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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 2003*
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________ to _________________.
Commission file number 333-84486
LAND O'LAKES, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Minnesota 41-0365145
- ---------------------------------------- -------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
4001 Lexington Avenue North
Arden Hills, Minnesota 55112
- ---------------------------------------- -------------------------------
(Address of Principal Executive Offices) (Zip Code)
(651) 481-2222
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12-b-2 of the Act). Yes [ ] No [X]
The number of shares of the registrant's common stock outstanding as of
October 31, 2003: 1,102 shares of Class A common stock, 4,975 shares of Class B
common stock, 191 shares of Class C common stock, and 1,141 shares of Class D
common stock.
Land O'Lakes, Inc. is a cooperative. Our voting and non-voting common
equity can only be held by our members. No public market for voting and
non-voting common equity of Land O'Lakes, Inc. is established and it is
unlikely, in the foreseeable future, that a public market for our voting and
non-voting common equity will develop.
We maintain a website on the Internet through which additional information
about Land O' Lakes, Inc. is available. Our website address is
www.landolakesinc.com. Our annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, press releases and earnings releases are
available, free of charge, on our website when they are released publicly or
filed with the SEC.
*Although Land O'Lakes, Inc. is not currently required to file this
Quarterly Report on Form 10-Q pursuant to Section 13 or 15(d), we are filing
voluntarily.
INDEX
PAGE
PART I. FINANCIAL INFORMATION........................................................................... 3
Item I. Financial Statements............................................................................. 3
LAND O'LAKES, INC.
Consolidated Balance Sheets as of September 30, 2003 (unaudited) and December 31, 2002................... 3
Consolidated Statements of Operations for the three and nine months ended September 30, 2003 and 2002
(unaudited).............................................................................................. 4
Consolidated Statements of Cash Flows for the nine months ended September 30, 2003 and 2002 (unaudited).. 5
Notes to Consolidated Financial Statements (unaudited)................................................... 6
LAND O'LAKES FARMLAND FEED LLC
Consolidated Balance Sheets as of September 30, 2003 (unaudited) and December 31, 2002.................. 22
Consolidated Statements of Operations for the three and nine months ended September 30, 2003 and 2002
(unaudited).............................................................................................. 23
Consolidated Statements of Cash Flows for the nine months ended September 30, 2003 and 2002 (unaudited).. 24
Notes to Consolidated Financial Statements (unaudited)................................................... 25
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 37
Item 3. Quantitative and Qualitative Disclosures about Market Risk...................................... 56
Item 4. Controls and Procedures......................................................................... 56
PART II. OTHER INFORMATION.............................................................................. 57
Item 1. Legal Proceedings............................................................................... 57
Item 6. Exhibits and Reports on Form 8-K................................................................ 57
SIGNATURES............................................................................................... 59
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LAND O'LAKES, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2003 2002
---- ----
($ IN THOUSANDS)
(UNAUDITED)
ASSETS
Current assets:
Cash and short-term investments.......................... $ 20,800 $ 64,327
Restricted cash.......................................... 20,000 --
Receivables, net......................................... 457,920 567,584
Receivable from legal settlement......................... -- 96,707
Inventories.............................................. 500,795 446,386
Prepaid expenses......................................... 50,871 189,246
Other current assets..................................... 41,161 13,878
----------------- --------------
Total current assets............................. 1,091,547 1,378,128
Investments................................................ 541,172 545,592
Property, plant and equipment, net......................... 641,491 579,860
Property under capital lease............................... 111,558 105,736
Goodwill, net.............................................. 373,680 323,413
Other intangibles.......................................... 105,279 101,770
Other assets............................................... 206,159 211,823
----------------- --------------
Total assets..................................... $ 3,070,886 $ 3,246,322
================= ==============
LIABILITIES AND EQUITIES
Current liabilities:
Notes and short-term obligations......................... $ 81,223 $ 37,829
Current portion of long-term debt........................ 72,434 104,563
Current portion of obligation under capital lease........ 10,083 108,279
Accounts payable ........................................ 372,544 701,786
Accrued expenses......................................... 228,493 204,629
Patronage refunds payable and other member equities payable 8,900 12,388
----------------- ---------------
Total current liabilities........................ 773,677 1,169,474
Long-term debt............................................. 1,023,555 1,007,308
Obligation under capital lease............................. 101,708 --
Employee benefits and other liabilities.................... 140,012 104,340
Deferred tax liabilities................................... 41,878 --
Minority interests......................................... 60,710 53,687
Equities:
Capital stock............................................ 2,143 2,190
Member equities.......................................... 870,813 873,659
Accumulated other comprehensive loss..................... (4,733) --
Retained earnings........................................ 61,123 35,664
----------------- ---------------
Total equities................................... 929,346 911,513
----------------- ---------------
Commitments and contingencies
Total liabilities and equities................... $ 3,070,886 $ 3,246,322
================= ===============
See accompanying notes to consolidated financial statements.
3
LAND O'LAKES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
---- ---- ---- ----
($ IN THOUSANDS)
(UNAUDITED)
Net sales..................................................... $ 1,580,288 $ 1,371,735 $ 4,430,783 $ 4,323,737
Cost of sales................................................. 1,446,319 1,259,003 4,046,342 3,939,127
------------- ------------- ------------- -------------
Gross profit.................................................. 133,969 112,732 384,441 384,610
Selling, general and administration........................... 122,047 123,595 352,276 375,309
Restructuring and impairment charges.......................... 302 942 3,169 8,218
------------- ------------- ------------- -------------
Earnings (loss) from operations............................... 11,620 (11,805) 28,996 1,083
Interest expense, net......................................... 19,313 18,052 53,589 53,000
Gain on legal settlements..................................... (3,355) (4,136) (22,532) (36,835)
Gain on sale of intangibles................................... -- -- (550) (4,184)
(Gain) loss on divestiture of businesses...................... -- (3,730) 700 (4,935)
Loss (gain) on sale of investment............................. 26 -- (820) --
Equity in (earnings) loss of affiliated companies............. (5,587) 4,544 (56,018) (29,822)
Minority interest in earnings (loss) of
subsidiaries................................................ 723 (1,365) 3,639 (1,455)
------------- -------------- ------------- --------------
Earnings (loss) before income taxes........................... 500 (25,170) 50,988 25,314
Income tax expense (benefit).................................. 1,863 (13,182) 8,041 (10,018)
------------- -------------- ------------- --------------
Net (loss) earnings........................................... $ (1,363) $ (11,988) $ 42,947 $ 35,332
============== ============== ============= =============
Applied to:
Member equities
Allocated patronage refunds.............................. $ (6,231) $ (12,406) $ 29,633 $ 41,390
Deferred equities........................................ 1,635 (5,613) (12,896) (16,206)
------------- -------------- -------------- --------------
(4,596) (18,019) 16,737 25,184
Retained earnings........................................... 3,233 6,031 26,210 10,148
------------- ------------- ------------- -------------
$ (1,363) $ (11,988) $ 42,947 $ 35,332
============== ============== ============= =============
See accompanying notes to consolidated financial statements.
4
LAND O'LAKES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
2003 2002
---- ----
($ IN THOUSANDS)
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings ..................................................... $ 42,947 $ 35,332
Adjustments to reconcile net earnings to net cash provided
(used) by operating activities:
Depreciation and amortization ................................. 83,460 77,280
Amortization of deferred financing charges .................... 3,489 2,289
Bad debt expense .............................................. 2,699 3,132
Proceeds from patronage revolvement received .................. 2,671 319
Non-cash patronage income ..................................... (1,638) (530)
Receivable from legal settlement .............................. 96,707 --
Deferred income tax expense ................................... 6,757 --
Decrease (increase) in other assets ........................... 8,908 (32,120)
Increase in other liabilities ................................. 4,027 4,966
Restructuring and impairment charges .......................... 3,169 8,218
Loss (gain) on divestiture of businesses ...................... 700 (4,935)
Equity in earnings of affiliated companies .................... (56,018) (29,822)
Minority interests ............................................ 3,639 (1,455)
Other ......................................................... (12,623) (6,236)
Changes in current assets and liabilities, net of acquisitions and
divestitures:
Receivables ................................................... 142,395 104,574
Inventories ................................................... (16,563) (18,982)
Other current assets .......................................... 149,350 98,752
Accounts payable .............................................. (348,329) (284,304)
Accrued expenses .............................................. 14,233 34,248
--------- ---------
Net cash provided (used) by operating activities ................. 129,980 (9,274)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment ....................... (55,329) (57,258)
Payments for investments ......................................... (9,815) (5,069)
Proceeds from divestiture of businesses .......................... 465 3,351
Proceeds from sale of investments ................................ 3,000 21,084
Proceeds from sale of property, plant and equipment .............. 18,084 11,655
Dividends from investments in affiliated companies ............... 5,193 8,632
Increase in restricted cash ...................................... (20,000) --
Other ............................................................ 2,998 3,980
--------- ---------
Net cash used by investing activities ............................ (55,404) (13,625)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in short-term debt ..................................... 13,330 42,407
Proceeds from issuance of long-term debt ........................ 6,215 4,773
Payments on principal of long-term debt ......................... (107,126) (81,775)
Payments on principal of capital lease obligation ............... (7,171) --
Payments for redemption of member equities ...................... (23,797) (36,970)
Other ........................................................... 446 2,173
--------- ---------
Net cash used by financing activities ........................... (118,103) (69,392)
--------- ---------
Net decrease in cash and short-term investments ................. (43,527) (92,291)
Cash and short-term investments at beginning of period ............ 64,327 130,169
--------- ---------
Cash and short-term investments at end of period .................. $ 20,800 $ 37,878
========= =========
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during periods for:
Interest, net of interest capitalized ........................... $ 52,970 $ 49,450
Income taxes recovered .......................................... $ (1,461) $ (21,654)
See accompanying notes to consolidated financial statements.
5
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, 2002 included in our Annual Report on Form 10-K. The results of
operations and cash flows for interim periods are not necessarily indicative of
results for a full year.
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 rights. FIN 46 is effective immediately for all
new variable interest entities created or acquired after January 31, 2003 and no
later than October 1, 2003 for variable interest entities created or acquired
prior to February 1, 2003. As permitted by the Interpretation, the Company
early-adopted FIN 46 on July 1, 2003 and began consolidating its joint venture
interest in MoArk LLC ("MoArk"), an egg production and marketing company, in the
third quarter of 2003.
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 the Company as of January 1,
2004, and the Company is currently evaluating the impact of the standard.
2. 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 at a present value of
$31.6 million using an effective interest rate of 7%.
6
Since the consolidation of MoArk impacted the comparability of several
categories on the financial statements, the table below summarizes selected
balance sheet items for MoArk as of September 30, 2003.
SEPTEMBER 30,
2003
-------------
Current assets................................. $ 95,632
Property, plant and equipment, net............. 84,928
Property under capital lease................... 12,588
Goodwill, net.................................. 63,985
Notes and short-term obligations............... 25,449
Other current liabilities...................... 35,834
Long-term debt (including current portion)..... 81,653
Obligation under capital lease (including
current portion)............................... 10,311
3. RESTRICTED CASH
On March 28, 2003, Cheese & Protein International LLC ("CPI"), a
consolidated joint venture, 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 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.
4. RECEIVABLES
A summary of receivables is as follows:
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
Trade accounts............................. $ 319,978 $ 237,106
Notes and contracts........................ 61,799 44,565
Notes from sale of trade receivables (see
Note 5).................................... 23,872 225,144
Other...................................... 74,237 79,024
------------- -----------
479,886 585,839
Less allowance for doubtful accounts....... 21,966 18,255
------------- -----------
Total receivables, net..................... $ 457,920 $ 567,584
============= ===========
A substantial portion of Land O'Lakes receivables is concentrated in
agriculture, as well as, 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.
5. RECEIVABLES PURCHASE FACILITY
In December 2001, the Company established a $100.0 million receivables
purchase facility with CoBank, ACB ("CoBank"). A wholly-owned, unconsolidated
qualifying special purpose entity ("QSPE") was established to purchase certain
receivables from the Company. CoBank has been granted an interest in the pool of
receivables owned by the QSPE. The transfers of the receivables from the Company
to the QSPE are structured as sales; and accordingly, the receivables
transferred to the QSPE are not reflected in the consolidated balance sheet.
However, the Company retains credit risk related to the repayment of the notes
receivable with the QSPE, which, in turn, is dependent upon the credit risk of
the QSPE's receivables pool. Accordingly, the Company has retained reserves for
estimated losses. The Company expects no significant gains or losses from the
facility. At September 30, 2003, $70.0 million was outstanding under this
facility. The total amount of accounts receivable sold during the three months
ended September 30, 2003 and 2002 were $448.3 million and $498.5 million,
respectively. The total amount of accounts receivable sold during the nine
months ended September 30, 2003 and 2002 were $1,694.6 million and $1,763.3
million, respectively.
7
6. INVENTORIES
A summary of inventories is as follows:
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
Raw materials................ $ 152,582 $ 141,849
Work in process.............. 33,021 33,707
Finished goods............... 315,192 270,830
------------- ------------
Total inventories............ $ 500,795 $ 446,386
============= ============
7. INVESTMENTS
A summary of investments is as follows:
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
CF Industries, Inc........................... $ 249,502 $ 249,502
Agriliance LLC............................... 125,598 91,629
Ag Processing Inc............................ 38,400 37,854
Advanced Food Products LLC................... 28,350 27,418
CoBank, ACB.................................. 19,752 22,061
Melrose Dairy Proteins, LLC.................. 6,643 6,579
Universal Cooperatives....................... 6,473 6,473
Prairie Farms Dairy, Inc..................... 5,620 5,092
MoArk LLC.................................... -- 44,678
Other -- principally cooperatives and joint
ventures..................................... 60,834 54,306
------------- -----------
Total investments............................ $ 541,172 $ 545,592
============= ===========
8. GOODWILL AND OTHER INTANGIBLE ASSETS
GOODWILL
The carrying amount of goodwill is as follows:
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
Dairy Foods.......................... $ 66,259 $ 66,718
Feed................................. 156,276 156,839
Seed................................. 13,414 16,948
Swine................................ 607 647
Agronomy............................. 65,255 69,823
Layers............................... 71,328 11,897
Other................................ 541 541
------------- -----------
Total goodwill....................... $ 373,680 $ 323,413
============= ===========
In the Layers segment, the consolidation and presumed minority interest
acquisition of MoArk caused goodwill to increase by $59.8 million, which was
partially offset by $0.4 million of amortization. Goodwill decreases in Dairy
Foods, Feed, Swine, and Agronomy resulted from amortization associated with
investments in joint ventures and cooperatives. The goodwill decrease of $3.5
million in the Seed segment was related to amortization and reclassifications.
8
OTHER INTANGIBLE ASSETS
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
Amortized other intangible assets:
Trademarks, less accumulated amortization
of $1,600 and $1,615, respectively......... $ 2,369 $ 2,725
Patents, less accumulated amortization of
$2,299 and $1,394, respectively............ 14,074 14,979
Agreements not to compete, less accumulated
amortization of $2,769 and $2,324,
respectively............................... 1,431 1,976
Other intangible assets, less accumulated
amortization of $7,835 and $7,343,
respectively............................... 10,442 5,127
------------- ------------
Total amortized other intangible assets......... 28,316 24,807
Total non-amortized other intangible assets --
trademarks.................................... 76,963 76,963
------------- ------------
Total other intangible assets................... $ 105,279 $ 101,770
============= ============
Amortization expense for the three months ended September 30, 2003 and 2002
was $1.4 million and $2.5 million, respectively. Amortization expense for the
nine months ended September 30, 2003 and 2002 was $3.7 million and $5.0 million,
respectively. The estimated amortization expense related to other intangible
assets subject to amortization for the next five years will approximate $3.1
million annually. The weighted-average life of the intangible assets subject to
amortization is approximately 12 years.
9. DEBT OBLIGATIONS
The Company had notes and short-term obligations of $81.2 million at
September 30, 2003 and $37.8 million at December 31, 2002. The Company also has
a $250 million 5-year revolving credit facility with a variable interest rate
based on LIBOR. There were no borrowings on this facility as of September 30,
2003.
A summary of long-term debt is as follow:
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------ ----------
Term A Loan -- quarterly installments through
2006 (variable rate based on LIBOR) ......................................... $ 229,304 $ 288,270
Term B Loan -- quarterly installments through
2008 (variable rate based on LIBOR) ......................................... 204,874 231,417
Senior unsecured notes -- due 2011 (8.75%) .................................... 350,000 350,000
MoArk LLC debt -- due 2003 through 2023
(6.25% weighted average) .................................................... 81,653 --
Industrial development revenue bonds and
other secured notes payable -- due 2003
through 2016 (1.1% to 5.5%) ................................................. 16,700 26,268
Capital Securities of Trust Subsidiary --
due 2028 (7.45%) ............................................................ 190,700 190,700
Other debt .................................................................... 22,758 25,216
---------- ----------
1,095,989 1,111,871
Less current portion .......................................................... 72,434 104,563
---------- ----------
Total long-term debt .......................................................... $1,023,555 $1,007,308
========== ==========
In the nine months ended September 30, 2003, the Company made payments on
the Term A Loan of $59.0 million and Term B Loan of $26.5 million, of which
$50.0 million were voluntary prepayments. The weighted average interest rates on
short-term borrowings and notes outstanding at September 30, 2003 and December
31, 2002 were 3.65% and 3.87%, respectively.
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. Based
upon Land O'Lakes existing credit ratings, the current LIBOR margins are 225
basis points for the revolving credit facility, 275 basis points for the Term A
Loan and 350 basis points for the Term B Loan. 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 September 30, 2003, interest rates on the Term A Loan and Term B Loan were
3.93% and 4.68%, respectively.
9
10. COMPREHENSIVE INCOME
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002
------------- -------------
Net earnings............................. $ 42,947 $ 35,332
Minimum pension liability adjustment..... (4,733) --
------------- -------------
Total comprehensive income............... 38,214 35,332
============= =============
The minimum pension liability adjustment is the Company's portion, net of
tax, of Agriliance's minimum pension liability adjustment.
11. RESTRUCTURING AND IMPAIRMENT CHARGES
RESTRUCTURING CHARGES
For the three months ended September 30, 2003, the Company recorded
restructuring charges of $0.3 million in the Dairy Foods segment for the planned
closure of a facility in Volga, SD. For the three months ended September 30,
2002, the Company recorded restructuring charges of $0.2 million in the Feed
segment related to employee severance and outplacement costs for employees at
various locations.
For the nine months ended September 30, 2003, the Company recorded
restructuring charges of $2.8 million. Of this amount, Dairy Foods recorded a
restructuring charge of $1.0 million which represented severance costs for 44
employees as a result of closing a facility in Perham, MN and recorded $0.9
million for the planned closure of a facility in Volga, SD. Feed recorded a
restructuring charge of $0.6 million which represented 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. For the nine months ended
September 30, 2002, the Company recorded restructuring charges of $4.6 million.
Of this amount, Feed recorded a restructuring charge of $3.0 million which
represented severance and outplacement costs for 136 employees at the Ft. Dodge,
IA office facility and other feed plant facilities and Dairy Foods recorded a
restructuring charge of $1.6 million which represented severance and
outplacement costs for 82 employees for the Faribault, MN plant closure.
A summary of restructuring activities and resulting reserve for the nine
months ended September 30, 2003 is as follows:
BALANCE BALANCE
DECEMBER 31, CHARGE TO UTILIZED SEPTEMBER 30,
2002 EXPENSE IN 2003 2003
----------- ----------- --------- -----------
Termination benefits.......... $ 8,871 $ 2,827 $ (8,865) $ 2,833
Other......................... 1,604 - (401) 1,203
----------- ----------- ---------- -----------
Total......................... $ 10,475 $ 2,827 $ (9,266) $ 4,036
=========== =========== ========== ===========
IMPAIRMENT CHARGES
For the three months ended September 30, 2002, the Company recorded an
impairment charge of $0.7 million in the Feed segment for the write-down of
certain plant assets to their estimated fair value.
For the nine months ended September 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
value. For the nine months ended September 30, 2002, the Company recorded an
impairment charge of $3.6 million. Feed recorded a $2.4 million charge related
to the write-down of certain impaired plant assets to their estimated fair
value, and Dairy Foods recorded a $1.2 million charge for impairment related to
the Faribault, MN dairy plant closure.
10
12. GAIN ON LEGAL SETTLEMENTS
During the nine months ended September 30, 2003 and 2002, the Company
recognized gains on legal settlements of $22.5 million and $36.8 million,
respectively, of which $3.4 million was recognized for the three month period
ended September 30, 2003, and $4.1 million was recognized for the three months
ended September 30, 2002. The gains represent cash received from product
suppliers against whom the Company alleged certain price-fixing claims.
13. GAIN ON SALE OF INTANGIBLES
For the nine months ended September 30, 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. For the nine months ended September 30, 2002, the
Company recorded a $4.2 million gain on the sale of a customer list pertaining
to the feed phosphate distribution business.
14. (GAIN) LOSS ON DIVESTITURE OF BUSINESSES
For the nine months ended September 30, 2003, the Company recorded a loss of
$0.7 million on the divestiture of a Feed business in Taiwan. For the nine
months ended September 30, 2002, the Company recorded a gain of $4.9 million
related to the divestitures of a Crop Seed business for $3.7 million and the
Dairy Foods business in Poland for $1.2 million.
15. GAIN ON SALE OF INVESTMENT
For the nine months ended September 30, 2003, the Company recorded a gain of
$0.8 million on the sale of a Feed investment in a swine joint venture.
16. SEGMENT INFORMATION
The Company operates in six segments: Dairy Foods, Animal Feed, Crop 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 Animal 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 Crop Seed segment is a supplier and distributor of crop seed products
in the United States. A variety of crop seed is sold, including alfalfa,
soybeans, corn, 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 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 percent of total invested
capital. A majority of corporate administration expense is allocated directly.
11
DAIRY FOODS FEED SEED SWINE AGRONOMY LAYERS OTHER CONSOLIDATED
----------- ---------- -------- -------- ---------- -------- -------- ------------
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2003
Net sales..................... $ 782,333 $ 582,949 $ 46,483 $ 22,824 $ -- $142,129 $ 3,570 $1,580,288
Cost of sales................. 742,415 522,457 36,412 21,701 -- 121,440 1,894 1,446,319
Selling, general and
administration.............. 33,653 58,599 12,003 1,353 3,228 12,075 1,136 122,047
Restructuring and impairment
charges..................... 300 -- 2 -- -- -- -- 302
Interest expense (income),
net......................... 7,108 6,285 (212) 1,611 1,723 3,427 (629) 19,313
Gain on legal settlements..... (65) (3,290) -- -- -- -- -- (3,355)
Loss on sale of investment.... -- 26 -- -- -- -- -- 26
Equity in (earnings) loss of
affiliated companies........ (2,192) (189) -- (339) 464 (3,344) 13 (5,587)
Minority interest in earnings
of subsidiaries............. -- 723 -- -- -- -- -- 723
---------- ---------- -------- -------- ---------- -------- -------- ----------
Earnings (loss) before income
taxes....................... $ 1,114 $ (1,662) $ (1,722) $ (1,502) $ (5,415) $ 8,531 $ 1,156 $ 500
========== =========== ========= ========= =========== ======== ======== ==========
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2002
Net sales..................... $ 710,519 $ 604,841 $ 32,094 $ 20,881 $ -- $ -- $ 3,400 $1,371,735
Cost of sales................. 671,691 532,305 28,325 24,781 -- -- 1,901 1,259,003
Selling, general and
administration............. 42,641 62,054 11,477 1,563 3,747 528 1,585 123,595
Restructuring and impairment
charges.................... -- 942 -- -- -- -- -- 942
Interest expense (income),
net ....................... 5,503 7,446 452 1,329 2,608 1,148 (434) 18,052
Gain on legal settlements..... (94) (4,042) -- -- -- -- -- (4,136)
Gain on divestiture of
businesses................ -- (24) (3,706) -- -- -- -- (3,730)
Equity in (earnings) loss of
affiliated companies........ (560) (834) -- 484 2,733 2,578 143 4,544
Minority interest in (loss)
earnings of subsidiaries.... (2,506) 1,141 -- -- -- -- -- (1,365)
----------- ----------- --------- --------- ----------- --------- --------- -----------
(Loss) earnings before income
taxes....................... $ (6,156) $ 5,853 $ (4,454) $ (7,276) $ (9,088) $ (4,254) $ 205 $ (25,170)
=========== =========== ========== ========== ============ ========== ========= ===========
DAIRY FOODS FEED SEED SWINE AGRONOMY LAYERS OTHER CONSOLIDATED
----------- ---------- -------- -------- ---------- -------- -------- ------------
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2003
Net sales..................... $2,083,571 $1,779,102 $349,475 $ 66,490 $ -- $142,129 $ 10,016 $4,430,783
Cost of sales................. 1,976,664 1,579,027 298,687 64,982 -- 121,440 5,542 4,046,342
Selling, general and
administration............. 106,236 178,499 35,142 4,042 9,911 13,053 5,393 352,276
Restructuring and impairment
charges.................... 1,900 707 562 -- -- -- -- 3,169
Interest expense (income),
net........................ 21,157 16,250 1,165 4,235 6,465 6,073 (1,756) 53,589
Gain on legal settlements..... (103) (22,429) -- -- -- -- -- (22,532)
Gain on sale of intangible.... -- (550) -- -- -- -- -- (550)
Loss on divestiture of
business................... -- 700 -- -- -- -- -- 700
Gain on sale of investment.... -- (820) -- -- -- -- -- (820)
Equity in (earnings) loss of
affiliated companies........ (3,322) (921) -- (49) (44,173) (7,597) 44 (56,018)
Minority interest in earnings
of subsidiaries............. -- 3,639 -- -- -- -- -- 3,639
---------- ---------- -------- -------- ---------- -------- -------- ----------
(Loss) earnings before income
taxes...................... $ (18,961) $ 25,000 $ 13,919 $ (6,720) $ 27,797 $ 9,160 $ 793 $ 50,988
=========== ========== ======== ========= ========== ======== ======== ==========
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002
Net sales..................... $2,151,949 $ 1,810,564 $ 284,986 $ 66,575 $ -- $ -- $ 9,663 $4,323,737
Cost of sales................. 2,029,720 1,593,719 241,980 68,409 3 -- 5,296 3,939,127
Selling, general and
administration.............. 127,317 188,104 34,634 4,792 13,232 1,713 5,517 375,309
Restructuring and impairment
charges..................... 2,800 5,418 -- -- -- -- -- 8,218
Interest expense (income),
net ........................ 15,298 22,546 2,168 3,966 6,906 3,345 (1,229) 53,000
Gain on legal settlements..... (922) (35,913) -- -- -- -- -- (36,835)
Gain on sale of intangible.... -- (4,184) -- -- -- -- -- (4,184)
(Gain) loss on divestiture of
businesses.................. (1,281) (24) (3,706) -- -- -- 76 (4,935)
Equity in (earnings) loss of
affiliated companies........ (497) (1,402) (105) 688 (36,633) 7,752 375 (29,822)
Minority interest in (loss)
earnings of subsidiaries.... (5,075) 3,511 -- -- -- -- 109 (1,455)
---------- ----------- --------- --------- ----------- --------- --------- -----------
(Loss) earnings before income
taxes...................... $ (15,411) $ 38,789 $ 10,015 $ (11,280) $ 16,492 $ (12,810) $ (481) $ 25,314
=========== =========== ========= ========== =========== ========== ========== ==========
12
17. 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.
13
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 2003
LAND WHOLLY- MAJORITY-
O'LAKES, INC. OWNED OWNED
PARENT CONSOLIDATED CONSOLIDATED NON-GUARANTOR
COMPANY GUARANTORS GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ----------- ----------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and short-term
investments ................... $ 12,331 $ 3,927 $ 2,557 $ 1,985 $ -- $ 20,800
Restricted cash .................. 20,000 -- -- -- -- 20,000
Receivables, net ................. 397,326 18,476 156,542 113,734 (228,158) 457,920
Inventories ...................... 290,973 50,471 106,818 52,533 -- 500,795
Prepaid expenses ................. 34,171 2,936 7,994 5,770 -- 50,871
Other current assets ............. 39,297 1,191 -- 673 -- 41,161
----------- ----------- ----------- ----------- ----------- -----------
Total current assets ........ 794,098 77,001 273,911 174,695 (228,158) 1,091,547
Investments ........................ 1,303,099 223 18,505 9,552 (790,207) 541,172
Property, plant and equipment,
net .............................. 256,721 13,541 233,736 137,493 -- 641,491
Property under capital lease ....... -- -- -- 111,558 -- 111,558
Goodwill, net ...................... 184,334 3,224 121,862 64,260 -- 373,680
Other intangibles .................. 4,084 1,178 95,744 4,273 -- 105,279
Other assets ....................... 142,796 582 26,987 54,982 (19,188) 206,159
----------- ----------- ----------- ----------- ----------- -----------
Total assets ................ $ 2,685,132 $ 95,749 $ 770,745 $ 556,813 $(1,037,553) $ 3,070,886
=========== =========== =========== =========== =========== ===========
LIABILITIES AND EQUITIES
Current liabilities:
Notes and short-term
obligations ................... $ 536 $ 2,900 $ 977 $ 114,607 $ (37,797) $ 81,223
Current portion of long-term
debt .......................... 62,890 55,171 -- 9,572 (55,199) 72,434
Current portion of obligation
under capital lease ........... -- -- -- 10,083 -- 10,083
Accounts payable ................. 357,219 14,138 95,615 38,041 (132,469) 372,544
Accrued expenses ................. 194,048 2,563 27,177 16,960 (12,255) 228,493
Patronage refunds and other
member equities payable ........ 8,900 -- -- -- -- 8,900
----------- ----------- ----------- ----------- ----------- -----------
Total current liabilities ... 623,593 74,772 123,769 189,263 (237,720) 773,677
Long-term debt ..................... 941,139 9,961 -- 82,081 (9,626) 1,023,555
Obligation under capital lease ..... -- -- -- 101,708 -- 101,708
Employee benefits and other
liabilities ...................... 111,939 89 26,674 1,310 -- 140,012
Deferred tax liabilities ........... 27,191 1,168 -- 13,519 -- 41,878
Minority interests ................. 51,924 -- 3,050 5,736 -- 60,710
Equities:
Capital stock .................... 2,143 966 502,116 91,145 (594,227) 2,143
Member equities .................. 870,813 -- -- -- -- 870,813
Accumulated other
comprehensive loss ............. (4,733) -- -- -- -- (4,733)
Retained earnings ................ 61,123 8,793 115,136 72,051 (195,980) 61,123
----------- ----------- ----------- ----------- ----------- -----------
Total equities .............. 929,346 9,759 617,252 163,196 (790,207) 929,346
----------- ----------- ----------- ----------- ----------- -----------
Commitments and contingencies
Total liabilities and equities ..... $ 2,685,132 $ 95,749 $ 770,745 $ 556,813 $(1,037,553) $ 3,070,886
=========== =========== =========== =========== =========== ===========
14
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003
LAND WHOLLY- MAJORITY-
O'LAKES, INC. OWNED OWNED
PARENT CONSOLIDATED CONSOLIDATED NON-GUARANTOR
COMPANY GUARANTORS GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ------------- ----------- ------------
(UNAUDITED)
Net sales........................ $ 755,684 $ 65,744 $ 522,966 $ 235,894 $ -- $ 1,580,288
Cost of sales.................... 700,970 63,387 467,664 214,298 -- 1,446,319
----------- ----------- ----------- ----------- ----------- -----------
Gross profit..................... 54,714 2,357 55,302 21,596 -- 133,969
Selling, general and administration 48,176 3,989 54,802 15,080 -- 122,047
Restructuring and impairment
charges.......................... 302 -- -- -- -- 302
----------- ----------- ----------- ----------- ----------- -----------
Earnings (loss) from operations.. 6,236 (1,632) 500 6,516 -- 11,620
Interest expense (income), net... 17,774 614 (1,609) 2,534 -- 19,313
Gain on legal settlements........ (3,148) -- (207) -- -- (3,355)
Loss on sale of investment....... -- -- 26 -- -- 26
Equity in (earnings) loss of
affiliated companies........... (6,516) -- (248) (3,297) 4,474 (5,587)
Minority interest in earnings of
subsidiaries .................. 345 -- 139 239 -- 723
----------- ----------- ----------- ----------- ----------- -----------
(Loss) earnings before income
taxes.......................... (2,219) (2,246) 2,399 7,040 (4,474) 500
Income tax (benefit) expense..... (856) (1,066) -- 3,785 -- 1,863
------------ ------------ ----------- ----------- ----------- -----------
Net (loss) earnings.............. $ (1,363) $ (1,180) $ 2,399 $ 3,255 $ (4,474) $ (1,363)
============ ============ =========== =========== ============ ============
15
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
LAND WHOLLY- MAJORITY-
O'LAKES, INC. OWNED OWNED
PARENT CONSOLIDATED CONSOLIDATED NON-GUARANTOR
COMPANY GUARANTORS GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ---------- ---------- ------------ ------------ ------------
(UNAUDITED)
Net sales ......................... $ 2,269,756 $ 164,446 $ 1,692,017 $ 304,564 $ -- $ 4,430,783
Cost of sales ..................... 2,097,762 156,713 1,501,445 290,422 -- 4,046,342
----------- ----------- ----------- ----------- ----------- -----------
Gross profit ...................... 171,994 7,733 190,572 14,142 -- 384,441
Selling, general and
administration................... 153,430 10,438 170,352 18,056 -- 352,276
Restructuring and impairment
charges ......................... 1,902 560 707 -- -- 3,169
----------- ----------- ----------- ----------- ----------- -----------
Earnings (loss) from operations ... 16,662 (3,265) 19,513 (3,914) -- 28,996
Interest expense (income), net .... 53,344 1,955 (4,889) 3,179 -- 53,589
Gain on legal settlements ......... (19,323) -- (3,209) -- -- (22,532)
Gain on sale of intangible ........ -- -- -- (550) -- (550)
Loss on divestiture of business ... 700 -- -- -- -- 700
Gain on sale of investment ........ -- -- (820) -- -- (820)
Equity in (earnings) loss of
affiliated companies ............ (73,166) -- (804) (3,297) 21,249 (56,018)
Minority interest in earnings of
subsidiaries .................... 2,522 -- 510 607 -- 3,639
----------- ----------- ----------- ----------- ----------- -----------
Earnings (loss) before income
taxes ........................... 52,585 (5,220) 28,725 (3,853) (21,249) 50,988
Income tax expense (benefit) ...... 9,638 (987) -- (610) -- 8,041
----------- ----------- ----------- ----------- ----------- -----------
Net earnings (loss) ............... $ 42,947 $ (4,233) $ 28,725 $ (3,243) $ (21,249) $ 42,947
=========== =========== =========== =========== =========== ===========
16
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
LAND WHOLLY- MAJORITY-
O'LAKES, INC. OWNED OWNED
PARENT CONSOLIDATED CONSOLIDATED NON-GUARANTOR
COMPANY GUARANTORS GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ---------- ---------- ------------ ------------ ------------
(UNAUDITED)
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net earnings (loss) ...................... $ 42,947 $ (4,233) $ 28,725 $ (3,243) $ (21,249) $ 42,947
Adjustments to reconcile net earnings
(loss) to net cash provided (used) by
operating activities:
Depreciation and amortization .......... 42,728 1,662 29,557 9,513 -- 83,460
Amortization of deferred financing
charges ............................. 3,489 -- -- -- -- 3,489
Bad debt expense ....................... 922 -- 1,777 -- -- 2,699
Proceeds from patronage revolvement
received ............................. 2,671 -- -- -- -- 2,671
Non-cash patronage income .............. (1,638) -- -- -- -- (1,638)
Receivable from legal settlement ....... 90,707 -- 6,000 -- -- 96,707
Deferred income tax expense ............ 6,757 -- -- -- -- 6,757
(Increase) decrease in other assets .... (6,778) 11,649 (549) (665) 5,251 8,908
Increase (decrease) in other
liabilities .......................... 5,811 (76) (1,672) (36) -- 4,027
Restructuring and impairment charges ... 1,902 560 707 -- -- 3,169
Loss on divestiture of business ........ 700 -- -- -- -- 700
Equity in (earnings) loss of affiliated
companies ............................ (73,166) -- (804) (3,297) 21,249 (56,018)
Minority interest ...................... 2,522 -- 510 607 -- 3,639
Other .................................. (14,136) 879 (1,253) 1,887 -- (12,623)
Changes in current assets and
liabilities, net of acquisitions and
divestitures:
Receivables ............................ 69,208 11,581 86,838 (28,200) 2,968 142,395
Inventories ............................ (38,142) 23,926 3,465 (5,812) -- (16,563)
Other current assets ................... 145,060 1,050 2,401 839 -- 149,350
Accounts payable ....................... (157,488) (45,681) (46,469) 1,858 (100,549) (348,329)
Accrued expenses ....................... 17,143 919 398 2,803 (7,030) 14,233
--------- --------- --------- --------- --------- ---------
Net cash provided (used) by operating
activities ............................. 141,219 2,236 109,631 (23,746) (99,360) 129,980
CASH FLOWS FROM INVESTING
ACTIVITIES:
Additions to property, plant and
equipment............................... (32,091) (582) (15,678) (6,978) -- (55,329)
Payments for investments ................. (9,815) -- -- -- -- (9,815)
Proceeds from divestiture of business .... 465 -- -- -- -- 465
Proceeds from sale of investments ........ -- -- 3,000 -- -- 3,000
Proceeds from sale of property, plant
and equipment .......................... 16,148 -- 1,936 -- -- 18,084
Dividends from investments in
affiliated companies.................... 5,193 -- -- -- -- 5,193
Increase in restricted cash .............. (20,000) -- -- -- -- (20,000)
Other .................................... 458 -- 2,540 -- -- 2,998
--------- --------- --------- --------- --------- ---------
Net cash used by investing activities .... (39,642) (582) (8,202) (6,978) -- (55,404)
CASH FLOWS FROM FINANCING
ACTIVITIES:
(Decrease) increase in short-term debt ... (23,554) -- 1,165 5,659 30,060 13,330
Proceeds from issuance of long-term debt.. 6,215 -- -- -- -- 6,215
Payments on principal of long-term debt .. (106,890) (236) (92,682) (2,028) 94,710 (107,126)
Payments on principal of capital lease
obligation ............................. -- -- -- (7,171) -- (7,171)
Payments for redemption of member
equities................................ (23,797) -- -- -- -- (23,797)
Other .................................... 446 (75) (5,894) 31,379 (25,410) 446
--------- --------- --------- --------- --------- ---------
Net cash (used) provided by financing
activities ............................. (147,580) (311) (97,411) 27,839 99,360 (118,103)
--------- --------- --------- --------- --------- ---------
Net (decrease) increase in cash and
short-term investment .................. (46,003) 1,343 4,018 (2,885) -- (43,527)
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 ................................... $ 12,331 $ 3,927 $ 2,557 $ 1,985 $ -- $ 20,800
========= ========= ========= ========= ========= =========
17
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2002
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 ..................... $ 58,334 $ 2,584 $ (1,461) $ 4,870 $ -- $ 64,327
Receivables, net ................... 472,165 30,057 150,447 45,377 (130,462) 567,584
Receivable from legal settlement ... 90,707 -- 6,000 -- -- 96,707
Inventories ........................ 254,517 74,397 108,493 8,979 -- 446,386
Prepaid expenses ................... 176,541 4,840 7,625 240 -- 189,246
Other current assets ............... 12,868 337 -- 673 -- 13,878
---------- ---------- ---------- ---------- ---------- ----------
Total current assets .......... 1,065,132 112,215 271,104 60,139 (130,462) 1,378,128
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 ......... -- -- -- 105,736 -- 105,736
Goodwill, net ........................ 187,755 13,172 121,673 813 -- 323,413
Other intangibles .................... 4,243 723 96,455 349 -- 101,770
Other assets ......................... 150,909 2,738 27,064 45,049 (13,937) 211,823
---------- ---------- ---------- ---------- ---------- ----------
Total assets .................. $2,831,148 $ 153,081 $ 783,475 $ 264,831 $ (786,213) $3,246,322
========== ========== ========== ========== ========== ==========
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
Obligation under capital lease ..... -- -- -- 108,279 -- 108,279
Accounts payable ................... 503,851 68,329 117,563 18,553 (6,510) 701,786
Accrued expenses ................... 158,323 1,644 45,361 4,526 (5,225) 204,629
Patronage refunds and other
member equities payable .......... 12,388 -- -- -- -- 12,388
---------- ---------- ---------- ---------- ---------- ----------
Total current liabilities...... 805,949 137,754 162,983 197,579 (134,791) 1,169,474
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 .................... 873,659 -- -- -- -- 873,659
Retained earnings .................. 35,664 2,713 86,465 (17,527) (71,651) 35,664
---------- ---------- ---------- ---------- ---------- ----------
Total equities ................ 911,513 3,797 594,421 43,596 (641,814) 911,513
---------- ---------- ---------- ---------- ---------- ----------
Commitments and contingencies
Total liabilities and
equities ........................... $2,831,148 $ 153,081 $ 783,475 $ 264,831 $ (786,213) $3,246,322
========== ========== ========== ========== ========== ==========
18
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002
LAND WHOLLY- MAJORITY-
O'LAKES, INC. OWNED OWNED
PARENT CONSOLIDATED CONSOLIDATED NON-GUARANTOR
COMPANY GUARANTORS GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ------------- ------------ ------------
(UNAUDITED)
Net sales ......................... $ 695,463 $ 63,822 $ 581,423 $ 31,027 $ -- $ 1,371,735
Cost of sales ..................... 640,356 70,672 511,446 36,529 -- 1,259,003
----------- ----------- ----------- ----------- ----------- -----------
Gross profit ...................... 55,107 (6,850) 69,977 (5,502) -- 112,732
Selling, general and
administration .................. 65,659 (5,983) 59,077 4,842 -- 123,595
Restructuring and impairment
charges ......................... -- -- 942 -- -- 942
----------- ----------- ----------- ----------- ----------- -----------
(Loss) earnings from operations ... (10,552) (867) 9,958 (10,344) -- (11,805)
Interest expense (income), net .... 18,052 989 (772) (217) -- 18,052
Gain on legal settlements ......... (4,136) -- -- -- -- (4,136)
(Gain) loss on divestiture of
businesses ...................... (3,078) (3,682) -- 3,030 -- (3,730)
Equity in loss (earnings) of
affiliated companies ............ 1,470 -- (603) -- 3,677 4,544
Minority interest in earnings
(loss) of subsidiaries .......... 3,516 -- (78) (4,803) -- (1,365)
----------- ----------- ----------- ----------- ----------- -----------
(Loss) earnings before income
taxes ........................... (26,376) 1,826 11,411 (8,354) (3,677) (25,170)
Income tax (benefit) expense ...... (14,388) 1,113 (286) 379 -- (13,182)
----------- ----------- ----------- ----------- ----------- -----------
Net (loss) earnings ............... $ (11,988) $ 713 $ 11,697 $ (8,733) $ (3,677) $ (11,988)
=========== =========== =========== =========== =========== ===========
19
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
LAND WHOLLY- MAJORITY-
O'LAKES, INC. OWNED OWNED
PARENT CONSOLIDATED CONSOLIDATED NON-GUARANTOR
COMPANY GUARANTORS GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------- ------------ ------------
(UNAUDITED)
Net sales ......................... $ 2,340,968 $ 167,723 $ 1,734,131 $ 80,915 $ -- $ 4,323,737
Cost of sales ..................... 2,175,800 150,725 1,523,648 88,954 -- 3,939,127
----------- ----------- ----------- ----------- ----------- -----------
Gross profit ...................... 165,168 16,998 210,483 (8,039) -- 384,610
Selling, general and
administration .................. 172,093 16,800 177,964 8,452 -- 375,309
Restructuring and impairment
charges ......................... 2,800 -- 5,418 -- -- 8,218
----------- ----------- ----------- ----------- ----------- -----------
(Loss) earnings from operations ... (9,725) 198 27,101 (16,491) -- 1,083
Interest expense (income), net .... 52,625 3,021 (2,211) (435) -- 53,000
Gain on legal settlements ......... (36,835) -- -- -- -- (36,835)
Gain on sale of intangible ........ -- -- (4,184) -- -- (4,184)
(Gain) loss on divestiture of
businesses ...................... (2,714) (3,682) -- 1,461 -- (4,935)
Equity in (earnings) loss of
affiliated companies ............ (49,182) -- (839) -- 20,199 (29,822)
Minority interest in earnings
(loss) of subsidiaries .......... 2,800 -- 230 (4,485) -- (1,455)
----------- ----------- ----------- ----------- ----------- -----------
Earnings (loss) before income
taxes............................ 23,581 859 34,105 (13,032) (20,199) 25,314
Income tax (benefit) expense ...... (11,751) 1,526 (782) 989 -- (10,018)
----------- ----------- ----------- ----------- ----------- -----------
Net earnings (loss) ............... $ 35,332 $ (667) $ 34,887 $ (14,021) $ (20,199) $ 35,332
=========== =========== =========== =========== =========== ===========
20
LAND O'LAKES, INC.
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
LAND WHOLLY- MAJORITY-
O'LAKES, INC. OWNED OWNED
PARENT CONSOLIDATED CONSOLIDATED NON-GUARANTOR
COMPANY GUARANTORS GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------- ------------ ------------
(UNAUDITED)
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net earnings (loss) ................. $ 35,332 $ (667) $ 34,887 $ (14,021) $ (20,199) $ 35,332
Adjustments to reconcile net earnings
(loss) to net cash provided (used)
by operating activities:
Depreciation and amortization ..... 37,908 2,885 33,963 2,524 -- 77,280
Amortization of deferred financing
charges......................... 2,289 -- -- -- -- 2,289
Bad debt expense .................. 957 -- 2,175 -- -- 3,132
Proceeds from patronage revolvement
received ........................ 319 -- -- -- -- 319
Non-cash patronage income ......... (530) -- -- -- -- (530)
(Increase) decrease in other assets (31,394) 2,673 (15,334) 6,554 5,381 (32,120)
Increase (decrease) in other
liabilities .................... 8,400 (654) (2,928) 148 -- 4,966
Restructuring and impairment
charges......................... 2,800 -- 5,418 -- -- 8,218
(Gain) loss on divestiture of
businesses...................... (2,714) (3,682) -- 1,461 -- (4,935)
Equity in (earnings) loss of
affiliated companies............. (49,182) -- (839) -- 20,199 (29,822)
Minority interest ................. 2,800 -- 230 (4,485) -- (1,455)
Other ............................. (6,988) -- 194 558 -- (6,236)
Changes in current assets and
liabilities, net of acquisitions
and divestitures:
Receivables ....................... 189,843 (10,407) 11,201 (6,791) (79,272) 104,574
Inventories ....................... (14,402) (2,569) (1,124) (887) -- (18,982)
Other current assets .............. 88,124 7,112 3,530 (14) -- 98,752
Accounts payable .................. (285,348) 2,219 (20,038) 1,730 17,133 (284,304)
Accrued expenses .................. 34,442 (4,847) 3,565 1,088 -- 34,248
--------- --------- --------- --------- ---------- ---------
Net cash provided (used) by
operating activities .............. 12,656 (7,937) 54,900 (12,135) (56,758) (9,274)
CASH FLOWS FROM INVESTING
ACTIVITIES:
Additions to property, plant and
equipment....................... (39,355) (1,083) (14,338) (2,482) -- (57,258)
Payments for investments ............ (3,315) (4) -- (1,194) (556) (5,069)
Proceeds from divestiture of
businesses......................... 3,351 -- -- -- -- 3,351
Proceeds from sale of investments ... 18,620 270 2,044 150 -- 21,084
Proceeds from sale of property, plant
and equipment ..................... 5,963 -- 5,692 -- -- 11,655
Dividends from investments in
affiliated companies............ 8,632 -- -- -- -- 8,632
Other ............................... 3,980 -- -- -- -- 3,980
--------- --------- --------- --------- ---------- ---------
Net cash used by investing
activities ........................ (2,124) (817) (6,602) (3,526) (556) (13,625)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Increase (decrease) in short-term
debt .............................. 30,603 (7,588) (4,169) 8,391 15,170 42,407
Proceeds from issuance of long-term
debt............................... 4,520 229 -- 24 -- 4,773
Payments on principal of long-term
debt .............................. (87,588) -- (44,610) (2,421) 52,844 (81,775)
Payments for redemption of member
equities .......................... (36,970) -- -- -- -- (36,970)
Other ............................... (3,642) 5,994 (581) 11,102 (10,700) 2,173
--------- --------- --------- --------- ---------- ---------
Net cash (used) provided by financing
activities ........................ (93,077) (1,365) (49,360) 17,096 57,314 (69,392)
--------- --------- --------- --------- ---------- ---------
Net (decrease) increase in cash and
short-term investments ............. (82,545) (10,119) (1,062) 1,435 -- (92,291)
Cash and short-term investments at
beginning period..................... 111,054 9,090 (1,027) 11,052 -- 130,169
--------- --------- --------- --------- ---------- ---------
Cash and short-term investments at end
of period............................ $ 28,509 $ (1,029) $ (2,089) $ 12,487 $ -- $ 37,878
========= ========= ========= ========= ========== =========
21
LAND O'LAKES FARMLAND FEED LLC
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2003 2002
---- ----
($ IN THOUSANDS)
(UNAUDITED)
ASSETS
Current assets:
Cash and short-term investments..................... $ 2,557 $ 356
Receivables, net.................................... 46,946 127,382
Receivable from legal settlement.................... -- 6,000
Inventories......................................... 113,998 113,078
Prepaid expenses and other current assets........... 8,294 7,835
Note receivable -- Land O'Lakes, Inc................ 124,203 29,493
--------------- -------------
Total current assets........................ 295,998 284,144
Investments........................................... 19,808 22,973
Property, plant and equipment, net.................... 239,049 251,739
Goodwill, net......................................... 122,137 122,486
Other intangibles..................................... 96,005 96,804
Other assets.......................................... 28,478 28,762
--------------- -------------
Total assets................................ $ 801,475 $ 806,908
=============== =============
LIABILITIES AND EQUITIES
Current liabilities:
Notes and short-term obligations.................... $ 977 $ 2,400
Accounts payable.................................... 102,793 121,219
Accrued expenses.................................... 29,552 48,134
--------------- -------------
Total current liabilities................... 133,322 171,753
Employee benefits and other liabilities............... 27,984 29,447
Minority interests.................................... 6,436 2,960
Equities:
Contributed capital................................. 515,376 515,376
Retained earnings................................... 118,357 87,372
--------------- -------------
Total equities.............................. 633,733 602,748
--------------- -------------
Commitments and contingencies
Total liabilities and equities........................ $ 801,475 $ 806,908
=============== =============
See accompanying notes to consolidated financial statements.
22
LAND O'LAKES FARMLAND FEED LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
---- ---- ---- ----
($ IN THOUSANDS)
(UNAUDITED)
Net sales............................... $ 582,259 $ 602,891 $ 1,776,015 $1,798,643
Cost of sales........................... 522,109 530,858 1,577,419 1,583,446
------------ ----------- ------------ ----------
Gross profit............................ 60,150 72,033 198,596 215,197
Selling, general and administration..... 57,509 60,378 174,947 181,208
Restructuring and impairment charges.... -- 942 707 5,418
------------ ----------- ------------ ----------
Earnings from operations................ 2,641 10,713 22,942 28,571
Interest income, net.................... (1,619) (737) (4,867) (2,081)
Gain on legal settlements............... (207) -- (3,209) --
Gain on sale of intangible.............. -- -- -- (4,184)
Loss (gain) on sale of investment....... 26 -- (820) --
Equity in earnings of affiliated
companies............................... (248) (576) (804) (839)
Minority interest in earnings of
subsidiaries............................ 378 194 1,117 680
------------ ----------- ------------ ----------
Earnings before income taxes............ 4,311 11,832 31,525 34,995
Income tax expense...................... 222 259 540 565
------------ ----------- ------------ ----------
Net earnings............................ $ 4,089 $ 11,573 $ 30,985 $ 34,430
============ =========== ============ ==========
See accompanying notes to consolidated financial statements.
23
LAND O'LAKES FARMLAND FEED LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
2003 2002
---- ----
($ IN THOUSANDS)
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings.............................................. $ 30,985 $ 34,430
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization.......................... 29,942 34,333
Bad debt expense....................................... 1,777 2,175
Receivable from legal settlement....................... 6,000 --
Decrease (increase) in other assets.................... 284 (15,101)
Decrease in other liabilities.......................... (1,431) (2,993)
Restructuring and impairment charges................... 707 5,418
Equity in earnings of affiliated companies............. (804) (839)
Minority interest...................................... 1,117 680
Gain on sale of investments............................ (820) --
Changes in current assets and liabilities, net of
acquisitions and divestitures:
Receivables............................................ 78,659 7,815
Inventories............................................ 870 875
Other current assets................................... 2,311 3,552
Accounts payable....................................... (42,947) (21,853)
Accrued expenses....................................... -- 3,919
-------------- -------------
Net cash provided by operating activities................. 106,650 52,411
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment................ (16,039) (14,298)
Proceeds from sale of investments......................... 3,000 2,044
Proceeds from sale of property, plant and equipment....... 1,936 5,692
Other..................................................... 2,540 --
-------------- -------------
Net cash used by investing activities................... (8,563) (6,562)
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in short-term debt............................... (1,176) (2,000)
Proceeds from note receivable from Land O'Lakes, Inc...... 370,790 339,982
Payments on note payable to Land O'Lakes, Inc............. (465,500) (386,850)
--------------- --------------
Net cash used by financing activities..................... (95,886) (48,868)
--------------- --------------
Net increase (decrease) in cash and short-term
investments ............................................ 2,201 (3,019)
Cash and short-term investments at beginning of period...... 356 3,019
-------------- -------------
Cash and short-term investments at end of period............ $ 2,557 $ --
============== =============
See accompanying notes to consolidated financial statements.
24
LAND O'LAKES FARMLAND FEED LLC
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 Farmland Feed LLC (the "Company"), all normal
recurring adjustments necessary for a fair statement of the financial position
and results of operations and cash flows for the interim periods. The statements
are condensed and therefore do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of
America for complete financial statements. For further information, refer to the
audited consolidated financial statements and footnotes for the year ended
December 31, 2002 included in our Annual Report on Form 10-K. The results of
operations and cash flows for interim periods are not necessarily indicative of
results for a full year.
2. RECEIVABLES
A summary of receivables is as follows:
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
Trade accounts............................. $ 38,108 $ 22,458
Notes and contracts........................ 2,872 23,494
Notes from sale of trade receivables (see -- 83,158
Note 3)....................................
Other...................................... 18,351 8,871
------------- -----------
59,331 137,981
Less allowance for doubtful accounts....... 12,385 10,599
------------- -----------
Total receivables, net..................... $ 46,946 $ 127,382
============= ===========
3. RECEIVABLES PURCHASE FACILITY
In December 2001, the Company along with Land O'Lakes, Inc. ("Land O'Lakes")
established a $100.0 million receivables purchase facility with CoBank, ACB
("CoBank"). A wholly-owned unconsolidated qualifying special purpose entity, LOL
Farmland Feed SPV, LLC, ("QSPE"), was established to purchase certain
receivables from the Company along with Land O'Lakes. CoBank has been granted an
interest in the receivables owned by the QSPE. The transfers of the receivables
from the Company to the QSPE are structured as sales; and accordingly, the
receivables transferred to the QSPE are not reflected in the Company's
consolidated balance sheet. However, the Company retains the credit risk related
to the repayment of the notes receivable with the QSPE, which in turn is
dependent upon the credit risk of the QSPE's receivables. Accordingly, the
Company has retained reserves for estimated losses. The Company expects no
significant gains or losses from the sale of the receivables. At September 30,
2003, $70.0 million was outstanding under this facility. The total amount of
accounts receivable sold during the three months ended September 30, 2003 and
2002 were $513.2 million and $561.5 million, respectively. The total amount of
accounts receivable sold during the nine months ended September 30, 2003 and
2002 were $1,584.3 million and $1,686.7 million, respectively.
4. INVENTORIES
A summary of inventories is as follows:
SEPTEMBER 30, DECEMBER 31,
2003 2002
----------- -----------
Raw materials..................... $ 76,936 $ 83,187
Finished goods.................... 37,062 29,891
----------- -----------
Total inventories................. $ 113,998 $ 113,078
=========== ===========
25
5. INVESTMENTS
The Company's investments are as follows:
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
New Feeds, LLC.......................... $ 3,054 $ 3,033
Agland-Land O'Lakes Feed, LLC........... 2,432 2,585
Pro-Pet, LLC............................ 2,150 2,326
Northern Country Feeds, LLC............. 1,762 1,704
LOL Farmland Feed SPV, LLC.............. 1,000 1,000
CalvaAlto Liquid, LLC................... 1,302 1,302
Strauss Feeds, LLC...................... 1,336 1,041
Nutrikowi Farmland, S.A. de C.V......... 876 876
Dakotaland Feeds, LLC................... 839 744
Harmony Farms, LLC...................... -- 2,435
Other................................... 5,057 5,927
----------- -----------
Total investments....................... $ 19,808 $ 22,973
=========== ===========
6. GOODWILL AND OTHER INTANGIBLE ASSETS
GOODWILL
The change in the carrying amount of goodwill for the nine months ended
September 30, 2003, is as follows.
Balance as of December 31, 2002....................... $ 122,486
Amortization expense................................ (349)
------------
Balance as of September 30, 2003...................... $ 122,137
===========
OTHER INTANGIBLE ASSETS
SEPTEMBER 30, DECEMBER 31,
2003 2002
----------- ------------
Amortized other intangible assets
Trademarks, less accumulated amortization of $320 and $240, respectively...... $ 562 $ 621
Patents, less accumulated amortization of $2,299 and $1,106, respectively..... 14,074 14,978
Agreements not to compete, less accumulated amortization of $778 and $560,
respectively................................................................ 623 775
Other intangible assets, less accumulated amortization of $6,147 and
$5,991, respectively........................................................ 3,783 3,467
----------- ------------
Total amortized other intangible assets......................................... 19,042 19,841
Total non-amortized other intangible assets-trademarks.......................... 76,963 76,963
----------- ------------