LIQUIDITY AND CAPITAL RESOURCES

Overview

Our principal liquidity requirements following the completion of the offering will be for working capital, consisting primarily of receivables, inventories, pre-paid expenses, reduced by accounts payable and accrued expenses; capital expenditures; and debt service. In addition, our board of directors will adopt a dividend policy which reflects a basic judgment that our stockholders would be better served if we distributed our excess cash to them instead of retaining it in our business. Under this policy, cash generated by our business in excess of operating needs and reserves, interest and principal payments on indebtedness, and certain capital expenditures would in general be distributed as regular quarterly dividends to the holders of our common stock and participating preferred stock and vested options to acquire participating preferred stock rather than retained by us and used to finance growth opportunities.

We currently intend to pay an initial dividend on February 1, 2005 with respect to the partial quarterly period commencing on the closing of this offering and ending on October 15, 2004 and a regular quarterly dividend payment for the period commencing on October 16, 2004 and ending on January 15, 2005 based on a quarterly dividend level of $0.235 per share of common stock and $0.475 per share of participating preferred stock. We currently intend to continue to pay quarterly dividends at these rates for the remainder of the first full year following the closing of this offering. In respect of the first year following the closing of this offering, this would be $0.940 per share, or approximately $34.3 million in the aggregate, on the common stock and $1.90 per share, or approximately $17.4 million in the aggregate, on the participating preferred stock. In determining our expected initial dividend levels, we reviewed and analyzed, among other things, our operating and financial performance in recent years, the anticipated cash requirements associated with our new capital structure, our anticipated capital expenditure requirements, our expected other cash needs, the terms of our debt instruments, including our amended and restated revolving credit facility, other potential sources of liquidity and various other aspects of our business. See “Dividend Policy and Restrictions” beginning on page 43.

We will fund our liquidity needs and our intended dividends with cash generated from operations and, to the extent necessary, through borrowings under the amended and restated revolving credit facility. In addition, as

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noted below, we expect to fund any growth capital expenditures with incremental borrowings. As of May 30, 2004 and February 22, 2004, we had $42.1 million and $0 million, respectively, outstanding under United Agri Products’ existing revolving credit facility. The revolver is included in our financial statements as part of our short-term debt.

We believe that our cash flows from operating activities and borrowing capabilities under the amended and restated revolving credit facility will be sufficient to meet our liquidity requirements in the foreseeable future, including funding of capital expenditures, and payment obligations under our debt service, the senior subordinated notes and our intended dividend payments on our common stock and participating preferred stock and vested options to acquire participating preferred stock.

Historical Cash Flow from Operating Activities

Historically, the ConAgra Agricultural Products Business’ sources of cash were primarily cash flows from operations and advances received from ConAgra Foods.

The information presented below for the fiscal year ended February 22, 2004 (Pro Forma) has been derived by combining the cash flow activity of UAP Holding Corp. (the “Successor”) for the thirteen weeks ended February 22, 2004 with the cash flow activity of the Predecessor for the thirty-nine weeks ended November 23, 2003 and applying the pro forma adjustments for the Acquisition. The information for the fourteen weeks ended May 30, 2004 represent the cash flow activity of the successor. The information for the fiscal year ended February 23, 2003 and February 24, 2002 represent the cash flow activity of the Predecessor.

Cash flows provided by (used in) operating activities totaled ($203.7) million in the fourteen weeks ended May 30, 2004 and ($154.8) million for the thirteen weeks ended May 25, 2003. The usage in the fourteen weeks ended May 30, 2004 was due to higher accounts receivable due to increased sales, offset by lower inventories and higher payables due to better inventory payable management. The decrease in the thirteen weeks ended May 25, 2003 was primarily due to higher accounts receivable and inventories, offset by higher payables. The increased usage in the current period versus the prior period was due to the purchasing of inventory closer to the seasonal use in the current period, as opposed to prepaying for inventory as in the prior period.

Cash flows provided by (used in) operating activities totaled $341.8 million, ($266.8) million and $120.7 million in fiscal 2004, 2003 and 2002, respectively. The increase in fiscal 2004 was due to improvements in working capital, including better inventory payable management due to a lower participation by us in early purchasing programs from our suppliers. The decrease in fiscal 2003 was primarily due to prepayments to various suppliers for early payment discounts on crop protection chemicals and lower year-end accounts payable to suppliers. This was partially offset by lower inventories and increased earnings.

Cash flows used in investing activities totaled $2.7 million in the fourteen weeks ended May 30, 2004 and ($8.5) million for the thirteen weeks ended May 25, 2003. Investing activities primarily represent expenditures for property, plant and equipment.

Cash flows used in investing activities totaled $653.1 million, $4.0 million and $12.8 million in fiscal 2004, 2003 and 2002, respectively. The increase in cash used in investing activities in fiscal 2004 was due to the Acquisition. Cash flows used in investing activities include capital expenditures for property, plant and equipment, which totaled $15.3 million, $6.4 million and $13.6 million in fiscal 2004, 2003 and 2002, respectively.

Cash flows provided by financing activities were $42.1 million in the fourteen weeks ended May 30, 2004 and $134.7 million in the thirteen weeks ended May 25, 2003. Cash flows provided by financing activities in the fourteen week period ended May 30, 2004 reflect borrowings under our existing revolving credit facility used to accommodate the seasonal working capital needs of our business. Financing activities in the prior period were primarily limited to net investments by ConAgra Foods and bank overdrafts.

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Cash flows provided by (used in) financing activities were $455.4 million, $226.7 million and ($181.5) million in fiscal 2004, 2003 and 2002, respectively. Cash flows provided by financing activities in fiscal 2004 included the contribution of equity by Apollo and issuance of long-term debt in connection with the Acquisition. Financing activities have historically been primarily limited to investments by and (distributions) to ConAgra Foods, which totaled $231.1 million and ($182.1) million in fiscal 2003 and 2002 respectively.

Capital Expenditures

Capital expenditures are expected to be approximately $18.1 million for fiscal 2005, which includes approximately $5.6 million for maintenance capital expenditures. This also includes approximately $3.7 million of capital expenditures for transition projects to enable our separation from our former parent, ConAgra Foods, and approximately $5.3 million for an investment in information systems. The remainder, or approximately $3.5 million, represents growth capital expenditures that are intended to support our strategic growth activities or bring about efficiencies in our formulation facilities. This expected figure represents management’s estimate of spending, but may change due to a variety of conditions, including local business conditions, changes in the farm economy, competitive conditions, changes that impact the economics of a given project, and the seasonality of our business.

We estimate that we will have capital expenditure requirements of approximately $10.0 million per year on average for the next two fiscal years, approximately $6.0 million of which in each fiscal year is expected to represent maintenance capital expenditures and approximately $4.0 million of which is expected to be allocated to growth projects. We expect we will finance maintenance capital expenditures from cash generated from operations, and we expect to finance growth capital expenditures through cash generated from operations, reductions in working capital, or incremental debt. Maintenance capital expenditures include all expenditures which meet capitalization requirements under generally accepted accounting principles but which do not meet the definition of growth capital expenditures set forth under “Dividend Policy and Restrictions—Minimum EBITDA” beginning on page 44 above. Maintenance capital expenditures generally support our current operations and our current level of profitability as it relates to our existing location base. Maintenance capital expenditures include items such as refurbishment or replacement of existing distribution or formulating equipment, compliance related projects, computer hardware, and quality improvement projects.

Credit Facilities and Other Long Term Debt

In connection with the Acquisition, United Agri Products entered into the existing five-year $500.0 million asset-based revolving credit facility. The existing revolving credit facility also provides for a $20.0 million revolving credit sub-facility for United Agri Products Canada Inc. (“UAP Canada”), a $50.0 million letter of credit sub-facility, a $25.0 million swingline loan sub-facility and a $25.0 million in-season over-advance sub- facility. The interest rates with respect to revolving loans under the existing revolving credit facility are based, at our option, on either the agent’s index rate plus an applicable index margin of 1.50% or upon LIBOR plus an applicable LIBOR margin of 2.75%. The interest rates with respect to in-season overadvances under the existing revolving credit facility are based, at our option, on either the agent’s index rate plus an applicable index margin of 2.75% or upon LIBOR plus an applicable LIBOR margin of 4.00%. These applicable margins are in each case subject to prospective reduction on a quarterly basis (other than the margins on in-season overadvances) if we reduce our ratio of funded debt to EBITDA (on a consolidated basis). Overdue principal, interest and other amounts will bear interest at a rate per annum equal to the rate otherwise applicable thereto plus an additional 2.0%. The obligations under the existing revolving credit facility are (or, in the case of future subsidiaries, will be) guaranteed by UAP Holdings and each of its existing and future direct and indirect U.S. subsidiaries. The obligations under the existing revolving credit facility are secured by a first priority lien on, or security interest in, subject to certain exceptions, substantially all of UAP Holdings’, United Agri Products’ and UAP Canada’s properties and assets and the properties and assets of each of the guarantors. The existing revolving credit facility contains customary representations, warranties and covenants and events of default for the type and nature of the Acquisition and a business such as ours.

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On December 16, 2003, United Agri Products issued $225.0 million aggregate principal amount of 8¼% Senior Notes which mature on December 15, 2011. On April 26, 2004, United Agri Products commenced a tender offer and consent solicitation with respect to all its outstanding $225.0 million aggregate principal amount of 8¼% Senior Notes. As of May 10, 2004, United Agri Products had received the requisite consents with respect to the 8  ¹ / 4 % Senior Notes. As of the date of this prospectus, all $225,000,000 aggregate principal amount of the 8  ¹ / 4 % Senior Notes have been validly tendered and have not been withdrawn in the 8  ¹ / 4 % Senior Note Tender Offer, and United Agri Products has executed a supplemental indenture with respect to the 8  ¹ / 4 % Senior Notes, with effectiveness subject to consummation of the Tender Offers. In addition, all of the 8  ¹ / 4 % Senior Notes will be repurchased in the 8  ¹ / 4 % Senior Note Tender Offer and the indenture governing the 8  ¹ / 4 % Senior Notes will be discharged. See “Description of Other Indebtedness” beginning on page 117 for a more detailed discussion of the terms of the tender offer and consent solicitation with respect to the 8¼% Senior Notes and “Description of Other Indebtedness—8¼% Senior Notes” beginning on page 123 for a more detailed discussion of the terms of the 8¼% Senior Notes.

On January 26, 2004, UAP Holdings issued $125.0 million aggregate principal amount at maturity of 10¾% Senior Discount Notes which mature on July 15, 2012. On April 26, 2004, UAP Holdings commenced a tender offer and consent solicitation with respect to all of its outstanding $125.0 million aggregate principal amount at maturity of 10¾% Senior Discount Notes. As of May 10, 2004, UAP Holdings had received the requisite consents with respect to the 10  ³ / 4 % Senior Discount Notes. As of the date of this prospectus, all $125,000,000 aggregate principal amount at maturity of the 10  ³ / 4 % Senior Discount Notes have been validly tendered and have not been withdrawn in the 10  ³ / 4 % Senior Discount Note Tender Offer, and UAP Holdings has executed a supplemental indenture with respect to the 10  ³ / 4 % Senior Discount Notes, with effectiveness subject to consummation of the Tender Offers. In addition, all of the 10  ³ / 4 % Senior Discount Notes will be repurchased in the 10  ³ / 4 % Senior Discount Note Tender Offer and the indenture governing the 10  ³ / 4 % Senior Discount Notes will be discharged. See “Description of Other Indebtedness” beginning on page 117 for a more detailed discussion of the terms of the tender offer and consent solicitation with respect to the 10¾% Senior Discount Notes and “Description of Other Indebtedness—10¾% Senior Discount Notes” beginning on page 126 for a more detailed discussion of the terms of the 10¾% Senior Discount Notes.

United Agri Products will enter into the Amended Credit Facilities upon the consummation of their offering. See “Description of Other Indebtedness” beginning on page 117.

OBLIGATIONS AND COMMITMENTS

As part of our ongoing operations, we enter into arrangements that obligate us to make future payments under contracts such as lease agreements, debt agreements and unconditional purchase obligations (i.e., obligations to transfer funds in the future for fixed or minimum quantities of goods or services at fixed or minimum prices, such as “take-or-pay” contracts). We enter into unconditional purchase obligation arrangements in the normal course of business in order to ensure that adequate levels of sourced product are available to us. The following is a summary of our contractual obligations as of February 22, 2004:

We have excluded lease obligations of $52.8 million from the table above as these are cancelable within one year.

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The above table also does not include the effects of this offering. As of May 30, 2004, on a pro forma basis after giving effect to this offering, our total indebtedness would have been $497.6 million, of which $292.0 million would have consisted of the senior subordinated notes represented by IDSs, $40.6 million would have consisted of the separate senior subordinated notes and $165.0 million would have consisted of the new senior secured second lien term loan. The Amended Credit Facilities consist of the amended and restated revolving facility, which has a five-year term, and a new senior secured second lien term loan facility, which has a seven year term. The senior subordinated notes will mature in 2014, subject to extension of maturity as described herein.

Additionally, the above table does not include our obligation to pay to ConAgra Foods 50% of rebate payments received by us related to the 2003 and prior crop years. As of the date hereof, we have paid ConAgra Foods $54.0 million pursuant to such obligation. See “Certain Relationships and Related Transactions—The Acquisition—The Stock Purchase Agreement” beginning on page 105.

As of May 30, 2004, we had $27.8 million of outstanding commercial commitment arrangements (e.g., guarantees). As of May 30, 2004, on a pro forma basis after giving effect to the Transactions, our total other commercial commitments (consisting of outstanding letters of credit) would have been $27.8 million.

The 8¼% Senior Notes were issued on December 16, 2003 and the proceeds from such offering were used to repay the entire principal amount, plus accrued interest, incurred in connection with a $175.0 million unsecured senior bridge loan facility. United Agri Products entered into the senior bridge loan facility on November 24, 2003 and used borrowings thereunder to fund, in part, the Acquisition.

As a holding company, our investments in our operating subsidiaries, including United Agri Products, constitute substantially all of our operating assets. Consequently, our subsidiaries conduct all of our consolidated operations and own substantially all of our operating assets. Our principal source of the cash required to pay our and our subsidiaries’ obligations and to repay the principal amount of our and our subsidiaries’ obligations, including the senior subordinated notes, is the cash that our subsidiaries generate from their operations and their borrowings under the existing revolving credit facility. Our subsidiaries are separate and distinct legal entities and have no obligations to make funds available to us. The terms of the Amended Credit Facilities will restrict our subsidiaries from paying dividends, making loans or other distributions and otherwise transferring assets to us. Furthermore, our subsidiaries will be permitted under the terms of the Amended Credit Facilities and the indenture governing the senior subordinated notes to incur additional indebtedness that may severely restrict or prohibit the making of distributions, the payment of dividends or the making of loans by such subsidiaries to us. We cannot assure you that the agreements governing our current and future indebtedness will permit our subsidiaries to provide us with sufficient dividends, distributions or loans to fund scheduled interest and principal payments on the senior subordinated notes when due. If we consummate an acquisition, our debt service requirements could increase. We may need to refinance all or a portion of our indebtedness, including the senior subordinated notes on or before maturity. We cannot assure you that we will be able to refinance any of our indebtedness, including the Amended Credit Facilities and the senior subordinated notes, on commercially reasonable terms or at all.

TRADING ACTIVITIES

As of May 30, 2004 and May 25, 2003, we had no outstanding derivative contracts. However, subject to limitations set forth in our debt agreements, including the indenture, we may, in the future, enter into derivative contracts to limit our exposure to changes in interest rates, foreign currency exchange rates and energy prices.

CRITICAL ACCOUNTING POLICIES

The process of preparing financial statements requires the use of estimates on the part of management. The estimates used by management are based on our historical experiences combined with management’s

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understanding of current facts and circumstances. Certain of our accounting policies are considered critical as they are both important to the portrayal of our financial condition and results of operations and require significant or complex judgment on the part of management. The following is a summary of certain accounting policies considered critical by our management.

Allowance for Doubtful Accounts.     Our allowance for doubtful accounts reflects reserves for customer receivables to reduce receivables to amounts expected to be collected. Management uses significant judgment in estimating uncollectible amounts. In estimating uncollectible amounts, management considers factors such as current overall economic conditions, industry-specific economic conditions, historical customer performance and anticipated customer performance. While management believes our processes effectively address our exposure for doubtful accounts, changes in the economy, industry, or specific customer conditions may require adjustment to the allowance for doubtful accounts recorded by us.

Inventory Valuation.     Management reviews inventory balances to determine if inventories can be sold at amounts equal to or greater than their carrying amounts. The review includes identification of slow moving inventories, obsolete inventories and discontinued products or lines of products. The identification process includes historical performance of the inventory, current operational plans for the inventory, as well as industry and customer specific trends. If our actual results differ from management expectations with respect to the selling of our inventories at amounts equal to or greater than their carrying amounts, we would be required to adjust our inventory balances accordingly.

Impairment of Long-Lived Assets (Including Property, Plant and Equipment), Goodwill and Identifiable Intangible Assets.     We reduce the carrying amounts of long-lived assets, goodwill and identifiable intangible assets to their fair values when the fair value of such assets is determined to be less than their carrying amounts (i.e., assets are deemed to be impaired). Fair value is typically estimated using a discounted cash flow analysis, which requires us to estimate the future cash flows anticipated to be generated by the particular asset(s) being tested for impairment as well as select a discount rate to measure the present value of the anticipated cash flows. When determining future cash flow estimates, we consider historical results adjusted to reflect current and anticipated operating conditions. Estimating future cash flows requires significant judgment by us in such areas as future economic conditions, industry-specific conditions, product pricing and necessary capital expenditures. The use of different assumptions or estimates for future cash flows could produce different impairment amounts (or none at all) for long-lived assets, goodwill and identifiable intangible assets.

Rebate Receivables.     Rebates are received from crop protection and seed products, based on programs offered by our vendors. The programs vary based on the product type and specific vendor practice. Historically, more than 85% of the rebates earned were from our chemical suppliers. The majority of the rebate programs run on a crop year basis, typically from October 1st to September 30th, although other periods are sometimes used. We also negotiate individually with our vendors for additional rebates after the conclusion of the crop year and often several months after we have purchased and sold the products for which we are negotiating rebates. Historically, the majority of the rebates have been earned based on our sales of the suppliers’ products in a given crop year. The rebate receivable recorded monthly is based on actual sales and the historical rebate percentage received. The actual rebates earned for most programs are finalized in our fourth fiscal quarter and adjustments are made to the accrual as necessary. The majority of our rebate receivables are collected during our fourth quarter. Because of the nature of the programs and the amount of rebates available are determined by our vendors, there can be no assurance that historical rebate trends will continue.

Accounting Treatment for IDSs .    Our IDS units include common stock and senior subordinated notes, which include three embedded derivative features that may require bifurcation under FASB 133. The potential embedded derivative features include (i) optional redemption by UAP Holdings beginning in 2011; (ii) optional redemption by UAP Holdings upon certain disallowances of the tax deduction for interest on the senior subordinated notes; (iii) a provision under which the holders of senior subordinated notes could require UAP Holdings to redeem their senior subordinated notes upon a change of control. Upon determination of the pricing

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associated with this offering or subsequent offerings, a determination will be made based upon any discount or premium associated with the senior subordinated notes if an embedded derivative should be bifurcated. If it is determined that an investor in these debt securities may be contractually obliged to settle in such a way that the investor would not recover substantially all of its initial recorded investment or there is a possible future interest rate scenario (even though it may be remote) under which the embedded derivative would at least double the investor’s initial rate of return on the debt instrument, the embedded derivative will be required to be bifurcated and separately accounted for. If it is determined that any of the embedded derivatives are required to be bifurcated and separately accounted for, the combination of derivatives that will be bifurcated will be classified as an asset or liability, not as mezzanine equity, and a portion of the proceeds from the original issuance will be allocated to those derivatives equal to the combined fair value of those derivatives. If a portion of the initial proceeds is allocated to any of the derivatives, the senior subordinated notes will initially be recorded at a premium or discount and accreted to their redemption value as a component of interest expense using the effective interest method. Any such allocation will not affect the tax treatment of the IDSs.

The common stock portion of the IDS unit will be included in stockholders’ equity, and dividends paid on the common stock will be recorded as a reduction to retained earnings when declared by us. The transaction costs related to the common stock portion of the IDS unit will be charged to expense as we will not receive any proceeds from this part of the offering. The senior subordinated notes portion of the IDS unit will be included in long-term debt, and the related transaction costs will be capitalized as deferred financing costs and amortized to interest expense using the effective interest method. Interest on the senior subordinated notes will be charged to expense as accrued by us. The bifurcated derivatives if any will be recorded as an asset or liability and will be marked to market with changes in fair value being recorded in earnings. We intend to determine the fair value of the common stock, the senior subordinated notes and embedded derivatives with reference to a number of factors, including the price obtained on the sale of the separate senior subordinated notes, which have the same terms as the senior subordinated notes included in the IDSs.

Accounting Treatment for Participating Preferred Stock .    In connection with the Recapitalization, we will issue approximately 8.4 million shares of participating preferred stock to certain current equity holders. Subject to certain conditions, shares of participating preferred stock may be converted into IDSs following the first anniversary of the consummation of this offering. One of the conditions to conversion is compliance with the requirement under the indenture governing the senior subordinated notes that approximately 2.8 million shares of participating preferred stock, which represents 10% of the fair value of our equity immediately after this offering, remain outstanding for the first two years following this offering. The participating preferred stock contains dividend features which are intended to replicate the yield on the IDS units. Any time a dividend is paid to the holders of common stock, holders of the participating preferred stock will be paid a dividend equal to the same amount per share as paid to the holders of the common stock on an “as if” converted basis. In addition to any such dividend, holders of the participating preferred stock will accrue dividends at a rate that will replicate the interest on the senior subordinated notes.

At the option of the holder subject to specified conditions referred to above, each share of participating preferred stock may be converted into one IDS (as may be adjusted for stock splits or stock dividends) following the first anniversary of the closing of this offering. Accordingly, at the date of issuance, a portion of participating preferred stock will be classified as temporary equity in the amount equal to the present value of the senior subordinated note’s par amount that the holder will be entitled to receive upon the earliest possible date of exchange using a discount rate equal to the interest rate on the senior subordinated note’s par amount. The difference between the amount recorded as temporary equity and the amount the holder will receive upon exchange will be accreted as a dividend and will be recorded as a reduction to retained earnings. Any such allocation will not affect the tax treatment of the IDSs. The issuance of participating preferred stock is part of a common control transaction and the related shares will be issued in exchange for the remaining shares of common stock held by our equity sponsor and management.

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The participating preferred stockholders’ right to exchange their shares of participating preferred stock for a fixed number of IDSs is an embedded derivative financial instrument which will require bifurcation under SFAS No. 133. We will recognize this derivative financial instrument as a liability at fair value with the offsetting amount as a distribution to our equity holders on the transaction date. The derivative will be recorded at fair value at each subsequent balance sheet date with the change in fair value recorded through earnings for so long as the exchange rights are outstanding.

In connection with the Recapitalization, we will issue shares of participating preferred stock to a rabbi trust in exchange for shares of common stock currently held in such trust, and the deferred compensation accounts under our deferred compensation plans, which are currently deemed to be invested in such shares of common stock, will instead be deemed to be invested in such shares of participating preferred stock. The resulting compensation expense will be based upon the fair value of the shares of participating preferred stock received by management at the date of exchange. Also, as a result of the recapitalization, the original stock options held by management will be exchanged for participating preferred stock options, remeasurement of the stock option grants and recognition of the change in fair value of the stock options will be recorded as compensation expense. Based on the fact that the new options held by management are convertible into an IDS unit which has both an equity and debt component, such a feature is not clearly and closely related to the option and thus will be accounted for as a derivative. UAP Holdings will account for these options at fair value and on a quarterly basis will mark the options to market through earnings.

We will present a two-class method of earnings per share. Basic earnings per share is calculated based on the respective rights of each class of common stock to participate in distributions, consistent with their respective relative dividend rights. Diluted earnings per share will reflect the participating preferred stock on an as-converted basis. To the extent that holders exercise their conversion rights, the portion of common stock included in temporary equity will be reclassified to debt and the associated interest payments will be included in interest expense. IDS units and cash paid to existing investors for common stock will be accounted for in the calculation of two class earnings per share as such distributions will affect income available to common stockholders.

Income Taxes .    We intend to account for our issuance of the IDSs in this offering as representing shares of common stock and senior subordinated notes by allocating the proceeds for each IDS unit to the underlying common stock, senior subordinated note or bifurcated embedded derivatives based upon the relative fair values of each. Accordingly, we will account for the portion of the aggregate IDSs outstanding that represents senior subordinated notes as long-term debt bearing a stated interest rate of     % maturing on          , 2019. We have concluded that it is appropriate and we intend to annually deduct interest expense of approximately $          million on the senior subordinated notes from taxable income for U.S. federal and state income tax purposes. There can be no assurances that the Internal Revenue Service will not seek to challenge the treatment of these senior subordinated notes as debt or the amount of interest expense deducted, although to date we have not been notified that the senior subordinated notes should be treated as equity rather than debt for U.S. federal and state income tax purposes. If the senior subordinated notes were required to be treated as equity for income tax purposes, the cumulative interest expense associated with the senior subordinated notes would not be deductible from taxable income, and we would be required to recognize additional tax expense and establish a related income tax liability. In addition, to the extent any portion of the interest expense is determined not to be deductible, we would be required to recognize additional tax expense and establish a related income tax liability. The additional tax due to the federal and state authorities would be based on our taxable income or loss for each of the years that we take the interest expense deduction. We do not currently intend to record a liability for a potential disallowance of this interest expense deduction. In addition, non-U.S. holders could be subject to withholding taxes on the payment of interest, which would be taxed as dividends, and we could be subject to additional liability for the withholding taxes that we do not intend to collect on such payments.

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For a discussion of the U.S. federal income tax treatment of the senior subordinated notes, see “Material U.S. Federal Income Tax Consequences” beginning on page 194.

RECENTLY ISSUED ACCOUNTING STANDARDS

In May 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for classification and measurement in the balance sheets for certain financial instruments which possess characteristics of both a liability and equity. Generally, it requires classification of such financial instruments as a liability. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003. For financial instruments in existence prior to May 31, 2003, SFAS No. 150 is effective as of the beginning of fiscal 2005. We adopted SFAS No. 150 on May 30, 2004.

OFF BALANCE SHEET ARRANGEMENTS

In January 2003, the FASB issued FIN No. 46, “Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51 (ARB 51),” which clarifies the consolidation accounting guidance in ARB 51, “Consolidated Financial Statements,” as it applies to certain entities in which equity investors who do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entities to finance their activities without additional subordinated financial support from other parties. Such entities are known as variable interest entities (VIEs). FIN No. 46 requires that the primary beneficiary of a VIE consolidates the VIE. FIN No. 46 also requires new disclosures for significant relationships with VIEs, whether or not consolidation accounting is used or anticipated. In December 2003, the FASB revised and re-released FIN No. 46 as “FIN No. 46(R).” The provisions of FIN No. 46(R) are effective for periods ending after March 15, 2004, and upon adoption by the company as of February 22, 2004, did not have a material impact on our financial position or results of operations.

All future cash payments required under our noncancelable leasing arrangements having remaining noncancelable lease terms of more than one year are reflected in the “contractual obligations” table above under “—Obligations and Commitments” beginning on page 72.