LAND O LAKES INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2003*

or

[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________ to ________________.

Commission file number 333-84486

LAND O'LAKES, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)

Minnesota 41-0365145
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

4001 Lexington Avenue North
Arden Hills, Minnesota 55112
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(Address of Principal Executive Offices) (Zip Code)

(651) 481-2222
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(Registrant's Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [X]

Indicate by check mark whether the registrant is an accelerated filer
(as defined in rule 12-b-2 of the Act). Yes [ ] No [X]

The number of shares of the registrant's common stock outstanding as of
July 31, 2003: 1,104 shares of Class A common stock, 4,950 shares of Class B
common stock, 192 shares of Class C common stock, and 1,140 shares of Class D
common stock.

Land O'Lakes, Inc. is a cooperative. Our voting and non-voting common
equity can only be held by our members. No public market for voting and
non-voting common equity of Land O'Lakes, Inc. is established and it is
unlikely, in the foreseeable future, that a public market for our voting and
non-voting common equity will develop.

We maintain a website on the Internet through which additional
information about Land O' Lakes, Inc. is available. Our website address is
www.landolakesinc.com. Our annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, press releases and earnings releases are
available, free of charge, on our website when they are released publicly or
filed with the SEC.

*Although Land O'Lakes, Inc. is not currently required to file this
Quarterly Report on Form 10-Q pursuant to Section 13 or 15(d), we are filing
voluntarily.

INDEX

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

LAND O'LAKES, INC.

CONSOLIDATED BALANCE SHEETS

See accompanying notes to consolidated financial statements.

3

LAND O'LAKES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes to consolidated financial statements.

4

LAND O'LAKES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes to consolidated financial statements.

5

LAND O'LAKES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ IN THOUSANDS IN TABLES)
(UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The unaudited consolidated financial statements reflect, in the opinion
of the management of Land O'Lakes, Inc. (the "Company"), all normal, recurring
adjustments necessary for a fair statement of the financial position and results
of operations and cash flows for the interim periods. The statements are
condensed and therefore do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of
America for complete financial statements. For further information, refer to the
audited consolidated financial statements and footnotes for the year ended
December 31, 2002 included in our Annual Report on Form 10-K. The results of
operations and cash flows for interim periods are not necessarily indicative of
results for a full year.

RECENT ACCOUNTING PRONOUNCEMENTS

On January 1, 2003, the Company adopted Statement of Financial
Accounting Standards 146, "Accounting for Costs Associated with Exit or Disposal
Activities." The standard requires that a liability for a cost associated with
an exit or disposal activity be recognized and measured initially at fair value
when the liability is incurred. Under prior accounting literature, certain costs
for exit activities were recognized at the date a company committed to an exit
plan. The provisions of the standard are effective for exit or disposal
activities initiated after December 31, 2002.

On January 17, 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities, an Interpretation of ARB 51," (FIN
46). The primary objectives of FIN 46 are to provide guidance on the
identification and consolidation of variable interest entities, or VIEs, which
are entities for which control is achieved through means other than through
voting rights. FIN 46 is effective immediately for all new variable interest
entities created or acquired after January 31, 2003 and no later than July 1,
2003 for variable interest entities created or acquired prior to February 1,
2003. Accordingly, the Company adopted FIN 46 on July 1, 2003 and expects to
begin consolidating its joint venture in MoArk, LLC, an egg production and
marketing company, in the third quarter of 2003. The adoption of FIN 46 did not
have a material impact on the Company's results of operations and financial
condition.

In May, 2003, The FASB issued Statement of Financial Accounting
Standards 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" The standard establishes
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. It requires
that an issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). The standard is effective for the
Company January 1, 2004, and the Company does not currently expect this standard
to have a material impact on its results of operations or financial position.
The Company already classifies its Capital Securities as long-term debt and the
related financing costs as interest expense.

2. RESTRICTED CASH

On March 28, 2003, Cheese & Protein International ("CPI"), a consolidated
joint venture, amended its lease for property and equipment relating to its
cheese manufacturing and whey processing plant in Tulare, California. The
amendment postponed the measurement of the fixed charge coverage ratio
requirement until March 2005. The amendment requires Land O'Lakes to maintain a
$20 million cash account (which may be replaced by a letter of credit at the
Company's option) to support the lease. The cash account or letter of credit
would only be drawn upon in the event of a CPI default, and would reduce amounts
otherwise due under the lease. The requirement would be lifted pending the
achievement of certain financial targets by CPI.

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3. RECEIVABLES

A summary of receivables is as follows:

A substantial portion of Land O'Lakes receivables is concentrated in the
agricultural industry. Collections of these receivables may be dependent upon
economic returns from farm crop and livestock production. The Company's credit
risks are continually reviewed, and management believes that adequate provisions
have been made for doubtful accounts.

4. RECEIVABLES PURCHASE FACILITY

In December 2001, the Company established a $100.0 million receivables
purchase facility with CoBank, ACB ("CoBank"). A wholly-owned, unconsolidated
qualifying special purpose entity ("QSPE") was established to purchase certain
receivables from the Company. CoBank has been granted an interest in the pool of
receivables owned by the QSPE. The transfers of the receivables from the Company
to the QSPE are structured as sales and, accordingly, the receivables
transferred to the QSPE are not reflected in the consolidated balance sheet.
However, the Company retains credit risk related to the repayment of the notes
receivable with the QSPE, which, in turn, is dependent upon the credit risk of
the QSPE's receivables pool. Accordingly, the Company has retained reserves for
estimated losses. The Company expects no significant gains or losses from the
facility. At June 30, 2003, $80.0 million was outstanding under this facility.
The total accounts receivable sold during the three months ended June 30, 2003
and 2002 were $571.9 million and $610.7 million, respectively. The total
accounts receivable sold during the six months ended June 30, 2003 and 2002 were
$1,244.7 million and $1,264.8 million, respectively.

5. INVENTORIES

A summary of inventories is as follows:

6. INVESTMENTS

A summary of investments is as follows:

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7. GOODWILL AND OTHER INTANGIBLE ASSETS

GOODWILL

The carrying amount of goodwill is as follows:

Goodwill decreases in Dairy Foods, Feed, Swine, Agronomy and Other were due
to amortization on joint ventures and cooperatives. The goodwill decrease of
$3.5 million in the Seed segment was related to amortization and
reclassifications.

OTHER INTANGIBLE ASSETS

Amortization expense for the three months ended June 30, 2003 and 2002 was
$1.2 million and $1.2 million, respectively. Amortization expense for the six
months ended June 30, 2003 and 2002 was $2.3 million and $2.5 million,
respectively. The estimated amortization expense related to other intangible
assets subject to amortization for the next five years will approximate $3.0
million annually. The weighted-average life of the intangible assets subject to
amortization is approximately 12 years.

8. RESTRUCTURING AND IMPAIRMENT CHARGES

RESTRUCTURING CHARGES

For the three months ended June 30, 2003, the Company recorded restructuring
charges of $1.5 million. Of this amount, Dairy Foods recorded a restructuring
charge of $0.6 million which represented severance costs as a result of the
planned closing of a facility in the Upper Midwest. Feed recorded a
restructuring charge of $0.6 million which represented severance costs related
to closing feed plants, and Seed recorded a restructuring charge of $0.3 million
for severance costs related to closing a facility.

For the six months ended June 30, 2003, the Company recorded restructuring
charges of $2.5 million. Of this amount, Dairy Foods recorded a restructuring
charge of $1.0 million which represented severance costs for 44 employees as a
result of closing a facility in the Upper Midwest and recorded $0.6 million for
the planned closure of another facility. Feed recorded a restructuring charge of
$0.6 million which represented severance costs related to closing feed plants,
and Seed recorded a restructuring charge of $0.3 million for severance costs
related to closing a facility.

For the three months ended June 30, 2002, the Company recorded restructuring
charges of $1.7 million. Of this amount, Dairy Foods recorded a restructuring
charge of $1.6 million which represented severance and outplacement

8

costs for 82 employees for the Faribault, MN plant closure. Feed recorded a
restructuring charge of $0.1 million which represented severance costs related
to closing feed plants.

For the six months ended June 30, 2002, the Company recorded restructuring
charges of $4.4 million. Of this amount, Feed recorded a restructuring charge of
$2.8 million which represented severance and outplacement costs for 136
employees at the Ft. Dodge, IA office facility and other feed plant facilities
and Dairy Foods recorded a restructuring charge of $1.6 million which
represented severance and outplacement costs for 82 employees for the Faribault,
MN plant closure.

A summary of restructuring activities and resulting reserve for the six
months ended June 30, 2003 is as follows:

IMPAIRMENT CHARGES

For the three months ended June 30, 2003 the Company recorded impairment
charges of $0.3 million in the Seed segment for the impairment of certain
assets. For the six months ended June 30, 2003 the Company recorded impairment
charges of $0.3 million in the Seed segment and $0.1 million in the Feed segment
for write downs of certain plant assets to their estimated fair value.

For the three months ended June 30, 2002 the Company recorded an impairment
charge of $2.2 million which was made up of a $1.3 million write-down of the
Faribault, MN plant and $0.9 million represented a write-down of certain feed
plant assets to their estimated fair value. For the six months ended June 30,
2002 the Company recorded an impairment charge of $2.9 million which was made up
of a $1.3 million write-down of the Faribault, MN plant and $1.6 million
represented a write-down of certain feed plant assets to their estimated fair
value.

9. GAIN ON LEGAL SETTLEMENTS

During the six months ended June 30, 2003 and 2002, the Company recognized
gains on legal settlements of $19.2 million and $32.7 million, respectively, of
which $10.3 million was recognized in the three months ended June 30, 2003, and
$32.7 million was recognized in the three months ended June 30, 2002. The gains
represent cash received from product suppliers against whom the Company alleged
certain price-fixing claims.

10. GAIN ON SALE OF INTANGIBLES

In the six months ended June 30, 2003, the Company recorded a $0.6 million
gain on the sale of a customer list relating to the divestiture of a joint
venture in Taiwan. In the six months ended June 30, 2002, the Company recorded a
$4.2 million gain on the sale of a customer list pertaining to the feed
phosphate distribution business.

11. LOSS (GAIN) ON DIVESTITURE OF BUSINESSES

For the six months ended June 30, 2003, the Company recorded a loss of $0.7
million on the divestiture of a Feed business in Taiwan. For the six months
ended June 30, 2002, the Company recorded a gain of $1.2 million primarily on
the divestiture of a Dairy Foods Poland business.

12. GAIN ON SALE OF INVESTMENT

For the three and six months ended June 30, 2003, the Company recorded gains
of $0.3 million and $0.8 million, respectively, on the sale of a Feed investment
in a swine joint venture.

9

13. DEBT OBLIGATIONS

In the six months ended June 30, 2003, the Company made payments on Term A
loan of $45.1 million and Term B loan of $26.5 million, of which $50.0 million
was a voluntary prepayment. The weighted average interest rates on short-term
borrowings and notes outstanding at June 30, 2003 and December 31, 2002 were
3.44% and 3.51%, respectively.

14. SEGMENT INFORMATION

The Company operates in five segments: Dairy Foods, Animal Feed, Crop Seed,
Swine and Agronomy.

The Dairy Foods segment produces, markets and sells products such as butter,
spreads, cheese, and other dairy related products. Products are sold under
well-recognized national brand names including LAND O LAKES, the Indian Maiden
logo and Alpine Lace, as well as under regional brand names such as New Yorker.

The Animal Feed segment is made up of a 92% ownership position in Land
O'Lakes Farmland Feed LLC ("Land O'Lakes Farmland Feed"). Land O'Lakes Farmland
Feed develops, produces, markets and distributes animal feeds such as ingredient
feed, formula feed, milk replacers, vitamins and additives.

The Crop Seed segment is a supplier and distributor of crop seed products in
the United States. A variety of crop seed is sold, including alfalfa, soybeans,
corn, forage and turf grasses.

The Swine segment has three programs: farrow-to-finish, swine aligned and
cost-plus. The farrow-to-finish program produces and sells market hogs. The
swine aligned program raises feeder pigs which are sold to local member
cooperatives. The cost-plus program provides minimum hog price guarantees to
producers in exchange for swine feed sales and profit participation.

The Agronomy segment consists primarily of the Company's 50% ownership in
Agriliance LLC ("Agriliance"), which is accounted for under the equity method.
Agriliance markets and sells two primary product lines: crop protection
(including herbicides and pesticides) and crop nutrients (including fertilizers
and micronutrients).

The Company allocates corporate administration expense to all of its
business segments, both directly and indirectly. Corporate staff functions that
are able to determine actual services provided to each segment allocate expense
on a direct and predetermined basis. All other corporate staff functions
allocate expense indirectly based on each segment's percent of total invested
capital. A majority of corporate administration expense is allocated directly.

10

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15. CONSOLIDATING FINANCIAL INFORMATION

The Company has entered into financing arrangements which are guaranteed by
the Company and certain of its wholly-owned and majority-owned subsidiaries and
limited liability companies (the "Guarantor Subsidiaries"). Such guarantees are
full, unconditional and joint and several.

The following supplemental financial information sets forth, on an
unconsolidated basis, balance sheet, statement of operations and cash flow
information for the Company, Guarantor Subsidiaries and the Company's other
subsidiaries (the "Non-Guarantor Subsidiaries"). The supplemental financial
information reflects the investments of the Company in the Guarantor and
Non-Guarantor Subsidiaries using the equity method of accounting.

12

LAND O'LAKES, INC.

SUPPLEMENTAL CONSOLIDATING BALANCE SHEET
JUNE 30, 2003

13

LAND O'LAKES, INC.

SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2003

14

LAND O'LAKES, INC.

SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2003

15

LAND O'LAKES, INC.

SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2003

16

LAND O'LAKES, INC.

SUPPLEMENTAL CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2002

17

LAND O'LAKES, INC.

SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2002

18

LAND O'LAKES, INC.

SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2002

19

LAND O'LAKES, INC.

SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002

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LAND O'LAKES FARMLAND FEED LLC

CONSOLIDATED BALANCE SHEETS

See accompanying notes to consolidated financial statements.

21

LAND O'LAKES FARMLAND FEED LLC

CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes to consolidated financial statements.

22

LAND O'LAKES FARMLAND FEED LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes to consolidated financial statements.

23

LAND O'LAKES FARMLAND FEED LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ IN THOUSANDS IN TABLES)
(UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The unaudited consolidated financial statements reflect, in the opinion of
the management of Land O'Lakes Farmland Feed LLC (the "Company"), all normal
recurring adjustments necessary for a fair statement of the financial position
and results of operations and cash flows for the interim periods. The statements
are condensed, therefore do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of
America for complete financial statements. For further information, refer to the
audited consolidated financial statements and footnotes for the year ended
December 31, 2002 included in our Annual Report on Form 10-K. The results of
operations and cash flows for interim periods are not necessarily indicative of
results for a full year.

RECENT ACCOUNTING PRONOUNCEMENTS

On January 1, 2003, the Company adopted Statement of Financial Accounting
Standards 146, "Accounting for Costs Associated with Exit or Disposal
Activities." The standard requires that a liability for a cost associated with
an exit or disposal activity be recognized and measured initially at fair value
when the liability is incurred. Under prior accounting literature, certain costs
for exit activities were recognized at the date a company committed to an exit
plan. The provisions of the standard are effective for exit or disposal
activities initiated after December 31, 2002.

2. RECEIVABLES

A summary of receivables is as follows:

3. RECEIVABLES PURCHASE FACILITY

In December 2001, the Company along with Land O'Lakes, Inc. ("Land O'Lakes")
established a $100.0 million receivables purchase facility with CoBank, ACB
("CoBank"). A wholly-owned unconsolidated qualifying special purpose entity,
Land O'Lakes Farmland Feed SPV, LLC, ("QSPE"), was established to purchase
certain receivables from the Company along with Land O'Lakes. CoBank has been
granted an interest in the receivables owned by the QSPE. The transfers of the
receivables from the Company to the QSPE are structured as sales and,
accordingly, the receivables transferred to the QSPE are not reflected in the
Company's consolidated balance sheet. However, the Company retains the credit
risk related to the repayment of the notes receivable with the QSPE, which in
turn is dependent upon the credit risk of the QSPE's receivables. Accordingly,
the Company has retained reserves for estimated losses. The Company expects no
significant gains or losses from the sale of the receivables. At June 30, 2003,
$80.0 million was outstanding under this facility. The total accounts receivable
sold during the three months ended June 30, 2003 and 2002 were $519.0 million
and $545.5 million, respectively. The total accounts receivable sold during the
six months ended June 30, 2003 and 2002 were $1,071.1 million and $1,125.2
million, respectively.

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4. INVENTORIES

A summary of inventories is as follows:

5. INVESTMENTS

The Company's investments are as follows:

6. GOODWILL AND OTHER INTANGIBLE ASSETS

GOODWILL

The change in the carrying amount of goodwill for the six months ended June 30,
2003, is as follows.

Balance as of January 1, 2003 .................................. $ 122,486
Amortization expense ......................................... (232)
---------
Balance as of June 30, 2003 .................................... $ 122,254
=========

OTHER INTANGIBLE ASSETS

Amortization expense for the three months ended June 30, 2003 and 2002 was
$0.7 million and $1.2 million, respectively. Amortization expense for the six
months ended June 30, 2003 and 2002 was $1.3 million and $1.8 million,
respectively. The estimated amortization expense related to other intangible
assets subject to amortization for the next five years will approximate $2.2
million annually. The weighted-average life of the intangible assets subject to
amortization is approximately 13 years.

25

7. RESTRUCTURING AND IMPAIRMENT CHARGES

RESTRUCTURING CHARGES

For the three and six months ended June 30, 2003, the Company recorded a
restructuring charge of $0.6 million which represented severance costs related
to closing feed plants.

For the six months ended June 30, 2002, the Company recorded restructuring
charges of $2.8 million representing severance and outplacement costs for 136
employees at the Ft. Dodge office and other plant facilities.

A summary of the restructuring reserve for the six months ended June 30,
2003 is as follows:

IMPAIRMENT CHARGES

For the six months ended June 30, 2003, the Company recorded impairment
charges of $0.1 million for write downs of certain plant assets to their
estimated fair value. For the three and six months ended June 30, 2002, the
Company recorded impairment charges of $1.0 million and $1.7 million,
respectively, for write downs of certain plant assets to their estimated fair
value.

8. GAIN ON LEGAL SETTLEMENTS

During the six months ended June 30, 2003, the Company recognized a gain on
legal settlements of $3.0 million, of which $2.1 was recognized in the three
months ended June 30, 2003. The gain represents cash received from product
suppliers against whom the Company alleged certain price-fixing claims.

9. GAIN ON SALE OF INTANGIBLE

In the six months ended June 30, 2002, the Company recorded a $4.2 million
gain on the sale of a customer list pertaining to the feed phosphate
distribution business.

10. GAIN ON SALE OF INVESTMENT

For the three and six months ended June 30, 2003, the Company recorded gains
of $0.3 million and $0.8 million, respectively, on the sale of a Feed investment
in a swine joint venture.

11. COMMITMENTS AND CONTINGENCIES

GUARANTEES OF PARENT DEBT

In November 2001, Land O'Lakes, which owns 92% of the Company, issued $350
million of senior notes, due 2011. These notes are guaranteed by certain
domestic, wholly-owned subsidiaries of Land O'Lakes, including the Company, and
by each domestic wholly-owned subsidiary of the Company.

This guarantee is a general unsecured obligation, ranks equally in right of
payment with all existing and future senior indebtedness of Land O'Lakes, is
senior in right of payment to all existing and future subordinated obligations
of Land O'Lakes, and is effectively subordinated to any secured indebtedness of
Land O'Lakes and its subsidiaries, including the Company, to the extent of the
value of the assets securing such indebtedness. The maximum potential amount of
future payments that the Company would be required to make is $350 million as of
June 30, 2003. Currently, the Company does not record a liability regarding the
guarantee. The Company has no recourse provision that would enable it to recover
amounts paid under the guarantee from Land O'Lakes or any other parties.

26

The notes are not guaranteed by certain majority-owned subsidiaries of the
Company (the "Non-Guarantors"). Summarized financial information of the
Non-Guarantors, which is consolidated in the financial statements of the
Company, as of and for the periods indicated, are as follows:

In November 2001, Land O'Lakes entered into new term facilities consisting
of a $325 million five-year Term Loan A facility and a $250 million seven-year
Term Loan B facility. These facilities are unconditionally guaranteed by certain
domestic, wholly-owned subsidiaries of Land O'Lakes, including the Company, and
by each domestic wholly-owned subsidiary of the Compan