**UNITEDSTATES********SECURITIES AND EXCHANGE COMMISSION********WASHINGTON, D.C. 20549**

 

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**FORM 10-Q**

 

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**x****                             ****QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**                                               ****Forthe quarterly period ended November 25, 2007**

 

**OR**

 

**o****                                ****TRANSITION REPORT PURSUANTTO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**                                               ****Forthe transition periodfrom          to          .**

 

**CommissionFile Number 000-51035**

 

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**UAP HoldingCorp.******(Exact Name of Registrant as Specified in Its Charter)

 

 

| **Delaware**                               | **11-3708834**       |
|--------------------------------------------|----------------------|
| (State  or Other Jurisdiction of           | (I.R.S.  Employer    |
| Incorporation  or Organization)            | Identification  No.) |
|                                       |                 |
| **7251 W.  4th Street, Greeley, Colorado** | **80634**            |
| (Address  of Principal Executive Offices)  | (Zip  Code)          |

 

**(970)356-4400** (Registrant’s Telephone Number,Including Area Code)

 

**Notapplicable** (Former Name, Former Address and FormerFiscal Year, if Changed Since Last Report)

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act.

 

| Large accelerated filer x |   | Accelerated filer o |   | Non-accelerated filer o |
|---------------------------|--------|---------------------|--------|-------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).Yes o  No x

 

Indicatethe number of shares outstanding of each of registrant’s classes of commonstock, as of the latest practicable date.

 

Asof December 20, 2007, there were 52,457,020 shares of the registrant’sCommon Stock, $0.001 par value, outstanding.

 

 

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*TABLE OF CONTENTS*

* *
| ***Part I. Financial  Information***                                                                | 3      |
|---------------------------------------------------------------------------------------------------------------|--------|
| ** **                                                                                                    |   |
| **ITEM 1. FINANCIAL STATEMENTS**                                                                         | 3      |
| **Report of Independent  Registered Public Accounting Firm**                                                  | 3      |
| **Consolidated Balance Sheets**                                                                               | 4      |
| **Consolidated Statements of  Earnings**                                                                      | 5      |
| **Consolidated Statements of  Cash Flows**                                                                    | 6      |
| **Consolidated Statement of  Stockholders’ Equity**                                                      | 7      |
| **Notes to Consolidated  Financial Statements**                                                               | 8      |
| ** **                                                                                                    |   |
| **ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF  OPERATIONS** | 18     |
| ** **                                                                                                    |   |
| **ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**                                  | 28     |
| ** **                                                                                                    |   |
| **ITEM 4.  CONTROLS AND PROCEDURES**                                                                     | 29     |
| ** **                                                                                                    |   |
| ***Part II.  Other Information***                                                                        | 30     |
| ** **                                                                                                    |   |
| **ITEM 1A. RISK FACTORS**                                                                                | 30     |
| ** **                                                                                                    |   |
| **ITEM 6. EXHIBITS**                                                                                     | 31     |
| ** **                                                                                                    |   |
| ***SIGNATURES***                                                                                              | 32     |

 

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**PART I.    FINANCIAL INFORMATION**

 

**ITEM 1.****                             ****FINANCIAL STATEMENTS**

 

**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

To theBoard of Directors and Stockholders of UAP Holding Corp.

Greeley,Colorado

 

Wehave reviewed the accompanying consolidated balance sheets of UAP Holding Corp.and subsidiaries (the “Company”) as of November 25, 2007, and November 26,2006, the related consolidated statements of earnings for the thirteen andthirty-nine week periods ended November 25, 2007, and November 26,2006, the consolidated statements of cash flows for the thirty-nine weekperiods ended November 25, 2007, and November 26, 2006, and theconsolidated statement of stockholders’ equity for the thirty-nine week periodended November 25, 2007. These interim financial statements are theresponsibility of the Company’s management.

 

Weconducted our reviews in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). A review of interim financialinformation consists principally of applying analytical procedures and makinginquiries of persons responsible for financial and accounting matters. It issubstantially less in scope than an audit conducted in accordance with thestandards of the Public Company Accounting Oversight Board (United States), theobjective of which is the expression of an opinion regarding the financialstatements taken as a whole. Accordingly, we do not express such an opinion.

 

Basedon our reviews, we are not aware of any material modifications that should bemade to such consolidated interim financial statements for them to be inconformity with accounting principles generally accepted in the United Statesof America.

 

Wehave previously audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated balance sheet ofUAP Holding Corp. and subsidiaries as of February 25, 2007, and therelated consolidated statements of earnings, stockholders’ equity, and cashflows for the year then ended (not presented herein); and in our report dated April 24,2007, we expressed an unqualified opinion on those consolidated financialstatements. In our opinion, the information set forth in the accompanyingconsolidated balance sheet as of February 25, 2007, is fairly stated, inall material respects, in relation to the consolidated balance sheet from whichit has been derived.

 

DELOITTE &TOUCHE LLP

 

Denver, Colorado

December 21, 2007

 

 

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**UAPHOLDING CORP.**

**CONSOLIDATEDBALANCE SHEETS**(in thousands, except share data)**UNAUDITED**

 
| ** **                                                                                                                                | ** ** | **November 25, 2007** | ** ** | **February 25, 2007** | ** ** | **November 26, 2006** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| **ASSETS**                                                                                                                                | ** ** | ** **                      | ** ** | ** **                      | ** ** | ** **                      | ** ** |
| Current assets:                                                                                                                           |       |                            |       |                            |       |                            |       |
| Cash and cash equivalents                                                                                                                 |       | $                               | 23,310     |                            | $          | 19,506                          |       | $ | 35,045 |   |
| Receivables, net                                                                                                                          |       | 772,465                         |       | 338,229                         |       | 724,930                         |       |
| Inventories                                                                                                                               |       | 684,087                         |       | 883,033                         |       | 599,474                         |       |
| Deferred income taxes                                                                                                                     |       | 31,615                          |       | 28,046                          |       | 24,665                          |       |
| Vendor prepayments                                                                                                                        |       | 40,864                          |       | 64,700                          |       | 12,950                          |       |
| Other current assets                                                                                                                      |       | 7,523                           |       | 8,547                           |       | 4,383                           |       |
| Total current assets                                                                                                                      |       | 1,559,864                       |       | 1,342,061                       |       | 1,401,447                       |       |
| Property, plant and equipment                                                                                                             |       | 166,413                         |       | 145,455                         |       | 130,794                         |       |
| Less accumulated depreciation                                                                                                             |       | (44,810                         | )          | (35,234                         | )          | (32,288                         | )          |
| Property, plant and equipment, net                                                                                                        |       | 121,603                         |       | 110,221                         |       | 98,506                          |       |
| Intangible assets, net                                                                                                                    |       | 51,377                          |       | 50,076                          |       | 31,660                          |       |
| Goodwill                                                                                                                                  |       | 47,034                          |       | 45,138                          |       | 41,611                          |       |
| Deferred income taxes                                                                                                                     |       | 7,414                           |       | 4,448                           |       | 6,370                           |       |
| Debt issuance costs, net                                                                                                                  |       | 9,880                           |       | 5,445                           |       | 5,746                           |       |
| Other assets                                                                                                                              |       | 3,590                           |       | 1,797                           |       | 1,986                           |       |
| Total assets                                                                                                                              |       | $                               | 1,800,762  |                            | $          | 1,559,186                       |       | $ | 1,587,326 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                             | ** ** | ** **                      | ** ** | ** **                      | ** ** | ** **                      | ** ** |
| Current liabilities:                                                                                                                      |       |                            |       |                            |       |                            |       |
| Accounts payable                                                                                                                          |       | $                               | 674,658    |                            | $          | 926,632                         |       | $ | 728,714 |   |
| Short-term debt                                                                                                                           |       | 293,879                         |       | 184,739                         |       | 373,615                         |       |
| Accrued payroll and related liabilities                                                                                                   |       | 33,818                          |       | 5,820                           |       | 15,604                          |       |
| Income taxes payable                                                                                                                      |       | 23,902                          |       | —                          |       | —                          |       |
| Deferred income taxes                                                                                                                     |       | 2,158                           |       | 2,200                           |       | 2,087                           |       |
| Other accrued liabilities                                                                                                                 |       | 89,788                          |       | 72,631                          |       | 87,909                          |       |
| Total current liabilities                                                                                                                 |       | 1,118,203                       |       | 1,192,022                       |       | 1,207,929                       |       |
| Long-term debt                                                                                                                            |       | 393,828                         |       | 172,390                         |       | 172,828                         |       |
| Deferred income taxes                                                                                                                     |       | 15,589                          |       | 17,953                          |       | 18,677                          |       |
| Other non-current liabilities                                                                                                             |       | 14,908                          |       | 6,567                           |       | 5,903                           |       |
| Commitments and contingencies (Note 13)                                                                                                   |       |                            |       |                            |       |                            |       |
| Stockholders’ equity:                                                                                                                |       |                            |       |                            |       |                            |       |
| Common stock, $.001 par value, 90,000,000 shares authorized,  52,457,020, 51,194,620, and 50,980,858 issued and outstanding, respectively |       | 52                              |       | 51                              |       | 51                              |       |
| Additional paid-in capital                                                                                                                |       | 158,545                         |       | 138,569                         |       | 133,344                         |       |
| Retained earnings                                                                                                                         |       | 94,374                          |       | 27,801                          |       | 44,813                          |       |
| Accumulated other comprehensive income                                                                                                    |       | 5,263                           |       | 3,833                           |       | 3,781                           |       |
| Stockholders’ equity                                                                                                                 |       | 258,234                         |       | 170,254                         |       | 181,989                         |       |
| Total liabilities and stockholders’ equity                                                                                           |       | $                               | 1,800,762  |                            | $          | 1,559,186                       |       | $ | 1,587,326 |   |

 

The accompanying notesare an integral part of the financial statements.

 

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**UAPHOLDING CORP.**

**CONSOLIDATEDSTATEMENTS OF EARNINGS**(in thousands,except share data)**UNAUDITED**

 
| ** **                                               | ** ** | **Thirteen Weeks Ended** | ** ** | **Thirty-Nine Weeks Ended** | ** ** |
|----------------------------------------------------------|------------|------------------------------------|------------|---------------------------------------|------------|
| ** **                                               | ** ** | **November 25, 2007**    | ** ** | **November 26, 2006**       | ** ** | **November 25, 2007** | ** ** | **November 26, 2006** | ** ** |
| Net sales                                                |       | $                                  | 497,773    |                                  | $          | 375,728 |   | $ | 2,965,323 |   | $ | 2,541,542 |   |
| Cost of goods sold                                       |       | 440,757                            |       | 335,107                               |       | 2,530,149 |   | 2,206,926 |   |
| Gross profit                                             |       | 57,016                             |       | 40,621                                |       | 435,174 |   | 334,616 |   |
| Selling, general and administrative expenses             |       | 79,300                             |       | 54,746                                |       | 257,630 |   | 209,954 |   |
| Royalties, service charges and other income and expenses |       | (5,653                             | )          | (4,179                                | )          | (24,910 | ) | (19,472 | ) |
| Operating income (loss)                                  |       | (16,631                            | )          | (9,946                                | )          | 202,454 |   | 144,134 |   |
| Interest expense, net                                    |       | 14,462                             |       | 11,472                                |       | 33,606 |   | 28,631 |   |
| Finance related and other charges                        |       | 379                                |       | 325                                   |       | 379 |   | 48,172 |   |
| Income (loss) before income taxes                        |       | (31,472                            | )          | (21,743                               | )          | 168,469 |   | 67,331 |   |
| Income tax expense (benefit)                             |       | (12,458                            | )          | (8,592                                | )          | 64,781 |   | 26,464 |   |
| Net income (loss)                                        |       | $                                  | (19,014    | )                                     | $          | (13,151 | ) | $ | 103,688 |   | $ | 40,867 |   |
| Earnings (loss) per share:                               |       |                               |       |                                  |       |   |   |   |   |
| Basic                                                    |       | $                                  | (0.36      | )                                     | $          | (0.26 | ) | $ | 2.00 |   | $ | 0.80 |   |
| Diluted                                                  |       | $                                  | (0.36      | )                                     | $          | (0.26 | ) | $ | 1.95 |   | $ | 0.78 |   |
| Cash dividends declared per share of common stock        |       | $                                  | 0.2250     |                                  | $          | 0.1875 |   | $ | 0.6750 |   | $ | 0.5625 |   |
| Weighted average shares outstanding:                     |       |                               |       |                                  |       |   |   |   |   |
| Basic                                                    |       | 52,417,891                         |       | 50,978,306                            |       | 51,943,792 |   | 50,932,591 |   |
| Diluted                                                  |       | 52,417,891                         |       | 50,978,306                            |       | 53,103,732 |   | 52,425,236 |   |

 

The accompanying notes are an integral part of thefinancial statements.

 

5

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**UAPHOLDING CORP.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**(in thousands)**UNAUDITED**

 
| ** **                                                                      | ** ** | **Thirty-Nine Weeks Ended** | ** ** |
|---------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                      | ** ** | **November 25, 2007**       | ** ** | **November 26, 2006** | ** ** |
| **Operations**                                                                  |       |                                  |       |   |   |
| Net income                                                                      |       | $                                     | 103,688    |   | $ | 40,867 |   |
| Adjustments to reconcile net income to net cash used for operating  activities: |       |                                  |       |   |   |
| Depreciation                                                                    |       | 9,899                                 |       | 8,636 |   |
| Stock compensation                                                              |       | 9,034                                 |       | 2,979 |   |
| Amortization of intangibles                                                     |       | 5,932                                 |       | 1,449 |   |
| Deferred income taxes                                                           |       | (7,570                                | )          | (57 | ) |
| Write-off of debt issuance costs                                                |       | —                                |       | 15,957 |   |
| Premium paid to tender notes payable                                            |       | —                                |       | 31,714 |   |
| Other                                                                           |       | (1,045                                | )          | 2,780 |   |
| Change in operating assets and liabilities, net of effects of  acquisitions:    |       |                                  |       |   |   |
| Increase in receivables, net                                                    |       | (435,848                              | )          | (437,967 | ) |
| Decrease in current liabilities and non-current liabilities                     |       | (164,214                              | )          | (72,264 | ) |
| Decrease in inventory                                                           |       | 202,228                               |       | 137,273 |   |
| Decrease in other operating assets                                              |       | 24,736                                |       | 71,606 |   |
| Net cash used for operations                                                    |       | (253,160                              | )          | (197,027 | ) |
| **Investing**                                                                   |       |                                  |       |   |   |
| Additions to property, plant and equipment                                      |       | (19,522                               | )          | (16,960 | ) |
| Acquisitions, net of cash acquired                                              |       | (8,879                                | )          | (31,511 | ) |
| Additions to purchase price of previous acquisitions                            |       | (4,934                                | )          | — |   |
| Addition of other long-lived assets                                             |       | (2,612                                | )          | (1,928 | ) |
| Proceeds from sales of assets                                                   |       | 2,345                                 |       | 9,399 |   |
| Net cash used for investing                                                     |       | (33,602                               | )          | (41,000 | ) |
| **Financing**                                                                   |       |                                  |       |   |   |
| Long-term debt issued                                                           |       | 225,000                               |       | 175,000 |   |
| Net borrowings on revolving line of credit                                      |       | 106,890                               |       | 371,865 |   |
| Dividends and dividend equivalents paid                                         |       | (33,251                               | )          | (28,660 | ) |
| (Decrease) increase in checks not yet presented                                 |       | (14,909                               | )          | 10,988 |   |
| Excess income tax benefits from stock-based compensation arrangements           |       | 9,799                                 |       | 9,130 |   |
| Debt issuance costs                                                             |       | (5,535                                | )          | (6,374 | ) |
| Proceeds from common stock options exercised                                    |       | 2,808                                 |       | 300 |   |
| Long-term debt payments and redemption                                          |       | (1,312                                | )          | (338,475 | ) |
| Net cash provided by financing                                                  |       | 289,490                               |       | 193,774 |   |
| Net effect of exchange rates on cash and cash equivalents                       |       | 1,076                                 |       | 130 |   |
| Net change in cash and cash equivalents                                         |       | 3,804                                 |       | (44,123 | ) |
| Cash and cash equivalents at beginning of period                                |       | 19,506                                |       | 79,168 |   |
| Cash and cash equivalents at end of period                                      |       | $                                     | 23,310     |   | $ | 35,045 |   |
| Supplemental disclosure of cash flow information:                               |       |                                  |       |   |   |
| Cash paid during the period for interest                                        |       | $                                     | 31,548     |   | $ | 28,008 |   |
| Cash paid for prior years’ accreted discount on notes payable              |       | $                                     | —     |   | $ | 20,968 |   |
| Cash paid during the period for income taxes                                    |       | $                                     | 24,729     |   | $ | 14,076 |   |
| Dividends and dividend equivalents declared but not yet paid                    |       | $                                     | 12,413     |   | $ | 9,559 |   |

 

The accompanying notes are an integral part of thefinancial statements.

 

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**UAP HOLDINGCORP.**

**CONSOLIDATEDSTATEMENT OF STOCKHOLDERS’ EQUITY**(in thousands)**UNAUDITED**

 
| **Thirty-Nine Weeks Ended November 25, 2007** | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Income** |   | **Total  Stockholders’  Equity** | ** ** |
|------------------------------------------------------------------------|------------|-------------------|------------|----------------------------------|------------|------------------------|------------|-----------------------------------------------|--------|---------------------------------------|------------|
| Balance at February 25, 2007                                      |       | $                 | 51         |                             | $          | 138,569                |       | $                                             | 27,801 |                                  | $          | 3,833 |   | $ | 170,254 |   |
| Adoption of FASB Interpretation No. 48                            |       | —            |       | —                           |       | (1,247                 | )          | —                                        |   | (1,247                                | )          |
| Adjusted balance at beginning of period                                |       | 51                |       | 138,569                          |       | 26,554                 |       | 3,833                                         |   | 169,007                               |       |
| Comprehensive income:                                                  |       |              |       |                             |       |                   |       |                                          |   |                                  |       |
| Net income                                                             |       | —            |       | —                           |       | 103,688                |       | —                                        |   | 103,688                               |       |
| Cash flow hedges, net of tax                                           |       | —            |       | —                           |       | —                 |       | (2,173                                        | )      | (2,173                                | )          |
| Foreign currency translation adjustment                                |       | —            |       | —                           |       | —                 |       | 3,603                                         |   | 3,603                                 |       |
| Total comprehensive income                                             |       | —            |       | —                           |       | —                 |       | —                                        |   | 105,118                               |       |
| Exercise of stock options                                              |       | 1                 |       | 2,807                            |       | —                 |       | —                                        |   | 2,808                                 |       |
| Stock compensation — stock options and restricted stock units     |       | —            |       | 9,561                            |       | —                 |       | —                                        |   | 9,561                                 |       |
| Excess income tax benefits from stock-based compensation arrangements  |       | —            |       | 9,799                            |       | —                 |       | —                                        |   | 9,799                                 |       |
| Payroll taxes on restricted stock units vested and issued              |       | —            |       | (2,191                           | )          | —                 |       | —                                        |   | (2,191                                | )          |
| Dividends and dividend equivalents                                     |       | —            |       | —                           |       | (35,868                | )          | —                                        |   | (35,868                               | )          |
| Balance at November 25, 2007                                      |       | $                 | 52         |                             | $          | 158,545                |       | $                                             | 94,374 |                                  | $          | 5,263 |   | $ | 258,234 |   |

 

The accompanying notes arean integral part of the financial statements.

 

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**UAPHOLDING CORP.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS****For the Thirteen and Thirty-Nine Week PeriodsEnded November 25, 2007, and November 26, 2006**

**UNAUDITED**

 

**1. Description of the Business and Significant AccountingPolicies**

 

***Interim Financial Statements.***The accompanying unaudited consolidatedfinancial statements of UAP Holding Corp. and its subsidiaries (the “Company,”“UAP,” “we,” “us,” and “our”) have been prepared in accordance with accountingprinciples generally accepted in the United States of America (“GAAP”) forinterim financial information and reflect all adjustments (consisting of normalrecurring accruals and changes in estimates) which, in the opinion ofmanagement, are necessary for a fair presentation of the financial position,operating results, and cash flows for the periods presented. The resultsreported in these interim financial statements are not necessarily indicativeof the results that may be reported for the entire year. These financialstatements should be read in conjunction with the consolidated and combinedfinancial statements and notes thereto contained in our Annual Report on Form 10-Kfor the fiscal year ended February 25, 2007.

 

***Business.***UAP is the largest independentdistributor of agricultural and professional non-crop inputs in the UnitedStates and Canada. We market a comprehensive line of products includingchemicals, fertilizer, and seed to farmers, commercial growers, and regionaldealers. We have approximately 370 distribution, storage, and sales locations.We also have three formulation facilities where we blend products primarily forsale by our distribution facilities.

 

Thepredecessor of UAP Holding Corp. was initially formed by ConAgra Foods, Inc.(“ConAgra”) through a series of acquisitions, beginning in May 1978.  In 2003, Apollo Management V, L.P.(“Apollo”), through UAP Holding Corp., acquired part of ConAgra Foods’ UnitedStates and Canadian agricultural products businesses from ConAgra.  In 2004, we consummated the initial publicoffering of our common stock.

 

***Fiscal Year.***Our fiscal year includes a fifty-two orfifty-three week period ending on the last Sunday in February. The fifty-two weeks ending on February 24,2008, will be referred to as “fiscal 2008,” and the fifty-two weeks ended February 25, 2007, will be referredto as “fiscal 2007.”

 

***Seasonality.*** Our business is seasonal based upon theplanting, growing, and harvesting cycles of our customers’ operations. Becauseof this seasonality, we experience significant fluctuations in our revenues,income, and net working capital levels. During the last three years, as aresult of the condensed nature of the planting season, more than 75% of our netsales occurred during the first and second fiscal quarters. Weather conditionsand changes in the mix of crops planted can also cause quarterly results tovary.

 

***Use of Estimates.*** The preparation of financial statementsin conformity with accounting principles generally accepted in the UnitedStates of America requires management to make estimates and assumptions. Theseestimates or assumptions affect reported amounts of assets, liabilities,revenue, and expenses as reflected in the financial statements. Actual resultscould differ from those estimates and the differences could be material.

 

***Vendor Rebate Receivables.*** We receive vendor rebates, primarilyfrom our chemical and seed suppliers. These rebates are usually covered bybinding agreements and published programs but can also be open-ended, subjectto future definition or revision. Rebates earned are generally based onachieving targeted sales, purchases, volume tiers, sales growth, or marketshare growth rates.

 

Rebatestypically cover performance during the crop year, which is based on planting,growing, and harvesting cycles.  This maydiffer from our fiscal year. The crop year for fiscal 2008 began as early as September 2006and will end as late as December 2007, depending on the product. Becauseof the timing of the crop year relative to our fiscal year and because ourvendor programs are typically not multi-year programs, the rebate income earnedand recognizable for the crop year ended during the current fiscal year willlargely be received and recorded by our fiscal year-end. Since we estimaterebates earned from our vendors throughout the year, changes in estimates canimpact our margin percentages by quarter. The programs that start late in onefiscal year and conclude in the subsequent fiscal year typically will notresult in significant income in the starting fiscal year because sales activityduring that period, the winter season, is significantly less.

 

Rebatesthat are probable and can be reasonably estimated are accrued at expected ratesbased on total estimated crop year performance. Rebates that are not probableor estimable are accrued when certain milestones are achieved. Rebates notcovered by binding agreements or published vendor programs are accrued whenconclusive documentation of right of receipt is obtained.

 

8

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

 

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

 
| ** **                                                                                      | ** ** | **Thirteen Weeks Ended**                        | ** ** | **Thirty-Nine Weeks Ended** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------|------------|
| **Earnings (loss) per share**                                                    | ** ** | **November 25, 2007**                           | ** ** | **November 26, 2006**       | ** ** | **November 25, 2007** | ** ** | **November 26, 2006** | ** ** |
| ** **                                                                                      | ** ** | **(in thousands, except share data)** | ** ** |
| Net income (loss)                                                                               |       | $                                                         | (19,014    | )                                     | $          | (13,151 | ) | $ | 103,688 |   | $ | 40,867 |   |
|                                                                                            |       |                                                      |       |                                  |       |   |   |   |   |
| Weighted average shares of common stock outstanding used in computing  basic earnings per share |       | 52,417,891                                                |       | 50,978,306                            |       | 51,943,792 |   | 50,932,591 |   |
| Net effect of dilutive stock options and restricted stock units                                 |       | —                                                    |       | —                                |       | 1,159,940 |   | 1,492,645 |   |
|                                                                                            |       |                                                      |       |                                  |       |   |   |   |   |
| Weighted average shares of common stock used in computing diluted  earnings per share           |       | 52,417,891                                                |       | 50,978,306                            |       | 53,103,732 |   | 52,425,236 |   |
|                                                                                            |       |                                                      |       |                                  |       |   |   |   |   |
| Basic earnings (loss) per share                                                                 |       | $                                                         | (0.36      | )                                     | $          | (0.26 | ) | $ | 2.00 |   | $ | 0.80 |   |
|                                                                                            |       |                                                      |       |                                  |       |   |   |   |   |
| Diluted earnings (loss) per share                                                               |       | $                                                         | (0.36      | )                                     | $          | (0.26 | ) | $ | 1.95 |   | $ | 0.78 |   |

 

**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 IncomeTaxes” (“FIN No. 48”), which clarifies the accounting for uncertainty inincome taxes recognized in an enterprise’s financial statements in accordancewith Statement of Financial Accounting Standards No. 109, “Accounting forIncome Taxes.” This interpretation prescribes a recognition threshold and ameasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in an income tax return. Thisinterpretation also provides guidance on derecognition, classification,interest and penalties, accounting in interim periods, disclosure, andtransition. FIN No. 48 was effective for fiscal years beginning after December 15,2006.

 

Weadopted the provisions of FIN No. 48 at the beginning of our currentfiscal year, as required. The cumulative effect of adoption was a $1.2 millionreduction of retained earnings. At February 25, 2007, the total amount ofunrecognized tax benefits was $4.4 million, all of which would impact theeffective tax rate, if recognized. Upon adoption, approximately $4.1 million ofthe unrecognized tax benefits were reflected in “Other non-currentliabilities.”

 

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

 

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

 

***Recent Accounting Pronouncements. ***In September 2006, the FASB issued Statement ofFinancial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS157”). This standard defines fair value, establishes a framework for measuringfair value in GAAP, and expands disclosures about fair value measurements. SFAS157 is effective for fiscal years beginning after November 15, 2007, andinterim periods within such years. We will adopt SFAS 157 in our first quarterof fiscal 2009, as required. We are currently reviewing the requirements ofthis statement and, at this point in time, we cannot determine the impact, ifany, that this statement may have on our business, financial condition, cashflow, results of operations, or liquidity.

 

9

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In February 2007,the FASB issued Statement of Financial Accounting Standard No. 159, “TheFair Value Option for Financial Assets and Financial Liabilities, including anamendment to FASB Statement No. 115” (“SFAS 159”). This statement permitsentities to choose to measure many financial instruments and certain otheritems at fair value that are not currently required to be measured at fairvalue. The objective is to improve financial reporting by providing entitieswith the opportunity to mitigate volatility in reported earnings caused bymeasuring related assets and liabilities differently without having to applycomplex hedge accounting provisions. This statement requires a business entityto report unrealized gains and losses on items for which the fair value optionhas been elected in earnings at each subsequent reporting date. An entity maydecide whether to elect the fair value option for each eligible item on itselection date, subject to certain requirements described in the statement. Thisstatement is effective as of the beginning of each reporting entity’s firstfiscal year that begins after November 15, 2007. We will adopt SFAS 159 inour first quarter of fiscal 2009, as required. We are currently reviewing therequirements of this statement and, at this point in time, we cannot determinethe impact, if any, that this statement may have on our business, financialcondition, cash flow, results of operations, or liquidity.

 

In December 2007, the FASB issuedFASB Statement No. 141(R), “Business Combinations” (“SFAS 141(R)”), whichestablishes accounting principles and disclosure requirements for alltransactions in which a company obtains control over another business.  This statement is effective for business combinationsfor which the acquisition date is on or after the beginning of the first annualreporting period beginning on or after December 15, 2008.  We are currently reviewing the requirementsof 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, cashflow, 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 heldby other parties in a subsidiary of the parent company.  This statementis effective for annual periods beginning after December 15, 2008.  We are currently reviewing the requirementsof 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, cashflow, results of operations, or liquidity.

 

**3. Acquisitions and Divestitures**

 

Duringthe thirty-nine weeks ended November 25, 2007, we acquired four businessesand paid $8.9 million in purchase price. The total initial purchase price paid may increase or decrease primarilydue to adjustments to working capital made in accordance with contractualprovisions.

 

Duringfiscal 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 weeksended November 25, 2007, for certain items, primarily customary workingcapital adjustments, related to these fiscal 2007 acquisitions. Our majoracquisitions in fiscal 2007 were (a) the first fiscal quarter purchase ofthe remaining 50% share of our joint venture in UAP Timberland, LLC, (b) thethird fiscal quarter purchase of Terral AgriServices, Inc. and certainassets of Terral FarmService, Inc. and Wisner Elevator, Inc., and (c) thefourth fiscal quarter purchase of certain retail and service assets of AGSCO, Inc.and AG Depot, Inc., and certain retail distribution assets of BoettcherEnterprises. For these fiscal 2007 acquisitions that occurred in thethirty-nine weeks ended November 26, 2006, we paid $31.5 million in purchaseprice, net of cash received.

 

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

 

**4. Royalties, Service Charges andOther Income and Expenses**

 

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

 
| ** **                                                                                      | ** ** | **Thirteen Weeks Ended** | ** ** | **Thirty-Nine Weeks Ended** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|---------------------------------------|------------|
| **Royalties, service charges and other income and expenses** | ** ** | **November 25, 2007**    | ** ** | **November 26, 2006**       | ** ** | **November 25, 2007** | ** ** | **November 26, 2006** | ** ** |
| ** **                                                                                      | ** ** | ** **                         | ** ** | **(in  thousands)**                   | ** ** | ** ** | ** ** |
| Royalty income                                                                                  |       | $                                  | (519       | )                                     | $          | (609 | ) | $ | (7,396 | ) | $ | (5,929 | ) |
| Service charges income                                                                          |       | (3,233                             | )          | (1,863                                | )          | (11,007 | ) | (7,659 | ) |
| Other income and expenses                                                                       |       | (1,901                             | )          | (1,707                                | )          | (6,507 | ) | (5,884 | ) |
|                                                                                            |       |                               |       |                                  |       |   |   |   |   |
| **Total**                                                                                       | ** ** | **$**                              | **(5,653** | **)**                                 | **$**      | **(4,179** | **)** | **$** | **(24,910** | **)** | **$** | **(19,472** | **)** |

 

10

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**5. Certain Asset Accounts**

 

***Receivables, net.***Ourreceivables include receivables from customers, net of allowances for doubtfulaccounts; vendor rebates receivable; and miscellaneous receivables as follows:

 
| **Receivables and Allowance for Doubtful Accounts** | ** ** | **November 25, 2007** | ** **  | **February 25, 2007** | ** ** | **November 26, 2006** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------|-------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                                                   | ** ** | ** **                      | ** **  | **(in thousands)**         | ** ** | ** **                      | ** ** |
| Receivables from customers                                                   |       | $                               | 623,485     |                            | $          | 289,160                         |       | $ | 584,276 |   |
| Allowance for doubtful accounts                                              |       | (20,551                         | )           | (15,735                         | )          | (16,589                         | )          |
| Receivables from customers, net                                              |       | 602,934                         |        | 273,425                         |       | 567,687                         |       |
| Vendor rebates receivable                                                    |       | 157,352                         |        | 47,439                          |       | 137,344                         |       |
| Miscellaneous receivables                                                    |       | 12,179                          |        | 17,365                          |       | 19,899                          |       |
| **Total**                                                                    | ** ** | **$**                           | **772,465** | ** **                      | **$**      | **338,229**                     | ** ** | **$** | **724,930** | ** ** |

 

***Inventories.***Inventoriesconsist primarily of chemical, fertilizer, and seed products purchased from oursuppliers or produced by one of our three formulation facilities, for resale toour customers. We record inventory at the lower of cost or market. We maintaina perpetual inventory system, which we reconcile to physical counts at eachlocation periodically.

 

Eachfiscal quarter, we analyze our inventory against historical sales of inventoryproducts to determine which items may be obsolete or slow moving. Inventory isthen reduced for the difference between our cost and the net realizable valueof inventory.

 

Inventoriesinclude the following:

 
| **Inventories**                   | ** ** | **November 25, 2007** | ** **  | **February 25, 2007** | ** ** | **November 26, 2006** | ** ** |
|-----------------------------------|------------|---------------------------------|-------------|---------------------------------|------------|---------------------------------|------------|
| ** **                        | ** ** | ** **                      | ** **  | **(in thousands)**         | ** ** | ** **                      | ** ** |
| Raw materials and work in process |       | $                               | 13,094      |                            | $          | 18,129                          |       | $ | 13,019 |   |
| Finished goods                    |       | 670,993                         |        | 864,904                         |       | 586,455                         |       |
| **Total**                         | ** ** | **$**                           | **684,087** | ** **                      | **$**      | **883,033**                     | ** ** | **$** | **599,474** | ** ** |

 

***Intangible Assets.***Intangible assetsconsist primarily of assets acquired in our business acquisitions and arerecorded at their respective fair values in accordance with Statement of FinancialAccounting Standards No. 141, “Business Combinations.” Our intangibleassets consist of finite- and indefinite-lived assets. Finite-lived intangibleassets are amortized based on their estimated useful lives, ranging from 3 to10 years, depending on the type of asset. Amortization expense for the thirteenweeks ended November 25, 2007, and November 26, 2006, was $2.3million 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 aretested for impairment in accordance with Statement of Financial AccountingStandards No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”).

 

Duringthe thirty-nine week period ended November 25, 2007, we recorded $7.2million of intangibles, related to product registration costs and businessacquisitions.  At November 25,2007, February 25, 2007, and November 26, 2006, net intangibleassets totaled $51.4 million, $50.1 million, and $31.7 million, respectively.

 

***Goodwill.*** Goodwillrepresents the excess of the purchase price paid over the fair value of the netassets acquired in business acquisitions plus acquisition costs. Goodwill isnot amortized. In accordance with SFAS No. 142, we test goodwill forimpairment annually and whenever events or changes in circumstances indicatethat the carrying amount may not be fully recoverable. We completed our latestgoodwill impairment test as of November 25, 2007, and determined thatthere was no impairment at that date. We may be subject to earnings volatilityif goodwill impairment occurs at a future date. During the thirty-nine weeksended November 25, 2007, we recorded $1.9 million of goodwill relatedto acquisitions completed during the period and finalization of purchaseaccounting 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.

 

11

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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 debtissuance costs related to the increase in our senior secured term loanfacility. Also included in our debt issuance costs at November 25, 2007,and November 26, 2006, are costs related to replacing our credit facilityand establishing a new senior secured credit facility. Debt issuance costs arebeing amortized on a straight-line basis, which approximates the effectiveinterest method, over the terms of the related debt. The related amortizationis 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 enteredinto two interest rate swaps to manage exposure to changes in cash flowsrelated to changes in the variable interest rate on a portion of our long-termdebt. Under the terms of the swaps, we pay a designated fixed rate and receivea variable rate, which is based on LIBOR. The rate received is expected tooffset the variable rate to be paid on the long-term debt which is also basedon LIBOR.

 

At November 25,2007, the notional value of the interest rate swaps was $165.0 million. Thenotional values of these amortizing swaps will decline to $90.0 million priorto 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 $3.8million. During the thirty-nine weeks ended November 25, 2007, thecritical terms of the hedge and the hedged items did not change and there hasbeen no adverse change in the risk of default by counterparties to the swapsince inception. As a result, no gain or loss has been recognized due to hedgeineffectiveness.

 

**7. Stock-Based Compensation**

 

Ourstock-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 “2007LTIP”).  At November 25, 2007, ourstock compensation programs were in accordance with the equity compensationplans maintained by the Company: the 2007 LTIP, the 2004 Long-Term IncentivePlan (the “2004 LTIP”), the 2003 Stock Option Plan (the “2003 Plan”), the 2004Non-Executive Director Stock Option Plan (the “Director Option Plan”), and theDirector Deferred Compensation Plan (the “Director DCP”).  There will be no further awards under each ofthe 2003 Plan, the 2004 LTIP, and the Director Option Plan. Awards after July 2007are made pursuant to the 2007 LTIP.

 

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

 
| ** **                                                                       | ** ** | **Shares Subject to Options** | ** ** | **Weighted-Average Exercise Price Per Share** | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                                                       | ** ** | ** **                              | ** ** |
| **Stock options**                                                           | ** ** | ** **                              | ** ** |
| Balance at February 26, 2006  (2,321,756 shares vested and exercisable)     |       | 2,841,272                               |       | $                                                            | 2.56       |   |
| Granted                                                                          |       | —                                  |       | —                                                       |       |
| Exercised                                                                        |       | (117,254                                | )          | $                                                            | 2.56       |   |
| Forfeited                                                                        |       | —                                  |       | —                                                       |       |
| **Balance at November 26, 2006  (2,374,379 shares vested and exercisable)** | ** ** | **2,724,018**                           | ** ** | **$**                                                        | **2.56**   | ** ** |
| ** **                                                                       | ** ** | ** **                              | ** ** | ** **                                                   | ** ** |
| Balance at February 25, 2007  (2,161,639 shares vested and exercisable)     |       | 2,511,278                               |       | $                                                            | 2.56       |   |
| Granted                                                                          |       | —                                  |       | —                                                       |       |
| Exercised                                                                        |       | (1,097,630                              | )          | $                                                            | 2.56       |   |
| Forfeited                                                                        |       | (2,343                                  | )          | $                                                            | 2.56       |   |
| **Balance at November 25, 2007  (1,233,886 shares vested and exercisable)** | ** ** | **1,411,305**                           | ** ** | **$**                                                        | **2.56**   | ** ** |

 

At November 25, 2007, there was $0.1 million of unrecognizedcompensation expense related to unvested stock options. The weighted-averageremaining contractual life at November 25, 2007, was 4.0 years, for bothoutstanding and exercisable options. The total intrinsic value (market value ofthe stock less the option exercise price) of options exercised in thethirty-nine weeks ended November 25, 2007, and November 26, 2006, was$28.6 million and $2.1 million, respectively. The intrinsic value ofexercisable options at November 25, 2007, based on the closing marketprice on November 23, 2007, was $33.2 million.

 

12

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

 
| ** **                            | ** ** | **Restricted  Stock Units** | ** ** | **Weighted-  Average Grant  Price per Share** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                            | ** ** | ** **                       | ** ** |
| **Restricted Stock Units**  | ** ** | ** **                       | ** ** |
| Balance at February 26, 2006     |       | 224,050                          |       | $                                                            | 15.94      |   |
| Granted                               |       | 515,350                          |       | $                                                            | 21.12      |   |
| Vested and converted to common stock  |       | (56,261                          | )          | $                                                            | 15.94      |   |
| Cancelled                             |       | (13,137                          | )          | $                                                            | 19.51      |   |
| **Balance at November 26, 2006** | ** ** | **670,002**                      | ** ** | **$**                                                        | **19.85**  | ** ** |
| ** **                            | ** ** | ** **                       | ** ** | ** **                                                   | ** ** |
| Balance at February 25, 2007     |       | 672,107                          |       | $                                                            | 19.87      |   |
| Granted                               |       | 849,795                          |       | $                                                            | 26.11      |   |
| Vested and converted to common stock  |       | (233,771                         | )          | $                                                            | 20.04      |   |
| Cancelled                             |       | (31,676                          | )          | $                                                            | 22.48      |   |
| **Balance at November 25, 2007** | ** ** | **1,256,455**                    | ** ** | **$**                                                        | **23.87**  | ** ** |

 

We recognize compensation expense over the vesting periods of theawards.  The compensation expense for thethirteen 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.  Thetotal 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 ofunrecognized compensation expense, before taxes and net of estimatedforfeitures, related to RSU grants, which will be recognized over theweighted-average remaining vesting period of 3.0 years.

 

**8. Income Taxes**

 

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

 

**9. Debt**

 

InOctober 2007, UAP Holding Corp., its wholly-owned subsidiary United AgriProducts, Inc. (“UAP, Inc.”), and certain of UAP Inc.’s subsidiariesentered into an amendment (the “Amendment”) to UAP, Inc.’s Second Amendedand Restated Credit Agreement dated June 1, 2006 (the “Amended CreditAgreement”) to, among other things, increase our senior secured term loanfacility by $225 million (such increase, the “Term Loan Add-on”).  Proceeds were used to pay down theoutstanding balance under UAP, Inc.’s revolving credit facility and to payrelated fees and expenses.

 

Interestrates with respect to the Term Loan Add-on and the existing term loans arebased 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) therate publicly quoted by The Wall Street Journal as the “base rate on corporateloans posted by at least 75% of the nation’s 30 largest banks” and (ii) theFederal Funds rate plus 0.50%, plus the applicable margin.  The applicable margin for the Term LoanAdd-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 creditfacility and senior notes and entered into a senior secured credit facility.The senior secured credit facility provided for a six-year $175 million termloan facility (which was increased to $400 million in October 2007, asdiscussed above) and a five-year senior secured asset-based revolvingcredit facility in an aggregate principal amount of $675 million, including $50million for letters-of-credit (jointly referred to hereafter as the “seniorsecured credit facility”). Availability of the revolving credit facility issubject to a borrowing base formula, which includes availability of anover-advance during certain periods. The senior secured credit facilityprovides that interest rates are based 

 

13

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

 

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

 

In June 2006, UAP HoldingCorp. and UAP, Inc. consummated the tender offers and consentsolicitations for the 103⁄4% Senior Discount Notes due 2012 issued by UAP HoldingCorp. and the 81⁄4% Senior Notes due 2011 issued by UAP, Inc. (collectively,the “Senior Notes”). The companies accepted for purchase $123.1 millionprincipal amount at maturity of the 103⁄4% Senior Discount Notes (representing98.5% of the previously outstanding 103⁄4% Senior Discount Notes) and $203.5 millionprincipal amount of the 81⁄4% Senior Notes representing approximately 99.9% ofthe previously outstanding 81⁄4% Senior Notes. Total consideration paid for thenotes tendered plus accrued interest thereon was $120.6 million for the 103⁄4%Senior Discount Notes and $227.2 million for the 81⁄4% Senior Notes. Thesepayments and related expenses were financed through borrowings under the newsenior secured credit facility.

 

Subsequently, UAP Holding Corp.repurchased in brokered market transactions all of the $1.9 million principalamount at maturity of its 103⁄4% Senior Discount Notes due 2012 that had remainedoutstanding following the closing on June 1, 2006, of the tender offer andconsent solicitation. Accordingly, all of the 103⁄4% Senior Discount Notes previouslyissued and authenticated under the indenture dated as of January 26, 2004,as supplemented (the “Indenture”), between UAP Holding Corp. and The Bank ofNew York (formerly JPMorgan Chase Bank, N.A.), as trustee (the “Trustee”), hadbeen delivered by UAP Holding Corp. to the Trustee and cancelled. In accordancewith Section 11.01 of the Indenture, UAP Holding Corp. satisfied anddischarged the Indenture, which satisfaction and discharge was acknowledged bythe Trustee on November 24, 2006. Upon satisfaction and discharge, theIndenture ceased to be of further effect (except for certain rights of theTrustee).

 

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

 

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

 

At November 25, 2007, we believe that the permitted distributionsavailable to pay dividends under the restricted payment covenant of the seniorsecured credit facility would be approximately $94 million, before givingeffect to the December 3, 2007 dividend payment of $12.0 million.

 

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

 

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

 

14

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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:

 
| **Debt**                                              | ** ** | **November 25, 2007** | ** **  | **February 25, 2007** | ** ** | **November 26, 2006** | ** ** |
|-------------------------------------------------------|------------|---------------------------------|-------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                            | ** ** | ** **                      | ** **  | **(in thousands)**         | ** ** | ** **                      | ** ** |
| **Total debt**                                        |       |                            |        |                            |       |                            |       |
| Senior Secured Asset-based Revolving Credit  Facility |       | $                               | 289,879     |                            | $          | 182,989                         |       | $ | 371,865 |   |
| Term Loan Facility                                    |       | 397,813                         |        | 174,125                         |       | 174,563                         |       |
| 81⁄4% Senior Notes                                 |       | 15                              |        | 15                              |       | 15                              |       |
| **Total debt**                                        | ** ** | **687,707**                     | ** **  | **357,129**                     | ** ** | **546,443**                     | ** ** |
| **Less: current portion**                             |       |                            |        |                            |       |                            |       |
| Senior Secured Asset-based Revolving Credit  Facility |       | $                               | 289,879     |                            | $          | 182,989                         |       | $ | 371,865 |   |
| Term Loan Facility                                    |       | 4,000                           |        | 1,750                           |       | 1,750                           |       |
| **Total long-term debt**                              | ** ** | **$**                           | **393,828** | ** **                      | **$**      | **172,390**                     | ** ** | **$** | **172,828** | ** ** |

 

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

 
| **Fiscal Year Ending** | ** ** | **At November 25, 2007** | ** **  |
|----------------------------------|------------|-----------------------------------------|-------------|
| ** **                       | ** ** | **(in thousands)**                 | ** **  |
| 2008                             |       | $                                       | 290,879     |   |
| 2009                             |       | 4,000                                   |        |
| 2010                             |       | 4,000                                   |        |
| 2011                             |       | 4,000                                   |        |
| 2012                             |       | 4,015                                   |        |
| 2013 and thereafter              |       | 380,813                                 |        |
| **Total**                        | ** ** | **$**                                   | **687,707** | ** ** |

 

**10. Incentive-Based Compensation Plan**

 

We have an incentive-based compensation plan for officers and keyemployees.  Factors considered in theplans include growth, profitability, and key performance metrics of bothindividual and overall company operating performance. Amounts charged(credited) to expense totaled $7.9 million and $18.0 million in the thirteenand 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 quarterlydividend 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 pershare dividend, and we paid a $0.225 per share dividend on June 1, 2007and September 4, 2007.

 

In addition to dividends to our stockholders, the RSUs that we havegranted to eligible employees, management, and members of our board ofdirectors include the right to receive dividend equivalent payments on each RSUthat 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 ofagricultural inputs to growers and regional dealers.

 

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

 
| ** **         | ** ** | **Thirteen Weeks Ended** | ** **  | **Thirty-Nine Weeks Ended** | ** ** |
|--------------------|------------|------------------------------------|-------------|---------------------------------------|------------|
| **Net sales** | ** ** | **November 25, 2007**    | ** **  | **November 26, 2006**       | ** ** | **November 25, 2007** | ** ** | **November 26, 2006** | ** ** |
| ** **         | ** ** | ** **                         | ** **  | **(in thousands)**               | ** ** | ** ** | ** ** |
| United States      |       | $                                  | 486,408     |                                  | $          | 367,812 |   | $ | 2,901,075 |   | $ | 2,485,501 |   |
| Canada             |       | 11,365                             |        | 7,916                                 |       | 64,248 |   | 56,041 |   |
| **Total**          | ** ** | **$**                              | **497,773** | ** **                            | **$**      | **375,728** | ** ** | **$** | **2,965,323** | ** ** | **$** | **2,541,542** | ** ** |

 

15

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| **Long-lived assets** | ** ** | **November 25, 2007** | ** **  | **February 25, 2007** | ** ** | **November 26, 2006** | ** ** |
|----------------------------|------------|---------------------------------|-------------|---------------------------------|------------|---------------------------------|------------|
| ** **                 | ** ** | ** **                      | ** **  | **(in thousands)**         | ** ** | ** **                      | ** ** |
| United States              |       | $                               | 239,532     |                            | $          | 216,238                         |       | $ | 185,065 |   |
| Canada                     |       | 1,366                           |        | 887                             |       | 814                             |       |
| **Total**                  | ** ** | **$**                           | **240,898** | ** **                      | **$**      | **217,125**                     | ** ** | **$** | **185,879** | ** ** |

 

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

 

Net sales by product category are as follows:

 
| ** **                                            | ** ** | **Thirteen Weeks Ended** | ** **  | **Thirty-Nine Weeks Ended** | ** ** |
|-------------------------------------------------------|------------|------------------------------------|-------------|---------------------------------------|------------|
| **Net sales by product category** | ** ** | **November 25, 2007**    | ** **  | **November 26, 2006**       | ** ** | **November 25, 2007** | ** ** | **November 26, 2006** | ** ** |
| ** **                                            | ** ** | ** **                         | ** **  | **(in thousands)**               | ** ** | ** ** | ** ** |
| Chemicals                                             |       | $                                  | 233,700     |                                  | $          | 218,278 |   | $ | 1,575,150 |   | $ | 1,499,040 |   |
| Fertilizer                                            |       | 209,467                            |        | 116,180                               |       | 888,259 |   | 606,981 |   |
| Seed                                                  |       | 32,216                             |        | 19,319                                |       | 416,850 |   | 362,535 |   |
| Other                                                 |       | 22,390                             |        | 21,951                                |       | 85,064 |   | 72,986 |   |
| **Total**                                             | ** ** | **$**                              | **497,773** | ** **                            | **$**      | **375,728** | ** ** | **$** | **2,965,323** | ** ** | **$** | **2,541,542** | ** ** |

 

**13. Commitments and Contingencies**

 

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

 

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

 

We are a party to a number of lawsuits and claims arising out of theoperation of our businesses. Our management believes the ultimate resolution ofsuch 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 thecosts of cleanup at certain sites. Pursuant to the asset purchase agreementdated November 24, 2003, in which ConAgra sold United Agri Products andits related businesses to UAP Holding Corp. (the “Apollo Acquisition”), ConAgrahas agreed to provide us with a partial reimbursement of costs that we mayincur relating to any cleanup requirements due to environmental conditions atour Greenville, Mississippi facility prior to our purchase of the site fromthem in November 2003. Additionally, on October 14, 2002, December 23,2002, and December 31, 2002, three separate lawsuits were filed in theCircuit Court of Washington County, Mississippi against our subsidiary, PlatteChemical Company (“Platte”), and certain former employees of Platte, relatingto alleged releases from Platte’s Greenville, Mississippi facility. Theplaintiffs in such suits are seeking compensation for alleged personal injuryand property damage. In connection with the Apollo Acquisition, ConAgra agreedto partially reimburse us, subject to a cap, for fees and expenses we incur inconnection with such lawsuits. Subsequent to November 23, 2003, anotherlawsuit not covered by the ConAgra cost sharing agreement was filed in theCircuit Court of Washington County, Mississippi against us, which lawsuitrelates to the same alleged releases from the Greenville, Mississippi facility.While discovery in the Greenville litigations is not yet complete, based oninformation 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 ofmerger (“Merger Agreement”) pursuant to which Agrium, through its subsidiaryAgrium U.S., Inc., commenced a tender offer on December 10, 2007 (“TenderOffer”), to purchase all the outstanding shares of common stock of UAP for$39.00 in cash per share. The Merger Agreement provides thatfollowing completion of the Tender Offer and assuming certain conditions aresatisfied, UAP will then engage in a merger (the “Merger”) with a subsidiary ofAgrium, pursuant to which each outstanding share of UAP common stock nottendered in the Tender Offer will be converted into the right to receive $39.00in cash.  Upon completion of the Merger,UAP will become a wholly-owned subsidiary of Agrium.  Agriumis a major retailer of agricultural products and services in both North andSouth America and a global producer and wholesale marketer of nutrients foragricultural, specialty, and industrial markets.

 

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

 

Ifthese transactions are completed, we will cease reporting financial results asa stand-alone company.  The accompanyingfinancial 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 notcompleted and the Merger Agreement is terminated under certaincircumstances, UAP may be liableto Agrium for a termination fee of $44 million, plus reimbursement to Agrium ofup to $10 million in costs incurred by Agrium in connection with thetransactions.  If the Merger is notcompleted due to failure to obtain regulatory approval and certain otherconditions are satisfied, Agrium may be liable to UAP for a reverse break feeof $54 million.

 

17

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**ITEM 2.                  MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.**

 

*Unless the context requires otherwise, all references to“Company,” “we,” “us,” “ours,” and “UAP” refer specifically to UAP HoldingCorp. and its consolidated subsidiaries. Additionally, all references to“United Agri Products” refer specifically only to United Agri Products, Inc.,and its subsidiaries, and all references to “United Agri Products, Inc.”refer specifically to United Agri Products, Inc., excluding itssubsidiaries.*

 

*We intend for this Management’s Discussion and Analysis ofFinancial Condition and Results of Operations (“MD&A”) to provide thereader with information that will assist in understanding our business,financial condition, cash flow, results of operations, or liquidity for theperiods presented. You should read this MD&A in conjunction with ourconsolidated financial statements and the accompanying notes thereto appearingelsewhere in this report. The results of operations for the thirteen andthirty-nine weeks ended November 25, 2007, are not necessarily indicativeof the results to be expected for other interim periods or for the full fiscalyear. This section should also be read in conjunction with our Annual Report onForm 10-K for the fiscal year ended February 25, 2007.*

 

*We operate on a fifty-two or fifty-three week fiscal year.Fiscal years are identified in this report according to the calendar year inwhich they end. The fifty-two weeks ending on February 24, 2008, will bereferred to as “fiscal 2008,”and the fifty-two weeks ended February 25, 2007,will be referred to as “fiscal 2007.”*

 

*In addition, the statements in the discussion and analysisregarding industry outlook, our expectations regarding the performance of ourbusiness, our liquidity and capital resources, and the other non-historicalstatements in the discussion and analysis are forward-looking statements. See“Forward-Looking Statements.”*

 

**Our Business**

 

We arethe largest independent distributor of agricultural inputs and professionalnon-crop products in the United States and Canada. Our customers includefarmers, commercial growers, regional dealers, and consumers in theprofessional non-crop market.

 

Wemarket a comprehensive line of products, including chemicals, fertilizer, andseed manufactured and/or marketed by the world’s leading agricultural inputcompanies, including BASF, Bayer, ConAgra International Fertilizer Company,Dow AgroSciences, DuPont, Monsanto, and Syngenta. In addition to our productoffering, we provide a broad array of value-added services including cropmanagement, biotechnology advisory services, custom fertilizer blending, seedtreatment, inventory management, and custom applications of crop inputs. Theproducts and services we offer are critical to our customers because they lowerthe overall cost of crop production and improve crop quality and yield.

 

Ouroperations entail a network of approximately 370 sales and distributionfacilities and three formulation plants strategically located in majorcrop-producing areas of the United States and Canada. Our business is highlyseasonal based upon the planting, growing, and harvesting cycles of ourcustomers’ operations. As a result of this seasonality, we experiencesignificant fluctuations in our revenues, net income, and working capitallevels throughout our fiscal year. During the last three years, because of the condensed nature of theplanting season, more than 75% of our net sales occurred during the first andsecond fiscal quarters of each year. Weather conditions and changes in the mix of crops planted can alsocause quarterly results to vary.

 

**TenderOffer**

 

On December 2, 2007,UAP, Agrium Inc. (“Agrium”), and a subsidiary of Agrium, entered into anagreement 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 stockof UAP for $39.00 in cash per share.  TheMerger Agreement provides that following completion of the Tender Offer andassuming certain conditions are satisfied, UAP will then engage in a merger(the “Merger”) with a subsidiary of Agrium, pursuant to which each outstandingshare of UAP common stock not tendered in the Tender Offer will be convertedinto the right to receive $39.00 in cash. Upon completion of the merger, UAP will become a wholly-owned subsidiaryof Agrium.  Agrium is a major retailer of agriculturalproducts and services in both North and South America and a global producer andwholesale marketer of nutrients for agricultural, specialty, and industrialmarkets.

 

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

 

18

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If these transactions arecompleted, we will cease reporting financial results as a stand-alonecompany.  If the Merger is not completedand the Merger Agreement is terminated under certain circumstances, UAP may beliable to Agrium for a termination fee of $44 million, plus reimbursement toAgrium of up to $10 million in costs incurred by Agrium in connection with thetransactions.  If the Merger is notcompleted due to failure to obtain regulatory approval and certain otherconditions are satisfied, Agrium may be liable to UAP for a reverse break feeof $54 million.

 

**Acquisitions**

 

We havebeen growing our retail business by leveraging our size and leading marketshare across North America.

 

Duringthe thirty-nine weeks ended November 25, 2007, we completed theacquisition of four businesses and paid $8.9 million in purchase price.  Immediately following the announcement of theMerger Agreement, UAP suspended business acquisition activity.

 

Duringfiscal 2007, we completed 11 acquisitions, including the following:

 

·                  During the firstfiscal quarter of 2007, we purchased the remaining 50% share of our jointventure in UAP Timberland, LLC and we acquired a retail distribution locationfrom an independent retail distributor.

 

·                  During the thirdfiscal quarter of 2007, we acquired Terral AgriServices, Inc. and certainassets of Terral FarmService, Inc. and Wisner Elevator, Inc.(collectively, “Terral”). In addition to the Terral acquisition, we acquiredthree retail distribution locations from independent retail distributors.

 

·                  During thefourth fiscal quarter of 2007, we acquired certain retail and service assets ofAGSCO, Inc. and AG Depot, Inc. In addition, we acquired certainretail distribution assets of Boettcher Enterprises, and three retaildistribution locations from independent retail distributors.

 

Forthese acquisitions, we paid $82.1 million in fiscal 2007 and an additional $4.9million in fiscal 2008. We also assumed liabilities of approximately $47million related to these acquisitions.

 

**Other Factors Impacting Our Results**

 

Accordingto the December 2007 “Crop Production” report published by the NationalAgricultural Statistics Service of the USDA, the 2007 planted corn acreage of 93.6 millionacres increased 20 percent from the 78.3 million acres planted in2006. In contrast, soybean acres were down 16 percent from the record highacres planted in 2006 and planted cotton acres were the lowest since 1989, down29 percent from 2006.  Our fiscal2008 results for three quarters reflect this shift in our customers’ acreage ofspecific crops.  The impact of higher corn production, primarily resultingfrom increased demand associated with ethanol production, is reflected inincreased fertilizer sales for the first three quarters of fiscal 2008. Our operations in the Midwest portions of the United States are experiencingthe most significant sales increases from increased corn acreage. However, the decrease in both soybean and cotton planted acres for fiscal 2008have resulted in lower sales from inputs on those crops.  The impactof these fluctuations in planted acres on the agricultural distributionindustry and other industries (such as livestock production, fertilizermanufacturing, textiles, and food processing) on the remainder of fiscal 2008and future years is difficult to predict and will continue to evolve over time.

 

19

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**RESULTS OF OPERATIONS**

 

**Analysis of Consolidated Statements of Earnings**

 
| ** **                                                | ** ** | **Thirteen Weeks Ended** | ** **  | **Percent**                     | ** ** | **Thirty-Nine Weeks Ended**                     | ** ** | **Percent**                     | ** ** |
|-----------------------------------------------------------|------------|------------------------------------|-------------|---------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                | ** ** | **November 25, 2007**    | ** **  | **November 26, 2006** | ** ** | **Change**                                                | ** ** | **November 25, 2007** | ** ** | **November 26, 2006** | ** ** | **Change** | ** ** |
| ** **                                                | ** ** | ** **                         | ** **  | ** **                      | ** ** | **(in thousands, except share data)** | ** ** | ** **                      | ** ** | ** ** | ** ** |
| ** **                                                | ** ** | ** **                         | ** **  | ** **                      | ** ** | ** **                                                | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                                 |       | $                                  | 497,773     |                            | $          | 375,728                                                   |       | 32.5                            | %          | $ | 2,965,323 |   | $ | 2,541,542 |   | 16.7 | % |
| Cost of goods sold                                        |       | 440,757                            |        | 335,107                         |       | 31.5                                                      | %          | 2,530,149                       |       | 2,206,926 |   | 14.6 | % |
| Gross profit                                              |       | 57,016                             |        | 40,621                          |       | 40.4                                                      | %          | 435,174                         |       | 334,616 |   | 30.1 | % |
| Selling, general and administrative  expenses             |       | 79,300                             |        | 54,746                          |       | 44.9                                                      | %          | 257,630                         |       | 209,954 |   | 22.7 | % |
| Royalties, service charges and other income  and expenses |       | (5,653                             | )           | (4,179                          | )          | 35.3                                                      | %          | (24,910                         | )          | (19,472 | ) | 27.9 | % |
| Operating income (loss)                                   |       | (16,631                            | )           | (9,946                          | )          | (67.2                                                     | )%         | 202,454                         |       | 144,134 |   | 40.5 | % |
| Interest expense, net                                     |       | 14,462                             |        | 11,472                          |       | 26.1                                                      | %          | 33,606                          |       | 28,631 |   | 17.4 | % |
| Finance related and other charges                         |       | 379                                |        | 325                             |       | 16.6                                                      | %          | 379                             |       | 48,172 |   | (99.2 | )% |
| Income (loss) before income taxes                         |       | (31,472                            | )           | (21,743                         | )          | (44.7                                                     | )%         | 168,469                         |       | 67,331 |   | 150.2 | % |
| Income tax expense (benefit)                              |       | (12,458                            | )           | (8,592                          | )          | 45.0                                                      | %          | 64,781                          |       | 26,464 |   | 144.8 | % |
| **Net income (loss)**                                     | ** ** | **$**                              | **(19,014** | **)**                           | **$**      | **(13,151**                                               | **)**      | **(44.6**                       | **)%**     | **$** | **103,688** | ** ** | **$** | **40,867** | ** ** | **153.7** | **%** |
| Earnings (loss) per share:                                | ** ** | ** **                         | ** **  | ** **                      |       |                                                      |       | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                     |       | $                                  |  (0.36 | )                               | $          |  (0.26                                               | )          | (38.5                           | )%         | $ |  2.00 |   | $ |  0.80 |   | 150.0 | % |
| Diluted                                                   |       | $                                  |  (0.36 | )                               | $          |  (0.26                                               | )          | (38.5                           | )%         | $ |  1.95 |   | $ |  0.78 |   | 150.0 | % |
| Effective tax rate                                        |       | 39.6                               | %           | 39.5                            | %          |                                                      |       | 38.5                            | %          | 39.3 | % |   |   |
| Comparison as a percent of Net sales:                     |       |                               |        |                            |       |                                                      |       |                            |       |   |   |   |   |
| Gross margin                                              |       | 11.5                               | %           | 10.8                            | %          |                                                      |       | 14.7                            | %          | 13.2 | % |   |   |
| Selling, general and administrative  expenses             |       | 15.9                               | %           | 14.6                            | %          |                                                      |       | 8.7                             | %          | 8.3 | % |   |   |
| Operating income (loss)                                   |       | (3.3                               | )%          | (2.6                            | )%         |                                                      |       | 6.8                             | %          | 5.7 | % |   |   |
| Income (loss) before income taxes                         |       | (6.3                               | )%          | (5.8                            | )%         |                                                      |       | 5.7                             | %          | 2.6 | % |   |   |
| Net income (loss)                                         |       | (3.8                               | )%          | (3.5                            | )%         |                                                      |       | 3.5                             | %          | 1.6 | % |   |   |
|                                                           |            |                                    |             |                                 |            |                                                           |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Thirteen Weeks Ended November 25, 2007, Compared toThirteen Weeks Ended November 26, 2006**

 

***Net Sales.***Sales increased 32.5percent to $497.8 million in the thirteen weeks ended November 25, 2007,compared to $375.7 million in the thirteen weeks ended November 26, 2006.

 

Sales of chemicalsincreased to $233.7 million in the thirteen weeks ended November 25, 2007,from $218.3 million in the thirteen weeks ended November 26, 2006. Acquiredbusinesses contributed approximately $8 million of retail chemicals sales, someof which were offset by lost wholesale revenues as some of our acquisitionswere former wholesale customers.  Sales of herbicides increased from lastyear, primarily due to the effect of acquisitions and increased sales ofglyphosate herbicides.  Glyphosate salesincreased mainly due to higher bulk sales to wholesale customers as thosecustomers sought to fill their storage tanks early in anticipation of higherprices and short supply.  Plant growthregulator sales decreased primarily due to lower cotton acres, and bothfungicide and insecticide sales showed slight decreases due to less disease andinsect pressure.

 

Sales of fertilizerincreased to $209.5 million in the thirteen weeks ended November 25, 2007,from $116.2 million in the thirteen weeks ended November 26, 2006. Acquired businesses contributed approximately $12 million of additionalrevenues, while increases in volumes sold and improvement in per ton sellingprices drove the remainder of the difference.  

 

20

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The volume growth was dueto increased grower demand, as growers continue to replenish nutrients in thesoil.  Favorable fall weather conditions and higher crop commodity pricesalso supported increased applications.

 

Sales of seed increasedto $32.2 million in the thirteen weeks ended November 25, 2007, from $19.3million in the thirteen weeks ended November 26, 2006. Acquired businessesrepresented approximately $1 million of the increase.  The remainingincrease was primarily due to increased sales of wheat seed.

 

Other sales wererelatively flat at $22.4 million in the thirteen weeks ended November 25,2007, compared to $22.0 million in the thirteen weeks ended November 26,2006.

 

***Cost of Goods Sold.***Cost of goods soldwas $440.8 million in the thirteen weeks ended November 25, 2007, comparedto $335.1 million in the thirteen weeks ended November 26, 2006. Grossprofit was $57.0 million in the thirteen weeks ended November 25, 2007,compared to $40.6 million in the thirteen weeks ended November 26, 2006.Gross margin (gross profit as a percentage of net sales) was 11.5% for thethirteen weeks ended November 25, 2007, compared to 10.8% for the thirteenweeks ended November 26, 2006. The increase in gross profit was primarilya result of increased sales volumes of fertilizer, better gross profits per tonof fertilizer, the effect of acquired businesses, and more sales ofhigher-margin proprietary chemical and seed products.  The gross profit increase was partially offsetby unfavorable timing of some vendor rebates. Vendors are now supplying moretimely information, better definition of criteria for earning rebates, andimproved communication of local area programs, resulting in our ability torecognize rebates earlier in the year. In the prior fiscal year, some of theserebates were recognized later in the year.  As a result of this, webelieve rebates were approximately $6 million lower in the thirteen weeks endedNovember 25, 2007 as compared to the thirteen weeks ended November 26,2006.

 

***Selling, General and Administrative Expenses.***Selling,general and administrative expenses increased to $79.3 million (15.9% of sales)in the thirteen weeks ended November 25, 2007, from $54.7 million (14.6%of sales) in the thirteen weeks ended November 26, 2006. The increase inexpenses was due to the additional expenses from our acquired businesses andhigher incentive-based compensation commensurate with the Company’sperformance.

 

***Royalties, Service Charges and Other Income and Expenses.***Theseitems include royalty income generated by our proprietary products group,service charge income paid by customers who do business with us on terms, aswell as other items. Other income increased to $5.7 million in the thirteenweeks ended November 25, 2007, up from $4.2 million in the thirteen weeksended November 26, 2006, primarily due to higher customer service chargeincome associated with higher sales as well as a higher percentage ofreceivables with associated service charges.

 

***Interest Expense, Net.***Interestexpense increased to $14.5 million in the thirteen weeks ended November 25,2007, compared to $11.5 million in the thirteen weeks ended November 26,2006. The increase was due to higher interest expense resulting from increasedshort-term borrowings related to our acquisition activity and increased workingcapital needs as well as higher long-term debt outstanding due to our add-on tothe term loan.

 

***Finance Related and Other Charges.***Financerelated and other charges of $0.4 million in the thirteen weeks ended November 25,2007, relate to the refinancing of our debt.  In the thirteen weeks ended November 26,2006, finance related and other charges of $0.3 million, relate to thesecondary offering of our common stock consummated on November 2, 2006.

 

**Thirty-Nine Weeks Ended November 25, 2007, Compared toThirty-Nine Weeks Ended November 26, 2006**

 

***Net Sales.***Sales increased 16.7percent to $2,965.3 million in the thirty-nine weeks ended November 25,2007, compared to $2,541.5 million for the thirty-nine weeks ended November 26,2006.

 

Sales of chemicalsincreased to $1,575.2 million in the thirty-nine weeks ended November 25,2007, from $1,499.0 million in the thirty-nine weeks ended November 26,2006. Acquired businesses contributed approximately $112 million of retailchemicals sales, some of which were offset by lost wholesale sales as some ofour acquisitions were former wholesale customers.  Sales of herbicidesincreased in the thirty-nine weeks ended November 25, 2007, from thecomparable period in fiscal 2007, primarily due to acquisitions and increasedsales of glyphosate herbicides, resulting from increased adoption of glyphosatetolerant corn.  Fungicide sales increased as a result of acquisitions andincreased applications for general plant health.  Insecticide salesdecreased due to the lack of insect pressure and the adoption of insectresistant corn seed to protect from corn rootworm, resulting in lessinsecticides used at planting time.

 

Sales of fertilizerincreased to $888.3 million in the thirty-nine weeks ended November 25,2007, from $607.0 million in the thirty-nine weeks ended November 26,2006.  Acquired businesses contributed approximately $54 million of theincrease.  

 

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Increases in volumes soldand an improvement in per ton selling prices drove the remainder of thedifference.  Volume growth was due to increased grower demand, mainly asgrowers switched their planted acreage to corn from soybeans in theMidwest.  Favorable weather conditions and higher commodity prices alsosupported increased applications. Volumes were also driven by applicationtiming.  Fertilizer is typically applied either in the fall or springseasons, depending on weather and fertilizer prices. Our experience in ourthird and fourth quarters of fiscal 2007 led us to believe that growers delayedfertilizer applications in the fall and winter months, thereby drivingincreased applications in the first half of fiscal 2008.

 

Sales of seed increasedto $416.9 million in the thirty-nine weeks ended November 25, 2007, from$362.5 million in the thirty-nine weeks ended November 26, 2006. Acquiredbusinesses represented approximately $33 million of the increase.  Theremaining increase was due to volume growth in third party and proprietarybrands of corn seed and higher prices resulting from higher corn acreage andincreased sales of seed with enhanced traits. Sales of cotton seed decreaseddue to lower planted acreage of cotton but were partially offset by sales ofwheat and soybean seed.

 

Sales of proprietarychemical and seed products were 17.3% of total chemical and seed sales in thethirty-nine weeks ended November 25, 2007, compared to 15.2% in thethirty-nine weeks ended November 26, 2006.

 

Other sales increased to$85.1 million in the thirty-nine weeks ended November 25, 2007, from $73.0million in the thirty-nine weeks ended November 26, 2006, due to acquiredbusinesses, increased application fees, and additional transportation andwarehousing revenue.

 

***Cost of Goods Sold.***Cost of goods soldwas $2,530.1 million in the thirty-nine weeks ended November 25, 2007,compared to $2,206.9 million in the thirty-nine weeks ended November 26,2006. Gross profit was $435.2 million in the thirty-nine weeks ended November 25, 2007,compared to $334.6 million in the thirty-nine weeks ended November 26,2006. Gross margin (gross profit as a percentage of net sales) was 14.7% forthe thirty-nine weeks ended November 25, 2007, compared to 13.2% for thethirty-nine weeks ended November 26, 2006. The increase in grossprofit was primarily a result of increased sales of higher-margin proprietarychemical products, higher fertilizer volumes with better unit profits, highersales of corn seed with better unit margins across our seed business, and theeffect of acquired businesses.  The gross profit increase was alsopartially due to the difference in timing of some vendor rebates. Vendors arenow supplying more timely information, better definition of criteria forearning rebates, and improved communication of local area programs, resultingin our ability to recognize rebates earlier in the year. In the prior fiscalyear, some of these rebates were recognized later in the year.  As aresult of this, we believe rebates were approximately $9 million higher in thethirty-nine weeks of this year as compared to the same period last year.

 

***Selling, General and Administrative Expenses.***Selling,general and administrative expenses increased to $257.6 million (8.7% of sales)in the thirty-nine weeks ended November 25, 2007, from $210.0 million(8.3% of sales) in the thirty-nine weeks ended November 26, 2006. Theincrease in expenses was due to the additional expenses from our acquiredbusinesses, higher incentive-based compensation commensurate with the company’sperformance, and higher stock-based compensation expense.  Higher fuel costs and maintenance costs toour buildings and equipment also contributed to the increase.

 

***Royalties, Service Charges and Other Income and Expenses.***Theseitems include royalty income generated by our proprietary products group,service charge income paid by customers who do business with us on terms, aswell as other items. Other income increased to $24.9 million in the thirty-nineweeks ended November 25, 2007, up from $19.5 million in the thirty-nineweeks ended November 26, 2006, primarily due to higher customer servicecharge income associated with higher sales, a higher percentage of receivables withassociated service charges and higher royalties from increased sales of certainproducts in our proprietary products group.

 

***Interest Expense, Net.***Interestexpense increased to $33.6 million in the thirty-nine weeks ended November 25,2007, compared to $28.6 million in the thirty-nine weeks ended November 26,2006. The increase was due to higher interest expense resulting from increasedshort-term borrowings related to our acquisition activity and increased workingcapital needs as well as higher long-term debt outstanding due to our add-on tothe term loan.

 

***Finance Related and Other Charges.***Financerelated and other charges of $0.4 million in the thirty-nine weeks ended November 25, 2007,related to the refinancing of our debt.  Finance related and other chargesin the thirty-nine weeks ended November 26, 2006, were $48.2 million,primarily related to the refinancing of our debt as well as a secondaryoffering of our common stock.

 

***Income Tax.***The effective income taxrate was 38.5% for the thirty-nine weeks ended November 25, 2007, comparedto 39.3% for the thirty-nine weeks ended November 26, 2006.  Thedecrease in tax rate was caused primarily by lower state 

 

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taxes, a higher federaldeduction for qualified production activity income from manufactured products,and higher income before income taxes.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

**Overview**

 

Ourongoing operations require availability of funds to service debt, fund workingcapital, and meet capital expenditure requirements. We may also requireavailability of funds for future acquisition activity. We currently finance andexpect to continue to finance these activities through cash flows fromoperations and from amounts available under our revolving credit facility,including the additional borrowing capacity under our revolving credit facilityafter giving effect to the Term Loan Add-on described in “Credit Facility andOther Long-Term Debt” below. Based upon the amount of future acquisitionactivity, we may need to seek other financing alternatives, including possibledebt or equity financings.

 

**OperatingActivities**

 

Cash flows used foroperating activities totaled $253.2 million in the thirty-nine weeks ended November 25,2007, compared to $197.0 million in the thirty-nine weeks ended November 26,2006. Operating cash flows were impacted by increased accounts receivables and decreasedaccounts payable, which were only partially offset by decreased inventory andhigher net income.  Accounts receivable increased due to acquiredbusinesses, higher sales activity and increased sales to retail customersresulting in longer receipt cycles.  Inventory and accounts payabledecreased from the end of fiscal 2007 primarily due to the seasonality of ourbusiness.

 

**InvestingActivities**

 

Cash flows used forinvesting activities totaled $33.6 million in the thirty-nine weeks ended November 25,2007, and $41.0 million in the thirty-nine weeks ended November 26,2006. Additions to property, plant and equipment were $19.5 million in thethirty-nine weeks ended November 25, 2007, compared to $17.0 million forthe thirty-nine weeks ended November 26, 2006.  Capital spendingduring the thirty-nine weeks ended November 25, 2007, was for a variety ofprojects, the largest of which are two fertilizer expansion projects.  Wespent $8.9 million for business acquisitions in the first thirty-nine weeks offiscal 2008 compared to $31.5 million spent in the first thirty-nine weeks offiscal 2007.  In addition, we spent $4.9 million in the first thirty-nineweeks of fiscal 2008 for additional purchase price related to fiscal 2007acquisitions.

 

**FinancingActivities**

 

Cash flows provided byfinancing activities were $289.5 million in the thirty-nine weeks ended November 25,2007, compared to $193.8 million in the thirty-nine weeks ended November 26,2006. Our Term Loan Add-On, completed in October 2007, provided $225.0million of cash, which was used to pay down short-term borrowings.  Short-term borrowings nonetheless increased$106.9 million to fund our acquisition activity and increased working capitalneeds.  Cash flows provided by financingactivities reflect $33.3 million of dividends and dividend equivalents paidduring the thirty-nine week period ended November 25, 2007.  Cash flows provided by financing activitiesalso reflect our increase in the senior secured term loan facility, completedin October 2007.

 

**Credit Facility and Other Long-Term Debt**

 

InOctober 2007, UAP Holding Corp., its wholly-owned subsidiary United AgriProducts, Inc. (“UAP, Inc.”), and certain of UAP Inc.’s subsidiariesentered into an amendment (the “Amendment”) to UAP, Inc.’s Second Amendedand Restated Credit Agreement dated June 1, 2006 (the “Amended CreditAgreement”) to, among other things, increase its senior secured term loanfacility by $225 million (such increase, the “Term Loan Add-on”).  Proceeds were used to pay down the outstandingbalance under UAP, Inc.’s revolving credit facility and to pay relatedfees and expenses.

 

Interestrates with respect to the Term Loan Add-on and the existing term loans arebased 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) therate publicly quoted by The Wall Street Journal as the “base rate on corporateloans posted by at least 75% of the nation’s 30 largest banks” and (ii) theFederal Funds rate plus 0.50%, plus the applicable margin.  The applicable margin for the Term LoanAdd-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.

 

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In June 2006, UAP, Inc. replaced both its revolving creditfacility and senior notes and entered into a senior secured credit facility.The senior secured credit facility provided for a six-year $175 million termloan facility and a five-year senior secured asset based revolving creditfacility in an aggregate principal amount of $675 million, including $50million for letters-of-credit (jointly referred to hereafter as the “seniorsecured credit facility”). Availability of the revolving credit facility issubject to a borrowing base formula, which includes availability of anover-advance during certain periods. The senior secured credit facilityprovides that interest rates are based on, at UAP, Inc.’s option, (a) LIBORplus the applicable margin or (b) the base rate, which is the higher of (i) therate publicly quoted by the Wall Street Journal as the base rate on corporateloans posted by at least 75% of the nation’s 30 largest banks or (ii) theFederal Funds rate plus 0.50%, plus the applicable margin.

 

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

 

Inconnection with the refinancing and early extinguishment of the senior notes,the Company recorded a pretax charge to finance related and other charges ofapproximately $47.9 million for fiscal 2007, all of which were primarilyincurred in the thirty-nine weeks ended November 26, 2006. These costsinclude approximately $31.8 million for tender premiums and related transactioncosts to acquire the debt and $16.1 million for the write-off of unamortizeddebt issue costs.

 

At November 25,2007, there was $675.0 million of total borrowing capacity under the revolvingcredit facility and United Agri Products had aggregate borrowing availabilitythereunder of $369.7 million (after giving effect to $289.9 million of revolvingloans and $15.4 million of letters of credit under the sub-facility).

 

At November 25,2007, approximately $94 million of permitted distributions were available topay dividends under the restricted payment covenant of the senior securedcredit facility, before giving effect to the December 3, 2007 dividendpayment of $12.0 million.

 

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

 

Oursenior secured credit facility contains certain customary representations,warranties, and affirmative covenants. In addition, it contains customarynegative covenants restricting our ability to, among other things:

 

·      incur additionalindebtedness;

 

·      pay dividends or make otherdistributions;

 

·      make certain investments;

 

·      incur liens; and

 

·      sell all or substantiallyall of our assets or merge with or into other companies.

 

Due tothe seasonal nature of our business, the amount of borrowings outstanding underthe revolving credit facility varies significantly throughout our fiscal year.During the fifty-two weeks ended November 25, 2007, short-term borrowingsreached a daily peak of $569.8 million on September 28, 2007, while cashon hand at the end of our fiscal periods reached a peak of $32.7 million on January 21,2007. Our average daily borrowings in the fifty-two weeks ended November 25,2007, were $324.7 million.

 

At November 25, 2007, we were in compliance with all covenantsunder our senior secured credit facility. However, transactions contemplated by the Merger Agreement may triggercertain change of control covenants of UAP’s senior secured credit facility. Ifthe Merger and other transactions contemplated by the Merger Agreement are completed,it is likely that the outstanding balances on the revolving credit facility andthe term loan facility will be paid either at or shortly after the closing ofthe Merger.

 

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For a discussion of the potential impact of the Merger Agreement on ourexisting financing arrangements, see Note 14 to the financial statements.

 

**Obligations and Commitments**

 

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

 

**Holding Company**

 

As a holding company, ourinvestments in our operating subsidiaries, including United Agri Products, Inc.,constitute substantially all of our operating assets. Consequently, oursubsidiaries conduct all of our consolidated operations and own substantiallyall of our operating assets. Our principal source of the cash required to payour and our subsidiaries’ obligations is the cash that our subsidiariesgenerate from their operations and borrowings under the senior securedrevolving credit facility. Our subsidiaries are separate and distinct legalentities and have no obligations to make funds available to us. The terms ofthe agreements governing United Agri Products’ existing indebtedness generallyrestrict United Agri Products from paying dividends, making loans or otherdistributions, and otherwise transferring assets to us. Furthermore, oursubsidiaries are permitted under the terms of the senior secured creditfacility to incur additional indebtedness that may severely restrict orprohibit the making of distributions, the payment of dividends, or the makingof loans by such subsidiaries to us. We cannot assure you that the agreementsgoverning United Agri Products’ current and future indebtedness willpermit our subsidiaries to provide us with sufficient dividends, distributions,or loans to fund dividends. If we consummate an acquisition, our debt servicerequirements could increase. We may need to refinance all or a portion ofUnited Agri Products’ indebtedness on or before maturity. We cannot assure youthat we will be able to refinance any of United Agri Products’ indebtedness oncommercially reasonable terms or at all.

 

**Dividend Policy**

 

On March 1, 2007, we paid a $0.1875 per share dividend, and wepaid a $0.225 per share dividend on June 1, 2007, September 4, 2007,and December 3, 2007.

 

Thereare no assurances that we will declare or pay any cash dividends in the future.The declaration and payment of future dividends to holders of our common stockis at the discretion of our board of directors and depends upon many factorsincluding our financial condition, earnings, legal requirements, restrictionsin our debt agreements, and other factors our board of directors deemsrelevant. The terms of our senior secured credit facility may also restrict usfrom paying cash dividends on our common stock under some circumstances. At November 25,2007, approximately $94 million of permitted distributions were available topay dividends under our restricted payment covenant in our senior securedcredit facility, before giving effect to the December 3, 2007 dividendpayment of $12.0 million.

 

Inaddition to dividends to our stockholders, we have granted restricted stockunits (“RSUs”) to eligible employees, management, and members of our board ofdirectors.  These RSUs generally includethe right to receive dividend equivalent payments on each RSU that are equal todividends paid on each share of our common stock.

 

In thepast, cash flow from our operating activities has been highly variable,resulting in negative cash flow during certain periods. Because of thevariability, if our cash flow from operating activities is insufficient to funddividend payments at intended levels, we may need to reduce or eliminatedividends or, to the extent permitted by our debt agreements, fund all or partof the dividends with additional debt or other sources of cash. To the extentwe pay dividends, the amount of cash available to us to pay principal andinterest on our outstanding debt will be reduced. Failure to pay the principalor interest on our debt would constitute an event of default under theapplicable debt agreements giving the holders of the debt the right toaccelerate its maturity. If any of our debt is accelerated, we may not havesufficient cash available to repay it in full and we may be unable to refinanceit on satisfactory terms or at all. An event of default under debt agreementsor an acceleration of the debt hereunder could also trigger an event of defaultunder other debt agreements. Furthermore, if we fund dividends with additionaldebt, our interest expense will increase which may cause a further reduction inthe amount of cash available to us.

 

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**Critical Accounting Policies and Estimates**

 

Theprocess of preparing our consolidated financial statements in accordance withU.S. generally accepted accounting principles, requires management to makeestimates, judgments, and assumptions that affect the amounts reported and theaccompanying note disclosures. The estimates made by management are based onhistorical experience combined with management’s understanding of current factsand circumstances. Management identifies critical accounting estimates as:

 

·      those that require the useof assumptions about matters that are inherently and highly uncertain at thetime the estimates are made; and

 

·      those for which changes inthe estimates, judgments, or assumptions, or the use of different estimates,judgments, and assumptions, could have a material impact on our consolidatedresults of operations or financial condition.

 

Managementhas discussed the development, selection, and disclosure of critical accountingpolicies and estimates with the Audit Committee of our board of directors. Webelieve that our most critical accounting policies and estimates, those whichare both important to the portrayal of our financial condition and results ofoperations and require the most difficult, subjective, complex, or significantjudgment on the part of management, are the following:

 

·      Allowance for DoubtfulAccounts;

 

·      Inventory Valuation andReserves;

 

·      Vendor Rebate Receivables;and

 

·      Income Taxes.

 

For adiscussion of the Company’s critical accounting policies and estimates, pleasesee our Annual Report on Form 10-K in the year ended February 25,2007. We have not changed these policies or the method of making theseestimates from those previously disclosed.

 

***Recent Accounting Pronouncements***

 

SeeNote 2 to the Consolidated Financial Statements for a discussion of the impactof adopting FASB Interpretation No. 48 (FIN No. 48), “Accounting forUncertainty in Income Taxes,” on February 26, 2007, and for a discussionof certain new accounting pronouncements that will be adopted in the future.

 

**Forward-Looking Statements**

 

Thisreport includes “forward-looking statements,” as that term is defined by ThePrivate Securities Litigation Reform Act of 1995 or by the Securities andExchange Commission (“SEC”) in its rules, regulations, and releases thatinvolve risks and uncertainties. Forward-looking statements include statementsconcerning our plans, objectives, goals, strategies, future events, futurerevenue or performance, capital expenditures, financing needs, plans or intentionsrelating to acquisitions and divestitures, business trends, and otherinformation that is not historical information, and, in particular, appearunder the heading “Management’s Discussion and Analysis of Financial Conditionand Results of Operations.” When used in this Report, the words “estimates,”“expects,” “anticipates,” “projects,” “plans,” “intends,” “believes,”“forecasts,” “foresees,” “likely,” “may,” “should,” “goal,” “target,” andvariations of such words or similar expressions are intended to identifyforward-looking statements. All forward-looking statements are based uponinformation available to us on the date of this Report.

 

Theseforward-looking statements are subject to risks, uncertainties and otherfactors, many of which are outside of our control that could cause actualresults to differ materially from the results discussed in the forward-lookingstatements including, among other things, the matters discussed in this Reportunder this “Item 2. Management’s Discussion and Analysis 

 

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ofFinancial Condition and Results of Operations.” Such risks, uncertainties andother factors may include, among others:

 

·      general economic andbusiness conditions;

 

·      industry trends;

 

·      restrictions contained inour debt agreements;

 

·      our substantial leverage,including the inability to generate the necessary amount of cash to service ourexisting debt and the incurrence of substantial indebtedness in the future;

 

·      the seasonality of ourbusiness and weather conditions;

 

·      the possibility of liabilityfor pollution and other damage that is not covered by insurance or that exceedsour insurance coverage;

 

·      increased competition in themarkets in which we operate;

 

·      our dependence on productmix and rebate programs to attain profitability;

 

·      our dependence on a limitednumber of key executives who we may not be able to adequately replace if theyleave our Company;

 

·      changes in governmentregulations, agricultural policy, and environmental, health, and safety lawsand regulations;

 

·      changes in businessstrategy, development plans, or cost savings plans;

 

·      our ability to reduceworking capital and manage expenses;

 

·      the ability of Agrium tocomplete the Tender Offer and our ability to satisfy certain other conditionsin the  Merger Agreement;

 

·      changes in the number ofacres planted and the mix of principal crops planted by our customers;

 

·      our ability to integratenewly acquired operations into our existing operations;

 

·      our ability to raise debt orequity financing to fund our acquisition strategy in the future;

 

·      the loss of any of our majorsuppliers or the bankruptcy or financial distress of our customers;

 

·      the ability to maintainprices and/or attain any price increases for our products;

 

·      availability, terms, anddeployment of capital; and

 

·      other factors over which wehave little or no control.

 

See “Item1A. Risk Factors” of this Report for further discussion about risks relating tothe Merger Agreement.  Risks and certainother uncertainties are also discussed in more detail in our Annual Report on Form 10-Kfor the fiscal year ended February 25, 2007, under the caption “Item 1A.Risk Factors.”

 

There may be other factors, including those discussed elsewhere in thisReport, which could cause our actual results to differ materially from theresults referred to in the forward-looking statements. All forward-lookingstatements attributable to us or persons acting on our behalf apply only at thedate of this Report and are expressly qualified in their entirety by thecautionary statements included in this Report. We undertake no obligation topublicly update or revise forward-looking statements to reflect events orcircumstances after the date made or to reflect the occurrence of unanticipatedevents.

 

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**ITEM 3.****  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK.**

 

Marketrisks affecting our business are exposure to changes in energy prices,fertilizer product prices, interest rates, foreign currency exchange rates, andinterest rate swaps.

 

Changesin energy prices have a direct impact on our fuel costs. These price increasesimpact our supply chain and selling expenses. Based on our historic usage, anapproximate $0.13 increase in the annual average per gallon price of fuel wouldincrease our annual fuel expense by $1.0 million. Higher fuel prices alsoaffect our customers such that higher expenses for fuel may reduce the cash orcredit available to our customers with which they purchase other products orservices from us.

 

Ourinventory of fertilizer products has price risk related to changes in energyprices and fertilizer global supply and demand patterns. Our total fertilizerinventories were $149.2 million, $142.9 million, and $88.6 million at November 25,2007, February 25, 2007, and November 26, 2006, respectively. Inorder to secure supply and pricing, we sometimes prepay vendors for fertilizerinventory.  This fertilizer will bedelivered later in the current fiscal year or early in the next fiscalyear.  Our prepaid fertilizer was $37.5million, $47.2 million, and $8.5 million at November 25, 2007, February 25,2007, and November 26, 2006, respectively.

 

Ouraverage daily borrowings under the senior secured revolving credit facility(net of cash on hand) in the fifty-two week period ended November 25,2007, were $381.1 million. The senior secured revolving credit facility isaffected by changes in interest rates. Based upon the amount of our averagedaily borrowings (net of cash on hand) in the fifty-two week period ended November 25,2007, a one percentage point change in the assumed weighted average interestrate on such credit facility would change our annual interest expense by $3.8million.

 

Ourforeign currency risk is limited primarily to the exchange rate differential inthe Canadian and U.S. dollar. The exchange rate was 1.0111, 0.8626, and 0.8816at November 25, 2007, February 25, 2007, and November 26, 2006,respectively. The exchange rate varied between 0.8455 and 1.1038 in thethirty-nine weeks ended November 25, 2007. A one-percentage point changein the exchange rate would have approximately a $0.3 million impact on thebalance sheet value at November 25, 2007.

 

In July 2006, in compliance with the terms of our senior securedcredit facility, we entered into two interest rate swaps to manage exposure tochanges in cash flows related to changes in the variable interest rate on aportion of our long-term debt. Under the terms of the swaps, we pay adesignated fixed rate and receive a variable rate, which is based on LIBOR. Therate received is expected to offset the variable rate to be paid on thelong-term debt which is also based on LIBOR. At November 25, 2007, thenotional value of the interest rate swaps was $165 million. These notionalvalues of these amortizing swaps will decline to $90 million prior toexpiration in July 2011.  At November 25,2007, the fair value of the swaps was ($6.1) million.  If future interest rates continue to decline,the amount of the mark-to-market loss may increase.

 

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**ITEM 4.****  CONTROLS AND PROCEDURES.**

 

At theend of the period covered by this report, we evaluated the effectiveness of thedesign and operation of our “disclosure controls and procedures” as theyrelated to our business (“Disclosure Controls”). This evaluation (“ControlsEvaluation”) was done under the supervision and with the participation ofmanagement, including our Chief Executive Officer (“CEO”) and Chief FinancialOfficer (“CFO”).

 

Ourmanagement, including the CEO and CFO, does not expect that our DisclosureControls or our “internal controls over financial reporting” will prevent allerrors and all fraud. A control system, no matter how well conceived andoperated, can provide only reasonable, not absolute, assurance that theobjectives of the control system are met. Further, the design of a controlsystem must reflect the fact that there are resource constraints, and thebenefits of controls must be considered relative to their costs. Because of theinherent limitations in all control systems, no evaluation of controls canprovide absolute assurance that all control issues and instances of fraud, ifany, have been detected. These inherent limitations include the realities thatjudgments in decision-making can be faulty, and that breakdowns can occurbecause of simple error or mistake. Additionally, controls can be circumventedby the individual acts of some persons, by collusion of two or more people, orby management override of the control. The design of any system of controlsalso is based in part upon certain assumptions about the likelihood of futureevents, and there can be no assurance that any design will succeed in achievingits stated goals under all potential future conditions; over time, controls maybecome inadequate because of changes in conditions, or the degree of compliancewith the policies or procedures may deteriorate. Because of the inherentlimitations in a cost-effective control system, misstatements due to error orfraud may occur and not be detected.

 

Basedupon the Controls Evaluation, the CEO and CFO have concluded that theDisclosure Controls are effective as of the end of the period covered by thisreport. There have been no significant changes in our internal controls or inother factors that could significantly affect internal controls subsequent tothe date we carried out this evaluation. In addition, there have been nochanges in our internal control over financial reporting that have occurred duringthe most recent fiscal quarter that have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting.

 

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**PART II.****         OTHER INFORMATION**

 

**ITEM 1A.****       RISK FACTORS.**

 

Except as setforth below, since the date of the filing of our Annual Report on Form 10-Kfor the year ended February 25, 2007, there have been no material changesto the risk factors described under Item 1A in such Form 10-K.  In addition to the other information setforth in this Report, you should carefully consider the risk factors discussedin Part I, Item 1A of our Annual Report on Form 10-K.  The risks described below and in our AnnualReport on Form 10-K are not the only risks facing our Company.  Additional risks and uncertainties notcurrently known to us or that we currently deem to be immaterial may alsomaterially adversely affect our business, financial condition, and/or operatingresults.

 

As discussed above (See“Tender Offer” in Item 2.  Management’sDiscussion and Analysis of Financial Condition and Results of Operations.), wehave entered into a Merger Agreement pursuant to which we are to be acquired byAgrium.  If all of the conditions setforth in the Merger Agreement are satisfied or waived and neither we nor Agriumelects to exercise our respective termination rights, the Merger will occur andwe will cease to be a standalone publicly-traded company.  Rather, we will be a wholly-owned subsidiaryof Agrium as of the effective time of the Merger.

 

***Weare subject to numerous risks associated with our planned acquisition byAgrium.***

 

On December 3, 2007,we announced that we had entered into the Merger Agreement with Agrium pursuantto which Agrium U.S. Inc., a subsidiary of Agrium, would commence a tenderoffer at an offer price of $39.00 per share to acquire all of the outstandingshares of our common stock.  Under theterms of the Merger Agreement, upon obtaining of a majority of our shares as aresult of the Tender Offer, Utah Acquisition Co., a Delaware corporation and a wholly-ownedsubsidiary of Agrium, will merge with and into UAP and we will become awholly-owned subsidiary of Agrium, thus ending our existence as a standalonepublicly-traded company.

 

Beginning with the firsttrading date, December 3, 2007, following the announcement of the MergerAgreement and continuing through the date hereof, our common stock has tradedwithin a narrow price range: from a low of $38.18 per share on December 5,2007, to a high of $38.63 per share on December 13, 2007.  This highly constricted trading rangesurrounding the tender offer price is typically seen in tender offeracquisitions such as ours, where the likelihood of one or more competingacquisition offers is relatively low, and where the likelihood of legal orregulatory impediments to the transaction is also anticipated to be low.  We expect that this narrow trading rangearound $39.00 per share is likely to continue until the closing of the TenderOffer and Merger.  As a result of thisnarrow trading range, together with the expected $39.00 per share cash paymentto be paid to the non-tendering UAP stockholders pursuant to the terms of theMerger Agreement, the returns on any new investments in our common stock willlikely be significantly limited*.*

 

***Because the Tender Offer has not yet closed, we cannot besure that the transactions contemplated by the Merger Agreement will beconsummated, which could have a negative effect on our financial performanceand stock price.***

 

The obligation of Agriumto consummate the Tender Offer and the Merger is subject to certain conditions,including the absence of the occurrence of any material adverse effect on ourbusiness prior to the closing of the Tender Offer.  If the conditions set forth in the MergerAgreement are not timely satisfied or waived, the acquisition of us by Agriummay not occur.  These conditions are setforth in the Merger Agreement which we filed, as an exhibit to the CurrentReport on Form 8-K, with the SEC on December 3, 2007.  We cannot ensure that each of the conditionsset forth in the Merger Agreement will be satisfied, and failure to completethese transactions could have a negative effect on our financial performanceand stock price.

 

If the acquisition isterminated it may cause a material disruption to our business and, undercertain circumstances we may be required to pay Agrium a termination fee of $44million plus reimbursement for up to $10 million in costs incurred by Agrium inconnection with the Tender Offer and Merger. In addition to such adverse consequences and possible adverse effects onour business which may result from the announcement of the Merger Agreement, ifthe acquisition is not consummated we could suffer a number of furtherconsequences that may adversely affect our business, results of operations andstock price, including, but not limited to, the following:

 

·      wewould not realize any anticipated benefits from being a part of a combinedcompany;

·      theprice of our common stock could decline to the extent that its current marketprice reflects a market assumption that the Tender Offer and Merger will becompleted;

·      wemay experience difficulties in attracting customers and strategic partners dueto changed perceptions about our competitive position, our management, or otheraspects of our business;

 

 

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·      ifthe Merger Agreement is terminated or the Tender Offer and Merger are notcompleted, we may not be able to find another buyer willing to pay anequivalent or higher price for shares of UAP common stock in an alternativeacquisition transaction;

·      wehave incurred and would remain liable for significant costs related to theTender Offer and Merger, such as legal, accounting and investment banking fees;

·      activitiesrelating to the acquisition and related uncertainties may lead to a loss ofrevenue and market position that we may not be able to regain;

·      wemay not be able to retain key employees or attract new employees in areas ofgrowth or need; and

·      wemay not be able to take advantage of alternative business opportunities oreffectively respond to competitive pressures due to a loss of our salespersonnel.

 

**ITEM 6.****          EXHIBITS.**

 
| 2.1    |   | Agreement and Plan of Merger, dated as of December 2, 2007, by and  among Agrium, Utah Acquisition Co. and UAP (incorporated herein by reference  to Exhibit 2.1 of Form 8-K filed by UAP on December 3, 2007).                                                                       |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                  |
| 4.1    |   | Third Amendment to the Second Amended and Restated Credit Agreement  (incorporated by reference to Exhibit 4.1 to the Company’s Current  Report on Form 8-K dated October 16, 2007).                                                                              |
|   |   |                                                                                                                                                                                                                                                                                  |
| 10.1   |   | UAP Holding Corp. 2007 Long-Term Incentive Plan Restricted Stock unit  Agreement (incorporated by reference to Exhibit 10.1 to the Company’s  Current Report on Form 8-K dated October 16, 2007).                                                                 |
|   |   |                                                                                                                                                                                                                                                                                  |
| 10.2   |   | Amended  and Restated Change of Control Employment Agreement between Larry K. Cordell  and UAP Holding Corp., dated as of December 4, 2007 (incorporated by  reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K  dated December 6, 2007). |
|   |   |                                                                                                                                                                                                                                                                                  |
| 10.3   |   | Form of  Amended and Restated Change of Control Employment Agreement (for David Bullock,  Todd Suko and Jeffrey Rutherford) (incorporated by reference to Exhibit 10.2  to the Company’s Current Report on Form 8-K dated December 6,  2007).                |
|   |   |                                                                                                                                                                                                                                                                                  |
| 10.4   |   | Form of  Amended and Restated Change of Control Employment Agreement (for Kevin  Howard, Dean Williams and David Tretter) (incorporated by reference to Exhibit 10.3  to the Company’s Current Report on Form 8-K dated December 6,  2007).                  |
|   |   |                                                                                                                                                                                                                                                                                  |
| 10.5   |   | Amended  and Restated Change of Control Employment Agreement between Alan Kessock and  UAP Holding Corp., dated as of December 5, 2007 (incorporated by  reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K  dated December 6, 2007).     |
|   |   |                                                                                                                                                                                                                                                                                  |
| 15.1   |   | Deloitte & Touche LLP Letter Re Unaudited Interim Financial  Information.                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                  |
| 31.1   |   | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of  the Securities Exchange Act of 1934, as adopted pursuant to Section 302  of the Sarbanes-Oxley Act of 2002.                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                  |
| 31.2   |   | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of  the Securities Exchange Act of 1934, as adopted pursuant to Section 302  of the Sarbanes-Oxley Act of 2002.                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                  |
| 32.1   |   | Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350,  as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                  |
| 32.2   |   | Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350,  as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                      |

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

Date: December 21,2007

 
| **UAP HOLDING CORP.** | ** **                                                                               |
|-----------------------|------------------------------------------------------------------------------------------|
| (Registrant)          |                                                                                     |
|                  |                                                                                     |
|                  |                                                                                     |
| By:                   | **/s/ Jeffrey L. Rutherford**                                                            |
|                  |                                                                                     |
| ** **            | **Jeffrey L. Rutherford**                                                                |
| ** **            | **Chief Financial Officer**                                                         |
| ** **            | **(Principal Financial Officer and duly authorized signatory on behalf  of Registrant)** |
|                  |                                                                                     |
|                  |                                                                                     |
| By:                   | **/s/ Alan Kessock**                                                                     |
|                  |                                                                                     |
| ** **            | **Alan Kessock**                                                                         |
| ** **            | **Chief Accounting Officer**                                                             |
| ** **            | **(Principal Accounting Officer)**                                                       |
|                       |                                                                                          |  |

 

32

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