Land O'Lakes, Inc. Annual Report 2001

SALES AND EARNINGS

Net sales for Land O'Lakes, Inc. and subsidiaries (the "Company") in 2001 were $6.0 billion, increasing $.2 billion or four percent compared with 2000. The divestiture of our fluid dairy assets in July 2000 and the contribution of certain agronomy assets to Agriliance on July 29, 2000 have impacted the year-to-year comparison. Excluding the effect of these prior year transactions, net sales in 2001 increased $1.2 billion or 26 percent. The increase was primarily attributed to the full-year effect of the Land O'Lakes Farmland Feed joint venture, which began operations in October 2000, and the acquisition of Purina Mills, Inc. in October 2001. These transactions contributed $453.0 million and $195.4 million, respectively, in sales growth. Higher commodity prices for dairy food products and the full-year effect of a dairy plant acquisition contributed $378.2 million to the increase. Volume growth in the seed and swine businesses and improved commodity prices for market hogs also added to the sales increase.

Net earnings were $71.5 million in 2001 compared with $102.9 million in 2000, a decrease of $31.4 million. Net earnings were impacted by an $18.1 million increase in extraordinary expense related to the early extinguishment of debt associated with the Purina Mills acquisition and a $17.3 million increase in income tax expense as a result of a reduction in non-member losses.

Earnings before income taxes and extraordinary item were $89.5 million in 2001 compared with $85.6 million in 2000, an increase of $3.9 million. If restructuring and impairment charges and a gain from divestiture of businesses were excluded, earnings before income taxes and extraordinary item were $93.3 million in 2001 compared with $50.8 million in 2000. This $42.5 million increase resulted primarily from an improvement in earnings from investments in affiliated companies, primarily Agriliance, stronger margins for dairy food products and increased unit sales and higher market prices for hogs. The increase was partially offset by lower volumes for dairy food products and reduced margins for crop seed products.

FINANCIAL CONDITION

The acquisition of Purina Mills in 2001 has temporarily increased the level of debt on Land O'Lakes balance sheet. The acquisition was financed with long-term debt, which significantly increased the Company's debt-to-capital ratio.

Debt is comprised of short-term and long-term debt, including capital securities. In the fourth quarter of 2001, a new financing package was arranged. The package currently consists of a $250 million revolving credit facility, a 5-year term loan for $325 million and a 7-year term loan for $250 million. All of these facilities are senior debt and are secured by most of the assets of Land O'Lakes. In addition, a 10-year senior unsecured note offering for $350 million was completed in November 2001.

Capital securities of $200.0 million were issued in March 1998 by a subsidiary of Land O'Lakes. The capital securities carry a coupon interest rate of 7.45 percent and are due in 2028. In 2000, Land O'Lakes repurchased $9.3 million of these securities at a discount, which resulted in an after-tax extraordinary gain of $3.6 million. At December 31, 2001, the outstanding capital securities balance was $190.7 million.

Long-term debt, including capital securities, was $1,147.5 million at December 31, 2001. This amount is up $484.8 million from the prior year, mostly due to the acquisition of Purina Mills. Land O'Lakes long-term debt-to-capital ratio, including capital securities, at December 31, 2001 was 56.1 percent, up from 43.5 percent at the end of 2000.

Short-term debt declined $103.2 million to $53.5 million at December 31, 2001 compared with $156.7 million at December 31, 2000. Total debt increased $381.5 million to $1,201.0 million at December 31, 2001 compared with $819.5 million at December 31, 2000.

Land O'Lakes credit ratings were lowered in 2001 due to the additional debt required to finance the Purina Mills acquisition. As of December 31, 2001, the Company's senior secured debt rating was BBB- (Standard & Poor's) and Ba2 (Moody's) and senior unsecured debt rating was BB (Standard & Poor's) and Ba3 (Moody's). Finally, the Company's capital securities ratings were B+ (Standard & Poor's) and Ba3 (Moody's).

Equities increased $31.5 million in 2001 to $836.5 million at December 31, 2001. The increase reflects net earnings in 2001, partially offset by equity revolvement, age retirements, estate redemptions and patronage refunds payable.

Cash returns to members decreased $7.4 million in 2001 to $46.9 million. Members received $13.4 million of equity revolvement, $30.7 million of cash patronage related to prior year's earnings and $2.8 million of age retirement, estate and other payments during the year.

PERFORMANCE MEASURES

Land O'Lakes is committed to improving profitability in each core business through the effective use of invested capital and increased returns to members. The Company uses two primary performance measures - return on invested capital (ROIC) and return on equity (ROE). ROIC indicates the operating return on permanently invested capital before considering the costs of permanent financing and income taxes. ROE combines the results of operating performance with the effects of financial leverage and income taxes to measure the return on members' investment in Land O'Lakes.

Return on invested capital The Company showed a slight increase in its return on invested capital, from 8.9 percent in 2000 to 9.1 percent in 2001. Land O'Lakes average ROIC for the five-year period ended in 2001 was 9.8 percent.

Return on equity The 2001 earnings decline resulted in a 4.5 percentage point decrease in ROE from 13.4 percent in 2000 to 8.9 percent in 2001. Average ROE for the five-year period ended in 2001 was 11.5 percent.

SEC REPORTING

As a result of the recent issue of 10-year senior notes, Land O'Lakes has agreed to issue publicly registered notes in an exchange offer and to file annual (10-K), quarterly (10-Q) and current (8-K) reports with the SEC. The Company anticipates filing a registration statement with the SEC in the first quarter of 2002. Effectiveness of the registration is subject to completion of the SEC review process.