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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____.
COMMISSION FILE NUMBER 333-84486
LAND O'LAKES FARMLAND FEED LLC
(Exact name of Registrant as specified in its charter)
DELAWARE 41-1981848
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1080 COUNTY ROAD F
ARDEN HILLS, MINNESOTA 55112
(Address of principal executive offices and zip code)
(651) 481-4700
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- ------
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION 3
ITEM 1. FINANCIAL STATEMENTS 3
Financial Statements (unaudited) for the three months
and nine months ended September 30, 2002 and 2001
Consolidated Balance Sheets as of September 30, 2002 and
December 31, 2001......................................................................................... 3
Consolidated Statements of Operations for the three months and nine months
ended September 30, 2002 and 2001......................................................................... 4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2002 and 2001......................................................................... 5
Notes to Consolidated Financial Statements.................................................................. 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............. 18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......................................... 31
ITEM 4. CONTROLS AND PROCEDURES............................................................................ 33
PART II. OTHER INFORMATION 33
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................................................... 33
SIGNATURES.................................................................................................. 35
CERTIFICATIONS.............................................................................................. 36
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LAND O'LAKES FARMLAND FEED LLC
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
($ IN THOUSANDS)
(UNAUDITED)
ASSETS
Current assets:
Cash and short-term investments $ - $ 3,019
Receivables, net 109,073 119,063
Inventories 112,684 113,559
Prepaid expenses 2,920 6,472
Notes receivable - Land O'Lakes, Inc. 17,658 -
-------- --------
Total current assets 242,335 242,113
Investments 31,121 31,496
Property, plant and equipment, net 254,138 326,956
Goodwill, net 162,266 104,749
Other intangibles, net 97,653 100,663
Other assets 32,756 27,640
-------- --------
Total assets $820,269 $833,617
======== ========
LIABILITIES AND EQUITIES
Current liabilities:
Notes and short-term obligations $ 3,000 $ 5,000
Notes payable - Land O'Lakes, Inc. - 29,210
Accounts payable 95,221 117,074
Accrued expenses 42,087 35,132
-------- --------
Total current liabilities 140,308 186,416
Notes payable - Land O'Lakes, Inc. 59,664 59,664
Employee benefits and other liabilities 33,880 36,656
Minority interests 3,125 2,919
Equities:
Contributed capital 515,379 515,044
Retained earnings 67,913 32,918
-------- --------
Total equities 583,292 547,962
-------- --------
Commitments and contingencies
Total liabilities and equities $820,269 $833,617
======== ========
See accompanying notes to consolidated financial statements.
3
LAND O'LAKES FARMLAND FEED LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
2002 2001 2002 2001
------------------------------- -------------------------------
($ IN THOUSANDS)
(UNAUDITED)
Net sales $ 594,448 $ 406,779 $ 1,774,451 $ 1,203,272
Cost of sales 522,415 374,547 1,559,254 1,104,316
----------- ----------- ----------- -----------
Gross profit 72,033 32,232 215,197 98,956
Selling, general and administration 60,378 24,845 181,208 77,334
Restructuring and impairment charges (reversals) 942 (2,433) 5,418 (4,242)
----------- ----------- ----------- -----------
Earnings from operations 10,713 9,820 28,571 25,864
Interest (income) expense, net (737) 1,478 (2,081) 4,932
Gain on sale of intangibles - - (4,184) -
Equity in earnings of affiliated companies (576) (405) (839) (1,236)
Minority interest in earnings of subsidiaries 194 508 680 721
----------- ----------- ----------- -----------
Net earnings $ 11,832 $ 8,239 $ 34,995 $ 21,447
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
4
LAND O'LAKES FARMLAND FEED LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
2002 2001
--------- ---------
($ IN THOUSANDS)
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 34,995 $ 21,447
Adjustments to reconcile net earnings to cash provided
by (used in) operating activities:
Depreciation and amortization 34,333 12,707
Bad debt expense 2,175 436
Increase in other assets (15,883) (302)
Decrease in other liabilities (2,776) (4,986)
Restructuring and impairment charges (reversals) 5,418 (4,242)
Equity in earnings of affiliated companies (839) (1,236)
Minority interests 680 721
Changes in current assets and liabilities,
net of acquisitions and divestitures:
Receivables 7,815 (7,914)
Inventories 875 11,753
Other current assets 3,552 5,554
Accounts payable (21,853) (15,005)
Accrued expenses 3,919 (27,787)
--------- ---------
Net cash provided by (used in) operating activities 52,411 (8,854)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (14,298) (14,482)
Proceeds from investments 2,044 1,676
Proceeds from sale of property, plant and equipment 5,692 3,374
--------- ---------
Net cash used in investing activities (6,562) (9,432)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in short-term debt (2,000) 1,660
Proceeds from note payable to Land O'Lakes, Inc. 339,982 280,551
Payments on note payable to Land O'Lakes, Inc. (386,850) (263,925)
--------- ---------
Net cash (used) provided by financing activities (48,868) 18,286
--------- ---------
Net decrease in cash and short-term investments (3,019) -
Cash and short-term investments at beginning of period 3,019 -
--------- ---------
Cash and short-term investments at end of period $ - $ -
========= =========
Supplementary Disclosure of Cash Flow Information:
Cash paid during periods for:
Interest, net of interest capitalized $ - $ -
See accompanying notes to consolidated financial statements.
5
LAND O'LAKES FARMLAND FEED LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ IN THOUSANDS IN TABLES)
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
The unaudited consolidated financial statements reflect, in the opinion
of the management of Land O'Lakes Farmland Feed LLC (the "Company"), all normal
recurring adjustments necessary for a fair statement of the financial position
and results of operations and cash flows for the interim periods. The statements
are condensed and, therefore do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of
America for complete financial statements. For further information, refer to the
audited consolidated financial statements and footnotes for the year ended
December 31, 2001 included in our Registration Statement on Form S-4, as
amended. The results of operations and cash flows for interim periods are not
necessarily indicative of results for a full year.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued SFAS No.
141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." Major provisions of these statements are as follows: all business
combinations must now use the purchase method of accounting, the pooling of
interests method of accounting is now prohibited; intangible assets acquired in
a business combination must be recorded separately from goodwill if they arise
from contractual or other legal rights or are separable from the acquired entity
and can be sold, transferred, licensed, rented or exchanged, either individually
or as a part of a related contract, asset or liability; goodwill and intangible
assets with indefinite lives are not amortized, but tested for impairment
annually, except in certain circumstances, and whenever there is an impairment
indicator; all acquired goodwill must be assigned to reporting units for
purposes of impairment testing and segment reporting. Land O'Lakes Farmland Feed
LLC has adopted the provisions of SFAS 141 and certain provisions of SFAS 142 as
of July 1, 2001, and the remaining provisions of SFAS 142 as of January 1, 2002.
As required by SFAS 142, Land O'Lakes Farmland Feed LLC performed step one of
the impairment testing of goodwill for the balances as of January 1, 2002 by
June 30, 2002. The fair value of goodwill exceeded the carrying amount,
therefore the second step of impairment testing is not required and no
impairment has been recognized in the current year of adoption.
Land O'Lakes Farmland Feed LLC will perform impairment tests annually
and whenever events or circumstances occur indicating that goodwill or other
intangible assets might be impaired. As of January 1, 2002, we are no longer
amortizing goodwill, except for goodwill related to the acquisition of
cooperatives and the formation of joint ventures.
The following table presents a reconciliation of net earnings adjusted
for the exclusion of amortization of goodwill no longer required to be
amortized, net of income taxes:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2002 2001 2002 2001
------- ------- ------- -------
Net earnings ................................... $11,832 $ 8,239 $34,995 $21,447
Add back: Goodwill amortization, net of tax..... - 210 - 390
------- ------- ------- -------
Adjusted net earnings .......................... $11,832 $ 8,449 $34,995 $21,837
======= ======= ======= =======
THREE
MONTHS ENDED
YEAR ENDED DECEMBER 31,
2001 2000
------- -------
Net earnings (loss) ............................ $39,146 $(6,228)
Add back: Goodwill amortization, net of tax..... 1,041 85
------- -------
Adjusted net earnings (loss) ................... $40,187 $(6,143)
======= =======
6
2. GOODWILL AND OTHER INTANGIBLE ASSETS
A summary of intangible assets follows:
AS OF SEPTEMBER 30, 2002
--------------------------------
GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION
-------------- ------------
Amortized intangible assets
Trademarks.......................................... $ 882 $ (240)
Patents............................................. 16,373 (1,106)
Agreements not to compete........................... 1,402 (560)
Other............................................... 9,930 (5,991)
---------- -----------
Total............................................... $ 28,587 $ (7,897)
========== ===========
Nonamortized intangible assets
Trademarks.......................................... $ 76,963
==========
Aggregate amortization expense:
For nine months ended September 30, 2002............ $ 3,916
Estimated amortization expense:
For three months ended December 31, 2002............ $ 1,026
For year ended December 31, 2003.................... 4,107
For year ended December 31, 2004.................... 4,107
For year ended December 31, 2005.................... 4,107
For year ended December 31, 2006.................... 3,991
For year ended December 31, 2007.................... 3,546
The changes in the carrying amount of goodwill for the nine months
ended September 30, 2002, are as follows:
Balance as of January 1, 2002................... $ 104,749
Reallocation of purchase price................ 57,866
Amortization expense.......................... (349)
-------------
Balance as of September 30, 2002............... $ 162,266
=============
The reallocation of the purchase price was primarily the result of
finalizing the appraisals during the third quarter ended September 30, 2002. The
offsetting reduction to property, plant and equipment resulted in a $3.9 million
adjustment to reduce depreciation expense, which was also recorded in the third
quarter ended September 30, 2002.
3. RECEIVABLES
A summary of receivables is as follows:
SEPTEMBER 30, DECEMBER 31,
2002 2001
-------------------- --------------------
Trade accounts............................................... $ 23,747 $ 25,320
Notes and contracts.......................................... 22,706 18,071
Notes from sale of trade receivables (see Note 4)............ 61,247 70,878
Other........................................................ 11,337 13,879
-------------------- --------------------
119,037 128,148
Less allowance for doubtful accounts......................... 9,964 9,085
-------------------- --------------------
Total receivables, net....................................... $ 109,073 $ 119,063
==================== ====================
4. RECEIVABLES PURCHASE FACILITY
In December 2001, Land O'Lakes, Inc., Land O'Lakes Farmland Feed LLC,
and Purina Mills, LLC established a $100.0 million receivables purchase facility
with CoBank, ACB (CoBank). A wholly owned unconsolidated special purpose entity,
Land O'Lakes Farmland Feed SPV, LLC, (SPE), was established to purchase certain
receivables from Land O'Lakes, Inc., Land O'Lakes Farmland Feed LLC, and Purina
Mills, LLC. CoBank has been granted an interest in the receivables owned by the
SPE. The transfers of the receivables from the Company to the SPE are structured
as sales and, accordingly, the receivables transferred to the SPE are not
reflected in the Company's consolidated balance sheet. However, Land O'Lakes,
Inc., Land O'Lakes Farmland Feed LLC, and Purina Mills, LLC retain the credit
risk related to the repayment of the notes receivable with the SPE, which in
turn is dependent upon the credit risk of the SPE's receivables. Accordingly,
the Company has retained reserves for estimated losses. The Company expects no
7
significant gains or losses from the sale of the receivables. At September 30,
2002 and December 31, 2001, there was $35.0 million and $75.8 million of SPE
borrowings outstanding, respectively. The total accounts receivable sold by the
Company during the three months and nine months ended September 30, 2002 were
$561.5 million and $1,686.7 million, respectively.
5. INVENTORIES
A summary of inventories is as follows:
SEPTEMBER 30, DECEMBER 31,
2002 2001
-------- --------
Raw materials ........ $ 79,447 $ 63,435
Finished goods ....... 33,237 50,124
-------- --------
Total inventories .... $112,684 $113,559
======== ========
6. INVESTMENTS
The Company's investments are as follows:
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------------ ------------------
Harmony Farms, LLC................................ $ 3,340 $ 3,969
New Feeds, LLC.................................... 2,979 3,214
Iowa River Feeds, LLC............................. 2,563 2,648
Agland Farmland Feed, LLC......................... 2,339 2,435
Pro-Pet, LLC...................................... 2,132 2,362
Nutri-Tech Feeds, LLC............................. 2,345 2,314
LOLFF SPV, LLC.................................... 1,000 1,805
Northern Country Feeds, LLC....................... 1,688 1,652
CalvaAlto Liquid, LLC............................. 1,302 1,302
T-PM Holding Company.............................. 1,375 1,290
Northern Colorado Feed, LLC....................... 834 1,210
Strauss Feeds, LLC................................ 1,229 1,073
Nutrikowi, LLC.................................... 876 783
Dakotaland Feeds, LLC............................. 669 736
Other............................................. 6,450 4,703
------------------ ------------------
Total investments................................. $ 31,121 $ 31,496
================== ==================
All of the above investments are accounted for under the equity method with the
exception of the unconsolidated LOLFF SPV, LLC and a portion of the investments
under the caption "Other", which are accounted for under the cost method.
7. PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment is as follows:
SEPTEMBER 30, DECEMBER 31,
2002 2001
-------------------- --------------------
Land and land improvements............................. $ 23,894 $ 23,826
Buildings and building equipment....................... 106,587 124,205
Machinery and equipment................................ 208,360 247,186
Construction in progress............................... 19,379 13,019
-------------------- --------------------
358,220 408,236
Less accumulated depreciation.......................... 104,082 81,280
-------------------- --------------------
Total property, plant and equipment, net............... $ 254,138 $ 326,956
==================== ====================
8. RESTRUCTURING AND IMPAIRMENT
For the three months ended September 30, 2002, the Company recorded a
$0.9 million restructuring and impairment charge of which $0.7 million was
related to the write-down of certain impaired plant assets to their estimated
fair value, and $0.2 million was related to employee severance and outplacement
costs. The 2001 reversal of $2.4 million was for the sale of certain animal feed
assets that had been written off in December 2000, and to reflect the decision
to continue operating a plant previously scheduled for shutdown.
8
For the nine months ended September 30, 2002 the Company recorded
restructuring and impairment charges of $5.4 million. Of this amount, $3.0
million represented severance and outplacement costs for employees and $2.4
million represented a write-down of certain impaired plant assets. $2.3 million
of the charges remained accrued as of September 30, 2002. For the nine months
ended September 30, 2001, the Company recorded a restructuring reversal of $4.2
million for the sale of certain assets that had been written off in December
2000, and to reflect the decision to continue to operate plants previously
scheduled for shutdown.
9. GAIN ON SALE OF INTANGIBLES
For the nine months ended September 30, 2002, the Company recorded a
gain of $4.2 million on the sale to Potash Corporation of Saskatchewan of a
customer list pertaining to the feed phosphate distribution business.
10. RELATED PARTY TRANSACTIONS
In accordance with the Management Services Agreement between Land
O'Lakes, Inc. and Farmland Industries, Inc. (Farmland), Land O'Lakes, Inc.
charges the Company for corporate services such as legal, insurance
administration, tax administration, human resources, payroll and benefit
administration, leasing, public relations, credit and collections, accounting,
and information technology support. These costs totaled $5.8 million and $4.8
million for the nine months ended September 30, 2002 and 2001, respectively.
Payroll and benefit-related costs are paid directly by Land O'Lakes,
Inc. and reimbursed by the Company. These costs totaled $78.7 million and $79.0
million for the nine months ended September 30, 2002 and 2001, respectively.
As part of the acquisition of Purina Mills, Inc. on October 11, 2001,
Land O'Lakes, Inc. assumed certain liabilities, including a $59.7 million
deferred tax liability. The Company has established a noncurrent note payable
for this liability and, as future taxes relating to the deferred tax liability
are paid by Land O'Lakes, Inc., the Company will make a corresponding payment to
Land O'Lakes, Inc. This note is non-interest bearing and $59.7 million was
outstanding at September 30, 2002 and December 31, 2001.
The Company has a $100 million revolving credit facility with Land
O'Lakes, Inc. which bears interest at LIBOR plus 260 basis points. The facility
terminates on October 31, 2003, and is renewable annually. The Company had a
note receivable from Land O' Lakes, Inc. of $17.7 million at September 30, 2002
and a note payable to Land O' Lakes, Inc. of $29.2 million at December 31, 2001.
The Company entered into a Feed Supply Agreement with Farmland whereby
Farmland agreed to purchase all of its feed and ingredients, excluding grain,
from the Company. Such sales are made at prices competitive with those available
from other suppliers. Sales to Farmland under the agreement totaled $1.5 million
and $6.1 million for the nine months ended September 30, 2002 and 2001,
respectively.
Sales with unconsolidated subsidiaries of the Company totaled $39.8
million and $34.1 million for the nine months ended September 30, 2002 and 2001,
respectively.
11. CONSOLIDATING FINANCIAL INFORMATION
Land O'Lakes, Inc. issued $350 million in senior notes which are
guaranteed by Land O'Lakes, Inc. and certain of its wholly and majority owned
subsidiaries, including the Company, (the "Guarantor Subsidiaries"). Such
guarantees are full, unconditional and joint and several.
The following supplemental financial information sets forth, on an
unconsolidated basis, balance sheet, statement of operations and cash flow
information for the Company, Guarantor Subsidiaries and the Company's other
subsidiaries (the "Non-Guarantor Subsidiaries"). The supplemental financial
information reflects the investments of the Company in the Guarantor and
Non-Guarantor Subsidiaries using the equity method of accounting.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LAND O'LAKES FARMLAND FEED LLC
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 2002
WHOLLY
WHOLLY WHOLLY OWNED
OWNED OWNED SUBSIDIARIES
LAND O'LAKES SUBSIDIARIES PURINA OF PURINA NON-
FARMLAND FEED OF MILLS, MILLS, GUARANTOR
LLC PARENT LOL FF LLC LLC PARENT LLC PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ---------- ------------ ------------ ------------ ------------
($ IN THOUSANDS)
(UNAUDITED)
ASSETS
Current assets:
Cash and short-term
investments $ (15,428) $ 7,871 $ 5,542 $ (74) $ 2,089 $ - $ -
Receivables, net 126,755 18,487 9,640 12,766 7,997 (66,572) 109,073
Inventories 49,812 13,681 43,326 1,852 4,013 - 112,684
Prepaid expenses 1,316 348 997 2 257 - 2,920
Note receivable -
Land O'Lakes, Inc. 17,658 - - - - - 17,658
--------- --------- --------- --------- --------- --------- ---------
Total current
assets 180,113 40,387 59,505 14,546 14,356 (66,572) 242,335
Investments 410,871 258 2,674 8,799 2,196 (393,677) 31,121
Property, plant and
equipment, net 75,882 7,622 162,151 1,101 7,382 - 254,138
Goodwill, net 12,951 3,655 144,738 - 922 - 162,266
Other intangibles, net 1,114 1,550 94,690 - 299 - 97,653
Other assets 27,979 2,207 20,924 - 956 (19,310) 32,756
--------- --------- --------- --------- --------- --------- ---------
Total assets $ 708,910 $ 55,679 $ 484,682 $ 24,446 $ 26,111 $(479,559) $ 820,269
========= ========= ========= ========= ========= ========= =========
LIABILITIES AND EQUITIES
Current liabilities:
Notes and short-term
obligations $ 3,000 $ - $ - $ - $ - $ - $ 3,000
Accounts payable 95,446 20,514 32,408 7,053 6,372 (66,572) 95,221
Accrued expenses 12,647 2,112 25,314 129 1,885 - 42,087
--------- --------- --------- --------- --------- --------- ---------
Total current
liabilities 111,093 22,626 57,722 7,182 8,257 (66,572) 140,308
Notes payable -
Land O'Lakes, Inc. 59,664 4,902 11,376 - 3,032 (19,310) 59,664
Employee benefits and
other liabilities (668) - 34,118 - 430 - 33,880
Minority interests (16) - 16 - 3,125 - 3,125
Equities:
Contributed capital 515,379 16,272 346,125 21,163 10,117 (393,677) 515,379
Retained earnings 23,458 11,879 35,325 (3,899) 1,150 - 67,913
--------- --------- --------- --------- --------- --------- ---------
Total equities 538,837 28,151 381,450 17,264 11,267 (393,677) 583,292
--------- --------- --------- --------- --------- --------- ---------
Total liabilities and
equities $ 708,910 $ 55,679 $ 484,682 $ 24,446 $ 26,111 $(479,559) $ 820,269
========= ========= ========= ========= ========= ========= =========
10
LAND O'LAKES FARMLAND FEED LLC
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002
WHOLLY
WHOLLY WHOLLY OWNED
OWNED OWNED SUBSIDIARIES
LAND O'LAKES SUBSIDIARIES PURINA OF PURINA NON-
FARMLAND FEED OF MILLS, MILLS, GUARANTOR
LLC PARENT LOL FF LLC LLC PARENT LLC PARENT SUBSIDIARIES CONSOLIDATED
------------- ------------ ---------- ------------ ------------ ------------
($ IN THOUSANDS)
(UNAUDITED)
Net sales $ 322,648 $ 53,264 $ 198,648 $ 6,863 $ 13,025 $ 594,448
Cost of sales 294,287 48,720 163,349 5,090 10,969 522,415
--------- --------- --------- --------- --------- ---------
Gross profit 28,361 4,544 35,299 1,773 2,056 72,033
Selling, general and administration 28,383 3,158 24,709 2,739 1,389 60,378
Restructuring and impairment
charges 942 - - - - 942
--------- --------- --------- --------- --------- ---------
(Loss) earnings from operations (964) 1,386 10,590 (966) 667 10,713
Interest (income) expense, net (548) 98 (317) (5) 35 (737)
Equity in (earnings) loss of
affiliated companies (486) - 101 (191) - (576)
Minority interest in (loss)
earnings of subsidiaries (41) 25 (62) - 272 194
--------- --------- --------- --------- --------- ---------
Net earnings (loss) $ 111 $ 1,263 $ 10,868 $ (770) $ 360 $ 11,832
========= ========= ========= ========= ========= =========
11
LAND O'LAKES FARMLAND FEED LLC
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
WHOLLY
WHOLLY WHOLLY OWNED
OWNED OWNED SUBSIDIARIES
LAND O'LAKES SUBSIDIARIES PURINA OF PURINA NON-
FARMLAND FEED OF MILLS, MILLS, GUARANTOR
LLC PARENT LOL FF LLC LLC PARENT LLC PARENT SUBSIDIARIES CONSOLIDATED
------------- ------------ ---------- ------------ ------------ ------------
($ IN THOUSANDS)
(UNAUDITED)
Net sales $ 972,246 $ 141,592 $ 599,488 $ 20,805 $ 40,320 $ 1,774,451
Cost of sales 884,684 128,452 495,054 15,458 35,606 1,559,254
----------- ----------- ----------- ----------- ----------- -----------
Gross profit 87,562 13,140 104,434 5,347 4,714 215,197
Selling, general and administration 83,818 8,662 77,180 7,822 3,726 181,208
Restructuring and impairment
charges 5,418 - - - - 5,418
----------- ----------- ----------- ----------- ----------- -----------
(Loss) earnings from operations (1,674) 4,478 27,254 (2,475) 988 28,571
Interest (income) expense, net (1,664) 339 (876) (10) 130 (2,081)
Gain on sale of intangibles (4,184) - - - - (4,184)
Equity in (earnings) loss of
affiliated companies (1,326) - 44 443 - (839)
Minority interest in (loss)
earnings of subsidiaries (8) 231 7 - 450 680
----------- ----------- ----------- ----------- ----------- -----------
Net earnings (loss) $ 5,508 $ 3,908 $ 28,079 $ (2,908) $ 408 $ 34,995
=========== =========== =========== =========== =========== ===========
12
LAND O'LAKES FARMLAND FEED LLC
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
WHOLLY
LAND WHOLLY WHOLLY OWNED
O'LAKES OWNED OWNED SUBSIDIARIES
FARMLAND SUBSIDIARIES PURINA OF PURINA
FEED OF MILLS, MILLS,
LLC PARENT LOL FF LLC LLC PARENT LLC PARENT
---------- ------------ ---------- ------------
($ IN THOUSANDS)
(UNAUDITED)
ASSETS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 5,508 $ 3,908 $ 28,079 $ (2,908)
Adjustments to reconcile net earnings
(loss) to cash provided (used) by
operating activities:
Depreciation and amortization 11,676 710 21,234 189
Bad debt expense 2,175 - - -
Decrease (increase) in other assets 30,080 (5) (2,640) (152)
(Decrease) increase in other liabilities (340) (3,624) 1,058 -
Restructuring and impairment charges 5,418 - - -
Equity in (earnings) loss of affiliated
companies (1,326) - 44 443
Minority interests (8) 231 7 -
Changes in current assets and liabilities,
net of acquisitions and divestitures:
Receivables (28,455) (4,346) 2,820 (433)
Inventories (3,594) 1,853 68 550
Other current assets 1,558 539 1,426 (2)
Accounts payable 36,684 5,588 (16,260) 1,933
Accrued expenses 9,528 694 (6,892) 235
--------- --------- --------- ---------
Net cash provided (used) by operating
activities 68,904 5,548 28,944 (145)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and
equipment (7,799) (444) (5,798) (143)
Proceeds from sale of investment 1,592 - 452 -
Proceeds from sale of property, plant
and equipment 5,692 - - -
--------- --------- --------- ---------
Net cash used by investing
activities (515) (444) (5,346) (143)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in short-term debt (2,000) - - -
Proceeds from note payable to
Land O'Lakes, Inc. 339,982 - - -
Payments on note payable to
Land O'Lakes, Inc. (402,025) (1,610) (32,212) -
--------- --------- --------- ---------
Net cash (used) provided by
financing activities (64,043) (1,610) (32,212) -
--------- --------- --------- ---------
Net increase (decrease) in cash 4,346 3,494 (8,614) (288)
Cash and short-term investments at
beginning of period (19,774) 4,377 14,156 214
Cash and short-term investments at --------- --------- --------- ---------
end of period $ (15,428) $ 7,871 $ 5,542 $ (74)
========= ========= ========= =========
NON-
GUARANTOR
SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------
($ IN THOUSANDS)
(UNAUDITED)
ASSETS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 408 $ - $ 34,995
Adjustments to reconcile net earnings
(loss) to cash provided (used) by
operating activities:
Depreciation and amortization 524 - 34,333
Bad debt expense - - 2,175
Decrease (increase) in other assets 536 (43,702) (15,883)
(Decrease) increase in other liabilities 130 - (2,776)
Restructuring and impairment charges - - 5,418
Equity in (earnings) loss of affiliated
companies - - (839)
Minority interests 450 - 680
Changes in current assets and liabilities,
net of acquisitions and divestitures:
Receivables (3,387) 41,616 7,815
Inventories 1,998 - 875
Other current assets 31 - 3,552
Accounts payable (629) (49,169) (21,853)
Accrued expenses 354 - 3,919
--------- --------- ---------
Net cash provided (used) by operating
activities 415 (51,255) 52,411
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and
equipment (114) - (14,298)
Proceeds from sale of investment - - 2,044
Proceeds from sale of property, plant
and equipment - - 5,692
--------- --------- ---------
Net cash used by investing
activities (114) - (6,562)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in short-term debt - - (2,000)
Proceeds from note payable to
Land O'Lakes, Inc. - - 339,982
Payments on note payable to
Land O'Lakes, Inc. (2,258) 51,255 (386,850)
--------- --------- ---------
Net cash (used) provided by
financing activities (2,258) 51,255 (48,868)
--------- --------- ---------
Net increase (decrease) in cash (1,957) - (3,019)
Cash and short-term investments at
beginning of period 4,046 - 3,019
Cash and short-term investments at --------- --------- ---------
end of period $ 2,089 $ - $ -
========= ========= =========
13
LAND O'LAKES FARMLAND FEED LLC
SUPPLEMENTAL CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2001
WHOLLY
WHOLLY WHOLLY OWNED
OWNED OWNED SUBSIDIARIES
LAND O'LAKES SUBSIDIARIES PURINA OF PURINA NON-
FARMLAND FEED OF MILLS, MILLS, GUARANTOR
LLC PARENT LOL FF LLC LLC PARENT LLC PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------ ---------- ------------ ------------ ------------ ------------
($ IN THOUSANDS)
(UNAUDITED)
ASSETS
Current assets:
Cash and short-term
investments ............ $ (19,774) $ 4,377 $ 14,156 $ 214 $ 4,046 $ - $ 3,019
Receivables, net .......... 103,219 14,147 9,680 12,417 4,556 (24,956) 119,063
Inventories ............... 46,219 15,534 43,393 2,402 6,011 - 113,559
Prepaid expenses .......... 2,883 887 2,423 - 279 - 6,472
--------- --------- --------- --------- --------- --------- ---------
Total current
assets ............... 132,547 34,945 69,652 15,033 14,892 (24,956) 242,113
Investments ................. 391,970 258 19,712 11,077 1,303 (392,824) 31,496
Property, plant and
equipment, net ............ 90,709 7,887 219,421 1,147 7,792 - 326,956
Goodwill, net ............... 13,262 3,656 86,872 - 959 - 104,749
Other intangibles, net ...... 1,163 - 99,169 - 331 - 100,663
Other assets ................ 88,531 3,246 - - 1,232 (65,369) 27,640
--------- --------- --------- --------- --------- --------- ---------
Total assets ........... $ 718,182 $ 49,992 $ 494,826 $ 27,257 $ 26,509 $(483,149) $ 833,617
========= ========= ========= ========= ========= ========= =========
LIABILITIES AND EQUITIES
Current liabilities:
Notes and short-term
obligations ............ $ 4,509 $ 23 $ - $ - $ 468 $ - $ 5,000
Notes payable-Land
O'Lakes, Inc. .......... 29,210 - - - - - 29,210
Accounts payable .......... 78,451 12,211 24,136 14,009 5,670 (17,403) 117,074
Accrued expenses .......... 13,170 1,418 19,120 (108) 1,532 - 35,132
--------- --------- --------- --------- --------- --------- ---------
Total current
liabilities .......... 125,340 13,652 43,256 13,901 7,670 (17,403) 186,416
Notes payable-Land
O'Lakes, Inc. ........... 59,664 6,512 58,763 - 5,290 (70,565) 59,664
Employee benefits and
other liabilities ......... 755 2,644 32,980 - 277 - 36,656
Minority interests .......... (840) 910 28 - 2,821 - 2,919
Equities:
Contributed capital ....... 515,044 18,300 350,600 16,299 9,982 (395,181) 515,044
Retained earnings
(accumulated deficit).... 18,219 7,974 9,199 (2,943) 469 - 32,918
--------- --------- --------- --------- --------- --------- ---------
Total equities ......... 533,263 26,274 359,799 13,356 10,451 (395,181) 547,962
--------- --------- --------- --------- --------- --------- ---------
Total liabilities and
equities .................. $ 718,182 $ 49,992 $ 494,826 $ 27,257 $ 26,509 $(483,149) $ 833,617
========= ========= ========= ========= ========= ========= =========
14
LAND O'LAKES FARMLAND FEED LLC
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001
LAND O'LAKES WHOLLY OWNED NON-
FARMLAND FEED SUBSIDIARIES OF GUARANTOR
LLC PARENT LOL FF LLC SUBSIDIARIES CONSOLIDATED
------------- --------------- ------------ ------------
($ IN THOUSANDS)
(UNAUDITED)
Net sales $ 343,150 $ 42,092 $ 21,537 $ 406,779
Cost of sales 315,973 37,889 20,685 374,547
--------- --------- --------- ---------
Gross profit 27,177 4,203 852 32,232
Selling, general and administration 22,450 2,434 (39) 24,845
Restructuring and impairment
(reversals) (2,433) - - (2,433)
--------- --------- --------- ---------
Earnings from operations 7,160 1,769 891 9,820
Interest expense, net 1,138 227 113 1,478
Equity in earnings of
affiliated companies (405) - - (405)
Minority interest in (loss)
earnings of subsidiaries (1) 100 409 508
--------- --------- --------- ---------
Net earnings $ 6,428 $ 1,442 $ 369 $ 8,239
========= ========= ========= =========
15
LAND O'LAKES FARMLAND FEED LLC
SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
LAND O'LAKES WHOLLY OWNED NON-
FARMLAND FEED SUBSIDIARIES OF GUARANTOR
LLC PARENT LOL FF LLC SUBSIDIARIES CONSOLIDATED
------------- --------------- ------------ ------------
($ IN THOUSANDS)
(UNAUDITED)
Net sales $ 1,032,046 $ 116,045 $ 55,181 $ 1,203,272
Cost of sales 947,013 104,860 52,443 1,104,316
----------- ----------- ----------- -----------
Gross profit 85,033 11,185 2,738 98,956
Selling, general and administration 69,240 6,667 1,427 77,334
Restructuring and impairment
(reversals) (4,242) - - (4,242)
----------- ----------- ----------- -----------
Earnings from operations 20,035 4,518 1,311 25,864
Interest expense, net 3,984 589 359 4,932
Equity in earnings of
affiliated companies (1,236) - - (1,236)
Minority interest in earnings
of subsidiaries 2 247 472 721
----------- ----------- ----------- -----------
Net earnings $ 17,285 $ 3,682 $ 480 $ 21,447
=========== =========== =========== ===========
16
LAND O'LAKES FARMLAND FEED LLC
SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
LAND O'LAKES WHOLLY OWNED NON-
FARMLAND FEED SUBSIDIARIES OF GUARANTOR
LLC PARENT LOL FF LLC SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- --------------- ------------ ------------ ------------
($ IN THOUSANDS)
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 17,285 $ 3,682 $ 480 $ - $ 21,447
Adjustments to reconcile net earnings
to cash provided (used) by operating
activities:
Depreciation and amortization 11,369 669 669 - 12,707
Bad debt expense 436 - - - 436
(Increase) decrease in other assets (5,477) 329 (1,185) 6,031 (302)
(Decrease) increase in other liabilities (3,806) (1,262) 82 - (4,986)
Restructuring and impairment reversals (4,242) - - - (4,242)
Equity in earnings of affiliated
companies (1,236) - - - (1,236)
Minority interests 2 247 472 - 721
Changes in current assets and liabilities, net
of acquisitions and divestitures:
Receivables 14,950 (2,485) (3,485) (16,894) (7,914)
Inventories 8,788 2,489 476 - 11,753
Other current assets 5,964 (407) (3) - 5,554
Accounts payable (17,569) (2,853) 254 5,163 (15,005)
Accrued expenses (26,049) (1,162) (576) - (27,787)
--------- --------- --------- --------- ---------
Net cash provided (used) by operating
activities 415 (753) (2,816) (5,700) (8,854)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (12,949) (1,381) (152) - (14,482)
Proceeds from sale of investment 1,676 - - - 1,676
Proceeds from sale of property, plant and
equipment 3,374 - - - 3,374
--------- --------- --------- --------- ---------
Net cash used by investing
activities (7,899) (1,381) (152) - (9,432)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term debt 1,659 (1,500) 1 1,500 1,660
Proceeds from note payable to Land O'
Lakes, Inc. 276,351 - - 4,200 280,551
Payments on note payable to Land O'
Lakes, Inc. (263,158) (2,481) 1,714 - (263,925)
--------- --------- --------- --------- ---------
Net cash provided (used) by financing
activities 14,852 (3,981) 1,715 5,700 18,286
--------- --------- --------- --------- ---------
Net increase (decrease) in cash 7,368 (6,115) (1,253) - -
Cash and short-term investments at beginning of
period (9,792) 7,397 2,395 - -
--------- --------- --------- --------- ---------
Cash and short-term investments at end of period $ (2,424) $ 1,282 $ 1,142 $ - $ -
========= ========= ========= ========= =========
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussions of financial condition and
results of operations Land O'Lakes Farmland Feed LLC together with the financial
statements and the notes to such statements included elsewhere in this Form
10-Q. This discussion contains forward-looking statements based on current
expectations, assumptions, estimates and projections of management Land O'Lakes
Farmland Feed. These forward-looking statements involve risks and uncertainties.
Actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, as more fully
described in the "Risk Factors" section and elsewhere in this Form 10-Q. We
undertake no obligation to update publicly any forward-looking statements.
OVERVIEW
General
Land O'Lakes Farmland Feed LLC produces both commercial and lifestyle
feed for a wide variety of animals, including dairy cattle, beef cattle, swine,
poultry, horses and other specialty animals such as laboratory and zoo animals.
Farmers and specialized livestock producers who derive income from the sale of
milk, eggs, poultry and livestock use Land O'Lakes Farmland Feed LLC's
commercial feed products. Customers who own animals principally for
non-commercial purposes use Land O'Lakes Farmland Feed LLC's lifestyle feed
products. Land O'Lakes Farmland Feed LLC markets animal feed products under the
Land O'Lakes Farmland Feed label. Through its wholly-owned subsidiary Purina
Mills, Inc., Land O'Lakes Farmland Feed LLC also markets animal feed, other than
dog and cat food, under the leading brands in the industry, Purina, Chow and the
"Checkerboard" Nine Square Logo.
Land O'Lakes Farmland Feed LLC was formed in October 2000 through the
combination of the feed businesses of Land O'Lakes, Inc. and Farmland Industries
Inc. Based on their relative contributions, Land O'Lakes, Inc. and Farmland
Industries, Inc. had ownership interests of 69.2% and 30.8%, respectively, at
the time of formation. Subsequent to the formation, the ownership interests were
changed to 73.7% and 26.3%, respectively, due to additional capital contribution
by Land O'Lakes, Inc. as well as an adjustment to the initial revenue stream
contribution.
In October 2001, Land O'Lakes acquired Purina Mills, Inc. and
contributed the business to Land O'Lakes Farmland Feed LLC in consideration of
an increase in Land O'Lakes, Inc.'s ownership interest from 73.7% to 92%. The
total purchase price of the Purina Mills, Inc. acquisition was $358.6 million.
The acquisition added $86.9 million of goodwill and $98.9 million of other
intangible assets to the balance sheet of Land O'Lakes Farmland Feed LLC. Land
O'Lakes, Inc. financed the acquisition and refinanced outstanding indebtedness
of Land O'Lakes, Inc. and Purina Mills, Inc. through a combination of secured
bank revolving credit and term debt and the issuance of $350.0 million of
unsecured senior notes due 2011. Land O'Lakes Farmland Feed LLC and its
wholly-owned domestic subsidiaries (other than LOL Farmland Feed SPV, LLC) have
guaranteed this indebtedness and have secured that obligation with substantially
all assets. By the end of 2002, Land O'Lakes Farmland Feed LLC expects to have
implemented programs that would enable it to generate recurring annual cost
savings of approximately $50 million as a result of the acquisition, relative to
costs that would have been incurred separately. In 2002, we expect to generate
approximately $25 million in savings, which are expected to be partially offset
by plant closing, severance, employee relocation and information technology
integration costs of approximately $20 million.
The table under "Results of Operations" reflects the relative
contribution of selected results of operations of Land O'Lakes Farmland Feed LLC
and Purina Mills, LLC for the periods presented.
Consolidated and Unconsolidated Businesses
Land O'Lakes Farmland Feed LLC has numerous business activities that are
not wholly-owned. The results of the majority and wholly-owned businesses are
fully consolidated. The minority owners' share in these businesses is eliminated
in the consolidated financial statements. Most of the investments in joint
ventures in which Land O'Lakes Farmland Feed LLC has 50% or less of the
governance rights are accounted for under the equity method of accounting. In
the third quarter of 2002, unconsolidated businesses contributed earnings of
$0.6 million to Land O'Lakes Farmland Feed LLC, compared to earnings of $0.4
million in the third quarter of 2001. For the nine months ended September 30,
2002, earnings in unconsolidated businesses were $0.8 million compared to $1.2
million for the nine months ended September 30, 2001. The investment in
unconsolidated businesses as of September 30, 2002 was $31.1 million, compared
to $31.5 million as of December 31, 2001. Cash flow from investment in
unconsolidated businesses in the third quarter of 2002 was $0.9 million,
compared to $1.2 million in the third quarter of 2001. Cash flow from investment
in unconsolidated businesses for the first nine months of 2002 was $2.0 million,
compared to $1.7 million for the first nine months of 2001.
18
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 the reported results of
operations and financial condition.
Inventory Valuation. Inventories are valued at the lower of cost or
market. Cost is determined on an average cost basis. Our products use
agricultural commodities as inputs, in particular corn, soybean meal, and wheat
midds. Through pricing and the use of risk management tools, the results are
marginally affected by the cost of commodity inputs. Industry practices in
animal feed pass cost fluctuations on to the customer in the long term, but do
not protect against large sudden movements in input costs in the short term.
We use derivative commodity instruments, primarily futures contracts, to
reduce the exposure to changes in commodity prices primarily for product inputs
such as soybean meal and corn. These contracts are not designated as hedges
under Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities." Accordingly, since the
adoption of SFAS No. 133, effective January 1, 2001, the futures contracts are
marked to market each month and unrealized gains and losses are recognized in
earnings. Prior to 2001, we did not mark derivative commodity instruments to
market; instead, we recorded losses or gains only when realized.
Allowance for Doubtful Accounts. We estimate the allowance for doubtful
accounts based on an analysis of specific accounts, an analysis of historical
trends, payment and write-off histories, current sales levels and the state of
the economy. Our credit risks are continually reviewed and management believes
that adequate provisions have been made for doubtful accounts. However,
unexpected changes in the financial strength of customers or changes in the
state of the economy could negatively impact the financial results.
Recoverability of Long-Lived Assets. We assess the recoverability of
goodwill and other long-lived assets annually or whenever events or changes in
circumstances indicate that expected future undiscounted cash flows might not be
sufficient to support the carrying amount of an asset. We deem an asset to be
impaired if a forecast of undiscounted future operating cash flows is less than
an asset's carrying amount. If an asset is determined to be impaired, the loss
is measured as the amount by which the carrying value of the asset exceeds its
fair value.
Merchandising Activities
Land O'Lakes Farmland Feed LLC, in addition to selling its own products,
buys, sells or brokers for a fee, soybean meal and other feed ingredients under
its ingredient merchandising program. Land O'Lakes Farmland Feed LLC markets
these ingredients to local member cooperatives and to other feed manufacturers,
which use them to produce feed. Although this activity generates substantial
revenues, it is a very low-margin business. However, we benefit from increased
purchasing efficiencies, resulting in lower prices for feed manufacturing
inputs. For the three months ended September 30, 2002, ingredient merchandising
generated net sales of $124.6 million, or 21.0% of net sales, and a gross profit
of $3.2 million, or 4.4% of total gross profit. For the nine months ended
September 30, 2002, ingredient merchandising generated net sales of $362.6
million, or 20.4% of net sales, and gross profit of $9.8 million, or 4.6% of
total gross profit.
Seasonality
The feed business is seasonal, with a higher percentage of the feed volume
sold, and earnings generated, during the first and fourth quarters of the year.
This seasonality is driven largely by weather conditions affecting cattle
product lines. If the weather is particularly cold and wet during the winter,
sales of cattle feed increase as compared with normal seasonal patterns because
the cattle are unable to graze under those conditions and have higher
nutritional requirements. If the weather is relatively warm during the winter,
sales of cattle feed may decrease as compared with normal seasonal patterns
because the cattle may be better able to graze under the warmer conditions.
Other product lines are affected marginally by seasonal conditions, but these
conditions do not materially affect quarter-by-quarter results of operations.
Agricultural Commodity Inputs and Outputs
Many of our products use agricultural commodities as inputs, such as
corn, soybean meal, and wheat midds. Through pricing and the use of risk
management tools, our results are marginally affected by the cost of commodity
inputs. Industry practices in animal feed pass cost fluctuations on to the
customer in the long term, but do not protect against large sudden movements in
input costs in the short term.
19
We follow industry standards for feed pricing. The feed industry
generally prices products based on Income Over Ingredient Cost (IOIC) per ton of
feed. This practice tends to mitigate the impact of volatility in commodity
ingredient markets on animal feed profits. As ingredient costs fluctuate, the
changes are generally passed on to customers through weekly or monthly changes
in prices. Thus, the key indicator of business performance is IOIC rather than
net sales. Net sales are considered a poor indicator of performance as large
fluctuations can occur from period to period due to volatility in underlying
commodity ingredient prices.
We enter into forward looking contracts to supply feed, which currently
represent approximately 20% of the feed output. When we enter into these
contracts, we also generally enter into forward input supply contracts to "lock
in" IOIC.
Changes in commodity grain prices also have an impact on the mix of
products that we sell. When grain prices are relatively high, the demand for
complete feed rises since many livestock producers are also grain growers and
will sell grain in the market and purchase complete feed as needed. When grain
prices are relatively low, these producers will feed their grain to their
livestock and purchase premixes and supplements to provide complete nutrition to
their animals. These fluctuations in product mix generally have minimal effect
on operating results. Complete feed has a far lower margin per ton than
supplements and premixes. Thus, during periods of relatively high grain prices,
although margins per ton are lower, we sell substantially more tonnage because
the grain portion of complete feed makes up the majority of its weight.
As dairy production has shifted from the Upper Midwest to the western
United States, we have seen a change in our feed product mix, with lower sales
of complete feed and increased sales of simple blends. Complete feed is
manufactured feed which meets the complete nutritional requirements of the
animal, whereas a simple blend is a blending of unprocessed commodities to which
the producer then adds vitamins to supply the animal's nutritional needs. This
change is a result of differences in industry practices. Dairy producers in the
western United States tend to purchase feed components and mix them at the farm
location rather than purchasing a complete feed product delivered to the farm.
Producers will purchase grain blends and concentrated premixes from separate
suppliers. This shift is reflected in increased sales of simple blends in our
Western feed region and increases in our subsidiaries that manufacture premixes
in the Western area. In addition, the increase in vertical integration of swine
and poultry producers has resulted in increased sales of lower-margin feed
products.
Historically, Purina Mills, Inc. reported results of its swine business
together with its feed business. Accordingly, the swine business which we
acquired from Purina Mills, Inc. in October 2001 is reported within our results
for the three and nine months ended September 30, 2002. For the nine months
ended September 30, 2002, the Purina Mills, LLC swine business generated a loss
of $2.5 million compared to a gain of $0.5 million for the nine months ended
September 30, 2001.
20
RESULTS OF OPERATIONS
THREE MONTHS ENDED
------------------
SEPTEMBER 30, 2002 SEPTEMBER 30, 2001
------------------ ------------------
% OF % OF
AMOUNT NET SALES AMOUNT NET SALES
-------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
Net Sales
Land O'Lakes Farmland Feed $ 388,937 65.4% $ 406,779 100.0%
Purina Mills 205,511 34.6% - 0.0%
- -------------------------------------------------------------------------------------------------------------------
Total sales 594,448 100.0% 406,779 100.0%
Cost of sales
Land O'Lakes Farmland Feed 353,976 91.0% 374,547 92.1%
Purina Mills 168,439 82.0% - 0.0%
- -------------------------------------------------------------------------------------------------------------------
Total cost of sales 522,415 87.9% 374,547 92.1%
Gross Profit
Land O'Lakes Farmland Feed 34,961 9.0% 32,232 7.9%
Purina Mills 37,072 18.0% - 0.0%
- -------------------------------------------------------------------------------------------------------------------
Total gross profit 72,033 12.1% 32,232 7.9%
Selling, general and administration expense 60,378 10.2% 24,845 6.1%
Restructuring and impairment charges (reversals) 942 0.1% (2,433) 0.6%
- -------------------------------------------------------------------------------------------------------------------
Earnings from operations 10,713 1.8% 9,820 2.4%
Interest (income) expense, net (737) 0.1% 1,478 0.4%
Gain on sale of intangibles - 0.0% - 0.0%
Equity in earnings of affiliated companies (576) 0.1% (405) 0.1%
Minority interest in earnings of subsidiaries 194 0.0% 508 0.1%
- -------------------------------------------------------------------------------------------------------------------
Net earnings $ 11,832 2.0% $ 8,239 2.0%
===================================================================================================================
NINE MONTHS ENDED
-----------------
SEPTEMBER 30, 2002 SEPTEMBER 30, 2001
------------------ ------------------
% OF % OF
AMOUNT NET SALES AMOUNT NET SALES
-------------------------------------------------------------
(AMOUNTS IN THOUSANDS)
Net Sales
Land O'Lakes Farmland Feed $ 1,154,158 65.0% $ 1,203,272 100.0%
Purina Mills 620,293 35.0% - 0.0%
- -----------------------------------------------------------------------------------------------------------------------
Total sales 1,774,451 100.0% 1,203,272 100.0%
Cost of sales
Land O'Lakes Farmland Feed 1,048,742 90.9% 1,104,316 91.8%
Purina Mills 510,512 82.3% - 0.0%
- -----------------------------------------------------------------------------------------------------------------------
Total cost of sales 1,559,254 87.9% 1,104,316 91.8%
Gross Profit
Land O'Lakes Farmland Feed 105,416 9.1% 98,956 8.2%
Purina Mills 109,781 17.7% - 0.0%
- -----------------------------------------------------------------------------------------------------------------------
Total gross profit 215,197 12.1% 98,956 8.2%
Selling, general and administration expense 181,208 10.2% 77,334 6.4%
Restructuring and impairment charges (reversals) 5,418 0.3% (4,242) 0.4%
- -----------------------------------------------------------------------------------------------------------------------
Earnings from operations 28,571 1.6% 25,864 2.2%
Interest (income) expense, net (2,081) 0.1% 4,932 0.4%
Gain on sale of intangibles (4,184) 0.2% - 0.0%
Equity in earnings of affiliated companies (839) 0.1% (1,236) 0.1%
Minority interest in earnings of subsidiaries 680 0.0% 721 0.1%
- -----------------------------------------------------------------------------------------------------------------------
Net earnings $ 34,995 2.0% $ 21,447 1.8%
=======================================================================================================================
21
THREE MONTHS ENDED SEPTEMBER 30, 2002 AS COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2001
NET SALES
Net sales for the three months ended September 30, 2002 increased $187.6
million, or 46.1%, to $594.4 million, compared to net sales of $406.8 million
for the three months ended September 30, 2001. The acquisition of Purina Mills
contributed $205.5 million in incremental sales. This increase was partially
offset by declines in Land O'Lakes Farmland Feed branded sales. Sales in our
animal health products decreased $3.8 million as a result of a realigned
marketing arrangement with a large vendor whereby the vendor sells product
directly to our customer in exchange for a margin-based fee. Swine feed sales in
our Land O'Lakes Farmland Feed branded products decreased $6.0 million as a
result of decreased volumes and depressed market prices for hog producers,
caused, in part, by excess food proteins (such as beef, cattle, swine and
chickens) in the United States market. Sales increased $2.8 million in our Land
O'Lakes Farmland Feed branded lifestyle product lines reflecting a later start
to the beginning of the aquaculture feeding season in 2002 compared to 2001.
Sales of Land O'Lakes Farmland Feed branded beef feeds decreased $1.6 million,
primarily due to the economic effect of drought conditions in the Central United
States and excess food proteins in the United States market. Sales of bulk
phosphates decreased $5.2 million due to the sale of this business to a third
party. Sales in our dairy feeds area increased $1.8 million, driven by strong
sales of simple blends in our Western feed division. These increased sales are
the result of more cows moving to the western United States. Sales from
ingredient merchandising decreased $2.9 million, from $127.5 million during the
three months ended September 30, 2001 to $124.6 million for the three months
ended September 30, 2002.
COST OF SALES
Cost of sales for the three months ended September 30, 2002 increased
$147.9 million, or 39.5%, to $522.4 million, compared to $374.5 million for the
three months ended September 30, 2001. The acquisition of Purina Mills added
$168.4 million in cost of sales for the three months ended September 30, 2002.
This increase was slightly offset by a decrease in Land O'Lakes Farmland Feed
LLC branded product lines. Our animal health products decreased $3.5 million
driven by a realigned marketing arrangement whereby we no longer record cost of
sales dollars, but rather a margin-based fee. Land O'Lakes Farmland Feed branded
lifestyle cost of sales increased $2.3 million as a result of a later start to
the beginning to the aquaculture feeding season in 2002 compared to the 2001.
Land O'Lakes Farmland Feed branded swine cost of sales decreased by $5.0 million
due to decreased volume caused, in part, by a protein glut in the United States.
Land O'Lakes Farmland Feed LLC branded beef feeds cost of sales decreased $0.7
million, due to slower sales as a result of weak economic conditions caused by
drought in the Plains states and depressed market prices as there continues to
be excess protein sources in the marketplace. Cost of sales of bulk phosphates
decreased $4.7 million as we sold this business during the first quarter of
2002. Cost of sales in our dairy feed area increased $0.9 million, primarily as
a result of strong sales in our Western feed division. Cost reductions from the
integration efforts related to Purina Mills reduced our cost of sales by $1.7
million. Cost of sales as a percent of sales decreased 4.2 percentage points,
from 92.1% in the third quarter of 2001 to 87.9% in the same period of 2002. The
decrease was due primarily to higher margins on certain Purina Mills products,
which carry a comparatively higher margin than our traditional product lines.
Cost of sales also decreased due to cost reductions in our purchasing,
manufacturing and distribution area as a result of the integration of the Purina
Mills, LLC operations. Cost of sales decreased $2.9 million as a result of the
decrease in ingredient merchandising sales. An unrealized hedging loss in the
third quarter of 2002 related to corn and soybean meal futures contracts
increased cost of sales by $1.6 million, compared to a loss of $0.1 million in
the third quarter of 2001. IOIC as a percent of cost of sales increased to 25.6%
in the third quarter of 2002 from 16.2% in the same period of 2001 due to the
change in product mix and strong performance in our higher margin areas of milk
replacer and concentrated feed items.
SELLING, GENERAL AND ADMINISTRATION EXPENSE
Selling, general and administration expense for the three months ended
September 30, 2002 increased $35.6 million, or 143.5%, to $60.4 million,
compared to $24.8 million for the three months ended September 30, 2001.
Selling, general and administration expense as a percent of sales increased 4.1
percentage points from 6.1% for the three months ended September 30, 2001 to
10.2% for the three months ended September 30, 2002. The majority of this
increase was related to the acquisition of Purina Mills, Inc., which contributed
$27.5 million in increased selling, general and administration expense. In
addition, in the third quarter of 2002, we incurred one-time integration costs
of $5.0 million with none in the same period in 2001.
RESTRUCTURING AND IMPAIRMENT CHARGES
Land O'Lakes Farmland Feed LLC recorded a $0.9 million restructuring and
impairment charge for the three months ended September 30, 2002, of which $0.7
million was related to the write-down of certain impaired plant assets to their
estimated fair value, and $0.2 million was related to employee severance and
outplacement costs for employees at various locations. The 2001 reversal of $2.4
million was to reflect the decision to continue operating a plant previously
scheduled for shutdown.
22
We anticipate restructuring and impairment charges of approximately $7
million in 2002 related to the integration of Purina Mills, LLC into Land
O'Lakes Farmland Feed LLC.
INTEREST (INCOME) EXPENSE
Interest (income) expense in the third quarter of 2002 was ($0.7)
million compared to $1.5 million in the same period of 2001. Since the formation
of Land O'Lakes Farmland Feed LLC, interest is charged based on actual
borrowings. In the first quarter of 2001, Land O'Lakes Farmland Feed had a
current note payable to Land O'Lakes, Inc. of $29.2 million. After the
securitization of the feed, seed, and swine accounts receivable, cash was
generated to pay off this note and provide cash to Land O' Lakes, Inc.
EQUITY IN EARNINGS OF AFFILIATED COMPANIES
In the third quarter of 2002, equity in earnings of affiliated companies
was $0.6 million compared to $0.4 million in the third quarter of 2001.
MINORITY INTEREST IN EARNINGS OF SUBSIDIARIES
In the third quarter of 2002, we recorded minority interest in earnings
of majority-owned subsidiaries of $0.2 million compared to $0.5 million in the
third quarter of 2001.
INCOME TAXES
Upon the formation of Land O'Lakes Farmland Feed LLC on October 1, 2000,
provisions for income taxes were no longer recorded since the taxable operations
pass directly to the joint venture owners. Prior to the formation, income taxes
were allocated to Land O'Lakes Feed Division on the basis of its taxable income
and included in the Land O'Lakes, Inc. tax return.
NET EARNINGS
Net earnings increased $3.6 million to $11.8 million in the third
quarter of 2002, compared to $8.2 million in the third quarter of 2001.
NINE MONTHS ENDED SEPTEMBER 30, 2002 AS COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 2001
NET SALES
Net sales for the nine months ended September 30, 2002 increased $571.2
million, or 47.5%, to $1,774.5 million, compared to net sales of $1,203.3
million for the nine months ended September 30, 2001. The acquisition of Purina
Mills, Inc. contributed $620.3 million in incremental sales. This increase was
partially offset by declines in Land O'Lakes Farmland Feed LLC branded sales.
Sales in our animal health products decreased $14.0 million as a result of a
realigned marketing arrangement with a large vendor whereby we no longer record
sales dollars, but rather a margin-based fee. Sales in our Land O'Lakes Farmland
Feed branded swine products decreased $13.0 million as a result of decreased
volumes and depressed market prices for hogs, caused, in part, by excess food
proteins in the United States market. Sales of Land O'Lakes Farmland Feed LLC
branded beef feeds decreased $8.4 million, primarily due to the effect of warmer
than average winter weather and excess food proteins in the United States
market. Sales also decreased $2.5 million in our Land O'Lakes Farmland Feed LLC
branded lifestyle product lines, reflecting a delayed start to the aquaculture
feeding season and slower sales in our pet food area earlier in the year as we
launched a new product line. Sales of bulk phosphates decreased $13.5 million
due to the sale of this business to a third party. Sales in our dairy feeds area
increased $6.1 million, driven by strong sales of simple blends in our Western
region. We also experienced an increase of $3.5 million in our animal milk
products as a result of strong volumes. Finally, sales from ingredient
merchandising decreased $3.9 million from $366.5 million for the nine months
ended September 30, 2001 to $362.6 million for the nine months ended September
30, 2002.
COST OF SALES
Cost of sales for the nine months ended September 30, 2002 increased
$455.0 million, or 41.2%, to $1,559.3 million, compared to $1,104.3 million for
the nine months ended September 30, 2001. The acquisition of Purina Mills, Inc.
added $510.5 million in cost of sales for the nine months ended September 30,
2002. This increase was slightly offset by a decrease in Land O'Lakes Farmland
Feed branded product lines. Animal health products decreased $13.6 million
driven by a realigned marketing arrangement whereby we no
23
longer record cost of sales dollars, but rather a margin-based fee. Land O'Lakes
Farmland Feed LLC branded lifestyle cost of sales declined $4.3 million as
result of improved risk management in our aquaculture area and lower sales in
our pet food as we launched a new product line. Land O'Lakes Farmland Feed LLC
branded beef feeds cost of sales decreased $4.9 million, due to slower sales as
a result of warm winter weather. Land O'Lakes Farmland Feed LLC branded swine
feed cost of sales decreased by $7.7 million. Cost of sales of bulk phosphates
decreased $12.1 million as we sold this business during the first quarter of
2002. Cost of sales in our Animal Milk Products area increased $0.9 million
primarily due to increased volumes. Cost of sales for our dairy feed increased
$7.4 million, primarily as a result of strong sales in our Western region. Cost
reductions from the integration efforts related to Purina Mills, LLC reduced our
cost of sales by $5.0 million. Cost of sales as a percent of net sales decreased
3.9 percentage points, from 91.8% in the first nine months of 2001 to 87.9% in
the same period of 2002. The decrease was due primarily to higher margins on
certain Purina Mills, LLC products, which carry a comparatively higher margin
than our traditional product lines, stronger margins in our aquaculture area and
strong sales in our milk replacer areas. Cost of sales decreased $3.7 million as
a result of the decline in ingredient merchandising sales. An unrealized hedging
gain in the first nine months of 2002 related to corn and soybean meal futures
contracts decreased cost of sales by $2.3 million, compared to an increase from
an unrealized hedging loss of $1.3 million in the first nine months of 2001.
IOIC as a percent of cost of sales increased to 25.7% in the first nine months
of 2002 from 17.5% in the same period of 2001 due to the change in product mix
and the change in unrealized hedging gains and losses as noted above.
SELLING, GENERAL AND ADMINISTRATION EXPENSE
Selling, general and administration expense for the nine months ended
September 30, 2002 increased $103.9 million, or 134.4%, to $181.2 million,
compared to $77.3 million for the nine months ended September 30, 2001. Selling,
general and administration expense as a percent of sales increased 3.8
percentage points from 6.4% for the nine months ended September 30, 2001 to
10.2% for the nine months ended September 30, 2002. The majority of this
increase was related to the acquisition of Purina Mills, Inc., which contributed
$85.0 million in increased selling, general and administration expense. In
addition, in the first nine months of 2002, we incurred one-time integration
costs of $15.0 million with none in the same period in 2001. We also incurred an
additional $1.7 million of bad debt expense in the first nine months of 2002.
RESTRUCTURING AND IMPAIRMENT CHARGES
For the nine months ended September 30, 2002, Land O'Lakes Farmland Feed
LLC recorded a $5.4 million restructuring and impairment charge, of which $2.4
million was related to the write-down of certain impaired plant assets to their
estimated fair value, and $3.0 million was related to employee severance and
outplacement costs for 136 employees at the Ft. Dodge, IA office facility and
other plant facilities. The 2001 reversal of $4.2 million was for the sale of
certain animal feed assets that had been written off in December 2000 and to
reflect the decision to continue operating a plant previously scheduled for
shutdown.
We anticipate restructuring and impairment charges of approximately $7
million in 2002 related to the integration of Purina Mills, LLC into Land
O'Lakes Farmland Feed LLC.
INTEREST (INCOME) EXPENSE
Interest (income) expense for the nine months ended September 30, 2002
was ($2.1) million compared to $4.9 million in the same period of 2001. Since
the formation of Land O'Lakes Farmland Feed LLC, interest is charged based on
actual borrowings. In the first quarter of 2001, Land O'Lakes Farmland Feed LLC
had a current note payable to Land O'Lakes, Inc. in the amount of $29.2 million.
After the securitization of the feed, seed, and swine accounts receivable, cash
was generated to pay off this note and provide cash to Land O' Lakes, Inc.
EQUITY IN EARNINGS OF AFFILIATED COMPANIES
For the nine months ended September 30, 2002, equity in earnings of
affiliated companies was $0.8 million compared to $1.2 million for the same
period of 2001.
MINORITY INTEREST IN EARNINGS OF SUBSIDIARIES
In each of the nine months ended September 30, 2002 and September 30,
2001, Land O'Lakes Farmland Feed LLC recorded minority interest in earnings of
majority-owned subsidiaries of $0.7 million.
24
INCOME TAXES
Upon the formation of Land O'Lakes Farmland Feed LLC on October 1, 2000,
provisions for income taxes were no longer recorded since the taxable operations
pass directly to the joint venture owners. Prior to the formation, income taxes
were allocated to Land O'Lakes Feed Division on the basis of its taxable income
and included in the Land O'Lakes, Inc. tax return.
NET EARNINGS
Net earnings for the nine months ended September 30, 2002 were $35.0
million compared to $21.4 million for the nine months ended September 30, 2001.
LIQUIDITY AND CAPITAL RESOURCES
Land O'Lakes Farmland Feed LLC relies on cash from operations, borrowings
from Land O'Lakes, Inc., and the sale of accounts receivable as the main sources
of financing working capital requirements, additions to property, plant and
equipment, and acquisitions and joint ventures. Other sources of funding consist
of leasing arrangements and the sale of non-strategic assets. Land O'Lakes
Farmland Feed LLC had a noncurrent note payable to Land O'Lakes, Inc. of $59.7
million at September 30, 2002 and December 31, 2001.
Net cash provided by operating activities of $52.4 million in the nine
months ended September 30, 2002 was $61.3 million more than the net cash used by
operating activities of $8.9 million for the nine months ended September 30,
2001. This increase in cash from operations was primarily due to an increase in
net earnings, and improved working capital due to accounts receivable and
accrued expenses, partially offset by accounts payable.
Net cash used in investing activities was $6.6 million in the nine months
ended September 30, 2002 as compared with $9.4 million in the nine months ended
September 30, 2001. This cash flow improvement in 2002 compared to 2001 was
primarily the result of higher proceeds from the sale of property, plant and
equipment.
Net cash used in financing activities was $48.9 million for the nine
months ended September 30, 2002, compared to net cash provided of $18.3 million
in the same period of 2001. Payments on notes payable to Land O' Lakes, Inc. in
the nine months ended September 30, 2002 and 2001 were $386.9 million and $263.9
million, respectively. Borrowings from Land O' Lakes, Inc. increased from $280.6
million in the nine months ended September 30, 2001 to $340.0 million in the
nine months ended September 30, 2002.
A revolving credit facility has been established between Land O'Lakes,
Inc. and Land O'Lakes Farmland Feed LLC for the purpose of financing working
capital at Land O'Lakes Farmland Feed LLC. Borrowings under the revolving credit
facility with Land O'Lakes, Inc. bear interest at 260 basis points over LIBOR.
The revolving credit facility with Land O'Lakes, Inc. terminates on October 31,
2003, and is renewable annually.
OFF-BALANCE SHEET ARRANGEMENTS
Land O'Lakes, Inc., Land O'Lakes Farmland Feed LLC and Purina Mills, LLC
entered into a revolving receivables securitization program with CoBank in
December 2001 for up to $100 million in advances against eligible receivables.
Under this program, these entities sell feed, seed and certain swine receivables
to LOL Farmland Feed SPV, LLC, a limited purpose wholly-owned subsidiary of Land
O'Lakes Farmland Feed LLC. This subsidiary is a qualifying special purpose
entity (QSPE) under applicable accounting rules. The QSPE was established for
the limited purpose of purchasing and obtaining financing for these receivables.
The transfers of the receivables to the QSPE are structured as sales and, in
accordance with applicable accounting rules, these receivables are not reflected
in the consolidated balance sheets of Land O'Lakes Farmland Feed LLC or Land
O'Lakes, Inc. The QSPE purchases the receivables with a combination of cash
initially received from CoBank, equal to the present value of eligible
receivables times the agreed advance rate; and notes, equal to the unadvanced
present value of the receivables. Land O'Lakes Farmland Feed LLC and the other
receivables sellers are subject to credit risk related to the repayment of the
QSPE notes, which in turn is dependent upon the ultimate collection on the
QSPE's receivables pool. Accordingly, Land O'Lakes Farmland Feed LLC has
retained reserves for estimated losses. As of September 30, 2002, $35.0 million
was drawn against this facility with $65.0 million available.
In addition, Land O'Lakes Farmland Feed LLC leases various equipment and
real properties under long-term operating leases. Total consolidated rental
expense for the nine months ended September 30, 2002 and 2001 was $9.1 million
and $3.4 million, respectively. The majority of this increase was due to the
addition of Purina Mills, LLC operations. Most of the leases require payment of
operating expenses applicable to the leased assets. Land O'Lakes Farmland Feed
LLC expects that in the normal course of business, most leases that expire will
be renewed or replaced by other leases.
25
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
At September 30, 2002, Land O'Lakes Farmland Feed LLC had certain
contractual obligations that require the following payments:
PAYMENTS DUE BY PERIOD (AS OF SEPTEMBER 30, 2002)
CONTRACTUAL CASH OBLIGATIONS TOTAL LESS THAN 1 YEAR 1-3 YEARS 4-5 YEARS AFTER 5 YEARS
----- ---------------- --------- --------- -------------
($ in thousands)
Operating Leases $10,725 $ 3,202 $ 5,367 $ 2,156 $ -
Note payable to Land O'Lakes, Inc. 59,664 - 17,898 17,898 23,868
------- ------- ------- ------- -------
Total Contractual Obligations $70,389 $ 3,202 $23,265 $20,054 $23,868
======= ======= ======= ======= =======
Land O'Lakes Farmland Feed LLC has certain commitments which may require
the following payments to be made:
AMOUNT OF CONTINGENT OBLIGATIONS (1)
EXPIRATION PER PERIOD (AS OF SEPTEMBER 30, 2002)
TOTAL AMOUNTS
OTHER GUARANTEES GUARANTEED LESS THAN 1 YEAR 1-3 YEARS 4-5 YEARS OVER 5 YEARS
------------- ---------------- --------- --------- ------------
($ in thousands)
Land O'Lakes Term Loan A(2) $291,217 $ 38,545 $157,920 $ 94,752 $ -
Land O'Lakes Term Loan B(2) 233,783 1,411 5,645 5,645 221,082
Land O'Lakes 8 3/4% Senior Notes due 2011 350,000 - - - 350,000
Producer Loans 7,000 7,000 - - -
-------- -------- -------- -------- --------
Total Guarantees $882,000 $ 46,956 $163,565 $100,397 $571,082
======== ======== ======== ======== ========
(1) See "Off-Balance Sheet Arrangements" for information concerning our
receivables securitization.
(2) These obligations are subject to mandatory prepayment in certain events.
Land O'Lakes Farmland Feed LLC expects that total capital expenditures
will be approximately $30 million in 2002 and approximately $44 million in 2003.
Of such amounts, Land O'Lakes Farmland Feed LLC currently estimates that a
minimum range of $16 million to $18 million of ongoing maintenance capital
expenditures is required each year.
Land O'Lakes Farmland Feed LLC expects that funds from operations and
available borrowings under its revolving credit line from Land O'Lakes, Inc. and
receivables securitization facility will provide sufficient working capital to
operate the business, to make expected capital expenditures and to meet
foreseeable liquidity requirements.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued SFAS No.
141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." Major provisions of these statements are as follows: all business
combinations must now use the purchase method of accounting, the pooling of
interests method of accounting is now prohibited; intangible assets acquired in
a business combination must be recorded separately from goodwill if they arise
from contractual or other legal rights or are separable from the acquired entity
and can be sold, transferred, licensed, rented or exchanged, either individually
or as a part of a related contract, asset or liability; goodwill and intangible
assets with indefinite lives are not amortized, but tested for impairment
annually, except in certain circumstances, and whenever there is an impairment
indicator; all acquired goodwill must be assigned to reporting units for
purposes of impairment testing and segment reporting. Land O'Lakes Farmland Feed
LLC has adopted the provisions of SFAS 141 and certain provisions of SFAS 142 as
of July 1, 2001, and the remaining provisions of SFAS 142 as of January 1, 2002.
As required by SFAS 142, Land O'Lakes Farmland Feed LLC performed step one of
the impairment testing of goodwill for the balances as of January 1, 2002 by
June 30, 2002. The fair value of goodwill exceeded the carrying amount,
therefore the second step of impairment testing is not required and no
impairment has been recognized in the current year of adoption.
Land O'Lakes Farmland Feed LLC will perform impairment tests annually
and whenever events or circumstances occur indicating that goodwill or other
intangible assets might be impaired. As of January 1, 2002, we are no longer
amortizing goodwill, except for goodwill related to the acquisition of
cooperatives and the formation of joint ventures.
26
The following table presents a reconciliation of net earnings adjusted
for the exclusion of amortization of goodwill no longer required to be
amortized, net of income taxes:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2002 2001 2002 2001
------- ------- ------- -------
Net earnings................................... $11,832 $ 8,239 $34,995 $21,447
Add back: Goodwill amortization, net of tax.... - 210 - 390
------- ------- ------- -------
Adjusted net earnings.......................... $11,832 $ 8,449 $34,995 $21,837
======= ======= ======= =======
THREE
MONTHS ENDED
YEAR ENDED DECEMBER 31,
2001 2000
------- -------
Net earnings (loss) .......................... $39,146 $(6,228)
Add back: Goodwill amortization, net of tax... 1,041 85
------- -------
Adjusted net earnings (loss) ................. $40,187 $(6,143)
======= =======
FORWARD LOOKING STATEMENTS
This Form 10-Q for the nine months ended September 30, 2002 includes
"forward-looking statements" within the meaning of the safe harbor provisions of
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements can be identified by the use of forward-looking
terminology such as "believes," "expects," "may," "will," "could," "should,"
"seeks," "pro forma," "as adjusted," "anticipates," "intends," or other
variations thereof, including their use in the negative, or by discussions of
strategies, plans or intentions. Although we believe that our plans, intentions
and expectations reflected in, or suggested by, such forward-looking statements
are reasonable, you should be aware that actual results could differ materially
from those projected by the forward-looking statements. For a discussion of
factors that could cause actual results to differ materially from the
anticipated results or other expectations expressed in our forward-looking
statements, see the discussion of risk factors set forth below. Because actual
results may differ, readers are cautioned not to place undue reliance on
forward-looking statements. We assume no obligation to update such
forward-looking statements or to update the reasons that actual results could
differ materially from those anticipated in such forward-looking statements.
RISK FACTORS
CHANGES IN CONSUMER PREFERENCES COULD DECREASE OUR REVENUES AND CASH FLOW.
We are subject to the risks of changing consumer preferences, which may
result from a general economic downturn and nutritional and health-related
concerns. Any shift in consumer preferences away from our products could
decrease our revenues and cash flow and impair our ability to operate our
business.
Our business relies on the sale of feed products to consumers who own
animals for recreational purposes or hobbies. The impact of an extended economic
downturn in the United States economy could cause some of these owners either to
sell their animals or to seek alternative, less expensive products.
COMPETITION IN THE INDUSTRY MAY REDUCE OUR SALES AND MARGINS.
Our business operates in a highly competitive environment. In addition,
we compete with companies that have substantial capital resources, research and
development staffs, facilities, diversity of product lines and brand
recognition. Increased competition as to any of our products could result in
reduced prices which would reduce our sales and margins.
Our competitors may succeed in developing new or enhanced products which
are better than ours. These companies may also prove to be more successful in
marketing and selling their products than we are with ours.
AN OVERSUPPLY OF FOOD PROTEINS IN THE U.S. MARKET COULD CONTINUE TO REDUCE OUR
NET SALES AND CASH FLOWS.
Our animal feed segment supplies feed to farmers and specialized
livestock producers for use in their commercial production of livestock. When
the price that these producers receive for their livestock declines as a result
of an oversupply of food proteins (such as beef cattle, swine and chicken) in
the market, such producers may decide to lower their production levels or to
seek alternative, lower margin products, resulting in lower net sales and cash
flows for us.
27
CHANGES IN OUR DISTRIBUTION CHANNELS COULD DECREASE OUR REVENUES AND CASH FLOW.
We sell our products through various distribution channels. Increased
turnover in any of these channels could result in a loss of distribution access
to certain markets, resulting in lower revenues and cash flows.
OUR OPERATING RESULTS FLUCTUATE BY SEASON AND ARE AFFECTED BY EXTREME WEATHER
CONDITIONS.
Our operating results are affected by seasonal fluctuations of our sales
and operating profits. Our sales are seasonal, with a higher percentage of sales
generated during the first and fourth quarters of the year. This seasonality is
driven largely by weather conditions affecting sales of our beef cattle
products. If the weather is particularly warm during the winter, then sales of
feed for beef cattle may decrease because the cattle may be better able to graze
under warmer conditions.
Live hog and wholesale pork prices are also affected by seasonal
factors. Because of production times for hogs, there are generally fewer hogs
available in the second quarter, causing live hog and wholesale pork prices to
be higher at these times. Conversely, there are generally more hogs available in
the fourth quarter, which generally causes live hog and wholesale pork prices to
be lower on average during these months.
In addition, severe weather conditions and natural disasters, such as
floods, droughts, frosts or earthquakes, or adverse growing conditions, diseases
and insect-infestation problems may reduce the quantity and quality of
commodities available for processing by us. A significant reduction in the
quantity or quality of commodities harvested or produced due to adverse weather
conditions, disease, insect problems or other factors could result in increased
processing costs and decreased production, with adverse financial consequences
to us.
INCREASED ENERGY AND GAS COSTS COULD INCREASE OUR EXPENSES AND REDUCE OUR
PROFITABILITY.
We require a substantial amount of electricity, natural gas and gasoline
to manufacture, store and transport our products. The prices of electricity,
natural gas and gasoline fluctuate significantly over time. Many of our products
compete based on price and we may not be able to pass on increased costs of
production, storage or transportation to our customers. As a result, increases
in the cost of electricity, natural gas or gasoline could substantially harm our
business and results of operations.
OUTBREAKS OF DISEASE CAN REDUCE OUR NET SALES AND OPERATING MARGINS.
The productivity and profitability of our businesses depend on animal
health and on disease control. We face the risk of outbreaks of mad cow disease,
which could lead to the destruction of beef cattle and dairy cows and decreased
demand for dairy and beef products. If this occurs, we could have decreased
demand for our feed products as dairy and beef producers decrease their herd
sizes due to decreased demand for dairy and beef products.
We face the risk of outbreaks of foot-and-mouth disease, which could
lead to a massive destruction of cloven-hoofed animals such as dairy cattle,
beef cattle, swine, sheep and goats and significantly reduce the demand for meat
products. Because foot-and-mouth disease is highly contagious and destructive to
susceptible livestock, any outbreak of foot-and-mouth disease could result in
the widespread destruction of all potentially infected livestock. Our operations
could suffer as a result of decreased demand for feed products. In addition, we
may be prevented from selling or transporting hogs.
CHANGES IN THE MARKET PRICES OF THE DAIRY AND AGRICULTURAL COMMODITIES THAT WE
USE AS INPUTS AS WELL AS THE PRODUCTS WE MARKET MAY CAUSE OUR OPERATING PROFIT
TO DECREASE.
Many of our products use agricultural commodities as inputs or
constitute agricultural commodity outputs. Consequently, increased cost of
commodity inputs and decreased market price of commodity outputs may reduce our
operating profit.
We follow industry standards for feed pricing. The feed industry
generally prices products on the basis of income over ingredient cost ("IOIC")
per ton of feed. This practice mitigates the impact of volatility in commodity
ingredient markets on our margins. However, if our commodity input prices were
to increase dramatically, we may be unable to pass these prices on to our
customers, who may find alternative feed sources at lower prices or may exit the
market entirely. This increased expense could reduce our profitability.
28
We have ownership interests in swine. In recent years, the market for
hogs and wholesale pork has been the subject of extreme market fluctuations as a
result of a number of factors, including industry expansion, processor capacity
and consumer demand. In December 1998, the price of hogs hit its lowest point in
nearly forty years, resulting in the price we received for a finished hog being
substantially less than the cost to produce the hog. The prices for weanling and
feeder pigs also decreased dramatically. As a result, in the fiscal years ended
December 31, 2000 and 1999, we experienced operating losses in the swine
production business; a large portion of which were attributable to our
contracts, which guarantee swine producers certain minimum prices for market
hogs and feeder pigs. Although we do not intend to renew or extend these
contracts, we may continue to incur losses under these contracts until the last
ones expire in 2004.
WE OPERATE THROUGH JOINT VENTURES IN WHICH OUR RIGHTS TO EARNINGS AND TO CONTROL
THE JOINT VENTURE ARE LIMITED.
We produce, market and sell products through numerous joint ventures
with unaffiliated third parties.
The terms of each joint venture are different, but our joint venture
agreements generally contain:
- - restrictions on our ability to transfer our ownership interest in the
joint venture;
- - no right to receive distributions without the unanimous consent of the
members of the joint venture; and
- - non-competition arrangements restricting our ability to engage
independently in the same line of business as the joint venture.
In addition to these restrictions, in connection with the formation of
some of our joint ventures, we have entered into purchase or supply agreements
which require us to purchase a minimum amount of the products produced by the
joint venture or supply a minimum amount of the raw materials used by the joint
venture. The day-to-day operations of some of our joint ventures are managed by
us through a management contract and others are managed by other joint venture
members. As a result, we do not have day-to-day control over certain of these
companies.
WE MAY NOT SUCCESSFULLY IMPLEMENT THE STRATEGIES RELATING TO OUR RECENT
ACQUISITIONS OR ACHIEVE THE ANTICIPATED BENEFITS FROM THESE ACQUISITIONS.
In addition to the acquisition of Purina Mills, we have added more than
20 joint ventures and acquisitions over the past five years. However, Purina
Mills represents our largest acquisition to date. The integration and
consolidation of Purina Mills as well as the other acquisitions into our
business require substantial management, financial and other resources. Such
integration involves a number of significant risks, including:
- - unforeseen liabilities;
- - unanticipated problems with the quality of the assets of the acquired
businesses;
- - loss of customers;
- - personnel turnover;
- - loss of relationships with suppliers or service providers; and
- - diversion of management's attention from other aspects of our business.
The effects of these risks and our inability to integrate and manage
Purina Mills and the other acquired businesses successfully or to achieve a
substantial portion of the anticipated cost savings from these acquisitions in
the timeframe we anticipate, could have a material adverse effect on our
business, financial condition or results of operations. See "Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
OUR OPERATIONS ARE SUBJECT TO NUMEROUS LAWS AND REGULATIONS, EXPOSING US TO
POTENTIAL CLAIMS AND COMPLIANCE COSTS THAT COULD ADVERSELY AFFECT OUR BUSINESS.
We are subject to Federal, state and local laws and regulations relating
to the manufacturing, labeling, packaging, health and safety, sanitation,
quality control, fair trade practices, and other aspects of our business. In
addition, zoning, construction and operating permits are required from
governmental agencies which focus on issues such as land use, environmental
protection, waste
29
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.
As a manufacturer of 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"). Several states also have laws that protect feed
distributors or restrict the ability of corporations to engage in farming
activities. These regulations may require us to alter or restrict our operations
or cause us to incur additional costs in order to comply with the regulations.
INABILITY TO PROTECT OUR TRADEMARKS AND OTHER PROPRIETARY RIGHTS COULD DAMAGE
OUR COMPETITIVE POSITION.
We rely on patents, copyrights, trademarks, trade secrets,
confidentiality provisions and licensing arrangements to establish and protect
our intellectual property. We have invested substantial resources promoting and
developing our trademarked brands and establishing their reputation as
high-quality products Any infringement or misappropriation of our intellectual
property could damage its value, could limit our ability to compete, could
damage our reputation and decrease our trademarks' value. We may have to engage
in litigation to protect our rights to our intellectual property, which could
result in significant litigation costs and require a significant amount of
management's time.
Purina Mills, LLC, our wholly owned subsidiary, licenses the trademarks
Purina, Chow and the "Checkerboard" Nine Square Logo under a perpetual,
royalty-free license from Nestle Purina PetCare Company. Under the terms of the
license agreement, Nestle Purina PetCare Company retains primary responsibility
for protecting the licensed trademarks from infringement. If Nestle Purina
PetCare Company fails to assert its rights to the licensed trademarks, Purina
Mills may be unable to stop such infringement or cause them to do so. Any such
infringement of the licensed trademarks, or of similar trademarks of Nestle
Purina PetCare Company, could result in a dilution in the value of the licensed
trademarks.
OUR BRAND NAMES COULD BE CONFUSED WITH NAMES OF OTHER COMPANIES WHO, BY THEIR
ACT OR OMISSION, COULD ADVERSELY AFFECT THE VALUE OF OUR BRAND NAMES.
Purina Mills, LLC's products are generally marketed under the trademarks
Purina, Chow and the "Checkerboard" Nine Square Logo under a perpetual,
royalty-free license from Nestle Purina PetCare Company. Nestle Purina PetCare
Company markets widely recognized products under the same trademarks and has
given other unaffiliated companies the right to market products under these
trademarks. A competitor of ours, Cargill, licenses from Nestle Purina PetCare
Company the right to market the same types of products which Purina Mills, LLC
sells under these trademarks in countries other than the United States. Acts or
omissions by Nestle Purina PetCare Company or other unaffiliated companies may
adversely affect the value of the Purina, Chow and the "Checkerboard" Nine
Square Logo trademarks and the demand for Purina Mills, LLC's products.
Third-party announcements or rumors about these unaffiliated companies could
also have these negative effects.
PRODUCT LIABILITY CLAIMS OR PRODUCT RECALLS COULD ADVERSELY AFFECT OUR BUSINESS
REPUTATION AND EXPOSE US TO INCREASED SCRUTINY BY FEDERAL AND STATE REGULATORS.
The sale of animal feed products involves the risk of injury to animals
as well as to humans who consume those animals. Such hazards could result from:
- - tampering by unauthorized third parties;
- - product contamination (such as listeria, E. coli. and salmonella) or
spoilage;
- - the presence of foreign objects, substances, chemicals, and other
agents;
- - residues introduced during the growing, storage, handling or
transportation phases; or
- - improperly formulated products which either do not contain the proper
mixture of ingredients or which otherwise do not have the proper
attributes.
Some of the products we sell are produced for us by third parties, or
contain inputs manufactured by third parties, and such third parties may not
have adequate quality control standards to assure that such products are not
adulterated, misbranded, contaminated or otherwise defective. We may be subject
to claims made by consumers as a result of products manufactured by these third
parties which are marketed under our brand names.
30
Consumption of our products may cause serious health-related illnesses
and we may be subject to claims or lawsuits relating to such matters. Even an
inadvertent shipment of adulterated products is a violation of law and may lead
to an increased risk of exposure to product liability claims, product recalls
and increased scrutiny by federal and state regulatory agencies. Such claims or
liabilities may not be covered by our insurance or by any rights of indemnity or
contribution which we may have against others in the case of products which are
produced by third parties. In addition, even if a product liability claim is not
successful or is not fully pursued, the negative publicity surrounding any
assertion that our products caused illness or injury could have a material
adverse effect on our reputation with existing and potential customers and on
our brand image. In the past, we have voluntarily recalled certain of our
products in response to reported or suspected contamination. If we determine to
recall any of our products, we may face material consumer claims.
OUR BUSINESS IS SUBJECT TO THE RISK OF ENVIRONMENTAL LIABILITY AND WE COULD BE
NAMED AS A RESPONSIBLE OR POTENTIALLY RESPONSIBLE PARTY.
Many of our current and former facilities have been in operation for
many years and, over that time, we and other operators of those facilities have
generated, used, stored, or disposed of substances or wastes that are or might
be considered hazardous under applicable environmental laws, including chemicals
and fuel stored in underground and above-ground tanks, animal wastes and large
volumes of wastewater discharges. As a result, the soil and groundwater at or
under certain of our current and former facilities may have been contaminated,
and we may be required to incur material expenditures to investigate, control
and remediate such contamination.
In addition, federal and state environmental authorities have proposed
new regulations and attempted to apply certain existing regulations for the
first time to agricultural operations. These regulations could result in
significant restraints on some of our operations, particularly our swine
operations, and could require us to spend significant amounts of money to bring
these operations into compliance.
STRIKES OR WORK STOPPAGES BY OUR UNIONIZED WORKERS COULD DISRUPT OUR BUSINESS.
At September 30, 2002, approximately 11% of our employees were covered
by collective bargaining agreements, some of which are due to expire within the
year. Our inability to negotiate acceptable contracts with the unions upon
expiration of these contracts could result in strikes or work stoppages and
increased operating costs as a result of higher wages or benefits paid to union
members or replacement workers. If the unionized workers were to engage in a
strike or work stoppage, or other non-unionized operations were to become
unionized, we could experience a significant disruption of our operations or
higher ongoing labor costs.
THERE IS NO ASSURANCE THAT OUR SENIOR MANAGEMENT TEAM OR OTHER KEY EMPLOYEES
WILL REMAIN WITH US.
We believe that our ability to successfully implement our business
strategy and to operate profitably depends on the continued employment of our
senior management team and other key employees. If members of the management
team or other key employees become unable or unwilling to continue in their
present positions, the operation of our business would be disrupted and we may
not be able to replace their skills and leadership in a timely manner to
continue our operations as currently anticipated. We operate generally without
employment agreements with, or key person life insurance on the lives of, our
key personnel.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
COMMODITY RISK
In the ordinary course of business, we are subject to market risk
resulting from changes in commodity prices associated with dairy and other
agricultural markets. See "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Overview -- Factors Affecting
Comparability -- Agricultural Commodity Inputs and Outputs." To manage the
potential negative impact of price fluctuations, we engage in various hedging
and other risk management activities.
As part of our trading activity, we utilize futures and option contracts
offered through regulated commodity exchanges to reduce risk on the market value
of our inventories and our fixed or partially fixed purchase and sale contracts.
We do not utilize hedging instruments for speculative purposes.
Certain commodities cannot be hedged with futures or option contracts
because such contracts are not offered for these commodities by regulated
commodity exchanges. Inventories and purchase contracts for those commodities
are hedged with forward
31
sales contracts to the extent practical so as to arrive at a net commodity
position within the formal position limits set by us and deemed prudent for each
of those commodities. Commodities for which futures contracts and options are
available are also typically hedged first in this manner, with futures and
options used to hedge within position limits that portion not covered by forward
contracts.
The notional or contractual amount of futures contracts provides an
indication of the extent of our involvement in such instruments for the dates
and the periods provided below, but does not represent exposure to market risk
or future cash requirements under certain of these instruments. A summary of our
futures contracts follows:
AT SEPTEMBER 30,
--------------------------------------------------------------------
2002 2001
----------------------------- ----------------------------
NOTIONAL FAIR NOTIONAL FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
(IN THOUSANDS)
Commodity futures contracts
Commitments to purchase ... $ 70,337 $ (2,597) $ 60,618 $ 24,783
Commitments to sell ....... (22,657) 210 (15,898) (12,886)
-------- -------- -------- --------
Total outstanding
derivatives ........... $ 47,680 $ (2,387) $ 44,720 $ 11,897
======== ======== ======== ========
THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------
2002 2001
----------------------------- ---------------------------
REALIZED REALIZED
NOTIONAL GAINS NOTIONAL GAINS
AMOUNT (LOSSES) AMOUNT (LOSSES)
-------- --------- -------- --------
(IN THOUSANDS)
Commodity futures contracts
Total volume of exchange
traded contracts:
Commitments to purchase .... $ (1,900) $ 4,189 $ 26,207 $ 1,485
Commitments to sell ........ $ 18,056 $ (1,553) $ 10,619 $ (444)
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------
2002 2001
----------------------------- -----------------------------
REALIZED REALIZED
NOTIONAL GAINS NOTIONAL GAINS
AMOUNT (LOSSES) AMOUNT (LOSSES)
-------- ---------- -------- ---------
(IN THOUSANDS)
Commodity futures contracts
Total volume of exchange
traded contracts:
Commitments to purchase .... $ 113,557 $ 3,003 $ 71,446 $ 505
Commitments to sell ........ $(101,836) $ (1,001) $ (45,898) $ (407)
INTEREST RATE RISK
Land O'Lakes Farmland Feed LLC is exposed to changes in interest rates.
Interest rate changes generally impact the amount of interest payments and,
therefore, future earnings and cash flows, assuming other factors are held
constant. Holding other variables constant, including levels of indebtedness, a
one-percentage point increase in interest rates would have an estimated negative
impact on pretax earnings and cash flows for the next year of approximately $0.6
million.
INFLATION RISK
Inflation is not expected to have a significant impact on our business,
financial condition or results of operations. We generally have been able to
offset the impact of inflation through a combination of productivity
improvements and price increases.
32
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
The Company's Chief Executive Officer and Chief Financial
Officer evaluated the effectiveness of the design and
operation of our disclosure controls and procedures (as
defined in rule 13a-14(c) under the Exchange Act) as of a date
(the "Evaluation Date") within 90 days prior to the filing
date of this quarterly report on Form 10-Q. Based upon their
evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that, as of the Evaluation Date, our
disclosure controls and procedures were effective in timely
alerting them to the material information relating to us (or
our consolidated subsidiaries) required to be included in our
periodic SEC filings.
(b) Changes in internal controls.
There were no significant changes made in our internal controls during
the period covered by this report or in other factors that could
significantly affect these controls subsequent to the date of their
evaluation and there were no corrective actions with regard to
significant deficiencies and material weaknesses.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
EXHIBIT
NO. DESCRIPTION
------- -----------
3.1 Certification of Formation of Land O'Lakes Farmland Feed LLC dated
August 11, 2000. (1)
3.2 Limited Liability Company Agreement of LOL FF LLC. (2)
4.1 Credit Agreement among Land O'Lakes, Inc., the Lenders party
thereto and The Chase Manhattan Bank, dated as of October
11, 2001. (3)
4.2 First Amendment dated November 6, 2001 to the Credit
Agreement dated October 11, 2001. (3)
4.3 Second Amendment dated February 15, 2002 to the Credit
Agreement dated October 11, 2001. (3)
4.4 Guarantee and Collateral Agreement among Land O'Lakes, Inc.
and certain of its subsidiaries and The Chase Manhattan
Bank, dated as of October 11, 2001. (3)
4.5 Indenture dated as of November 14, 2001, among Land O'Lakes,
Inc. and certain of its subsidiaries, and U.S. Bank,
including Form of 8 3/4% Senior Notes due 2011 and Form of
8 3/4% Senior Notes due 2011. (3)
4.6 Registration Rights Agreement dated November 14, 2001 by and
among Land O'Lakes, Inc. and certain of its subsidiaries,
J.P. Morgan Securities Inc., SPP Capital Partners, LLC,
SunTrust Robinson Capital Markets, Inc., Tokyo-Mitsubishi
International plc and U.S. Bancorp Piper Jaffray, Inc. (3)
4.7 Purchase Agreement by and between Land O'Lakes, Inc., and
certain of its subsidiaries, J.P. Morgan Securities Inc.,
SPP Capital Partners, LLC, SunTrust Robinson Capital
Markets, Inc., Tokyo-Mitsubishi International plc and U.S.
Bancorp Piper Jaffray, Inc., dated as of November 8, 2001. (3)
4.8 Form of Old Note (included in Exhibit 4.5). (3)
33
EXHIBIT
NO. DESCRIPTION
------- -----------
4.9 Form of New Note (included in Exhibit 4.5). (3)
99.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
(1) Incorporated by reference to exhibit 3.28 to the Land O'Lakes, Inc.
Registration Statement on Form S-4 filed March 18, 2002. (Registration
No. 333-84486).
(2) Incorporated by reference to exhibit 3.29 to the Land O'Lakes, Inc.
Registration Statement on Form S-4 filed March 18, 2002. (Registration
No. 333-84486).
(3) Incorporated by reference to the identical exhibit to Land O'Lakes,
Inc. Registration Statement on Form S-4 filed March 18, 2002
(Registration No. 333-84486).
(b) REPORTS ON FORM 8-K
There were no reports filed on Form 8-K for Land O'Lakes Farmland Feed
LLC for the three months ended September 30, 2002.
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Arden Hills,
State of Minnesota, on the 14th day of November, 2002.
LAND O'LAKES FARMLAND FEED LLC
By /s/ DANIEL KNUTSON
---------------------------------
Daniel Knutson
Chief Financial Officer
(Principal Financial and Accounting Officer)
35
CERTIFICATIONS
I, Robert DeGregorio, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Land O'Lakes
Farmland Feed LLC;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
the quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 14, 2002
By /s/ Robert DeGregorio
----------------------------------------
Robert DeGregorio
President
and Manager
36
I, Daniel Knutson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Land O'Lakes
Farmland Feed LLC;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
the quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 14, 2002
By /s/ Daniel Knutson
-----------------------------
Daniel Knutson
Senior Vice President
and Chief Financial Officer
37