UAPH Uap Hldg Corp (MM)

PART I.    FINANCIAL INFORMATION

The accompanying notes are an integral part of the financial statements.

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The accompanying notes are an integral part of the financial statements.

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The accompanying notes are an integral part of the financial statements.

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The accompanying notes are an integral part of the financial statements.

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UAP HOLDING CORP.

Rebates based on the amount of materials purchased reduce cost of goods sold as inventory is sold. Rebates that are based on sales volume are offset to cost of goods sold when we determine they have been earned based on our sales volume of related products.

Earnings (Loss) Per Share. Earnings (loss) per share are based on the weighted average number of shares of common stock outstanding during the period as follows:

2. Accounting Developments

Adoption of New Accounting Pronouncement.   In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN No. 48”), which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.” This interpretation prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in an income tax return. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN No. 48 was effective for fiscal years beginning after December 15, 2006.

We adopted the provisions of FIN No. 48 at the beginning of our current fiscal year, as required. The cumulative effect of adoption was a $1.2 million reduction of retained earnings. At February 25, 2007, the total amount of unrecognized tax benefits was $4.4 million, all of which would impact the effective tax rate, if recognized. Upon adoption, approximately $4.1 million of the unrecognized tax benefits were reflected in “Other non-current liabilities.”

Interest and penalties associated with uncertain tax positions are recognized as components of “Income tax expense.” The Company’s accrual for interest and penalties was $0.2 million upon adoption of FIN No. 48.

The Company is subject to U.S. federal income tax audits for fiscal year 2006 and fiscal year 2007.  The Company is also subject to state, local and Canadian income tax audits by taxing authorities for fiscal year 2004 through fiscal year 2007.  It is reasonably possible that the amount of unrecognized tax benefits could decrease between $1 million and $2 million in the next 12 months due to completion of income tax audits related to the Apollo acquisition of UAP from ConAgra and the expiration of federal and state statute of limitations.

Recent Accounting Pronouncements.  In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”). This standard defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within such years. We will adopt SFAS 157 in our first quarter of fiscal 2009, as required. We are currently reviewing the requirements of this statement and, at this point in time, we cannot determine the impact, if any, that this statement may have on our business, financial condition, cash flow, results of operations, or liquidity.

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In February 2007, the FASB issued Statement of Financial Accounting Standard No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment to FASB Statement No. 115” (“SFAS 159”). This statement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This statement requires a business entity to report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. An entity may decide whether to elect the fair value option for each eligible item on its election date, subject to certain requirements described in the statement. This statement is effective as of the beginning of each reporting entity’s first fiscal year that begins after November 15, 2007. We will adopt SFAS 159 in our first quarter of fiscal 2009, as required. We are currently reviewing the requirements of this statement and, at this point in time, we cannot determine the impact, if any, that this statement may have on our business, financial condition, cash flow, results of operations, or liquidity.

In December 2007, the FASB issued FASB Statement No. 141(R), “Business Combinations” (“SFAS 141(R)”), which establishes accounting principles and disclosure requirements for all transactions in which a company obtains control over another business.  This statement is e ffective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.  We are currently reviewing the requirements of this statement and, at this point in time, we cannot determine the impact, if any, that this statement may have on our business, financial condition, cash flow, results of operations, or liquidity.

In December 2007, the FASB issued FASB Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS 160”), which prescribes the accounting by a parent company for minority interests held by other parties in a subsidiary of the parent company.  This statement is effective for annual periods beginning after December 15, 2008.  We are currently reviewing the requirements of this statement and, at this point in time, we cannot determine the impact, if any, that this statement may have on our business, financial condition, cash flow, results of operations, or liquidity.

3. Acquisitions and Divestitures

During the thirty-nine weeks ended November 25, 2007, we acquired four businesses and paid $8.9 million in purchase price.  The total initial purchase price paid may increase or decrease primarily due to adjustments to working capital made in accordance with contractual provisions.

During fiscal 2007, we acquired eleven businesses at a total initial purchase price of $82.1 million, net of cash received, and assumed liabilities of approximately $47 million. We also paid an additional $4.9 million in the thirty-nine weeks ended November 25, 2007, for certain items, primarily customary working capital adjustments, related to these fiscal 2007 acquisitions. Our major acquisitions in fiscal 2007 were (a) the first fiscal quarter purchase of the remaining 50% share of our joint venture in UAP Timberland, LLC, (b) the third fiscal quarter purchase of Terral AgriServices, Inc. and certain assets of Terral FarmService, Inc. and Wisner Elevator, Inc., and (c) the fourth fiscal quarter purchase of certain retail and service assets of AGSCO, Inc. and AG Depot, Inc., and certain retail distribution assets of Boettcher Enterprises. For these fiscal 2007 acquisitions that occurred in the thirty-nine weeks ended November 26, 2006, we paid $31.5 million in purchase price, net of cash received.

During the thirty-nine weeks ended November 26, 2006, we sold a portion of our retail locations in western Canada for total consideration of $7.6 million.

4. Royalties, Service Charges and Other Income and Expenses

Royalties, service charges and other income and expenses consist of the following:

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5. Certain Asset Accounts

Receivables, net. Our receivables include receivables from customers, net of allowances for doubtful accounts; vendor rebates receivable; and miscellaneous receivables as follows:

Inventories. Inventories consist primarily of chemical, fertilizer, and seed products purchased from our suppliers or produced by one of our three formulation facilities, for resale to our customers. We record inventory at the lower of cost or market. We maintain a perpetual inventory system, which we reconcile to physical counts at each location periodically.

Each fiscal quarter, we analyze our inventory against historical sales of inventory products to determine which items may be obsolete or slow moving. Inventory is then reduced for the difference between our cost and the net realizable value of inventory.

Inventories include the following:

Intangible Assets. Intangible assets consist primarily of assets acquired in our business acquisitions and are recorded at their respective fair values in accordance with Statement of Financial Accounting Standards No. 141, “Business Combinations.” Our intangible assets consist of finite- and indefinite-lived assets. Finite-lived intangible assets are amortized based on their estimated useful lives, ranging from 3 to 10 years, depending on the type of asset. Amortization expense for the thirteen weeks ended November 25, 2007, and November 26, 2006, was $2.3 million and $0.7 million, respectively. For the thirty-nine weeks ended November 25, 2007, and November 26, 2006, amortization expense was $5.9 million and $1.4 million, respectively. Indefinite-lived assets are not amortized but are tested for impairment in accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”).

During the thirty-nine week period ended November 25, 2007, we recorded $7.2 million of intangibles, related to product registration costs and business acquisitions.  At November 25, 2007, February 25, 2007, and November 26, 2006, net intangible assets totaled $51.4 million, $50.1 million, and $31.7 million, respectively.

Goodwill. Goodwill represents the excess of the purchase price paid over the fair value of the net assets acquired in business acquisitions plus acquisition costs. Goodwill is not amortized. In accordance with SFAS No. 142, we test goodwill for impairment annually and whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. We completed our latest goodwill impairment test as of November 25, 2007, and determined that there was no impairment at that date. We may be subject to earnings volatility if goodwill impairment occurs at a future date. During the thirty-nine weeks ended November 25, 2007, we recorded $1.9 million of goodwill related to acquisitions completed during the period and finalization of purchase accounting for acquisitions completed in the prior fiscal year. At November 25, 2007, February 25, 2007, and November 26, 2006, goodwill totaled $47.0 million, $45.1 million, and $41.6 million, respectively.

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Debt Issuance Costs . Our debt issuance costs, net of amortization, were $9.9 million, $5.4 million, and $5.7 million at November 25, 2007, February 25, 2007, and November 26, 2006, respectively. In October 2007, we recorded $5.5 million of debt issuance costs related to the increase in our senior secured term loan facility. Also included in our debt issuance costs at November 25, 2007, and November 26, 2006, are costs related to replacing our credit facility and establishing a new senior secured credit facility. Debt issuance costs are being amortized on a straight-line basis, which approximates the effective interest method, over the terms of the related debt. The related amortization is recognized as interest expense and other amortization expense.

6. Hedging Activities

In July 2006, in compliance with the terms of our senior secured credit facility, we entered into two interest rate swaps to manage exposure to changes in cash flows related to changes in the variable interest rate on a portion of our long-term debt. Under the terms of the swaps, we pay a designated fixed rate and receive a variable rate, which is based on LIBOR. The rate received is expected to offset the variable rate to be paid on the long-term debt which is also based on LIBOR.

At November 25, 2007, the notional value of the interest rate swaps was $165.0 million. The notional values of these amortizing swaps will decline to $90.0 million prior to expiration in July 2011. The fair value of the interest rate swaps at November 25, 2007, was ($6.1) million and is classified in “Other non-current liabilities” on the balance sheet. The mark-to-market loss, net of taxes, deferred in “Accumulated other comprehensive income” at November 25, 2007, was $3.8 million. During the thirty-nine weeks ended November 25, 2007, the critical terms of the hedge and the hedged items did not change and there has been no adverse change in the risk of default by counterparties to the swap since inception. As a result, no gain or loss has been recognized due to hedge ineffectiveness.

7. Stock-Based Compensation

Our stock-based compensation programs include non-qualified stock options, restricted stock units, and deferred compensation. At our annual meeting in July 2007, our stockholders ratified the 2007 Long-Term Incentive Plan (the “2007 LTIP”).  At November 25, 2007, our stock compensation programs were in accordance with the equity compensation plans maintained by the Company: the 2007 LTIP, the 2004 Long-Term Incentive Plan (the “2004 LTIP”), the 2003 Stock Option Plan (the “2003 Plan”), the 2004 Non-Executive Director Stock Option Plan (the “Director Option Plan”), and the Director Deferred Compensation Plan (the “Director DCP”).  There will be no further awards under each of the 2003 Plan, the 2004 LTIP, and the Director Option Plan. Awards after July 2007 are made pursuant to the 2007 LTIP.

Stock Options. Stock options were granted to certain employees under the 2003 Plan and to members of our board of directors under the Director Option Plan. The following table summarizes information about stock options for the thirty-nine weeks ended November 25, 2007, and November 26, 2006:

At November 25, 2007, there was $0.1 million of unrecognized compensation expense related to unvested stock options. The weighted-average remaining contractual life at November 25, 2007, was 4.0 years, for both outstanding and exercisable options. The total intrinsic value (market value of the stock less the option exercise price) of options exercised in the thirty-nine weeks ended November 25, 2007, and November 26, 2006, was $28.6 million and $2.1 million, respectively. The intrinsic value of exercisable options at November 25, 2007, based on the closing market price on November 23, 2007, was $33.2 million.

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Restricted Stock Units. We granted restricted stock units (“RSUs” or “RSU”) to eligible employees, management, and members of our board of directors pursuant to the 2004 LTIP and the 2007 LTIP which are converted into shares of UAP common stock. The following is a summary of RSU activity for the thirty-nine weeks ended November 25, 2007, and November 26, 2006:

We recognize compensation expense over the vesting periods of the awards.  The compensation expense for the thirteen weeks ended November 25, 2007, and November 26, 2006, was $1.9 million and $1.0 million, respectively. For the thirty-nine weeks ended November 25, 2007, and November 26, 2006, the compensation expense was $9.1 million and $2.7 million, respectively.  The total fair values of RSUs that vested during the thirty-nine weeks ended November 25, 2007, and November 26, 2006, were $6.1 million and $1.2 million, respectively.

At November 25, 2007, there was approximately $17.9 million of unrecognized compensation expense, before taxes and net of estimated forfeitures, related to RSU grants, which will be recognized over the weighted-average remaining vesting period of 3.0 years.

8. Income Taxes

We adopted FIN No. 48 on February 26, 2007. This interpretation prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in an income tax return. This interpretation also provides guidance on subsequent adjustment of recorded amounts, classification of interest and penalties, accounting in interim periods, disclosure, and transition.  Refer to “Adoption of New Accounting Pronouncement” in Note 2 for the discussion regarding the cumulative effect of adopting FIN No. 48.

9. Debt

In October 2007, UAP Holding Corp., its wholly-owned subsidiary United Agri Products, Inc. (“UAP, Inc.”), and certain of UAP Inc.’s subsidiaries entered into an amendment (the “Amendment”) to UAP, Inc.’s Second Amended and Restated Credit Agreement dated June 1, 2006 (the “Amended Credit Agreement”) to, among other things, increase our senior secured term loan facility by $225 million (such increase, the “Term Loan Add-on”).  Proceeds were used to pay down the outstanding balance under UAP, Inc.’s revolving credit facility and to pay related fees and expenses.

Interest rates with respect to the Term Loan Add-on and the existing term loans are based on, at UAP, Inc.’s option, (a) LIBOR plus the applicable margin (as defined below) and (b) the base rate, which will be the higher of (i) the rate publicly quoted by The Wall Street Journal as the “base rate on corporate loans posted by at least 75% of the nation’s 30 largest banks” and (ii) the Federal Funds rate plus 0.50%, plus the applicable margin.  The applicable margin for the Term Loan Add-on (as well as the existing term loan under the existing credit facility) is 2.75% for LIBOR loans and 1.75% for base rate loans.

In June 2006, UAP, Inc. replaced both its revolving credit facility and senior notes and entered into a senior secured credit facility. The senior secured credit facility provided for a six-year $175 million term loan facility (which was increased to $400 million in October 2007, as discussed above) and a five-year senior secured asset-based revolving credit facility in an aggregate principal amount of $675 million, including $50 million for letters-of-credit (jointly referred to hereafter as the “senior secured credit facility”). Availability of the revolving credit facility is subject to a borrowing base formula, which includes availability of an over-advance during certain periods. The senior secured credit facility provides that interest rates are based

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on, at UAP, Inc.’s option, (a) LIBOR plus the applicable margin or (b) the base rate, which is the higher of (i) the rate publicly quoted by the Wall Street Journal as the base rate on corporate loans posted by at least 75% of the nation’s 30 largest banks or (ii) the Federal Funds rate plus 0.50%, plus the applicable margin.

The applicable margin for the revolving facility is 1.25% for LIBOR advances and 0.00% for base rate advances. The revolving facility is secured by a first-priority lien on all accounts, inventory, general intangibles related to accounts and inventory, and all proceeds of the foregoing (“Current Asset Collateral”) of UAP Holding Corp. and its subsidiaries, and a second priority lien (subject to certain exclusions and exceptions) on other assets and proceeds of such other assets. The term facility is secured by a first-priority lien (subject to certain exclusions and exceptions) in all assets of UAP Holding Corp. and its subsidiaries, and all proceeds thereof other than the Current Asset Collateral, and a second-priority lien in the Current Asset Collateral.

In June 2006, UAP Holding Corp. and UAP, Inc. consummated the tender offers and consent solicitations for the 10¾% Senior Discount Notes due 2012 issued by UAP Holding Corp. and the 8¼% Senior Notes due 2011 issued by UAP, Inc. (collectively, the “Senior Notes”). The companies accepted for purchase $123.1 million principal amount at maturity of the 10¾% Senior Discount Notes (representing 98.5% of the previously outstanding 10¾% Senior Discount Notes) and $203.5 million principal amount of the 8¼% Senior Notes representing approximately 99.9% of the previously outstanding 8¼% Senior Notes. Total consideration paid for the notes tendered plus accrued interest thereon was $120.6 million for the 10¾% Senior Discount Notes and $227.2 million for the 8¼% Senior Notes. These payments and related expenses were financed through borrowings under the new senior secured credit facility.

Subsequently, UAP Holding Corp. repurchased in brokered market transactions all of the $1.9 million principal amount at maturity of its 10¾% Senior Discount Notes due 2012 that had remained outstanding following the closing on June 1, 2006, of the tender offer and consent solicitation. Accordingly, all of the 10¾% Senior Discount Notes previously issued and authenticated under the indenture dated as of January 26, 2004, as supplemented (the “Indenture”), between UAP Holding Corp. and The Bank of New York (formerly JPMorgan Chase Bank, N.A.), as trustee (the “Trustee”), had been delivered by UAP Holding Corp. to the Trustee and cancelled. In accordance with Section 11.01 of the Indenture, UAP Holding Corp. satisfied and discharged the Indenture, which satisfaction and discharge was acknowledged by the Trustee on November 24, 2006. Upon satisfaction and discharge, the Indenture ceased to be of further effect (except for certain rights of the Trustee).

In connection with the refinancing and early extinguishment of the senior notes, the Company recorded a pretax charge to finance related and other charges of approximately $47.9 million for fiscal 2007, all of which were primarily incurred in the thirty-nine weeks ended November 26, 2006. These costs include approximately $31.8 million for tender premiums and related transaction costs to acquire the debt and $16.1 million for the write-off of unamortized debt issuance costs.

At November 25, 2007, there was $675.0 million of total borrowing capacity under the revolving credit facility and UAP, Inc. had aggregate borrowing availability thereunder of $369.7 million (after giving effect to $289.9 million of revolving loans and $15.4 million of letters of credit under the sub-facility).

At November 25, 2007, we believe that the permitted distributions available to pay dividends under the restricted payment covenant of the senior secured credit facility would be approximately $94 million, before giving effect to the December 3, 2007 dividend payment of $12.0 million.

Our weighted average interest rate on short-term borrowings outstanding at November 25, 2007, was 6.1%.

Our senior secured credit facility contains certain customary representations, warranties, and affirmative covenants. At November 25, 2007, we were in compliance with all covenants under our senior secured credit facility.

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Total current and long-term debt at November 25, 2007, February 25, 2007, and November 26, 2006, consisted of the following:

Maturities of debt in the remainder of fiscal 2008 and each of the five subsequent years are as follows:

10. Incentive-Based Compensation Plan

We have an incentive-based compensation plan for officers and key employees.  Factors considered in the plans include growth, profitability, and key performance metrics of both individual and overall company operating performance. Amounts charged (credited) to expense totaled $7.9 million and $18.0 million in the thirteen and thirty-nine weeks ended November 25, 2007, respectively, and ($4.1) million and $0.4 million in the thirteen and thirty-nine weeks ended November 26, 2006, respectively.

11. Dividends

On October 4, 2007, our board of directors declared a quarterly dividend on our common stock in the amount of $0.225 per share.  The record date for the dividend payment was November 15, 2007 and the dividend was paid on December 3, 2007.  On March 1, 2007, we paid a $0.1875 per share dividend, and we paid a $0.225 per share dividend on June 1, 2007 and September 4, 2007.

In addition to dividends to our stockholders, the RSUs that we have granted to eligible employees, management, and members of our board of directors include the right to receive dividend equivalent payments on each RSU that are equal to dividends paid on each share of our common stock.

12. Business Segment and Related Information

The Company has one reporting segment engaged in the sale of agricultural inputs to growers and regional dealers.

Net sales and long-lived assets by geographical area are as follows:

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Long-lived assets consist of property, plant and equipment, net of depreciation; goodwill, indefinite-life and amortizable intangibles; and other assets. Long-lived assets by geographical area are based on the location of facilities.

Net sales by product category are as follows:

13. Commitments and Contingencies

As part of our ongoing operations, we enter into arrangements that obligate us to make future payments under contracts such as lease agreements, debt agreements, and unconditional purchase obligations (i.e., obligations to transfer funds in the future for fixed or minimum quantities of goods or services at fixed or minimum prices, such as “take-or-pay” contracts). We enter into unconditional purchase obligation arrangements in the normal course of business to ensure that adequate levels of sourced product are available to us.

Income tax contingencies are provided for under FIN No. 48. See Note 2 and Note 8.

We are a party to a number of lawsuits and claims arising out of the operation of our businesses. Our management believes the ultimate resolution of such matters should not have a material adverse effect on our business, financial condition, cash flow, results of operations, or liquidity.

In some cases, pursuant to indemnity agreements, third parties (including government reimbursement funds and insurers) may contribute to the costs of cleanup at certain sites. Pursuant to the asset purchase agreement dated November 24, 2003, in which ConAgra sold United Agri Products and its related businesses to UAP Holding Corp. (the “Apollo Acquisition”), ConAgra has agreed to provide us with a partial reimbursement of costs that we may incur relating to any cleanup requirements due to environmental conditions at our Greenville, Mississippi facility prior to our purchase of the site from them in November 2003. Additionally, on October 14, 2002, December 23, 2002, and December 31, 2002, three separate lawsuits were filed in the Circuit Court of Washington County, Mississippi against our subsidiary, Platte Chemical Company (“Platte”), and certain former employees of Platte, relating to alleged releases from Platte’s Greenville, Mississippi facility. The plaintiffs in such suits are seeking compensation for alleged personal injury and property damage. In connection with the Apollo Acquisition, ConAgra agreed to partially reimburse us, subject to a cap, for fees and expenses we incur in connection with such lawsuits. Subsequent to November 23, 2003, another lawsuit not covered by the ConAgra cost sharing agreement was filed in the Circuit Court of Washington County, Mississippi against us, which lawsuit relates to the same alleged releases from the Greenville, Mississippi facility. While discovery in the Greenville litigations is not yet complete, based on information available to us at this time we do not believe that such litigations, if adversely determined, would have a material adverse effect on our business, financial condition, cash flow, results of operations, and liquidity.

14. Subsequent Events

Tender Offer . On December 2, 2007, UAP, Agrium Inc. (“Agrium”), and a subsidiary of Agrium, entered into an agreement and plan of merger (“Merger Agreement”) pursuant to which Agrium, through its subsidiary Agrium U.S., Inc., commenced a tender offer on December 10, 2007 (“Tender Offer”), to purchase all the outstanding shares of common stock of UAP for $39.00 in cash per share. The Merger Agreement provides that following completion of the Tender Offer and assuming certain conditions are satisfied, UAP will then engage in a merger (the “Merger”) with a subsidiary of Agrium, pursuant to which each outstanding share of UAP common stock not tendered in the Tender Offer will be converted into the right to receive $39.00 in cash.  Upon completion of the Merger, UAP will become a wholly-owned subsidiary of Agrium.  Agrium is a major retailer of agricultural products and services in both North and South America and a global producer and wholesale marketer of nutrients for agricultural, specialty, and industrial markets.

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The acquisition is subject to UAP stockholders tendering a majority of the outstanding shares of UAP common stock in the Tender Offer and satisfaction of certain other conditions, including receipt of certain U.S. and Canadian regulatory approvals.

If these transactions are completed, we will cease reporting financial results as a stand-alone company.  The accompanying financial statements do not reflect any of the potential impacts of the Merger, as those impacts will not be recorded until and if there is a closing.  

If the Merger is not completed and the Merger Agreement is terminated under certain circumstances, UAP may be liable to Agrium for a termination fee of $44 million, plus reimbursement to Agrium of up to $10 million in costs incurred by Agrium in connection with the transactions.  If the Merger is not completed due to failure to obtain regulatory approval and certain other conditions are satisfied, Agrium may be liable to UAP for a reverse break fee of $54 million.

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