-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, GBAoHWyYFleGJj85bm4D6xsH6TOOIR4sLxC7I/1hwgF46gtoRYaNF6H4PadwjeYw v+febC8wZA8prNNG78UVcA== 0000034616-94-000020.txt : 19941130 0000034616-94-000020.hdr.sgml : 19941130 ACCESSION NUMBER: 0000034616-94-000020 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19940831 FILED AS OF DATE: 19941129 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FARMLAND INDUSTRIES INC CENTRAL INDEX KEY: 0000034616 STANDARD INDUSTRIAL CLASSIFICATION: 2011 IRS NUMBER: 440209330 STATE OF INCORPORATION: KS FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 002-07250 FILM NUMBER: 94562473 BUSINESS ADDRESS: STREET 1: 3315 N OAK TRAFFICWAY CITY: KANSAS CITY STATE: MO ZIP: 64116 BUSINESS PHONE: 8164596000 FORMER COMPANY: FORMER CONFORMED NAME: CONSUMERS COOPERATIVE ASSOCIATION DATE OF NAME CHANGE: 19681201 10-K 1 10-K FOR FISCAL YEAR END 8/31/94 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended AUGUST 31, 1994 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 2-60372 FARMLAND INDUSTRIES, INC. (Exact Name of Registrant as Specified in Its Charter) KANSAS 44-0209330 (State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.) 3315 N. OAK TRAFFICWAY, KANSAS CITY, MISSOURI 64116-0005 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code: 816-459-6000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None 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 ( X ) No ( ) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( ) Farmland Industries, Inc. is a cooperative. Its voting stock can only be held by its members. No public market for voting stock of Farmland Industries, Inc. is established and it is unlikely, in the foreseeable future, that a public market for such voting stock will develop. Documents incorporated by reference: None PART 1 ITEMS 1 AND 2. BUSINESS AND PROPERTIES THE COMPANY Farmland Industries, Inc. ("Farmland") is a regional farm supply and marketing cooperative. Farmland is owned by its members and only its members are eligible to vote for directors or for the management or affairs of Farmland. Members are entitled to receive patronage refunds distributed by Farmland from its member-sourced annual net income. See "Business and Properties -Patronage Refunds and Distribution of Net Income." Farmland was incorporated in Kansas in 1931. Its principal executive offices are at 3315 North Oak Trafficway, Kansas City, Missouri 64116 (telephone 816-459-6000). Unless otherwise noted, references to years are to fiscal years ended August 31. MEMBERSHIP Farmland's membership includes voting members and associate members. At August 31, 1994, Farmland's membership consisted of 1,480 cooperative associations of farmers and ranchers and 1,365 pork or beef producers or associations of such producers. See "Patronage Refunds and Distribution of Net Income." VOTING MEMBERS Membership requirements are determined by the Farmland Board of Directors. The current policy requirements are: 1) Membership is limited to: (a) farmers' and ranchers' cooperative associations which have purchased farm supplies from or provided grain to Farmland during Farmland's two most recently completed years, and (b) producers of hogs and cattle or associations of such producers which have provided hogs or cattle to Farmland during Farmland's two most recent years. 2) Members must maintain a minimum investment of $1,000 in par value of Farmland's common stock. 3) Cooperatives must limit voting to agricultural producers and conduct a majority of their business with voting producers. ASSOCIATE MEMBERS Associate membership requirements in Farmland are as follows: 1) Any person meeting the requirements for membership can be an associate member. 2) Associate members must maintain a minimum investment of $1,000 in par value of Farmland's associate member common stock. 3) Associations other than those owned 100% by members, associate members or Farmland must conduct business on a cooperative basis. 4) Hog and/or cattle feeding businesses must derive a majority of earned income from such feeding business and agree to provide the information Farmland needs to pay patronage refunds from its hog and/or cattle marketing operations to members or other associate members that are eligible to receive such refunds. Associate members have all the rights of membership except that they do not have the right to vote at a meeting of the shareholders. In the event the Board of Directors of Farmland shall determine that any holder of the common stock or associate member common stock of Farmland does not meet the qualifications as may be established by the Board of Directors for holders thereof, such person shall have no rights or privileges on account of such common stock to vote for director(s) or to vote on the management or affairs of Farmland, and Farmland shall have the right, at its option, (a) to purchase such common stock at its book or par value, whichever is less, as determined by the Board of Directors of Farmland, or (b) in exchange for such common stock or associate member common stock to issue or record on the books of Farmland capital credits in an equivalent amount. On the failure of any holder, following any demand by Farmland therefor, to deliver the certificate or certificates evidencing any common stock or associate member common stock, Farmland may cancel the same on its books and issue or record on the books of Farmland an equivalent amount of capital credits in lieu thereof. BUSINESS GENERAL Farmland and subsidiaries (the "Company") conducts business primarily in two operating areas. On the input side of the agricultural industry, the Company operates as a farm supply cooperative. On the output side of the agricultural industry, the Company operates as a processing and marketing cooperative. Cooperative farm supply operations consists of three product divisions--petroleum, crop production and feed. Products of the petroleum division are principally refined fuels, propane, by-products of petroleum refining and a complete line of car, truck and tractor tires, batteries and accessories. Principal products of the crop production division are nitrogen, phosphate and potash fertilizers and a complete line of insecticides, herbicides and mixed chemicals. Feed division products include swine, dairy, pet, beef, poultry, mineral and specialty feeds, feed ingredients and supplements, animal health products and livestock services. Geographically, the Company's markets are mid-western states which comprise the corn belt and the wheat belt. The Company distributes products at wholesale. Approximately 65% of the Company's farm supply sales in 1994 were to local farm cooperative associations which are members and owners of Farmland. These cooperatives distribute products primarily to farmers and ranchers who utilize the products in the production of farm crops and livestock. Cooperative marketing operations include the storage and marketing of grain, processing pork and beef, and marketing fresh pork, processed pork, fresh beef and boxed beef. In 1994, approximately 61% of the hogs processed and 46% of the grain marketed were supplied to the Company by members. Cattle are purchased from producers in the proximity of the beef plants at Liberal and Dodge City, Kansas. A substantial portion of the Company's farm supply, pork and beef products, is produced in facilities owned by the Company or operated by the Company under long-term lease arrangements. No material part of the business of any segment of the Company is dependent on a single customer or a few customers. Information regarding the Company's property and its business is presented below. Financial information about the Company's industry segments is presented in note 12 of the notes to consolidated financial statements. The Company competes for market share with numerous participants with various levels of vertical integration, product and geographical diversification, sizes and types of operations. In the petroleum industry, competitors include major oil companies, independent refiners, other cooperatives and product brokers. Competitors in the crop production industry include global producers of nitrogen and phosphate fertilizers (some of which are cooperatives) and product importers and brokers. The feed, pork and beef industries are comprised of an infinite variety of competitive participants. Approximately 57% of the Company's supply product sales are manufactured by the Company. See "Cooperative Farm Supply Business--Petroleum, Crop Production and Feed" for information regarding the Company's manufacturing properties by business segment. COOPERATIVE FARM SUPPLY BUSINESS PETROLEUM MARKETING The principal product of this business segment is refined fuels. Approximately 68% of refined product sales in 1994 resulted from transactions with Farmland's members. The balance of the Company's refined product sales were principally through retailing chains in urban areas. Based on total volume of refined fuels withdrawn at terminal storage facilities along pipelines which serve most of the Company's trade territory, the Company estimates its market share in rural markets is approximately 8%. Other petroleum products include lube oil, grease, by-products of petroleum refining, and a complete line of car, truck and tractor tires, batteries and accessories. Sales of petroleum products as a percent of the Company's consolidated sales for 1994, 1993 and 1992 were 13%, 19% and 29%, respectively. Competitive methods in the petroleum industry include service, product quality and pricing. However, in refined fuel markets, price competition is most dominant. Many participants in the industry engage in one or more of the industry's processes (oil production and transportation, refining, wholesale distribution and retailing). The Company participates in the industry primarily as a midcontinent refiner and as a wholesale distributor of petroleum products. PRODUCTION The Company owns a refinery at Coffeyville, Kansas and at Phillipsburg, Kansas. Prior to June 30, 1992 the Company owned approximately 30% of the National Cooperative Refinery Association ("NCRA"). NCRA operates a refinery at McPherson, Kansas with a daily production capacity of 70,000 barrels. As a 30% owner, Farmland was required to purchase 30% of the production of this refinery. On June 30, 1992, the Company sold its ownership interest in NCRA. The Company owns a refinery at Phillipsburg, Kansas which is closed. A loading terminal located at the refinery remains in operation. The carrying value of this refinery at August 31, 1994 was approximately $2,400,000. The Company is evaluating alternative uses for this facility and cannot at this time determine the extent of any losses related to the closure of the refinery, but such losses are expected not to be significant. During the four months of 1992 in which it operated, sales associated with products of the Phillipsburg refinery amounted to approximately $20,900,000 and the total barrels processed by the refinery was 871,000. Refinery capacity at August 31, 1994 and production volume for 1994, 1993 and 1992 are as follows:
Average Daily Production Estimated Based on 365 Days per Year Daily Capacity (barrels) Location August 31, 1994 1994 1993 1992 Coffeyville 62,500 barrels 64,211 53,000 57,000 of crude oil (as certified by the Department of Energy) Phillipsburg 26,400 barrels N/A N/A N/A of crude oil
The Coffeyville refinery produced 25 million barrels of motor fuels and heating fuels in 1994, 20 million barrels in 1993, and 23 million barrels in 1992. Approximately 68% of petroleum product sales in 1994 represented products produced at this location. Management terminated negotiations with a potential purchaser of this refinery when final sale terms were determined not to be in the Company's best interest. See note 17 of the notes to consolidated financial statements. The Company acquired a mothballed refinery in Texas. The refinery is being reassembled at the Coffeyville refinery and when reassembly is complete in 1996, crude oil processing capacity is expected to increase. See "Business - Capital Expenditures." RAW MATERIALS Farmland's refinery at Coffeyville, Kansas is designed to process high quality crude oil with low sulfur content ("sweet crude"). Competition for sweet crude and declining production in proximity of the refinery has increased its cost of raw material relative to such cost for coastal refineries with the capacity for processing and access to lower quality crude grades. The Company's pipeline/trucking gathering system collects approximately 27% of its crude oil supplies from producers near its refineries. Additional supplies are acquired from diversified sources. Modifications to the Coffeyville refinery which increase its capability to efficiently process crude oil streams containing greater amounts of lower quality crude are continuing. Crude oil is purchased approximately 45 to 60 days in advance of the time the related refined products are marketed. Certain of these advance crude oil purchase transactions, as well as fixed price refined products advance sales contracts, are hedged utilizing petroleum futures contracts. During periods of volatile crude oil price changes or in extremely short crude supply conditions, the Company's petroleum operations could be affected to a greater extent than petroleum operations of more vertically integrated competitors with crude oil supplies available from owned producing reserves. In past periods of relatively severe crude oil shortages, various governmental regulations such as price controls and mandatory crude oil allocating programs have been implemented to spread the adversity among all industry participants. There can be no assurance as to what, if any, government action would be taken in the event a crude oil shortage developed. CROP PRODUCTION MARKETING The Company's crop production business segment includes nitrogen-, phosphate-, and potash-based fertilizer products and a complete line of crop protection products such as insecticides, herbicides and mixed chemicals. Sales of the crop production business segment as a percent of consolidated sales for 1994, 1993 and 1992 were 17%, 19% and 26%, respectively. Competition in the plant nutrient industry is dominated by price considerations. However, during the spring and fall plant nutrient application seasons, farming activities intensify and delivery service capacity is a significant competitive factor. Therefore, the Company maintains a significant capital investment in distribution assets and a seasonal investment in inventory to support its manufacturing operations. The Company has plant nutrient custom blending storage and distribution facilities at 15 locations throughout its trade territory. The Company's sales of crop production products are primarily at wholesale to local cooperative associations (the members, owners and customers of the Company). In view of this owner/customer relationship, management believes that, with respect to such customers, the Company has a slight competitive advantage. Domestic competition, mainly from other regional cooperatives, major petroleum companies with chemical divisions and integrated chemical companies, is very aggressive due to customers' sophisticated buying tendencies and production strategies that focus on costs and service. Also, foreign competition exists from producers of crop production products manufactured in countries with lower cost natural gas supplied (the principal raw material in nitrogen-based fertilizer products). In certain cases, foreign producers of fertilizer for export to the U.S. may be subsidized by their governments. The enactment of NAFTA has resulted in removing tariffs on most crop production products shipped to Canada and Mexico. In the opinion of management, this will increase marketing opportunities in these countries. PRODUCTION The Company manufacturers nitrogen-based crop production products. Based on total production capacity, the Company is one of the largest producers of anhydrous ammonia fertilizer in the U.S. The Company owns and produces nitrogen-based products at four anhydrous ammonia plants, four urea ammonium nitrate plants and two urea plants. Also, under long-term lease arrangements, the Company operates three anhydrous ammonia plants. The Company owns and produces phosphate-based products at one plant and has 50% ownership interest in two ventures which produce phosphate-based products. In addition, several custom dry blending and liquid fertilizer mixing facilities are operated on sites located throughout the Company's trade territory. Nitrogen fertilizer production information for 1994, 1993 and 1992 is as follows:
Estimated Annual Capacity Anhydrous Ammonia Actual Annual Production August 31, 1994 Anhydrous Ammonia Plant Location (based on 350 days per year)** 1994 1993 1992 (tons) (tons) Lawrence 450,000 443,000 375,000 450,000 Dodge City 259,000 257,000 241,000 254,000 Fort Dodge 242,500 256,000 232,000 240,000 Beatrice 278,300 277,000 243,000 250,000 Enid (2 plants)* 1,000,600 985,000 969,000 1,017,000 Pollock* 500,000 526,000 490,000 501,000 * Indicates leased plants ** The capacities in the table above represent current instant capacity which has increased due to efficiency and capacity improvements.
Synthetic anhydrous ammonia is the basic component of other commercially produced nitrogen fertilizer products and uses natural gas as the major raw material. Ammonia is used as the principal raw material in the production of value- added nitrogen products of urea, ammonium nitrate, urea ammonium nitrate solutions and other nitrogen products. Production of urea, ammonium nitrate, urea ammonium nitrate solutions and other nitrogen products from anhydrous ammonia, as a raw material, for 1994, 1993 and 1992 is as follows:
Actual Annual Production Location 1994 1993 1992 (tons) Lawrence 654,000 661,000 691,000 Enid 433,000 473,000 452,000 Dodge City 163,000 241,000 217,000 Beatrice 162,000 166,000 177,000
Ammonia is also used to react with phosphoric acid to produce phosphoric acid products such as liquid mixed fertilizer, diammonium phosphate and monoammonium phosphate. The Company owns a phosphate chemical plant located in Joplin, Missouri and land in Florida which contains an estimated 40 million tons of phosphate rock. The Joplin plant produces ammonium phosphate which is combined in varying ratios with muriate of potash to produce 12 different fertilizer grade products. In addition, feed grade phosphate (dicalcium phosphate) is produced at this facility. Production capacity and production at the Joplin plant for 1994, 1993 and 1992 are as follows:
Estimated Annual Capacity Actual Annual Production Location August 31, 1994 1994 1993 1992 (tons) Joplin 150,000 tons of 75,000 72,000 88,000 ammonium phosphate 160,000 tons of 157,000 141,000 129,000 feed grade phosphate
Prior to November 15, 1991, the Company owned and operated a phosphate chemical plant located in Green Bay, Florida. Effective November 15, 1991, the Company and Norsk Hydro a.s. formed Farmland Hydro, L.P. ("Hydro") to manufacture phosphate fertilizer products for distribution to international markets. Hydro operates a phosphate plant at Green Bay, Florida and owns phosphate rock reserves located in Hardee County, Florida which contain an estimated 40 million tons of phosphate rock. The Company provides management and administrative services and Norsk Hydro a.s. provides marketing services to Hydro. The joint venture's plant produces phosphoric acid products such as super acid, diammonium phosphate and monoammonium phosphate with annual phosphoric acid production capacity of 752,000 tons. The phosphate rock required to operate the joint venture's plant is presently purchased from outside suppliers and adequate supplies of sulfur are available from several producers. Plans for development of the phosphate reserves owned by the Company and Hydro have not been established in view of the availability of adequate supplies of phosphate rock from alternative sources. The Company and J.R. Simplot Company formed a joint venture in April 1992, SF Phosphates, Limited, to own and operate a phosphate mine located in Vernal, Utah, a phosphate chemical plant located in Rock Springs, Wyoming and a 96-mile pipeline connecting the mine to the plant. The plant produces monoammonium phosphate and super acid with annual production capacities of 275,000 and 145,000 tons, respectively. Under the venture agreement, The Company and Simplot purchase the production of SF Industries in proportion to their ownership. The Company, The National Gas Company of Trinidad and Tabago LTD., and Enron International C.V. have entered into an agreement to develop a new ammonia production facility in LaBrea, Trinidad, West Indies. Upon completion, the plant contemplated at this time is expected to have a production capacity of approximately 675,000 short tons of ammonia annually. The Company intends to operate the plant and to receive and market the production under agreements being negotiated at this time. The cost to complete this project has not been determined. RAW MATERIALS Natural gas, the largest single component of nitrogen fertilizer production, is purchased directly from natural gas producers. Natural gas purchase contracts are generally market sensitive and contract prices change as the market price for natural gas changes. The Company's management believes that the flexible pricing attributes of its gas supply contracts, without relinquishing rights to long-term supplies, are essential to its competitive position. In addition, the Company has a hedging program which utilizes natural gas futures and options to reduce risks of market price volatility. Natural gas is delivered to the Company's facilities under pipeline transportation delivery contracts which have been negotiated with each plant's delivering pipeline. Transportation delivery contracts, for the most part, are interruptible as defined by the Federal Energy Regulatory Commission. No significant nitrogen production has been lost, and none is anticipated, because of curtailments in transportation. FEED Products in the Company's feed line include swine, beef, poultry, dairy, pet, mineral and specialty feeds, feed ingredients and supplements, animal health products and livestock services. This business segment's sales were approximately 8%, 10% and 13% of consolidated sales for the years 1994, 1993 and 1992, respectively. Approximately 45% of the feed business segment's sales in 1994 was attributable to products manufactured in the Company's feed mills. The Company operates feed mixing plants at 19 locations throughout its territory, an animal protein and premix plant located in Eagle Grove, Iowa and a pet food plant in Muncie, Kansas. Feed production is as follows:
Estimated Annual Capacity Actual Annual Production Location August 31, 1994 1994 1993 1992 (tons) 22 feed mills (combined) 1,660,000 1,118,000 1,030,000 954,000
In addition, the Company's feed operations include placement of Company-owned feeder pigs with individuals who have contractual arrangements with the Company to feed pigs on a fee basis until weight gain is finished. During 1994, 1993 and 1992, approximately 250,100 pigs, 113,000 pigs and 46,300 pigs, respectively, were finished under this program. The majority of the finished pigs were sold to Farmland Foods, Inc. ("Foods") for processing. The Company owns a 45% interest in Alliance Farm Cooperative Association (formerly Yuma Feeder Pig Limited Liability Company) which operates farrowing facilities. The Company operates a facility for production of quality swine breeding stock. These animals are placed with farrowers under contractual arrangements. In addition, the Company purchases swine breeding stock for placement with such farrowers. The Company conducts research in genetic selection, breeding, animal health and nutrition at its research facility in Bonner Springs, Kansas. Through local cooperative associations of farmers and ranchers, the Company participates in livestock and hog services designed to produce lean, feed-efficient animals and help livestock producers select feed formulations which maximize weight gain. COOPERATIVE PROCESSING AND MARKETING BUSINESS AND PROPERTIES PORK PROCESSING AND MARKETING PRODUCTION The Company's pork processing and marketing operations are conducted through a 99%-owned subsidiary, Farmland Foods, Inc. ("Foods"). Foods operates eight food processing facilities. Meat processing facilities at Springfield, Massachusetts, Carey, Ohio, and New Riegel, Ohio produce Italian-style specialty meats and ham products. A facility at Wichita, Kansas processes pork into fresh sausage, and pork and beef into hot dogs, dry sausage and other luncheon meats. A facility at San Leandro, California was closed on September 1, 1993. A facility in Denison, Iowa and one in Crete, Nebraska function as pork abattoirs and have additional capabilities for processing pork into bacon, ham and smoked meats. An additional facility at Monmouth, Illinois was purchased on February 15, 1993. These facilities also process fresh pork into primal cuts for additional processing into fabricated meats which are sold to commercial users and to retail grocery chains, as well as case-ready and label-branded cuts for retail distribution. The eighth plant located in Carroll, Iowa is primarily a packaging facility for canned or cook-in-bag products. A previously closed pork processing plant at Iowa Falls, Iowa is currently held for sale. Plant capacities at August 31, 1994 and production for 1994, 1993 and 1992 are as follows:
Actual Weekly Production Estimated Weekly Capacity On a One-Shift Basis Location August 31, 1994 1994 1993 1992 (pounds) (pounds) Wichita 1,100,000 1,884,000 1,514,000 1,618,000 San Leandro** 300,000 -0- 243,000 269,000 Carroll 692,000 1,111,000* 1,204,000* 1,131,000* Springfield 400,000 622,000 666,000 560,000 Carey/Riegel 260,000 257,000 231,000 220,000 * All ham products were produced on 2 shifts during 1994, 1993 and 1992. ** Closed September 1, 1993
Actual Weekly Production Estimated Weekly Capacity On a One-Shift Basis Location August 31, 1994 1994 1993 1992 Denison 38,000 head slaughtered 40,000 37,000 39,000 Crete 42,000 head slaughtered 47,000 45,000 47,000 Monmouth 30,000 head slaughtered 28,000 25,000 -0-* *The Company did not own the Monmouth facility in 1992.
MARKETING The Company's pork marketing operations include meat processing, primarily pork, and marketing. Products marketed include fresh pork, fabricated pork, smoked meats, ham, bacon, fresh sausage, dry sausage, hot dogs, and packing house by-products. These products are marketed under Farmland, Maple River, Marco Polo, Carando, Regal, and other brand names. Product distribution is through national and regional retail food chains, food service accounts, distributors and international marketing activities. Pork marketing is a highly competitive industry with many suppliers of live hogs, fresh pork and processed pork products. Other meat products such as beef, poultry and fish also compete directly with pork products. Competitive methods in this segment include price, product quality, product differentiation and customer service. BEEF PROCESSING AND MARKETING PRODUCTION The Company's beef processing and marketing operations are conducted through two ventures. National Beef Packing Company, L.P., formed in April 1993, is located in Liberal, Kansas and is 58%-owned by Farmland. Hyplains Beef, L.C., formed in July 1992, is located in Dodge City, Kansas and is 50%-owned by Farmland. These facilities function as beef abattoirs and have capabilities for processing fresh beef into primal cuts for additional processing into fabricated or boxed beef. As of August 31, 1994, the two plants had an estimated daily capacity of 6,800 cattle and had operated during the year at 97% of capacity. MARKETING Products in the Company's beef processing and marketing operations include fresh beef, boxed beef and packing house by-products. Product distribution is through national and regional retail and food service customers under Farmland Black Angus Beef and other brand names. There is also a limited amount of international product distribution. Beef marketing is a highly competitive industry with many suppliers of live cattle, fresh beef and processed beef. Other meat products such as pork, poultry and fish also compete directly with beef products. Competitive methods in this industry include price, product quality and customer service. GRAIN MARKETING Effective June 30, 1992, the Company acquired substantially all the business and assets of Union Equity Co-Operative Exchange ("Union Equity") and conducts the grain marketing and storage operations, previously conducted by Union Equity, using the Union Equity name. The Company markets wheat, milo, corn, soybeans, barley and oats, with wheat constituting the majority of the marketing business. The Company purchases grain from members, associate members and nonmembers located in the midwestern part of the United States. Once the grain is purchased, the Company assumes all risks related to selling such grain. Since grain is a commodity, pricing of grain in the United States is principally conducted through bids based on the commodity futures markets. In 1994, approximately 37% of grain revenues have been from export sales. The five largest purchasers in terms of total revenues from grain operations were Mexico (6%), Jordan (5%), Egypt (4%), Israel (4%) and South Africa (2%). In 1993 and 1992, export sales or sales to domestic customers for export accounted for approximately 60% and 55%, respectively, of consolidated grain revenues. A majority of the grain export sales are under price subsidies or credit arrangements guaranteed by the United States Government, primarily through programs administered by the United States Department of Agriculture ("USDA"). Export-related sales are subject to international political upheavals and changes in other countries' trade policies which are not within the control of the United States or the Company. Foreign sales of grain are required to be paid in U.S. Dollars. TRADIGRAIN In December 1993, the Company acquired all the common stock of seven international grain trading companies (collectively referred to as "Tradigrain") formerly owned by B.P. Nutrition B.V. Tradigrain imports, exports and ships all major grains from the major producing countries to final consumers which are either governmental entities, private companies or other major grain companies. Tradigrain's purchases of grain are made on a cash basis against presentation of documents. Its sales of grain are mostly done against confirmed Letters of Credit at sight or on 180/360 days deferred basis. The volume of grain traded by Tradigrain varies from seven to ten million metric tons per year and represents total sales of between U.S. $800 million to U.S. $1.2 billion per year. PROPERTY The Company owns or leases thirty-one (31) inland elevators, and one (1) export elevator with a total licensed capacity of approximately 177,157,000 bushels of grain. The location, type, number and aggregate licensed capacity in bushels of the elevators at August 31, 1994 are as follows:
Aggregate Location Type Number Capacity Amarillo, Texas Inland 1 3,226,000 Black, Texas Inland 1 1,418,000 Commerce City, Colorado Inland 1 3,234,000 Darrouzett, Texas Inland 1 1,277,000 Enid, Oklahoma Inland 4 50,300,000 Fairfax, Kansas Inland 1 10,047,000 Galveston, Texas Export 1 3,253,000 Hutchinson, Kansas Inland 3 25,268,000 Idaho and Utah Inland 11 9,825,000 Lincoln, Nebraska Inland 1 5,099,000 Omaha, Nebraska Inland 1 4,266,000 Saginaw, Texas Inland 2 37,274,000 Stratford, Texas Inland 1 112,000 Topeka, Kansas Inland 1 12,055,000 Wichita, Kansas Inland 1 10,503,000
Storage of grain has declined because of changes in the U.S. Government's farm policies. As a result, several of the above elevators are substantially under-utilized. The Commerce City, Colorado elevator is leased to another operator. Seven of the above elevators are closed, including two at Enid, Oklahoma, two at Hutchinson, Kansas, one at Saginaw, Texas and the elevators at Stratford, Kansas and Wichita, Kansas. The aggregate licensed bushel capacity of the closed elevators is 61,446,000 bushels. PATRONAGE REFUNDS AND DISTRIBUTION OF NET INCOME For purposes of this section, annual income for 1994 means income before income taxes determined in accordance with federal income tax regulations. For 1995 and after, annual income means income before income taxes determined in accordance with generally accepted accounting principles. For this purpose, the term "member," means any member, associate member or any other person with which Farmland is a party to a currently effective patronage refund agreement. Farmland operates on a cooperative basis. In accordance with its bylaws, Farmland returns the member-sourced portion of its annual income to its members. Each member's portion of the annual patronage refund is determined by the quantity or value of business transacted by the member with Farmland and Farmland's income from such transactions. Such returns are referred to as patronage refunds. Generally, a portion of the patronage refund is returned in cash and for the balance of the patronage refund (the "invested portion") the members receive, Farmland common stock, associate member common stock or capital credits (the equity type received is determined by the membership status). The invested portion of the patronage refund is determined annually by Farmland's Board of Directors. The annual patronage refund is returned to members as soon as practical after the end of each fiscal year. The Internal Revenue Code allows a cooperative to deduct from its taxable income the total amount of the patronage refunds returned, provided that not less than 20% of the total patronage refund returned is cash. The Bylaws of Farmland provide that its Board of Directors has complete discretion with respect to the handling and ultimate disposition of any member-sourced losses. For the years ended 1994, 1993 and 1992, Farmland returned the following patronage refunds.
Cash Portion Invested Portion Total Patronage of Patronage Refunds of Patronage Refunds Refunds (Amounts in thousands) 1994 $ 26,552 $ 44,032 $ 70,584 1993 $ -0- $ -0- $ -0- 1992 $ 17,449 $ -0- $ 17,449
See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a discussion of the reasons for changes in the Company's income for 1994, 1993 and 1992. Income or loss from transactions with patrons not eligible to receive patronage refunds and extraneous income or loss (income from sources unrelated to the type of transactions conducted by the cooperative with its members) is subject to income taxes computed on the same basis as such tax is computed on the income or loss of other corporations. EQUITY REDEMPTION PLANS The Equity Redemption Plans described below (the "Plans") may be changed at any time or from time to time at the sole and absolute discretion of the Board of Directors. The Plans are also not binding upon the Board of Directors or the Company and the Board of Directors reserves the right to redeem, or to not redeem, any equities of the Company without regard to whether such action or inaction is in compliance with the Plans. Equity holders should therefore not rely to their detriment on the current terms of the Plans because they are subject to change without advance notice and may be deviated from in the sole and absolute discretion of the Board of Directors. The factors which may be considered by the Board of Directors in determining when, and under what circumstances, the Company may redeem equities include, but are not limited to, the terms of the Company's base capital plan, income and other tax considerations, the Company's results of operations, financial position, cash flow, capital requirements, long-term financial planning needs and other relevant considerations. By retaining discretion to determine the amount, timing and ordering of any equity redemptions, the Board believes that it can continue to assure that the best interests of the Company and thus of its members will be protected. BASE CAPITAL PLAN For the purposes of acquiring and maintaining adequate capital to finance the business of the Company, the Board of Directors has established a base capital plan ("Plan"). The Plan provides a mechanism for determining the Company's total capital requirements and each member's or patron's share thereof (the base capital requirement). As part of the Plan, the Board of Directors may, in its discretion, provide for redemption of Farmland common stock or associate member common stock held by members or associate members who have an investment in Farmland common stock or associate member common stock which exceeds the members' or associate members' base capital requirement. The Plan may provide a mechanism under which the cash portion of the patronage refund payable to members or patrons will depend upon the degree to which such members or associate members meet their base capital requirements. ESTATE SETTLEMENT PLAN The "Estate Settlement Plan" is subject to paragraph one above under the heading, "Equity Redemption Plans." The estate settlement plan provides that in the event of the death of an individual (a natural person) equity holder, the equity holdings of the deceased will be redeemed at par value with the exception of purchased equity holdings owned by the decreased for less than five years. This provision is subject to a limitation of $1.0 million in any one fiscal year without further authorization by the Board of Directors. SPECIAL REDEMPTION PLAN The "Special Redemption Plan" is subject to paragraph one above under the heading "Equity Redemption Plans." Provisions of the special redemption plan are as follows: 1. No special redemption will be made if the redemption of equities may result in a violation of the lending covenants; and 2. The targeted amount for special redemptions is based on consolidated net income (member and nonmember) and the ratio of funded indebtedness to capitalization before the special redemption but after giving effect to the distribution of cash and the redemption of equities under the base capital plan. The calculation for special redemption is as follows: Funded Indebtedness as Total Special Redemption as a Percent of as a Percent of Capitalization Consolidated Net Income > 50 % None 48 - 50 % 2.5 % 44 - 47 % 5.0 % 40 - 43 % 7.5 % < 40 % 10.0 % 3. The priority for redeeming equities under the Special Redemption Program will be as follows listed in order of first to be redeemed. a. Capital Credits (Series of Ten) which, on or before August 31, 1992, were issued to and which are currently held by, any dissolved cooperative for the benefit of its membership. One- third of the total outstanding amount of such Capital Credits, Series of Ten to be redeemed pro rata to such holders following each of the next three fiscal year-ends. b. Capital Credits (Series of Ten) outstanding ten years or longer -- paid in order of lowest numbered series first. c. Capital Credits held by individual livestock producers age 70 or older who have been held for five years or longer -- paid in descending order of age of the individual (oldest person first). Holders of equities in Farmland Foods, Inc. will have their equities redeemed on the same basis as holders of Farmland equity. Former Farmland Foods equity holders who accepted the exchange offer for Farmland Industries' equities in 1991 will be deemed to have met the five-year holding requirement for those equities involved in the exchange. d. Capital Credits (Series of Ten) outstanding five years or longer - - paid in order of lowest numbered series first. e. Capital Credits held by individual livestock producers age 65 or older that have been held for five years or longer -- paid in descending order of age of the individual (oldest person first). Holders of equities in Farmland Foods, Inc. will have their equities redeemed on the same basis as holders of Farmland equity. Former Farmland Foods equity holders who accepted the exchange offer for Farmland Industries' equities in 1991 will be deemed to have met the five-year holding requirement for those equities involved in the exchange. f. Any Capital Credits outstanding for twenty years or more -- paid in order of year issued, oldest first. Holders of equities in Farmland Foods, Inc. will have their equities redeemed on the same basis as holders of Farmland equity. Former Farmland Foods equity holders who accepted the exchange offer for Farmland Industries' equities in 1991 will be deemed to have met the five-year holding requirement for those equities involved in the exchange. Nonmember capital will participate on the same bassi as capital credits in the redemption. g. Capital Credits (Series of Ten) remaining balance -- paid in order of lowest numbered series first. h. Minority held equities in Farmland Foods, Inc. remaining balance - - paid in descending order of years outstanding, oldest first. i. Any Capital Credits outstanding for ten years or more -- paid in order of year issued, oldest first. Nonmember capital will participate on the same bassi as capital credits in the redemption. j. Any Common Stock or Associate Member Common Stock outstanding for twenty years or more -- in order of year issued, oldest first. k. Any Capital Credit outstanding for five years or more -- paid in order of year issued, oldest first. Nonmember capital will participate on the same bassi as capital credits in the redemption. l. Any Common Stock or Associate Member Common Stock outstanding for five years or more -- paid in order of year issued, oldest first. OTHER MATTERS RESEARCH The Company operates a research and development farm near Bonner Springs, Kansas where many aspects of animal nutrition are studied. The research is directed toward improving the nutrition and feeding practices of livestock and pets. Research related to commercialization of a wheat processing plant to produce wheat gluten as a replacement source for raw material used in certain consumer products has been completed and technology for an economically viable plant has been developed. Farmland has formed Heartland Wheat Growers, L.P., a joint venture with local cooperatives, and is currently building a wheat processing plant in Russell, Kansas that will process approximately 4.25 million bushels of wheat a year. See "Capital Expenditures." Expenditures related to Company-sponsored product and process improvements amounted to $2,702,000, $3,303,000 and $3,338,000 for the years ended 1994, 1993 and 1992, respectively. CAPITAL EXPENDITURES The Company plans capital expenditures of approximately $289.9 million during its two fiscal years ending August 31, 1995 and 1996. Capital expenditures of approximately $111.8 million are planned for the crop production business segment (excluding costs for construction of an anhydrous ammonia plant in Trinidad which is being evaluated at this time). A new urea ammonium nitrate ("UAN") facility is planned at the Fort Dodge, Iowa anhydrous ammonium plant. The new facility is expected to cost approximately $30.0 million of which $21.0 million are to be expended during this period. This facility will upgrade anhydrous ammonium to produce approximately 115,000 tons of UAN per year. A UAN plant at the Lawrence, Kansas facility is being expanded to increase production by approximately 128,000 tons per year. An estimated $2.5 million will be expended in fiscal 1995 to complete the project. Expenditures at the Dodge City, Kansas facility of approximately $6.0 million are expected to increase anhydrous ammonia and UAN production capacity by 52,500 tons and 10,500 tons, respectively. Capital expenditures of $66.4 million are planned for operating efficiency improvements, necessities and replacements, and $15.9 million is for environmental and safety issues, predominately at nitrogen fertilizer plants. Capital expenditures in the feed business segment are estimated to be $23.4 million. A feed mill in southeast New Mexico is being constructed at an approximate cost of $1.3 million. The remaining projected expenditures of $22.1 million are for feed mill and livestock production efficiencies, operating necessities and replacements. Capital expenditures in the petroleum business segment are expected to be $87.4 million and include approximately $32.9 million to increase daily crude oil processing capacity at the Coffeyville, Kansas refinery of which $27.9 million is to be expended during this period. The remaining projected expenditures of the petroleum business segment are as follows: $23.6 million for operating necessities; $20.7 million for increased operating efficiency; and, $10.2 million for environmental and safety issues. Capital expenditures of approximately $32.6 million are planned in the pork marketing business segment. A waste water expansion project at the Crete, Nebraska facility is expected to cost approximately $2.4 million. A 10,000 square foot loading dock and storage facility will be constructed at the Monmouth, Illinois plant for an estimated $1.5 million. The remaining expenditures are mostly for operational improvements and replacements. Capital expenditures of approximately $7.3 million planned for the grain business segment are mainly for expansion and replacements. Heartland Wheat Growers, L.P. (a partnership between the Company and local cooperatives) located in Russell, Kansas, was formed for the purpose of constructing and operating a wheat processing facility, to produce wheat gluten, wheat starch and derivative products and to market and distribute such products. The Company has a seventy-nine percent (79%) interest in the partnership. The Company's planned investment to finance construction of the wheat gluten plant amounts to approximately $25.5 million of which $21.5 million will be expended during the period. The Company intends to fund its capital program with cash from operations or from its primary sources of debt capital. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources." MATTERS INVOLVING THE ENVIRONMENT The Company's farm supply manufacturing and distribution operations, its food processing and marketing operations and its grain marketing operations continue to be affected to some extent by federal, state and local regulations regarding the environment. The Company recognizes liabilities related to remediation of contaminated properties when the related costs are probable and can be reasonably estimated. Estimates of these costs are based upon currently available facts, existing technology, undiscounted site specific costs, and currently enacted laws and regulations. In reporting environmental liabilities, no offset is made for potential recoveries. Such liabilities include estimates of the Company's share of costs attributable to potentially responsible parties ("PRPs") which are insolvent or otherwise unable to pay. All liabilities are monitored and adjusted regularly as new facts or changes in law or technology occur. The Company has been designated as a PRP under the Comprehensive Environmental Response, Compensation and Liability Act, at 17 sites. The Company's responsibilities at nine sites appear to be de minimis. The Company is aware of probable obligations for environmental matters at 30 other sites. At certain of these sites no claim or assessment has been made. In the opinion of management, the probable and reasonably determinable costs related to PRP and other sites are $7,164,000 and such amount has been accrued. The costs of resolving environmental matters are not quantifiable because many such matters are in preliminary stages and the timing, extent and costs of various actions which governmental authorities may require are unknown. It is possible that costs of such resolution may be greater than the liabilities which, in the opinion of management, are probable and reasonably determinable at August 31, 1994. In the opinion of management, it is reasonably possible for such costs to approximate $39,000,000 and to extend over 30 years. Under the Resource Conservation Recovery Act of 1976 ("RCRA"), the company has four closure and five post-closure plans in place for six locations. Closure and post-closure plans are also in place for three landfills and two injections wells as required by state regulations. Operations are being conducted at these locations and the Company does not plan to terminate such operations in the foreseeable future. Therefore, the Company has not accrued these environmental exit costs. The Company accrues these liabilities when plans for termination of plant operations have been made. Such closure and post- closure care costs are estimated to be $5.4 million at August 31, 1994. The Company has been notified by the Environmental Protection Agency ("EPA") of proposed civil penalties totaling approximately $1,715,000 for alleged violations of environmental regulations at the Coffeyville refinery. The Company is negotiating with the EPA concerning these matters and believes that such negotiations may result in compromise settlements. Absent such settlements, the Company may contest these matters. Accordingly, no provision has been made in the accompanying financial statements for these proposed penalties. Protection of the environment requires the Company to incur expenditures for equipment or processes, which may impact the Company's future net income. However, the Company does not anticipate that its competitive position will be adversely affected by such expenditures or by laws and regulations enacted to protect the environment. Environmental expenditures are capitalized when such costs provide future economic benefits. In 1994, the Company had capital expenditures of approximately $2,592,000 to prevent future discharges into the environment. The majority of such expenditures was for improvements at the Coffeyville refinery. Management believes the Company is currently in substantial compliance with existing environmental rules and regulations. GOVERNMENT REGULATION The Company's business is conducted within a legal environment created by numerous federal, state and local laws which have been enacted to protect the public's interest by promoting fair trade practices, safety, health and welfare. The Company's operating procedures conform to the intent of these laws and management believes that the Company is currently in compliance with all such laws, the violation of which could have a material effect on the Company. Certain policies may be implemented from time to time by the U.S. Department of Agriculture, the Department of Energy, or by other governmental agencies which may impact the demands of farmers and ranchers for the Company's products or which may impact the methods by which certain of the Company's operations are conducted. Such policies may impact the Company's farm supply and marketing operations. Management is not aware of any newly implemented or pending policies having a significant impact or which may have a significant impact on operations of the Company. EMPLOYEE RELATIONS At August 31, 1994, the Company had approximately 11,000 employees. Approximately 41% of the Company's employees were represented by unions having national affiliations. The Company's relationship with employees is considered to be generally satisfactory. No labor strikes or work stoppages within the last three fiscal years have had a materially adverse effect on the Company's operating results. Current labor contracts expire on various dates through March 1997. There are no wage re-openers in any of the collective bargaining agreements. RECENT ACCOUNTING PRONOUNCEMENTS See "Management's Discussion and Analysis of Financial Condition and Results of Operations." ITEM 3. LEGAL PROCEEDINGS In the opinion of Robert B. Terry, Vice President and General Counsel of Farmland, there is no litigation existing or pending against Farmland, or any of its subsidiaries, which if determined adversely, would have a material adverse effect on the financial position of the Company, and with respect to income tax matters as explained in note 7 of the notes to consolidated financial statements, he has no knowledge which would result in a different conclusion than the opinion of special tax counsel to the Company which is cited in note 7 of the notes to consolidated financial statements. The Company is involved in two environmental regulatory matters with the government involving potential monetary sanctions as follows: 1) The Company is a party to an administrative enforcement action brought by the U.S. Environmental Protection Agency ("EPA") which alleges violations of the Emergency Planning and Community Right-to-Know Act and the release reporting requirements of the Comprehensive Environmental Response, Compensation, and Liability Act, as amended, at its Coffeyville, Kansas refinery. This action involves alleged violations of release reporting requirements and seeks a civil fine in the amount of $350,000. 2) The Company is a party to an administrative enforcement action brought by the EPA which alleges violations of the Resource Conservation Recovery Act of 1976, as amended, at its Coffeyville, Kansas refinery. In this action, the government has proposed a civil penalty in the amount of $1,365,000. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders, through the solicitation of proxies or otherwise. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS There is no established public market for the common stock, associate member common stock and capital credits of Farmland. In view of the following, it is unlikely in the foreseeable future that a public market for these equities will develop: 1) the common stock, associate member common stock and capital credits are nondividend bearing; 2) the right of any holder of common stock, associate member common stock and capital credits to receive patronage refunds (including any cash patronage refunds) from Farmland is dependent on whether the holder is an eligible member or associate member of Farmland or is a party to a currently effective patronage refund agreement with Farmland. See "Business and Properties, the Company, 'Voting Members' and 'Associate Members'"; 3) the amount of patronage refunds (including any cash patronage refunds) a holder, eligible to receive patronage refunds, may receive is dependent on the net income of Farmland which is attributable to the quantity or value of business such holder transacts with Farmland and the amount by which a holder's investment in Farmland varies from such holder's base capital requirement. See "Patronage Refunds and Distribution of Net Income," and 4) Farmland intends to redeem its equities only in accordance with provisions of its equity redemption plans which provisions are determined by the Farmland Board of Directors at its sole discretion. See "Equity Redemption Plans." There are approximately 2,570 holders of common stock, 275 holders of associate member common stock, and 9,835 holders of capital credits based upon the number of recordholders. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data as of the end of, and for each of the years in the five-year period ended August 31, 1994 are derived from the consolidated financial statements of the Company, which consolidated financial statements have been audited by KPMG Peat Marwick LLP, independent certified public accountants. The consolidated financial statements as of August 31, 1994 and 1993 and for each of the years in the three-year period ended August 31, 1994, and the independent auditors' report thereon, are included elsewhere herein. The information set forth below should be read in conjunction with information included elsewhere herein: Management's Discussion and Analysis of Financial Condition and Results of Operations, the consolidated financial statements and related notes, and the independent auditors' report which contains an explanatory paragraph concerning income tax adjustments proposed by the Internal Revenue Service on the gain on sale of and certain distributions by Terra Resources, Inc.
Year Ended August 31 1994 1993 1992 1991 1990 (Dollars in Thousands) Summary of Operation: (3)(4)(5) Net Sales . . . . $6,677,933 $4,722,940 $3,429,307 $3,638,072 $3,377,603 Interest Expense (net of interest capitalized) . . $ 51,485 $ 36,764 $ 27,965 $ 36,951 $ 30,090 Income (Loss) Before Income Taxes and extraordinary item (1)(2) $ 78,766 $ (36,833)$ 70,504 $ 50,166 $ 58,184 Net income (Loss) (1)(2) $ 73,876 $ (30,400)$ 62,313 $ 42,693 $ 48,580 Distribution of Net Income: Patronage Refunds: Equity Reinvestments $ 44,032 $ 1,155 $ 1,038 $ 17,837 $ 24,403 Cash or Equivalent 26,580 495 17,918 12,571 8,800 Earned Surplus and Other Equities 3,264 (32,050) 43,357 12,285 15,377 . . . . . $ 73,876 $ (30,400)$ 62,313 $ 42,693 $ 48,580 Balance Sheets: Working Capital $ 290,704 $ 260,519 $ 208,629 $ 122,124 $ 121,518 Property, Plant and Equipment, Net $ 501,290 $ 504,378 $ 446,002 $ 490,712 $ 469,710 Total Assets . . $1,926,631 $1,719,981 $1,526,392 $1,369,231 $1,352,889 Long-Term Debt . $ 517,806 $ 485,861 $ 322,377 $ 291,192 $ 273,071 Capital Shares and Equities $ 585,013 $ 561,707 $ 588,129 $ 497,364 $ 476,011 See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for details.
(1) On July 28, 1983, Farmland sold the stock of Terra Resources, Inc. ("Terra"), a wholly-owned subsidiary engaged in oil and gas exploration and production operations, and exited its oil and gas exploration and production activities. The gain from the sale of Terra amounted to $237,200,000 for tax reporting purposes. During 1983, and prior to the sale of the Terra stock, Farmland received certain distributions from Terra totaling $24,800,000. For tax purposes, Farmland claimed intercorporate dividends-received deductions for the entire amount of such distributions. On March 24, 1993, the Internal Revenue Service ("IRS") issued a statutory notice to Farmland asserting deficiencies in federal income taxes (exclusive of statutory interest thereon) in the aggregate amount of $70,775,000. The asserted deficiencies relate primarily to the Company's tax treatment of the sale of the Terra stock and the distributions received from Terra prior to the sale. The IRS asserts that Farmland incorrectly treated the Terra sale gain as income against which certain patronage-sourced operating losses could be offset, and that, as a nonexempt cooperative, Farmland was not entitled to an intercorporate dividends-received deduction in respect of the 1983 distribution by Terra. It further asserts that Farmland incorrectly characterized gains for tax purposes aggregating approximately $14,600,000, and a loss of approximately $2,300,000, from the disposition of certain other assets. On June 11, 1993, Farmland filed a petition in the United States Tax Court contesting the asserted deficiencies in their entirety. Discovery and other pre-trial phases of the litigation have since been ongoing. The case is scheduled for trial on March 6, 1995. If the IRS ultimately prevails on all of the adjustments asserted in the statutory notice, Farmland would have additional federal and state income tax liabilities aggregating approximately $85,800,000 plus accumulating statutory interest thereon through October 31, 1994, of approximately $154,900,000 (before tax benefits of the interest deduction). In addition, such adjustments would affect the computation of Farmland's taxable income for its 1989 tax year and, as a result, could increase Farmland's federal and state income taxes for that year by approximately $5,000,000 plus applicable statutory interest thereon. No provision has been made in the consolidated financial statements for federal or state income taxes (or interest thereon) in respect of the IRS claims described above. Farmland believes that it has meritorious positions with respect to all of these claims and will continue to vigorously pursue their favorable resolution through the pending litigation. In the opinion of Bryan Cave, Farmland's special tax counsel, it is more likely than not that the courts will ultimately conclude that (i) Farmland's treatment of the Terra sale gain was substantially, if not entirely, correct; and (ii) Farmland properly claimed a dividends-received deduction in respect of the 1983 distributions which it received from Terra prior to the sale of the Terra stock. Counsel has further advised, however, that none of the issues involved in these disputes is free from doubt, and that there can be no assurance that the courts will ultimately rule in favor of Farmland on any of these issues. Should the IRS ultimately prevail on all of its asserted claims, all claimed federal and state income taxes as well as accrued interest would become immediately due and payable, and would be charged to current operations. In such case, the Company would be required to renegotiate agreements with its banks to maintain compliance with various requirements of such agreements, including working capital and funded indebtedness provisions. However, no assurance can be given that such renegotiation would be successful. Alternatives could include other financing arrangements or the possible sale of assets. (2) During the year ended August 31, 1991, the Company changed its method for inventory pricing of certain petroleum inventories from the first-in, first-out (FIFO) method previously used to the last-in, first-out (LIFO) method because the LIFO method better matches current costs with current revenues. Pro forma effects of retroactive application of the LIFO method are not determinable. (3) Effective June 30, 1992, the Company acquired the grain marketing assets of Union Equity. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and note 2 of the notes to consolidated financial statements. (4) During 1993, Farmland obtained a 58% interest in NBPC, a limited liability company. Effective April 15, 1993, NBPC acquired Idle Wild Food's beef packing plant and feed lot located in Liberal, Kansas. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and note 2 of the notes to consolidated financial statements. (5) On August 30, 1993, Farmland reduced its ownership interest in The Cooperative Finance Association, Inc. ("CFA") to 49%. In addition, CFA purchased the assets and operations of Farmland Financial Services Company. Effective December 1, 1993, CFA owners approved a recapitalization plan which limits the voting rights of any owner (including Farmland) to 20% or less regardless of the number of voting shares held. Accordingly, CFA is not a subsidiary of Farmland at August 31, 1993 and Farmland is no longer engaged in commercial lending operations. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES The Company maintains two primary sources for debt capital: a continuous public offering of its debt securities and bank lines of credit. The Company's debt securities are offered through a wholly-owned broker/dealer subsidiary on a best-efforts basis. The types of securities offered include certificates payable on demand and five-, ten- and twenty-year subordinated debt certificates. The total amount of such debt outstanding and the flow of funds to, or from, the Company as a result of this public offering is influenced by the rate of interest which Farmland establishes for each type of debt certificate offered and by options of Farmland to call for redemption certain of its outstanding debt certificates. During 1994, the outstanding balance of demand loan and subordinated debt certificates increased $17.6 million. In 1994, Farmland entered into a $650,000,000 syndicated credit facility provided by eight domestic and international banking institutions. This agreement provides short-term credit of up to $450,000,000 to finance seasonal operations and inventory, and revolving term credit of up to $200,000,000. In addition, this credit facility supports letters of credit issued by participating banks on behalf of Farmland. At August 31, 1994, short-term borrowings under this facility were $217,399,000, revolving term borrowings were $95,000,000 and $62,600,000 was being utilized to support letters of credit. Farmland pays commitment fees of 1/8 of 1% annually on the unused portion of the short-term commitment and 1/4 of 1% annually on the unused portion of the revolving term commitment. In addition, Farmland must maintain consolidated working capital of not less than $150,000,000, consolidated net worth of not less than $475,000,000 and funded indebtedness and senior funded indebtedness of not more than 52% and 43% of capitalization, respectively. All computations are based on consolidated financial data adjusted to exclude nonrecourse subsidiaries (as defined in the credit agreement). Computed in accordance with the agreement, at August 31, 1994, working capital was $207,383,000, net worth was $585,013,000 and funded indebtedness and senior funded indebtedness were 47.03% and 23.34% of capitalization, respectively. In addition to the syndicated credit facility, Farmland has credit facilities with various commercial banks. At August 31, 1994, Farmland's available credit from commercial banks under committed and uncommitted arrangements was $26.2 million and $37.2 million, respectively. Borrowings under these committed and uncommitted credit facilities were $26.2 million and $25.0 million, respectively, at August 31, 1994. In addition, $2.2 million was used to support letters of credit issued by such banks on Farmland's behalf. Financial covenants of these arrangements are not more restrictive than Farmland's syndicated credit facilities. In the opinion of management, these arrangements for debt capital are adequate for the Company's present operating and capital plans. However, alternative financing arrangements are continuously evaluated. NBPC, 58%-owned by Farmland, maintains borrowing agreements with a bank which provides financing support for its beef packing operations. Borrowings under this credit agreement are nonrecourse to Farmland or Farmland's other affiliates. At August 31, 1994, NBPC's available bank credit of $61,596,000 had been borrowed. All assets of NBPC (carried at $150,409,000) are pledged to support its borrowings. At August 31, 1994, Farmland had issued letters of credit in the amount of $15,000,000 to support NBPC's bank credit agreements. Tradigrain has borrowing agreements with various international banks which provide financing and letters of credit to support current international grain trading transactions. Obligations of Tradigrain under these loan agreements are nonrecourse to the Company. Leveraged leasing has been utilized to finance data processing equipment, railcars, and a substantial portion of nitrogen fertilizer production equipment. Under the most restrictive covenants of its leases, the Company has agreed to maintain working capital of at least $75 million, consolidated funded indebtedness not greater than 65% of consolidated capitalization, and consolidated senior funded indebtedness not greater than 50% of consolidated capitalization. As a cooperative, Farmland's annual net income or loss determined in accordance with income tax regulations in 1994 and in accordance with generally accepted accounting principles in 1995 and after is identified to transactions with members eligible to receive patronage refunds ("member-sourced income") or to transactions with parties not entitled to receive patronage refunds ("nonmember-sourced income"). The annual nonmember-sourced income or loss is adjusted for the amount of applicable income tax expense or benefit thereon and the amount remaining is transferred to retained earnings. The member-sourced income is distributed to members as patronage refunds unless the earned surplus account, after such distribution, would be lower than 30% of the sum of the prior year-end balance of outstanding common, associate member stock, capital credits, nonmember capital and patronage refunds for reinvestment. In such cases, member-sourced income shall be reduced by the lesser of 15% or an amount required to increase the earned surplus account to the required 30%. The amount by which the member-sourced income is so reduced is treated as nonmember-sourced income. The member-sourced income remaining is distributed to members as patronage refunds. For the years ended August 31, 1994, 1993 and 1992, the earned surplus account exceeded the required amount by $2.3 million, $3.8 million and $49.5 million, respectively. Generally, a portion of the patronage refund is distributed in cash and the balance (the "invested portion") is distributed in common stock, associate member common stock, or capital credits (depending on the membership status of the recipient), or the Board of Directors may determine to distribute the invested portion in any other form or forms of equities. The invested portion of the patronage refund is determined annually by the Board of Directors but such invested portion shall not, for any year, exceed 80% of the total patronage refunds. The invested portion of the patronage refund is a source of funds from operations which is retained for use in the business and increases Farmland's equity base. Common stock and associate member common stock representing the invested portion of patronage refunds may be redeemed by cash payments from Farmland to holders thereof who participate in Farmland's base capital plan. Capital credits and other equities of Farmland and Farmland Foods, Inc. may be redeemed under other equity redemptions. The base capital plan and other equity redemption plans are explained under the heading "Equity Redemption Plans." In 1994, operations generated a net cash inflow of $106.0 million. Other major cash sources include $34.6 million from dispositions of investments and notes receivables, $17.6 million (net) from investors in demand loan and subordinated debt certificates and $17.1 million from sales of property, plant and equipment. The primary uses of cash include $69.8 million for capital additions or improvements, $36.6 million (net) for repayment of bank loans and other notes payable, $35.8 million for acquisition of businesses (Tradigrain and National Carriers, Inc.) and $22.1 million for investments and notes receivables. On July 28, 1983, Farmland sold the stock of Terra Resources, Inc. ("Terra"), a wholly-owned subsidiary engaged in oil and gas exploration and production operations, and exited its oil and gas exploration and production activities. The gain from the sale of Terra amounted to $237,200,000 for tax reporting purposes. During 1983, and prior to the sale of the Terra stock, Farmland received certain distributions from Terra totaling $24,800,000. For tax purposes, Farmland claimed intercorporate dividends-received deductions for the entire amount of such distributions. On March 24, 1993, the Internal Revenue Service ("IRS") issued a statutory notice to Farmland asserting deficiencies in federal income taxes (exclusive of statutory interest thereon) in the aggregate amount of $70,775,000. The asserted deficiencies relate primarily to the Company's tax treatment of the sale of the Terra stock and the distributions received from Terra prior to the sale. The IRS asserts that Farmland incorrectly treated the Terra sale gain as income against which certain patronage-sourced operating losses could be offset, and that, as a nonexempt cooperative, Farmland was not entitled to an intercorporate dividends-received deduction in respect of the 1983 distribution by Terra. It further asserts that Farmland incorrectly characterized gains for tax purposes aggregating approximately $14,600,000, and a loss of approximately $2,300,000, from the disposition of certain other assets. On June 11, 1993, Farmland filed a petition in the United States Tax Court contesting the asserted deficiencies in their entirety. Discovery and other pre-trial phases of the litigation have since been ongoing. The case is scheduled for trial on March 6, 1995. If the IRS ultimately prevails on all of the adjustments asserted in the statutory notice, Farmland would have additional federal and state income tax liabilities aggregating approximately $85,800,000 plus accumulating statutory interest thereon through October 31, 1994, of approximately $154,900,000 (before tax benefits of the interest deduction). In addition, such adjustments would affect the computation of Farmland's taxable income for its 1989 tax year and, as a result, could increase Farmland's federal and state income taxes for that year by approximately $5,000,000 plus applicable statutory interest thereon. No provision has been made in the consolidated financial statements for federal or state income taxes (or interest thereon) in respect of the IRS claims described above. Farmland believes that it has meritorious positions with respect to all of these claims and will continue to vigorously pursue their favorable resolution through the pending litigation. In the opinion of Bryan Cave, Farmland's special tax counsel, it is more likely than not that the courts will ultimately conclude that (i) Farmland's treatment of the Terra sale gain was substantially, if not entirely, correct; and (ii) Farmland properly claimed a dividends-received deduction in respect of the 1983 distributions which it received from Terra prior to the sale of the Terra stock. Counsel has further advised, however, that none of the issues involved in these disputes is free from doubt, and that there can be no assurance that the courts will ultimately rule in favor of Farmland on any of these issues. Should the IRS ultimately prevail on all of its asserted claims, all claimed federal and state income taxes as well as accrued interest thereon would become immediately due and payable, and would be charged to current operations. In such case, the Company would be required to renegotiate agreements with its banks to maintain compliance with various requirements of such agreements, including working capital and funded indebtedness provisions. However, no assurance can be given that such renegotiation would be successful. Alternatives could include other financing arrangements or the possible sale of assets. RESULTS OF OPERATIONS The Company's revenues depend to a large extent on conditions in agriculture and may be volatile due to factors beyond the Company's control, such as weather, crop failures, federal agricultural programs, production efficiencies, and direct imports or exports. In addition, global variables which affect supply, demand and price of crude oil and refined fuels impact the Company's petroleum operations. Management cannot determine the extent to which future operations of the Company may be impacted by these factors. The Company's cash flow and net income may continue to be volatile as conditions affecting agriculture and markets for the Company's products change. The increase (decrease) in sales and operating profit by business segment in each of the years in the three-year period ended August 31, 1994, compared with the prior year is presented in the table below. Management's discussion of business segment sales, operating profit or loss and other factors affecting the Company's income before income taxes and extraordinary item during 1994, 1993 and 1992 follows the table.
Income Before Income Taxes and Extraordinary Item Sales-Increase (Decrease) -Increase (Decrease) 1994 1993 1992 1994 1993 1992 Compared Compared Compared Compared Compared Compared with 1993 with 1992 with 1991 with 1993 with 1992 with 1991 (Amounts in Millions) (Amounts in Millions) Sales and Operating Profit of Business Segments: Petroleum . . . . $ (32) $ (92) $ (210) $ 32 $ (13) $ 17 Crop Production . 278 (13) (138) 74 (60) (13) Feed . . . . . . 49 34 (21) (4) (1) (3) Food Processing and Marketing . . 943 563 21 4 (8) 14 Grain Marketing* 674 798 155 (34) 1 (1) Other . . . . . . 43 4 (16) (4) 7 (10) . . . . . . . $1,955 $1,294 $ (209) $ 68 $ (74) $ 4
Corporate Expenses and Other: General corporate expenses (increase) decrease . (9) 9 13 Other income and deductions (net) increase (decrease) 14 7 (5) Interest expense (increase) decrease . . . . . (14) (9) 9 Equity in income (loss) of investees . . . . . 23 (10) (1) Minority owners' interest in loss (income) of subsidiaries . . . . 5 (1) -0- Provision for (loss) on disposition of assets . . 29 (29) . -0- Income before income taxes and extraordinary item $ 116 $(107) $.20 * Grain marketing operations were acquired in 1992
In computing the operating profit (loss) of a business segment, none of the following have been added or deducted: corporate, general and administrative expenses which cannot practicably be identified or allocated to a business segment, interest expense, equity in income (loss) of investees, and miscellaneous income or deductions. PETROLEUM SALES Sales of petroleum products reflect a decrease of $31.9 million in 1994 compared with 1993 primarily due to lower prices of refined fuels and propane. The effect of lower prices was to reduce reported sales by approximately $62.4 million. Part of this decrease was offset by the effect of a 6% increase of refined fuels and propane unit sales. Sales of the petroleum segment decreased $92.2 million in 1993 compared with 1992, primarily a result of 12% lower unit sales of refined fuels (gasoline, diesel and distillates) and a 2% decline of the average selling price. Unit sales decreased principally because the Company sold its investment in National Cooperative Refinery Association ("NCRA") in June 1992. The refined fuels unit sales decrease in 1993 reduced sales by approximately $92.2 million compared with 1992 and lower prices of refined fuels reduced sales by $17.7 million. Sales of other products (principally asphalt and coke) decreased $12.4 million. Propane sales increased approximately $30.1 million in 1993 due to 27% higher unit sales and 18% higher prices. In 1992, sales of petroleum products declined $209.7 million compared with 1991. This decrease resulted primarily because unit sales of refined products (gasoline, distillate and diesel) and the average price of these products were lower in 1992 than 1991 by 19% and 16%, respectively. The unit sales and price declines reduced sales of these products by approximately $37.3 million and $154.2 million, respectively. In addition, propane prices in 1992 averaged approximately 82% of the prior year's level, which reduced sales by approximately $13.5 million. OPERATING PROFIT Results from petroleum operations increased $31.7 million primarily because unit margins on diesel fuels with low levels of sulfur (required by the Environmental Protection Agency for diesel fuel sold after September 30, 1993) were higher than the corresponding period of the prior year. These margins were significantly higher immediately after the crossover to the low sulfur level diesel. In addition, margins on other refined fuels improved because the cost per barrel of crude oil decreased and because production at the Coffeyville, Kansas refinery was substantially higher than in the prior year. Operating profit of the petroleum segment decreased $12.8 million in 1993 compared with 1992. The favorable effects of improved margins in propane and lower marketing and administrative expenses were more than offset by the unfavorable effects of lower income from distributing fuels produced by NCRA and the write-down to market value of certain petroleum inventories. Operating profit of the petroleum segment was $8.2 million in 1992 compared with a loss of $9.3 million loss in 1991. Most of this improvement resulted from elimination in 1992 of losses experienced in 1991 on petroleum futures contracts. The Company changed its hedging practice in March 1991. CROP PRODUCTION SALES Crop production sales in 1994 increased $278.5 million compared with 1994 due to higher plant nutrient prices and unit sales. The average price per ton of nutrient increased approximately 13.3% and unit sales increased approximately 1.1 million tons or 18%. Sales of the crop production segment decreased $13.0 million in 1993 compared with 1992. Nitrogen fertilizer sales increased $54.1 million due to 8% higher unit sales and because the average selling price increased 3%. Phosphate fertilizer sales decreased $67.1 million. This decrease is primarily a result of the sale of the Green Bay, Florida phosphate plant to a 50%-owned joint venture. Subsequent to this sale (on November 15, 1991) export sales from the Green Bay plant have not been reported in the Company's operations. In 1992, the Company's sales included export sales from the Green Bay plant of $60.9 million. The crop production segment's sales declined $137.7 million in 1992 compared with 1991. Substantially all of this decrease resulted from lower unit sales and prices for phosphate fertilizers. The Company reported 30% lower phosphate unit sales in 1992 which reduced sales approximately $117.3 million. This decrease resulted principally from the sale on November 15, 1991 of the Green Bay, Florida phosphate plant to a 50%-owned joint venture. In addition, sales of phosphate fertilizer decreased approximately $18.2 million, because the average price was 7% lower. Sales of turf and garden products were approximately $2.9 million lower. OPERATING PROFIT Operating profits of the crop production business in 1994 increased $74.4 million compared with 1993. This increase resulted from higher unit sales and unit margins. Unit margins in 1994 were approximately twice the level of 1993 which increased operating profit in this segment approximately $66.8 million. Unit sales increased over one million tons (18%) which increased operating profit approximately $10.8 million. In addition, included in the statement of operations in the caption, "Equity in income (loss) of investees", is $15.3 million in 1994 representing the Company's share of net income from fertilizer joint ventures. This is an increase of $23.4 million compared with 1993. Demand for plant nutrients in 1994 was stronger than in 1993 due to an increase in the number of acres under cultivation, principally corn acreage (corn acreage harvested was relatively low in 1993 due to wet weather and the resulting floods in the Company's trade territory). In addition, demand for plant nutrients was stimulated by favorable weather conditions during the fall and spring application seasons. The increased demand for plant nutrients translated into higher unit sales and margins and contributed significantly to the Company's increased net income in 1994. Operating profit of the crop production segment decreased $60.3 million in 1993 compared with 1992, primarily because of 29% higher natural gas cost (the principal raw material consumed in producing nitrogen fertilizer) which was not recovered through selling prices. Fertilizer margins decreased approximately $43.2 million because of higher gas cost. In addition, phosphate fertilizer margins decreased approximately $7.1 million because decreased phosphate fertilizer selling prices more than offset decreased cost. In addition, the Company's share of the net loss of fertilizer ventures (included in the Company's statement of operations in the caption, "Equity in loss of investees"), was $8.2 million in 1993 compared with a loss of $1.3 million in 1992. The crop production segment's operating profit of $111.9 million decreased $13.4 million in 1992 compared with 1991. The decrease resulted primarily from lower phosphate fertilizer selling prices and from realignment of the Company's phosphate fertilizer production operations into two 50%-owned ventures. FEED SALES Sales of feed products increased $48.7 million in 1994 compared with 1993. Unit sales of formula feed and feed ingredients each increased approximately 10% which generated a $39.6 million increase in sales. The balance of the sales increase resulted primarily from higher feed ingredient prices. Sales of the feed segment increased $33.9 million in 1993 compared with 1992, primarily because of higher unit sales. Formula feed unit sales increased approximately 9% which increased sales $20.3 million. Feed ingredients unit sales increased approximately 12% which increased sales by $18.0 million. In addition, sales of animal health products increased $2.5 million. Lower formula feed selling prices partly offset the effect of higher unit sales. The feed segment's sales for 1992 decreased $20.9 million compared with 1991, principally because feed ingredients unit sales decreased 22%. Unit sales of feed ingredients decreased because sales efforts were directed from products with near break-even margins to products with higher margins. Feed ingredient sales decreased approximately $41.7 million because of the unit sales decline. Feed ingredient prices increased an average of 8% which increased sales by approximately $11.2 million and formula feed sales increased $6.8 million, principally due to higher unit sales. OPERATING PROFIT Operating profit of the feed business segment decreased $3.7 million in 1994 compared with 1993. Gross margins decreased approximately $.5 million reflecting lower margins on feed ingredients and pet food of $.8 million and $.4 million, respectively, partly offset by $.7 million higher margins on animal health products. In addition, sales marketing and feed administration expensed increased $3.2 million primarily due to higher commissions and other variable compensation plans. Operating profit of the feed segment of $20.7 million in 1993 decreased slightly compared with 1992. The decrease was due to the impact of lower selling prices. Operating profit of the feed segment for 1992 of $21.3 million decreased $3.2 million compared with 1991. The decrease resulted from $1.3 million lower patronage refund income on purchases from other cooperatives and from $2.2 million higher expenses partly offset by $.4 million higher gross margins. FOOD PROCESSING AND MARKETING SALES Sales of the food marketing and processing business increased $943.0 million in 1994 compared with 1993. Sales of beef increased $735.5 million principally because National Beef Packing Company, L.P. ("NBPC") has been included in the Company's 1994 results for the full year. NBPC was acquired in April 1993. Pork sales increased $207.5 million, due mostly to including operations of the Monmouth, Illinois plant in the Company's results for a full year in 1994. This plant was acquired in February 1993. In addition, sales of specialty meats of the Carando division increased $13.0 million. Food marketing sales increased $562.5 million in 1993 compared with 1992, primarily due to business acquisitions. In April 1993, the Company and partners organized National Beef Packing Company, L.P. ("NBPC"). Farmland obtained a 58% ownership interest in NBPC which acquired a beef packing plant and feedlot located in Liberal, Kansas. As a result of this acquisition, the Company's sales included beef sales of $442.1 million in 1993. In February 1993, Foods, a 99%-owned subsidiary, purchased a pork processing plant located at Monmouth, Illinois. As a result of this acquisition, sales of pork products increased approximately $90.0 million. Sales of fabricated pork products at the Company's other plants increased $17.0 million and sales of specialty meats of the Carando division increased $8.3 million. Sales of the food marketing segment in 1992 increased $21.1 million compared with 1991. Sales of specialty meats increased $50.3 million primarily because these products were not included in sales for 1991 prior to April 1, when the Company acquired three specialty meats plants. Fresh and processed pork sales were lower than in 1991 because the effect of lower wholesale prices was greater than the effect of higher unit sales. OPERATING PROFIT Operating profit in the Food Marketing and Processing business segment of $20.6 million in 1994 reflects an increase of $4.1 million compared with 1993. The increase includes $13.0 million higher operating profit of the pork business partly offset by an $8.9 million decrease of operating profit of the beef business. Operating profit from pork marketing and processing operations increased primarily due to higher volume and higher margins on fresh pork, branded pork, hams and specialty meats of the Carando division. Operating profit of the beef business decreased owing to weak consumer demands for beef and industry price competition. Operating profit of the food marketing segment decreased $8.7 million in 1993 compared with 1992. The decrease is primarily due to 4.6% higher live hog cost. Margins on fabricated products and hams increased $3.6 million and $4.4 million, respectively, and margins on beef products (not included in the Company's operations in 1992) were $4.2 million. These increases resulted from acquisitions which increased sales as discussed above. However, these increases were more than offset by the effects of 4.6% higher cost of live hogs which could not be fully recovered through increased wholesale prices of fresh and processed pork products and by higher selling and administrative expenses. Operating profits of the food marketing segment for 1992 increased $13.8 million compared with 1991. The improvement includes higher gross margins of approximately $26.8 million, partially offset by approximately $13.4 million higher selling, general and administrative expenses. The gross margin increase includes $9.9 million higher margins on specialty meats attributable to ownership of specialty meats plants during all of 1992, compared with only five months of 1991. Additional improvements of gross margins resulted from a more favorable spread between the costs of live hogs and wholesale pork prices, from higher unit sales, and from a shift of sales to value-added products with higher unit margins. Selling, general and administrative expenses of this segment increased, primarily due to expenses incurred in connection with the specialty meats plants which were operated by the Company for only five months in the prior year. GRAIN MARKETING SALES AND OPERATING PROFIT Grain sales increased $673.6 million in 1994 compared with 1993 primarily due to the acquisition of Wells-Bowman Trading Company and from operating elevators in Utah and Idaho which were leased to the Company in 1994. The grain marketing business had an operating loss of $33.5 million in 1994 compared with near break-even operations in 1993. The operating loss in 1994 includes an operating loss of $14.4 million in the international operations of Tradigrain and an operating loss of $19.1 million in the Company's Union Equity division. The loss in 1994 resulted primarily from negative unit margins on international grain transactions and higher domestic operating expenses. Grain operations which were acquired in July 1992, reported sales for the full year in 1993 of $953.5 million. Sales for the two months ended August 31, 1992 were $155.2 million. In 1993, operating profit of the grain business was $.1 million compared with a loss of $.7 million for the two months ended August 31, 1992. In 1993, grain marketing operations were relocated to Kansas City from Enid, Oklahoma, an export elevator at Houston, Texas was sold and certain duplicative administrative assets costs were eliminated. As a result, cost reductions were realized in 1993. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses ("SG & A") increased $81.5 million in 1994 compared with 1993. However, as a percent of sales, these expenses were slightly lower in 1994 than in 1993. Approximately $17.6 million of the increase resulted from acquisition of Tradigrain and National Carriers, Inc. and from including NBPC in the Company's financial statements for the full year in 1994. Approximately $29.0 million of the increase was in pork marketing and processing and resulted primarily from including the Monmouth, Illinois pork plant in the Company's operations for a full year, and from higher sales of pork. Farm supply businesses and the grain marketing business had higher SG & A of $13.1 million and $3.4 million, respectively. The balance of the SG & A increase was primarily variable compensation plans. These expenses decreased $12.3 million in 1993 compared with 1992 primarily due to SG & A directly connected to business segments. Corporate, general and administrative expenses, not identified to business segments (see note 12 of the notes to consolidated financial statements), decreased $6.3 million in 1993 compared with 1992. In 1992, corporate general and administrative expenses not identified to business segments decreased $5.2 million compared with 1991. This decrease was mostly lower retirement plan costs, reduced corporate advertising and reduced coverage and cost of liability insurance. OTHER INCOME (DEDUCTIONS) INTEREST EXPENSE Interest expense reflects an increase of $14.7 million in 1994 compared with 1993. The increase is primarily attributable to including the interest costs of NBPC's beef operations in the Company's financial statements for a full year in 1994, the acquisition of National Carriers, Inc. and Tradigrain in May 1994 and by higher interest rates. Interest expense increased $8.8 million in 1993 compared with 1992 due to an increase of the average level of borrowings, partly offset by lower interest rates. Interest expense decreased $8.9 million in 1992 compared with 1991. The decrease results from lower borrowings and lower interest rates. PROVISION FOR LOSS ON DISPOSITION OF ASSETS See note 17 of the notes to consolidated financial statements. OTHER, NET See note 16 of the notes to consolidated financial statements. RECENT ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," was issued by the Financial Accounting Standards Board ("FASB") in May 1993 and is effective for fiscal years beginning after December 15, 1993 (the Company's 1995 fiscal year). Statement 115 expands the use of fair value accounting and the reporting for certain investments in debt and equity securities. Management expects the adoption of Statement 115 will not have a significant impact on the Company's consolidated financial statements. Statement of Financial Accounting Standards No. 112, "Employer's Accounting for Postemployment Benefits," was issued by the FASB in November 1992 and is effective for fiscal years beginning after December 15, 1993 (the Company's 1995 fiscal year). Statement 112 establishes standards of accounting and reporting for the estimated cost of benefits provided to former or inactive employees. Management expects that the adoption of Statement 112 will not have a significant impact on the Company's consolidated financial statements. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES FINANCIAL STATEMENTS Independent Auditors' Report . . . . . . . . . . . . . . 30 Consolidated Balance Sheets, August 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . 31 Consolidated Statements of Operations for each of the years in the three-year period ended August 31, 1994 . . . . . 33 Consolidated Statements of Cash Flows for each of the years in the three-year period ended August 31, 1994 . . . . . 34 Consolidated Statements of Capital Shares and Equities for each of the years in the three-year period ended August 31, 1994 . . . . . . . . . . . . 36 Notes to Consolidated Financial Statements . . . . . . . 37 FINANCIAL STATEMENT SCHEDULES Farmland Industries, Inc. and Subsidiaries for each of the years in the three-year period ended August 31, 1994: 1I--Amounts Receivable from Related Parties 67 V--Property, Plant and Equipment . . . . . . . . . . . . 68 VI--Accumulated Depreciation and Amortization of . . . . 71 Property, Plant and Equipment IX--Short-term Borrowings . . . . . . . . . . . . . . . 74 X--Supplementary Income Statement Information . . . . . 74 All other schedules are omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes. INDEPENDENT AUDITORS' REPORT The Board of Directors Farmland Industries, Inc.: We have audited the accompanying consolidated balance sheets of Farmland Industries, Inc. and subsidiaries as of August 31, 1994 and 1993, and the related consolidated statements of operations, cash flows and capital shares and equities for each of the years in the three-year period ended August 31, 1994. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Farmland Industries, Inc. and subsidiaries as of August 31, 1994 and 1993, and the results of their operations and their cash flows for each of the years in the three-year period ended August 31, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. As discussed in note 7 to the consolidated financial statements, the Internal Revenue Service (IRS) has examined the Company's tax returns for the years ended August 31, 1984 and 1983, and has proposed certain adjustments. Should the IRS ultimately prevail, the federal and state income taxes and statutory interest thereon could be significant. Farmland believes it has meritorious positions with respect to such claims and, based upon the opinion of special tax counsel, management believes it is more likely than not that the courts will ultimately conclude that Farmland's treatment of such items was substantially, if not entirely, correct. The ultimate outcome of this matter can not presently be determined. Therefore, no provision for such income taxes and interest has been made in the accompanying consolidated financial statements. KPMG PEAT MARWICK LLP Kansas City, Missouri October 21, 1994 FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
August 31 1994 1993 (Amounts in Thousands) Current Assets: Cash and cash equivalents . . . . . . . . . $ 44,084 $ 28,373 Accounts receivable - trade . . . . . . . .. 394,906 320,980 Inventories (note 3) . . . . . . . . . . .. 538,314 496,690 Other current assets . . . . . . . . . . .. 119,139 69,357 Total Current Assets . . . . . . . . .. $ 1,096,443 $ 915,400 Investments and Long-Term Receivables (note 4). $ 189,601 $ 183,312 Property, Plant and Equipment (notes 5 and 6): Property, plant and equipment, at cost . . . .. $ 1,202,159 $ 1,154,343 Less accumulated depreciation and amortization . 700,869 649,965 Net Property, Plant and Equipment . . . . .. $ 501,290 $ 504,378 Other Assets . . . . . . . . . . . . . . . . .. $ 139,297 $ 116,891 Total Assets . . . . . . . . . . . . . . . . .. $ 1.926,631 $ 1,719,981 See accompanying notes to consolidated financial statements.
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS LIABILITIES AND EQUITIES
August 31 1994 1993 (Amounts in Thousands) Current Liabilities: Demand loan certificates . . . . . . . . . . $ 23,158 $ 29,860 Short-term notes payable (note 6) . . . . . 279,137 256,655 Current maturities of long-term debt (note 6) 27,840 31,947 Accounts payable - trade . . . . . . . . . . 246,181 217,982 Other current liabilities (note 9) . . . . . 229,423 118,437 Total Current Liabilities . . . . . $ 805,739 $ 654,881 Long-Term Debt (excluding current maturities) (note 6) $ 517,806 $ 485,861 Deferred Income Taxes (note 7) . . . . . . . . $ 6,340 $ 2,169 Minority Owners' Equity in Subsidiaries (note 8) $ 11,733 $ 15,363 Capital Shares and Equities (note 9): Preferred shares, $25 par value--Authorized 8,000,000 shares, 148,069 shares issued and outstanding (148,325 shares in 1993) . $ 3,702 $ 3,708 Common shares, $25 par value -- Authorized 50,000,000 shares, 14,542,478 shares issued and outstanding (15,199,833 shares in 1993) . . . . . . . 363,562 379,996 Associate member common shares (nonvoting), $25 par value -- Authorized 2,000,000 shares, 370,707 shares issued and outstanding (327,828 shares in 1993) . 9,268 8,196 Earned surplus and other equities . . . . . 208,481 169,807 Total Capital Shares and Equities . $ 585,013 $ 561,707 Contingent Liabilities and Commitments (notes 4, 6, 7, 10 and 11) Total Liabilities and Equities . . . . . . . . $ 1,926,631 $ 1,719,981 See accompanying notes to consolidated financial statements.
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended August 31 1994 1993 1992 (Amounts in Thousands) Sales . . . . . . . . . . . . . . $6,677,933 $4,722,940 $3,429,307 Cost of sales . . . . . . . . . . . . . 6,284,084 4,470,290 3,099,316 Gross income . . . . . . . . . . . . . $ 393,849 $ 252,650 $ 329,991 Selling, general and administrative expenses $ 305,279 $ 223,792 $ 236,065 Other income (deductions): Interest expense . . . . . . . . . $ (51,485) $ (36,764) $ (27,965) Interest income . . . . . . . . . . 6,170 4,189 2,667 Equity in income (loss) of investees (note 4) 10,878 (12,394) (2,341) Provision for loss on disposition of assets (note 17) . . . . . . . . . . . -0- (29,430) -0- Other, net (note 16) . . . . . . . 20,111 9,536 4,217 . . . . . . . . . . . . . . $ (14,326) $ (64,863) $ (23,422) Income (loss) before income taxes and minority owners' interest and extraordinary item. . . . . . . $ 74,244 $ (36,005) $ 70,504 Income tax (expense) benefit (note 7) . (4,890) 6,433 (9,458) Minority owners' interest in loss (income) of subsidiaries . . . . . . . . . . 4,522 (828) -0- Income (loss) before extraordinary item $ 73,876 $ (30,400 $ 61,046 Extraordinary item - Utilization of loss carryforward (note 7) . . . . . . . -0- -0- 1,267 Net income (loss) . . . . . . . $ 73,876 $ (30,400) $ 62,313 Distribution of net income (note 9): Patronage refunds: Farm supply patrons . . . . . . $ 59,685 $ -0- $ 16,229 Pork marketing patrons . . . . 10,927 -0- 1,245 The Cooperative Finance Association's patrons . . . -0- 1,650 1,482 . . . . . . . . . . . . . . $ 70,612 $ 1,650 $ 18,956 Earned surplus and other equities . . . 3,264 (32,050) 43,357 . . . . . . . . . . . . . . $ 73,876 $ (30,400) $ 62,313 See notes to consolidated financial statements
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended August 31 1994 1993 1992 (Amounts in Thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) . . . . . . . . . . $ 73,876 $ (30,400) $ 62,313 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization . . . 62,960 57,730 50,784 Provision for loss on disposition of assets . . . . . . . . . . . -0- 29,430 -0- (Gain) on disposition of fixed assets (1,794) (385) (1,181) Patronage refunds received in equities (2,171) (2,241) (2,320) Proceeds from redemption of patronage equities . . . . . . 573 1,731 7,727 Equity in (income) loss of investees 10,878) 12,394 2,341 Deferred income tax (benefit) expense (5,034) (3,463) 1,752 Other . . . . . . . . . . . . . . 770 7,604 3,786 Changes in assets and liabilities (exclusive of assets and liabilities of businesses acquired): Accounts receivable . . . . . . (12,079) (92,024) 9,095 Inventories . . . . . . . . . . (4,692) (65,402) (27,483) Other assets . . . . . . . . . (45,990) (30,154) 11,490 Accounts payable . . . . . . . 17,884 19,630 (48,425) Other liabilities . . . . . . . 32,617 (17,981) 10,722 Net cash provided by (used in) operating activities . . . . . . . . . $ 106,042 $(113,531) $ 80,601 CASH FLOWS FROM INVESTING ACTIVITIES: Advances to borrowers by finance companies $ -0- $(624,618) $ (733,403) Collections from borrowers by finance companies -0- 631,668 685,383 Acquisition of businesses . . . . . . . (35,790) (10,500) -0- Proceeds from disposal of investments and notes receivable . . . . . . . . . 34,577 12,115 71,582 Acquisition of investments and notes receivable (22,117) (50,378) (58,979) Capital expenditures . . . . . . . . . (69,776) (98,238) (79,954) Proceeds from sale of fixed assets . . 14,785 10,900 8,191 Distribution from joint venture, net . -0- -0- 29,324 Proceeds from sale of assets to joint venture partner . . . . . . . 2,310 -0- 62,104 Proceeds from disposition of subsidiary (note 2) -0- 87,227 -0- Other . . . . . . . . . . . . . . 5,547 (2,140) -0- Net cash used in investing activities . $ (70,464) $ (43,964) $ (15,752) CASH FLOWS FROM FINANCING ACTIVITIES: Net decrease of demand loan certificates $ (6,702) $ (13,224) $ (13,712) Proceeds from bank loans and notes payable 888,088 916,799 669,608 Payments of bank loans and notes payable (924,731) (777,268) (711,101) Proceeds from issuance of subordinated debt certificates . . . . . . . . 57,636 72,423 57,780 Payments for redemption of subordinated debt certificates . . . . . . . . (33,034) (16,490) (22,557) Payments for redemption of equities . . (3,244) (13,505) (8,046) Payments of patronage refunds and dividends -0- (17,946) (12,204) Other . . . . . . . . . . . . . . 2,120 340 (3,853) Net cash provided by (used in) financing activities . . . . . . . $ (19,867) $ 151,129 $ (44,085) Net increase (decrease) in cash and cash equivalents . . . . . . . . . $ 15,711 $ (6,366) $ 20,764 Cash and cash equivalents at beginning of year 28,373 34,739 13,975 Cash and cash equivalents at end of year $ 44,084 $ 28,373 $ 34,739 SUPPLEMENTAL SCHEDULE OF CASH PAID FOR INTEREST AND INCOME TAXES: Interest . . . . . . . . . . . . . . $ 38,425 $ 41,136 $ 35,626 Income taxes (net of refunds) . . . . . $ 9,746 $ 1,479 $ 12,181 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Equities and minority owners' interest called for redemption . . . . . . . $ 12,935 $ -0- $ 13,365 Transfer of assets in exchange for investment in joint ventures . . . $ 309 $ -0- $ 63,911 Issuance of Farmland equities to minority owners' of Foods . . . . $ -0- $ -0- $ 16,680 Appropriation of current year's net income as patronage refunds . . . . . . . $ 70,612 $ -0- $ 18,956 Acquisition of businesses: Fair value of net assets acquired . $ 35,539 $ 1,414 $ 30,321 Goodwill . . . . . . . . . . . . . 1,094 16,086 20,976 Minority owners' investment . . . . (843) (7,000) -0- $ 35,790 $ 10,500 $ 51,297 See accompanying notes to consolidated financial statements.
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CAPITAL SHARES AND EQUITIES
Years Ended August 31, 1994, 1993 and 1992 Earned Total Associate Surplus Capital Member And Shares Preferred Common Common Other And Shares Shares Shares Equities Equities (Amounts in Thousands) Balance at August 31, 1991 . . $ 3,733 $330,646 $7,680 $155,305 $497,364 Issue, redemption and cancellation of equities . (20) 44,297 (15) 13 44,275 Appropriation of current year's net income . . . . . -0- -0- -0- 62,313 62,313 Transfers to current liabilities -0- (12,045) (6) (19,329) (31,380) Transfers from minority owners' equity . . . . . . -0- 5,570 -0- 10,072 15,642 Dividends on preferred stock . -0- -0- -0- (5) (5) Distribution to farm supply patrons in common stock, associate member common stock and other equities . . . . -0- 15,807 873 (16,760) (80) Exchange of common stock, associate member common stock and other equities -0- (7,892) (356) 8,248 -0- Balance at August 31, 1992 . . $ 3,713 $376,383 $8,176 $199,857 $588,129 Issue, redemption and cancellation of equities . (5) 6,740 (49) (1,058) 5,628 Appropriation of current year's net loss . . . . . . . . . -0- -0- -0- (30,400) (30,400) Transfers to current liabilities -0- -0- -0- (1,650) (1,650) Exchange of common stock, associate member common stock and other equities -0- (3,127) 69 3,058 -0- Balance at August 31, 1993 . . $ 3,708$ 379,996 $8,196 $169,807 $561,707 Issue, redemption and cancellation of equities . (6) (364) 17 (3,475) (3,828) Appropriation of current year's net income . . . . . . . . -0- -0- -0- 73,876 73,876 Patronage refund payable in cash transferred to current liabilities . . -0- -0- -0- (26,552) (26,552) Base capital redemptions transferred to current liabilities . . -0- (8,628) (112) -0- (8,740) Other equity redemptions transferred to current liabilities . . -0- -0- -0- (3,362) (3,362) Transferred to liabilities . . -0- -0- -0- (8,084) (8,084) Dividends on preferred stock . -0- -0- -0- (4) (4) Exchange of common stock, associate member common stock and other equities . . . . -0- (7,442) 1,167 6,275 -0- Balance at August 31, 1994 . . $ 3,702 $363,562 $9,268 $208,481 $585,013 See accompanying notes to consolidated financial statements.
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Farmland Industries, Inc. ("Farmland"), a Kansas corporation, is organized and operated as a cooperative and its mission is to be a producer-driven and profitable agricultural supply to consumer foods cooperative system. Principles of Consolidation -- The consolidated financial statements include the accounts of Farmland and all its majority-owned subsidiaries (the "Company"). All significant intercompany accounts and transactions have been eliminated. Cash and Cash Equivalents -- Investments with maturities of less than three months are included in "Cash and cash equivalents." Investments -- Investments in companies 20% to 50% owned are accounted for by the equity method. Other investments are stated at cost. Accounts Receivable -- The Company uses the allowance method to account for doubtful accounts and notes. Uncollectible accounts and notes receivable from members are written off against the Farmland common stock held by members before such uncollectible accounts are charged to operations. Inventories -- Grain inventories are valued at market adjusted for net unrealized gains or losses on open commodity contracts. Crude oil, refined petroleum products, cattle and beef inventories are valued at the lower of last-in, first-out cost or market. Other inventories are valued at the lower of first-in, first-out cost or market. Supplies are valued at cost. When practicable, the Company hedges certain inventories, advance sales and purchase contracts with fixed prices and anticipated purchases of raw materials. Property, Plant and Equipment -- These assets are stated at cost and depreciated principally on a straight-line basis over the estimated useful life of the individual assets (3 to 40 years). Leasehold improvements are amortized on a straight-line basis over the terms of the individual leases (15 to 21 years). Goodwill -- The excess of cost over the fair market value of assets of businesses purchased is amortized on a straight-line basis over a period of 15 to 25 years. Sales -- The Company's policy is to recognize sales at the time product is shipped. Net margins on international grain merchandised and sales commissions on brokered agricultural chemicals, rather than the value of such products, are included in net sales. Environmental Costs -- Liabilities related to remediation of contaminated properties are recognized when the related costs are considered probable and can be reasonably estimated. Estimates of these costs are based upon currently available facts, existing technology, undiscounted site specific costs, and currently enacted laws and regulations. In reporting environmental liabilities, no offset is made for potential recoveries. All liabilities are monitored and adjusted regularly as new facts or changes in law or technology occur. Environmental expenditures are capitalized when such costs provide future economic benefits. Research and Development Costs -- Total research and development costs for the Company for the years ended August 31, 1994, 1993 and 1992 were $2,702,000, $3,303,000 and $3,338,000, respectively. Federal Income Taxes -- Farmland and its cooperative subsidiaries are subject to income taxes on all income not distributed to patrons as patronage refunds. Farmland and all its subsidiaries file consolidated federal and state income tax returns. Effective September 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." The Company accounted for income taxes using the deferred method under APB Opinion 11 for the year ended August 31, 1993 and 1992. (2) ACQUISITIONS AND DISPOSITIONS Effective June 30, 1992, Farmland acquired substantially all the business and assets of Union Equity Co-Operative Exchange ("Union Equity") in exchange for 2,051,880 shares of Farmland common stock with a par value of $51,297,000 and Farmland's assumption of substantially all of Union Equity's liabilities. The acquisition has been accounted for as a purchase and, accordingly, the results of operations of Union Equity have been included in the Company's consolidated financial statements from June 30, 1992. The excess of the purchase price over the fair value of the net identifiable assets acquired ($20,976,000) has been recorded as goodwill and is being amortized on a straight-line basis over 25 years. During 1993, Farmland and partners organized NBPC. Farmland retained a 58% ownership interest in NBPC by investing $10,500,000 in cash. On April 15, 1993, NBPC acquired the business of Idle Wild Foods, Inc. ("Idle Wild"), a beef packing plant and feedlot located in Liberal, Kansas. NBPC acquired the assets by assuming liabilities of Idle Wild with a fair value of approximately $130,605,000 (including bank loans which are nonrecourse to NBPC's partners). The acquisition has been accounted for as a purchase and, accordingly, the results of operations of NBPC have been included in the Company's consolidated financial statements from April 15, 1993. The liabilities assumed over the fair value of the net identifiable assets acquired has been recorded as goodwill. To establish The Cooperative Finance Association ("CFA") as an independent finance association for its members, on August 30, 1993 CFA purchased 10,113,000 shares of its voting common stock from Farmland for a purchase price comprised of $1,541,000 in cash, equities of Farmland (with a par value of $2,406,000) held by CFA and a $6,166,000 subordinated promissory note payable to Farmland bearing interest of 5.3%. In addition, during 1993, CFA: 1) repaid its operating loan from Farmland ($25,181,000); and, 2) purchased the lending operations and assets of Farmland Financial Services Company for a cash payment of $60,505,000 and a $2,128,000, 6% subordinated note payable to Farmland. Farmland repaid $87,227,000 of its borrowings from the National Bank for Cooperatives with the proceeds received from CFA. As a result of CFA's stock purchase and amendments to CFA's bylaws, Farmland's voting control in CFA decreased to 25%. Accordingly, effective August 31, 1993, CFA is not included in the consolidated balance sheet of the Company. The following unaudited financial information, for the years ended August 31, 1993 and 1992, presents pro forma results of operations of the Company as if the disposition of CFA and the acquisitions of Union Equity and NBPC had occurred at the beginning of each period presented. The pro forma financial information includes adjustments for amortization of goodwill, additional depreciation expense and increased interest expense on debt assumed in the acquisitions. The pro forma financial information does not necessarily reflect the results of operations that would have occurred had the Company been a single entity which excluded CFA and included Union Equity and NBPC for the full years 1993 and 1992.
August 31 (Unaudited) 1993 1992 (Amounts in Thousands) Net sales . . . . . . .. . . . . $ 5,357,867 $ 5,441,303 Income (loss) before extraordinary item . $ (44,040) $ 47,225
In October 1993, the Company acquired approximately 53% of the common stock of National Carriers, Inc. ("NCI") and increased its ownership of NCI to 79% in August 1994. NCI is a trucking company located in Liberal, Kansas. NCI provides substantially all the trucking service needs of NBPC. The purchase price of NCI ($4,423,000) was paid in cash. In December 1993, the Company acquired all the common stock of seven international grain trading companies (collectively referred to as "Tradigrain"). The purchase price for Tradigrain ($31,367,000) was paid in cash. The acquisitions of NCI and Tradigrain have been accounted for by the purchase method of accounting and, accordingly, the operating results of each enterprise have been included in the Company's consolidated financial statements from the respective dates of acquisition. The excess of the cash paid over the fair value of the net assets acquired has been recorded as goodwill. The pro forma effects of acquisitions of NCI and Tradigrain on the consolidated financial statements are not significant. (3) INVENTORIES Major components of inventories are as follows:
August 31 1994 1993 (Amounts in Thousands) Grain . . . . . . . . . . $ 136,353 $ 91,990 Beef . . . . . . . . . . 24,267 27,754 Materials . . . . . . . . . 51,428 43,857 Supplies . . . . . . . . . 39,885 41,388 Finished and in-process products . . . . . 286,381 291,701 $ 538,314 $ 496,690
The carrying values of crude oil and refined petroleum inventories stated under the lower of last-in, first-out ("LIFO") cost or market at August 31, 1994 and 1993 were $86,179,000 and $84,088,000, respectively. Had the lower of first-in, first-out ("FIFO") cost or market been used to value these products, the carrying values of inventories at August 31, 1994 and 1993 would have been lower by $4,145,000 and $5,754,000, respectively. Net income for 1994, 1993 and 1992 was $1,609,000 lower, $4,119,000 higher and $1,935,000 lower, respectively, as a result of using LIFO as compared with FIFO, including a $3,164,000 recovery in 1994 of an $8,346,000 lower of cost or market adjustment in 1993. Liquidation of prior year inventory layers in 1992 reduced income before income taxes and patronage refunds by $3,302,000. The carrying values of beef inventories stated under LIFO at August 31, 1994 and 1993 were $24,267,000 and $27,754,000, respectively. The LIFO method of accounting for beef inventories had no effect on the carrying value of inventories or on the results reported in 1994 and 1993, as market value of these inventories was lower than LIFO or FIFO cost. (4) INVESTMENTS AND LONG-TERM RECEIVABLES Investments and long-term receivables are as follows:
August 31 1994 1993 (Amounts in Thousands) Investments accounted for by the equity method $ 52,478 $ 37,456 Notes receivable from ventures, 20% to 50% owned 48,955 60,204 National Bank for Cooperatives . . . . . . . . 28,786 31,824 Investments in and advances to other cooperatives 42,662 37,690 Other investments and long-term receivables . . 16,720 16,138 $ 189,601 $183,312
National Bank for Cooperatives ("CoBank") requires borrowers from the bank to maintain an investment in stock of the bank. The amount of investment required is based on the average amount borrowed from CoBank during the previous five years. At August 31, 1994, Farmland's investment in CoBank approximated its requirement. This investment has been pledged to secure borrowings from CoBank under the syndicated loan agreement. Summarized financial information of investees accounted for by the equity method is as follows:
August 31 1994 1993 (Amounts in Thousands) Current Assets . . . . . . . . . . . . $ 105,981 $ 66,532 Long-Term Assets . . . . . . . . . . . 252,704 223,937 Total Assets . . . . . . . . . . . . $ 358,685 $ 290,469 Current Liabilities . . . . . . . . . . $ 111,077 $ 79,224 Long-Term Liabilities . . . . . . . . . 144,255 141,991 Total Liabilities . . . . . . . . . $ 255,332 $ 221,215 Net Assets . . . . . . . . . . . . . . $ 103,353 $ 69,254
Year Ended August 31 1994 1993 1992 (Amounts in Thousands) Net sales . . . . . . . . $ 803,516 $ 601,194 $ 218,913 Net income (loss) . . . . $ 24,285 $ (22,755) $ (5,046) Farmland's equity in net income (loss) $ 10,878 $ (12,394) $ (2,341)
The Company's investments accounted for by the equity method consist principally of 50% equity interests in Hyplains Beef, L.L.C. and in two phosphate fertilizer manufacturing ventures (Farmland Hydro, L.P. and SF Phosphates Limited Company). On November 15, 1991, Farmland and Norsk Hydro a.s. ("Hydro") formed a joint venture company, Farmland Hydro, to manufacture phosphate fertilizer products for distribution to international markets. As part of the joint venture agreement, Farmland sold a 50% interest in its Green Bay, Florida phosphate fertilizer plant and certain phosphate rock reserves located in Hardee County, Florida to Hydro for an amount approximately equal to Farmland's carrying value of the assets. Subsequently, Farmland and Hydro contributed the assets to the joint venture. Farmland operates the plant under a management agreement with the joint venture and Hydro provides international marketing services. See note 15 of the notes to consolidated financial statements. Farmland and J. R. Simplot formed a joint venture (SF Phosphates, Limited Company) to operate a phosphate mine located in Vernal, Utah, a fertilizer plant located in Rock Springs, Wyoming, and a 96-mile pipeline that connects the mine with the fertilizer plant. The purchase of the mine, plant and pipeline from Chevron Corporation was completed in April 1992. Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," was issued by the Financial Accounting Standards Board ("FASB") in May 1993 and is effective for fiscal years beginning after December 15, 1993 (the Company's 1995 fiscal year). Statement 115 expands the use of fair value accounting and the reporting for certain investments in debt and equity securities. In the opinion of management, the adoption of Statement 115 will not have a significant impact on the Company's consolidated financial statements. (5) PROPERTY, PLANT AND EQUIPMENT A summary of cost for property, plant and equipment is as follows:
August 31 1994 1993 (Amounts in Thousands) Land and improvements . . . . $ 13,614 $ 11,825 Site improvements . . . . . . 28,647 26,877 Buildings . . . . . . . . . . 224,767 215,420 Machinery and equipment . . . 716,683 678,784 Automotive equipment . . . . 65,986 46,807 Furniture and fixtures . . . 48,613 45,405 Livestock . . . . . . . . . . 3,926 4,373 Mining properties . . . . . . 3,119 3,119 Leasehold improvements . . . 15,085 12,149 Capital lease . . . . . . . . 50,956 52,342 Construction in progress . . . 30,763 57,242 $ 1,202,159 $ 1,154,343
For the years ended August 31, 1994, 1993 and 1992, the Company capitalized construction period interest of $357,000, $1,611,000 and $330,000, respectively. (6) BANK LOANS, SUBORDINATED DEBT CERTIFICATES AND NOTES PAYABLE Bank loans, subordinated debt certificates and notes payable are as follows:
August 31 1994 1993 (Amounts in Thousands) National Bank for Cooperatives --5.61% to 9.2%, maturing 1995 through 2001 $ 74,278 $ 66,098 Other bank notes--5.74% to 7.75%, maturing 1995 through 2001 . . . . . . . . 117,813 138,244 Subordinated certificates of investment and capital investment certificates-- 7.25% to 10.5%, maturing 1995 through 2014 210,054 192,857 Subordinated monthly interest certificates --7.25% to 12%, maturing 1995 through 2014 70,057 62,913 Industrial revenue bonds--5.75% to 8.0%, maturing 1995 through 2007 . . . . . . . . 25,055 27,880 Promissory notes--7% to 10%, maturing 1995 through 2001 . . . . . . . . 18,684 13,805 Other--5% to 13% . . . . . . . . . . . . . . . 29,705 16,011 $ 545,646 $ 517,808 Less current maturities . . . . . . . . . . . . 27,840 31,947 $ 517,806 $ 485,861
In 1994, Farmland entered into a $650,000,000 syndicated credit facility provided by eight domestic and international banking institutions. This agreement provides short-term credit of up to $450,000,000 to finance seasonal operations and inventory, and revolving term credit of up to $200,000,000. At August 31, 1994, short-term borrowings under this facility were $217,399,000, revolving term borrowings were $95,000,000 and $62,600,000 was being utilized to support letters of credit issued on behalf of Farmland by participating banks. Farmland pays commitment fees of 1/8 of 1% annually on the unused portion of the short-term commitment and 1/4 of 1% annually on the unused portion of the revolving term commitment. In addition, Farmland must maintain consolidated working capital of not less than $150,000,000, consolidated net worth of not less than $475,000,000 and funded indebtedness and senior funded indebtedness of not more than 52% and 43% of capitalization, respectively. All computations are based on consolidated financial data adjusted to exclude nonrecourse subsidiaries (as defined in the credit agreement). Computed in accordance with the agreement, at August 31, 1994, working capital was $207,383,000, net worth was $585,013,000 and funded indebtedness and senior funded indebtedness were 47.03% and 23.34% of capitalization, respectively. Farmland and subsidiaries maintain other borrowing arrangements with banks and financial institutions. Under such agreements, at August 31, 1994, $35,495,000 was borrowed from banks and letters of credit issued by banks amounted to $2,200,000. Financial covenants of these arrangements are not more restrictive than the Company's syndicated credit facility. NBPC, 58%-owned by Farmland, maintains borrowing agreements with a bank which provides financing support for its beef packing operations. Borrowings under this credit agreement are nonrecourse to Farmland or Farmland's other affiliates. At August 31, 1994, NBPC's available bank credit of $61,596,000 had been borrowed. All assets of NBPC (carried at $150,409,000) are pledged to support its borrowings. At August 31, 1994, Farmland had issued letters of credit in the amount of $15,000,000 to support NBPC's bank credit agreements. Tradigrain has borrowing agreements with various international banks which provide financing and letters of credit to support current international grain trading transactions. Obligations of Tradigrain under these loan agreements are nonrecourse to the Company. The subordinated debt certificates have been issued under several different indentures. Farmland may redeem subordinated certificates of investments and capital investment certificates in advance of scheduled maturities. Farmland may redeem subordinated certificates of investments, capital investment certificates and subordinated monthly interest certificates upon death of the holder. The outstanding subordinated debt certificates are subordinated to senior indebtedness. At August 31, 1994, senior indebtedness included $450,827,000 for money borrowed, and other instruments (principally long-term operating leases) provide for aggregate payments over nine years of approximately $126,505,000. Under industrial revenue bonds and other agreements, property, plant and equipment with a carrying value of $29,267,000 have been pledged. Bank loans, subordinated debt certificates and notes payable mature during the fiscal years ending August 31 in the following amounts: (Amounts in Thousands) 1995 . . . . . . . . . . . . . . . . . . $ 27,840 1996 . . . . . . . . . . . . . . . . . . 44,884 1997 . . . . . . . . . . . . . . . . . . 182,996 1998 . . . . . . . . . . . . . . . . . . 54,057 1999 . . . . . . . . . . . . . . . . . . 32,921 2000 and after . . . . . . . . . . . . . 202,948 $ 545,646 (7) INCOME TAXES On July 28, 1983, Farmland sold the stock of Terra Resources, Inc. ("Terra"), a wholly-owned subsidiary engaged in oil and gas exploration and production operations, and exited its oil and gas exploration and production activities. The gain from the sale of Terra amounted to $237,200,000 for tax reporting purposes. During 1983, and prior to the sale of the Terra stock, Farmland received certain distributions from Terra totaling $24,800,000. For tax purposes, Farmland claimed intercorporate dividends-received deductions for the entire amount of such distributions. On March 24, 1993, the Internal Revenue Service ("IRS") issued a statutory notice to Farmland asserting deficiencies in federal income taxes (exclusive of statutory interest thereon) in the aggregate amount of $70,775,000. The asserted deficiencies relate primarily to the Company's tax treatment of the sale of the Terra stock and the distributions received from Terra prior to the sale. The IRS asserts that Farmland incorrectly treated the Terra sale gain as income against which certain patronage-sourced operating losses could be offset, and that, as a nonexempt cooperative, Farmland was not entitled to an intercorporate dividends-received deduction in respect of the 1983 distribution by Terra. It further asserts that Farmland incorrectly characterized gains for tax purposes aggregating approximately $14,600,000, and a loss of approximately $2,300,000, from the disposition of certain other assets. On June 11, 1993, Farmland filed a petition in the United States Tax Court contesting the asserted deficiencies in their entirety. Discovery and other pre-trial phases of the litigation have since been ongoing. The case is scheduled for trial on March 6, 1995. If the IRS ultimately prevails on all of the adjustments asserted in the statutory notice, Farmland would have additional federal and state income tax liabilities aggregating approximately $85,800,000 plus accumulating statutory interest thereon through October 31, 1994, of approximately $154,900,000 (before tax benefits of the interest deduction). In addition, such adjustments would affect the computation of Farmland's taxable income for its 1989 tax year and, as a result, could increase Farmland's federal and state income taxes for that year by approximately $5,000,000 plus applicable statutory interest thereon. No provision has been made in the consolidated financial statements for federal or state income taxes (or interest thereon) in respect of the IRS claims described above. Farmland believes that it has meritorious positions with respect to all of these claims and will continue to vigorously pursue their favorable resolution through the pending litigation. In the opinion of Bryan Cave, Farmland's special tax counsel, it is more likely than not that the courts will ultimately conclude that (i) Farmland's treatment of the Terra sale gain was substantially, if not entirely, correct; and (ii) Farmland properly claimed a dividends-received deduction in respect of the 1983 distributions which it received from Terra prior to the sale of the Terra stock. Counsel has further advised, however, that none of the issues involved in these disputes is free from doubt, and that there can be no assurance that the courts will ultimately rule in favor of Farmland on any of these issues. Should the IRS ultimately prevail on all of its asserted claims, all claimed federal and state income taxes as well as accrued interest would become immediately due and payable, and would be charged to current operations. In such case, the Company would be required to renegotiate agreements with its banks to maintain compliance with various requirements of such agreements, including working capital and funded indebtedness provisions. However, no assurance can be given that such renegotiation would be successful. Alternatives could include other financing arrangements or the possible sale of assets. The Company adopted FASB Statement 109 effective September 1, 1993. The cumulative effect of this change in accounting for income taxes was immaterial. Prior years' financial statements have not been restated to apply the provisions of Statement 109. Income tax expense (benefit) attributable to income from continuing operations is comprised of the following:
Year Ended August 31 1994 1993 1992 (Amounts in Thousands) Federal: Current . . . . . . . . . . $ 10,076 $ (2,502) $ 6,600 Deferred . . . . . . . . . (3,217) (2,944) 1,490 $ 6,859 $ (5,446) $ 8,090 State: Current . . . . . . . . . . $ 1,965 $ (468) $ 1,106 Deferred . . . . . . . . . (755) (519) 262 $ 1,210 $ (987) $ 1,368 Foreign: Current . . . . . . . . . . $ (2,117) $ -0- $ -0- Deferred . . . . . . . . . (1,062) -0- -0- $ (3,179) $ -0- $ -0- $ 4,890 $ (6,433) $ 9,458
Income tax expense (benefit) attributable to income from continuing operations differs from the "expected" income tax expense (benefit) using statutory rate of 35% (34% for 1993 and 1992), as follows:
Year Ended August 31 1994 1993 1992 Computed "expected" income tax expense (benefit) on income (loss) before income taxes . . . . . . . . . . 35.0 % (34.0) % 34.0% Increase (reduction) in income tax expense (benefit) attributable to: Patronage refunds . . . . . . . . . . . (33.3) (4.0) (9.2) Utilization of member-sourced losses . -0- -0- (11.4) Patronage-sourced items for which no benefit is available . . -0- 26.5 -0- State income tax expense (benefit) net of federal income tax effect . . . . . 1.1 (2.2) 1.2 Benefit associated with exempt income of foreign sales corporation . . . . . -0- (1.4) (1.5) Other, net . . . . . . . . . . . . . . 3.8 (2.7) .3 Income tax expense (benefit) . . . . . . . 6.6 % (17.8)% 13.4 %
The tax effect of temporary differences that give rise to significant portions of deferred tax liabilities and deferred tax assets at August 31, 1994 is as follows: August 31, 1994 (Amounts in Thousands) Deferred tax liabilities: Property, plant and equipment principally due to differences in depreciation . . . $ 20,242 Prepaid pension cost . . . . . . . . . . . 21,124 Other . . . . . . . . . . . . . . . . . . . 14,021 Total gross deferred liabilities . . . . $ 55,387 Deferred tax assets: Safe harbor leases . . . . . . . . . . . . $ 5,391 Accrued expenses . . . . . . . . . . . . . 27,017 Accounts receivable, principally due to allowance for doubtful accounts . . . . 4,394 Other . . . . . . . . . . . . . . . . . . . 12,245 Total gross deferred assets . . . . . . $ 49,047 Net deferred tax liability . . . . . . . . . . $ 6,340 A valuation allowance for deferred tax assets was not necessary at August 31, 1994. The significant components of deferred income tax benefit attributable to income from continuing operations for the year ended August 31, 1994 are as follows: August 31, 1994 (Amounts in Thousands) Deferred tax benefit . . . . . . . . . . . . . $ (8,044) Charge in lieu of taxes resulting from initial recognition of acquired tax benefits that are allocated to reduce goodwill related to the acquired entity . . 3,010 $ (5,034) Deferred income taxes for the year ended August 31, 1993 and 1992 result from timing differences in the recognition of income and expenses for financial reporting and income tax reporting purposes. The sources of these timing differences and their tax effect are as follows:
Year Ended August 31 1993 1992 (Amounts in Thousands) Depreciation . . . . . . . . . . . . . . . $ 473 $ 1,562 Safe harbor lease rentals . . . . . . . . . (378) (478) Provision for loss on proposed sale of assets (3,454) -0- Unfunded pension expense . . . . . . . . . (355) (129) Reinstatement of deferred income taxes previously offset by net operating loss carryforward for financial reporting purposes . . . -0- 1,294 Other, net . . . . . . . . . . . . . . . . 251 (497) $ (3,463) $ 1,752
At August 31, 1994, Farmland and its consolidated subsidiaries have alternative minimum tax credit carryforwards of approximately $7,025,000. The tax benefit for the year ended August 31, 1993 results from the carryback of nonpatronage-sourced losses to reduce the amount of federal and state income taxes paid during prior years. During the year ended August 31, 1994, Farmland utilized nonmember-sourced loss carryforwards amounting to $7,525,000 to reduce goodwill for financial reporting purposes by $3,010,000. During the year ended August 31, 1992, all of Foods' nonmember-sourced loss carryforwards were utilized and deferred income taxes amounting to $1,294,000 were reinstated. During the year ended August 31, 1992, Farmland utilized nonmember-sourced loss carryforwards amounting to $3,168,000 to reduce income tax expense for financial reporting purposes by $1,267,000. Utilization of these loss carryforwards has been presented as an extraordinary item in the accompanying consolidated statement of operations for the year ended August 31, 1992. In connection with the acquisition of Union Equity, Farmland acquired member-sourced and nonmember-sourced loss carryforwards from Union Equity amounting to approximately $18,600,000 and $10,600,000, respectively. For the year ended August 31, 1992, Farmland was able to utilize member-sourced and nonmember-sourced loss carryforwards amounting to $18,600,000 and $2,800,000, respectively. The benefit of the utilization of the nonmember- sourced loss carryforward amounting to $1,134,000 has been recorded as a reduction of goodwill in the accompanying consolidated balance sheet as of August 31, 1992. See note 2 of the notes to consolidated financial statements. (8) MINORITY OWNERS' EQUITY IN SUBSIDIARIES A summary of the equity of subsidiaries owned by others is as follows:
August 31 1994 1993 (Amounts in Thousands) Farmland Foods, Inc. . . . . . . . . . . . $ 5,618 $ 6,401 National Beef Packing Company, L.P. and G.P. 2,925 7,865 Heartland Wheat Growers, L.P. and G.P. . . 2,100 -0- Other subsidiaries . . . . . . . . . . . . 1,090 1,097 $ 11,733 $ 15,363
(9) PREFERRED STOCK, EARNED SURPLUS AND OTHER EQUITIES A summary of preferred stock is as follows:
August 31 1994 1993 (Amounts in Thousands) Preferred shares, $25 par value - Authorized 8,000,000 shares: 6% - 608 shares issued and outstanding (624 shares in 1993) . . . . . . . . $ 15 $ 15 5-1/2% - 2,592 shares issued and outstanding (2,832 shares in 1993) . . . . . . . 65 71 Series F - 144,869 shares issued and outstanding (144,869 shares in 1993) . . . . . . 3,622 3,622 $ 3,702 $ 3,708
The 5-1/2% and 6% preferred stocks have preferential liquidation rights over the Series F preferred stock. Dividends on the 5-1/2% and 6% preferred stock are cumulative if declared by the Farmland Board of Directors and only to the extent earned each year. Series F preferred stock is nondividend bearing. Upon liquidation, holders of all preferred stock are entitled to the par value thereof and, with respect to the 5-1/2% and 6% preferred stock, any declared or unpaid earned dividends. A summary of earned surplus and other equities is as follows:
August 31 1994 1993 (Amounts in Thousands) Earned surplus . . . . . . . . . . $ 130,250 $ 123,974 Patronage refund payable in equities 44,032 -0- Nonmember capital . . . . . . . . . 103 104 Capital credits . . . . . . . . . . 32,547 38,105 Unallocated equity . . . . . . . . -0- 6,021 Additional paid-in surplus . . . . 1,603 1,603 Currency translation adjustment . . (54) -0- $ 208,481 $ 169,807
In accordance with the bylaws of Farmland, the member-sourced portion of its net income or loss and the resulting patronage refund payable to members and patrons are determined annually. The bylaws provide that the amount of the patronage refund payable be reduced if immediately after the payment of such patronage refund, the amount of earned surplus would be less than 30% of the previous year-end balance of members' equity accounts (defined for this purpose as the sum of common stock, associate member common stock, capital credits, nonmember capital and patronage refunds payable in equities). The reduction of patronage refunds is limited to the lesser of 15% or the amount required to increase the balance of the earned surplus account to the required 30%. As of August 31, 1994 and 1993, earned surplus exceeded the required amount by approximately $2,329,000 and $3,874,000, respectively. The patronage refund payable for 1994 is $70,584,000. The cash portion is $26,552,000 and is included in "Other current liabilities" in the consolidated balance sheet at August 31, 1994. The balance ($44,032,000) of the patronage refund is payable in equities of Farmland and is included in the consolidated balance sheet as "Earned surplus and other equities." No patronage refunds were paid by Farmland for 1993. The patronage refund for 1992 was $17,449,000, all of which was paid in cash. Farmland maintains a base capital plan. The plan's objectives are as follows: 1) to achieve proportionality between the dollar amount of business a member or associate member of Farmland ("Participant") transacts with Farmland and the par value of Farmland equity which the Participant should hold (hereinafter referred to as the Participants' "Base Capital Requirement"); and, 2) provide a method for the Board of Directors, in its discretion, to redeem equities held by a Participant when the par value of the Participant's investment exceeds the Participant's Base Capital Requirement. This plan provides that the relationship between the par value of a Participant's investment in Farmland equity and the Participant's Base Capital Requirement shall influence the cash portion of any patronage refund paid to the Participant. The Base Capital Requirement shall be determined annually by the Farmland Board of Directors at its sole discretion. At August 31, 1994, common stock and associate member common stock with a par value of $8,740,000 have been approved for redemption by the Board of Directors under the base capital plan and such amounts have been included in "Other current liabilities" in the consolidated balance sheet at August 31, 1994. Farmland maintains an estate settlement plan for redemption of equities held by estates of deceased individuals (except equities purchased and held less than five years) and a special equity redemption plan to redeem equities of holders who do not participate in the Farmland base capital plan. Under these plans, the Board of Directors, in its discretion, may redeem equities based on certain factors, including the financial position and consolidated net income of the Company. A priority for redeeming equities under these plans has been established. At August 31, 1994, certain equities of Farmland with a face amount of $3,448,000 and capital equity fund certificates held by certain members of Farmland Foods, Inc. in the amount of $747,000 have been approved by the Board of Directors for redemption under the estate settlement and special equity redemption plan. Accordingly, such amounts have been included in "Other current liabilities" in the consolidated balance sheet at August 31, 1994. Nonmember capital represents patronage refunds distributed in the form of book credits. Capital credits are issued: 1) for payment of patronage refunds to patrons who do not satisfy requirements for membership or associate membership; and, 2) upon conversion of common stock or associate member common stock held by persons who do not meet qualifications for membership or associate membership in Farmland. Unallocated equity represents the cumulative difference between the amount of member-sourced income for financial reporting and income tax reporting purposes. Additional paid-in surplus results from members donating Farmland equity to Farmland. None of the aforementioned equities are held by or for the account of Farmland or in any sinking or other special fund of Farmland and none have been pledged by Farmland. (10) CONTINGENT LIABILITIES AND COMMITMENTS The Company leases various equipment and real properties under long-term operating leases. For the years ended August 31, 1994, 1993 and 1992, rental expenses totaled $41,794,000, $41,104,000 and $43,300,000, respectively. Rental expense is reduced for mileage credits received on leased railroad cars ($1,866,000 in 1994, $1,939,000 in 1993 and $663,000 in 1992). The leases have various remaining terms ranging from one year to fifteen years. Some leases are renewable, at Farmland's option, for additional periods. The minimum amount Farmland must pay for these leases during the fiscal years ending August 31 are as follows: (Amounts in Thousands) 1995 . . . . . . . . . . . $ 49,883 1996 . . . . . . . . . . . 40,275 1997 . . . . . . . . . . . 36,154 1998 . . . . . . . . . . . 29,440 1999 . . . . . . . . . . . 22,209 2000 and after . . . . . . 69,008 $ 246,969 Farmland and its subsidiaries are involved in various lawsuits incidental to the businesses. In the opinion of management, the ultimate resolution of these litigation issues will not have a material adverse effect on the Company's consolidated financial statements. The Company has certain throughput agreements, take-or-pay agreements, minimum quantity agreements, and minimum charge agreements for various raw material supplies and services through 1996. The Company's minimum obligations under such agreements are $1,248,000 in 1995 and $924,000 in 1996. The Company has been designated by the Environmental Protection Agency as a potentially responsible party ("PRP") under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), at various National Priority List ("NPL") sites. In addition, the Company is aware of possible obligations associated with environmental matters at other sites, including sites where no claim or assessment has been made. The Company's probable and reasonably determinable obligations for resolution of environmental matters at NPL and other sites are estimated to be $7,164,000 and such amount has been accrued. The ultimate costs of resolving environmental matters are not quantifiable because many such matters are in preliminary stages and the timing and extent of actions which governmental authorities may ultimately require are unknown. It is possible that the costs of such resolution may be greater than the liabilities which, in the opinion of management, are probable and reasonably determinable at August 31, 1994. In the opinion of management, it is reasonably possible for such costs to approximate $39,000,000 and to extend over 30 years. CFA has loans receivable from customers engaged in pork production operations and from cooperative associations which are guaranteed by Farmland. At August 31, 1994, such guarantees amounted to $5,868,000. In addition, Farmland has issued letters of credit to support borrowing arrangements of a subsidiary as described in note 6. At August 31, 1994, the Company was committed to expenditures for acquisition and completion of construction of plant and equipment aggregating approximately $19,000,000. (11) EMPLOYEE BENEFIT PLANS The Farmland Industries, Inc. Employee Retirement Plan ("the Plan") is a defined benefit plan covering substantially all employees of Farmland and its subsidiaries who meet minimum age and length-of-service requirements. Benefits payable under the Plan are based on years of service and the employee's average compensation during the highest four of the employee's last ten years of employment. The assets of the Plan are maintained in a trust fund. The majority of the Plan's assets are invested in common stocks, corporate bonds, United States Government securities and short-term investment funds. The Company's funding policy is to make the maximum annual contribution to the Plan's trust fund that can be deducted for federal income tax purposes. The Company charges pension cost as accrued based on actuarial valuation of the Plan. Components of the Company's pension cost are as follows:
August 31 1994 1993 1992 (Amounts in Thousands) Service cost - benefits earned during the period . . . . . . $ 8,663 $ 7,449 $ 6,519 Interest cost on projected benefit obligation . . . . . 15,292 12,134 11,332 Actual return on Plan assets . . (10,949) (15,842) (20,591) Net amortization and deferral . (7,860) (374) 4,027 Pension expense . . . . . . . $ 5,146 $ 3,367 $ 1,287
The discount rate and the rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligations at August 31, 1994 were 8.0% and 4.5%, respectively (8.5% and 5% at August 31, 1993, and 9% and 5% at August 31, 1992, respectively). The expected long-term rate of return on assets at August 31, 1994, 1993 and 1992 were 8.5%, 8.5% and 9%, respectively. The following table sets forth the Plan's funded status and amounts recognized in the Company's consolidated balance sheet at August 31, 1994 and 1993. Such prepaid pension cost is based on the Plan's funded status as of May 31, 1994 and 1993.
August 31 1994 1993 (Amounts in Thousands) Actuarial present value of benefit obligations: Vested benefits . . . . . . . . . . . . $ 148,648 $ 123,061 Nonvested benefits . . . . . . . . . . 9,163 7,102 Accumulated benefit obligation . . . . $ 157,811 $ 130,163 Increase in benefits due to future compensation increases 53,533 51,633 Projected benefit obligation . . . . . $ 211,344 $ 181,796 Estimated fair value of Plan assets . . 226,681 212,647 Plan assets in excess of projected benefit obligation $ 15,337 $ 30,851 Unrecognized net loss from past experience different from that assumed and effects of changes in assumptions . . . . . . . . . . 37,332 21,754 Unrecognized net transition asset being recognized over 10 years . . . . . (933) (1,866) Unrecognized prior service cost . . . . 1,308 2,590 Prepaid pension cost at end of year . . . . $ 53,044 $ 53,329
The Company provides group life insurance benefits for retired employees who were hired before January 1, 1988 and reach normal retirement age while working for the Company. Prior to 1994, the Company charged operations for the amount of an annual insurance premium paid for group life insurance covering both retired and active employees. In 1994, the cost of providing group life insurance for retired employees was not separable from the cost of providing group life insurance for active employees. For the years ended August 31, 1993 and 1992, such insurance premium were $1,178,000 and $783,000, respectively. In fiscal year 1994, the Company adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" and the effect was insignificant. Statement of Financial Accounting Standards No. 112, "Employer's Accounting for Postemployment Benefits," was issued by the FASB in November 1992 and is effective for fiscal years beginning after December 15, 1993 (the Company's 1995 fiscal year). Statement 112 establishes standards of accounting and reporting for the estimated cost of benefits provided to former or inactive employees. Management expects that the adoption of Statement 112 will not have a significant impact on the Company's consolidated financial statements. (12) INDUSTRY SEGMENT INFORMATION The Company's business is conducted within three general operating areas: cooperative farm supply operations, cooperative marketing operations and other operations. As a farm supply cooperative, the Company engages in manufacturing and wholesale distribution of input products of agricultural production. The Company's principal farm supply products are petroleum, crop production and feed. Petroleum products include gasoline, distillate, diesel fuel, propane, lube oils, grease and automotive parts and accessories. Products in the crop production area include nitrogen, phosphate and potash fertilizers, herbicides, insecticides and other farm chemicals. Feed products include a complete line of formulated feeds. Supply products are sold primarily at wholesale to local farm cooperatives. Marketing operations include pork and beef processing, marketing and the distribution of fresh meat products, ham, bacon, sausage, deli meats, Italian specialty meats and boxed beef, and the marketing and storage of grain. Other operations include convenience fuel and food stores, farm supply stores, finance company operations and services such as accounting, financial, management, environmental and safety, and transportation. See note 2 of the notes to consolidated financial statements. The operating income (loss) of each industry segment includes the revenue generated on transactions involving products within that industry segment less identifiable and allocated expenses. In computing operating income (loss) of industry segments none of the following items has been added or deducted: interest expense, interest income, other income (deductions) or corporate expenses (included in the statements of operations as selling, general and administrative expenses), which cannot practicably be identified or allocated by industry segment. Operating income (loss) of industry segments for the years ended August 31, 1993 and 1992 have been restated for comparative purposes to exclude certain costs which were not identified to business segments in 1994 but which were identified to business segments in 1993 and 1992. Corporate assets include cash, investments in other cooperatives, the corporate headquarters of Farmland and certain other assets. Following is a summary of industry segment information as of and for the years ended August 31, 1994, 1993 and 1992:
Unallocated Cooperative Corporate Cooperative Farm Supply Marketing and Items and Crop Processing Other Inter-Segment Petroleum Production Feed Foods Grain Operations Eliminations Consolidated (Amounts in Thousands) 1994 Sales to unaffiliated customers $855,479 $1,163,357 $527,864 $2,355,599 $1,627,156 $148,478 $ -0- $6,677,933 Transfers between segments 4,843 9,513 2,072 3,007 -0- -0- (19,435) -0- Total sales and transfers $860,322 $1,172,870 $529,936 $2,358,606 $1,627,156 $148,478 $ (19,435) $6,677,933 Operating income (loss) of industry segments $ 27,172 $ 126,047 $ 17,019 $ 20,634 $ (33,455) $ (2,368) $ 55,049 Equity in income (loss) of investees (note 4) $ (41) $ 15,466 $ 155 $ (4,404) $ -0- $ (298) $ 10,878 General corporate expenses (66,479) Other corporate income 26,281 Interest expense (51,485) Minority interest 4,522 Income before income taxes and extraordinary item $ 78,766 Identifiable assets at August 31, 1994 $306,366 $ 357,178 $ 92,767 $ 395,159 $ 341,367 $ 62,301 $1,555,138 Investment in and advances to investees $ 746 $ 76,439 $ 1,761 $ 13,927 $ -0- $ 8,560 $ -0- $ 101,433 Corporate assets 270,060 Total assets $1,926,631 Provision for depreciation and amortization $ 9,911 $ 14,700 $ 3,815 $ 16,776 $ 4,011 $ 7,982 $ 5,765 $ 62,960 Capital expenditures (including $16,888,000 of capital assets of business acquired) $ 14,399 $ 14,136 $ 4,508 $ 19,040 $ 6,256 $ 26,051 $ 2,274 $ 86,664 1993 Sales to unaffiliated customers $887,389 $ 884,811 $479,205 $1,412,634 $ 953,521 $105,380 $ -0- $4,722,940 Transfers between segments 5,591 7,970 2,330 3,496 -0- -0- (19,387) -0- Total sales and transfers $892,980 $ 892,781 $481,535 $1,416,130 $ 953,521 $105,380 $ (19,387) $4,722,940 Operating income (loss) of industry segments $ (4,602) $ 51,654 $ 20,676 $ 16,485 $ 104 $ 2,262 $ 86,579 Equity in income (loss) of investees (note 4) $ 2 $ (8,223) $ (35) $ (3,306) $ -0- $ (832) $ (12,394) Provision for loss on disposition of assets (note 17) (20,022) (6,155) (3,253) (29,430) General corporate expenses (57,721) Other corporate income 13,725 Interest expense (36,764) Minority interest (828) (Loss) before income taxes and extraordinary item $ (36,833) Identifiable assets at August 31, 1993 $308,731 $ 324,956 $ 94,948 $ 391,152 $ 254,734 $ 35,986 $1,410,507 Investment in and advances to investees $ 526 $ 72,166 $ 1,572 $ 18,686 - $ 3,553 $ 1,606 $ 98,109 Corporate assets 211,365 Total assets $1,719,981 Provision for depreciation and amortization $ 13,546 $ 13,843 $ 4,487 $ 10,807 $ 2,637 $ 3,369 $ 9,041 $ 57,730 Capital expenditures (including $48,362,000 of capital assets of business acquired) $ 35,629 $ 17,972 $ 6,590 $ 73,561 $ 1,894 $ 3,613 $ 7,341 $ 146,600 1992 Sales to unaffiliated customers $979,542 $897,820 $ 445,338 $ 850,103 $ 155,169 $101,335 $ -0- $3,429,307 Transfers between segments 5,727 9,744 2,531 4,064 -0- -0- (22,066) -0- Total sales and transfers $985,269 $907,564 $ 447,869 $ 854,167 $ 155,169 $101,335 $ (22,066) $3,429,307 Operating income (loss) of industry segments $ 8,241 $111,907 $ 21,346 $ 25,162 $ (726) $ (5,018) $ 160,912 Equity in loss of investees (note 4) $ (31) $ (1,362) $ 15 $ (963) $ (2,341) General corporate expenses (66,982) Other corporate income 6,880 Interest expense (27,965) Income before income taxes and extraordinary item $ 70,504 Identifiable assets at August 31, 1992 $289,021 $313,943 $ 76,300 $ 201,726 $ 173,376 $207,274 $1,261,640 Investment in and advances to investees $ 139 $ 66,899 $ 1,143 $ 6,004 $ 1,197 $ 4,408 $ 79,790 Corporate assets 184,962 Total assets $1,526,392 Provision for depreciation and amortization $ 12,269 $ 14,888 $ 3,013 $ 9,051 $ 613 $ 4,513 $ 6,437 $ 50,784 Capital expenditures (including $47,977,000 of capital assets of business acquired) $ 25,089 $ 17,119 $ 5,115 $ 14,862 $ 48,440 $ 11,141 $ 6,165 $ 127,931
(13) SIGNIFICANT GROUP CONCENTRATION OF CREDIT RISK Farmland extends credit to its customers on terms no more favorable than standard terms of the industries it serves. A substantial portion of Farmland's receivables are concentrated in the agricultural industry. Collections on 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. Farmland maintains investments in and advances to cooperatives, cooperative banks and joint ventures from which it purchases products or services. A substantial portion of the business of these investees is dependent upon the agribusiness economic sector. See note 4 of the notes to consolidated financial statements. (14) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS Estimates of fair values are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could affect the estimates. Except as follows, the fair market value of the Company's financial instruments approximates the carrying value: CAPTION> August 31, 1994 August 31, 1993 Carrying Fair Carrying Fair Amount Value Amount Value (Amounts in Thousands) FINANCIAL ASSETS: Investment and long-term receivables: Notes receivable from investees, 20% to 50% owned . . . . . . . $ 48,955 $ 45,414 $ 60,204 $ 58,111 National Bank for Cooperatives . 28,786 **** 31,824 **** Other cooperatives: Equities . . . . . . . . . . 28,132 **** 22,877 **** Notes receivable . . . . . . 14,530 13,385 14,813 13,408 FINANCIAL LIABILITIES: Long-term debt: Subordinated certificates of investment, capital investment certificates and subordinated monthly interest certificates . . . . . $ 280,111 $ 284,523 $ 255,770 $ 287,168
The estimated fair value of notes receivable has been determined by discounting future cash flows using a market interest rate. The estimated fair value of the subordinated debt certificates was calculated using the discount rate for subordinated debt certificates with similar maturities currently offered for sale. ****Investments in National Bank for Cooperatives and other cooperatives' equities which have been purchased are carried at cost and securities received as patronage refunds are carried at par value, less provisions for other than temporary impairment. The Company believes it is not practicable to estimate the fair value of these securities because there is no established market for these securities and it is inappropriate to estimate future cash flows which are largely dependent on future patronage earnings of the cooperatives. (15) RELATED PARTY TRANSACTIONS Farmland Hydro, L.P., Hyplains Beef, L.C. (50%-owned investees) and National Beef Packing Company, L.P. (a 58%-owned consolidated limited partnership) have credit agreements with various banks. Borrowings under these agreements are nonrecourse to Farmland and its other affiliates. Cash distributions by these entities to their owners are restricted by these credit agreements. To support the efforts of these entities to meet compliance provisions of their credit agreements, Farmland advances funds and provides management and administrative services to these entities, in certain instances, on terms less advantageous to Farmland than transactions conducted by Farmland in the ordinary course of its business. At August 31, 1994, Farmland's equity investments in and advances to these entities amounted to $132,613,000. (16) OTHER INCOME In June 1993, the Company filed a lawsuit against 43 insurance carriers and other parties (the "Defendants") seeking declaratory judgments regarding Defendants' insurance coverage obligations for environmental remediation costs. In fiscal year 1994, the Company negotiated settlements with 20 insurance companies and as part of the settlements, the Company provided Defendants with releases of various possible environmental obligations. As a result of these settlements, the Company received cash payments of $13,566,000 in 1994 and has included such amount in the caption "Other income" in the consolidated statement of operations for the year then ended. (17) PROVISION FOR LOSS ON DISPOSITION OF ASSETS At August 31, 1993, management was negotiating to sell the Company's refinery at Coffeyville, Kansas. Based on the progress of negotiation and the transactions contemplated, operations for the year ended August 31, 1993 included a $20,022,000 provision for loss on the sale of the refinery. Accordingly, the net carrying value of property, plant and equipment has been reduced by $20,022,000 in the consolidated balance sheets at August 31, 1993. The transactions contemplated were subject to certain conditions, including negotiation of final agreements. During 1994, management determined that final sale terms anticipated by the potential purchaser were not in the Company's best interest. Accordingly, negotiations were terminated and the sale was not consummated. In 1993, the Company entered discussions with a potential purchaser of a dragline. Based on these discussions, the Company estimated a loss of $6,155,000 from the sale. Accordingly, at August 31, 1993, the carrying value of the dragline was written down by $6,155,000 and a provision for this loss was included in the Company's consolidated statement of operations for the year then ended. In 1994, this sale was consummated on terms substantially as expected. At August 31, 1993, the carrying value of a pork processing plant at Iowa Falls, Iowa was written down by $3,253,000 to an estimated disposal value. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE No disagreement on any matter of accounting principles or practices or financial statement disclosure was reported. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The directors of Farmland are as follows:
Total Expiration Years of of Service Age as of Positions Present as August 31 Held With Term as Board Name 1994 Farmland Director Member Business Experience During Last Five Years Albert J. Shivley 51 Chairman 1995 10 General Manager--American Pride Co-op of the Association, Brighton, Colorado, a local Board cooperative association of farmers and ranchers. H. D. Cleberg 55 President 1994 4 Mr. Cleberg has been with Farmland since 1968. and Chief He was named as president-elect in February 1991 Executive and became President in April 1991. From Officer September 1990 to January 1991 he served as Senior Vice President and Chief Operating Officer, Agricultural Group. From April 1989 to August 1990 he served as Executive Vice President, Operations. Otis H. Molz 63 Vice 1994 11 Producer--Deerfield, Kansas. Mr. Molz has served Chairman as Chairman of the Board of the National Bank for and Vice Cooperatives since January 1993. He served as President Chairman of the Board of Directors of Farmland Industries, Inc. from December 1991 to December 1992. He served as First Vice President of the National Bank for Cooperatives from January 1990 to January of 1993. He was Second Vice Chairman from January 1, 1989 to January 1, 1990. Lyman Adams, Jr. 43 1995 2 General Manager--Cooperative Grain and Supply, Hillsboro, Kansas, a local cooperative association of farmers and ranchers. Ronald J. Amundson 50 1994 6 General Manager--Central Iowa Cooperative, Jewell, Iowa, a local cooperative association of farmers and ranchers. Baxter Ankerstjerne 58 1996 4 Producer--Peterson, Iowa. Since December 1988 Mr. Ankerstjerne has served as Chairman of the Board of Directors of Farmers Cooperative, Association, Marathon, Iowa, a local cooperative association of farmers and ranchers. Jody Bezner 53 1994 3 Producer--Texline, Texas. Richard L. Detten 60 1996 7 Producer--Ponca City, Oklahoma. Steven Erdman 44 1995 2 Producer--Bayard, Nebraska Warren Gerdes 46 1995 * General Manager--Farmers Cooperative Elevator Company, Buffalo Lake, Minnesota, a local cooperative association of farmers and ranchers. Ben Griffith 45 1995 5 General Manager--Central Cooperatives, Inc., Pleasant Hill, Missouri, a local cooperative association of farmers and ranchers. Gail D. Hall 52 1994 6 General Manager--Lexington Cooperative Oil Company, Lexington, Nebraska, a local cooperative association of farmers and ranchers. Barry Jensen 49 1996 4 Producer--White River, South Dakota. Since May 1989 Mr. Jensen has served as President of Farmers Co-op Oil Association, Winner, South Dakota, a local cooperative association of farmers and ranchers. Robert Merkle 65 1994 12 Producer--Ashkum, Illinois and a Director of Tri Central Co-op, Ashkum, Illinois, a local cooperative association of farmers and ranchers. Greg Pfenning 45 1994 2 Producer--Hobart, Oklahoma. Director of Hobart & Roosevelt Cooperative, a local cooperative association of farmers and ranchers. Vonn Richardson 61 1996 7 Producer--Plains, Kansas. President of The Plains Equity Exchange and Cooperative Union, Plains, Kansas, a local cooperative association of farmers and ranchers. Monte Romohr 41 1996 4 Producer--Gresham, Nebraska. In March 1988, Mr. Romohr became President of Farmers Co-op Business Association, Shelby, Nebraska, a local cooperative association of farmers and ranchers. Joe Royster 42 1996 1 General Manager--Dacoma Farmers Cooperative, Inc., Dacoma, Oklahoma, a local cooperative association of farmers and ranchers. Paul Ruedinger 64 1995 11 Producer--Van Dyne, Wisconsin. Raymond J. Schmitz 63 1996 7 Producer--Baileyville, Kansas Theodore J. Wehrbein 49 1995 8 Producer--Plattsmouth, Nebraska. Past Director of Nehawka Farmers Cooperative Company, Nehawka, Nebraska, a local cooperative association of farmers and ranchers. Robert Zinkula 64 1996 4 Producer--Mount Vernon, Iowa. Secretary and Treasurer of Linn Cooperative Oil Company, Marion, Iowa, a local cooperative association of farmers and ranchers. * Elected to the Farmland Industries, Inc. Board of Directors in April 1994.
Directors are elected for a term of three years by the shareholders of Farmland at its annual meeting. The expiration dates for such three-year terms are sequenced so that about one-third of Farmland's Board of Directors is elected each year. H. D. Cleberg is serving as director-at-large; the remaining twenty-one directors were elected from nine geographically defined districts in Farmland's territory. The executive committee consists of Ronald Amundson, Ben Griffith, Robert Merkle, Otis Molz, Albert Shivley, and H. D. Cleberg. The audit committee consists of Ben Griffith, Richard Detten, Steven Erdman, Barry Jensen and Joe Royster. The executive officers of Farmland are:
Age as of August 31, Name 1994 Principal Occupation and Other Positions J. F. Berardi 51 Executive Vice President and Chief Financial Officer - Mr. Berardi joined Farmland March 1, 1992 to serve in his present position. Mr. Berardi served as Executive Vice President and Treasurer of Harcourt Brace Jovanovich, Inc., a diversified Fortune 200 company, and was a member of its Board of Directors from 1988 until 1990. From 1986 to 1989 Mr. Berardi served as Senior Vice President and Chief Financial Officer of Harcourt Brace Jovanovich, Inc. H. D. Cleberg 55 President and Chief Executive Officer - Mr. Cleberg has been with Farmland since 1968. He was appointed to his present position effective April 1991. From September 1990 to March 1991 he served as Senior Vice President and Chief Operating Officer. From April 1989 to August 1990 he served as Executive Vice President, Operations. From October 1987 to March 1989 he served as Vice President and General Manager, Fertilizer and Ag Chemicals Operations, and from July 1986 to September 1987 he served as President, Farmland Foods. Prior to July 1986 he held several executive management positions, most recently Vice President, Field Services and Operations Support. S. P. Dees 51 Executive Vice President, Farmland and Director General of Farmland Industrias, S.A. de C.V. - Mr. Dees was appointed to his present position in September 1993. From October 1990 to September 1993 he served as Executive Vice President, Administrative Group and General Counsel. Mr. Dees joined Farmland in October 1984, serving as Vice President and General Counsel, Law and Administration until September 1990. He was a partner in the law firm of Stinson, Mag and Fizzell, Kansas City, Missouri, from 1971 until his employment by Farmland. G. E. Evans 50 Senior Vice President, Agricultural Production Marketing/Processing - Mr. Evans has been with Farmland since 1971. He was appointed to his present position in January 1992. From April 1991 to January 1992 he served as Senior Vice President, Agricultural Inputs. He served as Executive Vice President, Agricultural Marketing from October 1990 to March 1991. He served as Executive Vice President, Operations from January 1990 to September 1990. He served as Vice President, Farmland Industries and President, Farmland Foods from October 1987 to December 1989. He served as Vice President and General Manager, Feed Operations from June 1986 to September 1987, and from May 1983 to June 1986 he served as Vice President, Feed Operations. R. W. Honse 51 Executive Vice President, Agricultural Inputs Operations - Mr. Honse has been with Farmland since September 1983. He was appointed to his present position in January 1992, and served as Executive Vice President, Agricultural Operations from October 1990 to January 1992. From April 1989 to September 1990, he served as Vice President and General Manager, Crop Production Operations. From July 1986 to March 1989 he served as General Manager of the Florida phosphate fertilizer complex. B. L. Sanders 53 Vice President and Corporate Secretary - Dr. Sanders has been with Farmland since 1968. He was appointed to his present position in September 1991. From April 1990 to September 1991 he served as Vice President, Strategic Planning and Development. From October 1987 to March 1990 he served as Vice President, Planning. From July 1986 to September 1987 he served as Director, Management Information Services. From July 1984 to June 1986 he served as Executive Director, Corporate Strategy and Research and from 1968 to June 1984, as Executive Director, Economic and Market Research.
EXECUTIVE COMPENSATION The following table sets forth the annual compensation awarded to, earned by, or paid to the Chief Executive Officer and the Company's next four most highly compensated executive officers for services rendered to the Company in all capacities during 1994, 1993 and 1992.
Annual Compensation Employee Year Variable Other Name and Ending Compensation Annual Principal Position August 31 Salary Plan Compensation H. D. Cleberg, . . . . . . 1994 $439,728 $338,481 President and . . . . . . 1993 $433,506 Chief Executive Officer 1992 $408,972 $185,745 G. E. Evans, . . . . . . 1994 $278,304 $217,761 Senior Vice President 1993 $278,304 Agricultural Production 1992 $255,900 $114,257 Marketing/Processing R. W. Honse, . . . . . . 1994 $251,532 $205,206 Executive Vice President 1993 $231,964 Agricultural Inputs Operations 1992 $204,686 $ 94,433 J. F. Berardi, . . . . . . 1994 $216,252 $146,576 Executive Vice President 1993 $206,016 and Chief Financial Officer 1992 $100,008 $ 28,075 S. P. Dees, . . . . . . 1994 $205,066 $119,093 $124,138(a) Executive Vice President 1993 $205,366 Farmland and Director 1992 $195,738 $ 51,521 General of Farmland Industrias, S.A. de C.V. (a) Mr. Dees received a differential reration and reimbursements for taxes in connection with foreign assignments.
An Annual Employee Variable Compensation Plan, a Long-Term Management Incentive Plan, and an Executive Deferred Compensation Plan have been established by the Company to meet the competitive salary programs of other companies, and to provide a method of compensation which is based on the Company's performance. Under the Company's Annual Employee Variable Compensation Plan, all regular salaried employees total compensation is based on a combination of base and variable pay. The variable compensation payment is dependent upon the employee's position, the performance of the Company for the fiscal year or other performance criteria of the individual's operating unit. Variable compensation is awarded only in years that the Company achieves a performance level, approved each year by the Board of Directors. The Company intends for its total cash compensation (base plus variable) to be competitive, recognizing that in the event the Company fails to achieve a predetermined threshold level of performance, the base pay alone will place the employees well under market rates. This system of variable compensation allows the company to keep its fixed costs (base salaries) lower, and only increase payroll costs consistent with the Company's ability to pay. Amounts accrued under this plan for the years ended August 31, 1994, 1993 and 1992 amounted to $17,779,000, $-0- and $10,033,000, respectively. Distributions under this plan are made annually after the close of each fiscal year. Under the Long-Term Management Incentive Plan, the Company's executive management employees are paid cash bonus amounts determined by a formula which takes into account the level of management and the average annual net income of the Company over a three-year period. The current Long-Term Management Incentive Plan is effective September 1, 1994 through August 31, 1996. For the year ended August 31, 1994, the Company accrued $1,607,000 under this plan. The Company's performance did not reach a level where incentive was earned under the Long-Term Management Incentive Plan that covered the three-year period ended August 31, 1993. As a result, operations in 1993 were credited by $2,463,000 to reverse provisions for management incentive awards previously charged against operations in 1992 and 1991 ($1,171,000 and $1,292,000, respectively). The Company's Executive Deferred Compensation Plan permits executive employees to defer part of their salary and/or part or all of their bonus compensation. The amount to be deferred and the period for deferral is specified by an election made semi-annually. Payments of deferred amounts shall begin at the earlier of the end of the specified deferral period, retirement, disability or death. The employee's deferred account balance is credited annually with interest at the highest rate of interest paid by the Company on any subordinated debt certificate sold during the year. Payment of an employee's account balance shall, at the employee's election, be a lump sum or in ten annual installments. Amounts deferred pursuant to the plan for the accounts of the named individuals during the fiscal years 1994, 1993 and 1992 are included in the cash compensation table. The Company established the Farmland Industries, Inc. Employee Retirement Plan ("Plan") in 1986 for all employees whose customary employment is at the rate of at least 1000 hours per year. Participation in the Plan is optional prior to age 34, but mandatory thereafter. Approximately 6,560 active and 6,540 inactive employees were participants in the Plan on August 31, 1994. The Plan is funded by employer and employee contributions to provide lifetime retirement income at normal retirement age 65, or a reduced income beginning as early as age 55. The Plan also contains provisions for death and disability benefits. The Plan has been determined qualified under the Internal Revenue Code. The Plan is administered by a committee appointed by the Board of Directors of Farmland, and all funds of the Plan are held by a bank trustee in accordance with the terms of the trust agreement. It is the present intent to continue this plan indefinitely. The Company's funding policy is to make the maximum annual contributions to the Plan's trust fund that can be deducted for federal income tax purposes. Company contributions made to the Plan for the year ended August 31, 1994 were $2,885,000. No contributions were made to the Plan in 1993 and 1992. Payments to participants in the Plan are based upon length of participation and compensation (limited to $150,000 annually for any employee) reported to the Plan for the four highest of the last ten years of employment. See note 11 of the notes to consolidated financial statements. In 1982, the Tax Equity and Fiscal Responsibility Act (TEFRA) imposed a maximum retirement benefit which may be paid by a qualified retirement plan. At the present time, that limit is $118,000. The following table sets forth the estimated annual benefits payable at age 65 for members of the Retirement Plan, which benefits are not reduced by virtue of Social Security payments:
Remuneration Years of Service Salaries 15 20 25 30 $ 100,000. . . $ 26,250 $ 35,000 $ 43,750 $ 52,500 125,000. . . 32,812 43,750 54,687 65,625 150,000. . . 39,375 52,500 65,625 78,750 175,000. . . 45,937 61,250 76,562 91,875 200,000. . . 52,500 70,000 87,500 105,000 225,000. . . 59,062 78,750 98,437 118,125* 250,000. . . 65,625 87,500 109,375 131,250* 275,000. . . 72,187 96,250 120,312* 144,375* 300,000. . . 78,750 105,000 131,250* 157,500* *Exceeds the actual amount which can be paid pursuant to the present limitations of TEFRA.
Subject to the $150,000 maximum limit on annual compensation which may be covered by a qualified pension plan, amounts included in the cash compensation table do not vary substantially from the compensation covered by the pension plan. The following table sets forth the credited years of service for the executive officers of the Company at August 31, 1994. Name Years of Creditable Service H. D. Cleberg . . . . . . . . . . . . 29 G. E. Evans . . . . . . . . . . . . . 20 R. W. Honse . . . . . . . . . . . . . 20 J. F. Berardi . . . . . . . . . . . . 1 S. P. Dees . . . . . . . . . . . . . . 9 The Company established the Farmland Industries, Inc. Supplemental Executive Retirement Plan ("SERP") effective January 1, 1994. The SERP is intended to supplement the retirement income of executive participants in the Farmland Industries, Inc. Employee Retirement Plan whose retirement benefit would otherwise be reduced because of the limitation of the Internal Revenue Code on the amount of salary which can be included in the computation of retirement income ($150,000) or the amount of retirement benefit which may be paid by a qualified retirement plan ($118,000). The Company's Board of Directors has appointed an Administrative Committee to administer the SERP. To fund the SERP, the Company purchased cash value life insurance polices on the lives of plan participants. The Company owns these insurance policies and has the sole right to name policy beneficiaries. The total SERP premiums for all participants for the eight months ended August 31, 1994 was $621,012 of which $383,736 was charged to operations. The Company's obligation to pay supplemental retirement benefits under the SERP is limited to the aggregate cash value of the life insurance policies designated by the Administrative Committee as policies of the SERP. If the benefits under the plan for a year would exceed the total cash value of the policies, each participant's payment will be reduced. CERTAIN TRANSACTIONS The Company transacts business in the ordinary course with its directors and with its local cooperative members with which the directors are associated on terms no more favorable than those available to its other local cooperative members. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT No person owns of record or is known to own beneficially more than five percent of Farmland's equity securities. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company transacts business in the ordinary course with its directors and with its local cooperative members with which the directors are associated on terms no more favorable than those available to its other local cooperative members. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A) Listing of Financial Statements, Financial Statement Schedules and Exhibits (1) Financial Statements Independent Auditors' Report Consolidated Balance Sheets, August 31, 1994 and 1993 Consolidated Statements of Operations for each of the years in the three-year period ended August 31, 1994 Consolidated Statements of Cash Flows for each of the years in the three-year period ended August 31, 1994 Consolidated Statements of Capital Shares and Equities for each of the years in the three-year period ended August 31, 1994 Notes to Consolidated Financial Statements (2) Financial Statement Schedules Farmland Industries, Inc. and Subsidiaries for each of the years in the three-year period ended August 31, 1994: II--Amounts Receivable from Related Parties V--Property, Plant and Equipment VI--Accumulated Depreciation and Amortization of Property, Plant and Equipment IX--Short-term Borrowings X--Supplementary Income Statement Information All other schedules are omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes. (3) Exhibits Articles of Incorporation and Bylaws: 3.A Articles of Incorporation and Bylaws of Farmland Industries, Inc. effective December 1, 1993. Instruments Defining the Rights of Security Holders, Including Indentures: 4.A(1) Trust Indenture dated November 20, 1981, as amended January 4, 1982, including specimen of Demand Loan Certificates. (Incorporated by Reference - Form S-1, No.2-75071, effective January 7, 1982) 4.A(2) Trust Indenture dated November 8, 1984, as amended January 3, 1985, including specimen of 20-year Subordinated Capital Investment Certificates. (Incorporated by Reference - Form S-1, No.2-94400, effective December 31, 1984) 4.A(2)(1) Amendment Number 2, dated December 3, 1991, to Trust Indenture dated November 8, 1984 as amended January 3, 1985, covering Farmland Industries, Inc.'s 20-Year Subordinated Capital Investment Certificates (Incorporated by Reference - Form SE, filed December 3, 1991) 4.A(3) Trust Indenture dated November 8, 1984, as amended January 3, 1985, including specimen of 10-year Subordinated Capital Investment Certificates. (Incorporated by Reference - Form S-1, No.2-94400, effective December 31, 1984) 4.A(3)(1) Amendment Number 2, dated December 3, 1991, to Trust Indenture dated November 8, 1984 as amended January 3, 1985, covering Farmland Industries, Inc.'s 10-Year Subordinated Capital Investment Certificates. (Incorporated by Reference - Form SE, filed December 3, 1991) 4.A(4) Trust Indenture dated November 8, 1984, as amended January 3, 1985, including specimen of 5-year Subordinated Capital Investment Certificates. (Incorporated by Reference - Form S-1, No.2-94400, effective December 31, 1984) 4.A(4)(1) Amendment Number 2, dated December 3, 1991, to Trust Indenture dated November 8, 1984 as amended January 3, 1985, covering Farmland Industries, Inc.'s 5-Year Subordinated Capital Investment Certificates. (Incorporated by Reference - Form SE, filed December 3, 1991) 4.A(5) Trust Indenture dated November 8, 1984, as amended January 3, 1985 and November 20, 1985, including specimen of 10-year Subordinated Monthly Income Capital Investment Certificates. (Incorporated by Reference - Form S-1, No. 2-94400, effective December 31, 1984) 4.A(6) Trust Indenture dated November 11, 1985 including specimen of the 5-year Subordinated Monthly Income Capital Investment Certificates. (Incorporated by Reference - Form S-1, No. 33-1970, effective December 31, 1985) Instruments Defining Rights of Owners of Indebtedness not Registered: 4.B(1) Credit Agreement among Farmland Industries, Inc., as Borrower, ABN Amro Bank N.V., The Bank of Nova Scotia, Boatmen's First National Bank of Kansas City, The Chase Manhattan Bank, N.A., Commerce Bank of Kansas City, N.A., NBD Bank, N.A., as Banks and The National Bank for Cooperatives, Cooperatieve Centrale Raiffeisen- Boerenleenbank B.A. "Rabobank Nederland", New York Branch, as Banks and as Co-Agents, dated May 19, 1994, (the "Syndicated Credit Facility"). (Incorporated by Reference - Form 10-Q filed July 14, 1994) 4.B(2) List identifying contents of all omitted schedules referenced in and not filed with, the Syndicated Credit Facility, dated May 19, 1994. (Incorporated by Reference - Form 10-Q, filed July 14, 1994) Material Contracts: Lease Contracts: 10.A(1) The First National Bank of Chicago, not individually but solely as Trustee for AT&T Commercial Finance Corporation, The Boatmen's National Bank of St. Louis, Firstier Bank, N.A. and Norwest Bank Minnesota, National Association and Farmland Industries, Inc. consummated a leveraged lease in the amount of $73,153,000 dated September 6, 1991. (Incorporated by Reference - Form SE, filed December 3, 1991.) 10.A(2) The First National Bank of Commerce as Trustee for General Electric Credit Corporation as Beneficiary and Farmland Industries, Inc. consummated a leveraged lease in the amount of $51,909,257.90 dated March 17, 1977. (Incorporated by Reference - Form S-1, No.2-60372, effective December 22, 1977) Management Remunerative Plans Filed Pursuant to Item 14C of this Report. 10.(iii)(A)(1) Annual Employee Variable Compensation Plan (September 1, 1994 - August 31, 1995) 10.(iii)(A)(2) Farmland Industries, Inc. Management Long-Term Incentive Plan (Effective September 1, 1993). (Incorporated by Reference - Form 10-K, filed November 29, 1993) 10.(iii)(A)(3) Farmland Industries, Inc. Executive Deferred Compensation Plan (Incorporated by Reference - Form SE, filed November 23, 1987) 21. Subsidiaries of the Registrant Farmland Foods, Inc., a 99%-owned subsidiary, was incorporated under the laws of the State of Kansas. Farmland Foods, Inc. has been included in the consolidated financial statements filed in this registration. Farmland Insurance Agency, a wholly-owned subsidiary, was incorporated under the laws of the State of Missouri. Farmland Insurance Agency has been included in the consolidated financial statements filed in this registration. Farmers Chemical Company, a wholly-owned subsidiary, was incorporated under the laws of the State of Kansas. Farmers Chemical Company has been included in the consolidated financial statements filed in this registration. Farmland Securities Company, a wholly-owned subsidiary, was incorporated under the laws of the State of Delaware. Farmland Securities Company has been included in the consolidated financial statements filed in this registration. Cooperative Service Company, a wholly-owned subsidiary, was incorporated under the laws of the State of Nebraska. Cooperative Service Company has been included in the consolidated financial statements filed in this registration. Double Circle Farm Supply Company, a wholly-owned subsidiary, was incorporated under the laws of the State of Nevada. Double Circle Farm Supply Company has been included in the consolidated financial statements filed in this registration. National Beef Packing Company, L.P., a 58%-owned subsidiary, was formed under the laws of the State of Delaware. National Beef Packing Company has been included in the consolidated financial statements filed in this registration. NBPCo, L.L.C., a wholly-owned subsidiary, was formed under the laws of the State of Kansas. NBPCo has been included in the consolidated financial statements filed in this registration. Farmland Financial Services Company, a wholly-owned subsidiary, was incorporated under the laws of the State of Kansas. Farmland Financial Services Company has been included in the consolidated financial statements filed in this registration. Farmland Transportation, Inc., a wholly-owned subsidiary, was incorporated under the laws of the State of Missouri. Farmland Transportation, Inc. has been included in the consolidated financial statements filed in this registration. Environmental and Safety Services, Inc., a wholly-owned subsidiary, was incorporated under the laws of the State of Missouri. Environmental and Safety Services, Inc. has been filed in the consolidated financial statements included in this registration. Penterra, Inc., a 81%-owned subsidiary, was incorporated under the laws of the State of Kansas. Penterra, Inc. has been included in the consolidated financial statements filed in this registration. Farmland Industries, Ltd., a wholly-owned subsidiary, was incorporated under the laws of the United States Virgin Islands. Farmland Industries, Ltd. has been included in the consolidated financial statements filed in this registration. Heartland Data Services, Inc., a wholly-owned subsidiary, was incorporated under the laws of the State of Kansas. Heartland Data Services, Inc. has been included in the consolidated financial statements filed in this registration. Equity Country, Inc., a wholly-owned subsidiary, was incorporated under the laws of the State of Delaware. Equity Country, Inc. has been included in the consolidated financial statements filed in this registration. Equity Export Oil and Gas Company, Inc., a wholly-owned subsidiary, was incorporated under the laws of the State of Oklahoma. Equity Export Oil and Gas Company, Inc. has been included in the consolidated financial statements filed in this registration. Ceres Realty Corporation, a wholly-owned subsidiary, was incorporated under the laws of the State of Missouri. Ceres Realty Corporation has been included in the consolidated financial statements filed in this registration. Heartland Wheat Growers, L.P., a 79%-owned subsidiary, was formed under the laws of the State of Kansas. Heartland Wheat Growers has been included in the consolidated financial statements filed in this registration. Heartland Wheat Growers, Inc., a 79%-owned subsidiary, was incorporated under the laws of the State of Kansas. Heartland Wheat Growers has been included in the consolidated financial statements filed in this registration. Farmland Industrias S.A. de C.V., a wholly-owned subsidiary, was formed under the laws of Mexico. Farmland Industrias has been included in the consolidated financial statements filed in this registration. National Carriers, Inc., a 79%-owned subsidiary, was incorporated under the laws of the State of Kansas. National Carriers has been included in the consolidated financial statements filed in this registration. Supreme Land, Inc., a wholly-owned subsidiary, was incorporated under the laws of the State of Kansas. Supreme Land has been included in the consolidated financial statements filed in this registration. Tradigrain, Inc., a wholly-owned subsidiary, was incorporated under the laws of the State of Tennessee. Tradigrain has been included in the consolidated financial statements filed in this registration. Tradigrain S.A., a wholly-owned subsidiary, was formed under the laws of Switzerland. Tradigrain has been included in the consolidated financial statements filed in this registration. Tradigrain Shipping S.A., a wholly-owned subsidiary, was formed under the laws of Switzerland. Tradigrain has been included in the consolidated financial statements filed in this registration. Tradigrain S.A., a wholly-owned subsidiary, was formed under the laws of France. Tradigrain has been included in the consolidated financial statements filed in this registration. Tradigrain GmbH, a wholly-owned subsidiary, was formed under the laws of Germany. Tradigrain has been included in the consolidated financial statements filed in this registration. Tradigrain LTD., a wholly-owned subsidiary, was formed under the laws of Great Britain. Tradigrain has been included in the consolidated financial statements filed in this registration. Tradigrain S.A., a wholly-owned subsidiary, was formed under the laws of Argentina. Tradigrain has been included in the consolidated financial statements filed in this registration. 24. Power of Attorney 27. Financial Data Schedule (Fiscal Year Ended August 31, 1994). (B) Reports on Form 8-K No reports on Form 8-K have been filed during the last quarter of the period covered by this report. (C) Exhibits The exhibits required by Item 601 of Regulation S-K are filed herewith or have been filed with the Securities and Exchange Commission and are incorporated by reference as part of this Form 10-K. See Item 14(A)(3). (D) Financial Statement Schedules required by Regulation are filed herewith: See Item 14(A)(2). FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES SCHEDULE II--AMOUNTS RECEIVABLE FROM RELATED PARTIES For the Years Ended August 31, 1994, 1993 and 1992
Balance at Deductions Balance at the Beginning Amounts Amounts the End Name of Debtor of the Period Additions Collected Written Off of the Period (Amounts in Thousands) AUGUST 31, 1994 S.F. Industries (a) $ 450 $ 2,000 $ 2,450 $ -0- $ -0- Hyplains Beef (b) . $ 6,126 $ 17,744 $ -0- $ -0- $ 23,870 AUGUST 31, 1993 S.F. Industries . . $ 950 $ -0- $ 500 $ -0- $ 450 Hyplains Beef . . . $ 4,348 $ 1,778 $ -0- $ -0- $ 6,126 AUGUST 31, 1992 S.F. Industries . . $ -0- $ 3,950 $ 3,000 $ -0- $ 950 Hyplains Beef . . . $ -0- $ 4,348 $ -0- $ -0- $ 4,348 (a) Farmland has a $5,000,000 commitment to S.F. Industries, L.L.C. to fund working capital requirements, interest on the working capital loan, calculated at the LIBOR rate plus .50% is payable on the last day of September, December, March and June. (b) Farmland purchases cattle for the day-to-day operations of its 50% owned venture, Hyplains Beef L.C. This receivable is non-interest bearing and payments are made on a daily basis as funds become available to Hyplains.
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES SCHEDULE V--PROPERTY, PLANT AND EQUIPMENT FOR THE YEAR ENDED AUGUST 31, 1994
Other Balance Charges Balance September 1,Additions Retirements Add/ August 31, Classification 1993 at Cost or Sales (Deduct) 1994 (Amounts in Thousands) Land and Land Improvements $ 11,825 $ 2,214 $ 16 $ (409) $ 13,614 Site Improvements . . . . . 26,877 1,524 129 375 28,647 Buildings . . . . . 215,420 7,814 1,523 3,056 224,767 Machinery and Equipment . . 678,784 61,997 12,976 (11,122) 716,683 Automotive Equipment . . . 46,807 8,349 8,617 19,447 65,986 Furniture and Fixtures . . 45,405 7,982 4,236 (538) 48,613 Livestock . . . . . 4,373 1,968 1,639 (776) 3,926 Mining Properties . . . . . 3,119 -0- -0- -0- 3,119 Leasehold Improvements . . 12,149 2,716 -0- 220 15,085 Capital Lease . . . . . 52,342 1,691 2,955 (122) 50,956 Construction and Acquisitions in Progress (a) . . . 57,242 (26,479) -0- -0- 30,763 Total Property, Plant and Equipment . $1,154,343 $69,776 $32,091 $10,131 $ 1,202,159 (a) Construction and acquisitions in progress reflects the net change for the period after transfers to other classifications.
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES SCHEDULE V--PROPERTY, PLANT AND EQUIPMENT FOR THE YEAR ENDED AUGUST 31, 1993 CAPTION> Other Balance Charges Balance September 1, Additions Retirements Add/ August 31, Classification 1992 at Cost or Sales (Deduct) 1993 (Amounts in Thousands) Land and Land Improvements . $ 11,437 $ 880 $ 1,043 $ 551 $ 11,825 Site Improvements . . . . . . 15,308 10,087 96 1,578 26,877 Buildings . . . . . . 193,215 34,531 9,806 (2,520) 215,420 Machinery and Equipment . . . 593,014 77,998 11,409 19,181 678,784 Automotive Equipment . . . . 46,324 6,459 2,032 (3,944) 46,807 Furniture and Fixtures . . . 37,850 7,251 1,491 1,795 45,405 Livestock . . . . . . -0- -0- -0- 4,373 4,373 Mining Properties . . . . . . 26,569 217 -0- (23,667) 3,119 Leasehold Improvements . . . 10,215 5,745 158 (3,653) 12,149 Fertilizer Properties . . . . 48,695 -0- -0- (48,695) -0- Capital Lease . . . . . . -0- -0- -0- 52,342 52,342 Construction and Acquisitions in Progress(a) . . . . 53,812 3,432 -0- (2) 57,242 Total Property, Plant and Equipment . . $1,036,439 $146,600 $26,035 $(2,661) $1,154,343 (a) Construction and acquisitions in progress reflects the net change for the period after transfers to other classifications.
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES SCHEDULE V--PROPERTY, PLANT AND EQUIPMENT FOR THE YEAR ENDED AUGUST 31, 1992
Other Balance Charges Balance Balance September 1, Additions Retirements Add/ August 31, Classification 1991 at Cost or Sales (Deduct) 1992 (Amounts in Thousands) Land and Land Improvements . . . . . . . $ 12,560 $ 2,618 $ 3,534 $ (207) $ 11,437 Site Improvements . . . . . . . . . . . . 19,751 425 6,146 1,278 15,308 Buildings . . . . . . . . . . . . 154,062 50,132 10,217 (762) 193,215 Machinery and Equipment . . . . . . . . . 711,751 35,653 151,368 (3,022) 593,014 Automotive Equipment . . . . . . . . . . 44,328 8,071 5,852 (223) 46,324 Furniture and Fixtures . . . . . . . . . 37,166 5,462 5,264 486 37,850 Mining Properties . . . . . . . . . . . . 82,672 -0- 54,826 (1,277) 26,569 Leasehold Improvements . . . . . . . . . 9,465 749 -0- 1 10,215 Fertilizer Properties . . . . . . . . . . 49,544 -0- 849 -0- 48,695 Construction and Acquisitions in Progress(a) . . . . . . . . . . 35,207 24,821 4,574 (1,642) 53,812 Total Property, Plant and Equipment . . . . . . . . $ 1,156,506 $ 127,931 $ 242,630 $ (5,368) $1,036,439 (a) Construction and acquisitions in progress reflects the net change for the period after transfers to other classifications.
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES SCHEDULE VI--ACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT FOR THE YEAR ENDED AUGUST 31, 1994
Additions Charged to Other Balance Profit and Retirements, Charges Balance September 1, Loss of Renewals and Add/ August 31, Classification 1993 Income Replacements (Deduct) 1994 Amounts in Thousands) Land Improvements . . . . . .$ 154 $ 1 $ -0- $ -0- $ 155 Site Improvements . . . . . . 12,707 1,337 91 (7) 13,946 Buildings . . . . . . 76,426 8,950 820 2,740 87,296 Machinery and Equipment . . .453,705 28,449 4,472 (2,215) 475,467 Automotive Equipment . . . . 36,062 4,356 3,623 9,626 46,421 Furniture and Fixtures . . . 27,855 7,361 3,227 162 32,151 Livestock . . . . . . 1,768 1,396 1,013 (362) 1,789 Mining Properties . . . . . . 192 19 -0- -0- 211 Leasehold Improvements . . . 3,847 1,323 -0- 213 5,383 Capital Lease . . . . . . 37,249 3,350 2,429 (120) 38,050 Construction and Acquisitions in Progress (a) . . . . -0- -0- -0- -0- -0- Totals . . . . . .$ 649,965 $ 56,542 $ 15,675 $ 10,037 $ 700,869 (a) Construction and acquisitions in progress reflects the net change for the period after transfers to other classifications.
NOTE: The following percentages are used for computing depreciation: Land Improvements . . . . . . 6 to 10% Site Improvements . . . . . . 3 to 30% Buildings . . . . . . . . . . 2 to 10% Machinery and Equipment . . . 3 to 20% Automotive Equipment . . . . 10 to 33% Furniture and Fixtures . . . 10 to 20% Livestock . . . . . . . . . 25 to 50% Mining Properties . . . . . . 4 to 21% Leasehold Improvements . . .. 4 to 6% Fertilizer Properties . . .. 6 to 7% Capital Lease . . . . . . .. 6 to 7% FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES SCHEDULE VI--ACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT FOR THE YEAR ENDED AUGUST 31, 1993
Additions Charged to Other Balance Profit and Retirements, Charges Balance September 1, Loss of Renewals and Add/ August 31, Classification 1992 Income Replacements (Deduct) 1993 (Amounts in Thousands) Land Improvements . . . . . . $ 153 $ 1 $ -0- $ -0- $ 154 Site Improvements . . . . . . 10,377 2,439 94 (15) 12,707 Buildings . . . . . . 69,907 7,832 875 (438) 76,426 Machinery and Equipment(a) . 418,331 28,720 10,499 17,153 453,705 Automotive Equipment . . . . 32,827 4,366 1,474 343 36,062 Furniture and Fixtures . . . 21,537 6,398 1,333 1,253 27,855 Livestock . . . . . . 1,768 1,768 Mining Property . . . . . . . 192 192 Leasehold Improvements . . . 3,211 872 11 (225) 3,847 Fertilizer Properties . . . . 34,094 3,199 78 (37,215) -0- Capital Lease . . . . . . 37,249 37,249 Construction and Acquisitions in Progress (b) . . . . -0- -0- -0- -0- -0- Totals . . . . . . $ 590,437 $ 53,827 $ 14,364 $ 20,065 $ 649,965 (a) Based on negotiations with potential purchasers, the carrying values of the Coffeyville, Kansas refinery and a dragline were reduced by adjusting accumulated depreciation by $17,622,000 and $6,155,000, respectively. (b) Construction and acquisitions in progress reflects the net change for the period after transfers to other classifications.
NOTE: The following percentages are used for computing depreciation: Land Improvements . . . . . . 6 to 10% Site Improvements . . . . . . 3 to 30% Buildings . . . . . . . . . . 2 to 10% Machinery and Equipment . . . 3 to 20% Automotive Equipment . . . . 10 to 33% Furniture and Fixtures . . . 10 to 20% Livestock . . . . . . . . . 25 to 50% Mining Properties . . . . . . 4 to 21% Leasehold Improvements . . .. 4 to 6% Fertilizer Properties . . .. 6 to 7% Capital Lease . . . . . . .. 6 to 7% FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES SCHEDULE VI--ACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT FOR THE YEAR ENDED AUGUST 31, 1992
Additions Charged to Other Balance Profit and Retirements, Charges Balance September 1, Loss of Renewals and Add/ August 31, Classification 1991 Income Replacements (Deduct) 1992 (Amounts in Thousands) Land Improvements . . . . . . $ 153 $ 1 $ -0- $ (1) $ 153 Site Improvements . . . . . . 13,666 676 3,968 3 10,377 Buildings . . . . . . 72,369 5,810 8,261 (11) 69,907 Machinery and Equipment . . . 488,684 29,592 98,262 (1,683) 418,331 Automotive Equipment . . . . 32,293 3,149 2,626 11 32,827 Furniture and Fixtures . . . 22,075 3,738 5,486 1,210 21,537 Leasehold Improvements . . . 2,375 836 -0- -0- 3,211 Fertilizer Properties . . . . 34,066 3,591 3,563 -0- 34,094 Construction and Acquisitions in Progress(a) . . . . . 113 -0- -0- (113) -0- Totals . . . . . . $ 665,794 $ 47,393 $ 122,166 $ (584) $ 590,437 (a) Construction and acquisitions in progress reflects the net change for the period after transfers to other classifications.
NOTE: The following percentages are used for computing depreciation: Land Improvements . . . . . . . . 6 to 10% Site Improvements . . . . . . . . 3 to 30% Buildings . . . . . . . . . . . 2 to 10% Machinery and Equipment . . . . . 3 to 20% Automotive Equipment . . . . . . 10 to 33% Furniture and Fixtures . . . . . 10 to 20% Leasehold Improvements . . . . . 4 to 6% Fertilizer Properties . . . . . 6 to 7% FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES SCHEDULE IX--SHORT-TERM BORROWINGS
Weighted Maximum Average Average Amount Amount Interest Balance Weighted Outstanding Outstanding Rate Category of Aggregate End of Average During During During the Short-Term Borrowings Period Interest Rate the Period the Period Period (1) (Amounts in Thousands) August 31, 1994: Demand Loan Certificates . $ 23,158 4.3% $ 39,873 $ 28,299 3.9% Bank Debt . . . . . $ 281,886 5.2% $ 417,446 $ 302,500 4.2% August 31, 1993: Demand Loan Certificates . $ 29,860 3.8% $ 46,403 $ 35,002 4.3% Bank Debt . . . . . $ 268,783 4.1% $ 370,726 $ 348,230 4.2% August 31, 1992: Demand Loan Certificates . $ 43,084 5.5% $ 58,684 $ 50,516 6.3% Bank Debt . . . . . $ 200,072 4.5% $ 200,822 $ 174,397 5.3% (1) The weighted average interest rate was calculated by dividing an interest amount on short-term borrowings by the average daily balance of short-term borrowings during the period.
SCHEDULE X--SUPPLEMENTARY INCOME STATEMENT INFORMATION
Charged to Costs and Expenses For the Year Ended August 31 1994 1993 1992 (Amounts in Thousands) 1. Maintenance and repairs $ 58,730 $ 61,273 $ 50,252 NOTE: All other items required by Schedule X are excluded as such items are less than one (1) percent of total sales for each of the years presented.
SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, FARMLAND INDUSTRIES, INC. HAS DULY CAUSED THIS FORM 10-K TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED IN THE CITY OF KANSAS CITY, STATE OF MISSOURI ON NOVEMBER 29, 1994. FARMLAND INDUSTRIES, INC. BY H. D. CLEBERG H. D. Cleberg President and Chief Executive Officer BY JOHN F. BERARDI John F. Berardi Executive Vice President and Chief Financial Officer PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS FORM 10-K HAS BEEN SIGNED FOR THE FOLLOWING PERSONS ON THE DATE INDICATED PURSUANT TO VALID POWER OF ATTORNEY EXECUTED ON OCTOBER 19, 1994. Signature Title Date ALBERT J. SHIVLEY Chairman of Board, November 29, 1994 Albert J. Shivley Director OTIS H. MOLZ Vice Chairman of Board, November 29, 1994 Otis H. Molz Director LYMAN ADAMS Director November 29, 1994 Lyman Adams RONALD J. AMUNDSON Director November 29, 1994 Ronald J. Amundson BAXTER ANKERSTJERNE Director November 29, 1994 Baxter Ankerstjerne JODY BEZNER Director November 29, 1994 Jody Bezner RICHARD L. DETTEN Director November 29, 1994 Richard L. Detten WILLARD ENGEL Director November 29, 1994 Willard Engel STEVEN ERDMAN Director November 29, 1994 Steven Erdman BEN GRIFFITH Director November 29, 1994 Ben Griffith GAIL D. HALL Director November 29, 1994 Gail D. Hall BARRY JENSEN Director November 29, 1994 Barry Jensen ROBERT MERKLE Director November 29, 1994 Robert Merkle GREG PFENNING Director November 29, 1994 Greg Pfenning VONN RICHARDSON Director November 29, 1994 Vonn Richardson MONTE ROMOHR Director November 29, 1994 Monte Romohr Director November 29, 1994 Joe Royster PAUL RUEDINGER Director November 29, 1994 Paul Ruedinger RAYMOND J. SCHMITZ Director November 29, 1994 Raymond J. Schmitz THEODORE J. WEHRBEIN Director November 29, 1994 Theodore J. Wehrbein ROBERT ZINKULA Director November 29, 1994 Robert Zinkula EX-99 2 EXHIBIT INDEX Exhibit 99 EXHIBIT INDEX The following exhibits and financial statement schedules are filed as a part of this Form 10-K. Certain on these exhibits are incorporated by the reference indicated. Items marked with an asterisk (*) are filed herewith. Exhibit No. Exhibit Articles of Incorporation and Bylaws: * 3.A Articles of Incorporation and Bylaws of Farmland Industries, Inc. effective December 1, 1993. Instruments Defining the Rights of Security Holders, Including Indentures: 4.A(1) Trust Indenture dated November 20, 1981, as amended January 4, 1982, including specimen of Demand Loan Certificates. (Incorporated by Reference - Form S-1, No.2-75071, effective January 7, 1982) 4.A(2) Trust Indenture dated November 8, 1984, as amended January 3, 1985, including specimen of 20-year Subordinated Capital Investment Certificates. (Incorporated by Reference - Form S-1, No.2-94400, effective December 31, 1984) 4.A(2)(1) Amendment Number 2, dated December 3, 1991, to Trust Indenture dated November 8, 1984 as amended January 3, 1985, covering Farmland Industries, Inc.'s 20-Year Subordinated Capital Investment Certificates (Incorporated by Reference - Form SE, filed December 3, 1991) 4.A(3) Trust Indenture dated November 8, 1984, as amended January 3, 1985, including specimen of 10-year Subordinated Capital Investment Certificates. (Incorporated by Reference - Form S-1, No.2-94400, effective December 31, 1984) 4.A(3)(1) Amendment Number 2, dated December 3, 1991, to Trust Indenture dated November 8, 1984 as amended January 3, 1985, covering Farmland Industries, Inc.'s 10-Year Subordinated Capital Investment Certificates. (Incorporated by Reference - Form SE, filed December 3, 1991) 4.A(4) Trust Indenture dated November 8, 1984, as amended January 3, 1985, including specimen of 5-year Subordinated Capital Investment Certificates. (Incorporated by Reference - Form S-1, No.2-94400, effective December 31, 1984) 4.A(4)(1) Amendment Number 2, dated December 3, 1991, to Trust Indenture dated November 8, 1984 as amended January 3, 1985, covering Farmland Industries, Inc.'s 5-Year Subordinated Capital Investment Certificates. (Incorporated by Reference - Form SE, filed December 3, 1991) 4.A(5) Trust Indenture dated November 8, 1984, as amended January 3, 1985 and November 20, 1985, including specimen of 10-year Subordinated Monthly Income Capital Investment Certificates. (Incorporated by Reference - Form S-1, No. 2-94400, effective December 31, 1984) 4.A(6) Trust Indenture dated November 11, 1985 including specimen of the 5-year Subordinated Monthly Income Capital Investment Certificates. (Incorporated by Reference - Form S-1, No. 33-1970, effective December 31, 1985) Instruments Defining Rights of Owners of Indebtedness not Registered: 4.B(1) Credit Agreement among Farmland Industries, Inc., as Borrower, ABN Amro Bank N.V., The Bank of Nova Scotia, Boatmen's First National Bank of Kansas City, The Chase Manhattan Bank, N.A., Commerce Bank of Kansas City, N.A., NBD Bank, N.A., as Banks and The National Bank for Cooperatives, Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A. "Rabobank Nederland", New York Branch, as Banks and as Co-Agents, dated May 19, 1994, (the "Syndicated Credit Facility"). (Incorporated by Reference - Form 10-Q filed July 14, 1994) 4.B(2) List identifying contents of all omitted schedules referenced in and not filed with, the Syndicated Credit Facility, dated May 19, 1994. (Incorporated by Reference - Form 10-Q, filed July 14, 1994) Material Contracts: Lease Contracts: 10.A(1) The First National Bank of Chicago, not individually but solely as Trustee for AT&T Commercial Finance Corporation, The Boatmen's National Bank of St. Louis, Firstier Bank, N.A. and Norwest Bank Minnesota, National Association and Farmland Industries, Inc. consummated a leveraged lease in the amount of $73,153,000 dated September 6, 1991. (Incorporated by Reference - Form SE, filed December 3, 1991.) 10.A(2) The First National Bank of Commerce as Trustee for General Electric Credit Corporation as Beneficiary and Farmland Industries, Inc. consummated a leveraged lease in the amount of $51,909,257.90 dated March 17, 1977. (Incorporated by Reference - Form S-1, No.2-60372, effective December 22, 1977) Management Remunerative Plans Filed Pursuant to Item 14C of this Report. * 10.(iii)(A)(1) Annual Employee Variable Compensation Plan (September 1, 1994 - August 31, 1995) 10.(iii)(A)(2) Farmland Industries, Inc. Management Long-Term Incentive Plan (Effective September 1, 1993). (Incorporated by Reference - Form 10-K, filed November 29, 1993) 10.(iii)(A)(3) Farmland Industries, Inc. Executive Deferred Compensation Plan (Incorporated by Reference - Form SE, filed November 23, 1987) * 21. Subsidiaries of the Registrant * 24. Power of Attorney * 27. Financial Data Schedule (Fiscal Year Ended August 31, 1994). EX-3 3 ARTICLES AND BYLAWS Exhibit 3(A) ARTICLES OF INCORPORATION AND BYLAWS OF FARMLAND INDUSTRIES, INC. Kansas City, Missouri (Effective 12-1-93) ARTICLES OF INCORPORATION ARTICLE I - NAME Section 1. Name. The name of this corporation shall be FARMLAND INDUSTRIES, INC. ARTICLE II - PURPOSES Section 1. Purposes. The purposes for which the Association is organized are to engage in any activity in connection with the marketing or selling of the agricultural products of its members and other patrons; or with the harvesting, threshing, milling, preserving, drying, processing, canning, packing, storing, handling, shipping, or utilization thereof, including (without limitation) doing a public warehouse business and storing agricultural products in interstate commerce; or the manufacturing or marketing of the by-products thereof; or in connection with the manufacturing, selling, or supplying to its members and other patrons of machinery, equipment or supplies, or in connection with agricultural education, research, legislation and economic and social conditions; or in connection with the improvement of livestock breeds by means of artificial breeding or otherwise; or in the financing of the above-enumerated activities; or in any one or more of the activities specified herein. ARTICLE III - PLACE OF BUSINESS Section 1. Place. The place where its business is to be transacted is at 3315 North Oak Trafficway, Kansas City, Missouri, and at such other places either within or outside the State of Kansas as may be provided by the bylaws or as determined by the Board of Directors. ARTICLE IV - TERM Section 1. Term. The term for which this corporation is to exist is fifty years. (By a Certificate of Renewal filed with the Secretary of State of Kansas on September 7, 1973, the term was extended for a period of fifty years from and after September 1, 1973.) ARTICLE V - NUMBER OF DIRECTORS Section 1. Number of Directors. The number of directors of this corporation shall be twenty-two (22), and the term of office of each thereof shall be three (3) years and until his successor is elected and has qualified. ARTICLE VI - CAPITAL STOCK Section 1. Authorized Capital Stock. The capital stock of this Association shall be $1,500,000,000, consisting of 50,000,000 shares of common stock of the par value of $25 per share, 2,000,000 shares of associate member common stock of the par value of $25 per share and 8,000,000 shares of preferred stock of the par value of $25 per share. Section 2. Common Stock. The common stock of this Association may be purchased, owned or held only by producers of agricultural products and associations of such producers, who patronize the Association in accordance with uniform terms and conditions and only such producers and associations of such producers shall be regarded as eligible voting members of the Association. In the event the Board of Directors of the Association shall determine that any holder of the common stock of this Association does not meet the qualifications as may be established by the Board of Directors for holders thereof, such person shall have no rights or privileges on account of such common stock to vote for director(s) or to vote on the management or affairs of the Association, and the Association shall have the right, at its option, (a) to purchase such common stock at its book or par value, whichever is less, as determined by the Board of Directors of the Association, or (b) in exchange for such common stock, to issue an equivalent par value amount of associate member common stock or to issue or record on the books of the Association, capital credits in an equivalent amount. On the failure of any holder, following any demand by the Association therefor, to deliver the certificate or certificates evidencing any common stock, the Association may cancel the same on its books and issue associate member common stock or issue or record on the books of the Association an equivalent amount of capital credits, in lieu thereof. The common stock of this Association may be transferred, and associate member common stock and capital credits may be converted to common stock and transferred, only with the consent of the Board of Directors of the Association and on the books of the Association and then only to persons eligible to hold the same; and no purported assignment or transfer of common stock shall pass to any person not eligible to hold the same, any rights or privileges on account of such stock to vote on the management or affairs of the Association. Each holder of common stock shall be entitled to a minimum of one vote. Common shareholders will receive one additional vote for each complete increment of $1,000 in common stock above membership requirements and one additional vote for each complete increment of dollar volume of business in an amount equal to the product of $1,000 multiplied by a fraction the numerator of which is the total dollar volume of patronage business of the Association during the preceding fiscal year with common shareholders and the denominator of which is the total dollar amount of the Association's common stock issued and outstanding at the close of the preceding fiscal year. No common shareholder shall be entitled to vote more than five percent (5%) of the total votes of the Association available to be cast. This Association shall have a lien on (and right of setoff against) all of its issued common stock for all indebtedness of the holder(s), whether due or to become due, thereof to the Association. No interest or dividend shall be paid on outstanding common stock. The Board of Directors, in its sole discretion, may at any time or times and on any basis deemed appropriate authorize the retirement of any common stock, in whole or in part. Each certificate of common stock issued subsequent to the date of an amendment shall have the then applicable provisions printed thereon. Section 3. Associate Member Common Stock. The associate member common stock of the Association may be purchased, owned or held by any person having the qualifications as may be established by the Board of Directors. Associate member common stock shall have all of the rights and privileges attendant to that of common stock, except that such associate member common stock shall not entitle the holder thereof to vote, irrespective of the number of shares held, for director(s) or to vote on the management or affairs of the Association. In the event the Board of Directors of the Association shall determine that any holder of the associate member common stock of the Association does not meet the qualifications as may be established by the Board of Directors for holders thereof, the Association shall have the right, at its option, (a) to purchase such associate member common stock at its book or par value, whichever is less, as determined by the Board of Directors of the Association, or (b) to convert the associate member common stock held by any such person to capital credits by notifying such holder, after which such associate member common stock shall be cancelled on the books of the Association. The associate member common stock of this Association may be transferred, and common stock and capital credits may be converted to associate member common stock and transferred, only with the consent of the Board of Directors of the Association and then only to persons eligible to hold the same; and no purported assignment or transfer of associate member common stock shall pass to any person not eligible to hold the same, any rights or privileges on account of such stock. This Association shall have a lien on (and right of setoff against) all of its issued associate member common stock for all indebtedness of the holder(s), whether due or to become due, thereof to the Association. No interest or dividend shall be paid on outstanding associate member common stock. The Board of Directors, in its sole discretion, may at any time or times and on any basis deemed appropriate au- thorize the retirement of any associate member common stock, in whole or in part. Each certificate of associate member common stock issued subsequent to the date of an amendment shall have the then applicable provisions printed thereon. Section 4. Preferred Stock. The preferred stock shall be nonvoting and may be (1) made subject to redemption at such time or times, and at such price or prices, and (2) issued in such series, with such designations, preferences, and relative, participating, optional or other special rights, and qualifications, limitations or restrictions as shall be stated and expressed in the Articles of Incorporation of this Association, or in the resolution or resolutions adopted by the Board of Directors thereof for the issue of such stock; and the said Board of Directors is hereby granted authority (1) to provide from time to time for the issue of preferred stock, in one or more series, and with such designations, preferences, and relative, participating, optional or other special rights, and qualifications, limitations or restrictions, and (2) to make such stock, or any part thereof, subject to redemption at such time or times, and at such price or prices, as the said Board of Directors, in its sole discretion, may from time to time determine. Section 5. Capital Credits. The Association may issue at any time, and record or transfer on its books and records, one or more classes of capital credits in the Association. Holders of capital credits shall not be entitled to vote. The capital credits of this Association may be transferred, and common stock and associate member common stock may be converted to capital credits and transferred, only with the consent of the Board of Directors of the Association and on the books of the Association. The Board of Directors, in its sole discretion, may at any time or times and on any basis deemed appropriate authorize the transfer or retirement of any capital credits, in whole or in part. No interest or dividend shall be paid on outstanding capital credits. This Association shall have a lien on (and right of setoff against) all of its issued capital credits for all indebtedness of the holder(s), whether due or to become due, thereof to the Association. Each certificate of capital credits issued subsequent to the date of an amendment shall have the then applicable provisions printed thereon. ARTICLE VII - INDEMNIFICATION Section 1. Indemnification. The Association may agree to the terms and conditions upon which any director, officer, employee or agent accepts his office or position and in its bylaws, by contract or in any other manner may agree to indemnify and protect any director, officer, employee or agent of the Association, or any person who serves at the request of the Association as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, to the fullest extent permitted by the laws of the State of Kansas. Section 2. Limitation of Liability. Without limiting the generality of the foregoing provisions of this ARTICLE VII, to the fullest extent permitted or authorized by the laws of the State of Kansas, including without limitation the provisions of subsection (b)(8) of Kan. Stat. Ann. Section 17-6002 (1981) as now in effect and as it may from time to time hereafter be amended, no person who is currently or shall hereinafter become a director of the Association shall have personal liability to the Association for monetary damages for breach of fiduciary duty as a director for any act or omission occurring subsequent to the date this provision becomes effective. If the Kansas General Corporation Code is amended after approval of this provision by the shareholders of the Association, to authorize corporate action further limiting or eliminating the personal liability of directors, then the liability of a director of the Association shall be limited or eliminated to the fullest extent permitted by the Kansas General Corporation Code, as so amended. BYLAWS ARTICLE I - CAPITAL STOCK Section 1. Stock Certificates. Certificates of stock shall be issued to each holder of fully-paid shares. Each certificate shall state the par value of the shares, the number of shares represented, the name of the person to whom issued, and shall bear the signature of the president or a vice president and the secretary or an assistant secretary and the seal of the Association, which signatures and seal may be facsimiles. Certificates of stock shall be numbered and issued in numerical order and a record of each certificate issued shall be kept. Section 2. Certificates of Indebtedness. The Association shall have the authority to issue certificates of indebtedness in such form and containing such terms as may be approved by the Board of Directors, which certificates shall bear such rate or rates of interest as the Board of Directors may from time to time determine. ARTICLE II - DISTRIBUTION OF EARNINGS Section 1. Current Year's Net Earnings and Patronage Refund Obligation. (a) The Association shall determine annually its earnings or loss including the appropriate portions thereof constituting net earnings for patronage refunds. It shall then allocate and distribute its net overall earnings from its allocation units as patronage refunds to its Members and Patrons with the amounts distributed being determined on the basis of their patronage with such units during the year. (b) The Association's overall earnings or loss shall first be determined using generally accepted accounting principles. For the fiscal year ending August 31, 1994, the overall net earnings or loss shall then be increased or decreased in accordance with the applicable rules and regulations for computing income taxes. Beginning with the fiscal year ending August 31, 1995, the overall net earnings or loss shall no longer be adjusted based on such applicable rules and regulations for computing income taxes. Then any earnings or losses of the allocation units shall be offset in accordance with Section 4 of this Article to establish the overall net earnings of the Association's remaining allocation units which will be available for patronage refunds. (c) The Association's overall net earnings or loss shall be divided into (i) a patronage-sourced portion, determined on the basis of the quantity or value of business done by the Association with or for its Members or Patrons who are eligible to receive patronage refunds and who acquire supplies or services from, or market products through the Association, and (ii) a non-patronage- sourced portion which shall include amounts determined on the basis of the quan- tity or value of business done with or for persons who are not eligible to receive patronage refunds from the Association, plus such net amounts of income (or expense) which are unrelated to the marketing, purchasing or service operations carried on by the Association for its Members and Patrons on a cooperative basis. (d) Any patronage-sourced net earnings shall be further reduced (but not below zero) by the ratably determined portion of dividends on stock applicable to such net earnings that are paid or payable for the fiscal year. Then there shall be deducted the accumulated amount of patronage-sourced losses from prior years which have not otherwise been disposed of by the Board of Directors but not in excess of the amount of net operating loss carryforwards available for use in such year. (e) If at the conclusion of any fiscal year, the amount of retained earnings (which shall include the current year's non-patronage-sourced net earnings) is less than thirty percent (30%) of Member and Associate Member common stock issued and outstanding, and patronage refunds for reinvestment balances as of the end of the previous year then, in order to provide for the Association's reasonable member reserves, there shall be transferred to re- tained earnings, from patronage-sourced net earnings, as members' contribution to reserves, an amount equal to the lesser of (i) fifteen percent (15%) of the current year's remaining patronage-sourced net earnings, or (ii) such amount necessary to increase retained earnings (which shall include the current year's non-patronage-sourced net earnings) to thirty percent (30%) of Member and Associate Member common stock outstanding at the conclusion of the previous fiscal year. (f) Any amount then remaining shall constitute the net earnings of the Association from which Members' and Patrons' patronage refunds shall be paid, and such amount shall be apportioned among the Members and Patrons of the appropriate allocation units on any equitable patronage basis approved by the Board of Directors, and the amounts so determined, shall be paid as patronage refunds in the form of cash, qualified or non-qualified written notices of allocation, provided, however, that a payment by qualified written notice of allocation shall be accompanied by no less than twenty percent (20%) of the stated dollar amount thereof in cash with the balance at par value in Member common stock, Associate Member common stock or capital credits at par value or stated value as determined by the Board of Directors. The Board of Directors shall determine the cash and non-cash amounts, if any, of a Member's or Patron's patronage refund to be retained for purposes of collecting amounts due the Association for such Member's or Patron's subscriptions to any official publication of the Association or for any or all of such Member's or Patron's outstanding indebtedness to the Association, provided that no retention of cash hereunder shall reduce the cash portion of any Member's or Patron's patronage refund otherwise paid by qualified written notice of allocation, to an amount which is less than twenty percent (20%) of the total stated dollar amount thereof. Section 2. Bylaw Consent. Each applicant for membership who continues as a voting member after having been accepted to membership in the Association and after receiving a copy of this bylaw consent provision, shall, by such act alone, consent that the amount of any distributions paid by qualified written notices of allocation, respecting such person's patronage with the Association occurring after it has received a copy of the bylaw consent and while such person remains a voting member thereafter, shall be taken into account by such person at its stated dollar amount for the taxable year in which such distribution(s) are received, in the manner provided by 26 U.S.C. 1385(a). Section 3. Losses. The Board of Directors of this Association shall have complete discretion to determine the handling and ultimate disposition of the Association's losses (including allocation unit losses) and the form, priority and manner in which such losses or portions thereof shall be taken into account, retained, and ultimately disposed of or recovered. The Board may retain losses of the Association and subsequently (i) dispose of them by offset against the net earnings of the Association of subsequent years, (ii) apply such losses to prior years' patronage allocations at any time in order to dispose of them by means of offset and cancellation against members' and patrons' equity account balances, (iii) select and use any other method of disposition as the Board of Directors, in its sole discretion, shall from time to time then determine. Section 4. Netting of Allocation Unit Earnings and Loss. If one or more of the Association's allocation units experience both earnings and losses during any fiscal year, the earnings and losses of such allocation unit or units shall be ratably allocated to and netted with the earnings and losses of the remaining allocation units of the Association in order to determine the Association's overall net earnings. The Association's Patrons and Members shall be notified in any fiscal year for which such netting has occurred. Section 5. Definitions. (a) As used in this Article, the term "Member" shall mean a holder of common stock or Associate Member common stock of the Association; the term "Patron" shall include any person, firm or association which is not also a Member or Associate Member of the Association, with whom the Association has in effect an agreement pursuant to which it has agreed to pay patronage refunds to such person on the basis of the quantity or value of the Association's business done with or for such person during the fiscal year. (b) As used in this Article, the term "allocation unit" shall mean any business or other unit of the Association with respect to which patronage refunds are to be paid (or patronage-sourced losses are to be taken into account) on the basis of the quantity or value of business done during the year with the Association by its Members and Patrons. ARTICLE III - CAPITALIZATION Section 1. Base Capital Plan. For the purposes of acquiring and maintaining adequate capital to finance the business of the Association, the Board of Directors may establish a Base Capital Plan. The Plan may provide a mechanism for determining the Association's total capital requirements and each member's or patron's share thereof (the base capital requirement). As part of the Plan, the Board of Directors may, in its discretion, provide for redemption of capital held by members or patrons in excess of their base capital requirements and may provide a mechanism under which the cash portion of the patronage refund payable to members or patrons will depend upon the degree to which such members or patrons meet their base capital requirements. Such Plan may be amended or modified from time to time or suspended by the Board of Directors as it deems fit. ARTICLE IV - MEMBERS' AND PATRONS' INVESTMENTS Section 1. Common Stock, Associate Member Common Stock, Capital Credits. As a condition of the right to receive patronage refunds as hereinbefore provided, and as a condition of each purchase from, or other transaction with, the Association, and in consideration of similar subscriptions by others, each Member and Patron entitled to receive patronage refunds under the bylaws shall and does hereby, as of the first day of each fiscal year of the Association, irrevocably subscribe for and agree to purchase common stock, associate member common stock or other capital credit(s) of the Association, at par, in an amount of not more than eighty percent (80%) of the amount to be paid to such patron by the Association as patronage refunds resulting from business transacted during such year, as conclusively determined by the Board of Directors of the Association at the time of payment of such refunds. Such subscriptions shall be payable in cash on or before the last day of such fiscal year, without the execution and delivery of any further agreement, and without any acceptance, call or notice by the Association, but only out of such patronage refunds. ARTICLE V - MEETINGS Section 1. Annual Meeting. The annual meeting of the shareholders shall be held each year at such time and at such place as may be fixed from time to time by the Board of Directors. Section 2. Special Meetings. The chairman of the board shall call a special meeting of the shareholders upon a written request of at least ten percent (10%) of the shareholders, or upon a majority vote of the directors. The notice of the time, place, and purpose of such special meeting shall be issued within fifteen (15) days from and after the presentation of such petition, and such special meeting shall be held within thirty (30) days from and after the date of presenting such petition. Section 3. Notice of Meetings. Notice shall be given by the secretary of all annual and special meetings of the shareholders by mailing a notice thereof to each shareholder not less than fifteen (15) days preceding the date of the proposed meeting. Section 4. Presiding Officer. The chairman of the board of the Association shall preside at all meetings of shareholders, and shall cast the deciding vote in all cases of a tie. Section 5. Absent Members Voting. Voting by proxy shall not be permitted, but absent shareholders entitled to vote may vote on specific questions, other than the removal of directors, by ballots transmitted to the secretary, and such ballots shall be counted only in the meeting at the time at which such vote is taken. Section 6. Quorum. A quorum for the transaction of business shall consist of at least two hundred (200) shareholders entitled to vote and at least one- third of the total votes eligible to be cast. All shareholders voting by mail and all votes cast by mail shall be counted as present in determining a quorum for the consideration of a specified question on which votes may be cast by mail. ARTICLE VI - DIRECTORS AND OFFICERS Section 1. Directors. The business and affairs of the Association shall be managed under the direction and control of the Board of Directors, consisting of twenty-two (22) members, elected at annual meetings by the shareholders entitled to vote from their own numbers for three-year terms. Twenty-one members of the Board of Directors shall be elected according to districts as hereinafter provided and shall be known as district directors. The remaining member of the Board of Directors shall be nominated and elected from the floor and shall be known as a director-at-large. Section 2. Election of Directors. (a) The territory in which the Association operates shall, for the purpose of electing district directors, be divided into districts, each of which shall be entitled to the number of directors herein specified. DISTRICT 1 (Missouri and Kentucky) -- 1 director; DISTRICT 2 (Kansas) -- 4 directors; DISTRICT 3 (Colorado, Wyoming, Utah, Oregon and Idaho) -- 1 director; DISTRICT 4 (Nebraska) -- 4 directors; DISTRICT 5 (South Dakota, North Dakota and Montana) -- 1 director; DISTRICT 6 (Iowa, Illinois and Indiana) -- 4 directors; DISTRICT 7 (Oklahoma and Arkansas) -- 3 directors; DISTRICT 8 (Michigan, Minnesota and Wisconsin) -- 2 directors; and DISTRICT 9 (Texas and New Mexico) -- 1 director. (b) The Board of Directors may from time to time assign to any of the aforesaid districts any member or members residing in any state or states or foreign country or foreign countries, other than the states named in the foregoing paragraph. In any such case a member so assigned to any district shall for all purposes be deemed to belong to such district and shall be entitled to attend and participate in the hereinafter mentioned caucus of that district. (c) The various districts shall, by caucus, nominate their candidate or candidates for director as herein provided. The following persons shall be eligible for election as a director at the annual meeting of members: individual shareholders; members, directors, officers, or employees of an association shareholder; and, employees of the Association. In the event the number of directors who are employees of shareholders entitled to vote totals ten or more at any given time, no employee of a shareholder may be elected or appointed to the Board of Directors, provided however, this limitation shall not disqualify any director in office from being eligible for election or re-election as a director. No person shall be eligible for nomination as a director if such person has attained 65 years of age. Five months prior to the annual meeting the chairman of the board shall appoint a nominating committee for each district in which the term of a director expires at the next annual meeting. The district nominating committee shall consist of three persons (one person to be appointed as chairman) meeting the qualifications required to be a director as set forth above. As promptly as possible after the appointment of district nominating committees, the secretary of the Association shall notify the president of each member association in each such district, by mail, of the members of the district nominating committee. Each member association may notify the chairman of the district nominating committee of the member association's candidate or candidates for director at least three months prior to the date of the annual meeting. Such action shall be evidenced by board resolution duly recorded in its minutes. The district nominating committee shall mail its report to the president of each member association in each such district at least one month prior to the annual meeting and shall render its report at the caucus of such district to be held at and in conjunction with the annual meeting, and in doing so, shall provide at least one candidate, but not more than three candidates, for each director term which is expiring. In addition to the names of candidate or candidates provided by member associations for consideration by the district nominating committee, such committee may also consider as candidates persons the committee feels qualified. Any official delegate may make nominations at the district caucus. Such district shall thereupon nominate its nominee or nominees for directors and the names of said nominee or nominees shall be placed before the members at the annual meeting for election. Should said nominee or nominees fail to receive a majority of the votes cast by shareholders entitled to vote and present and voting, nominations may be made from the floor, of nominee or nominees from the district involved, and such shareholders shall thereupon vote on said nominee or nominees. In each district caucus wherein directors are nominated and in the election of directors at the annual meeting, shareholders entitled to vote shall have the number of votes as determined under the Articles of Incorporation, of the Association, for each director to be elected. (d) A redistricting of the territory served by the Association, or a reapportionment of the number of directors for each district, may be made by the members at any annual meeting. Section 3. Officers. The officers, each of whom shall serve at the will of the Board of Directors and shall be elected by the Board of Directors, shall consist of a chairman of the board, vice chairman, president, vice president, secretary, one or more assistant secretaries, treasurer, one or more assistant treasurers, and such other officers as the Board of Directors may from time to time deem advisable. Only the chairman of the board, vice chairman, president, and the vice president need be members of the Board of Directors. No person may hold the offices of chairman of the board and president at the same time. Section 4. Vacancies. Any vacancy on the Board of Directors shall be filled by appointment by the remainder of the board until the next annual meeting when a replacement for the unexpired term shall be elected. Section 5. Meetings. The board shall meet upon the call of the chairman of the board who shall determine the time and place of meetings, or upon call by a majority of the directors; and meetings shall be held at least quarterly. Section 6. Quorum. A majority of the qualified members shall constitute a quorum both for the Board of Directors and the executive committee. Section 7. Compensation. The compensation of the directors for attendance at meetings shall be Three Hundred Dollars ($300.00) per day, plus necessary expenses. Section 8. Removal. Any director of the Association may be removed for cause, by vote of not less than two-thirds of the members present, at any annual meeting or at any special meeting called for the purpose. A director shall be informed in writing of the charges preferred against him at least fifteen (15) days before the meeting and at such meeting shall have an opportunity to be heard in person or by counsel and by witnesses thereto. Officers or agents of the Board of Directors may be removed from office or employment at any time by action of the Board of Directors. Section 9. Indemnification of Directors, Officers and Employees. Each person who is or was a director, officer or employee of the Association or is or was serving at the request of the Association as a director, officer or employee of another corporation (including the heirs, executors, administrators or estate of such person) shall be indemnified by the Association as of right to the full extent permitted or authorized by the laws of the State of Kansas, as now in effect and as hereafter amended, against any liability, judgment, fine, amount paid in settlement, cost and expense (including attorneys' fees) asserted or threatened against and incurred by such person in his capacity as or arising out of his status as a director, officer or employee of the Association, or, if serving at the request of the Association, as a director, officer or employee of another corporation. The indemnification provided by this bylaw provision shall not be exclusive of any other rights to which those indemnified may be entitled under any other bylaw or under any agreement, vote of shareholders or disinterested directors or otherwise, and shall not limit in any way any right which the Association may have to make different or further indemnifications with respect to the same or different persons or classes of persons. ARTICLE VII - DUTIES OF DIRECTORS Section 1. Management of Business. The Board of Directors shall direct the management of the affairs of the Association and shall make all necessary rules and regulations, not inconsistent with the law or the articles of incorporation or bylaws of the Association, for the management and control of the affairs of the Association and the guidance of the officers, agents, and employees thereof. The day-to-day business affairs of the Association shall be in the management and control of the president, selected by the board. Section 2. Executive Committee. An executive committee of six, which shall include the chairman, vice chairman, and president of the Association and three other members to be elected by the board from among its own members at its first meeting after the annual meeting shall have all the powers and exercise all the functions of the Board of Directors, subject to the Board of Directors' general control and direction. Section 3. Bonds. The Board of Directors shall require all officers and employees charged by the Association with responsibility for the custody of any of its funds or property to give adequate bonds, and the costs thereof shall be paid by the Association. Section 4. Audits. As often as the Board of Directors may consider necessary, but at least once a year, the Board of Directors shall obtain the services of a competent and disinterested auditor, who shall make a careful audit of the books and accounts of the Association and render a report in writing thereon. The annual audit report shall be submitted to the members of the Association at the annual meeting. ARTICLE VIII - DUTIES OF OFFICERS Section 1. Duties of Chairman of the Board. The chairman of the board shall preside over all meetings of the shareholders and of the Board of Directors and call special meetings of the shareholders and of the Board of Directors whenever he deems such action advisable. Section 2. Duties of Vice Chairman. In the absence or disability of the chairman, the vice chairman shall perform the duties and exercise the powers of the chairman. The vice chairman shall perform such other duties as may be imposed upon him from time to time by the board. Section 3. Duties of President. The president shall be the chief executive officer; shall sign or delegate to such other officers or employees of the Association as the president may, in his sole discretion, determine, the authority to sign stock certificates, deeds, leases, bills of sale and other instruments conveying any interest in real estate or personal property of the Association and such other instruments or documents as the Board of Directors may authorize or direct from time to time; shall have and exercise the power to hire and fire all employees other than officers, administrative officers, agents or employees selected by the Board of Directors; see that the management and business operations of the Association are exercised and conducted in accordance with general policies established by the Board of Directors; and perform such other duties and exercise such other power or powers as the Board of Directors may from time to time authorize or direct. Section 4. Duties of Vice Presidents. One vice president shall be chosen from the membership of the board. The president may appoint such additional vice presidents as he deems appropriate to conduct the affairs of the Association. The duties of vice presidents shall be assigned to them by the president. The president may delegate to one or more elected officer(s) the authority to perform his duties during his absence in such manner as he deems appropriate. In the event of the total disability or death of the president, the vice president who is a board member shall perform the duties of the president until such time as the board shall otherwise direct or until a successor to the president is elected. Section 5. Duties of Secretary. The secretary shall (1) keep a complete record of the meetings of the shareholders and of the directors; (2) sign all stock and membership certificates with the president or a vice president, and such other papers pertaining to the Association as he may be authorized or directed to sign by the directors; (3) serve all notices and make all reports required by law and these bylaws, and perform such other secretarial duties as may be required by the Board of Directors. The assistant secretaries shall perform the duties and exercise the powers of the secretary during the absence or disability of the secretary. Section 6. Duties of Treasurer. The treasurer shall keep such records and perform such other duties pertaining to his office as the Board of Directors may require. The assistant treasurers shall perform the duties and exercise the powers of the treasurer during the absence or disability of the treasurer. ARTICLE IX - GENERAL PROVISIONS Section 1. Fiscal Year. The fiscal year of this Association shall commence September 1 and end on August 31. Section 2. Amendments. These bylaws may be amended or altered, in whole or in part, as provided by law, at any regular meeting of the members or at any special meeting, when such action has been duly announced in the call, provided that a majority of the votes cast by the shareholders entitled to vote and present and voting, including those votes cast by mail, shall approve such amendment or alteration. Section 3. Official Publication. The Association may publish an official publication. It may be mailed to subscriber lists provided by member associations and the subscription price may be deducted from patronage refunds earned by members. Section 4. Membership Vote for Sale of Principal Business. The Association shall not, without approval by a vote of the majority of the votes cast by members entitled to vote and present and voting at a duly called meeting of the Association, sell or convey or cause or permit the sale or conveyance of more than forty-nine percent (49%) of the voting shares in any subsidiary which accounted for fifty percent (50%) or more of the Association's gross sales on a consolidated basis during any one of the Association's three (3) most recently completed fiscal years or during such shorter period as such subsidiary has been in existence. ARTICLE X - DISSOLUTION Section 1. Upon dissolution or liquidation of the Association in any manner, except as may be otherwise provided by law, the assets of the Association shall be distributed in the following order and manner, to wit: 1. To pay all costs and expenses of dissolution, liquidation and distribution; 2. To pay and discharge all indebtedness of the Association, exclusive of any liability for the distribution of net earnings; 3. To retire, at par value plus unpaid accrued dividends thereon, if any, the five and one-half percent (5 1/2%) and the six percent (6%) preferred stock; 4. To retire, at par value plus unpaid accrued dividends thereon, if any, all other preferred stock of the Association, in the order and in accordance with such priority as may be provided for by the terms and provisions of the outstanding certificates therefor; 5. To pay all patronage refunds payable from current net earnings; and 6. All remaining assets, if any, shall be distributed among the holders of common stock and associate member common stock or other capital credit(s) in proportion to the amounts thereof held by each. EX-10 4 EMPLOYEE VARIABLE COMPENSATION Exhibit 10.(iii)(A)(1) FY 95 STANDARD VARIABLE COMPENSATION PLAN (SEPTEMBER 1, 1994 - AUGUST 31, 1995) OBJECTIVE To pay additional cash beyond base salary to eligible employees of Farmland Industries, Inc. or one of its units, contingent upon the company's financial performance. Farmland Industries, Inc. ("Corporate") must achieve a threshold or minimum income before extraordinary items, or no payout occurs, regardless of individual business/service unit results. This plan includes three important exhibits which are an integral part of the plan structure. Please be aware of and consult them. They include the following: Exhibit A - Corporate and Unit financial performance criteria and levels Exhibit B - A summary chart of plan structure Exhibit C - Descriptions and definitions of accounting terms and methodologies relevant to this plan PLAN STRUCTURE The plan provides a one-time cash payment following the conclusion of FY 95 to eligible employees for the attainment of corporate and unit objectives. Participation is divided into four categories. Category 1 participants receive payout based solely on corporate net income. A category 1, non-management employee at grade 72 or below will normally have a payout opportunity based 100% on corporate results; however, such employees in a production environment or in a subsidiary may be in a customized plan. Whether on a customized plan or standard plan, they will not be allowed to switch back and forth from year to year. Individuals employed by a business unit, but whose functions provide service to the entire company, may be placed on a 100% corporate payout opportunity. Such employees shall remain on a 100% corporate opportunity until the nature of their job changes. Payout opportunity for category 1 will be determined as a percentage of eligible gross wages or salary paid during the fiscal year. Payout opportunities for categories 2,3, and 4 will be a percentage of salary range midpoint. Any variations in the criteria explained in categories 1-4 below result in a customized variation from the standard plan (i.e., a customized plan). CATEGORY 1 Participants All eligible corporate and business unit employees with job grades 0-72 (excluding grade 0-72 production supervisors). Payout Opportunity 3%-5%-8% Based on gross earnings during the fiscal year. Measure 100% Corporate Return on Equity CATEGORY 2 Participants All eligible corporate and business unit employees with job grades 73-79. Grade 0-72 production supervisors. Payout Opportunity 5%-8%-15% - Grade 0-72 Production Supervisors 5%-8%-15% - Grades 73-74 6%-12%-20% - Grades 75-77 8%-18%-34% - Grades 78-79 Based on Midpoint Measures Corporate Units: 100% Corporate Return on Equity Corporate unit participants include eligible corporate and region employees, as well as any eligible employee of a business unit, as designated by management. Business Units: 50% Corporate Return on Equity 50% Business Unit Cash Flow Return on Assets Earnings After Interest (Note: The three business unit measures are weighted equally) CATEGORY 3 Participants All eligible employees with job grades 80 or above who are not Farmland Industries, Inc. vice presidents. Payout Opportunity 10%-22%-40% Based on Midpoint Measures Corporate Units: 100% Corporate Return on Equity Corporate unit participants include eligible corporate and regional employees, as well as any eligible employees of a business unit, as designated by management. Business Units: 30% Corporate Return on Equity 70% Business Unit Cash Flow Return on Assets Earnings After Interest CATEGORY 4 Participants All eligible Farmland Industries, Inc. vice presidents and above. Payout Opportunity 15%-31%-52% - VPs serving on the Management Council Designated members of senior management 20%-40%-64% - Designated members of senior management 25%-45%-70% - Chief Executive Officer Based on Midpoint A cash patronage payment will be required prior to any payout to participants in this category. Measures Senior Management and Corporate Unit 100% Corporate Return on Equity Vice Presidents Business Unit 30% Corporate Return on Equity Vice Presidents 70% Business Unit Cash Flow Return on Assets Earnings After Interest ELIGIBILITY The following types of employees are ineligible for payout under the Standard Variable Compensation Plan: - Employees represented by an organized bargaining unit. - Employees hired after 5/31/95. (Waived if the employee is a former regular full time employee during FY 95. Payout is prorated.) - Regular part time employees with less than 500 hours of service during FY 95. - Temporary employees with less than 1000 hours of service during FY 95. - Employees terminated for cause prior to 8/31/95. - Employees who terminate voluntarily prior to 8/31/95. (Employees who terminate to accept a position with a member cooperative may be eligible for a prorated payout.) - Employees included in variable compensation plans other than the standard variable compensation plan. PRORATIONS The circumstances listed below result in a prorated payout (the amount of payout is proportionate to time served as an active employee in this plan during the fiscal year): Death/Disability Retirement Reduction in Force Focus Team member obtaining outside employment Layoff Leave of Absence Involuntary separations, other than for reasons listed above, which are not for performance or for cause may result in prorated payout. Employees who voluntarily terminate prior to 08/31/95 for the purpose of assuming a position with an MCA cooperative may be eligible to receive a prorated payout. To secure eligibility, the employee must notify Corporate Human Resources, in writing, at the time of separation and ensure that the MCA cooperative notifies Farmland's Corporate Human Resources Department, in writing, to verify employment from the point of separation through the conclusion of the plan year. Employees on formal disciplinary or performance probation are ineligible for that portion of the fiscal year. Employees who transfer from one business/service unit to another receive a prorated award based on the goals attained and eligible gross wages paid or the salary range midpoint in each unit. DETERMINATION OF PAYOUT Payout is determined as a percentage of salary range midpoint or eligible gross wages paid during the fiscal year. Business unit or corporate performance measurements are labeled "threshold", "target", and "maximum". Threshold - The performance level required for the plan to pay out. Attainment of threshold results in a payout equivalent to 3% of eligible gross wages or salary paid during the fiscal year to category 1 participants. Payouts for categories 2, 3 and 4 range from 5% to 25% of midpoint. No payout occurs for achievement below threshold. Target - Identifies the actual performance objective. Attainment of target results in a payout to category 1 participants equivalent to 5% of eligible gross wages or salary earned during the fiscal year. Category 2, 3 and 4 participants receive payouts ranging from 8% to 45% of midpoint. Maximum - A performance level exceeding target at which the payout percentage is frozen. Attainment of maximum results in a payout equivalent to 8% of eligible gross wages or salary earned during the fiscal year to category 1 participants. Category 2, 3, and 4 participants would receive payouts ranging from 15% to 70% of midpoint. No payout occurs beyond these percentages regardless of performance. Payout for performance between threshold and target or target and maximum is prorated. APPROVED: H. D. Cleberg -------------------------------------------- H.D. Cleberg President and CEO EXHIBIT A FY 95 PERFORMANCE CRITERIA AND GOALS CORPORATE: Threshold Target Maximum Return on Equity 8% 11.5% 15% Business Unit: Threshold Target Maximum Cash Flow Return on Assets Earnings after interest EXHIBIT B FY 95 STANDARD VARIABLE COMPENSATION PLAN
Management Corporate Employees Basis Business Unit Employees Basis Category Level for Payout for Payout Thr Target Max Grades 1 Non-Mgmt. 100% Corporate Return on Equity 100% Corporate Return on Equity 3% 5% 8% 0-72 2 Managers 100% Corporate Return on Equity 50% Corporate Return on Equity 5% 8% 15% Production & Above Supv. & 50% Business Unit Measures 73-74 Cashflow 6% 12% 20% 75-77 Return on Assets Earnings after interest 8% 18% 34% 78-79 3 Managers & 100% Corporate Return on Equity 30% Corporate Return on Equity 10% 22% 40% 80+ Directors Non-Farmland 70% Business Unit Measures Industries, Inc Cash Flow VPs) Return on Asset Earnings after interest 4 Vice Presidents (All Senior Management, Corporate, (Business Unit VP's) 15% 31% 52% FII VPs & and Senior and Regional VP's) Designated Sr Management 30% Corporate Return on Equity Mgmt 100% Corporate Return on Equity 70% Business Unit Measures 20% 40% 64% Designated Cash Patronage Qualifier Cash Flow Sr Mgmt Return on Assets Earnings after interest 25% 45% 70% CEO Cash Patronage Qualifier Notes: (1) No payout unless the Company achieves the threshold (i.e., minimally acceptable) return on equity level. (2) Employees may at management discretion be placed at payout opportunity levels lower than those for which they would be qualified based on grade and/or organizational level. (3) No payout for category 4 unless cash patronage is paid. (4) The business unit measures of cash flow, return on assets, and earnings after interest are weighted equally.
EXHIBIT C ACCOUNTING TERMS AND METHODOLOGY DEFINITIONS INCOME is defined as income before taxes and extraordinary items as reported for Key Results purposes. EQUITY is the prior year's ending equity. Equity includes all capital shares and equities ( preferred, common and associate member shares, patronage refunds for reinvestment, and earned surplus). It does not include minority owners equity in subsidiaries. RETURN ON EQUITY (ROE) is the ratio determined by dividing Income by Equity. CASH FLOW will be measured by using the Net Cash Generated formula of net income plus beginning assets minus ending assets. The assets are those reported for Key Results purposes, and at the business unit level, exclude such items as prepayments and redating of inventory. AVERAGE ASSETS are the key results assets averaged by adding the previous year- end assets, September through July ending assets multiplied by two, the current year ending assets and dividing by 24. RETURN ON AVERAGE ASSETS is the ratio of income divided by the Average Assets. EARNINGS AFTER INTEREST is the Key Results income for the operating unit after interest, other income and joint venture income. TREATMENT OF THE VARIABLE COMPENSATION EXPENSE The ROE targets have been expressed after the recognition of the variable compensation expense. In calculating the level at which variable compensation will be paid, the variable compensation expense is added back to Income. For example, assume Equity is $586 million and the ROE for threshold is expressed as 8%. This would correspond to Income of $46.9 million (.08 times $586 million). However, the $46.9 million includes variable compensation expense (variable compensation expense is budgeted at target and an accrual is made each month). EXAMPLE OF REQUIRED INCOME * (ASSUMING PRIOR YEAR ENDING EQUITY OF $586 MILLION) ROE REQUIRED INCOME Threshold 8 % $46,880,000 Target 11.5% $67,390,000 Maximum 15 % $87,900,000 * Actual FY 94 ending ROE has yet to be determined. When it is, these income figures will be subject to some modification. DETERMINATION OF EXTRAORDINARY ITEM If Farmland achieves its performance goals, but experiences a loss year due to extraordinary items, the Board of Directors of Farmland Industries, Inc. maintains the discretion to authorize, adjust, or deny payout of the management portion of the Variable Compensation Plan (include employee in categories 2-4). This also applies to employees with management level payout opportunities who participate in customized plans. Employees on sales incentive plans, with base pay administered through sales paylines, are not affected by this provision unless specific portions of their plans are tied to corporate performance; nor are employees in category 1. GUIDELINES FOR "EXTRAORDINARY" DESIGNATION The Chief Financial Officer and the Chief Executive Officer must approve the classification of any item as "extraordinary." Transactions deemed as "extraordinary" and therefore excluded in the determination of Income for variable compensation include: * The punitive portion of litigation results in favor of or against Farmland, excluding redemptive payments on normal business matter where the intent is to substantially restore net income to where it would have been had the incident not occurred. * Nonrecurring (one-time) adjustments to income or expense such as the gain from settlement of the retirement plan. Any such items would generally be reported as extraordinary items on Farmland financial statements under generally accepted accounting principles. * The gain or loss on the disposal of a major asset, group of assets, or investments. * The gain or loss from any new business activity or business unit added subsequent to the approval of the Business Plan, provided that the acquisition was such that it required specific Board of Director approval outside of the business plan. * The impact of adjustments resulting from LIFO inventory computations or reserves. * Other items as approved. Specific requests by an operating unit for treatment of an item as "extraordinary" must be approved by the Senior Management representative before review by the Chief Financial Officer and the Chief Executive Officer. EX-21 5 SUBSIDIARIES OF REGISTRANT Exhibit 21 SUBSIDIARIES OF THE REGISTRANT Farmland Foods, Inc., a 99%-owned subsidiary, was incorporated under the laws of the State of Kansas. Farmland Foods, Inc. has been included in the consolidated financial statements filed in this registration. Farmland Insurance Agency, a wholly-owned subsidiary, was incorporated under the laws of the State of Missouri. Farmland Insurance Agency has been included in the consolidated financial statements filed in this registration. Farmers Chemical Company, a wholly-owned subsidiary, was incorporated under the laws of the State of Kansas. Farmers Chemical Company has been included in the consolidated financial statements filed in this registration. Farmland Securities Company, a wholly-owned subsidiary, was incorporated under the laws of the State of Delaware. Farmland Securities Company has been included in the consolidated financial statements filed in this registration. Cooperative Service Company, a wholly-owned subsidiary, was incorporated under the laws of the State of Nebraska. Cooperative Service Company has been included in the consolidated financial statements filed in this registration. Double Circle Farm Supply Company, a wholly-owned subsidiary, was incorporated under the laws of the State of Nevada. Double Circle Farm Supply Company has been included in the consolidated financial statements filed in this registration. National Beef Packing Company, L.P., a 58%-owned subsidiary, was formed under the laws of the State of Delaware. National Beef Packing Company has been included in the consolidated financial statements filed in this registration. NBPCo, L.L.C., a wholly-owned subsidiary, was formed under the laws of the State of Kansas. NBPCo has been included in the consolidated financial statements filed in this registration. Farmland Financial Services Company, a wholly-owned subsidiary, was incorporated under the laws of the State of Kansas. Farmland Financial Services Company has been included in the consolidated financial statements filed in this registration. Farmland Transportation, Inc., a wholly-owned subsidiary, was incorporated under the laws of the State of Missouri. Farmland Transportation, Inc. has been included in the consolidated financial statements filed in this registration. Environmental and Safety Services, Inc., a wholly-owned subsidiary, was incorporated under the laws of the State of Missouri. Environmental and Safety Services, Inc. has been filed in the consolidated financial statements included in this registration. Penterra, Inc., a 81%-owned subsidiary, was incorporated under the laws of the State of Kansas. Penterra, Inc. has been included in the consolidated financial statements filed in this registration. Farmland Industries, Ltd., a wholly-owned subsidiary, was incorporated under the laws of the United States Virgin Islands. Farmland Industries, Ltd. has been included in the consolidated financial statements filed in this registration. Heartland Data Services, Inc., a wholly-owned subsidiary, was incorporated under the laws of the State of Kansas. Heartland Data Services, Inc. has been included in the consolidated financial statements filed in this registration. Yuma Feeder Pig, Inc., a 72%-owned subsidiary, was incorporated under the laws of the state of Colorado. Yuma Feeder Pig, Inc. has been included in the consolidated financial statements filed in this registration. Equity Country, Inc., a wholly-owned subsidiary, was incorporated under the laws of the State of Delaware. Equity Country, Inc. has been included in the consolidated financial statements filed in this registration. Equity Export Oil and Gas Company, Inc., a wholly-owned subsidiary, was incorporated under the laws of the State of Oklahoma. Equity Export Oil and Gas Company, Inc. has been included in the consolidated financial statements filed in this registration. Ceres Realty Corporation, a wholly-owned subsidiary, was incorporated under the laws of the State of Missouri. Ceres Realty Corporation has been included in the consolidated financial statements filed in this registration. Heartland Wheat Growers, L.P., a 79%-owned subsidiary, was formed under the laws of the State of Kansas. Heartland Wheat Growers has been included in the consolidated financial statements filed in this registration. Heartland Wheat Growers, Inc., a 79%-owned subsidiary, was incorporated under the laws of the State of Kansas. Heartland Wheat Growers has been included in the consolidated financial statements filed in this registration. Farmland Industrias S.A. de C.V., a wholly-owned subsidiary, was formed under the laws of Mexico. Farmland Industrias has been included in the consolidated financial statements filed in this registration. National Carriers, Inc., a 79%-owned subsidiary, was incorporated under the laws of the State of Kansas. National Carriers has been included in the consolidated financial statements filed in this registration. Supreme Land, Inc., a wholly-owned subsidiary, was incorporated under the laws of the State of Kansas. Supreme Land has been included in the consolidated financial statements filed in this registration. Tradigrain, Inc., a wholly-owned subsidiary, was incorporated under the laws of the State of Tennessee. Tradigrain has been included in the consolidated financial statements filed in this registration. Tradigrain S.A., a wholly-owned subsidiary, was formed under the laws of Switzerland. Tradigrain has been included in the consolidated financial statements filed in this registration. Tradigrain Shipping S.A., a wholly-owned subsidiary, was formed under the laws of Switzerland. Tradigrain has been included in the consolidated financial statements filed in this registration. Tradigrain S.A., a wholly-owned subsidiary, was formed under the laws of France. Tradigrain has been included in the consolidated financial statements filed in this registration. Tradigrain GmbH, a wholly-owned subsidiary, was formed under the laws of Germany. Tradigrain has been included in the consolidated financial statements filed in this registration. Tradigrain LTD., a wholly-owned subsidiary, was formed under the laws of Great Britain. Tradigrain has been included in the consolidated financial statements filed in this registration. Tradigrain S.A., a wholly-owned subsidiary, was formed under the laws of Argentina. Tradigrain has been included in the consolidated financial statements filed in this registration. EX-24 6 POWER OF ATTORNEY Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears below constitutes and appoints H.D. Cleberg and John F. Berardi, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him in his name, place and stead, in any and all capacities, to sign any and all Farmland Industries, Inc.'s Registration Statements and annual reports pursuant to Sections 13 or 15d of the Securities Act of 1934, including any amendments to such registration statements and reports and file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as they might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Signature Title Date ALBERT J. SHIVLEY Chairman of Board, October 19, 1994 Albert J. Shivley Director OTIS H. MOLZ Vice Chairman of Board, October 19, 1994 Otis H. Molz Director LYMAN ADAMS Director October 19, 1994 Lyman Adams RONALD J. AMUNDSON Director October 19, 1994 Ronald J. Amundson BAXTER ANKERSTJERNE Director October 19, 1994 Baxter Ankerstjerne JODY BEZNER Director October 19, 1994 Jody Bezner RICHARD L. DETTEN Director October 19, 1994 Richard L. Detten STEVEN ERDMAN Director October 19, 1994 Steven Erdman WARREN GERDES Director October 19, 1994 Warren Gerdes BEN GRIFFITH Director October 19, 1994 Ben Griffith GAIL D. HALL Director October 19, 1994 Gail D. Hall BARRY JENSEN Director October 19, 1994 Barry Jensen ROBERT MERKLE Director October 19, 1994 Robert Merkle GREG PFENNING Director October 19, 1994 Greg Pfenning VONN RICHARDSON Director October 19, 1994 Vonn Richardson MONTE ROMOHR Director October 19, 1994 Monte Romohr JOE ROYSTER Director October 19, 1994 Joe Royster PAUL RUEDINGER Director October 19, 1994 Paul Ruedinger RAYMOND J. SCHMITZ Director October 19, 1994 Raymond J. Schmitz THEODORE J. WEHRBEIN Director October 19, 1994 Theodore J. Wehrbein ROBERT ZINKULA Director October 19, 1994 Robert Zinkula EX-27 7 FINANCIAL DATA SCHEDULE PERIOD ENDING 8/31/94
5 FDS Form 10-K Fiscal Year Ended August 31, 1994 YEAR AUG-31-1994 SEP-01-1993 AUG-31-1994 44,084 0 394,906 0 538,314 1,096,443 1,202,159 700,869 1,926,631 805,739 517,806 363,562 0 3,702 217,749 1,926,631 6,677,933 6,677,933 6,284,084 6,284,084 20,111 0 51,485 74,244 4,890 73,876 0 0 0 73,876 0 0
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