tax deductible by the Company when qualified written
notices of allocation are issued and non-qualified patronage refunds are tax
deductible when redeemed with cash. The Company will not issue any non-qualified
patronage refunds for 2003.
The allocation to retained earnings of $42.3 million in 2003, $12.6 million
in 2002 and $(2.2) million in 2001 represents earnings or (losses) generated by
non-member businesses plus amounts under the retained earnings program as
provided in the bylaws of the Company.
17. ACQUISITIONS AND DIVESTITURES
During 2003, Land O'Lakes divested of a feed business in Taiwan for $0.4
million in cash, which resulted in a loss of $0.7 million. The Company also
divested a powdered cocoa business for $1.4 million in cash, which resulted in a
gain of $1.4 million.
Proceeds from divestitures in 2002 totaled $22.4 million. The Company
divested its dairy foods and feed operations in Poland for $4.2 million in cash
and $6.3 million in debt assumed, which resulted in a gain of $1.3 million. Net
cash proceeds were $11.0 million on a divestiture of a seed coating business in
Idaho and a seed inoculation business in Brazil, which resulted in a gain of
$4.0 million. Other divestitures in 2002 resulted in net cash proceeds of $0.9
million and a loss of $0.3 million.
On October 11, 2001, the Company acquired 100% of the outstanding stock of
Purina Mills, Inc. ("Purina Mills"), a lifestyle feed business. The results of
operations for Purina Mills are included in the consolidated financial
statements since that date. The aggregate purchase price was approximately $359
million, net of cash acquired, of which $247 million represented cash payments
for stock and acquisition costs and $112 million represented debt retirement.
The unaudited pro forma results of operations for the year ended December 31,
2001 would have reflected net sales of $6,530.2 million and net earnings of
$71.2 million for the Company assuming the Purina Mills acquisition had occurred
on January 1, 2001. The unaudited pro forma
F-41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
results of operations are for informational purposes only and do not purport to
represent what the Company's results of operations would have been if the
acquisition had actually occurred on that date.
18. RESTRUCTURING AND IMPAIRMENT CHARGES
A summary of restructuring and impairment charges is as follows:
<Table>
<Caption>
2003 2002 2001
------ ------- -------
Restructuring charges (reversals)........................ $3,532 $13,173 $(4,067)
Impairment charges....................................... 3,954 18,239 7,800
------ ------- -------
Total restructuring and impairment charges............... $7,486 $31,412 $ 3,733
====== ======= =======
</Table>
RESTRUCTURING CHARGES
In 2003, the Company recorded restructuring charges of $3.5 million. Of
this amount, Dairy Foods recorded restructuring charges of $1.0 million which
represented severance costs for 44 employees as a result of closing a facility
in Perham, MN and $1.6 million for severance related to the closure of a
facility in
Volga, SD. Feed recorded a restructuring charge of $0.6 million for severance
costs related to closing feed plants, and Seed recorded a restructuring charge
of $0.3 million for severance costs related to closing a facility. The balance
remaining to be paid at December 31, 2003 for employee severance and
outplacement costs was $4.2 million.
In 2002, the Company recorded restructuring charges of $13.2 million. In
the Dairy Foods segment, the Company recorded a $4.4 million restructuring
charge related to employee severance and outplacement costs for 374 employees at
various locations. In the Feed segment, the Company recorded an $8.8 million
restructuring charge related to employee severance and outplacement costs for
375 employees at various locations.
In 2001, the Company recorded a restructuring reversal of $4.1 million.
Dairy Foods recorded a restructuring charge of $1.7 million for severance costs
for 63 production employees resulting from the consolidation of production
facilities. Feed reversed $5.8 million of a prior-year restructuring charge
primarily due to a change in business strategy following the Purina Mills
acquisition, which resulted in the decision to continue to operate plants that
were held for sale at December 31, 2000.
IMPAIRMENT CHARGES
In 2003, the Company recorded impairment charges of $4.0 million.
Impairment charges of $1.4 million in the Feed segment, $0.5 million in the Seed
segment and $0.5 million in the Swine segment were recognized for write-downs of
certain assets to their estimated fair value. The Company recorded goodwill
impairments in the Seed and Swine segments for $1.0 million and $0.6 million,
respectively.
In 2002, the Company recorded impairment charges of $18.2 million. In the
Dairy Foods segment, the Company recorded a $15.1 million impairment charge,
which was related primarily to the write-down of impaired plant assets held for
sale to their estimated fair value. In the Feed segment, the Company recorded an
$3.1 million impairment charge, which was primarily related to the write-down of
impaired plant assets held for sale to their estimated fair value.
In 2001, the Company recorded impairment charges of $7.8 million. The Feed
segment recorded an impairment charge of $6.0 million related to the Company's
feed operation in Mexico held for sale at December 31, 2001 in order to value
the business at its expected selling price less costs of disposal. Swine
recorded an impairment charge of $1.8 million to reduce undeveloped land with
permit issues to its estimated fair value.
F-42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. GAIN ON LEGAL SETTLEMENTS
Gains on legal settlements were $22.8 million, $155.5 million and $3.0
million in 2003, 2002 and 2001, respectively. The gains represent cash received
from product suppliers against whom the Company alleged certain price-fixing
claims.
20. OTHER (INCOME) EXPENSE, NET
<Table>
<Caption>
2003 2002 2001
------- ------- -------
(Gain) loss on sale of investments...................... $ (877) $ 933 $ (336)
Gain on divestitures of businesses...................... (684) (4,992) --
Gain on sale of intangibles............................. (550) (4,184) --
Loss on extinguishment of debt.......................... 552 -- 23,453
------- ------- -------
Total other (income) expense, net....................... $(1,586) $(8,243) $23,177
======= ======= =======
</Table>
In 2003, the Company recorded a $0.9 million gain on sale of an investment
in a swine joint venture within the Feed segment. In 2002, the Company recorded
a loss of $0.9 million, which was primarily due to the sale of an investment in
the Feed segment. In 2001, the Company recorded a $0.3 million gain on the sale
of investments, primarily in the Agronomy segment.
In 2003, the divestiture of a powdered cocoa business in Dairy Foods
resulted in a gain of $1.4 million, which was partially offset by the loss on a
divestiture of a Feed business in Taiwan. The Company recorded a gain on
divestitures of businesses of $5.0 million in 2002, primarily from the sale of a
seed coating business in Idaho and a seed inoculation business in Brazil.
In 2003, the Company recorded a $0.6 million gain on the sale of a customer
list relating to the divestiture of a joint venture in Taiwan. In 2002, the
Company recorded a $4.2 million gain on the sale of a customer list pertaining
to the feed phosphate distribution business.
In 2003, a prepayment penalty on Term loan B resulted in a loss of $0.5
million. In 2001, the early extinguishment of previous credit facilities
resulted in a loss of $23.5 million.
21. COMMITMENTS AND CONTINGENCIES
The Company leases various equipment and real properties under long-term
operating leases. Total rental expense was $51.7 million in 2003, $44.4 million
in 2002 and $34.8 million in 2001. Most of the leases require payment of
operating expenses applicable to the leased assets. Management expects that in
the normal course of business most leases that expire will be renewed or
replaced by other leases.
Minimum lease commitments under noncancelable operating leases at December
31, 2003, total $117.0 million composed of $31.7 million for 2004, $28.4 million
for 2005, $20.0 million for 2006, $14.4 million for 2007, $12.1 million for 2008
and $10.4 million for later years.
At December 31, 2003 the Company had $110.0 million in obligations under
capital lease, which represents the present value of the future minimum lease
payments for the leases of CPI and MoArk. CPI leases the real property and
certain equipment relating to its cheese manufacturing and whey processing plant
in Tulare, CA. CPI had a lease balance of $99.2 million at December 31, 2003.
The entire lease balance of $108.3 million at December 31, 2002 was classified
as a current liability as CPI was in default of covenants at that time. MoArk
leases land, buildings and equipment at various locations. MoArk had a lease
balance of $10.8 million at December 31, 2003.
Minimum commitments for obligations under capital leases at December 31,
2003, total $110.0 million composed of $10.4 million for 2004, $10.1 million for
2005, $10.2 million for 2006, $10.2 million for 2007, $10.2 million for 2008 and
$58.9 million for later years.
F-43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 2003, Land O'Lakes had capital commitments of $7.6 million
for equipment and construction in progress at the CPI facility.
The Company is currently and from time to time involved in litigation and
environmental claims incidental to the conduct of business. The damages claimed
in some of these cases are substantial. Although the amount of loss that may
result from these matters cannot be ascertained with certainty, the Company does
not currently believe that, in the aggregate, they will result in a loss
material to the Company's consolidated financial condition, future results of
operations or cash flows.
On February 24, 2004, Cache La Poudre Feeds, LLC ("Cache") filed a lawsuit
in the United States District Court for the District of Colorado against the
Company, Land O'Lakes Farmland Feed LLC and certain named officers thereof
claiming trademark infringement with respect to certain animal feed sales under
the Profile trade name. Cache seeks damages of at least $132.8 million, which,
it claims, is the amount the named entities generated in gains, profits and
advantages from using the Profile trade name. In response to Cache's complaint,
the Company denied any wrongdoing and pursued certain counterclaims against
Cache relating to, among other things, trademark infringement, and other claims
against Cache and Cache's attorneys for, among other things, libel and slander.
In addition, the Company believes that Cache's calculation of the Company's
gains, profits and advantages generated from using the Profile trade name were
grossly overstated. The Company believes that sales revenue generated from the
sale of products carrying the Profile trade name are immaterial. Although the
amount of any loss that may result from this matter cannot be ascertained with
certainty, we do not currently believe that it will result in a loss material to
our consolidated financial condition, future results of operations or cash flow.
In the third quarter of 2003, three separate lawsuits were filed against
the Company by Ohio alpaca producers in which it is alleged that the Company
manufactured and sold animal feed that caused the death of, or damage to,
certain of the producers' alpacas. It is possible that additional lawsuits or
claims relating to this matter could be brought against the Company. Although
the amount of any loss that may result from these matters cannot be ascertained
with certainty, we do not currently believe that, in the aggregate, they will
result in losses material to our consolidated financial condition, future
results of operations or cash flows.
In a letter dated January 18, 2001, the Company was identified by the
United States Environmental Protection Agency ("EPA") as a potentially
responsible party for the hazardous waste located at the Hudson Refinery
Superfund Site in Cushing, Oklahoma. The letter invited the Company to enter
into negotiations with the EPA for the performance of a remedial investigation
and feasibility study in connection with the site, and also demanded that the
Company reimburse the EPA approximately $8.9 million for remediation expenses
already incurred at the site. The Company has responded to the EPA in March 2001
denying any responsibility. No further communication has been received from the
EPA.
22. SEGMENT INFORMATION
The Company operates in six segments: Dairy Foods, Feed, Seed, Swine,
Agronomy and Layers.
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.
The Feed segment is largely made up of a 92% ownership position in Land
O'Lakes Farmland Feed LLC ("Land O'Lakes Farmland Feed"). Land O'Lakes Farmland
Feed develops, produces, markets and distributes animal feeds such as ingredient
feed, formula feed, milk replacers, vitamins and additives.
The 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, forage and turf grasses.
F-44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
The Agronomy segment consists primarily of the Company's 50% ownership in
Agriliance LLC ("Agriliance"), which is accounted for under the equity method.
Agriliance markets and sells two primary product lines: crop protection
(including herbicides and pesticides) and crop nutrients (including fertilizers
and micronutrients).
The Layers segment consists of the Company's joint venture in MoArk, which
was consolidated as of July 1, 2003. MoArk produces and markets shell eggs and
egg products that are sold at retail and wholesale for consumer and industrial
use throughout the United States.
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 percentage of total invested
capital. A majority of corporate administrative expense is allocated directly.
<Table>
<Caption>
RESTATED OTHER/ RESTATED
DAIRY FOODS FEED SEED SWINE AGRONOMY LAYERS ELIMINATION CONSOLIDATED
----------- ---------- -------- -------- -------- -------- ----------- ------------
FOR THE YEAR ENDED DECEMBER
31, 2003
Net sales..................... $2,975,027 $2,467,207 $479,309 $ 91,187 $ -- $317,829 $ (4,456) $6,326,103
Cost of sales(1)............. 2,804,770 2,179,115 416,213 88,581 -- 264,727 (10,468) 5,742,938
Selling, general and
administrative............. 141,368 229,989 46,354 5,285 13,993 24,598 6,754 468,341
Restructuring and impairment
charges.................... 2,605 1,962 1,775 1,144 -- -- -- 7,486
Interest expense (income),
net........................ 29,107 28,133 3,384 5,882 9,019 9,869 (2,446) 82,948
Gain on legal settlements.... (103) (22,429) -- -- -- (310) -- (22,842)
Other (income) expense,
net........................ (1,384) (727) -- -- -- -- 525 (1,586)
Equity in (earnings) loss of
affiliated companies....... (4,952) (1,641) -- 105 (36,237) (14,480) 60 (57,145)
Minority interest in earnings
of subsidiaries............ -- 6,366 -- -- -- -- -- 6,366
---------- ---------- -------- -------- -------- -------- -------- ----------
Earnings (loss) before income
taxes...................... $ 3,616 $ 46,439 $ 11,583 $ (9,810) $13,225 $ 33,425 $ 1,119 $ 99,597
========== ========== ======== ======== ======== ======== ======== ==========
FOR THE YEAR ENDED DECEMBER
31, 2002
Net sales.................... $2,898,815 $2,444,668 $406,871 $ 83,239 $ -- $ -- $ 8,942 $5,842,535
Cost of sales(1)............. 2,743,668 2,155,342 353,852 93,482 -- -- 3,865 5,350,209
Selling, general and
administrative............. 156,016 235,835 44,272 5,795 18,885 2,120 7,725 470,648
Restructuring and impairment
charges.................... 19,647 11,765 -- -- -- -- -- 31,412
Interest expense (income),
net........................ 20,136 36,427 4,318 5,521 9,469 4,509 (1,709) 78,671
Gain on legal settlements.... (3,166) (152,378) -- -- -- -- -- (155,544)
Other (income) expense,
net........................ (1,796) (2,642) (3,956) 119 -- -- 32 (8,243)
Equity in loss (earnings) of
affiliated companies....... 580 (1,560) 75 1,491 (26,598) 2,915 422 (22,675)
Minority interest in (loss)
earnings of subsidiaries... (21) 5,380 19 -- -- -- 109 5,487
---------- ---------- -------- -------- -------- -------- -------- ----------
(Loss) earnings before income
taxes...................... $ (36,249) $ 156,499 $ 8,291 $(23,169) $(1,756) $ (9,544) $ (1,502) $ 92,570
========== ========== ======== ======== ======== ======== ======== ==========
FOR THE YEAR ENDED DECEMBER
31, 2001
Net sales.................... $3,462,139 $1,864,021 $413,567 $109,895 $ -- $ -- $ 8,096 $5,857,718
Cost of sales(1)............. 3,231,333 1,691,309 354,175 96,980 -- -- 2,285 5,376,082
Selling, general and
administrative............. 168,940 133,438 49,127 5,155 16,511 329 8,829 382,329
Restructuring and impairment
charges.................... 1,661 272 -- 1,800 -- -- -- 3,733
Interest expense (income),
net........................ 20,046 13,786 6,268 6,182 8,057 3,281 (1,936) 55,684
Gain on legal settlements.... -- (2,996) -- -- -- -- -- (2,996)
Other expense (income),
net........................ -- -- 66 -- (117) -- 23,168 23,117
Equity in (earnings) loss of
affiliated companies....... (4,940) (4,437) 324 (3,325) (34,704) (1,771) 270 (48,583)
Minority interest in (loss)
earnings of subsidiaries... (1,000) 7,992 6 -- -- -- (116) 6,882
---------- ---------- -------- -------- -------- -------- -------- ----------
Earnings (loss) before income
taxes...................... $ 46,099 $ 24,657 $ 3,601 $ 3,103 $10,253 $ (1,839) $(24,404) $ 61,470
========== ========== ======== ======== ======== ======== ======== ==========
</Table>
F-45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
RESTATED OTHER/ RESTATED
DAIRY FOODS FEED SEED SWINE AGRONOMY LAYERS ELIMINATION CONSOLIDATED
----------- ---------- -------- -------- -------- -------- ----------- ------------
2003
Total assets................. $ 939,610 $ 945,497 $439,858 $ 69,294 $423,341 $315,555 $255,905 $3,389,060
Depreciation and
amortization............... 42,958 44,895 2,156 3,548 6,101 6,326 14,784 120,768
Capital expenditures......... 28,220 24,049 542 5,060 -- 3,769 12,412 74,052
2002
Total assets................. $ 922,606 $1,087,432 $448,039 $ 73,883 $426,696 $ 58,332 $215,643 $3,232,631
Depreciation and
amortization............... 36,831 46,555 3,023 3,829 6,090 873 9,561 106,762
Capital expenditures......... 32,347 26,047 573 3,126 -- -- 25,344 87,437
2001
Total assets................. $ 712,246 $ 981,229 $379,912 $ 77,911 $411,738 $ 60,364 $449,859 $3,073,259
Depreciation and
amortization............... 42,466 31,707 5,008 5,575 6,321 329 5,882 97,288
Capital expenditures......... 37,749 24,872 2,685 7,310 -- -- 11,320 83,936
(1) Cost of sales includes unrealized hedging (gains) losses of:
2003......................... $ (3,035) $ (11,802) $ (2,645) $ (1,980) $ -- $ -- $ -- $ (19,462)
2002......................... 394 (154) (2,265) 888 -- -- -- (1,137)
2001......................... 139 3,735 2,265 423 -- -- -- 6,562
</Table>
23. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<Table>
<Caption>
RESTATED
--------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER FULL YEAR
---------- ---------- ---------- ---------- ----------
2003
Net sales................ $1,451,018 $1,400,594 $1,582,969 $1,891,522 $6,326,103
Gross profit............. 125,535 125,330 133,531 198,769 583,165
Net (loss) earnings...... (380) 44,932 (1,634) 39,076 81,994
</Table>
<Table>
<Caption>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER FULL YEAR
---------- ---------- ---------- ---------- ----------
2002
Net sales................ $1,530,103 $1,419,762 $1,371,248 $1,521,422 $5,842,535
Gross profit............. 146,683 122,529 112,243 110,871 492,326
Net (loss) earnings...... (1,773) 47,447 (12,290) 62,988 96,372
</Table>
24. RELATED PARTY TRANSACTIONS
The Company has a 50% voting interest in Melrose Dairy Proteins, LLC, a
joint venture with Dairy Farmers of America formed in April 2001. For the years
ended December 31, 2003, 2002 and 2001, the Company purchased $15.1 million,
$18.6 million and $1.3 million, respectively, in product from the venture and
sold $95.2 million, $96.1 million and $63.2 million, respectively, in product to
the venture.
The Company has a 50% voting interest in Agriliance LLC, a joint venture
with United Country Brands formed in July 2000. For the years ended December 31,
2003, 2002 and 2001, the Company sold services to the venture of $9.2 million,
$8.3 million and $7.1 million, respectively.
F-46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
25. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The activity in the allowance for doubtful accounts is as follows:
<Table>
<Caption>
BALANCE AT
BEGINNING CHARGES TO BALANCE AT
DESCRIPTION OF YEAR EXPENSE OTHER(a) END OF YEAR
- ----------- ---------- ---------- -------- -----------
Year ended December 31, 2003............... $18,255 $5,222 $(3,925) $19,552
Year ended December 31, 2002............... 22,954 5,094 (9,793) 18,255
Year ended December 31, 2001............... 17,870 1,871 3,213 22,954
</Table>
- ---------------
(a) Includes accounts written-off, recoveries, acquisitions, and the impact of
consolidations.
26. CONSOLIDATING FINANCIAL INFORMATION
The Company has entered into financing arrangements which are guaranteed by
the Company and certain of its wholly-owned and majority-owned subsidiaries and
limited liability companies (the "Guarantor Subsidiaries"). Such guarantees are
full, unconditional and joint and several.
The following supplemental financial information sets forth, on an
unconsolidated basis, balance sheet, statement of operations and cash flow
information for the Company, Guarantor Subsidiaries and the Company's other
subsidiaries and limited liability companies (the "Non-Guarantor Subsidiaries").
The supplemental financial information reflects the investments of the Company
in the Guarantor and Non-Guarantor Subsidiaries using the equity method of
accounting.
F-47
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2003
<Table>
<Caption>
RESTATED
LAND WHOLLY- MAJORITY-
O'LAKES, INC. OWNED OWNED
PARENT CONSOLIDATED CONSOLIDATED NON-GUARANTOR RESTATED
COMPANY GUARANTORS GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------- ------------ ------------
($ IN THOUSANDS)
ASSETS
Current assets:
Cash and short-term
investments.................. $ 99,753 $ 4,207 $ -- $ 6,314 $ -- $ 110,274
Restricted cash................ 20,118 -- -- -- -- 20,118
Receivables, net............... 386,678 82,097 194,002 120,064 (159,254) 623,587
Inventories.................... 265,924 45,981 132,027 52,894 -- 496,826
Prepaid expenses............... 227,495 3,053 10,975 4,850 -- 246,373
Other current assets........... 33,968 2,318 -- 5,720 -- 42,006
---------- -------- -------- -------- ----------- ----------
Total current assets......... 1,033,936 137,656 337,004 189,842 (159,254) 1,539,184
Investments...................... 1,311,131 223 18,587 11,227 (834,527) 506,641
Property, plant and equipment,
net............................ 246,803 13,357 228,100 136,371 -- 624,631
Property under capital lease,
net............................ -- -- 31 109,114 -- 109,145
Goodwill......................... 183,665 3,224 121,993 64,201 -- 373,083
Other intangibles................ 1,140 3,041 95,241 3,516 -- 102,938
Other assets..................... 65,734 4,464 26,483 56,036 (19,279) 133,438
---------- -------- -------- -------- ----------- ----------
Total assets................. $2,842,409 $161,965 $827,439 $570,307 $(1,013,060) $3,389,060
========== ======== ======== ======== =========== ==========
LIABILITIES AND EQUITIES
Current liabilities:
Notes and short-term
obligations.................. $ 62,802 $ 2,927 $ 165 $114,208 $ (99,399) $ 80,703
Current portion of long-term
debt......................... 1,786 56,430 -- 6,055 (56,430) 7,841
Current portion of obligations
under capital lease.......... -- -- -- 10,399 -- 10,399
Accounts payable............... 566,201 59,621 110,238 38,706 (13,072) 761,694
Accrued expenses............... 145,705 23,740 38,824 18,207 -- 226,476
Patronage refunds and other
member equities payable...... 19,449 -- -- -- -- 19,449
---------- -------- -------- -------- ----------- ----------
Total current liabilities.... 795,943 142,718 149,227 187,575 (168,901) 1,106,562
Long-term debt................... 984,884 9,769 -- 79,729 (9,000) 1,065,382
Obligations under capital
lease.......................... -- -- 14 99,636 -- 99,650
Employee benefits and other
liabilities.................... 127,881 1,256 28,803 18,055 (632) 175,363
Minority interests............... 54,337 -- 2,561 5,841 -- 62,739
Equities:
Capital stock.................. 2,125 1,216 502,506 95,745 (599,467) 2,125
Member equities................ 866,586 -- -- -- -- 866,586
Accumulated other comprehensive
loss......................... (65,617) -- -- -- -- (65,617)
Retained earnings.............. 76,270 7,006 144,328 83,726 (235,060) 76,270
---------- -------- -------- -------- ----------- ----------
Total equities............... 879,364 8,222 646,834 179,471 (834,527) 879,364
---------- -------- -------- -------- ----------- ----------
Commitments and contingencies
Total liabilities and
equities................... $2,842,409 $161,965 $827,439 $570,307 $(1,013,060) $3,389,060
========== ======== ======== ======== =========== ==========
</Table>
F-48
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003
<Table>
<Caption>
RESTATED
LAND WHOLLY- MAJORITY-
O'LAKES, INC. OWNED OWNED
PARENT CONSOLIDATED CONSOLIDATED NON-GUARANTOR RESTATED
COMPANY GUARANTORS GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------- ------------ ------------
($ IN THOUSANDS)
Net sales............... $3,200,812 $227,445 $2,349,658 $548,188 $ -- $6,326,103
Cost of sales........... 2,946,734 220,353 2,074,563 501,288 -- 5,742,938
---------- -------- ---------- -------- -------- ----------
Gross profit............ 254,078 7,092 275,095 46,900 -- 583,165
Selling, general and
administrative........ 202,418 13,246 220,856 31,821 -- 468,341
Restructuring and
impairment charges.... 4,749 775 1,962 -- -- 7,486
---------- -------- ---------- -------- -------- ----------
Earnings (loss) from
operations............ 46,911 (6,929) 52,277 15,079 -- 107,338
Interest expense
(income), net......... 75,841 2,517 (941) 5,531 -- 82,948
Gain on legal
settlements........... (19,633) -- (3,209) -- -- (22,842)
Other (income) expense,
net................... (710) -- (876) -- -- (1,586)
Equity in (earnings)
loss of affiliated
companies............. (110,466) -- (1,421) (10,179) 64,921 (57,145)
Minority interest in
earnings (loss) of
subsidiaries.......... 4,935 -- (8) 1,439 -- 6,366
---------- -------- ---------- -------- -------- ----------
Earnings (loss) before
income taxes.......... 96,944 (9,446) 58,732 18,288 (64,921) 99,597
Income tax expense
(benefit)............. 14,950 (2,935) 84 5,504 -- 17,603
---------- -------- ---------- -------- -------- ----------
Net earnings (loss)..... $ 81,994 $ (6,511) $ 58,648 $ 12,784 $(64,921) $ 81,994
========== ======== ========== ======== ======== ==========
</Table>
F-49
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2003
<Table>
<Caption>
RESTATED
LAND WHOLLY- MAJORITY-
O'LAKES, INC. OWNED OWNED
PARENT CONSOLIDATED CONSOLIDATED NON-GUARANTOR RESTATED
COMPANY GUARANTORS GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------- ------------ ------------
($ IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)................... $ 81,994 $(6,511) $ 58,648 $ 12,784 $(64,921) $ 81,994
Adjustments to reconcile net earnings
(loss) to net cash provided by
operating activities:
Depreciation and amortization........ 55,451 1,956 39,549 16,076 -- 113,032
Amortization of deferred financing
costs.............................. 7,092 -- -- 644 -- 7,736
Bad debt expense..................... 1,883 134 1,889 1,316 -- 5,222
Proceeds from patronage revolvement
received........................... 5,000 -- -- -- -- 5,000
Non-cash patronage income............ (3,578) -- -- -- -- (3,578)
Receivable from legal settlement..... 90,707 -- 6,000 -- -- 96,707
Deferred income tax expense.......... 11,674 -- -- -- -- 11,674
(Increase) decrease in other
assets............................. (8,955) 4,628 1,475 3,375 5,342 5,865
(Decrease) increase in other
liabilities........................ (1,081) (77) 3,265 (3,691) (632) (2,216)
Restructuring and impairment
charges............................ 4,749 775 1,962 -- -- 7,486
Gain from divestitures of
businesses......................... (684) -- -- -- -- (684)
Equity in (earnings) loss of
affiliated companies............... (110,466) -- (1,421) (10,179) 64,921 (57,145)
Minority interests................... 4,935 -- (8) 1,439 -- 6,366
Other................................ (11,248) -- (876) -- -- (12,124)
Changes in current assets and
liabilities, net of acquisitions and
divestitures:
Receivables.......................... 23,373 (34,801) (55,601) (12,843) 28,792 (51,080)
Inventories.......................... (14,277) 28,416 (23,534) (4,383) -- (13,778)
Other current assets................. (59,958) 3,268 (3,350) 1,788 -- (58,252)
Accounts payable..................... 63,159 (8,708) (7,325) 1,357 (6,562) 41,921
Accrued expenses..................... 20,353 22,266 (6,537) 2,050 5,225 43,357
--------- ------- -------- -------- -------- ---------
Net cash provided by operating
activities........................... 160,123 11,346 14,136 9,733 32,165 227,503
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and
equipment.......................... (36,055) (871) (24,068) (13,058) -- (74,052)
Payments for investments............. (41,671) -- -- -- 31,374 (10,297)
Net proceeds from divestitures of
businesses......................... 1,815 -- -- -- -- 1,815
Proceeds from sale of investments.... -- -- 3,000 -- -- 3,000
Proceeds from sale of property, plant
and equipment...................... 17,612 -- 5,357 -- -- 22,969
Dividends from investments in
affiliated companies............... 29,420 -- 1,956 5,980 -- 37,356
Increase in restricted cash.......... (20,118) -- -- -- -- (20,118)
Other................................ 2,818 -- 1,287 -- -- 4,105
--------- ------- -------- -------- -------- ---------
Net cash (used) provided by investing
activities......................... (46,179) (871) (12,468) (7,078) 31,374 (35,222)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term
debt............................... 60,600 109 (207) (16,654) (32,165) 11,683
Proceeds from issuance of long-term
debt............................... 185,037 -- -- -- -- 185,037
Principal payments on long-term
debt............................... (289,608) (8,961) -- (6,341) -- (304,910)
Principal payments on obligations
under capital lease................ -- -- -- (9,590) -- (9,590)
Payments for debt issuance costs..... (3,486) -- -- -- -- (3,486)
Payments for redemption of member
equities........................... (24,380) -- -- -- -- (24,380)
Other................................ (688) -- -- 31,374 (31,374) (688)
--------- ------- -------- -------- -------- ---------
Net cash used by financing
activities......................... (72,525) (8,852) (207) (1,211) (63,539) (146,334)
--------- ------- -------- -------- -------- ---------
Net increase in cash................. 41,419 1,623 1,461 1,444 -- 45,947
Cash and short-term investments at
beginning of year.................... 58,334 2,584 (1,461) 4,870 -- 64,327
--------- ------- -------- -------- -------- ---------
Cash and short-term investments at end
of year.............................. $ 99,753 $ 4,207 $ -- $ 6,314 $ -- $ 110,274
========= ======= ======== ======== ======== =========
</Table>
F-50
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2002
<Table>
<Caption>
RESTATED
LAND WHOLLY- MAJORITY-
O'LAKES, INC. OWNED OWNED
PARENT CONSOLIDATED CONSOLIDATED NON-GUARANTOR RESTATED
COMPANY GUARANTORS GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------- ------------ ------------
($ IN THOUSANDS)
ASSETS
Current assets:
Cash and short-term investments... $ 58,334 $ 2,584 $ (1,461) $ 4,870 $ -- $ 64,327
Receivables, net.................. 449,959 30,057 150,447 45,377 (130,462) 545,378
Receivable from legal
settlement...................... 90,707 -- 6,000 -- -- 96,707
Inventories....................... 254,731 74,397 108,493 8,979 -- 446,600
Prepaid expenses.................. 176,541 4,840 7,625 240 -- 189,246
Other current assets.............. 12,868 337 -- 673 -- 13,878
---------- -------- -------- -------- --------- ----------
Total current assets............ 1,043,140 112,215 271,104 60,139 (130,462) 1,356,136
Investments......................... 1,163,031 1,102 20,777 2,496 (641,814) 545,592
Property, plant and equipment,
net............................... 260,078 23,131 246,402 50,249 -- 579,860
Property under capital lease, net... -- -- -- 105,736 -- 105,736
Goodwill............................ 187,755 13,172 121,673 813 -- 323,413
Other intangibles................... 4,243 723 96,455 349 -- 101,770
Other assets........................ 159,210 2,738 27,064 45,049 (13,937) 220,124
---------- -------- -------- -------- --------- ----------
Total assets.................... $2,817,457 $153,081 $783,475 $264,831 $(786,213) $3,232,631
========== ======== ======== ======== ========= ==========
LIABILITIES AND EQUITIES
Current liabilities:
Notes and short-term
obligations..................... $ 27,040 $ 2,818 $ 59 $ 66,174 $ (58,262) $ 37,829
Current portion of long-term
debt............................ 104,347 64,963 -- 47 (64,794) 104,563
Obligations under capital lease... -- -- -- 108,279 -- 108,279
Accounts payable.................. 503,510 68,329 117,563 18,553 (6,510) 701,445
Accrued expenses.................. 160,721 1,644 45,361 4,526 (5,225) 207,027
Patronage refunds and other member
equities payable................ 12,388 -- -- -- -- 12,388
---------- -------- -------- -------- --------- ----------
Total current liabilities....... 808,006 137,754 162,983 197,579 (134,791) 1,171,531
Long-term debt...................... 988,696 10,197 -- 18,023 (9,608) 1,007,308
Employee benefits and other
liabilities....................... 75,588 1,333 26,071 1,348 -- 104,340
Minority interests.................. 49,402 -- -- 4,285 -- 53,687
Equities:
Capital stock..................... 2,190 1,084 507,956 61,123 (570,163) 2,190
Member equities................... 858,996 -- -- -- -- 858,996
Retained earnings................. 34,579 2,713 86,465 (17,527) (71,651) 34,579
---------- -------- -------- -------- --------- ----------
Total equities.................. 895,765 3,797 594,421 43,596 (641,814) 895,765
---------- -------- -------- -------- --------- ----------
Commitments and contingencies
Total liabilities and
equities...................... $2,817,457 $153,081 $783,475 $264,831 $(786,213) $3,232,631
========== ======== ======== ======== ========= ==========
</Table>
F-51
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2002
<Table>
<Caption>
RESTATED
LAND WHOLLY- MAJORITY-
O'LAKES, INC. OWNED OWNED
PARENT CONSOLIDATED CONSOLIDATED NON-GUARANTOR RESTATED
COMPANY GUARANTORS GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------- ------------ ------------
($ IN THOUSANDS)
Net sales............... $3,117,998 $225,407 $2,376,716 $122,414 $ -- $5,842,535
Cost of sales........... 2,912,942 206,517 2,096,814 133,936 -- 5,350,209
---------- -------- ---------- -------- -------- ----------
Gross profit............ 205,056 18,890 279,902 (11,522) -- 492,326
Selling, general and
administrative........ 216,575 20,748 222,139 11,186 -- 470,648
Restructuring and
impairment charges.... 19,784 362 11,266 -- -- 31,412
---------- -------- ---------- -------- -------- ----------
(Loss) earnings from
operations............ (31,303) (2,220) 46,497 (22,708) -- (9,734)
Interest expense
(income), net......... 71,956 3,939 3,411 (635) -- 78,671
Gain on legal
settlements........... (147,902) -- (7,642) -- -- (155,544)
Other (income) expense,
net................... (3,151) (3,932) (2,621) 1,461 -- (8,243)
Equity in (earnings)
loss of
affiliated
companies............. (47,970) 247 (1,021) -- 26,069 (22,675)
Minority interest in
earnings of
subsidiaries.......... 4,454 -- 231 802 -- 5,487
---------- -------- ---------- -------- -------- ----------
Earnings (loss) before
income taxes.......... 91,310 (2,474) 54,139 (24,336) (26,069) 92,570
Income tax (benefit)
expense............... (5,062) 911 (841) 1,190 -- (3,802)
---------- -------- ---------- -------- -------- ----------
Net earnings (loss)..... $ 96,372 $ (3,385) $ 54,980 $(25,526) $(26,069) $ 96,372
========== ======== ========== ======== ======== ==========
</Table>
F-52
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2002
<Table>
<Caption>
RESTATED
LAND WHOLLY- MAJORITY-
O'LAKES, INC. OWNED OWNED
PARENT CONSOLIDATED CONSOLIDATED NON-GUARANTOR RESTATED
COMPANY GUARANTORS GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------- ------------ ------------
($ IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss).................. $ 96,372 $ (3,385) $ 54,980 $(25,526) $(26,069) $ 96,372
Adjustments to reconcile net earnings
(loss) to net cash provided (used)
by operating activities:
Depreciation and amortization...... 53,222 3,693 43,879 2,905 -- 103,699
Amortization of deferred financing
costs............................ 3,063 -- -- -- -- 3,063
Bad debt expense................... 1,894 -- 3,200 -- -- 5,094
Proceeds from patronage revolvement
received......................... 2,061 -- -- -- -- 2,061
Non-cash patronage income.......... (1,921) -- -- -- -- (1,921)
Receivable from legal settlement... (90,707) -- (6,000) -- -- (96,707)
Deferred income tax benefit........ (8,810) -- -- -- -- (8,810)
(Increase) decrease in other
assets........................... (87,897) (2,204) (3,801) 5,823 2,236 (85,843)
Increase (decrease) in other
liabilities...................... 7,501 (601) (9,377) 176 -- (2,301)
Restructuring and impairment
charges.......................... 19,784 362 11,266 -- -- 31,412
(Gain) loss on divestitures of
businesses....................... (2,521) (3,932) -- 1,461 -- (4,992)
Equity in (earnings) loss of
affiliated companies............. (47,970) 247 (1,021) -- 26,069 (22,675)
Minority interests................. 4,454 -- 231 802 -- 5,487
Other.............................. 9,496 488 (2,281) (7,777) -- (74)
Changes in current assets and
liabilities, net of acquisitions
and divestitures:
Receivables........................ 25,214 4,575 (11,509) (4,901) (35,136) (21,757)
Inventories........................ 17,748 (18,791) (1,055) (2,526) -- (4,624)
Other current assets............... (26,286) 4,683 (653) 40 -- (22,216)
Accounts payable................... 54,664 7,011 7,508 (38) (6,434) 62,711
Accrued expenses................... 6,377 (4,978) (13,323) 1,178 (5,225) (15,971)
-------- -------- -------- -------- -------- --------
Net cash provided (used) by operating
activities......................... 35,738 (12,832) 72,044 (28,383) (44,559) 22,008
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and
equipment.......................... (54,164) (1,176) (25,995) (6,102) -- (87,437)
Payments for investments............. (22,561) (6) -- (300) 6,641 (16,226)
Net proceeds from divestitures of
businesses......................... 16,070 -- -- -- -- 16,070
Proceeds from sale of investments.... 22,101 1,420 3,700 150 -- 27,371
Proceeds from sale of property, plant
and equipment...................... 17,472 241 6,600 -- -- 24,313
Dividends from investments in
affiliated companies............... 22,832 -- 3,726 -- -- 26,558
Other................................ 4,366 -- 750 -- -- 5,116
-------- -------- -------- -------- -------- --------
Net cash provided (used) by investing
activities......................... 6,116 479 (11,219) (6,252) 6,641 (4,235)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in short-term
debt............................... (62,960) 5,574 (4,572) 4,175 67,901 10,118
Proceeds from issuance of long-term
debt............................... 8,004 313 -- 23 (2,283) 6,057
Principal payments on long-term
debt............................... (3,112) (40) (55,441) (3,447) -- (62,040)
Payments for redemption of member
equities........................... (37,878) -- -- -- -- (37,878)
Other................................ 1,372 -- (1,246) 27,702 (27,700) 128
-------- -------- -------- -------- -------- --------
Net cash (used) provided by financing
activities......................... (94,574) 5,847 (61,259) 28,453 37,918 (83,615)
-------- -------- -------- -------- -------- --------
Net decrease in cash................. (52,720) (6,506) (434) (6,182) -- (65,842)
Cash and short-term investments at
beginning of year.................... 111,054 9,090 (1,027) 11,052 -- 130,169
-------- -------- -------- -------- -------- --------
Cash and short-term investments at end
of year.............................. $ 58,334 $ 2,584 $ (1,461) $ 4,870 $ -- $ 64,327
======== ======== ======== ======== ======== ========
</Table>
F-53
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001
<Table>
<Caption>
RESTATED
LAND WHOLLY- MAJORITY-
O'LAKES, INC. OWNED OWNED
PARENT CONSOLIDATED CONSOLIDATED NON-GUARANTOR RESTATED
COMPANY GUARANTORS GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------- ------------ ------------
($ IN THOUSANDS)
Net sales............... $3,754,542 $215,187 $1,763,928 $124,061 $ -- $5,857,718
Cost of sales........... 3,483,069 180,692 1,599,083 113,238 -- 5,376,082
---------- -------- ---------- -------- -------- ----------
Gross profit............ 271,473 34,495 164,845 10,823 -- 481,636
Selling, general and
administrative........ 210,807 31,625 125,188 14,709 -- 382,329
Restructuring and
impairment charges
(reversals)........... 9,461 -- (5,728) -- -- 3,733
---------- -------- ---------- -------- -------- ----------
Earnings (loss) from
operations............ 51,205 2,870 45,385 (3,886) -- 95,574
Interest expense
(income),
net................... 45,973 4,677 5,616 (582) -- 55,684
Gain on legal
settlements........... (2,996) -- -- -- -- (2,996)
Other expense (income),
net................... 23,117 -- -- -- -- 23,117
Equity in (earnings)
loss of
affiliated
companies............. (82,388) -- (2,577) -- 36,382 (48,583)
Minority interest in
earnings (loss) of
subsidiaries.......... 7,275 -- 359 (752) -- 6,882
---------- -------- ---------- -------- -------- ----------
Earnings (loss) before
income taxes.......... 60,224 (1,807) 41,987 (2,552) (36,382) 61,470
Income tax (benefit)
expense............... (7,847) 761 -- 485 -- (6,601)
---------- -------- ---------- -------- -------- ----------
Net earnings (loss)..... $ 68,071 $ (2,568) $ 41,987 $ (3,037) $(36,382) $ 68,071
========== ======== ========== ======== ======== ==========
</Table>
F-54
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2001
<Table>
<Caption>
RESTATED
LAND WHOLLY- MAJORITY-
O'LAKES, INC. OWNED OWNED
PARENT CONSOLIDATED CONSOLIDATED NON-GUARANTOR RESTATED
COMPANY GUARANTORS GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------- ------------ ------------
($ IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss).................. $ 68,071 $ (2,568) $ 41,987 $ (3,037) $(36,382) $ 68,071
Adjustments to reconcile net earnings
(loss) to net cash provided (used)
by operating activities:
Depreciation and amortization...... 61,682 5,207 26,396 3,042 -- 96,327
Amortization of deferred financing
charges.......................... 961 -- -- -- -- 961
Bad debt expense................... 2,654 -- (783) -- -- 1,871
Proceeds from patronage revolvement
received......................... 2,895 -- -- -- -- 2,895
Non-cash patronage income.......... (4,999) -- -- -- -- (4,999)
Deferred income tax expense........ 18,962 -- -- -- -- 18,962
(Increase) decrease in other
assets........................... (41,611) (71) 26,147 291 2,701 (12,543)
Increase (decrease) in other
liabilities...................... 84,202 (533) (77,384) 88 (10,900) (4,527)
Restructuring and impairment
charges (reversals).............. 9,461 -- (5,728) -- -- 3,733
Equity in (earnings) loss of
affiliated companies............. (82,388) -- (2,577) -- 36,382 (48,583)
Minority interests................. 7,275 -- 359 (752) -- 6,882
Other.............................. (11,756) -- 5,981 (378) -- (6,153)
Changes in current assets and
liabilities, net of acquisitions
and divestitures:
Receivables........................ 62,880 464 (8,646) (5,427) (6,630) 42,641
Inventories........................ 12,665 (1,952) 11,057 (415) -- 21,355
Other current assets............... (22,294) 2,263 19,967 (136) -- (200)
Accounts payable................... 123,755 (59,137) (2,701) 1,666 60,042 123,625
Accrued expenses................... (11,046) (1,217) (24,480) 729 -- (36,014)
---------- -------- -------- -------- -------- ----------
Net cash provided (used) by operating
activities......................... 281,369 (57,544) 9,595 (4,329) 45,213 274,304
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and
equipment.......................... (46,240) (1,475) (19,353) (16,868) -- (83,936)
Acquisitions, net of cash acquired... (371,858) -- -- -- -- (371,858)
Payments for investments............. (31,630) (278) (20,883) (1,405) 8,007 (46,189)
Proceeds from sale of investments.... 5,264 -- -- -- -- 5,264
Proceeds from sale of property, plant
and equipment...................... 29,940 145 -- 139 -- 30,224
Dividends from investments in
affiliated companies............... 3,548 -- -- -- -- 3,548
Other................................ (3,156) -- 4,901 -- -- 1,745
---------- -------- -------- -------- -------- ----------
Net cash (used) provided by investing
activities......................... (414,132) (1,608) (35,335) (18,134) 8,007 (461,202)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in short-term
debt............................... (80,726) 61,703 7,736 6,715 (49,240) (53,812)
Proceeds from issuance of long-term
debt............................... 1,347,917 -- -- 17,584 4,027 1,369,528
Principal payments on long-term
debt............................... (922,823) (55) (8,702) (3,524) -- (935,104)
Payments for debt issuance costs..... (20,265) -- -- -- -- (20,265)
Payments for redemption of member
equities........................... (46,896) -- -- -- -- (46,896)
Other................................ (38,714) 7,140 37,354 1,849 (8,007) (378)
---------- -------- -------- -------- -------- ----------
Net cash provided (used) by financing
activities......................... 238,493 68,788 36,388 22,624 (53,220) 313,073
---------- -------- -------- -------- -------- ----------
Net increase in cash................. 105,730 9,636 10,648 161 -- 126,175
Cash and short-term investments at
beginning of year.................... 5,324 (546) (11,675) 10,891 -- 3,994
---------- -------- -------- -------- -------- ----------
Cash and short-term investments at end
of year.............................. $ 111,054 $ 9,090 $ (1,027) $ 11,052 $ -- $ 130,169
========== ======== ======== ======== ======== ==========
</Table>
F-55
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Members and Management
Moark, LLC and Subsidiaries
Chesterfield, Missouri
We have audited the accompanying consolidated balance sheet of Moark, LLC
and Subsidiaries as of December 27, 2003 and February 1, 2003, and the related
consolidated statements of operations, members' equity and cash flows for the
eleven months ended December 27, 2003 and for the year ended February 1, 2003.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Moark, LLC and Subsidiaries as of December 27, 2003 and February 1, 2003, and
the consolidated results of their operations and their cash flows for the eleven
months ended December 27, 2003 and the year ended February 1, 2003, in
conformity with U.S. generally accepted accounting principles.
/s/ MOORE STEPHENS FROST
--------------------------------------
Certified Public Accountant
Little Rock, Arkansas
January 20, 2004
F-56
MOARK, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 27, 2003 AND FEBRUARY 1, 2003
<Table>
<Caption>
DECEMBER 27, FEBRUARY 1,
2003 2003
------------ ------------
ASSETS
Current assets
Cash and cash equivalents................................. $ 3,607,394 $ 8,520,673
Accounts receivable -- trade, less allowance for doubtful
accounts of $2,088,686 and $1,091,799, respectively..... 59,998,841 43,688,012
Inventories............................................... 39,285,698 37,607,594
Refundable income taxes................................... -- 63,380
Current portion of notes receivable....................... 258,224 316,580
Prepaid expenses and other current assets................. 2,848,511 2,799,440
------------ ------------
Total current assets........................................ 105,998,668 92,995,679
------------ ------------
Property, plant and equipment
Land...................................................... 8,157,855 8,945,544
Land improvements......................................... 837,324 802,868
Buildings and leasehold improvements...................... 43,375,647 44,675,270
Machinery and equipment................................... 62,030,112 56,188,621
Vehicles.................................................. 7,942,765 7,347,461
Furniture and fixtures.................................... 1,186,762 1,019,313
Construction in progress.................................. 1,762,265 2,042,861
------------ ------------
125,292,730 121,021,938
Less accumulated depreciation............................. (30,368,066) (21,642,249)
------------ ------------
Net property, plant and equipment........................... 94,924,664 99,379,689
------------ ------------
Investments, intangibles and other assets
Other assets.............................................. 786,484 1,286,488
Notes receivable, less current portion.................... 3,525,619 3,654,008
Investment in affiliates.................................. 9,001,694 3,699,087
Assets held for sale...................................... 4,940,846 3,512,652
Intangible assets -- finite-lived, net.................... 2,785,804 3,828,303
Goodwill.................................................. 63,985,483 62,235,483
------------ ------------
Total investments, intangibles and other assets............. 85,025,930 78,216,021
------------ ------------
Total assets................................................ $285,949,262 $270,591,389
============ ============
LIABILITIES AND MEMBERS' EQUITY
Current liabilities
Notes payable............................................. $ -- $ 22,421,871
Accounts payable.......................................... 31,132,383 23,442,090
Accrued expenses and other current liabilities............ 10,591,205 8,379,688
Income taxes payable...................................... 580,224 --
Current maturities of long-term debt and capital lease
obligations............................................. 7,587,394 19,511,414
Current deferred income taxes............................. 2,200,000 2,949,000
------------ ------------
Total current liabilities................................... 52,091,206 76,704,063
------------ ------------
Long-term debt and capital lease obligations, less current
maturities................................................ 98,972,338 91,034,788
------------ ------------
Deferred income taxes....................................... 17,725,000 13,484,300
------------ ------------
Liabilities held for sale................................... 531,133 291,906
------------ ------------
Members' equity............................................. 116,629,585 89,076,332
------------ ------------
Total liabilities and members' equity....................... $285,949,262 $270,591,389
============ ============
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-57
MOARK, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE ELEVEN MONTHS ENDED DECEMBER 27, 2003 AND THE YEAR ENDED FEBRUARY 1,
2003
<Table>
<Caption>
DECEMBER 27, FEBRUARY 1,
2003 2003
------------ ------------
Net sales................................................... $496,002,145 $408,268,443
Cost of sales............................................... 427,257,562 374,984,080
------------ ------------
Gross profit................................................ 68,744,583 33,284,363
Expenses
General and administrative................................ 24,762,315 18,141,316
Selling................................................... 9,662,270 12,235,544
------------ ------------
Total expenses.............................................. 34,424,585 30,376,860
------------ ------------
Operating income............................................ 34,319,998 2,907,503
Other income (expense)
Interest expense.......................................... (6,580,460) (6,374,425)
Interest and other income................................. 1,966,521 1,239,019
Equity in earnings (loss) of affiliates................... 11,282,607 (1,284,388)
Gain (loss) on sale of assets............................. 553,903 (125,560)
------------ ------------
7,222,571 (6,545,354)
------------ ------------
Income (loss) before income taxes and discontinued
operations................................................ 41,542,569 (3,637,851)
Income tax expense (benefit)................................ 4,054,164 (1,948,594)
------------ ------------
Income (loss) before discontinued operations................ 37,488,405 (1,689,257)
Loss from operations of discontinued component.............. 1,335,152 675,331
------------ ------------
Net income (loss)........................................... $ 36,153,253 $ (2,364,588)
============ ============
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-58
MOARK, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF MEMBERS' EQUITY
FOR THE ELEVEN MONTHS ENDED DECEMBER 27, 2003 AND THE YEAR ENDED FEBRUARY 1,
2003
<Table>
<Caption>
MEMBERS'
EQUITY
------------
Balance -- February 2, 2002................................. $ 91,506,174
Net loss.................................................. (2,364,588)
Distribution to members, net.............................. (65,254)
------------
Balance -- February 1, 2003................................. 89,076,332
Net income................................................ 36,153,253
Distribution to members................................... (8,600,000)
------------
Balance -- December 27, 2003................................ $116,629,585
============
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-59
MOARK, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE ELEVEN MONTHS ENDED DECEMBER 27, 2003 AND THE YEAR ENDED FEBRUARY 1,
2003
<Table>
<Caption>
DECEMBER 27, FEBRUARY 1,
2003 2003
------------ ------------
Cash flows from operating activities
Net income (loss)......................................... $ 36,153,253 $ (2,364,588)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities
Depreciation............................................ 8,999,519 9,263,349
Amortization............................................ 1,042,499 329,495
(Gain) loss on sale of assets........................... (553,902) 125,560
Equity in (income) loss of affiliates................... (11,282,607) 1,284,388
Net change in operating assets of discontinued
operations............................................. (1,188,967) (530,583)
Change in deferred income taxes......................... 3,491,700 (3,328,034)
Change in operating assets and liabilities
Accounts receivable -- trade.......................... (16,310,829) (6,851,525)
Inventories........................................... (1,678,104) (7,719,675)
Refundable income taxes............................... 63,380 1,818,605
Prepaid expenses and other current assets............. (49,071) 787,440
Accounts payable...................................... 7,690,293 3,329,815
Accrued expense and other current liabilities......... 2,211,517 3,021,629
Income taxes payable.................................. 580,224 --
------------ ------------
Net cash provided by (used in) operating activities......... 29,168,905 (834,124)
------------ ------------
Cash flows from investing activities
Accretion of bond discount................................ -- (21,837)
Proceeds from sale of assets.............................. 1,321,185 631,158
Purchase of property, plant and equipment................. (5,311,777) (4,767,806)
Purchase of subsidiaries, net of cash acquired............ (1,750,000) (5,942,584)
Investment in affiliates.................................. 5,980,000 (984,585)
Payment of acquisition costs.............................. -- (75,927)
Purchase of minority interest............................. -- (2,000,000)
Other assets.............................................. 500,004 72,140
Collections on note receivable............................ 186,745 1,969,886
------------ ------------
Net cash provided by (used in) investing activities......... 926,157 (11,119,555)
------------ ------------
Cash flows from financing activities
Net (repayments) borrowings on notes payable.............. (8,299,978) 7,381,385
Repayments of capital lease obligations................... (2,781,003) (929,305)
Proceeds from long-term debt.............................. 21,581 32,040
Repayments of long-term debt.............................. (15,348,941) (8,416,620)
Distributions to members, net............................. (8,600,000) (65,254)
------------ ------------
Net cash provided by (used in) financing activities......... (35,008,341) (1,997,754)
------------ ------------
Net decrease in cash and cash equivalents................... (4,913,279) (13,951,433)
Cash and cash equivalents -- beginning of year.............. 8,520,673 22,472,106
------------ ------------
Cash and cash equivalents -- end of year.................... $ 3,607,394 $ 8,520,673
============ ============
Supplementary disclosures of cash flow information
Cash paid during the year for:
Interest................................................ $ 6,586,193 $ 7,543,223
Income taxes (net of refunds received).................. 581,195 (418,052)
Supplementary disclosure of non-cash transactions
Purchase of property, plant and equipment through capital
lease obligations....................................... $ -- $ 11,447,785
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-60
MOARK, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 2003 AND FEBRUARY 1, 2003
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Basis of presentation -- On February 2, 2000, Land O'Lakes, Inc. and the
Moark group of affiliated companies established a new joint venture ("Moark,
LLC") to facilitate the strategy of becoming a top tier marketer and producer of
shell eggs and processed egg products in the United States. In connection with
the formation of this venture, Land O'Lakes, Inc. contributed cash and a
commitment to provide additional funding and the Moark group contributed their
existing egg and egg product operations.
b. Principles of consolidation -- The consolidated financial statements
include the accounts of Moark, LLC and all subsidiaries in which Moark, LLC has
the ability to exercise significant control over operating and financial
policies. The entities (collectively referred to as "the Company") which are
included in the consolidated financial statements are Moark, LLC, Premier Farms,
LLC, Moark Egg Corporation, Norco Ranch Holding Company, Inc., Norco Ranch,
Inc., Hi Point Industries, LLC, L&W Egg Products, Inc., Kofkoff Egg Farm, LLC,
Whip-O-Will Egg Farms, LLC, Pacheco Egg Farms, LLC, Kofkoff Feed, Inc.,
Colchester Foods, Inc., Fitchville Realty, Inc., Egg Express, Inc., McAnally
Enterprises, LLC, Southern New England Egg, LLC, Cutler at Philadelphia, LLC,
Cutler at Abbeville, LLC, Sunbest Farms of Iowa, LLC, and Sunbest Foods of Iowa,
Inc. All significant intercompany balances and transactions have been
eliminated.
c. Business environment -- The Company operates as a marketer and producer
of shell eggs and egg products covering the majority of the United States. As
such, it operates in an environment wherein the commodity nature of both its
products for sale and its primary raw materials causes sales prices and
production costs to fluctuate, often on a short-term basis, due to the
world-wide supply and demand situation for those commodities. The supply and
demand factors for its products for sale and the supply and demand factors for
its primary raw materials correlate to a degree, but are not the same, thereby
causing margins between sales prices and production costs to increase, to
decrease, or to invert, often on a short-term basis.
d. Limited liability company -- Since Moark, LLC is a limited liability
company, no interest holder of the Company shall be personally liable for the
debts, obligations, or liabilities of Moark, LLC unless the individual has
signed a specific personal guarantee. Moark, LLC shall dissolve upon the sale of
all or substantially all of the property of Moark, LLC; the vote by the managers
to dissolve, wind up and liquidate the Company; entry of a decree of judicial
dissolution pursuant to a legal authority; on December 31, 2050.
e. Fiscal year -- During the eleven months ended December 27, 2003, the
Company changed its year end to use a 52-53 week fiscal year ending on the last
Saturday in December. Prior to this change, the Company's fiscal year ended on
the Saturday closest to January 31. The eleven months ended December 27, 2003
and the year ended February 1, 2003 were 48 and 52 week periods, respectively.
f. Revenue recognition -- Revenue is recognized by the Company when the
following criteria are met: persuasive evidence of an agreement exists; delivery
has occurred or services have been rendered; the Company's price to the buyer is
fixed and determinable; and collectibility is reasonably assured.
g. Cash equivalents -- For purposes of the consolidated statement of cash
flows, the Company considers all highly liquid instruments with an original
maturity of three months or less to be cash equivalents.
h. Accounts receivable -- The Company reviews their customer accounts on a
periodic basis and records a reserve for specific amounts that the Company feels
may not be collected. In addition, the Company has established a general reserve
based on historical percentages of bad debts. Amounts will be written off at the
point when collection attempts on the accounts have been exhausted. Management
uses significant judgment in estimating uncollectible amounts. In estimating
uncollectible amounts, management considers factors such as current overall
economic conditions, industry-specific economic conditions, historical customer
performance and anticipated customer performance. Past due status is determined
based upon contractual terms. While management believes the Company's processes
effectively address its exposure to doubtful accounts,
F-61
MOARK, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
changes in economic, industry or specific customer conditions may require
adjustment to the allowance recorded by the Company.
i. Inventories -- Layer flock inventories are valued at amortized costs.
All other inventories are stated at the lower of cost, determined using the
first-in, first-out method, or market.
j. Property, plant and equipment -- Property, plant and equipment
contributed in connection with the initial establishment of the Company was
recorded at its estimated fair values at the date of contribution. Additions to
property, plant and equipment are recorded at original cost. Depreciation is
provided by the straight-line method over the estimated useful lives of the
related assets.
k. Long-lived assets -- During the year ended February 1, 2003, the Company
adopted Statement of Financial Accounting Standards No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" which supercedes and amends No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of." This statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amounts of any asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount the carry amount of the
assets exceeds the fair value of the assets. Based upon management's assessment
of the existing assets, no impairment loss needs to be recognized at December
27, 2003.
l. Goodwill -- As a result of certain acquisition and merger transactions,
the Company has recorded goodwill for the excess of the amount paid over the
fair value of the assets acquired at the date of the acquisition or merger.
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets"
(SFAS 142). SFAS 142 eliminated the requirement for systematic amortization of
goodwill and replaced this with a requirement to evaluate the goodwill for
impairment at least on an annual basis. The Company adopted SFAS 142, effective
February 3, 2002. No impairment loss resulted from the impairment test completed
during the eleven months ended December 27, 2003, the year ended February 1,
2003 or on the date of adoption.
m. Franchise agreements -- Fees paid to acquire franchises are reported as
intangible assets-finite-lived, net of accumulated amortization and are being
amortized to operations over the life of the franchise on the straight-line
method. The franchise agreements granted certain rights to the Company to
produce, sell and distribute certain product lines for an initial term of twenty
years with options to renew. The agreements required an initial payment and
monthly service fees based on a percentage of net sales of the products sold.
The Company has also agreed to comply with franchise requirements relating to
insurance limits, feed additives, packaging supplies, and promotional materials.
n. Other assets -- Other assets consist primarily of long-term grower
advances, the long-term portion of a prepaid lease agreement and deposits. The
lease agreement is being expensed over the term of the lease.
o. Income taxes -- The Company utilizes the liability method on accounting
for income taxes. This method requires the Company to recognize deferred tax
assets and liabilities for the expected future tax consequences of events that
have been recognized in its financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined based on the
difference between the financial statement basis of the assets and liabilities
and their related tax basis using enacted tax rates in effect for the years in
which the differences are expected to be recovered.
A portion of the Company's inventory has been valued using the farm price
method for income tax reporting purposes. This results in these inventories
being reflected at a lower value in the tax returns with lower taxable income
reported. Current deferred income taxes relate primarily to this difference
between
F-62
MOARK, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
financial statements and taxable income. Net operating loss carryforwards have
been used to reduce current deferred income taxes.
Timing differences exist for depreciation on certain assets due to the use
of the accelerated cost recovery system of depreciation for income tax reporting
purposes. In addition, certain of the Company's incorporated subsidiaries
utilized the cash basis method of accounting for income tax reporting prior to
being acquired. The difference between this method and the accrual method is
being recorded in taxable income over a ten year period. Long-term deferred
income taxes relate primarily to these differences.
Moark, LLC, and several of its subsidiaries are limited liability companies
and as such, are taxed as partnerships for income tax purposes. Accordingly, the
taxable income or loss of these entities is reported on the individual income
tax returns of their members. No provision for income taxes or deferred income
tax liability related to these entities are included in the accompanying
consolidated financial statements.
p. Advertising -- The Company expenses the costs of advertising as
incurred. Advertising costs during the eleven months ended December 27, 2003 and
the year ended February 1, 2003 were approximately $1,835,000 and $3,400,000,
respectively.
q. Shipping and handling -- All shipping and handling costs are expensed as
incurred and are included in cost of sales in the accompanying consolidated
statement of operations.
r. Estimates -- The preparation of the financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of certain assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
s. Fair value -- As of December 27, 2003 and February 1, 2003, the stated
value of the Company's long-term receivables and long-term debt approximates
their fair value based on current market rates for financial instruments of the
same remaining maturities and with similar credit quality.
t. Reclassifications -- Certain reclassifications have been made to the
February 1, 2003 amounts to conform to the December 27, 2003 presentation. The
reclassifications had no impact on the net loss.
u. Recently issued accounting pronouncements -- In August 2001, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standard No. 143, "Accounting for Asset Retirement Obligations." This statement
requires the Company to recognize the fair value of the liability associated
with the cost the Company would be obligated to incur in order to retire an
asset at some point in the future. The liability would be recognized in the
period in which it is incurred and can be reasonably estimated. The standard is
effective for fiscal years beginning after June 15, 2002. The Company has
elected early implementation of this standard. The Company reviews its assets
and believes that is has no assets that will require funds to retire at some
point in the future.
2. ACQUISITIONS AND MERGERS
Effective February 19, 2002, the Company entered into agreements to acquire
certain assets of Sunbest Farms of Iowa, LLC and Latco, Inc. as well as the
stock of Sunbest Foods of Iowa, Inc. This group of entities was jointly
operating in a shell egg production operation in Iowa and owned a 50% interest
in a shell egg operation in Utah. The purchase price for the above operations
was approximately $3,150,000, plus the assumption of certain liabilities. In
addition, the Company simultaneously entered into two agreements for the layer
production and pullet production facilities in Iowa for ten-year terms with an
option to purchase these assets at the termination of the agreements. The layer
production agreement met the requirement for treatment as a capitalized lease
obligation and, accordingly, the associated assets and corresponding lease
obligations have been recorded in the accompanying financial statements.
F-63
MOARK, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INVENTORIES
Inventories consist of:
<Table>
<Caption>
DECEMBER 27, FEBRUARY 1,
2003 2003
------------ -----------
Layer flocks and pullets................................... $23,061,272 $21,753,749
Feed and feed ingredients.................................. 4,942,245 4,255,767
Egg and egg products....................................... 8,632,896 8,905,826
Supplies and other......................................... 2,649,285 2,692,252
----------- -----------
$39,285,698 $37,607,594
=========== ===========
</Table>
4. NOTES RECEIVABLE
Notes receivable consist of the following:
<Table>
<Caption>
DECEMBER 27, FEBRUARY 1,
2003 2003
------------ -----------
Note receivable from an individual; interest at 8%; due in
monthly installments of $34,942, including interest,
through December 2019..................................... $3,656,205 $3,774,390
Various notes receivable; interest at 8%; due in monthly
installments including interest, through February 2004.... 127,638 196,198
---------- ----------
3,783,843 3,970,588
Less current portion........................................ 258,224 316,580
---------- ----------
Notes receivable, less current portion...................... $3,525,619 $3,654,008
========== ==========
</Table>
The Company reviews their note receivable on a periodic basis and records a
reserve for specific amounts that the Company feels may not be collected. At the
point the Company records this amount in reserve, interest income will no longer
be accrued. Amounts will be written off when collection attempts on the amounts
have been exhausted. All notes receivable are considered fully collectible, and
accordingly, no provisions have been made at December 27, 2003 and February 1,
2003.
5. CAPITALIZED LEASES
The Company is obligated for certain property, plant and equipment under
capital leases that expire at various dates during the next several years.
Assets under capital leases, excluding land, are being amortized over their
useful lives which range from five to twenty years. The amortization expense is
included with depreciation expense in the accompanying statement of operations
and cash flows.
Assets under capital leases consist of the following:
<Table>
<Caption>
DECEMBER 27, FEBRUARY 1,
2003 2003
------------ -----------
Land....................................................... $ 200,000 $ 200,000
Buildings.................................................. 7,199,618 7,199,618
Machinery and equipment.................................... 7,238,865 7,238,865
Accumulated amortization................................... (2,393,397) (1,137,178)
----------- -----------
Net assets under capitalized lease......................... $12,245,086 $13,501,305
=========== ===========
</Table>
F-64
MOARK, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 27, 2003, the future minimum lease payments under capital
leases are as follows:
<Table>
2004........................................................ $ 1,945,050
2005........................................................ 1,942,857
2006........................................................ 1,941,291
2007........................................................ 1,871,789
2008........................................................ 1,704,902
Thereafter.................................................. 4,631,253
-----------
Total minimum lease payments................................ 14,037,142
Less amount representing interest........................... 2,556,132
-----------
Present value of future minimum lease payments.............. $11,481,010
===========
</Table>
6. INTANGIBLE ASSETS -- FINITE LIVED
Intangible assets -- finite-lived consisted of the following:
<Table>
<Caption>
FRANCHISE
FEES OTHER TOTAL
---------- ---------- ----------
Original costs................................... $3,073,985 $1,370,247 $4,444,232
Accumulated amortization, February 1, 2003....... 371,857 244,072 615,929
Amortization................................... 363,839 678,660 1,042,499
---------- ---------- ----------
Accumulated amortization, December 27, 2003...... 735,696 922,732 1,658,428
---------- ---------- ----------
Net intangible assets -- finite-lived............ $2,338,289 $ 447,515 $2,785,804
========== ========== ==========
</Table>
These intangible assets -- finite-lived are being amortized over the term
of the agreement or the estimated useful period. These lives range from 4 to 20
years. Further amortization expense at December 27, 2003 is as follows:
<Table>
2004........................................................ $ 438,760
2005........................................................ 306,970
2006........................................................ 185,321
2007........................................................ 171,879
2008........................................................ 171,879
Thereafter.................................................. 1,510,995
----------
$2,785,804
==========
</Table>
7. GOODWILL
The changes in the carrying value of goodwill during the eleven months
ended December 27, 2003 and the year ended February 1, 2003, are as follows:
<Table>
<Caption>
DECEMBER 27, FEBRUARY 1,
2003 2003
------------ -----------
Balance -- beginning of the period......................... $62,235,483 $60,443,233
Goodwill acquired during the period........................ 1,750,000 1,792,250
----------- -----------
Balance -- end of the period............................... $63,985,483 $62,235,483
=========== ===========
</Table>
F-65
MOARK, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. ASSETS AND LIABILITIES HELD FOR SALE -- DISCONTINUED OPERATIONS
In January 2004, the Company entered into a letter of intent to sell its
interest in Cutler at Philadelphia, LLC. Accordingly, these assets and
liabilities have been reported separately as assets and liabilities held for
sale on the balance sheet. The results of its operations for the eleven months
ended December 27, 2003 and the year ended February 1, 2003 are reported as a
component of discontinued operations in the statement of operations.
Summarized results of operations for Cutler at Philadelphia, LLC for the
eleven months ended December 27, 2003 and the year ended February 1, 2003 are as
follows:
<Table>
<Caption>
DECEMBER 27, FEBRUARY 1,
2003 2003
------------ -----------
Sales...................................................... $19,453,076 $15,127,867
Loss from discontinued operations.......................... 1,335,152 675,331
</Table>
9. INVESTMENTS IN AFFILIATES
The Company owns fifty percent of Grand Mesa Eggs, Inc., which operates as
a commercial egg producer with operations located in Colorado. During the year
ended February 1, 2003, the Company acquired fifty percent of Delta Egg Farm,
LLC ("Delta") through the purchase of Sunbest Foods of Iowa, Inc. Delta operates
as a producer of shell eggs with operations located in Utah. In addition, during
the year ended February 1, 2003, the Company entered into a joint venture in
which it owns a fifty percent interest in Moark/ Fort Recovery Egg Marketing,
LLC, which operates as a wholesale egg distributor. The Company accounts for
these investments under the equity method. The investment reflects the initial
price paid for the ownership and there has been no amortization of any
differences between the level of investment and the underlying net assets. The
following is summarized information regarding one hundred percent of the
affiliated companies' assets, liabilities, equity and results of operations:
<Table>
<Caption>
ELEVEN MONTHS ENDED DECEMBER 27, 2003
------------------------------------------------------
MOARK/FORT
RECOVERY EGG
GRAND MESA DELTA EGG MARKETING,
EGGS, INC. FARM, LLC LLC TOTAL
---------- ----------- ------------ ------------
Current assets................... $4,788,016 $ 7,071,326 $ 8,527,172 $ 20,386,514
Property, plant and equipment,
net............................ 2,172,268 19,060,973 -- 21,233,241
Other assets..................... 156,945 313,034 -- 469,979
Current liabilities.............. 1,875,843 671,638 4,066,054 6,613,535
Other liabilities................ 1,630,394 13,726,000 -- 15,356,394
Stockholder or members' equity... 3,610,992 12,047,695 4,461,118 20,119,805
Net sales........................ 12,133,716 48,769,188 77,969,744 138,872,648
Cost of goods sold............... 9,502,318 41,015,749 62,011,274 112,529,341
Selling, general and
administrative expenses........ 574,517 1,026,067 228,254 1,828,838
Net finance expense.............. 60,536 1,173,222 -- 1,233,758
Other income (expense), net...... 89,504 -- -- 89,504
Income tax expense............... 805,000 -- -- 805,000
Net income....................... 1,280,850 5,554,150 15,730,216 22,565,216
</Table>
F-66
MOARK, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<Table>
<Caption>
YEAR ENDED FEBRUARY 1, 2003
------------------------------------------------------
MOARK/FORT
RECOVERY EGG
GRAND MESA DELTA EGG MARKETING,
EGGS, INC. FARM, LLC LLC TOTAL
----------- ----------- ------------ -----------
Current assets................... $ 2,597,767 $ 4,355,128 $ 4,320,740 $11,273,635
Property, plant and equipment,
net............................ 2,522,194 20,325,186 -- 22,847,380
Other assets..................... 179,399 328,519 -- 507,918
Current liabilities.............. 1,563,102 4,891,288 3,669,988 10,124,378
Other liabilities................ 1,406,117 13,624,000 -- 15,030,117
Stockholder or members' equity... 2,330,141 6,493,545 650,752 9,474,438
Net sales........................ 10,720,380 16,705,845 39,077,354 66,503,579
Cost of goods sold............... 11,017,950 15,537,111 38,131,410 64,686,471
Selling, general and
administrative expenses........ 603,750 1,160,902 315,192 2,079,844
Net finance expense.............. 104,994 1,290,241 -- 1,395,235
Income tax (benefit)............. (338,675) -- -- (338,675)
</Table>
10. NOTES PAYABLE
Notes payable consist of the following:
<Table>
<Caption>
DECEMBER 27, FEBRUARY 1,
2003 2003
------------ -----------
Credit facilities, payable to Farm Credit Services;
interest as 3.95%; $1,455,000 payable March 1, 2003,
balance due June 1, 2003. Maximum amount of borrowings
available at February 1, 2003 was $25,000,000 subject to
a borrowing base calculation............................. $ -- $19,421,871
Revolving line of credit, payable to Bank of America;
interest at prime (4.25% at February 1, 2003) balance due
at September 30, 2003. Maximum amount of borrowings
available at February 1, 2003 was $3,000,000 subject to a
borrowing base calculation............................... -- 3,000,000
------ -----------
$ -- $22,421,871
====== ===========
</Table>
F-67
MOARK, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consists of:
<Table>
<Caption>
DECEMBER 27, FEBRUARY 1,
2003 2003
------------ ------------
Credit agreements, consisting of: (1) a revolving
commitment not to exceed $60,000,000, subject to a
borrowing base computation, payable to a lender group
made up of certain banks and agricultural credit
associations; and (2) a term loan commitment not to
exceed $15,000,000, to a bank; interest is to be
charged as defined (4.75% as of December 27, 2003);
secured by essentially all assets of the Company; due
on or before December 26, 2005. (See paragraph
below.)................................................ $ 27,977,448 $ 24,499,930
Note payable to an agricultural credit association;
interest at 3.50%; secured by certain real estate;
payable in monthly installments of $258,550, including
interest, through September 2011....................... 20,741,062 23,029,675
Note payable to a company and trusts; interest at 8%;
secured by the common stock of Norco Ranch, Inc. and
the membership interest of McNally Enterprises, LLC and
Hi Point Industries, LLC; payable in monthly
installments ranging from $34,880 to $135,394,
including interest, through February 2020 to January
2022................................................... 32,577,998 33,068,099
Capital lease obligation payable to a company; interest
at 7.00%; payable in monthly installments of $118,667,
including interest, through February 2012.............. 9,319,213 10,002,421
Notes payable to an agricultural credit association;
interest ranging from 3.0% to 6.25%; secured by certain
accounts receivable, inventories, and property and
equipment; monthly installments ranging from $2,976 to
$75,593, including interest, through dates ranging from
June 2005 to June 2011................................. 10,730,164 12,513,992
Note payable to a company; interest at 8.00%; secured by
equipment; payable in quarterly installments of
$64,705, including interest, through January 2011...... 1,413,444 1,518,522
Notes payable to various banks; interest ranging from
7.9% to 9.0%; secured by certain accounts receivable,
inventories, and property and equipment; monthly
installments ranging from $597 to $19,724, including
interest, through dates ranging from July 2005 to June
2007................................................... 1,498,387 2,868,775
Various capital lease obligations with a financing
company; interest ranging from 5.22% to 7.93%; secured
by certain equipment; payable in monthly installments
ranging from $313 to $12,192, including interest,
through dates ranging from June 2005 through January
2009................................................... 1,478,106 2,501,854
Various notes payable to financing companies; secured by
certain equipment; payable in various monthly
installments, including interest, through dates ranging
from December 2004 to August 2009...................... 823,910 542,934
------------ ------------
106,559,732 110,546,202
Less current maturities.................................. 7,587,394 19,511,414
------------ ------------
Long-term debt, less current maturities.................. $ 98,972,338 $ 91,034,788
============ ============
</Table>
F-68
MOARK, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Annual maturities of long-term debt and capital lease obligations are as
follows:
<Table>
<Caption>
LONG-TERM CAPITAL LEASE
DEBT OBLIGATIONS TOTAL
----------- ------------- ------------
2004......................................... $ 6,322,703 $ 1,264,691 $ 7,587,394
2005......................................... 32,977,102 1,351,890 34,328,992
2006......................................... 5,614,914 1,445,874 7,060,788
2007......................................... 5,671,929 1,467,625 7,139,554
2008......................................... 5,449,676 1,497,728 6,947,404
Thereafter................................... 39,042,398 4,453,202 43,495,600
----------- ----------- ------------
$95,078,722 $11,481,010 $106,559,732
=========== =========== ============
</Table>
The Company entered into a new credit agreement on December 26, 2003,
consisting of a $60 million revolving loan note and a $15 million term note. The
former notes payable, along with certain revolving lines of credit, were
refinanced with the new agreement subsequent to December 27, 2003. As a result,
the outstanding balances of these debt instruments at December 27, 2003 have
been reported as long-term in accordance with the terms of the new agreement.
Interest rates will vary based on a leverage ratio of the Company. The credit
agreement matures December 26, 2005 and is secured by all inventory, accounts
receivable and certain fixed assets of the Company.
The Company's notes payable and revolving line of credit agreements with
certain banks, agricultural credit associations, and certain individuals require
compliance with certain restrictive covenants, including the maintenance of
minimum levels of equity and working capital. In addition, these covenants
restrict dividend payments, capital expenditures, investments, stockholder
loans, fundamental changes in ownership, and the granting loans or extensions of
credit. As of December 27, 2003, the Company was in compliance with these
restrictions and covenants.
12. BANK OVERDRAFTS
The Company had outstanding checks in excess of bank balances on certain of
its subsidiaries of approximately $2,923,000 and $3,460,000 as of December 27,
2003 and February 1, 2003, respectively. The bank accounts utilized by the
subsidiaries do not automatically draft funds from Moark, LLC's corporate bank,
therefore, these outstanding checks were reclassified into accounts payable for
financial statement presentation.
13. INCOME TAXES
Income taxes (benefit) consist of:
<Table>
<Caption>
DECEMBER 27, FEBRUARY 1,
2003 2003
------------ -----------
Current provision (benefit)................................ $ 562,464 $(6,345,560)
Deferred provision......................................... 3,491,700 4,396,966
---------- -----------
$4,054,164 $(1,948,594)
========== ===========
</Table>
The Company's provision for income taxes (benefit) varies from the
statutory U.S. tax rate primarily due to the effect of state income taxes,
certain nondeductible expenses and the partnership tax treatment for certain of
the entities.
F-69
MOARK, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Total gross deferred tax assets and liabilities are as follows:
<Table>
<Caption>
DECEMBER 27, FEBRUARY 1,
2003 2003
------------ -----------
Gross deferred tax liabilities............................. $25,270,000 $22,844,613
Gross deferred tax assets.................................. 5,345,000 6,411,313
----------- -----------
Net deferred tax liability................................. $19,925,000 $16,433,300
=========== ===========
</Table>
At December 27, 2003 and February 1, 2003, the Company has net operating
loss carryforwards for Federal income tax purposes of approximately $244,000 and
$7,200,000, respectively, available to offset future taxable income. Unless
utilized, these carryforwards will begin expiring in 2007. These carryforwards
have been used to reduce deferred tax liabilities that would otherwise exist for
financial statement purposes.
14. RELATED PARTIES
The Company is related by common ownership to other corporations and
proprietorships engaged in operations related to the commercial shell egg
industry. The Company also held an equity interest in an affiliated Company,
which was engaged in related operations. The Company sells products to and
purchases products from certain of these related entities. In addition, the
Company pays a member fees for environmental services and certain royalty fees.
Activity between the Company and these related entities and the balances owed to
and from these entities are summarized as follows:
<Table>
<Caption>
DECEMBER 27, FEBRUARY 1,
2003 2003
------------ -----------
Sales to related parties................................... $ 2,424,172 $ 3,345,379
Purchase from and payments of fees to related parties...... 34,140,866 27,766,464
Accounts receivable from related parties................... 811,576 660,042
Accounts payable to related parties........................ 11,347,425 1,182,994
</Table>
The Company also has guaranteed certain loan agreements for Delta Egg Farm,
LLC, of which the Company is a 50% owner. The Company is responsible for 50% of
the outstanding balance on these guaranteed notes totaling approximately
$12,500,000 as of December 27, 2003.
In March 2003, the members of the Company advanced $5,000,000 to the
Company. These advances, along with interest of approximately $181,000, were
repaid to the members prior to December 27, 2003.
During the eleven months ended December 27, 2003, the Company entered into
a consulting agreement with one of its members for an annual amount of
approximately $1,445,000 due February 1 of each year. Included in the statement
of operations for the eleven months ended December 27, 2003 is $1,325,000
related to this agreement.
A subsidiary of one of the Company's members has written insurance policies
for the Company providing for general liability, property and workers
compensation insurance policies covering most of the Company's employees.
Premiums during the year ended December 27, 2003 were approximately $5,200,000.
15. COMMITMENTS AND CONTINGENCIES
a. Non-cancelable operating leases of certain vehicles, equipment and real
estate expire in various years through 2010. These leases generally contain
renewal options for periods ranging from two years to five years and require the
Company to pay all executory costs (property taxes, maintenance and insurance).
F-70
MOARK, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments at December 27, 2003 are as follows:
<Table>
Fiscal Year
2004........................................................ $ 4,386,327
2005........................................................ 4,081,531
2006........................................................ 3,868,931
2007........................................................ 3,599,097
2008........................................................ 2,943,971
Thereafter.................................................. 2,928,577
-----------
$21,808,434
===========
</Table>
Rent expense for all operating leases was $5,399,189 and $7,641,631, for
the eleven months ended December 27, 2003 and the year ended February 1, 2003,
respectively. Included in operating leases are certain leases with related
parties. Payments to the related parties in connection with these leases totaled
approximately $370,000 and $404,000, respectively.
b. The Company has a defined contribution retirement plan that contains a
401(k) salary deferral feature that covers essentially all of the full-time
employees of Moark, LLC and its affiliated companies. Those who have attained
the age of eighteen and who have completed minimum periods of service are
eligible to participate. The Company makes matching contributions as required by
the plan document and is permitted to make discretionary contributions if
desired by the Company's management.
There were no discretionary contributions made for the eleven months ended
December 27, 2003 and the year ended February 1, 2003. Matching contributions to
the above plans during the eleven months ended December 27, 2003 and the year
ended February 1, 2003 were approximately $289,100 and $110,500, respectively.
c. Non-qualified -- The Company has a non-qualified retirement plan for
certain key employees. The benefits under this plan require the participants to
remain in the employment of the Company for a specified number of years, or
until retirement age, in order to obtain any benefits and to observe certain
covenants dealing with competition. No contributions were made to this plan
during the eleven months ended December 27, 2003 or the year ended February 1,
2003. This plan was terminated effective January 2004.
d. The Company is self-insured for health insurance purposes. The Company
has obtained stop-loss insurance policies to cover losses in excess of $60,000
per employee and aggregate losses in excess of $1,000,000 per plan year.
Provisions have been made in these financial statements to cover losses incurred
under this self-insurance program.
e. The Company has outstanding commodity contracts for the futures
purchases of corn at December 27, 2003. These commitments are not in excess of
the current operating requirements of the Company.
f. The Company is one of a group of defendants in a lawsuit that is
currently in the discovery phase. The Company anticipates that an ultimate
settlement of this lawsuit will be reached and accordingly, has estimated its
liability regarding this matter, which is included in other current liabilities
in the balance sheet at December 27, 2003. This matter was settled during
January 2004 for the balance of the estimated liability at December 27, 2003.
16. CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of trade receivables with a
variety of customers and cash and cash investments deposited with a financial
institution and a credit association.
F-71
MOARK, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Concentrations of credit risk with respect to accounts receivable are
limited because a large number of geographically diverse customers make up the
Company's customer base, thus spreading the trade credit risk. At December 27,
2003 and February 1, 2003, no single group or customer represents greater that
10% of total accounts receivable. The Company controls credit risk through
credit approvals, credit limits, and monitoring procedures. The Company performs
ongoing credit evaluations of its customers but generally does not require
collateral to support accounts receivable.
At December 27, 2003 and February 1, 2003 and at times during the years
then ended, the Company maintained cash and cash investment balances with
financial institutions in excess of Federal Deposit Insurance Corporation (FDIC)
insured limits.
F-72
AGRILIANCE, LLC
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<Table>
<Caption>
MAY 31, AUGUST 31,
2004 2003
---------- -------------
($ IN THOUSANDS)
ASSETS
Current assets:
Cash...................................................... $ 7,062 $ 18,095
Trade receivables, net of allowance for bad debts of
$11,223 and $18,006, respectively...................... 524,161 455,532
Rebates receivable........................................ 76,837 131,465
Other receivables......................................... 13,394 18,543
Receivable from Agriliance AFC, LLC....................... 12,544 --
Receivable from Land O'Lakes, Inc. ....................... 1,089 --
Receivable from CHS, Inc. ................................ -- 50
Inventories............................................... 592,528 559,643
Vendor prepayments........................................ 75,695 63,481
Prepaid expenses.......................................... 6,101 3,132
---------- ----------
Total current assets................................... 1,309,411 1,249,941
Property, plant and equipment:
Land and land improvements................................ 18,468 18,579
Buildings................................................. 63,720 66,962
Machinery and equipment................................... 110,445 100,432
Construction in progress.................................. 17,234 5,608
---------- ----------
Total property, plant and equipment.................... 209,867 191,581
Less accumulated depreciation............................. (100,487) (90,077)
---------- ----------
Net property, plant and equipment...................... 109,380 101,504
Long term receivable from Agronomy Company of Canada........ 7,000 7,000
Other assets................................................ 7,139 11,111
---------- ----------
Total assets........................................... $1,432,930 $1,369,556
========== ==========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Short-term debt........................................... $ 55,000 $ 15,000
Current portion of long-term debt......................... -- 100,000
Accounts payable.......................................... 717,249 755,967
Customer prepayments...................................... 161,010 93,430
Accrued expenses.......................................... 103,774 102,257
Payable to Land O'Lakes, Inc. ............................ -- 984
Payable to Farmland Industries, Inc. ..................... -- 10,067
Payable to CHS, Inc. ..................................... 62 --
Other current liabilities................................. 7,144 6,038
---------- ----------
Total current liabilities.............................. 1,044,239 1,083,743
Long-term debt.............................................. 100,000 --
Other noncurrent liabilities................................ 25,745 27,061
Members' equity:
Contributed capital....................................... 159,089 159,089
Retained earnings......................................... 119,188 114,994
Accumulated other comprehensive loss...................... (15,331) (15,331)
---------- ----------
Total members' equity....................................... 262,946 258,752
---------- ----------
Total liabilities and members' equity....................... $1,432,930 $1,369,556
========== ==========
</Table>
See accompanying notes to consolidated financial statements.
F-73
AGRILIANCE, LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<Table>
<Caption>
FOR THE NINE MONTHS ENDED
MAY 31,
-------------------------
2004 2003
----------- -----------
($ IN THOUSANDS)
Net sales................................................... $2,502,949 $2,548,766
Cost of sales............................................... 2,245,759 2,297,349
---------- ----------
Gross profit.............................................. 257,190 251,417
Selling, general, and administrative expense................ 193,738 209,466
Gain on sale of assets...................................... (1,113) (2,302)
---------- ----------
Earnings from operations.................................. 64,565 44,253
Interest expense, net....................................... 7,549 8,351
Equity in earnings of affiliated company.................... (1,778) (232)
---------- ----------
Net earnings.............................................. $ 58,794 $ 36,134
========== ==========
</Table>
See accompanying notes to consolidated financial statements.
F-74
AGRILIANCE, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<Table>
<Caption>
NINE MONTHS ENDED
MAY 31,
--------------------
2004 2003
-------- ---------
($ IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings.............................................. $ 58,794 $ 36,134
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization.......................... 11,703 15,224
Bad debt expense....................................... 873 7,279
Gain on sale of assets................................. (1,113) (2,302)
Decrease in other non-current assets................... 3,829 2,340
Decrease in other non-current liabilities.............. (1,315) (522)
Changes in current assets and liabilities:
Trade receivables...................................... (69,503) (158,837)
Receivables/payables from related parties.............. (24,571) (22,225)
Rebates receivable..................................... 54,628 27,070
Other receivables...................................... 5,149 10,616
Inventories............................................ (32,885) (82,940)
Vendor prepayments..................................... (12,214) (102,035)
Accounts payable and customer prepayments.............. 28,861 305,984
Accrued expenses....................................... 1,517 10,997
Other current assets and liabilities................... (1,864) (1,259)
-------- ---------
Net cash provided by operating activities................. 21,889 45,524
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment................ (20,401) (14,134)
Proceeds from sale of property, plant and equipment....... 2,078 6,243
-------- ---------
Net cash used by investing activities..................... (18,323) (7,891)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payment on) short-term debt................ 40,000 (33,500)
Increase in cash overdrafts............................... -- 20,706
Distribution of earnings to members....................... (54,599) (35,000)
-------- ---------
Net cash used by financing activities..................... (14,599) (47,794)
-------- ---------
Net change in cash and cash equivalents................... (11,033) (10,161)
Cash and cash equivalents at beginning of period............ 18,095 10,161
-------- ---------
Cash and cash equivalents at end of period.................. $ 7,062 $ --
======== =========
</Table>
See accompanying notes to consolidated financial statements.
F-75
AGRILIANCE, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The unaudited consolidated financial statements reflect, in the opinion of
the management of Agriliance, 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. These statements should be read in
conjunction with the audited consolidated financial statements and footnotes for
the year ended August 31, 2003. The results of operations and cash flows for
interim periods are not indicative of results for a full year.
2. BORROWING ARRANGEMENTS
In December 2003, the company renegotiated its revolving credit agreement,
extending the facility for an additional three years and increasing the
available borrowing capacity from $185 million to $225 million. The amendment
also lowered the interest rate spread by 0.25%, allowed for the issuance of
letters of credit up to $50 million and adjusted certain covenant restrictions.
The facility is secured by the Company's inventory and the accounts receivable
of its wholly owned subsidiary, Agro Distribution, LLC. At May 31, 2004, $55
million was outstanding under this agreement and the interest rate on the
revolving credit agreement was 3.1% (LIBOR + 2.00%).
Also in December 2003, Agriliance issued $100 million of senior secured
notes in a private placement, using the funds to repay their existing term
facility. The private placement consisted of four notes, two with fixed-rate
interest rates and two notes with floating rates. The fixed-rate notes are for
$42 million and $47 million, bearing interest at 5.66% and 6.31%, respectively,
and maturing in December 2008 and 2010. The floating rate notes are for $6
million, maturing in December 2008 and for $5 million, maturing in December
2010. Both of these notes bear interest at variable rates based on LIBOR plus
applicable margins. All of the notes are secured by the same assets which secure
the revolving credit facility, on a pari passu basis.
In addition, Agriliance is party to a revolving receivables securitization
program which allows for draws of up to $200 million in advances against
eligible receivables. Under this program, Agriliance sells trade receivables to
Agriliance SPV, LLC, a wholly-owned subsidiary of Agriliance, LLC. This
subsidiary is a qualifying special purpose entity (QSPE) under applicable
accounting rules, and 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
Agriliance. The QSPE purchases the receivables with a combination of cash and
notes. CoBank lends funds to the SPV based upon the value of the receivables
pool, at an agreed advance rate. As of May 31, 2004, $183 million was drawn
under this securitization. The facility is currently scheduled to terminate in
December 2006.
F-76
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Managers
Agriliance, LLC:
We have audited the accompanying consolidated balance sheets of Agriliance,
LLC and subsidiaries as of August 31, 2003 and 2002, and the related
consolidated statements of operations, cash flows, and members' equity for each
of the years in the three-year period ended August 31, 2003. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Agriliance,
LLC and subsidiaries as of August 31, 2003 and 2002, and the results of their
operations and their cash flows for each of the years in the three-year period
ended August 31, 2003 in conformity with U.S. generally accepted accounting
principles.
/s/ KPMG LLP
Minneapolis, Minnesota
November 6, 2003
F-77
AGRILIANCE, LLC
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
AUGUST 31,
-----------------------
2003 2002
---------- ----------
($ IN THOUSANDS)
ASSETS
Current assets:
Cash...................................................... $ 18,095 $ 10,161
Trade receivables, net of allowance for bad debts of
$18,006 and $16,134 in 2003 and 2002, respectively..... 455,532 394,497
Receivable from Land O'Lakes, Inc. ....................... -- 1,791
Receivable from CHS, Inc. ................................ 50 250
Rebates receivable........................................ 131,465 102,668
Other receivables......................................... 18,543 28,063
Inventories............................................... 559,643 376,988
Vendor prepayments........................................ 63,481 5,735
Prepaid expenses.......................................... 3,132 2,806
---------- ----------
Total current assets................................... 1,249,941 922,959
Property, plant and equipment:
Land and land improvements................................ 18,579 18,231
Buildings................................................. 66,962 64,656
Machinery and equipment................................... 100,432 103,133
Construction in progress.................................. 5,608 3,599
---------- ----------
Total property, plant and equipment.................... 191,581 189,619
Less accumulated depreciation............................. (90,077) (76,840)
---------- ----------
Net property, plant and equipment...................... 101,504 112,779
Long term receivable from Agronomy Company of Canada........ 7,000 7,000
Other assets................................................ 11,111 14,467
---------- ----------
Total assets........................................... $1,369,556 $1,057,205
========== ==========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Short-term debt........................................... $ 15,000 $ 66,500
Current portion of long-term debt......................... 100,000 --
Accounts payable.......................................... 755,967 485,244
Customer prepayments...................................... 93,430 22,063
Accrued expenses.......................................... 102,257 77,935
Payable to Land O'Lakes, Inc. ............................ 984 --
Payable to Farmland Industries, Inc. ..................... 10,067 42,826
Other current liabilities................................. 6,038 6,335
---------- ----------
Total current liabilities.............................. 1,083,743 700,903
Long-term debt.............................................. -- 100,000
Other noncurrent liabilities................................ 27,061 7,960
Members' equity:
Contributed capital....................................... 159,089 159,089
Retained earnings......................................... 114,994 89,253
Accumulated other comprehensive loss...................... (15,331) --
---------- ----------
Total members' equity....................................... 258,752 248,342
---------- ----------
Total liabilities and members' equity....................... $1,369,556 $1,057,205
========== ==========
</Table>
See accompanying notes to consolidated financial statements.
F-78
AGRILIANCE, LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
YEARS ENDED AUGUST 31,
------------------------------------
2003 2002 2001
---------- ---------- ----------
($ IN THOUSANDS)
Net sales................................................ $3,485,623 $3,615,451 $4,072,248
Cost of sales............................................ 3,119,287 3,289,980 3,696,350
---------- ---------- ----------
Gross profit........................................... 366,336 325,471 375,898
Selling, general, and administrative expense............. 299,097 267,947 310,655
Asset impairment charge.................................. -- -- 14,820
Gain on sale of assets................................... (2,787) (2,486) (3,092)
---------- ---------- ----------
Earnings from operations............................... 70,026 60,010 53,515
Interest expense, net.................................... 9,285 12,966 28,462
---------- ---------- ----------
Net earnings........................................... $ 60,741 $ 47,044 $ 25,053
========== ========== ==========
</Table>
See accompanying notes to consolidated financial statements.
F-79
AGRILIANCE, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
YEARS ENDED AUGUST 31,
---------------------------------
2003 2002 2001
--------- --------- ---------
($ IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings............................................ $ 60,741 $ 47,044 $ 25,053
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization........................ 23,517 27,996 38,319
Bad debt expense..................................... 16,787 5,442 5,792
Gain on sale of assets............................... (2,787) (2,486) (3,092)
Asset impairment charge.............................. -- -- 14,820
Change in other non-current assets and liabilities... 6,405 (2,187) (3,175)
Changes in current assets and liabilities:
Trade receivables.................................... (77,822) (124,617) 182,405
Receivables/payables from related parties............ (29,784) 10,941 43,396
Rebates receivable................................... (28,797) 16,308 (12,160)
Other receivables.................................... 9,520 14,320 4,986
Inventories.......................................... (182,655) 112,738 87,482
Vendor prepayments................................... (57,746) 17,914 82,757
Accounts payable..................................... 342,090 (47,740) (358,319)
Accrued expenses..................................... 24,322 3,933 10,383
Other current assets and liabilities................. (623) 1,247 13,612
--------- --------- ---------
Net cash provided by operating activities............... 103,168 80,853 132,259
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment.............. (16,704) (15,515) (23,871)
Proceeds from sale of property, plant and equipment..... 7,970 13,050 22,044
--------- --------- ---------
Net cash used by investing activities................... (8,734) (2,465) (1,827)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on short-term debt.............................. (51,500) (20,500) (88,000)
Payments on long-term debt.............................. -- (15,000) (35,000)
Decrease in cash overdraft.............................. -- (32,727) (7,212)
Distribution of earnings to members..................... (35,000) -- (220)
--------- --------- ---------
Net cash used by financing activities................... (86,500) (68,227) (130,432)
--------- --------- ---------
Net change in cash and cash equivalents................. 7,934 10,161 --
Cash and cash equivalents at beginning of period.......... 10,161 -- --
--------- --------- ---------
Cash and cash equivalents at end of period................ $ 18,095 $ 10,161 $ --
========= ========= =========
</Table>
See accompanying notes to consolidated financial statements.
F-80
AGRILIANCE, LLC
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY
<Table>
<Caption>
ACCUMULATED
OTHER TOTAL
CONTRIBUTED RETAINED COMPREHENSIVE MEMBERS' COMPREHENSIVE
CAPITAL EARNINGS (LOSS) EQUITY INCOME
----------- -------- ------------- -------- -------------
($ IN THOUSANDS)
Balance, August 31, 2000.......... $159,089 $ 17,376 $ -- $176,465
Net earnings...................... -- 25,053 -- 25,053
Distribution to members........... -- (220) -- (220)
-------- -------- -------- --------
Balance, August 31, 2001.......... 159,089 42,209 -- 201,298
Net earnings...................... -- 47,044 -- 47,044
-------- -------- -------- --------
Balance, August 31, 2002.......... 159,089 89,253 -- 248,342
Net earnings...................... -- 60,741 -- 60,741 60,741
Minimum pension liability
adjustment...................... -- -- (15,331) (15,331) (15,331)
--------
Comprehensive income.............. -- -- -- -- $ 45,410
--------
Distribution to members........... -- (35,000) -- (35,000)
-------- -------- -------- --------
Balance, August 31, 2003.......... $159,089 $114,994 $(15,331) $258,752
======== ======== ======== ========
</Table>
See accompanying notes to consolidated financial statements.
F-81
AGRILIANCE, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION
Agriliance, LLC (Agriliance or the Company) is a distributor of
agricultural inputs and is owned by: Land O'Lakes, Inc. (50% voting ownership);
CHS, Inc. (25% voting ownership); and Farmland Industries, Inc. (25% voting
ownership) (the members). Farmland Industries, Inc. filed for Chapter 11
bankruptcy court protection on May 31, 2002.
The economic interest in profits and losses of the Company is allocated to
members for wholesale crop protection business operations as follows: 50.0%,
38.1%, and 11.9% for Land O'Lakes, Inc.; CHS, Inc.; and Farmland Industries,
Inc., respectively. The economic interest in profits and losses of the Company
is generally allocated to members for all other business operations as follows:
50.0%, 25.0%, and 25.0% for Land O'Lakes, Inc.; CHS, Inc.; and Farmland
Industries, Inc., respectively.
Based upon the results of various business operations for the year ended
August 31, 2003, the actual economic interest in profits and losses of the
Company was allocated to members as follows: 50.0%, 35.5%, and 14.5% for Land
O'Lakes, Inc.; CHS, Inc.; and Farmland Industries, Inc., respectively. The
liability of each member is limited to each member's respective capital account
balance.
(b) STATEMENT PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, with intercompany transactions eliminated.
(c) REVENUE RECOGNITION
Revenue is recognized as it is earned, which generally occurs when
fertilizer, chemical, and agricultural products are delivered or services are
provided.
(d) INCOME TAXES
The Company's taxable operations pass directly to the joint venture owners
under the LLC organization. As a result, no provision for income taxes is
recorded in the accompanying consolidated statement of operations.
(e) INVENTORIES
Inventories are stated primarily at the lower of cost or market. Cost is
determined on a first-in, first-out or average-cost basis.
(f) REBATES RECEIVABLE
Rebates receivable have been accrued based on contractual agreements
combined with current sales and market data, in accordance with EITF Issue No.
02-16, "Accounting by a Customer (Including a Reseller) for Certain
Consideration Received from a Vendor."
(g) PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost. Depreciation is provided
over the estimated useful lives (10 to 20 years for land improvements and
buildings, and 3 to 5 years for machinery and equipment) of the respective
assets in accordance with the straight-line method. The Company assesses the
recoverability of long-lived assets whenever events or changes in circumstances
indicate that expected future undiscounted cash flows may not be sufficient to
support the carrying amount of an asset. The Company deems an asset to be
F-82
AGRILIANCE, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
impaired if a forecast of undiscounted future operating cash flows is less than
its 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.
(h) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards (SFAS) No. 107, Disclosures
about Fair Value of Financial Instruments, requires disclosure of the fair value
of all financial instruments to which the Company is a party. All financial
instruments are carried at amounts that approximate estimated fair value.
(i) ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
(j) RECLASSIFICATIONS
Certain 2002 and 2001 amounts have been reclassified to conform with the
current year presentation. These reclassifications had no effect on reported
earnings.
(2) SHORT-TERM DEBT
The Company has a $185 million revolving credit agreement with JP Morgan,
which expires December 18, 2003. The Company expects to extend this facility to
a multi-year facility. Short-term debt is secured by the Company's inventory and
the accounts receivable of its wholly owned subsidiary, Agro Distribution, LLC.
At August 31, 2003 and 2002, $15 million and $66.5 million, respectively, were
outstanding. Interest on borrowings under this revolving credit agreement was
charged at 5.00% (Prime + 1.00%) and at 4.06% (LIBOR + 2.25%) at August 31, 2003
and 2002, respectively.
(3) LONG-TERM DEBT
The Company has a long-term credit agreement with JP Morgan, which expires
June 28, 2004. The Company expects to extend this facility to a new multi-year
facility. Long-term debt is secured by the Company's inventory and the accounts
receivable of its wholly owned subsidiary, Agro Distribution, LLC. At August 31,
2003 the entire portion of $100 million of long-term debt was classified as
current because the due date is June 24, 2004. At August 31, 2002 the total
long-term debt outstanding was $100 million. Interest on borrowings under this
long-term credit agreement was charged at 3.10% (LIBOR + 2.00%) and at 4.06%
(LIBOR + 2.25%) at August 31, 2003 and 2002, respectively.
The loan agreement includes certain restrictive financial covenants. At
August 31, 2003 and 2002, the Company was in compliance with these covenants.
Interest paid on short-term and long-term debt for the years ended August
31, 2003, 2002 and 2001 totaled $9.6 million, $12.9 million and $31.5 million,
respectively.
(4) RECEIVABLES PURCHASE FACILITY
The Company has a $200 million receivables purchase facility with CoBank. A
wholly owned subsidiary, Agriliance SPV, Inc., purchases the receivables from
Agriliance and transfers them to CoBank. Such transactions are structured as
sales and, accordingly, the receivables transferred to CoBank without recourse
to
F-83
AGRILIANCE, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Agriliance are not reflected in the consolidated balance sheet. At August 31,
2003 and 2002, $23 million and $69 million, respectively, were outstanding under
this facility. The total accounts receivable sold during the years ended August
31, 2003, 2002 and 2001 were $2,885 million, $2,949 million and $3,317 million,
respectively.
(5) PENSION AND OTHER POSTRETIREMENT PLANS
<Table>
<Caption>
YEAR ENDED AUGUST 31,
------------------------------
2003 2002 2001
-------- -------- --------
($ IN THOUSANDS)
Pension benefits:
Total plan assets at fair value...................... $ 52,511 $ 54,001 $ 43,352
Total projected benefit obligation................... (76,468) (57,755) (46,854)
-------- -------- --------
Funded status........................................ $(23,957) $ (3,754) $ (3,502)
======== ======== ========
Accrued (prepaid) pension cost recognized in the
consolidated balance sheet......................... $ 3,027 $ (65) $ (400)
Benefits cost........................................ 4,210 4,817 3,778
Employer contribution................................ 1,668 4,684 2,013
Benefits paid........................................ 1,835 1,197 974
Discount rate........................................ 6.00% 7.25% 7.25%
Expected return on plan assets....................... 8.50% 9.00% 9.50%
Rate of compensation increase........................ 3.00% 4.00% 4.50%
</Table>
The Company has a defined contribution plan in which the Company matches
50% of the first 6% of employee contributions. The Company contributed
$2,293,000, $2,343,000 and $2,410,000 to the plan for the fiscal years ended
August 31, 2003, 2002 and 2001, respectively.
In addition to the defined benefit and defined contribution retirement
plans, the Company has a supplemental executive retirement plan, which is an
unfunded defined benefit plan. The actuarial present value of the projected
benefit obligation totaled $1,745,000, $1,539,000 and $1,932,000 at August 31,
2003, 2002 and 2001, respectively.
Due to the impacts on plan assets of depressed equity markets and
increasing projected pension obligations, the Company recognized an additional
pension liability adjustment of $15,331,000 for the fiscal year ended August 31,
2003. In accordance with Statement of Financial Accounting Standards (SFAS) No.
87, the adjustment was made to other comprehensive income of the Company and did
not impact current year net earnings.
F-84
AGRILIANCE, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company also provides certain health care benefits for retired
employees.
<Table>
<Caption>
YEAR ENDED AUGUST 31,
---------------------------
2003 2002 2001
------- ------- -------
($ IN THOUSANDS)
Other postretirement benefits:
Total plan assets at fair value....................... $ -- $ -- $ --
Total projected benefit obligation.................... (8,034) (5,501) (5,379)
------- ------- -------
Funded status...................................... $(8,034) $(5,501) (5,379)
------- ------- -------
Accrued benefit cost recognized in the consolidated
balance sheet......................................... $ 4,855 $ 4,152 $ 3,491
Benefits cost........................................... 933 836 555
Benefits paid........................................... 212 140 140
Discount rate........................................... 6.00% 7.25% 7.25%
</Table>
For measurement purposes, a 6.0% ultimate trend rate of increase in the per
capita cost of covered health care benefits was assumed.
(6) RELATED PARTY TRANSACTIONS
Land O'Lakes, Inc., CHS, Inc., and Farmland Industries, Inc. charged the
Company for accounting, legal, risk management, building, advertising, and
certain employee benefit and other employee-related expenses. Total purchased
services were:
<Table>
<Caption>
YEAR ENDED AUGUST 31,
-------------------------
2003 2002 2001
------ ------- ------
($ IN THOUSANDS)
Land O'Lakes, Inc. ....................................... $8,400 $11,269 $9,897
CHS, Inc. ................................................ 3,536 3,906 3,783
Farmland Industries, Inc.................................. 345 1,132 1,265
</Table>
The Company made the following sales to related parties:
<Table>
<Caption>
YEAR ENDED AUGUST 31,
------------------------------
2003 2002 2001
-------- -------- --------
($ IN THOUSANDS)
Land O'Lakes, Inc. .................................. $ 1,576 $ 1,794 $ 2,102
CHS Cooperatives..................................... 208,706 166,034 139,188
Farmland Industries, Inc............................. 1,262 5,845 8,128
</Table>
During the years ended August 31, 2003, 2002 and 2001, the Company made
product purchases from Farmland Industries, Inc. totaling $337,587,000,
$485,692,000 and $697,916,000, respectively.
During the years ended August 31, 2003, 2002 and 2001, the Company made
product purchases from Land O'Lakes, Inc. totaling $9,809,000, $11,178,000 and
$5,301,000, respectively.
In addition, during the years ended August 31, 2003, 2002 and 2001, the
Company made product purchases from CF Industries, Inc. (Land O'Lakes, Inc. and
CHS, Inc. hold a combined 58.2% interest in
CF Industries, Inc.) totaling $565,153,000, $453,655,000 and $609,245,000,
respectively.
F-85
AGRILIANCE, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) LEASE COMMITMENTS
Future minimum lease commitments under noncancelable operating leases are
as follows:
<Table>
<Caption>
YEAR ENDING AUGUST 31,
- ---------------------- ($ IN THOUSANDS)
2004........................................................ $12,731
2005........................................................ 10,212
2006........................................................ 6,513
2007........................................................ 3,233
2008 and thereafter......................................... 705
</Table>
Rent expense for the years ended August 31, 2003, 2002 and 2001 was
$18,766,000, $19,870,000 and $21,409,000, respectively.
(8) CONTINGENCIES
(a) CONTINGENCY WITH FARMLAND INDUSTRIES, INC.
At the formation of Agriliance, the founding members of the Company
contributed property, plant and equipment and other assets to the Company in
exchange for ownership interests in the company. Farmland, Industries, Inc.
(Farmland), a 25% owner of the Company, never completed formal title transfer of
certain property, plant and equipment it transferred to Agriliance. At August
31, 2003, the net book value of those Farmland-related assets was $7.5 million.
Although Farmland's Chapter 11 bankruptcy filing will delay settlement of
this matter, management of the Company is of the opinion the Company will be
granted title to these assets. Accordingly, in the accompanying consolidated
financial statements as of and for the year ended August 31, 2003, no provisions
beyond depreciation have been recorded against the Farmland-contributed
property, plant and equipment.
(b) ENVIRONMENTAL
The Company is required to comply with various environmental laws and
regulations incident to its normal business operations. The Company is also a
party to environmental issues related to operations contributed to Agriliance by
Farmland Industries, Inc. To the extent these environmental costs are not paid
by the Farmland Bankruptcy Trustee, the Company may have future obligations due.
The Company has reserved for future costs of remediation of identified issues.
Additional costs for losses which may be identified in the future cannot be
presently determined; however, management does not believe any such issues would
materially affect the results of operations or the financial position of the
Company.
(c) GUARANTEES
The Company is contingently liable for guarantees on customer loans with
terms generally ending prior to March, 2004, totaling $21.0 million at August
31, 2003. The Company has recorded reserves for the expected losses related to
such guarantees.
(d) GENERAL
Certain claims and lawsuits have been filed in the ordinary course of
business. It is management's opinion that settlement of all litigation would not
require payment of an amount which would be material to the results of
operations or to the financial position of the Company.
F-86
AGRILIANCE, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) SUBSEQUENT EVENT
On September 30, 2003, the Agriliance Board of Directors approved a $30
million dividend distribution to its members and the distribution was made on
October 15, 2003.
F-87
Until November 25, 2004 (90 days after commencement of the exchange offer),
all dealers that effect transactions in the New Notes may be required to deliver
a prospectus, regardless of whether they are participating in this offering.
This is in addition to the dealers' obligation to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.