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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
|X| Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended December 31, 2001*
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 0-
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LAND O'LAKES, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Minnesota 41-0365145
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
4001 Lexington Avenue North
Arden Hills, Minnesota 55126
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(Address of Principal Executive Offices) (Zip Code)
(651) 481-2222
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(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Not applicable.
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.
Documents incorporated by reference: None.
* Although Land O'Lakes is not currently required pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934 to file this annual report,
we are voluntarily filing this annual report on Form 10-K.
FORWARD-LOOKING STATEMENTS
The information in this Annual Report on Form 10-K under the headings
"Item 1. Business" and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" contains forward-looking
statements. The forward-looking statements are based on the beliefs of our
management as well as on assumptions made by and information currently available
to us at the time the statements were made. When used in this Form 10-K, the
words "anticipate", "believe", "estimate", "expect", "may", "will", "could",
"should", "seeks", "pro forma" and "intend" and similar expressions, as they
relate to us are intended to identify the forward-looking statements. All
forward-looking statements attributable to persons acting on our behalf or us
are expressly qualified in their entirety by the cautionary statements set forth
here and in "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations--Risk Factors" on pages 46 to 59. We undertake no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or for any other reason. Although
we believe that these statements are reasonable, you should be aware that actual
results could differ materially from those projected by the forward-looking
statements. For a discussion of factors that could cause actual results to
differ materially from the anticipated results or other expectations expressed
in our forward-looking statements, see the discussion of risk factors set forth
in "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations--Risk Factors" on pages 46 to 59. Because actual results
may differ, readers are cautioned not to place undue reliance on forward-looking
statements.
PART I
ITEM 1. BUSINESS.
Unless context requires otherwise, when we refer to "Land O'Lakes," the
"Company," "we," "us" or "our," we mean Land O'Lakes, Inc. together with its
consolidated subsidiaries.
OVERVIEW
We were formed as a Minnesota dairy cooperative corporation in 1921 and
entered the animal feed business in 1928. Since our formation, we have expanded
our business through acquisitions and joint ventures. In 1997, we merged with
Atlantic Dairy Cooperative, a Pennsylvania-based cooperative, providing us with
increased butter production and access to raw milk near our largest butter
markets. In 1998, we merged with Dairyman's Cooperative Creamery Association of
Tulare, California, which increased our access to milk production in the western
United States. Also in 1998, we acquired many of the agricultural service assets
of Countrymark Cooperative, expanding our presence to the eastern Corn Belt in
feed, seed and agronomy. In 2000, we formed Agriliance, a joint venture for the
distribution of crop nutrient and crop protection products. We have also
rationalized our business lines in order to concentrate on our core businesses.
In 2000, for example, we sold our fluid dairy business to Dean Foods, and in
2001, we contributed our aseptic dairy products business to our Advanced Food
Products joint venture. In October, 2000, we formed Land O'Lakes Farmland Feed,
an animal feed joint venture with Farmland Industries. Land O'Lakes and Farmland
Industries each contributed substantially all of the assets of each of their
North American animal feed businesses to form the joint venture. On October 11,
2001, Land O'Lakes acquired Purina Mills and subsequently contributed Purina
Mills to Land O'Lakes Farmland Feed.
We are a leading producer of dairy products, animal feed and crop seed in
the United States. We market our dairy products under the LAND O LAKES, Alpine
Lace, Lake to Lake and New Yorker brands and the Indian Maiden logo. We market
our animal feed, other than dog and cat food, under the Purina and Chow brands
and the "Checkerboard" Nine-Square Logo. We also market our animal feed products
under the Land O'Lakes Farmland Feed label. Our crop seed products are sold
under the CROPLAN GENETICS brand. In addition to these three segments, we also
have swine and agronomy segments and various unconsolidated joint ventures and
investments.
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BUSINESS SEGMENTS
DAIRY FOODS
Overview. We produce, market and sell butter, spreads, cheese and other
related dairy products. We sell our products under our national brand names,
including LAND O LAKES, the Indian Maiden logo and Alpine Lace, as well as under
our regional brands such as New Yorker and Lake to Lake. Our network of 14 dairy
manufacturing facilities is geographically diverse and allows us to support our
customers on a national scale. Our customer base includes major national
supermarket and supercenter chains, industrial customers, including major food
processors, and foodservice customers, including restaurants, schools, hotels
and airlines.
Products. We manufacture over 300 dairy-based food products. Our principal
dairy products and activities include:
Butter. We produce and market branded butter under our proprietary
LAND O LAKES brand name for retail and foodservice customers. In addition,
we produce nonbranded butter for our private label and industrial
customers. Our butter products include salted butter, unsalted butter,
light butter, whipped butter, flavored butter and our newest product,
ultra creamy butter.
Spreads. We produce and market a variety of spreads, including
margarine, nonbutter spreads and butter blends. These products are
primarily marketed under the LAND O LAKES brand and are sold to our
retail, foodservice and industrial customers.
Cheese. We produce and sell cheese for retail sale in deli and dairy
cases, to foodservice businesses and to industrial customers. Our deli
cheese products are marketed under the LAND O LAKES, Alpine Lace and New
Yorker brand names. Our dairy case cheese products are sold under the LAND
O LAKES and Lake to Lake brand names. We also sell cheese products to
private label customers. We offer a broad selection of cheese products
including, cheddar, monterey jack, mozzarella, American and other
processed cheeses.
Other. We manufacture nonfat dry milk and whey for sale to our
industrial customers. We produce nonfat dry milk by drying the nonfat milk
byproduct of our butter manufacturing process. It is used in processed
foods, such as instant chocolate milk. Whey is a valued protein-rich
byproduct of the cheesemaking process which is used in processed foods,
sports drinks and other nutritional supplements.
Raw Milk Wholesaling. We purchase raw milk from our members and sell
it directly to other dairy manufacturers, particularly fluid milk
processors. We generate substantial revenues but negligible margins on
these sales. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations-- Wholesaling and Brokerage
Activities."
Sales, Marketing and Advertising. In order to meet the needs of our
retail, foodservice and industrial customers we have sales efforts designed to
service each of these customer bases. Our retail customers are serviced through
direct sales employees and independent national food brokers. Our retail sales
force consists of 55 employees that service our larger retail customers, such as
supermarket and supercenter chains, and manage our national food broker
relationships. We have long-standing relationships with the two leading national
food brokers in the United States.
We market our products to our industrial customers through a combination
of six dedicated salespeople and the efforts of the managers at our 14
manufacturing facilities. Our industrial customers generally maintain a direct
relationship with our facility managers in order to coordinate delivery and
ensure that our products meet their specifications.
Our foodservice products are primarily sold through independent regional
food brokers and food distributors. In addition, we employ 43 salespeople who
are responsible for maintaining these regional food broker relationships and
marketing to our large foodservice customers directly.
Distribution. We contract with third-party trucking companies to
distribute our dairy products throughout the United States in refrigerated
trucks. Our dairy products are shipped to our customers either directly from the
manufacturing facilities or from one of our five regional distribution centers
located in New Jersey, Georgia, Illinois, California and Ohio. As most of our
dairy products are perishable, our distribution facilities are designed to
provide necessary temperature controls in order to ensure the quality and
freshness of our products. The combination of our
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strategically located manufacturing and distribution facilities and our
logistics capabilities enables us to provide our customers with an efficient
distribution system.
Production. We produce our dairy products at 14 manufacturing facilities
strategically located throughout the United States. We also have contractual
arrangements whereby we engage other dairy processors to produce some of our
products. We believe the geographic distribution of our plants allows us to
service our customers in a timely and efficient manner. In 2001, we processed
approximately 10.4 billion pounds of milk, primarily into butter and cheese.
Butter is produced by separating the cream from milk, pasteurizing it and
churning the cream until it hardens into butter. Butter production levels
fluctuate due to the seasonal availability of milk and butterfat. The cheese
manufacturing process involves adding a culture and a coagulant to milk. Over a
period of hours, the milk mixture hardens to form cheese. At that point, whey is
removed and separately processed. Finally, the cheese is salted, shaped and
aged. Our cheese facilities generally run at high capacity utilization levels
throughout the year. Our dairy foods segment also has insignificant foreign
operations in Paslek, Poland.
Supply and Raw Materials. Our principal raw material for production of
dairy products is milk. During 2001, we sourced approximately 89.5% of our raw
milk from our members. We enter into milk supply agreements with all of our
dairy members to ensure our milk supply. These contracts typically provide that
we will pay the producer for milk in the month following its delivery, at a
price determined by us, which typically includes a premium over Federal market
order prices. These contracts provide that we will purchase all of the milk
produced by our members for a fixed period of time, generally one year. As a
result, we often purchase more milk from our members than we require for our
production operations. There are three principal reasons for doing this: first,
we need to sell a certain percentage (which is not less than 10% of the amount
procured and depends on which Federal market order the milk is subject to) of
our raw milk to fluid dairy processors in order to participate in the Federal
market order system, which enables us to have lower input cost of milk; second,
it decreases our need to purchase additional supply during periods of low milk
production in the United States (typically August, September and October); and
third, it ensures that our members have a market for the milk they produce
during periods of high milk production. We enter into fixed-price forward sales
contracts with some of our large industrial cheese customers representing 10-15%
of our processed milk volume. We simultaneously enter into milk supply
agreements with a fixed price in order to ensure our margins on these contracts.
We also purchase cream, bulk cheese and bulk butter as raw materials for
production of our dairy products. We typically purchase cream pursuant to annual
agreements with fluid processors to purchase all of their cream production. We
typically purchase bulk cheese and butter pursuant to annual contracts. These
cheese and butter contracts provide for annual targets and delivery schedules
and are based on market prices. We also engage in isolated spot market purchases
of these commodities to meet our needs.
Customers. We sell our dairy products directly and indirectly to over 500
customers. Our products are sold in over 5,000 retail locations, including
supermarkets and supercenters, convenience stores, warehouse club stores and
military commissaries. Our retail customers include supermarket and supercenter
chains. In addition, we sell our products through food brokers and distributors
to foodservice providers such as restaurant chains, schools, hotels and
airlines.
Research and Development. We seek to offer our customers product
innovations designed to meet their needs. In addition, we work on product and
packaging innovations to increase overall demand for our products and improve
product convenience. In 2001, we spent $10.1 million on dairy research and
development, and we employed approximately 71 individuals in research capacities
at our dedicated dairy foods research facility.
Competition. The bulk of the dairy industry consists of national and
regional competitors. Our branded cheese products compete with products from
national competitors such as Kraft, Borden and Sargento as well as several
regional competitors. For butter, our competition comes primarily from regional
brands, such as Challenge, Borden and Breakstone. Because our retail customers
are consolidating we face increased competitive pressures. We rely on our brands
to differentiate our products from our competition. We believe our branded
products compete on the basis of brand name recognition, product quality and
reputation and customer support. Products in the private label and industrial
markets compete primarily based on price. We believe our product quality and
consistency of supply distinguishes our products in these markets.
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ANIMAL FEED
Overview. Through Land O'Lakes Farmland Feed, we are the leading producer
of animal feed for both the commercial and lifestyle sectors of the animal feed
market in the United States. Our commercial feed products are used by farmers
and specialized livestock producers who derive income from the sale of milk,
eggs, poultry and livestock. Our lifestyle feed products are used by customers
who own animals principally for non-commercial purposes. Margins on our
lifestyle feed products are significantly higher than those on our commercial
feed products. We market our animal feed, other than dog and cat food, under the
leading brands in the industry, Purina, Chow and the "Checkerboard" Nine Square
Logo. We also market our animal feed products under the Land O'Lakes Farmland
Feed label. As of December 31, 2001, we operated a geographically diverse
network of 103 feed mills, which permits us to distribute our animal feed
nationally through approximately 1,400 of our local member cooperatives,
approximately 4,000 independent dealers operating under the Purina brand name
and directly to customers. We believe we are a leader among feed companies in
animal feed research and development with a focus on enhancing animal
performance and longevity. For example, we developed and introduced milk
replacer for young animals, and our patented product formulations make us the
only supplier of certain unique milk replacer products. These products allow
dairy cows to return to production sooner after birthing and increase the annual
production capacity of sows. We expect the addition of Purina Mills to our feed
operations to generate significant cost savings as we eliminate redundant
facilities, reduce overhead costs, increase capacity utilization, increase our
purchasing economies and improve our logistics and transportation system. Other
than certain insignificant foreign investments and sales, we operate our feed
business entirely through our Land O'Lakes Farmland Feed joint venture.
Products. We sell proprietary formulas of commercial and lifestyle animal
feed. We also produce commercial animal feed to meet our customers'
specifications. We sell feed for a wide variety of animals, such as dairy
cattle, beef cattle, swine, poultry, horses and other specialty animals such as
laboratory and zoo animals. Our principal feed products and activities include:
Complete Feed. These products provide a balanced mixture of grains,
proteins, nutrients and vitamins which meet the entire nutritional
requirement of an animal. They are sold as ground meal, in pellets or in
extruded pieces. Sales of complete feeds typically represent the majority
of net sales. We generally sell our lifestyle animal feed as complete
feed. We market our lifestyle animal feed through the use of our strong
trademarks, namely, Purina, Chow and the "Checkerboard" Nine Square Logo.
Supplements. These products provide a substantial part of a complete
ration for an animal, and typically are distinguished from complete feed
products by their lack of the bulk grain portion of the feed. Commercial
livestock producers typically mix our supplements with their own grain to
provide complete animal nutrition.
Premixes. These products are concentrated additives for use in
combination with bulk grain and a protein source, such as soybean meal.
Premixes consist of a combination of vitamins and minerals that are sold
to commercial animal producers and to other feed mill operators for mixing
with bulk grains and proteins.
Milk Replacers. Milk replacers, a product we invented, are sold to
commercial livestock producers to meet the nutritional requirements of
their young animals, while increasing their overall production capability
by returning the parent animal to production faster. We market these
products primarily under our Maxi Care and Amplifier Max brand names.
Ingredient Merchandising. In addition to selling our own products,
we buy and sell or broker for a fee soybean meal and other feed
ingredients. We market these ingredients to our local member cooperatives
and to other feed manufacturers which use them to produce their own feed.
Although this activity generates substantial revenues, it is a very
low-margin business. Through our ingredient merchandising, we benefit from
increased purchasing power, resulting in lower prices for our own feed
inputs.
Sales, Marketing and Advertising. We employ approximately 450 direct
salespeople in regional territories. In our commercial feed business, we also
provide our customers with information and technical assistance through trained
animal nutritionists. We also provide information resources and technical
assistance to these nutritionists. Our advertising and promotional expenditures
are focused on higher margin products, specifically our lifestyle animal feed
and milk replacers. We advertise in recreational magazines to promote our
lifestyle
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animal feed products. To promote our horse feed products, we have
dedicated promoters who travel to rodeos and other horse related events. We
promote our milk replacers with print advertising in trade magazines. On a pro
forma basis, we spent $14.9 million on advertising and promotion for the year
ended December 31, 2001.
Distribution. We distribute our animal feed nationally primarily through
our network of approximately 1,400 local member cooperatives and approximately
4,000 Purina-branded dealers or directly to customers. We deliver our products
primarily by truck using our own fleet, as well as independent carriers.
Deliveries are made directly from our feed mills to delivery locations within
each feed mill's geographic area.
Production. The basic feed manufacturing process consists of grinding
various grains and protein sources into meal and then mixing these materials
with certain nutritional additives, such as vitamins and minerals. The resulting
products are sold in a variety of forms, including meal, pellets, blocks and
liquids. Our products are formulated based upon proprietary research pertaining
to nutrient content. As of December 31, 2001, we operated 103 feed mills across
the United States. We plan to reduce the number of feed mills we operate by
taking advantage of the overlap between our existing facilities and those of
Purina Mills in certain local markets. Consistent with current industry capacity
utilization, our facilities operate below their capacity. With the reduction of
redundant facilities and conversion of certain facilities to a single product,
we expect to increase our capacity utilization. Our animal feed segment operates
or has investments in insignificant foreign operations in Canada, Mexico,
Poland, Taiwan, the Philippines and the United Kingdom.
Supply and Raw Materials. We purchase the bulk components of our products
from various suppliers and in the open ingredient markets. These bulk components
include corn, soybean meal and grain byproducts. In order to reduce
transportation costs, we arrange for delivery of these products to occur at our
feed mill operations throughout the United States. We purchase vitamins and
minerals from multiple vendors, including vitamin, pharmaceutical and chemical
companies.
Customers. Our customers range from large commercial corporations to
individuals. We also sell our animal feed products to local cooperatives. These
local cooperatives either use these products in their own feed manufacturing
operations or resell them to their customers. Our customers purchase our animal
feed products for a variety of reasons, including our ability to provide
products that fulfill some or all of their animals' nutritional needs, our
knowledge of animal nutrition, our ability to maintain quality control and our
available capacity.
Research and Development. Our animal feed research and development focuses
on enhancing animal performance and longevity. We also dedicated significant
resources to developing proprietary formulas that allow us to offer our
commercial customers alternative feed formulations using lower cost ingredients.
We employ 97 people in various animal feed research and development functions at
our three research and development facilities. In 2001, on a pro forma basis, we
spent $12.1 million on research and development.
Competition. The animal feed industry is highly fragmented. Our
competitors consist of many small local manufacturers, several regional
manufacturers and a limited number of national manufacturers. The available
market for commercial feed may become smaller and competition may increase as
meat processors become larger and integrate their business by acquiring their
own feed production facilities. In addition, purchasers of commercial feed tend
to select products based on price rather than manufacturer and some of our feed
products are purchased from third parties with minimal further processing by us.
As a result of these factors, the barriers to entry in the feed industry are
low. The market for lifestyle feed is also consolidating. We believe we
distinguish ourselves from our competitors through our high-performance,
value-added products, which we research, develop and distribute on a national
basis. We believe our brands, Purina, Chow and the "Checkerboard" Nine Square
Logo, provide us with a competitive advantage, as they are well-recognized,
national brands for lifestyle animal feed. We also compete on the basis of
service by providing training programs, using animal nutritionists with advanced
technical qualifications to consult with local member cooperatives, independent
dealers and livestock producers and by developing and manufacturing customized
products to meet their needs.
Governance. We operate our domestic feed business through our Land O'Lakes
Farmland Feed joint venture. Prior to the Purina Mills acquisition, we owned
73.7% of the joint venture. After the Purina Mills acquisition, we contributed
all of the equity interest in Purina Mills to Land O'Lakes Farmland Feed. As a
result, our ownership of
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Land O'Lakes Farmland Feed increased to 92.0%. We manage Land O'Lakes Farmland
Feed's day-to-day operations, and it is governed by a five member board of
managers. We have the right to appoint three members to the board and Farmland
Industries has the right to appoint two members to the board. According to the
terms of the Land O'Lakes Farmland Feed operating agreement, actions of the
board of managers require a majority vote. Certain items require unanimous
approval of the board of managers, including (1) materially changing the scope
of the business of the joint venture; (2) electing to dissolve the joint
venture; (3) selling all or substantially all of its assets or significant
assets; (4) requiring additional capital contributions; (5) authorizing cash
distributions of earnings; (6) changing income tax elections or changing
accounting practices to the extent they have a material impact on Farmland
Industries; (7) reducing the number of meetings of the members committee to less
than four per calendar year; (8) amending the management services agreement with
Land O'Lakes; and (9) adopting annual budgets and business plans or any material
amendments thereto.
Pursuant to the Land O'Lakes Farmland Feed operating agreement, we have a
one-time option to purchase Farmland Industries' interest in the joint venture
at a price to be determined by negotiation or appraisal. The option period runs
from September 1, 2003, to September 1, 2005. Farmland Industries may reject our
request to exercise our option; however, if Farmland Industries rejects our
request, the voting rights on the board will be allocated based upon Land
O'Lakes' and Farmland Industries' financial interests in Land O'Lakes Farmland
Feed, and the number of actions requiring unanimous consent of the board will be
limited to items (2), (4), (5), (6) and (8) above as well as any action that
affects one member or the other or any distribution which is not proportionate
to a member's ownership interest.
CROP SEED
Overview. We sell seed for a variety of crops, including alfalfa,
soybeans, corn and forage and turf grasses, under our CROPLAN GENETICS brand. We
also distribute certain crop seed products under third-party brands and under
private labels. Alfalfa is commonly grown for use in dairy and beef cattle
nutrition. We distribute our seed products through our network of local member
cooperatives, to other seed companies, to retail distribution outlets and under
private labels. We have strategic relationships with Syngenta and Monsanto, two
leading crop seed producers in the United States, to which we provide
distribution and research and development services.
Products. We develop, produce and distribute seed products including seed
for alfalfa, soybeans, corn and forage and turf grasses. We also market and
distribute seed products produced by other crop seed companies, including seed
for corn, soybeans, sunflowers, canola, sorghum and sugarbeets. Seed products
are often genetically engineered through selective breeding or gene splicing to
produce crops with specific traits. These traits include resistance to
herbicides and pesticides and enhanced tolerance to adverse environmental
conditions. As a result of our relationships with certain life science
companies, we believe we have access to one of the most diverse genetic
databases of any seed company in the industry. We also license some of our
proprietary alfalfa seed traits to other seed companies for use in their seed
products.
Sales, Marketing and Advertising. We have a sales force of approximately
130 employees who promote the sale of our seed products throughout the country,
particularly in the Midwest. Our sales and marketing strategy is built upon the
relationships we have established with our local member cooperatives and our
ability to purchase and distribute quality seed products at a low cost due to
our size and scale. We market our crop seed products under our brand name
CROPLAN GENETICS. We also distribute certain crop seed products under
third-party brands and under private label. We engage in a limited amount of
advertising, primarily utilizing marketing brochures and field signs. We are a
leader in online customer communications and order processing. We also
participate in the Total Farm Solutions program with our affiliate Agriliance.
Through this program, trained agronomists are placed at local cooperatives to
provide advisory services regarding crop seed and agronomy products.
Distribution. We distribute our seed products through our network of local
member cooperatives, to other seed companies and to retail distribution outlets.
We have relationships with Syngenta and Monsanto, two leading crop seed
producers in the United States, to which we provide distribution and research
and development services. We also sell our proprietary products under private
labels to other seed companies for sale through their distribution channels.
Additionally, several of our product lines (particularly turf grasses) are sold
to farm supply retailers and home and garden centers. We use third-party
trucking companies for the nationwide distribution of our seed products.
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Supply and Production. Our alfalfa, soybeans, corn and forage and turf
grass seed are produced to our specifications and under our supervision on farms
owned by us and geographically diverse third-party producers. We maintain a
significant inventory of corn and alfalfa seed products in order to mitigate
negative effects caused by weather or pests. Our alfalfa and corn seed products
can be stored for up to four years after harvesting. Our crop seed segment has
foreign operations in Argentina, Brazil, Canada and Hungary.
Customers. We sell our seed products to over 7,000 customers, none of
which represented more than 3% of our crop seed net sales in 2001. Our customers
consist primarily of our local member cooperatives and other seed companies
across the United States and internationally. Our customer base also includes
retail distribution outlets.
Research and Development. We focus our research efforts on crop seed
products for which we have a significant market position, particularly alfalfa
seed. We also work with other seed companies to jointly develop beneficial crop
seed traits. In 2001, we spent $4.0 million on crop seed research and
development. As of December 31, 2001, we employed 18 individuals in research and
development capacities and had four research and development facilities.
Competition. Our competitors include Pioneer Hi-Bred International,
Monsanto, Syngenta and The Dow Chemical Company as well as many small niche seed
companies. We differentiate our seed business by supplying a branded,
technologically advanced, high quality product, and by providing farmers with
access to agronomists through our joint Total Farm Solutions program with
Agriliance. These services are increasingly important as the seed industry
becomes more dependent upon biotechnology and crop production becomes more
sophisticated. Due to the added cost involved, our competitors, with the
exception of Pioneer, generally do not provide such services. We can provide
these services at a relatively low cost because we often share the costs of an
agronomist with Agriliance or with a local cooperative.
SWINE
We market both young weanling and feeder pigs (approximately 11 and 45
pounds respectively) and mature market hogs (approximately 260 pounds) under
five primary programs: swine aligned, farrow-to-finish, pass-through, cost-plus
and market risk sharing. Under the swine aligned program, we own sows and raise
feeder pigs for sale to our local member cooperatives. We raise market hogs for
sale to pork processors under our farrow-to-finish program. Under the
pass-through program, we enter into commitments to purchase weanling and feeder
pigs from producers and generally have commitments to immediately resell the
animals to swine producers. Both the cost-plus and the market risk sharing
programs provide minimum price floors to producers for market hogs. The price
floor in our cost-plus program is fixed while the price floor in our market risk
sharing program floats with the market price of hogs and the cost of swine feed.
We experienced pro forma losses in our swine business of $42.0 million in
1999, primarily as a result of our cost-plus and market sharing risk contracts
which were highly sensitive to the drastic declines in market hog prices.
Following 1999, our cost-plus contracts were renegotiated to provide for lower
floor prices. The majority of our pass-through and market risk sharing contracts
have either been renegotiated or were canceled in Purina Mills' bankruptcy. Our
remaining cost-plus and market risk sharing contracts all expire no later than
2005. We are not entering into new cost-plus or market risk sharing contracts.
We own approximately 61,000 sows producing approximately 720,000 feeder
pigs and 370,000 market hogs annually at seven facilities we own or lease and at
facilities owned by approximately 143 contract producers. The dramatic
volatility in the live hog markets in 1998 and 1999, where live hog prices
reached lows of $8 per hundredweight compared to their 40 year average of $38
per hundredweight, resulted in our swine operations generating losses primarily
in connection with our cost-plus, market risk sharing and pass-through programs.
AGRONOMY
Our agronomy segment consists primarily of joint ventures and investments
that are not consolidated in our financial results. The two most significant of
these are Agriliance and CF Industries. As a result, our agronomy segment has no
net sales, but we allocate overhead to selling and administration and may
recognize patronage as a
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reduction in cost of sales. For a discussion of our agronomy accounting and
results see "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations."
OTHER
We also operate various other wholly-owned businesses such as LOL Finance
Co., which provides financing to farmers and livestock producers.
JOINT VENTURES AND INVESTMENTS
Other than Cheese & Protein International, which is a consolidated
unrestricted subsidiary, the joint ventures and investments described below are
unconsolidated.
Agriliance LLC. Agriliance, a 50/50 joint venture with United Country
Brands was formed for the purpose of distributing and manufacturing agronomy
products. Prior to the contribution of our agronomy assets to Agriliance, the
financial results of these assets were consolidated for financial reporting
purposes.
Products. Agriliance markets and sells two primary product lines: crop
nutrients (including fertilizers and micronutrients) and crop protection
products (including herbicides, pesticides, fungicides and adjuvants). For
Agriliance's fiscal year ended August 31, 2001, approximately 87% of these
products were manufactured by third-party suppliers and marketed under the
suppliers' brand names. The remaining 13% was either manufactured by Agriliance
or by a third-party supplier and marketed under the brand names Agrisolutions
(for herbicides, pesticides and related products) and Origin (for
micronutrients).
Sales and Marketing. Agriliance has an internal sales force of
approximately 100 employees. Agriliance's sales and marketing efforts serve the
entire United States and focus on the area from the Midwest to the eastern Corn
Belt. Agriliance's strategy is built upon strong relationships with local
cooperatives and Agriliance's ability to purchase and distribute quality
agronomy products at a low cost due to its size and scale. Agriliance engages in
a limited amount of advertising in trade journals and produces marketing
brochures and advertisements utilized by local cooperatives. In addition,
Agriliance assists local member cooperatives and independent farmers by
identifying, recruiting and training agronomists who provide advice relating to
agronomy products. In the Midwest, Agriliance has started implementing the Total
Farm Solutions program, an effort to utilize the expertise of the agronomists to
bundle Agriliance products with our seed products.
Production, Source of Supply and Raw Materials. Agriliance operates
primarily as a wholesale distributor of products purchased from other
manufacturers. Agriliance's primary suppliers of crop protection products are
Syngenta, Monsanto, BASF, Dow Chemical, DuPont and Aventis. Agriliance enters
into annual distribution agreements with these manufacturers. However,
Agriliance manufactures approximately 10% of its proprietary crop protection
products. Agriliance's production facilities are located in Iowa, Arkansas,
Missouri and Minnesota. Agriliance procures approximately 80% of its fertilizer
needs from CF Industries, of which we are a member, and Farmland Industries.
Agriliance sources their remaining fertilizer supply needs from a variety of
suppliers including PCS, IMC, Terra Nitrogen, Mississippi Chemical and Agrium.
Agriliance also produces micronutrient products. In 2001, approximately 58% of
Agriliance's agronomy products were sourced from three suppliers.
Customers and Distribution. Agriliance's customer base consists primarily
of farmers, many of whom are members of our cooperative. Agriliance distributes
its products through our local member cooperatives and also through retail
agronomy centers owned by Agriliance. Agriliance stores inventory at a number of
strategically positioned locations, including leased warehouses and storage
space at local cooperatives. Agriliance serves most of the key agricultural
areas of the United States, with its customers and distribution concentrated in
the Midwest.
Competition. Agriliance's primary competitors are national crop nutrient
distributors, such as Cargill, IMC, PCS, Agrium and Royster Clark, national crop
protection product distributors, such as UAP, Helena and Wilbur-Ellis, as well
as smaller regional brokers and distributors. This wholesale agronomy industry
is consolidating as distributors attempt to expand their distribution
capabilities and efficiencies. Wholesale agronomy customers tend to purchase
products based upon a distributor's ability to provide ready access to product
at critical times prior to and during the growing season. In addition, certain
customers purchase on the basis of price. We believe Agriliance
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distinguishes itself from its competitors as a result of its distribution
network, which enables it to efficiently distribute product to customers. In
addition, Agriliance provides access to trained agronomists who give advice to
farmers on both agronomy and crop seed products to optimize their crop
production.
Governance. Agriliance is managed by a four member board of managers. We
and United Country Brands each have the right to appoint two of the managers.
Certain actions require the unanimous approval of the board, including (1)
adopting or amending the annual business plan; (2) distributing products
produced by Agriliance to anyone other than the members or patrons of
Agriliance's members; (3) approving capital expenditures related to the
expansion of Agriliance's production capabilities, purchasing additional
inventory or changing the types of products produced by Agriliance; (4)
incurring indebtedness other than in the ordinary course of business; (5)
appointing, replacing, or discharging an executive officer; (6) making
distributions to members; and (7) changing income tax or special accounting
elections. Pursuant to the terms of Agriliance's operating agreement, Land
O'Lakes, CHS Cooperatives and Farmland Industries have all agreed to refrain
from directly or indirectly engaging in the wholesale marketing of fertilizer
and agricultural chemicals in North America, except through Agriliance, for so
long as they, or an entity in which they are a material owner, remain a member
of Agriliance, and for a period of four years following termination of their
membership.
MoArk LLC. In January 2000, we formed MoArk LLC, a joint venture of which
we own 50%, with Osborne Investments, LLC, to produce and market eggs and egg
products. We have the right to purchase from Osborne (and Osborne has the right
to cause us to buy from them) their interest in MoArk for a minimum purchase
price of $55.0 million (adjusted for tax benefits received by Osborne and
purchase price already paid) or a greater amount based upon MoArk's performance
over time. These rights are exercisable in January 2007. In addition, Osborne
has the right to cause us to buy 15% of their interest in MoArk (7.5% of MoArk)
in January 2003 for $9.0 million (adjusted for tax benefits received by Osborne)
if MoArk has achieved revenues in excess of $300.0 million annually. Although
Osborne has a 50% interest in MoArk, we are allocated 100% of the income or loss
of MoArk (other than on capital transactions involving realized gain or loss on
intangible assets, which are allocated 50/50).
Products. MoArk produces and markets shell eggs and egg products that are
sold at retail and wholesale for consumer and industrial use throughout the
United States. As of December 31, 2001, MoArk marketed and processed eggs from
approximately 26 million layers (hens) which produced approximately 520 million
dozen eggs annually. Approximately 50% of the eggs and egg products marketed are
produced by layers owned by MoArk. The remaining 50% are purchased on the spot
market or from third-party producers. Shell eggs represent approximately 70% of
eggs MoArk sells annually, and the balance are broken for use in egg products
such as refrigerated liquid, frozen, dried and extended shelf life liquid. MoArk
recently launched a high quality, all natural shell egg product marketed under
the LAND O LAKES brand name in a Northeast market. Through MoArk's acquisition
of Cutler Egg Products in April 2001, MoArk acquired a patented process that
extends the shelf life of a refrigerated liquid egg product utilizing an
ultra-pasteurization process. In 2001, shell eggs represented 80% of MoArk's
total net sales, while egg products represented 20% of net sales.
Customers and Distribution. MoArk has approximately 950 retail grocery,
industrial, foodservice and institutional customers. While supply contracts
exist with a number of the larger retail organizations, the terms are typically
market based, annual contracts and allow early cancellation by either party.
MoArk primarily delivers directly to its customer (store to door delivery).
Alternatively, some customers pick up product at one of MoArk's facilities.
Sales and Marketing. MoArk's internal sales force maintains direct
relationships with customers. MoArk also uses food brokers to maintain select
accounts and for niche and "spot" activity in situations where MoArk cannot
effectively support the customer or needs to locate a customer or customers for
excess products. With the exception of the advertising activity associated with
the launch of the LAND O LAKES brand eggs, amounts spent for advertising are
insignificant.
Competition. MoArk competes with other egg processors, including Cal-Maine
Foods, Rose Acre Farms, Inc. and Michael Foods. MoArk competes with these
companies based upon its low cost production system, its high margin regional
markets and its diversified product line.
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Governance. We are entitled to appoint three managers to the board of
managers of MoArk, and Osborne has the right to appoint the remaining three
managers until its governance interest has been transferred to us. According to
the terms of MoArk's operating agreement, two managers elected by us and two
managers elected by Osborne constitute a quorum. Actions of the board of
managers require a unanimous vote of a quorum of the board of managers. MoArk is
required to maintain at all times a net worth in excess of $40.0 million. If
MoArk's net worth were to decline below $40.0 million, we would be required to
contribute the necessary funds in order to maintain the $40.0 million net worth.
As of December 31, 2001, MoArk's net worth was approximately $102 million. In
the event we decide to sell or transfer any or part of our economic and
governance interest in MoArk, including our right to cause the transfer of the
governance interest owned by Osborne, we must first offer to sell or transfer to
Osborne all of the rights and interests to be sold or transferred at a similar
price and under similar material terms and conditions.
Cheese & Protein International LLC. Cheese & Protein International, a 70%
owned consolidated joint venture with a subsidiary of Mitsui & Co. (USA), is
constructing a plant in Tulare, California to produce mozzarella cheese and
whey. In connection with the formation of the venture, we entered into a
marketing agreement with Mitsui and Cheese & Protein International which gives
us the right to distribute the products produced by the venture in the United
States and gives Mitsui the right to distribute the same products outside the
United States. The purchase price for all products is based upon the market
prices for such product. We have also contracted with Cheese & Protein
International to provide no less than 70% of their milk requirements at prices
based upon market prices for milk. In addition, we have agreed to purchase no
less than 70% of Cheese & Protein International's estimated production of
mozzarella cheese, based upon market prices. This venture is governed by a 10
member committee. We have the right to appoint seven members to the committee.
The remaining three members are appointed by our joint venture partner.
Advanced Food Products, LLC. We own a 35% interest in Advanced Food
Products, a joint venture which manufactures and markets a variety of custom and
noncustom aseptic products. Aseptic products are manufactured to have extended
shelf life through specialized production and packaging processes, enabling food
to be stored without refrigeration until opened. We formed Advanced Food
Products in 2001, with a subsidiary of Bongrain, S.A., a French food company,
for the purpose of manufacturing and marketing aseptically packaged cheese
sauces, snack dips, snack puddings, and ready to drink dietary beverages. We own
a 35% interest in Advanced Food Products. The venture is governed by a six
member board of managers, and we have the right to appoint two members. Bongrain
manages the day-to-day operations of the venture.
Dairy Marketing Alliance, LLC. Our joint venture Dairy Marketing Alliance
is owned 50% by us and 50% by Dean Foods. Dairy Marketing Alliance markets a
variety of sour cream products, cream products and single-serve dairy-based
beverages such as GRIP `N GO brand beverages under the LAND O LAKES brand name.
Dairy Marketing Alliance is a joint venture formed in July 2000 in connection
with the sale of our fluid dairy business to Dean Foods Company.
CF Industries, Inc. CF Industries is one of North America's largest
interregional cooperatives, and is owned by nine cooperatives. CF Industries
manufactures fertilizer products, which are distributed by its members or their
affiliates. CF Industries has manufacturing facilities in Louisiana, Alberta,
Canada and Florida. As of December 31, 2001, our equity interest in CF
Industries, which represents allocated but unpaid patronage, had a book value of
approximately $248.5 million. For the year ended December 31, 2001, our
percentage of ownership of allocated equity of CF Industries was 33.8%. Each of
the members has the right to elect one director to the board of directors.
CoBank. CoBank is a cooperative lender of which we are a member. Our
equity interest in CoBank and the amount of patronage we receive is dependent
upon our outstanding borrowings from CoBank. As of December 31, 2001, our
investment in CoBank had a book value of $21.5 million.
Ag Processing. Ag Processing is a cooperative that produces soybean meal
and soybean oil. As a member of Ag Processing, we are entitled to patronage
based upon our purchases of these products. We use soybean meal as an ingredient
in our feed products. Soybean oil is an ingredient used to produce our spread
products.
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DESCRIPTION OF THE COOPERATIVE
Land O'Lakes is incorporated in Minnesota as a cooperative corporation.
Cooperatives resemble traditional corporations in most respects, but with two
primary distinctions. First, a cooperative's common shareholders, its "members",
either supply the cooperative with raw materials or purchase its goods and
services. Second, to the extent a cooperative allocates its earnings from member
business to its members and meets certain other requirements, it is allowed to
deduct this "patronage income" from its taxable income. Patronage income is
allocated in accordance with the amount of business each member conducts with
the cooperative.
Cooperatives typically derive a majority of their business from members,
although they are allowed by the Internal Revenue Code to conduct non-member
business. Earnings are designated as "pool" earnings or "non-pool" earnings
according to the Internal Revenue Code and decisions made by each cooperative.
Pool earnings are then segregated into earnings generated from member and
non-member business. Pool earnings may be treated as patronage income if they
are generated from business conducted with or for a member of the cooperative.
Non-pool earnings and earnings from non-member business are taxed as corporate
income in the same manner as a typical corporation. The after-tax amount is
retained as permanent equity by the cooperative. Pool earnings from member
business are either allocated to patronage income or retained as permanent
equity (in which case it is taxed as corporate income) or some combination
thereof.
In order to obtain favorable tax treatment on allocated patronage income,
the Internal Revenue Code requires that at least 20% of each member's annual
allocated patronage income be distributed in cash. The portion of patronage
income that is not distributed in cash is retained by the cooperative, allocated
to member equities and distributed to the member at a later time as a
"revolvement" of equity. The cooperative's members must recognize the amount of
allocated patronage income (whether distributed to members or retained by the
cooperative) in the computation of their individual taxable income.
Cooperatives are also allowed to designate patronage income as
"nonqualified" patronage income and allocate it to member equities. The
cooperative pays taxes on this nonqualified patronage income as if it was
derived from non-member business. The cooperative's members do not include
undistributed nonqualified patronage income in their current taxable income.
However, the cooperative may revolve the equity representing the nonqualified
patronage income to members at some later date, and is allowed to deduct those
amounts from its taxable income at that time. When nonqualified patronage income
is revolved to the cooperative's members, the revolvement must be included in
the members' taxable income.
OUR STRUCTURE AND MEMBERSHIP
We have both voting and nonvoting members, with differing membership
requirements for cooperative and individual members. We also separate our
members into two categories: "dairy members" supply our dairy foods segment with
dairy products, primarily milk, cream, cheese and butter, and "ag members"
purchase agricultural products, primarily agronomy products, feed and seed from
our other operations or joint ventures. We further divide our dairy and ag
members by region. There are eight dairy regions and five ag regions.
All of our members must purchase stock and comply with uniform conditions
prescribed by our board of directors and by-laws. The board of directors may
terminate a membership if it determines that the member has failed to adequately
patronize us or has become our competitor.
A cooperative voting member (a "Class A" member) must be an association of
producers of agricultural products operating on a cooperative basis engaged in
either the processing, handling, or marketing of its members' products or the
purchasing, producing, or distributing of farm supplies or services. Class A
members are entitled to a number of votes based on the amount of business done
with the Company. Class A members tend to be ag members, although a Class A
member may be both an ag and dairy member if they both supply us with dairy
products and purchase agricultural products from us or our joint ventures.
An individual voting member (a "Class B" member) is an individual,
partnership, corporation or other entity other than a cooperative engaged in the
production of agricultural commodities. Class B members are entitled to one
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vote. Class B members tend to be dairy members. Class B members may be both an
ag and dairy member if they both provide us with dairy products and purchase
agricultural products from us or our joint ventures.
Our nonvoting cooperative members ("Class C" members) are associations
operating on a cooperative basis but whose members are not necessarily engaged
in the production or marketing of agricultural products. Such members are not
given the right to vote, because doing so may jeopardize our antitrust exemption
under the Capper-Volstead Act (the exemption requires all our voting members be
engaged in the production or marketing of agricultural products). Class C
members also include cooperatives which are in direct competition with us.
Nonvoting individual members ("Class D" members) generally do a low volume of
business with us and are not interested in our governance.
GOVERNANCE
Our board is made up of 24 directors. Our dairy members nominate 12
directors from among the dairy members and our ag members nominate 12 directors
from among the ag members. The nomination of directors is conducted within each
group by region. The number of directors nominated from each region is based on
the total amount of business conducted with the cooperative by that region's
members. Directors are elected to four year terms at our annual meeting by
voting members in a manner similar to a typical corporation. Our by-laws require
that, at least every five years, we evaluate both the boundaries of our regions
and the number of directors from each region, so that the number of directors
reflects the proportion of patronage income from each region.
The board may also choose to elect up to three non-voting advisory
members. Currently, we have one such member. The board governs our affairs in
virtually the same manner as the boards of typical corporations.
EARNINGS
As described above, we divide our earnings between pool and non-pool and
member and non-member business. We then allocate member earnings to dairy foods
operations or agricultural operations (which is comprised of our feed, crop
seed, agronomy and swine segments). Pool earnings from each of our segments are
currently maintained in separate pools. We are discussing the possibility of
establishing a second pool for our dairy foods segment for farmers who sell milk
to us for resale as commodity fluid milk. For our dairy foods operations, the
amount of member business is based on the amount of dairy products supplied to
us by our dairy members. In calendar year 2001, 70.6% of our dairy input
requirements came from our dairy members. For our agricultural operations, the
amount of member business is based on the dollar-amount of products sold to our
agricultural members. In calendar year 2001, 83% of our pro forma agricultural
products net sales, and 49% of our pro forma operating income, was derived from
sales to agricultural members.
PATRONAGE INCOME AND EQUITY
To acquire and maintain adequate capital to finance our business, our
by-laws allow us to retain up to 15% of our earnings from member business as
additions to permanent equity. We currently retain 10% and allocate the
remainder of our earnings from member business to patronage income.
We have two plans through which we revolve patronage income to our
members; the Equity Target Program for our dairy foods operations and the
Revolvement Program for our agriculture businesses.
The Equity Target Program provides a mechanism for determining the capital
requirements of our dairy foods operations and each dairy member's share of
those requirements. The board of directors has established an equity target
investment of $2.75 per hundred pounds of milk (or milk equivalent) delivered
per year by that member to us. We distribute 20% of allocated patronage income
to a dairy member annually until the investment target is reached by that
member. The remaining 80% of allocated patronage income is retained and
allocated to member equities and revolved in the twelve years after the member
becomes inactive. When the member's equity investment reaches the target, and
for as long as the member's equity target investment is maintained, we
distribute 100% of the member's future allocated patronage income. The equity
target as well as the revolvement period may be changed at the discretion of the
board.
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For calendar year 2000, we allocated $54.4 million of our member earnings
as patronage income to our dairy members. Of that amount, 92% or $50.1 million
was allocated to dairy members who have yet to reach their equity target
investment, and we distributed $10.0 million (20%) to those members and retained
and allocated $40.1 million (80%) to member equities. 8% or $4.3 million was
distributed to dairy members who have met their equity investment requirement.
We also allocated $32.9 million of our member earnings as nonqualified patronage
refunds, which were retained as member equities. We plan to revolve $13.2
million of dairy members' equity for 2001.
In the Revolvement Program for our agricultural businesses, we currently
distribute 30% of allocated patronage income in cash and retain and allocate the
remaining 70% to member equity. This equity is revolved 9 1/2 years later. Both
the amount distributed in cash and the revolvement period are subject to change
by the board. For calendar year 2000, we allocated $54.6 million of our member
earnings to our agricultural members. Of that amount, we paid patronage income
of $16.4 million to our members in cash and retained and allocated $38.2 million
to member equities. Our board suspended revolvement of ag member equities for
the 2001 fiscal year.
In connection with the sale of our branded fluid milk business to Dean
Foods in 2000, we recognized earnings of $57.9 million. $32.9 million of these
earnings were designated as nonqualified patronage and allocated to member
equities. We paid income tax on this nonqualified patronage, however, we will be
able to deduct these earnings from our taxable income if we choose to revolve
the earnings to our members in the future. The board has no present intention of
revolving the equity representing this nonqualified patronage income.
Our Estate Redemption Plan provides that we will redeem equity holdings of
deceased natural persons upon the demise of the owner. The Company's Age
Retirement Program provides that we will redeem in full equity holdings of dairy
members who are natural persons when the member reaches age 75 or older and
becomes inactive. Subject to various requirements, we may redeem the equity
holdings of members in bankruptcy or liquidation. All equity redemptions must be
presented to, and receive the approval of, our board of directors before
payment. We revolved $2.8 million of member equities in connection with these
programs in 2001 and expect to revolve approximately $3.2 million in 2002.
EMPLOYEES
At March 1, 2002, we had approximately 8,600 employees, approximately 27%
of whom were represented by unions having national affiliations. Our contracts
with these unions expire at various times throughout the next several years,
with the last contract expiring on January 1, 2005. We consider our relationship
with employees to be generally satisfactory. We have had no labor strikes or
work stoppages within the last five years.
Of the 8,600 employees above, approximately 2,100 were employed by Land
O'Lakes Farmland Feed, 14% of whom were represented by unions having national
affiliations.
PATENTS, TRADEMARKS AND INTELLECTUAL PROPERTY
We rely on patents, copyrights, trademarks, trade secrets, confidentiality
provisions and licensing arrangements to establish and protect our intellectual
property. We believe that in addition to certain patented processes, the
formulas and production methods of our dairy foods products are trade secrets.
We also have patented processes for our milk replacement products and deem our
feed product formulations to be proprietary.
We own a number of registered and unregistered trademarks used in
connection with the marketing and sale of our food products as well as our feed
and seed products including LAND O LAKES, and the Indian Maiden logo, Alpine
Lace, New Yorker, Lake to Lake, Extra Melt, GRIP `N GO, CROPLAN GENETICS, Maxi
Care, Amplifier Max and Omolene. Land O'Lakes Farmland Feed licenses certain
trademarks from Land O'Lakes, including LAND O LAKES, the Indian Maiden logo,
Maxi Care, and Amplifier Max, for use in connection with its animal feed and
milk replacer products. Purina Mills, a wholly-owned subsidiary of Land O'Lakes
Farmland Feed, licenses the trademarks Purina, Chow and the "Checkerboard" Nine
Square Logo from Nestle Purina PetCare Company under a perpetual, royalty-free
license. This license only gives Purina Mills the right to use these trademarks
to market the particular products that Purina Mills currently markets with these
trademarks. Purina Mills does not have the right to use these trademarks outside
of the United States, or in conjunction with any products designed primarily for
use with cats, dogs or humans. We do not have the right to assign any of these
trademarks without the written consent of
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Nestle Purina PetCare Company. These trademarks are important to Land O'Lakes
Farmland Feed because brand name recognition is a key factor to its success in
marketing and selling its products. The registrations of these trademarks in the
United Stated and foreign countries are effective for varying periods of time,
and may be renewed periodically, provided that we, as the registered owner, or
our licensees, where applicable, comply with all applicable renewal requirements
including, where necessary, the continued use of the trademarks in connection
with similar goods.
We entered into a license agreement with Dean Foods in connection with the
sale of our fluid dairy assets in July 2000. This license grants Dean Foods a
perpetual, exclusive, royalty-free license to utilize certain trademarks,
including LAND O LAKES and the Indian Maiden logo in connection with the
manufacturing, marketing, promotion distribution and sale of milk (except small
bottle milk), buttermilk, yogurt, eggnog, cottage cheese, ice cream and juices.
In addition, we entered into a license agreement with our joint venture Dairy
Marketing Alliance, which grants Dairy Marketing Alliance a perpetual,
exclusive, royalty-free license to utilize certain trademarks, including LAND O
LAKES and the Indian Maiden logo, and certain intellectual property, in
connection with the manufacture, marketing, promotion, distribution and sale of
milk, buttermilk, yogurt, eggnog, cottage cheese, ice cream and juices which are
marketed utilizing new nutrient claims, as well as small bottle milk, cream
products and sour cream. The license relating to milk (other than small bottle
milk), buttermilk, yogurt, eggnog, cottage cheese, ice cream and juices will
terminate, and would then be granted to Dean Foods, in the event Dean Foods
elects to market such products utilizing new nutrient claims as a part of its
basic business.
We have also entered into other license agreements with other affiliated
and unaffiliated companies, such as MoArk, which permit them to utilize our
trademarks in connection with the marketing and sale of certain products.
ENVIRONMENTAL MATTERS
We are subject to various Federal, state, local, and foreign environmental
laws and regulations, including those governing the use, storage, discharge and
disposal of hazardous materials. Violations of these laws and regulations may
lead to civil and criminal fines and penalties or other sanctions. These laws
and regulations may also impose liability for the cleanup of environmental
contamination. We generate large volumes of waste water. Changes in
environmental regulations governing disposal of these materials could have a
material adverse effect on our business, financial condition or results of
operations.
We use regulated substances in operating our manufacturing equipment and
we use and store other chemicals on site (including acids, caustics and
refrigeration chemicals). Agriliance stores petroleum products and other
chemicals on-site (including fertilizers, pesticides and herbicides). Discovery
of significant contamination or changes in environmental regulations governing
the handling of these materials could have a material adverse effect on our
business, financial condition, or results of operations.
Many of our current and former facilities have been in operation for many
years and, over that time, we and other operators of those facilities have
generated, used, stored, or disposed of substances or wastes that are or might
be considered hazardous under applicable environmental laws, including chemicals
and fuel stored in underground and above-ground tanks, animal wastes and large
volumes of wastewater discharges. As a result, the soil and groundwater at or
under certain of our current and former facilities (and/or in the vicinity of
such facilities) may have been contaminated, and we may be required to make
material expenditures to investigate, control and remediate such contamination.
We are also potentially responsible for environmental conditions at a
number of former facilities and at waste disposal facilities operated by third
parties. We have been identified as a potentially responsible party under the
federal Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA" or "Superfund") at various National Priorities List sites and have
unresolved liability with respect to the past disposal of hazardous substances
at several such sites. CERCLA may impose joint and several liability on certain
statutory classes of persons for the costs of investigation and remediation of
contaminated properties, regardless of fault or the legality of the original
disposal. These persons include the present and former owners or operators of a
contaminated property, and companies that generated, disposed of, or arranged
for the disposal of hazardous substances found at the property. We have
contested our liability at one Superfund site, as to which we have declined to
pay past
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response costs associated with ongoing site study, and we have received a notice
of potential liability regarding three other waste disposal sites under
investigation by the EPA, as to which we are disputing our responsibility.
We have, on average, paid less than $250,000 in each of the last five
years for investigation and remediation of environmental matters, including
Superfund and related matters, but there can be no assurance that expenditures
for such activities will not rise materially if substantial contamination is
discovered at one of our current or former facilities or if other potentially
responsible parties fail or refuse to participate in cost sharing at any
Superfund site, or similar disposal site, at which we are implicated.
In addition, Federal and state environmental authorities have proposed new
regulations and have attempted to apply certain existing regulations for the
first time to agricultural operations. These regulations could result in
significant restraints on some of our operations, particularly our swine
operations, and could require us to spend significant amounts to bring these
operations into compliance. In addition, any failure to comply could result in
the imposition of fines and penalties. We cannot predict whether future changes
in environmental laws or regulations will materially increase the cost of
operating our facilities and conducting our business. Any such changes could
adversely affect our business, financial condition and results of operations.
REGULATORY MATTERS
We are subject to Federal, state and local laws and regulations relating
to the manufacturing, labeling, packaging, health and safety, sanitation,
quality control, fair trade practices, and other aspects of our business. In
addition, zoning, construction and operating permits are required from
governmental agencies which focus on issues such as land use, environmental
protection, waste management, and the movement of animals across state lines.
These laws and regulations may, in certain instances, affect our ability to
develop and market new products and to utilize technological innovations in our
business. In addition, changes in these rules might increase the cost of
operating our facilities or conducting our business which would adversely affect
our finances.
Our dairy business is affected by Federal price support programs and
Federal and state pooling and pricing programs. Since 1949, the Federal
government has maintained price supports for cheese, butter and nonfat dry milk.
The government stands as a ready purchaser of these products at their price
support levels. Historically, when the product price reached 110% of its price
support level, the government would sell its inventory into the market,
effectively limiting the price of these products. Because prices for these
products have generally been higher than their support level for a number of
years, the government currently has minimal inventories of cheese and butter. As
a result, these commodity prices have been able to be greater than 110% of their
price support levels for several years. According to data from the USDA, over
the past five years, butter has sold at an average of 176% of the support price
without reaching support levels, and cheese has sold at an average of 121% of
the support price. However, cheese sold at or near support levels at points
between October 2000 and January 2001. The 1996 Federal Agricultural Improvement
and Reform Act ("FAIR") provided for the termination of dairy price supports.
The termination of price supports was initially set to occur on December 31,
1999. This date was subsequently extended, and is currently set for May 31,
2002. On October 5, 2001, the United States House of Representatives passed a
bill which, if enacted, would extend the dairy price supports until December 31,
2011. On February 12, 2002, the United States Senate passed a bill which, if
enacted, would extend the dairy supports until December 31, 2006. The extension
of dairy price supports is a part of a much larger farm bill which is currently
in conference committee. If FAIR is not renewed we will no longer benefit from
the existence of price supports, which means that we will no longer have a ready
purchaser of our products at a certain minimum price. This could have an adverse
effect on our financial results.
Federal and certain similar state regulations attempt to ensure that the
supply of raw milk flows in priority to fluid milk and soft cream producers
before producers of hard products such as cheese and butter. This is
accomplished in two ways. First, the Federal market order system sets minimum
prices for raw milk. The minimum price of raw milk for use in fluid milk and
soft cream production is set as a premium to the minimum price of raw milk used
to produce hard products. The minimum price of raw milk used to produce hard
products is, in turn, set based on the market prices of cheese and butter.
Second, the Federal market order system establishes a pooling program under
which participants are required to send at least some of their raw milk to fluid
milk producers. The specific amount varies based on region, but is at least 10%
of the raw milk a participant handles. Certain areas in the country, such as
California, have adopted systems which supersede the Federal market order system
but are similar
16
to it. In addition, because the Federal market order system is not intended as
an exclusive regulation of the price of raw milk, certain states have, and
others could, adopt regulations which could increase the price we pay for raw
milk, which could have an adverse effect on our financial results. We also pay a
premium above the market order price based on competitive conditions in
different regions.
Producers of dairy products which are participants in the Federal market
order system pay into regional "pools" for the milk they use based on the amount
of each class of dairy product produced and the price of those products. As
described above, only producers of dairy products who send the required minimum
amount of raw milk to fluid milk producers may participate in the pool. The
amounts paid into the pool for raw milk used to make fluid milk and soft creams
are set at a premium to the amounts paid into the pool for raw milk used to make
cheese or butter. The pool then returns to each dairy product producer for raw
milk it handled the weighted average price for all raw milk (including that used
for fluid milk and soft creams, whose producers must pay into the pool) sold in
that region. The dairy product producer pays at least this pool price to the
dairy farmer for milk received. This pooling system provides an incentive for
hard product producers to participate in the pool (and therefore supply the
required minimum for fluid milk production), because the average price for raw
milk received by these producers from the pool is more than the average price
they pay into the pool.
As a cooperative, we are exempt from the requirement that we pay pool
prices to our members for raw milk supplied to us. However, as a practical
matter, we must pay a competitive price to our members in order to ensure
adequate supply of raw milk for our production needs and therefore our
operations are affected by these regulations.
If we did not participate in the pool, we would not receive the advantage
of the average pool payment and we would not be able to pay our milk producers
as much as participating processors without incurring higher costs for our raw
milk. To maintain our participation in the federal market order program and
avoid this competitive disadvantage, we must procure at least 110% of our raw
milk requirements to meet our production needs. If we are unable to procure at
least 110% of our requirements, we would have lower production which could have
a material adverse affect on our results of operations. In addition, if the pool
was eliminated we would be subject to additional market forces when procuring
raw milk, which could result in increased milk costs and decreased supply, which
could materially affect our business.
As a manufacturer and distributor of food and animal feed products, we are
subject to the Federal Food, Drug and Cosmetic Act and regulations issued
thereunder by the Food and Drug Administration ("FDA"). This regulatory scheme
governs the manufacture (including composition and ingredients), labeling,
packaging, and safety of food. The FDA regulates manufacturing practices for
foods through its good manufacturing practices regulations, specifies the
standards of identity for certain foods and animal feed, and prescribes the
format and content of certain information required to appear on food and animal
feed product labels. In addition, the FDA enforces the Public Health Service Act
and regulations issued thereunder, which authorize regulatory activity necessary
to prevent the introduction, transmission, or spread of communicable diseases.
We and our products are also subject to state and local regulation through
mechanisms such as the licensing of dairy manufacturing facilities, enforcement
by state and local health agencies of state standards for food products,
inspection of facilities, and regulation of trade practices. Modification of
these Federal, state and local laws and regulations could increase our costs of
sales or prevent us from marketing foods in the way we currently do and could
have a material adverse effect on our business prospects, results of operations
and financial condition.
Pasteurization of milk and milk products is also subject to inspection by
the United States Department of Agriculture. We and our products are also
subject to state and local regulation through mechanisms such as the licensing
of dairy manufacturing facilities, enforcement by state and local health
agencies of state standards for food products, inspection of facilities, and
regulation of trade practices in connection with the sale of food products.
Modification of these Federal, state and local laws and regulations could
increase our costs of sales or prevent us from marketing foods in the way we
currently do and could have a material adverse effect on our business prospects,
results of operations and financial condition.
Land O'Lakes Farmland Feed distributes animal feed products through a
network of approximately 4,000 independent dealers. Various states in which
these dealers are located have enacted dealer protection laws which could have
the effect of limiting our rights to terminate dealers. In addition, failure to
comply with such laws could
17
result in awards of damages or statutory sanctions. As a result, it may be
difficult to modify the way we distribute our feed products which may put us at
a competitive disadvantage.
Several states have enacted "corporate farming laws" that restrict the
ability of corporations to engage in farming activities. Minnesota, North
Dakota, South Dakota, Nebraska, Kansas, Oklahoma, Missouri, Iowa and Wisconsin,
states in which we conduct business, have corporate farming laws. We believe
that our operations currently comply with the corporate farming laws in these
states and their exemptions, but these laws could change in the future and
additional states could enact corporate farming laws that regulate our
businesses. Even with the exemptions, these corporate farming laws restrict our
ability to expand or alter our operations in these states.
ITEM 2. PROPERTIES.
We own the land underlying our corporate headquarters in Arden Hills,
Minnesota and lease the buildings. Our corporate headquarters, consisting of a
main office building and a research and development facility, has an aggregate
of approximately 275,000 gross square feet. In addition, we own offices,
manufacturing plants, storage warehouses and facilities for use in our various
business segments. Thirty-five of our owned properties are mortgaged to secure
our indebtedness. The following table provides summary information about our
principal facilities:
TOTAL NUMBER TOTAL NUMBER
OF FACILITIES OF FACILITIES REGIONAL LOCATION
BUSINESS SEGMENT OWNED LEASED OF FACILITIES
- ------------------ ------------ ------------- ----------------
Dairy Foods...... 17(1) 40 Midwest(2) - 39
West(3) - 11
East(4) - 6
South(5) - 1
Animal Feed...... 97(6) 11 Midwest - 65
West - 23
East - 5
South - 15
Crop Seed........ 23 1 Midwest - 14
West - 10
Swine............ 17(7) 3 Midwest - 19
East - 1
Agronomy......... 2 0 Midwest - 2
- ----------
(1) Includes a closed facility and a facility utilized for feed
manufacturing which is accounted for in the dairy foods segment.
(2) The Midwest region includes the states of Ohio, Michigan, Indiana,
Illinois, Wisconsin, Minnesota, Iowa, Missouri, Oklahoma, Kansas,
Nebraska, South Dakota and North Dakota and Ontario, Canada.
(3) The West region includes the states of Montana, Wyoming, Colorado,
Texas, New Mexico, Arizona, Utah, Idaho, Washington, Oregon, Nevada,
California, Alaska and Hawaii.
(4) The East region includes the states of Maine, New Hampshire,
Vermont, New York, Massachusetts, Rhode Island, Connecticut,
Pennsylvania, New Jersey, Delaware and Maryland.
(5) The South region includes the states of West Virginia, Virginia,
North Carolina, Kentucky, Tennessee, South Carolina, Georgia,
Florida, Alabama, Mississippi, Louisiana and Arkansas.
(6) Includes two closed facilities and a research and development
facility.
(7) Includes 11 facilities which will be sold upon completion of
construction and permitting and two facilities which we will operate
upon completion of construction and permitting.
We do not believe that we will have difficulty in renewing the leases we
currently have or in finding alternative space in the event those leases are not
renewed. We consider our properties suitable and adequate for the conduct of our
business.
18
ITEM 3. LEGAL PROCEEDINGS.
We are currently and from time to time involved in litigation incidental
to the conduct of our business. The damages claimed against us in some of these
cases are substantial. Although the amount of liability that may result from
these matters cannot be ascertained, we do not currently believe that, in the
aggregate, they will result in liabilities material to our consolidated
financial condition, future results of operations or cash flow.
In a letter dated January 18, 2001, we were identified by the United
States Environmental Protection Agency ("EPA") as a potentially responsible
party for the hazardous waste located at the Hudson Refinery Superfund Site in
Cushing, Oklahoma. The letter invited us to enter into negotiations with the EPA
for the performance of a remedial investigation and feasibility study in
connection with the site, and also demanded that we reimburse the EPA
approximately $8.9 million for remediation expenses already incurred at the
site. We have responded to the EPA denying any responsibility. No further
communication has been received from the EPA.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
There is no established public market for the common equity of Land
O'Lakes. In view of the following, it is unlikely in the foreseeable future that
a public market for these securities will develop:
(1) the common stock interests are nondividend bearing;
(2) the right of any holder of common stock to receive patronage income
depends on the quantity and value of the business the member conducts with us
(See "Item 1. Business - Description of the Cooperative - Patronage Income and
Equity");
(3) the class of common stock issued to a member depends on (i) whether
the member is a cooperative or individual member, (ii) whether the member is a
"dairy member" or "ag member", (iii) the volume of business the member conducts
with us, and (iv) the type of business conducted by the member (See "Item 1.
Business - Description of the Cooperative - Our Structure and Membership");
(4) we may redeem holdings of members under certain circumstances upon the
approval of our board of directors (See "Item 1. Business - Description of the
Cooperative - Patronage Income and Equity"); and
(5) our board of directors may terminate a membership if it determines
that the member has failed to adequately patronize us or has become our
competitor (See "Item 1. Business - Description of the Cooperative - Our
Structure and Membership").
As of December 31, 2001, there were approximately 1,172 holders of Class A
common stock, 5,867 holders of Class B common stock, 200 holders of Class C
common stock and 1,438 holders of Class D common stock.
ITEM 6. SELECTED FINANCIAL DATA.
The historical consolidated financial information presented below as of
December 31, 2001 and 2000 and for each of the years ended December 31, 1999,
2000 and 2001 has been derived from, and should be read together with, our
audited consolidated financial statements and the related notes included
elsewhere in this Annual Report on Form 10-K. The historical consolidated
financial information as of December 31, 1997, 1998, and 1999 and for each of
the years ended December 31, 1997 and 1998 has been derived from our audited
consolidated financial
19
statements and the related notes, which have not been included in this Annual
Report on Form 10-K. You should read this selected consolidated historical
financial information along with "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations."
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
1997 1998 1999 2000 2001
---------- ---------- ---------- ---------- ----------
(DOLLARS IN MILLIONS)
STATEMENT OF OPERATIONS DATA:
Net sales .............................. $ 4,195.3 $ 5,174.2 $ 5,615.8 $ 5,768.8 $ 5,973.4
Cost of sales .......................... 3,737.6 4,680.0 5,100.4 5,146.1 5,378.6
Selling and administration ............. 336.9 396.0 506.9 485.3 487.2
Restructuring and impairment
charges(1) ........................... -- -- 3.9 54.2 3.7
---------- ---------- ---------- ---------- ----------
Earnings from operations ........... 120.8 98.2 4.6 83.2 103.9
Interest expense, net .................. 14.6 27.2 44.7 52.4 56.1
(Gain) from divestiture of
businesses(2) ........................ -- -- (54.2) (89.0) --
Equity in (earnings) loss of
affiliated companies ................. (0.9) 0.8 (7.3) 35.6 (48.6)
Minority interest in earnings (loss)
of subsidiaries ...................... 0.5 0.1 (0.1) (1.4) 6.9
---------- ---------- ---------- ---------- ----------
Earnings before income taxes and
extraordinary item ............... 106.6 70.1 21.5 85.6 89.5
Income tax expense (benefit) ........... 12.0 1.5 0.1 (13.7) 3.6
---------- ---------- ---------- ---------- ----------
Earnings before extraordinary
item ............................ $ 94.6 $ 68.6 $ 21.4 $ 99.3 $ 85.9
========== ========== ========== ========== ==========
OTHER FINANCIAL DATA:
EBITDA(3) .............................. $ 162.6 $ 157.9 $ 87.9(4) $ 214.1 $ 213.7
Depreciation and amortization .......... 43.2 61.4 81.7 83.6 97.3
Capital expenditures ................... 86.9 103.1 109.3 104.3 83.9
Cash patronage paid to members(5) ...... 31.3 25.9 20.0 10.6 30.7
Equity revolvement paid to members(6) .. 27.4 14.4 28.7 43.6 16.2
BALANCE SHEET DATA (AT END OF
PERIOD):
Cash and short-term investments ........ $ 13.8 $ 4.5 $ 197.8 $ 4.0 $ 130.2
Working capital(7) ..................... 351.7 407.3 464.8 476.9 368.5
Property, plant and equipment, net ..... 283.1 450.1 461.8 467.8 675.3
Total assets ........................... 1,565.9 2,291.8 2,700.1 2,473.3 3,091.4
Total debt(8) .......................... 434.0 453.2 783.9 628.8 1,010.3
Capital Securities of Trust Subsidiary . -- 200.0 200.0 190.7 190.7
Minority interests ..................... 8.3 10.0 14.9 55.1 59.8
Total member equities and retained
earnings ............................. 539.4 781.1 768.8 805.0 836.5
See accompanying Notes to Selected Land O'Lakes Historical Financial Data.
20
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
1997 1998 1999 2000 2001
---------- ---------- ---------- ---------- ----------
(DOLLARS IN MILLIONS)
SELECTED SEGMENT FINANCIAL
INFORMATION
DAIRY FOODS
Net sales .............................. $ 2,234.1 $ 3,266.6 $ 3,291.1 $ 3,194.2 $ 3,572.4
EBITDA(3) .............................. 69.6 99.8 36.8(4) 115.4 108.9
Depreciation and amortization .......... 26.9 37.1 47.4 42.8 42.5
Capital expenditures ................... 39.1 55.5 63.3 60.3 37.7
ANIMAL FEED(9)(10)
Net sales .............................. 882.7 824.3 931.2 1,182.2 1,864.0
EBITDA(3) .............................. 27.1 34.4 33.9 41.8 80.7
Depreciation and amortization .......... 9.3 10.8 14.7 18.6 31.7
Capital expenditures ................... 12.1 14.4 17.4 21.5 24.9
CROP SEED
Net sales .............................. 93.2 145.3 190.8 365.5 413.6
EBITDA(3) .............................. 8.1 9.9 8.4 18.6 17.6
Depreciation and amortization .......... 2.1 0.9 2.7 5.6 5.0
Capital expenditures ................... 2.1 2.4 4.8 3.5 2.7
SWINE(10)
Net sales .............................. 44.3 62.5 82.7 102.0 109.9
EBITDA(3) .............................. 2.5 (17.7) (12.6) 6.8 12.0
Depreciation and amortization .......... 0.7 4.7 7.9 6.2 5.6
Capital expenditures ................... 27.6 22.6 14.0 9.6 7.3
AGRONOMY(11)
Net sales .............................. 786.6 774.7 1,023.3 857.0 --
EBITDA(3) .............................. 50.3 24.3 17.6 27.5 (10.1)
Depreciation and amortization .......... -- 0.8 3.4 4.6 6.3
Capital expenditures ................... -- -- -- -- --
OTHER
Net sales .............................. 154.4 100.9 96.7 67.9 13.5
EBITDA(3) .............................. 5.0 7.2 3.8 4.0 4.6
Depreciation and amortization .......... 4.2 7.1 5.6 5.8 6.2
Capital expenditures ................... 6.0 8.2 9.8 9.5 11.3
See accompanying Notes to Selected Land O'Lakes Historical Financial Data.
21
NOTES TO SELECTED LAND O'LAKES CONSOLIDATED HISTORICAL FINANCIAL DATA
(1) The following table summarizes restructuring and impairment charges
(reversals):
YEARS ENDED DECEMBER 31,
-----------------------------------
1999 2000 2001
------ ------- ------
(DOLLARS IN MILLIONS)
Restructuring charges
(reversals) ...................... $ -- $ 9.7 $ (4.1)
Impairment of assets ............... 3.9 44.5 7.8
------ ------- ------
Total ......................... $ 3.9 $ 54.2 $ 3.7
====== ======= ======
The impairment charge of $3.9 million in 1999 was related to
under-utilization of the Land O'Lakes cheese production assets in Poland.
The impairment charge of $44.5 million in 2000 resulted primarily from a
write-down of goodwill related to a previous acquisition. The impairment
charge of $7.8 in 2001 included $6.0 million related to our investment in
a Mexican feed operation held for sale at December 31, 2001. We recorded
this impairment charge in order to value the investment at its expected
selling price less costs of disposal. In addition, our swine segment
recorded an impairment charge of $1.8 million to reduce undeveloped land
with permit issues to its estimated fair value.
In 2000, we recorded restructuring charges of $9.7 million resulting from
the consolidation of facilities and reduced personnel at Land O'Lakes
Farmland Feed. Of the $9.7 million, $7.2 million related to the closing
and planned sale of 12 plants and consisted of $5.5 million to write down
the book value of the plants and $1.7 million for demolition and
environmental clean-up. The remaining $2.5 million represented severance
and outplacement costs for 119 non-plant employees. In 2001, we recorded
restructuring charges of ($4.1) million. Our dairy foods segment recorded
a restructuring charge of $1.7 million, which had not been paid at
December 31, 2001, for severance costs for 63 production employees
resulting from the consolidation of production facilities. Our animal feed
segment reversed $5.7 million of a prior year restructuring charge
primarily due to the decision we made following the acquisition of Purina
Mills to continue to operate plants that were held for sale at December
31, 2000.
(2) In November 1999, we sold our flavoring business for $75.9 million in
cash, resulting in a gain of $54.2 million. In April 2000, we divested
swine assets in North Carolina for net proceeds of $4.4 million, resulting
in a gain of $0.5 million. In July 2000, we sold our fluid dairy assets
for $179.7 million, resulting in a gain of $88.5 million.
(3) EBITDA is defined as earnings before income taxes, extraordinary items,
interest expense (net of interest income), depreciation and amortization,
non-cash impairment charges or reversals, equity in earnings or loss of
affiliated companies, gain from divestiture of businesses, minority
interest, and the other items described below. EBITDA is presented because
it is a widely accepted financial indicator of a company's ability to
incur and service indebtedness. EBITDA should not be considered an
alternative to net sales in excess of expenses as a measure of our
operating results or to cash flow as a measure of liquidity. In addition,
although EBITDA is not recognized under generally accepted accounting
principles, it is widely used as a general measure of a company's
performance because it assists in comparing performance on a relatively
consistent basis across companies without regard to depreciation and
amortization, which can vary significantly depending on accounting methods
(particularly where acquisitions are involved) or nonoperating factors
such as historical cost basis. Because EBITDA is not calculated
identically by all companies, the presentation herein may not be
comparable to other similarly titled measures of other companies. The
definition of EBITDA conforms to that which is included in the indenture
for our 8 3/4% senior notes due 2011.
22
Other items excluded from EBITDA are:
YEARS ENDED DECEMBER 31,
----------------------------------------------
1997 1998 1999 2000 2001
------- ------- ------- ------- -------
(DOLLARS IN MILLIONS)
Unrealized hedging losses(a) ..... $ -- $ -- $ -- $ -- $ 6.6
Gain sale of assets(b) ........... -- -- -- -- (1.8)
Non-cash impairment charges(c) ... -- -- 3.9 44.5 7.8
EBITDA from unrestricted
subsidiaries(d) ................ (1.4) (1.7) (2.3) 2.8 (0.1)
------- ------- ------- ------- -------
Total ....................... $ (1.4) $ (1.7) $ 1.6 $ 47.3 $ 12.5
======= ======= ======= ======= =======
(a) Reflects non-cash expense for mark-to-market derivative contracts
incurred as a result of adopting SFAS No. 133 in 2001. See "Item 7.
Management's Discussion and Analysis of Financial Condition and
Results of Operations".
(b) Reflects cash gain resulting from the sale of certain swine assets.
(c) See note 1.
(d) Reflects exclusion of earnings of unrestricted subsidiaries as
required by the definition of EBITDA included in the indenture for
our 8 3/4% senior notes due 2011.
(4) Period results include an inventory write-down of $62.1 million for cheese
and butter due to lower of cost or market adjustments.
(5) Reflects the portion of earnings allocated to members for the prior fiscal
year distributed in cash in the current fiscal year.
YEARS ENDED DECEMBER 31,
----------------------------------------------
1997 1998 1999 2000 2001
------- ------- ------- ------- -------
(DOLLARS IN MILLIONS)
20% required for tax deduction ... $ 21.7 $ 18.6 $ 15.0 $ 7.0 $ 28.5
Discretionary .................... 9.6 7.3 5.0 3.6 2.2
------- ------- ------- ------- -------
Total ....................... $ 31.3 $ 25.9 $ 20.0 $ 10.6 $ 30.7
======= ======= ======= ======= =======
(6) Reflects the distribution of earnings previously allocated to members and
not paid out as cash patronage. The years 1999, 2000 and 2001 include the
distribution of a portion of the equity issued in connection with the
acquisition of Dairyman's Cooperative Creamery Association and acquisition
of certain assets of Countrymark Cooperative.
YEARS ENDED DECEMBER 31,
----------------------------------------------
1997 1998 1999 2000 2001
------- ------- ------- ------- -------
(DOLLARS IN MILLIONS)
Revolvement
Dairy Foods .................... $ 5.9 $ 4.1 $ 15.6 $ 13.8 $ 14.0
Ag Services .................... 21.5 10.3 13.1 29.8 2.2
------- ------- ------- ------- -------
Total ......................... $ 27.4 $ 14.4 $ 28.7 $ 43.6 $ 16.2
======= ======= ======= ======= =======
(7) Working capital is defined as current assets (less cash and cash
equivalents) minus current liabilities (less notes and short-term
obligations, and current maturities of long-term debt).
(8) Total debt excludes the 7.45% Capital Securities due on March 15, 2028, of
our trust subsidiary which are subordinated to our 8 3/4% senior notes due
2011 and allow for the deferment of interest payments up to ten semiannual
periods at our option.
(9) On October 1, 2000, we combined our feed assets with those of Farmland
Industries to form Land O'Lakes Farmland Feed. We consolidate the
operating activities of Land O'Lakes Farmland Feed.
23
(10) Historically, Purina Mills reported results of its swine business together
with its feed business. Accordingly, the portion of our swine business
which we acquired from Purina Mills is reported in our pro forma animal
feed segment results for the year ended December 31, 2001.
(11) On July 28, 2000, we contributed all of our revenue generating agronomy
assets (excluding our investment in CF Industries and assets held for
sale) to Agriliance, a joint venture with United Country Brands, in
exchange for a 50% interest in Agriliance. Beginning July 29, 2000, our
share of earnings or losses in Agriliance were reported under the equity
method of accounting.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
You should read the following discussion of financial condition and
results of operations together with the financial statements and the notes to
such statements included elsewhere in this Annual Report on Form 10-K. As
mentioned under the heading "Forward-Looking Statements," this discussion
contains forward-looking statements based on current expectations, assumptions,
estimates and projections of our management. These forward-looking statements
are subject to risks and uncertainties, including those discussed under "Risk
Factors" on pages 46 to 59 of this Annual Report on Form 10-K, that could
cause actual results to differ materially from those projected.
OVERVIEW
GENERAL
Segments
We operate our business in five segments, dairy foods, animal feed, crop
seed, swine and agronomy, predominantly in the United States. We have limited
international operations, certain of which have recently been sold or are in the
process of being sold. Our dairy foods segment produces, markets and sells
butter, spreads, cheese and other dairy products. We operate our animal feed
segment principally through Land O'Lakes Farmland Feed LLC, our 92% owned joint
venture with Farmland Industries. Our animal feed segment develops, produces,
markets and distributes animal feed to both commercial and lifestyle customers.
The results of the animal feed business are consolidated in our financial
statements and the minority interest is eliminated. As a result of the Purina
Mills acquisition in October 2001, animal feed results in 2001 include Purina
Mills swine marketing activities since Purina Mills historically reported
results of its swine business together with its feed business. Our crop seed
segment sells seed for a variety of crops, including alfalfa, corn, soybeans and
forage and turf grasses. Our swine segment produces and markets both young
feeder pigs and mature market hogs. Our agronomy segment distributes crop
nutrient and crop protection products. Historically, our agronomy segment
consisted primarily of the assets we contributed to Agriliance, our
unconsolidated joint venture. Since the contribution of those assets to
Agriliance at the end of July 2000, our investment has been accounted for on the
equity method through our agronomy segment, along with the agronomy assets we
retained. Our membership interest in CF Industries, an interregional plant food
manufacturing cooperative, is accounted for through this segment on a cost
basis. We also derive a portion of revenues and income from other related
businesses, which are insignificant to our overall results. We allocate
corporate administration expense to all five of our business segments using two
methodologies, direct usage for services for which we are able to track this
usage, such as payroll and legal, and invested capital for all other expenses. A
majority of these costs is allocated based on direct usage. We allocate these
costs to segments whether or not they are solely composed of investments and
joint ventures.
Principles of Consolidation
We have numerous business activities that are not wholly-owned. The
results of Land O'Lakes Farmland Feed, Cheese & Protein International and other
majority-owned businesses are fully consolidated. The minority owners' share in
these businesses is eliminated in our consolidated financial statements. Most of
our investments in joint ventures in which we have 50% or less of the governance
rights are accounted for under the equity method of accounting. These include
Agriliance, MoArk, Dairy Marketing Alliance and Advanced Food Products. When we
record equity income or loss from these joint ventures, we also allocate an
overhead charge on these investments. These charges are based upon our costs
rather than the fair market value of the services. In addition, we invest in
other cooperatives such as CF Industries, Ag Processing and CoBank, which are
accounted for on the cost basis
24
method of accounting. Under this method, patronage income, if any, from these
cooperative investments is recorded in our financial statements either as a
reduction in cost of sales or, in the case of CoBank, as a reduction in interest
expense in the year in which the patronage income is earned.
Unconsolidated Businesses
We have investments in certain entities that are not consolidated in our
financial statements. In 2001, unconsolidated businesses contributed earnings of
$48.6 million to us, compared to a loss of $35.6 million in 2000 and earnings of
$7.3 million in 1999. Our investment in unconsolidated businesses as of December
31, 2001 was $568.1 million, compared to $465.8 million as of December 31, 2000
and $460.0 million as of December 31, 1999. Cash flow from our investment in
unconsolidated businesses in 2001 was $2.5 million, compared to $3.5 million in
2000 and $2.9 million in 1999.
Agriliance and CF Industries constitute the most significant of our
investments in unconsolidated businesses, both of which are reflected in our
agronomy results. Our investment in and earnings or losses from Agriliance,
beginning July 29, 2000, and CF Industries were as follows as of and for the
year ended:
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 2000 2001
------------ ------------ ------------
(IN MILLIONS)
AGRILIANCE:
Investment ....................... N/A $ 44.2 $ 84.0
Equity in earnings (loss) ........ N/A (32.4) 34.2
CF INDUSTRIES:
Investment ....................... $248.5 $ 248.5 $ 248.5
Patronage income ................. -- -- --
We did not receive cash distributions from Agriliance or CF Industries during
these periods.
We, Cenex Harvest States Cooperatives ("CHS") and Farmland Industries,
Inc. contributed substantially all of our agronomy marketing assets to
Agriliance in July 2000. Our agronomy marketing operations, and those of CHS and
Farmland were previously managed through various operating entities. We have a
50 percent equity ownership in Agriliance. The other 50 percent ownership
interest in Agriliance is owned by United Country Brands (jointly owned by CHS
and Farmland). We provide certain support services to Agriliance at competitive
market prices. Agriliance was billed $4.9 million in the five months ended
December 31, 2000 and $7.1 million in 2001 for the support services. In
addition, we purchase insignificant amounts of product from Agriliance. The
fiscal year of Agriliance ends on August 31. Unless otherwise indicated,
references to the annual or quarterly results of Agriliance are presented on a
calendar year basis to conform with our presentation. Agriliance funds its
operations from operating cash flows, an initial working capital contribution on
formation and borrowings from unaffiliated third parties. Agriliance has entered
into syndicated secured term and revolving credit arrangements in an aggregate
amount of $407 million as of August 31, 2001. Since then, credit arrangements
were renegotiated and as of December 31, 2001 amounted to $325 million. In
addition, Agriliance has entered into a $200 million receivables securitization
with CoBank. We do not guarantee these obligations. We do not have an obligation
to contribute additional capital to finance Agriliance's operations. Agriliance
performance reflects the seasonal nature of its business. Most of its annual
sales and earnings, which are principally derived from the distribution of
fertilizer and crop protection products manufactured by others, including CF
Industries, occur in the first and second quarter of each year, with off-season
losses in the third and fourth quarter. The equity in loss of $32.4 million from
Agriliance that we recorded in 2000 reflected its operating results from July
29, 2000 through the end of the year, an off-season period. In contrast, the
equity in earnings that we recorded for 2001 included a full year of operations.
CF Industries is an inter-regional cooperative involved in the manufacture
of crop nutrients, in which we have a 34% ownership interest based on our
product purchases. As a member, we are allowed to elect one board member out of
a total of nine board members for CF Industries. Agriliance is one of CF
Industries' most significant customers. CF Industries operates in a highly
cyclical industry. The oversupply of nitrogen in the industry since 1998 has
resulted in depressed prices and, consequently, depressed earnings. Since CF
Industries is a cooperative, we only receive earnings from our investment when
the cooperative allocates and distributes patronage to us. No patronage was
allocated and distributed to us in the last three years because CF Industries
realized losses in those
25
years. We anticipate that no patronage allocations will occur until these losses
have been recouped. Our $248.5 million investment in CF Industries consists of
approximately $150 million in noncash patronage income from prior periods (not
distributed to us) and approximately $100 million that was acquired as part of
our Countrymark acquisition in 1998 based on Countrymark's prior business with
CF Industries. Prior to the contribution of our agronomy assets to Agriliance,
our agronomy business earned patronage income on the business it conducted with
CF Industries. Since July 29, 2000, we have been entitled to receive patronage
income for business that Agriliance transacts with CF Industries on behalf of
our members, primarily fertilizer purchases. We believe these sales are on terms
comparable to those available to unaffiliated third parties.
We have an investment in CoBank, an agricultural cooperative bank, which
amounted to $21.5 million on December 31, 2001, $20.6 million on December 31,
2000 and $19.7 million on December 31, 1999. This investment constitutes less
than one percent of CoBank's total shareholder equity. We account for our
investment in CoBank under the cost basis method of accounting. The investment
consists of an initial nominal cash amount of $1,000 and equity additions based
on a percentage (currently 11.5%) of our five-year average loan volume. Since
CoBank operates as a cooperative, we receive patronage income from CoBank based
on our annual loan volume with CoBank. This patronage income reduces our
interest expense. We believe these loan transactions to be on terms comparable
to those available to unaffiliated third parties.
Critical Accounting Policies
We utilize certain accounting measurements under applicable generally
accepted accounting principles, which involve the exercise of management's
judgment about subjective factors and estimates about the effect of matters
which are inherently uncertain. The following is a summary of those accounting
measurements which we believe are most critical to our reported results of
operations and financial condition.
Inventory Valuation. Inventories are valued at the lower of cost or
market. Cost is determined on a first-in, first-out or average cost basis. Many
of our products, particularly in our dairy foods, animal feed and swine
segments, use dairy or agricultural commodities as inputs or constitute dairy or
agricultural commodity outputs. Consequently, our results are affected by the
cost of commodity inputs and the market price of outputs. Government regulation
of the dairy industry and industry practices in animal feed tend to stabilize
margins in those segments but do not protect against large movements in either
input costs or output prices. Such large movements in commodity prices could
result in significant write-downs to ou