December 21, 2005
Ms. April Sifford
United States Securities and Exchange Commission
Division of Corporation Finance
450 Fifth Street, N.W.
Washington, D.C. 20549-7010
Re: Land O'Lakes, Inc.
Form 10-K for the Fiscal Year Ended December 31, 2004
Filed March 30, 2005
File No. 333-84486
Dear Ms. Sifford:
On behalf of Land O'Lakes, Inc. (the "Company"), I am writing in response to the
comments made by the staff (the "Staff") of the Securities and Exchange
Commission (the "Commission") in its letter dated November 30, 2005 (the
"Comment Letter") with respect to the Company's annual report on Form 10-K for
the year ended December 31, 2004 (File No. 333-84486) ("Form 10-K"). Thank you
again for allowing us additional time to respond.
For the convenience of the Staff's review, we have set forth the comments
contained in the Staff's Comment Letter above each of the Company's
corresponding responses.
STAFF COMMENT:
1. We note that you purchase all of the milk produced by your members for
a fixed period of time, generally one year or less. Please tell us how
you considered FIN 46 in determining whether to consolidate these
members.
MANAGEMENT RESPONSE:
As a cooperative, the Company purchases approximately 96% of its raw milk
requirements from its members, who are principally individual, independent
farmers. These farmers, who conduct business as sole proprietors, partnerships
or corporations, supply milk to the Company under short-term, renewable
contracts, generally for one year. The short-term nature of the contracts
enables farmers to change the parties with whom they contract to sell their milk
each year. Accordingly, the Company experiences changes in the sources of its
milk supply each year based, in part, on farmers shifting the sale of their milk
production among competitors in the industry.
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The Company believes that FIN 46 does not specifically apply to its members
because: 1) farmers that are organized as sole proprietors are not considered
entities under paragraph 3 of FIN46R, 2) given the short-term nature of the
Company's purchase obligation with respect to any particular farmer, the
Company's relationship with these farmers does not have the characteristics of a
controlling financial interest, and 3) the Company has no direct or indirect
financial ownership interest in these independent farmers. In addition, many of
these farmers have other farm operations that do not involve the Company's dairy
business.
STAFF COMMENT:
2. Please tell us why you have presumed for accounting purposes that you
will acquire the remaining 42.5% of MoArk, and thus recorded the
presumed $42.2 million payment as a long-term liability. In your
response, please cite the specific accounting literature that you
applied in accounting for your investment in MoArk.
MANAGEMENT RESPONSE:
As discussed in Note 2 of Notes to Consolidated Financial Statements on page 78
of the Form 10-K, effective July 1, 2003, the Company began to consolidate the
accounts of MoArk into its financial statements. A provision of the joint
venture agreement between the Company and the minority interest holder in MoArk
allows the Company to buy the minority interest at a minimum price of $42.2
million in 2007, subject to additional purchase price based on a set formula. In
addition, the minority interest holder has a put option that allows the minority
interest holder to sell its interest to the Company under the same terms and
timing. In accordance with paragraph 4 of EITF 00-04, this provision should be
viewed on a combined basis with the minority interest and accounted for as a
financing of the Company's purchase of the minority interest. Paragraphs 4 and
16 of EITF 00-04 require initial measurement of this obligation at the present
value of the minimum contracted purchase price, and accreted to the future
purchase price amount through charges to interest expense. The Company recorded
a $31.6 million present value liability related to this obligation on July 1,
2003 which is being accreted to the Company's future $42.2 million obligation to
purchase the remaining 42.5% ownership interest of MoArk in 2007 at a rate of
7%.
STAFF COMMENT:
3. We note on page 116 that MoArk obtained waivers for any non-compliance
with restrictions and covenants to its notes payable and revolving line
of credit agreements. Please expand your analysis of liquidity and
capital resources to include a description of the breach, the steps
that the company intends to take to cure or address the breach, and the
impact or reasonably likely impact of the breach on your financial
condition or operating performance. Refer to FRC 501.13.c. for further
guidance.
MANAGEMENT RESPONSE:
For its fiscal year ended December 25, 2004, MoArk LLC incurred a technical
violation of the capital expenditure covenant in its loan agreement with Farm
Credit Services of Western Missouri. The covenant limits annual capital
expenditures to $5,000,000. The actual amount of capital expenditures made by
MoArk during this period was $5,581,867. The covenant calculation for the fourth
quarter of 2004 identified the violation, at which point a waiver was requested.
The waiver was granted by Farm Credit Services on February 11, 2005. The balance
of the outstanding MoArk term loan with Farm
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Credit Services to which covenant violation related was $25.8 million at
December 25, 2004. At year-end 2004, the Company had cash and cash equivalents
of $73.1 million, and consolidated long-term debt (including current portion) of
$943.9 million. The covenant violation had no impact on the financial condition,
liquidity or operating performance of the Company, and at no time did management
believe that it had or was likely to have a material impact on the Company's
liquidity or capital resources. In the event of any material debt covenant
violations in the future, the Company will include the disclosures suggested in
the guidance in FRC 501.13.c.
STAFF COMMENT:
4. Please tell us how you considered SFAS 150 in accounting for your
member equities.
MANAGEMENT RESPONSE:
At the time of adoption of SFAS 150, the Company reviewed the terms of its
member equities and concluded that its member equities did not meet any of the
criteria specified in SFAS 150 paragraphs 9 - 15 that would require
classification of these financial instruments as liabilities. The Company's
member equities are not mandatorily redeemable nor does the Company have a legal
or constructive obligation to redeem them. Member equities are subject to
redemption solely at the discretion of the Company's Board of Directors, and the
Company retains the unconditional right to refuse redemption of the members'
shares.
STAFF COMMENT:
5. Please provide us with your analysis of the significance of your
investment in CF Industries, Inc. under Rule 3-09 of Regulation S-X.
MANAGEMENT RESPONSE:
Rule 3-09 of Regulation S-X applies to either: 1) majority-owned subsidiaries
that are not consolidated by the registrant or by a subsidiary of the registrant
or 2) investments that are accounted for by the equity method. CF Industries,
Inc. is a cooperative and, in accordance with paragraph 11.13 of the AICPA Audit
and Accounting Guide "Audits of Agricultural Producers and Agricultural
Cooperatives," investments made by cooperatives in other cooperatives should be
accounted for at cost. The Company accounts for its investment in CF Industries,
Inc. at cost and discloses this policy in Note 1 of the Notes to Consolidated
Financial Statements on page 76 of the Form 10-K. Accordingly, because the
Company's investment in CF Industries, Inc. is accounted for under the cost
method, Rule 3-09 of Regulation S-X does not apply. As a further note, the
Company sold its entire investment in CF Industries, Inc. during the third
quarter ended September 30, 2005.
STAFF COMMENT:
6. Please disclose the description, balance at the beginning of period,
amounts charged to costs and expenses, amounts charged to other
accounts, deductions, and balance at the end of the period for all of
your valuation and qualifying accounts and reserves. Refer to Rules
5-04 and 12-09 of Regulation S-X for additional guidance.
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MANAGEMENT RESPONSE:
Rule 5-04(b) of Regulation S-X allows information required by any schedules to
be shown in the related financial statements or in a note thereto in lieu of a
schedule. The Company has provided the relevant information required in Rules
5-04 and 12-09 of Regulation S-X in Note 25 of the Notes to Consolidated
Financial Statements on page 93 related to its allowance for doubtful accounts.
The Company has no other valuation and qualifying accounts and reserves as
defined in Rule 12-09 (1) of Regulation S-X.
STAFF COMMENT:
7. Please tell us why you have presented "Proceeds from patronage
revolvement received" as an adjustment to reconcile net earnings to net
cash provided by operating activities on your consolidated statements
of cash flows. In your response, please describe what you mean by
patronage "revolvement."
MANAGEMENT RESPONSE:
The Company is a member of other cooperatives. These cooperatives return a
portion of their earnings to members in the form of patronage, which is
generally based on the volume of business transacted with the cooperative by the
member. This "patronage income" is reported as earned by the Company and is
reflected in net earnings. A portion of such patronage income is sometimes
distributed in the form of capital stock and other equities. This portion of
patronage is included in net earnings, but represents "non-cash patronage
income" and accordingly, is reflected as a negative component of "adjustments to
reconcile net earnings to net cash provided by operating activities" in order to
reflect in operating cash flow only the portion of current year patronage income
received in cash. When these capital stock and other equities are redeemed by
the issuing cooperative, and cash is paid to the Company in later periods, it is
referred to as "patronage revolvement received." The cash received upon later
redemption of the capital stock and other equities issued in lieu of cash
patronage is reflected as an adjustment to reconcile net earnings to net cash
provided by operating activities (within the caption "proceeds from patronage
revolvement received") in order to reflect in operating cash flow the portion of
prior period patronage income received in cash upon redemption of the capital
stock and other equities received originally.
STAFF COMMENT:
8. We note that you provide services within your Seed segment (refer to
page eight) and that you receive a sales-based royalty from Dean Foods
(refer to page 14). Please expand your revenue recognition policy
footnote to describe the following, to the extent material:
o how you account for royalty revenue;
o how you account for service revenue; and
o how you allocate revenue among elements.
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MANAGEMENT RESPONSE:
o Royalty revenue in the Dairy Foods segment accounts for less than $5
million in annual net sales, or less than 0.1% of the Company's total
net sales. Royalty revenue from Dean Foods (which accounts for
substantially all royalties recorded in the Dairy Foods segment) is
included in net sales in the consolidated statements of operations and
is recognized based on volumes sold under the applicable license
agreements. Given the relative insignificance of royalty revenue to
total Company revenue, the Company does not believe that a further
description of its accounting policies surrounding the recognition of
such revenue is necessary pursuant to paragraph 12 of APB 22,
Disclosure of Accounting Policies.
o On page 8, the Company discloses that it provides farmers with access
to agronomists. In 2004, the expense related to the activities of these
agronomists was approximately $2 million. These agronomists provide
crop production consultation to farmers who may or may not be customers
of the Company. The Seed segment derives its revenue from the sale of
seed product and does not, through contracts or other means, have an
obligation to provide access to the services of the agronomists as a
condition of product purchases by farmers. Accordingly, the Company
views the work performed by these individuals as a marketing, rather
than a revenue-generating, activity.
o It is not in the nature of the Company's businesses to enter into sales
transactions that include multiple deliverables as contemplated by EITF
00-21. The Company's primary revenue-generating activities are product
sales. Revenue related to such transactions is recognized when title
and risk of loss pass to the customer, which is also the point in time
at which all of the Company's obligations to the customer related to
the sale transaction are fulfilled. Therefore, the revenue allocation
guidance in EITF 00-21 does not apply to the Company's single-element
sales transactions.
STAFF COMMENT:
9. We note, on page 75, that you have recorded changes in the fair value
of securities to accumulated other comprehensive income. We further
note the following in your derivative commodity instruments policy on
page 76, which appears to be inconsistent with your recording of
changes in fair value of securities to accumulated other comprehensive
income:
o Changes in the fair values of futures contracts are recognized
in earnings; and
o Changes in the fair values of interest rate swaps designated
and effective as fair value hedges are recorded in net
earnings and are offset by corresponding changes in the fair
value of the hedged debt.
Please clarify how you account for your derivative financial
instruments, provide the disclosures required by paragraphs 44 to 47 of
SFAS 133, and describe the financial statement line items where
derivative activities are recorded, to the extent applicable and
material.
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MANAGEMENT RESPONSE:
The Company reports changes in fair value of marketable securities and
derivative financial instruments as follows:
o The change in the fair value of securities reported as accumulated
other comprehensive income (loss) in the Consolidated Statements of
Equities on page 75 of the Company's Form 10-K represents the
unrealized gains (losses) on available-for-sale securities held by the
Company in a rabbi trust. The rabbi trust is included in the
consolidated financial statements and holds investments that support
the Company's deferred compensation program and Supplemental Executive
Retirement Plan. As of December 31, 2004, the balance in the trust was
$5.5 million and was included in other assets in the consolidated
balance sheet. These securities are accounted for under SFAS 115 and
are not hedged with derivative financial instruments. Paragraph 13 of
SFAS 115 and paragraph 5 of SFAS 130 require that unrealized gains and
losses for available-for-sale securities be reported in other
comprehensive income (loss).
o The Company uses futures and options contracts offered through
regulated commodity exchanges to reduce the risk associated with
commodity price changes on the market value of inventories and fixed
or partially fixed purchase and sale contracts. The Company also uses
forward sales contracts to hedge commodity positions where futures and
option contracts are not offered for certain commodities on regulated
commodity exchanges. On page 76 of the Company's Form 10-K, the
Company discloses that it has not designated hedge accounting for
these instruments; accordingly, mark-to-market adjustments on open
contracts are recorded in net earnings as required by SFAS 133
paragraph 18a. The Company primarily records these gains or losses
from the mark-to-market adjustments through cost of sales as further
described in footnote (1) to Note 22 of the Notes to Consolidated
Financial Statements on page 92.
o The Company uses interest rate swap instruments to balance its mix of
fixed and floating interest rate debt. These swaps are designated as
fair value hedge instruments in accordance with SFAS 133 paragraph 20
and accounted for as required in paragraph 22. Paragraph 22 of SFAS
133 requires that: 1) gains and losses on fair value hedges to be
recognized currently in earnings, and 2) the gain or loss (that is,
the change in fair value) of the hedged item attributable to the
hedged risk shall adjust the carrying amount of the hedged item and be
recognized currently in earnings. For the year ended December 31,
2004, changes in the fair value of these interest rate swap
derivatives were recorded as an adjustment to interest expense, and
were offset by the fair value adjustment to the underlying debt. The
fair value of the interest rate swap derivatives was included in other
assets at December 31, 2004, and the fair value adjustment on the
hedged debt was included in short- or long-term debt as appropriate.
The Company's derivative instruments, including its derivative commodity
instruments and interest rate swap instruments, are disclosed in the Company's
financial statements as required in paragraph 44 of SFAS 133. Paragraph 44
states that disclosures for derivative instruments must include a description of
the Company's objectives for holding or issuing the instruments (including the
purpose of the derivative activity), the context needed to understand the
objectives, and its strategies for achieving those objectives. Disclosures must
also describe the risk management policy of the entity, including a description
of the items for which risks are hedged. The Company's disclosures with respect
to these matters are outlined below.
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o The Company's purpose in entering into derivative commodity
instruments is to reduce its exposure to changes in commodity prices.
The Company has included disclosure of this objective in Note 1 of
Notes to the Consolidated Financial Statements on page 76 of Form
10-K. This disclosure identifies the purpose of the derivative
commodity instruments as being to "reduce the exposure to changes in
commodity prices." Additional required disclosures related to the
Company's derivative commodity instruments are set forth in Item 7 on
page 43 and in Item 7A on page 54 of the Form 10-K. The disclosure on
page 43 states "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 in dairy foods, soybean meal and corn in animal feed, and
soybeans in 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 disclosure on page 54
states "As part of our trading activity, we utilize futures and option
contracts offered through regulated commodity exchanges to reduce risk
on the market value of our inventories and our fixed or partially
fixed purchase and sale contracts. We do not utilize hedging
instruments for speculative purposes." Page 54 also discloses the
Company's risk management policy in the form of "formal position
limits" to which management adheres to in its commodity hedging
activities. The Company will expand its disclosure in Note 1 of Notes
to Consolidated Financial Statements related to derivative commodity
instruments in future Form 10-K filings to include information
consistent with that disclosed on pages 43 and 54, including a
description of commodities hedged and the risk management policy
established to limit the use of hedging derivatives.
o The Company has included a disclosure in Note 1 of Notes to
Consolidated Financial Statements on page 76 of the Form 10-K that
identifies the purpose of the interest rate swap derivatives as being
to "help manage its exposure to interest rate fluctuations..." Note 1
also describes the objective of these swaps as "the objective of the
swaps is to convert fixed rate debt to floating in order to achieve
historical interest rate exposure levels." Note 10 on page 82 includes
a description of the items being hedged: "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" and also identifies the risk management
efforts to "return to historical exposure levels for floating interest
rate debt." Additionally, the disclosures identified on pages 76 and
82 for the interest rate swaps are also set forth in Item 7A on page
55.
Given the nature of the Company's derivative instruments, the disclosure
requirements in SFAS 133 paragraphs 45-47 are not applicable to the Company.
STAFF COMMENT:
10. You state you have structured the transfers of receivables to a special
purpose entity as sales; however, we note your disclosure that you
retain credit risk associated with the notes you receive from the
special purpose entity in return. Please tell us why you do not
consolidate the special-purpose entity related to your receivables
purchase facility and address the criteria of paragraph 9 of SFAS 140
to demonstrate these transfers should be accounted for as sales. In
your response, please explain the business purpose of these transfers
and the benefit of holding notes receivable from the special purpose
entity versus trade receivables if you are subject to the same credit
risk.
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MANAGEMENT RESPONSE:
In accordance with SFAS 140, the Company does not consolidate the special
purpose entity (SPE). Paragraph 35 of SFAS 140 identifies the following
conditions of a qualifying SPE, all of which the Company has met:
o It (the SPE) is demonstrably distinct from the transferor (Land
O'Lakes). Paragraph 36 states that a qualifying SPE is demonstrably
distinct from the transferor only if 1) the SPE cannot be unilaterally
dissolved by the Company, its affiliates, or agents, and 2) at least
10% of the fair value of the SPE's beneficial interests is held by
parties other than the Company, its affiliates, or agents. Condition 1
is met because dissolution of the SPE requires unanimous vote of the
board members, of which at least one member must be an independent
party from the Company. Condition 2 is met because the rights to
receive cash collected by the SPE are first granted to CoBank as part
of the collateral pledged on borrowings.
Furthermore, the SPE's legal structure (as described in the Purchase and Sale
Agreement) upon formation conforms to the following requirements of SFAS 140
paragraph 35:
o Its permitted activities (1) are significantly limited, (2) were
entirely specified in the legal documents that established the SPE or
created the beneficial interests in the transferred assets that it
holds, and (3) may be significantly changed only with the approval of
the holders of at least a majority of the beneficial interests held by
entities other than the transferor;
o It only holds (1) financial assets transferred to it that are passive
in nature (ie., the SPE is not required to make decisions other than
the decisions inherent in servicing), (2) servicing rights related to
the financial assets that it holds, temporarily, (3) nonfinancial
assets obtained in connection with the collection of financial assets
that it holds, and (4) cash collected from assets that it holds and
investments purchased with that cash pending distribution to holders
of beneficial interests that are appropriate for the purpose;
o It can only dispose of its noncash financial assets (that is,
receivables) in automatic response to a condition such as (1) the
occurrence of an event or circumstance that is specified by legal
documents that established the SPE, (2) termination of the SPE or
maturity of the beneficial interests in those financial assets on a
fixed or determinable date that is specified at inception, as well as
other conditions specified in paragraph 35(d).
As a result of meeting the requirements above, the SPE is considered a
qualifying SPE. Paragraph 46 of SFAS 140 states that "a qualifying SPE shall not
be consolidated in the financial statements of a transferor or its affiliates."
Accordingly, the Company does not consolidate this SPE.
The structure of the securitization facility is that the Company's receivables
are transferred to a wholly-owned, unconsolidated SPE. These transfers are
accounted for as a sale of financial assets in accordance with paragraph 9 of
SFAS 140, based on meeting all of the following conditions:
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o Paragraph 9(a) requires that the transferred assets must be "isolated
from the transferor -- put presumptively beyond the reach of the
transferor and its creditors, even in bankruptcy." The Company
received a True Sale Opinion from outside legal counsel upon the
formation of the SPE that concluded the transfers would be viewed as
sales in a court of law and are beyond the reach of the Company and
its creditors.
o Paragraph 9(b) requires that each transferee has "the right to pledge
or exchange the assets (or beneficial interests) it received, and no
condition both constrains the transferee from taking advantage of its
right to pledge or exchange and provides more than a trivial benefit
to the transferor." The SPE facility uses its pool of receivables as
collateral for its borrowings through CoBank. This collateral is not
guaranteed by the Company. The SPE has the right to pledge or exchange
its receivables without constraints from the Company.
o Paragraph 9(c) requires that the "transferor does not maintain
effective control over the transferred assets through either (1) an
agreement that both entitles and obligates the transferor to
repurchase or redeem them before their maturity or (2) the ability to
unilaterally cause the holder to return specific assets, other than
through a cleanup call." No agreement exists that obligates the
Company to repurchase the receivables sold nor obligates the SPE to
re-sell the receivables to the Company.
As indicated on page 42 of Management's Discussion and Analysis of Financial
Condition and Results of Operations in the section entitled "Off-Balance Sheet
Arrangements," the business purpose of the receivables securitization facility
is principally to reduce the Company's overall financing costs. The interest
rate paid to CoBank under this facility is less than a comparable rate available
under the Company's revolving credit facility.
A description of the Company's credit risk compared to the SPE's credit risk is
as follows:
The receivables are sold by the Company to the SPE at a fair market discount,
which reflects both the time value of money as well as the credit risk related
to the receivables' obligors. The SPE then borrows from CoBank against the pool
of receivables. The only cash the SPE receives is from either the CoBank
borrowing or the collection of receivables. In general, the amount of
receivables sold to the SPE from the Company is higher than the amount of SPE
borrowings outstanding with CoBank. As a result, the SPE typically pays the
Company for these receivables with a combination of cash and notes. As
receivables are collected by the SPE, the proceeds may either be used to repay
CoBank borrowings or to repay a portion of the note to the Company.
CoBank's lending to the SPE is secured by the receivables pool and is not
guaranteed by the Company. CoBank is exposed to the credit default risk of the
receivables' obligors, and has no recourse back to the Company in the event that
the obligors default on their receivables obligations. As a result of this
securitization, the Company is not subject to the same credit risk as the SPE.
The Company's risk is limited to the extent the SPE fails to generate sufficient
cash from its collections of receivables to repay its note due to the Company
(after first paying CoBank for any outstanding borrowings). Therefore, the
Company effectively retains some limited credit risk on its notes receivable
with the SPE.
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STAFF COMMENT:
11. You state no amounts were outstanding under the receivables purchase
facility as of December 31, 2004. However, you have recorded "Notes
from sale of trade receivables" of $362,123 as of December 31, 2004 in
Note 4 on page 79. Please tell us the nature of the $362,123 and
explain why you state no amounts are outstanding under the facility.
MANAGEMENT RESPONSE:
Where the Company refers to amounts outstanding under this facility, it is
referring to amounts owed by the SPE to CoBank. The securitization is often used
as a source of liquidity for the Company. In periods where the Company has
excess cash, the cash collected by the SPE from its receivables is used to repay
the amounts the SPE owes CoBank under the securitization facility instead of
transferring the funds collected to the Company to repay amounts outstanding on
the note. As of December 31, 2004, the SPE had no amounts currently borrowed
from CoBank under the securitization facility. However, there was a note
receivable to the Company from the SPE in the amount of $362,123 related to
prior sales of receivables. This amount is collected by the Company from the SPE
as the SPE collects the receivables, as discussed in management's response to
Comment 10.
STAFF COMMENT:
12. Please revise your disclosures, as necessary, to ensure all information
required by SFAS 140, paragraph 17(f) is presented.
MANAGEMENT RESPONSE:
Required SFAS 140 paragraph 17(f) disclosures are as follows:
o Paragraph 17(f)(1) requires disclosure of accounting policies for
initially measuring the retained interests, if any, including the
methodology used in determining their fair value. The Company has no
retained interests in the securitized financial assets.
o Paragraph 17(f)(2) requires disclosures for characteristics of the
securitization facility (including continuing involvement with the
transferred assets, such as servicing, recourse and restrictions on
retained interests) and the gain or loss from sale of financial assets
in securitization. The Company has no continuing involvement with the
transferred assets, except for limited credit risk related to the
repayment of the note from the SPE. Disclosure is provided on page 42
of Management's Discussion and Analysis of Financial Condition and
Results of Operations in the section entitled "Off-Balance Sheet
Arrangements" as follows: "Land O'Lakes and 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." The Company will expand its disclosure in its Notes to the
Consolidated Financial Statements in future Form 10-K filings to
include information consistent with that disclosed on page 42.
o Paragraph 17(f)(3) requires disclosure of key assumptions used in
measuring the fair value of retained interests at the time of
securitization. The Company has no retained interests in the
securitized financial assets.
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o Paragraph 17(f)(4) requires cash flows between the SPE and the
transferor be disclosed. Note 5 of the Notes to Consolidated Financial
Statements on page 79 of the Form 10-K discloses the total accounts
receivable sold to the SPE of $5,839.2 million and $2,593.0 million in
2004 and 2003, respectively. Note 4 on page 79 also includes
disclosure of the note receivable balances from the sale of trade
receivables to the SPE in the amounts of $362.1 million and $181.3
million for 2004 and 2003, respectively. The Company believes that its
disclosures in Notes 4 and 5 on page 79 of the Notes to Consolidated
Financial Statements address the requirements of SFAS 140 paragraph
17(f)(4).
STAFF COMMENT:
13. Please tell us why you amortized goodwill associated with your
investments in joint ventures and cooperatives. In your response, cite
specific accounting literature that you considered. Refer to paragraph
59 of SFAS 142 for additional guidance.
MANAGEMENT RESPONSE:
The amortization of goodwill related to investments in cooperatives is discussed
as follows:
o SFAS 142 paragraph 48c states that "this Statement shall not be
applied to previously recognized goodwill... acquired in a combination
between two or more mutual enterprises..." A mutual enterprise is
defined in Appendix F to SFAS 142 as "an entity other than an
investor-owned entity that provides dividends, lower costs, or other
economic benefits directly and proportionately to its owners, members,
or participants. Farm cooperatives are examples of mutual
enterprises." Because the Company and certain of its investees are
farm cooperatives, and hence mutual enterprises, SFAS 142 is not
applicable. Accordingly, the Company continues to amortize goodwill
associated with those investments.
The amortization of goodwill related to investments in joint ventures is
discussed as follows:
o SFAS 141 paragraph 9 states that "the formation of a joint venture is
not a business combination." SFAS 142 paragraph 4 states the
"provisions of this Statement apply to goodwill that an entity
recognizes in accordance with Statement 141." Accordingly, SFAS 142
does not apply to joint ventures and the Company continues to amortize
goodwill associated with joint ventures.
o The goodwill reported in the Agronomy segment arose primarily upon the
formation of a joint venture in which the Company contributed assets
with a book value in excess of the underlying equity it received for
the net assets in the investee. The SEC staff indicated at the 2001
SEC Conference that positive basis differences that result from the
contribution of property to a joint venture should not be treated as
equity-method goodwill, and accordingly should continue to be
amortized. Therefore, the Company believes that paragraph 59 of SFAS
142 does not apply and the Company continues to amortize such
goodwill.
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STAFF COMMENT:
14. Please tell us why goodwill decreased by $37.1 million due to the
purchase of the minority interest of Land O'Lakes Farmland Feed LLC. In
your response, cite specific accounting literature to support why you
recorded a decrease of goodwill.
MANAGEMENT RESPONSE:
As disclosed in Note 11 of the Notes to Consolidated Financial Statements on
page 82 of the Company's Form 10-K, in June of 2004 the Company completed the
purchase of the remaining 8% minority interest held in Land O'Lakes Farmland
Feed LLC from a third party. In accordance with SFAS 141 paragraphs 14, A5 and
A6, the Company accounted for this business combination transaction using the
purchase method. Paragraph 10 of ARB 51 states that two or more purchases of an
entity made over a period of time "should generally be determined on a
step-by-step basis." The Company's 92% ownership position was acquired through 2
transactions, the first in 1999 (69% ownership) and the second in 2001 (up to
92% ownership) which resulted in the recognition of goodwill of $137.5 million.
The book value of the 8% minority interest acquired in 2004 exceeded the
purchase price, creating negative goodwill. SFAS 141 paragraph 44 requires this
negative goodwill to be allocated as a reduction of amounts assigned to acquired
long-lived assets. After considering the fair value of other long-lived assets,
the Company allocated the negative goodwill to goodwill in the consolidated
balance sheet.
STAFF COMMENT:
15. Please disclose why goodwill in the Seed segment decreased from $12,405
thousand at December 31, 2003, to $10,465 thousand at December 31,
2004.
MANAGEMENT RESPONSE:
Goodwill in the Seed segment decreased by approximately $1.9 million from
$12,405 thousand at December 31, 2003, to $10,465 thousand at December 31, 2004,
due to the recognition of an impairment charge related to goodwill in the Seed
segment, and a later further reduction upon the sale of a Seed subsidiary. Note
17 of Notes to Consolidated Financial Statements on page 89 of the Company's
Form 10-K discloses a $1.5 million goodwill impairment charge recognized in 2004
in anticipation of the sale of a Seed subsidiary. Note 20 of Notes to
Consolidated Financial Statements on page 90 of the Company's Form 10-K
discloses that the Company also recorded a $0.4 million reduction in the
carrying value of goodwill related to the Seed subsidiary upon the completion of
the sale. This Seed subsidiary, which was acquired in 1999, operated as a
stand-alone business and was never integrated into the Seed segment business.
Paragraph 39 of SFAS 142 allows the $1.9 million of acquired goodwill to be
included in the carrying amount of the disposal since the Seed subsidiary was
never integrated into the Seed reporting unit after its acquisition.
Given that the Company has disclosed the components of the changes in Seed
goodwill in Notes 17 and 20 of Notes to Consolidated Financial Statements, the
Company does not believe that it is necessary to repeat these disclosures in
Note 9.
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STAFF COMMENT:
16. Please tell us why net operating loss carryforwards increased from
$15,641 thousand at December 31, 2003, to $32,178 thousand at December
31, 2004. Additionally, disclose when your net operating loss
carryforwards expire. Please refer to paragraph 48 of SFAS 109 for
further reference.
MANAGEMENT RESPONSE:
The increase in the net operating loss carryforward from December 31, 2003 to
December 31, 2004 was the result of: 1) 2004 net losses incurred in the
Company's taxable businesses including its swine operations, MoArk LLC, and CPI
LLC; and 2) an increase in the amount of deductible book-to-tax temporary
differences included in the Company's consolidated tax return for 2004.
Paragraph 48 of SFAS 109 requires disclosure of the amount and expiration dates
of operating loss carryforwards. The Company's net operating loss carryforwards
total $84,123 thousand. The tax benefit for these net operating loss
carryforwards is $32,178 thousand and will expire (if not used) primarily in
fiscal years 2022 (55% of the total) and 2024 (41% of the total). The Company
will revise its disclosure in future Form 10-K filings to include the amount and
expiration dates of operating loss carryforwards for tax purposes, as required
by SFAS 109 paragraph 48.
In connection with our responses to the SEC's comments above, we acknowledge
that:
- The Company is responsible for the adequacy and accuracy of the
disclosure in the filing;
- Staff comments or changes to disclosure in response to staff comments
do not foreclose the Commission from taking any action with respect to
the filing; and
- The Company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the federal
securities laws of the United States.
Although the Company is a voluntary filer, the Company intends to voluntarily
file periodic reports in the future pursuant to the requirements to do so under
the Company's indentures for its senior notes.
We hope that this letter responds adequately to the Staff's questions. If you
have any further comments or questions, please contact me at (651) 481-2710.
Thank you for your time and consideration.
Sincerely,
/s/ Daniel Knutson
Senior Vice President and Chief Financial Officer
Cc: Mr. Ryan Milne
Ms. Shannon Buskirk
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