0000034616-95-000029.txt : 19950920 0000034616-95-000029.hdr.sgml : 19950920 ACCESSION NUMBER: 0000034616-95-000029 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19941130 FILED AS OF DATE: 19950919 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FARMLAND INDUSTRIES INC CENTRAL INDEX KEY: 0000034616 STANDARD INDUSTRIAL CLASSIFICATION: MEAT PACKING PLANTS [2011] IRS NUMBER: 440209330 STATE OF INCORPORATION: KS FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 002-07250 FILM NUMBER: 95574804 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-Q/A 1 2ND AMENDMENT TO 10-Q PERIOD ENDING 11/30/94 FORM 10-Q/A (Amendment No. 2) SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended Commission File November 30, 1994 Number 2-67985 FARMLAND INDUSTRIES, INC. (Exact name of registrant as specified in its charter) Kansas 44-0209330 (State of Incorporation) (I.R.S. Employer Identification No.) 3315 North Oak Trafficway, Kansas City, Missouri (Address of principal executive offices) 64116 (Zip Code) 816-459-6000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes {X} No { } FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS
November 30 1994 August 31 Restated 1994 -------------- --------------- (Amounts in Thousands) Current Assets: Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . $ -0- $ 44,084 Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . 380,854 394,906 Inventories (Note 2) . . . . . . . . . . . . . . . . . . . . . . . 590,826 538,314 Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . 10,769 15,159 Other current assets . . . . . . . . . . . . . . . . . . . . . . . 95,060 103,980 -------------- --------------- Total Current Assets . . . . . . . . . . . . . . . . . . . . . $ 1,077,509 $ 1,096,443 -------------- --------------- Investments and Long-Term Receivables . . . . . . . . . . . . . . . . . $ 197,094 $ 189,601 -------------- --------------- Property, Plant and Equipment: Property, plant and equipment, at cost . . . . . . . . . . . . . . $ 1,218,935 $ 1,202,159 Less accumulated depreciation and amortization . . . . . . . . . . 711,943 700,869 -------------- --------------- Net Property, Plant and Equipment . . . . . . . . . . . . . . . . . . . . $ 506,992 $ 501,290 -------------- --------------- Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 138,783 $ 139,297 -------------- --------------- Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,920,378 $ 1,926,631 ============== =============== See Accompanying Notes to Condensed Consolidated Financial Statements.
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS LIABILITIES AND EQUITIES
November 30 1994 August 31 Restated 1994 -------------- --------------- (Amounts in Thousands) Current Liabilities: Accounts and notes payable . . . . . . . . . . . . . . . . . . . . $ 442,479 $ 548,476 Current maturities of long-term debt . . . . . . . . . . . . . . . 34,943 27,840 Customers' advances on product purchases . . . . . . . . . . . . . 74,466 24,438 Other current liabilities . . . . . . . . . . . . . . . . . . . . . 224,731 204,985 -------------- --------------- Total Current Liabilities . . . . . . . . . . . . . . . . . . $ 776,619 $ 805,739 -------------- --------------- Long-Term Debt (excluding current maturities) . . . . . . . . . . . . . . $ 493,161 $ 517,806 -------------- --------------- Deferred Income Taxes (Note 1) . . . . . . . . . . . . . . . . . . . . . $ 6,340 $ 6,340 -------------- --------------- Minority Owners' Equity in Subsidiaries . . . . . . . . . . . . . . . . . $ 11,453 $ 11,733 Net Income (Note 1) . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 47,945 $ -0- -------------- --------------- Capital Shares and Equities: Common shares, $25 par value - Authorized 50,000,000 shares . . . . . . . . . . . . . . . . . . . . . . $ 399,361 $ 363,562 Other equities . . . . . . . . . . . . . . . . . . . . . . . . . . 185,499 221,451 -------------- --------------- Total Capital Shares and Equities . . . . . . . . . . . . . . $ 584,860 $ 585,013 -------------- --------------- Total Liabilities and Equities . . . . . . . . . . . . . . . . . . . . . $ 1,920,378 $ 1,926,631 ============== ===============
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended ---------------------------------- November 30 November 1994 1993 Restated Restated --------------- --------------- (Amounts in Thousands) Sales . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,616,167 $ 1,473,992 Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . 1,481,889 1,383,764 --------------- --------------- Gross income . . . . . . . . . . . . . . . . . . . . . . . . . $ 134,278 $ 90,228 --------------- --------------- Selling, general & administrative expenses . . . . . . . . . . . . $ 75,346 $ 65,905 --------------- --------------- Other income (deductions): Interest expense . . . . . . . . . . . . . . . . . . . . . . $ (13,443) $ (13,133) Other, net . . . . . . . . . . . . . . . . . . . . . . . . . 4,642 2,930 --------------- --------------- Total other income (deductions) . . . . . . . . . . . . . . . . . . $ (8,801) $ (10,203) ---------------- ---------------- Income before income taxes, equity in net income (loss) of investees and minority owners' interest in net loss of subsidiaries . . . . . . . . . . . . . . . . . . $ 50,131 $ 14,120 Income tax (expense) (Note 1) . . . . . . . . . . . . . . . . . . . (8,768) (759) ---------------- ---------------- Income before equity in net income (loss) of investees and minority owners' interest in net loss of subsidiaries . . . . . . . . . . . . . . . . . . $ 41,363 $ 13,361 Equity in net income (loss) of investees (Note 4) . . . . . . . . . 6,370 (4,067) Minority owners' interest in net loss of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . 212 1,441 --------------- --------------- Net income (Note 1) . . . . . . . . . . . . . . . . . . . . . . . . $ 47,945 $ 10,735 =============== =============== See Accompanying Notes to Condensed Consolidated Financial Statements.
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended --------------------------------- November 30 November 30 1994 1993 Restated Restated -------------- --------------- (Amounts in Thousands) Cash flows from operating activities: Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 47, 945 $ 10,735 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization . . . . . . . . . . . . . . . . 16,435 16,625 Equity in (income) loss of investee . . . . . . . . . . . . . (6,370) 4,067 Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . (628) (1,616) Changes in assets and liabilities: Accounts receivable . . . . . . . . . . . . . . . . . . . 12,724 (15,518) Inventories . . . . . . . . . . . . . . . . . . . . . . . (52,512) (56,782) Other current assets . . . . . . . . . . . . . . . . . . 14,036 (51,809) Accounts payable . . . . . . . . . . . . . . . . . . . . (23,860) 29,795 Advances on product purchases . . . . . . . . . . . . . . 50,028 28,461 Other current liabilities . . . . . . . . . . . . . . . . 856 9,348 -------------- --------------- Net cash provided by (used in) operating activities . . . . . . . . . . . $ 58,654 $ (26,694) -------------- ---------------- Cash flows from investing activities: Proceeds from disposal of investments and notes receivable . . . . $ 6,502 $ 2,829 Acquisition of investments and notes receivable . . . . . . . . . . (9,232) (10,038) Acquisition of businesses . . . . . . . . . . . . . . . . . . . . -0- (2,223) Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . (20,764) (21,407) Proceeds from sale of fixed assets . . . . . . . . . . . . . . . . 1,312 8,504 -------------- --------------- Net cash provided by (used in) investing activities . . . . . . . . . . . $ (22,182) $ (22,335) --------------- ---------------- Cash flows from financing activities: Net increase of demand loan certificates . . . . . . . . . . . . . $ 3,768 $ 7,999 Proceeds from bank loans and notes payable . . . . . . . . . . . . 191,610 256,530 Payments on bank loans and notes payable . . . . . . . . . . . . . (300,727) (295,803) Proceeds from issuance of subordinated debt certificates . . . . . 9,092 14,472 Payments for redemption of subordinated debt certificates . . . . . (3,433) (3,857) Increase of checks and drafts outstanding . . . . . . . . . . . . . 57,536 40,063 Payments for redemption of equities . . . . . . . . . . . . . . . . (12,166) (16) Payments of patronage refunds and dividends . . . . . . . . . . . . (26,236) -0- Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . -0- 1,268 -------------- --------------- Net cash provided by (used in) financing activities . . . . . . . . . . . $ (80,556) $ 20,656 --------------- --------------- Net decrease in cash and cash equivalents . . . . . . . . . . . . . . . . $ (44,084) $ (28,373) Cash and cash equivalents at beginning of period . . . . . . . . . . . . 44,084 28,373 -------------- --------------- Cash and cash equivalents at end of period . . . . . . . . . . . . . . . $ -0- $ -0- ============== =============== See accompanying Notes to Condensed Consolidated Financial Statements
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (1) Interim Financial Statements Unless the context requires otherwise, (i) "Farmland" or the "Company" herein refers to Farmland Industries, Inc. and its consolidated subsidiaries, and (ii) all references herein to "year" or "years" are to fiscal years ended August 31. The information included in these Condensed Consolidated Financial Statements of Farmland reflects all adjustments (consisting only of normal recurring accruals) which, in the opinion of management, are necessary for a fair statement of the results for the interim periods presented. In accordance with the bylaws of Farmland and its cooperative subsidiaries, the member-sourced portion of income before income taxes is determined annually and distributed to members of Farmland as patronage refunds. The member-sourced portion of such income is determined on the basis of the quantity or value of business done by Farmland during the year with or for patrons entitled to receive patronage refunds. As this determination is made only after the end of the fiscal year, and since the appropriation of earned surplus is dependent on the determination of the amount of patronage refunds, and in view of the fact that the portion of the annual patronage refund to be paid in cash and Farmland equity (common stock, associate member common stock or capital credits) is determined (by the Farmland Board of Directors at its discretion) after the amount of the annual patronage refund has been determined, Farmland makes no provision for patronage refunds in its interim financial statements. Therefore, the amount of net income has been reflected as a separate item in the accompanying November 30, 1994 Condensed Consolidated Balance Sheet. As patronage refunds are an integral part of the computation of income taxes, the Company has historically not provided for income taxes in interim period financial statements. However, in accordance with generally accepted accounting principles, effective with the accompanying restated financial statements for the three months ended November 30, 1994, the Company commenced including a provision for estimated income taxes in its interim financial statements. For the three months ended November 30, 1994, the Company estimated an effective tax rate based on historic effective rates. The effect of this change was to include an estimated income tax provision for the three months ended November 30, 1994 of $8,768,000. The actual effective rate may be subject to revision. Based on the effective tax rate for 1994, the Condensed Consolidated Financial Statements for the three months ended November 30, 1993 have been restated to include an interim income tax expense of $759,000. (2) Inventories Major components of inventories at November 30, 1994, and August 31, 1994, are as follows:
November 30 August 31 1994 1994 --------------- ---------- (Amounts in Thousands) Finished and in-process products . . . . $ 313,956 $ 286,381 Materials . . . . . . . . . . . . . . . 46,586 51,428 Supplies . . . . . . . . . . . . . . . . 41,602 39,885 Beef . . . . . . . . . . . . . . . . . 25,451 24,267 Grain . . . . . . . . . . . . . . . . . 163,231 136,353 --------------- --------------- $ 590,826 $ 538,314 =============== ===============
Grain inventories are valued at market adjusted for the net unrealized gains or losses on open grain contracts. Crude oil, refined petroleum products, cattle and beef by-products are valued at the lower of last-in, first-out (LIFO) cost or market. Other inventories are valued at the lower of first-in, first-out (FIFO) cost or market. Supplies are valued at cost. In applying the lower of cost or market valuation method in the case of petroleum LIFO inventory, the general practice is modified to conform to the integral view of interim financial statements. Accordingly, a seasonal market value decline below cost of LIFO inventories, at an interim date, which is reasonably expected to be restored by year-end, is not recognized in interim results of operations since no loss is expected to be incurred in the annual period. At November 30, 1994, the carrying value of petroleum inventories stated under the LIFO method was $100,654,000. This exceeded the market value of such inventory by $18,034,000. However, based on historical prices of energy products and seasonal market price variations, the market value decline below cost is expected to be a temporary seasonal price fluctuation. Had the lower of first-in, first-out (FIFO) cost or market been used to value these petroleum products, inventories at November 30, 1994 would have been lower by $8,689,000. The carrying value of beef inventories stated under the LIFO method was $25,451,000 at November 30, 1994. The LIFO method of accounting for beef inventories had no effect on the carrying value of inventories or on the income reported for the three months ended November 30, 1994 because market value of these inventories was lower than LIFO or FIFO cost. (3) Contingencies In July 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. 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 $70,800,000. The asserted deficiencies relate primarily to the Company's tax treatment of the $237,200,000 gain resulting from its sale of the stock of Terra and the IRS's contention that Farmland incorrectly treated the Terra sale gain as income against which certain patronage-sourced operating losses could be offset. The statutory notice further asserts that Farmland incorrectly characterized for tax purposes gains aggregating approximately $14,600,000, and a loss of approximately $2,300,000, from dispositions of certain other assets and that Farmland was not entitled to a claimed intercorporate dividends-received deduction with respect to a $24,800,000 distribution received in 1983 from Terra. On June 11, 1993, Farmland filed a petition in the United States Tax Court contesting the asserted deficiencies in their entirety. The case was tried on June 13-15, 1995. Prior to trial, the IRS withdrew its challenge to Farmland's claimed intercorporate dividends-received deduction and several other minor issues were resolved. The parties will submit post-trial briefs to the court in September and November 1995. If the United States Tax Court decides in favor of the IRS on all unresolved issues raised in the statutory notice, Farmland would have additional federal and state income tax liabilities aggregating approximately $85,800,000 plus accumulating statutory interest thereon (approximately $173,400,000 before tax benefits of the interest deduction, through June 30, 1995), or $259,200,000 in the aggregate at June 30, 1995. In addition, such a decision 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 b y approximately $5,000,000 plus applicable statutory interest thereon. Finally, the additional federal and state income taxes and accrued interest thereon, which would be owed based on an adverse decision, would become immediately due and payable unless the Company appealed the decision and posted the requisite bond to stay assessment and collection. The liability resulting from an adverse decision would be charged to current operations and would have a material adverse effect on the Company and may affect its ability to pay, when due, principal and interest on the Company's indebtedness. In order to pay any such tax claim, the Company would have to consider new financing arrangements, including the incurrence of indebtedness and the sale of assets. Moreover, the Company would be required to renegotiate the Credit Agreement with its bank lenders, as well as other existing financing agreements with certain other parties, not only to permit such new financing arrangements, but also to cure events of default under the Credit Agreement and certain of such other existing agreements and to maintain compliance with various requirements of the Credit Agreement and such other existing financing agreements, including working capital and funded indebtedness provisions, in order to avoid default thereunder. No assurance can be given that such financing arrangements or such renegotiation would be successfully concluded. 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. In the opinion of Bryan Cave, Farmland's special tax counsel, it is more likely than not that the courts will ultimately conclude that Farmland's treatment of the Terra sale gain was substantially, if not entirely, correct. Such counsel has further advised, however, none of the issues involved in this dispute is free from doubt, and there can be no assurance that the courts will ultimately rule in favor of Farmland on any of these issues. 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 sites. The Company currently is aware of probable obligations for environmental matters at 23 properties. As of November 30, 1994, the Company has made an environmental accrual of $8,562,000 ($8.4 million at May 31, 1995). The Company periodically reviews and, as appropriate, revises its environmental accruals. Based on current information and regulatory requirements, the Company believes that the accruals established for environmental expenditures are adequate. The Company's actual final costs of addressing certain environmental matters are not quantifiable, and therefore have not been accrued, because such matters are in preliminary stages and the timing, extent and costs of various actions which governmental authorities may require are currently unknown. Management also is aware of other environmental matters for which there is a reasonable possibility that the Company will incur costs to resolve. It is possible that the costs of resolution of the matters described in this paragraph may exceed the liabilities which, in the opinion of management, are probable and which costs are reasonably estimable at November 30, 1994. In the opinion of management, it is reasonably possible for such costs to be approximately an additional $29,000,000 (an additional $24,00,000 at May 31, 1995). At November 30, 1994, the Company was involved in two administrative proceedings brought by Region VII of the Environmental Protection Agency ("EPA") with respect to alleged violations under the Emergency Planning and Community Right-to-Know Act and RCRA at the Coffeyville refinery. Specifically, the two administrative proceedings are described as follows: (1) The Company is a party to an administrative enforcement action brought by Region VII of the EPA which alleges violations of the Emergency Planning and Community Right-to-Know Act and the release reporting requirements of CERCLA at its Coffeyville, Kansas refinery. This proceeding involves alleged violations of release reporting requirements and seeks a civil penalty in the amount of $350,000. (2) The Company is a party to an administrative enforcement action brought by Region VII of the EPA which alleges violations of RCRA at its Coffeyville, Kansas refinery. In this proceeding, the EPA has proposed a civil penalty in the amount of approximately $1.4 million. Subsequently, the Company became involved in an administrative proceeding brought by Region VII of the EPA with respect to alleged violations under the Clean Air Act. The Company has been informed by the U.S. Department of Justice of its intent to bring an enforcement action alleging certain violations of the Clean Air Act at its Coffeyville, Kansas refinery. The U.S. Department of Justice has informed the Company that it will seek a civil penalty of at least $1.6 million. The Company is currently negotiating with the EPA concerning all of these matters and believes that such negotiations may result in compromise settlements. Absent such settlements, the Company may contest the EPA's allegations. Accordingly, no provision has been made in the Company's financial statements for these proposed penalties. See "Business Matters Invovling the Environment" contained in the Company's Annual Report on Form 10-K, as amended by form 10-K/A (Amendment No. 1), for the year ended August 31, 1994. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Financial Condition, Liquidity and Capital Resources The Company has historically maintained two primary sources for debt capital: a substantially continuous public offering of its debt securities (the ''continuous debt program'') and bank lines of credit. The Company's debt securities issued under the continuous debt program generally are offered on a best-efforts basis through the Company's wholly owned broker-dealer subsidiary, Farmland Securities Company, and through American Heartland Investments, Inc. (which is not affiliated with Farmland), and also may be offered by selected unaffiliated broker-dealers. The types of securities offered in the continuous debt program include certificates payable on demand and five- and ten-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 the continuous debt program are 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 the three months ended November 30, 1994, the outstanding balance of demand loan and subordinated debt certificates increased $9.4 million. Farmland has a $650.0 million Credit Agreement. The Credit Agreement provides short-term credit of up to $450.0 million to finance seasonal operations and inventory, and revolving term credit of up to $200.0 million. At November 30, 1994, short-term borrowings under the Credit Agreement were $139.0 million, revolving term borrowings were $80.0 million and $59.1 million was being utilized to support letters of credit issued on behalf of Farmland by participating banks. As of November 30, 1994, Farmland paid commitment fees under the Credit Agreement 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 $150.0 million, consolidated net worth of not less than $475.0 million and funded indebtedness and senior funded indebtedness of not more than 52% and 43% of Combined Total Capitalization (as defined in the Credit Agreement), respectively. All computations are based on consolidated financial data adjusted to exclude nonrecourse subsidiaries (as defined in the Credit Agreement). At November 30, 1994, Farmland was in compliance with all covenants under the Credit Agreement. The Credit Agreement expires in May 1997. The Company maintains other borrowing arrangements with banks and financial institutions. Under such agreements, at November 30, 1994, $48.3 million was borrowed and letters of credit issued by banks amounted to $2.2 million. Financial covenants of these arrangements generally are not more restrictive than under the Credit Agreement. 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. National Beef Packing Company, L.P. ("NBPC"), 58%-owned by Farmland (such interest having increased to 68% effective March 1, 1995), maintains borrowing agreements with a group of banks which provide financing support for its beef packing operations. Such borrowings are nonrecourse to Farmland or Farmland's other affiliates. At November 30, 1994, $82.6 million was available under this agreement of which $59.4 million was borrowed and $8.5 million was utilized to support letters of credit. In addition, NBPC has incurred certain long-term borrowings from Farmland. NBPC has pledged certain assets to Farmland and such group of banks to support its borrowings. Tradigrain, which is comprised of seven international grain trading subsidiaries of Farmland, 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 Farmland or Farmland's other affiliates. Leveraged leasing has been utilized to finance railcars and a substantial portion of the Company's fertilizer production equipment. Under the most restrictive covenants of its leases, the Company has agreed to maintain working capital of at least $75.0 million, Consolidated Funded Debt of not greater than 65% of Consolidated Capitalization and Senior Funded Debt of not greater than 50% of Consolidated Capitalization (all as defined in the most restrictive lease). As a cooperative, Farmland's member-sourced net earnings (i.e., income from business done with or for members) are distributed to its voting members, associate members and patrons in the form of common equity, capital credits or cash. For this purpose, net income or loss was determined in accordance with the requirements of federal income tax law up to 1994 and is determined in accordance with generally accepted accounting principles in 1995 and after. Other income is treated as "nonmember-sourced income". Nonmember-sourced income is subject to income tax and after-tax earnings are transferred to earned surplus. Under Farmland's bylaws, the member-sourced income is distributed to members as patronage refunds unless the earned surplus account, at the end of that year, is lower than 30% of the sum of the prior year-end balance of outstanding common stock, associate member stock, capital credits, nonmember capital and patronage refunds for reinvestment. In such cases, member-sourced income is 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 1992, 1993 and 1994, the earned surplus account exceeded the required amount by $49.5 million, $3.8 million and $2.3 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 the invested portion of the patronage refund is not deductible for federal income tax purposes when it is issued unless at least 20% of the amount of the patronage refund is paid in cash. 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., a 99% owned subsidiary ("Foods"), may be redeemed under other equity redemption plans. The base capital plan and other equity redemption plans are described in the Form 10-K under "Business Equity Redemption Plans" . Major uses of cash during the three months ended November 30, 1994 include net payments of $109.1 million to decrease the balance of bank loans and other notes outstanding, $26.2 million for patronage refunds and dividends distributed from income of the 1994 fiscal year, $20.8 million for capital expenditures, $12.1 million for the redemption of equities under the Farmland base capital p l an and special redemption plan and $9.2 million for acquisition of investments. Major sources of cash include $58.7 million from operations, $57.5 million from an increase in the balance of checks and drafts outstanding and $9.4 million from an increase in the balance of demand loan and subordinated debt outstanding. The IRS issued a statutory notice to Farmland asserting significant deficiencies in federal income taxes and statutory interest thereon. Farmland filed a petition in the United States Tax Court contesting the asserted deficiencies in their entirety. See Note 3 of the Notes to the Condensed Consolidated Financial Statements. Results of Operations GENERAL The Company conducts business primarily in two operating areas: inputs and outputs. 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. The Company's farm supply operations consist of three principal product divisionsCpetroleum, crop production and feed. Principal products of the petroleum division are 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, through the Company's ownership in the Wilfarm joint venture, a complete line of insecticides, herbicides and mixed chemicals. Principal products of the feed division include swine, dairy, pet, beef, poultry, mineral and specialty feeds, feed ingredients and supplements, animal health products and livestock services. The Company's three farm supply divisions produce and distribute products principally at wholesale. Over 50% of the Company's farm supply products sold in 1994 were produced in plants owned by the Company or operated by the Company under long-term lease arrangements. Approximately 65% of the Company's sales of farm supply products sold in 1994 were to farm cooperative associations which are members of Farmland. These farm cooperatives distribute products primarily to farmers and ranchers in states which comprise the corn belt and the wheat belt and who utilize the products in the production of farm crops and livestock. On the output side, the Company's processing and marketing operations include the storage and marketing of grain, the processing of pork and beef, and the marketing of fresh pork, processed pork and fresh beef. In 1994, approximately 61% of the hogs processed and 46% of the grain marketed were supplied to the Company by its members. Substantially all of the Company's pork and beef products sold in 1994 were processed in plants owned by the Company. A substantial portion of the Company's farm supply, pork and beef products are 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. The Company's revenues, margins and net income 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 U.S. imports and exports. In addition, various federal and state regulations to protect the environment encourage farmers to reduce the amount of fertilizer and other chemical applications. Global variables which affect supply, demand and price of crude oil, refined fuels, natural gas and other commodities may impact the Company's operations. Historically, changes in the costs of raw materials used in the manufacture of the Company's finished products have not necessarily resulted in corresponding changes in the prices at which such products have been sold by the Company. Management cannot determine the extent to which these factors may impact future operations of the Company. 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. Operating results for any quarter are not necessarily indicative of the results expected for the full year. The principal businesses of the Company are highly seasonal. Historically, the majority of sales of farm supply products occur in the spring. Revenues in the beef business and in grain marketing historically have been concentrated in the summer and summer is the lowest sales period for pork products. In view of the seasonality of the Company's businesses, it must be emphasized that the results for the three months ended November 30, 1994 should not be annualized to project a full year's results. Three Months Ended November 30, 1994 Compared With Three Months Ended November 30, 1993 Sales Sales for the three months ended November 30, 1994 increased $142.2 million or 9.6% compared with the corresponding period of the prior year. The increase includes $117.0 million higher sales of agricultural output products, $22.1 million higher sales of farm production input products and $3.1 million higher sales of other products and services. Sales of agricultural output products increased principally because grain sales reported in the three months ended November 30, 1994 (which reflect an increase of $95.6 million) include operations of a grain trading company acquired in May 1994 and sales at elevators in Utah and Idaho which Farmland leased in February 1994. These operations were not included in financial reports of the Company for the first quarter of the prior year. In addition, sales of beef and pork increased $15.1 million and $6.3 million, respectively. This increase resulted from higher unit sales of beef and pork partly offset by lower unit prices of pork. The increased sales of agricultural input products includes $52.9 million higher sales of crop production products, $17.2 million in lower sales of petroleum products and $13.6 million lower feed sales. Sales of crop production products increased because unit prices of plant nutrients increased approximately 19% and unit sales of these products increased approximately 4%. Sales of petroleum products decreased because of lower refined fuel and propane prices and lower propane unit sales. Feed sales decreased because of lower formula feed unit sales and because of lower prices of formula feed and feed ingredients. Net Income Net income of $47.9 million for the three months ended November 30, 1994 increased $37.2 million compared with the corresponding period of the prior year. Operating profit in the Company's crop production and food marketing businesses increased $33.2 million and $23.1 million, respectively. In addition, the Company's share of net income from joint ventures engaged in crop production and beef packing operations increased $5.5 million and $4.5 million, respectively. These increases were partially offset by decreased operating profits of $13.8 million in petroleum, $2.8 million higher general corporate expenses and an $8.0 million increase of the provision for income taxes. Operating profit of the crop production business increased in the three months ended November 30, 1994 as a result of higher prices of nitrogen-based products coupled with decreased per unit costs of natural gas (the principal raw material used in production of nitrogen-based plant nutrients). Income of crop production joint ventures increased because of 15% higher market prices of phosphate fertilizers. Operating profit of the food marketing business increased in the three months ended November 30, 1994 compared with the corresponding period of the prior year with improved results in pork and beef. Pork processing and marketing operating profit increased $19.0 million primarily due to increased margins on fresh pork products partially offset by slightly higher promotional expenses. Operating profits in the beef business were $2.0 million in the three months ended November 30, 1994 compared with a loss of $2.1 million in the corresponding period of the prior year. This increase is attributable to higher market prices for beef and the availability of cattle at more favorable cost levels. In addition, the income of Hyplains Beef, a 50%-owned joint venture, increased due to higher unit production and sales of boxed beef products. Results from petroleum operations decreased due to lower unit sales of refined fuels and propane coupled with lower prices for refined fuels. The increase of operating profits of the crop production and food marketing businesses in the three months ended November 30, 1994 (as described above) are attributable to favorable spreads between selling prices and raw material costs (natural gas in the case of nitrogen-based fertilizers and live hogs and cattle in the food marketing business). These price and cost factors are beyond the control of the Company's management and have been volatile in the past. Accordingly, management cannot determine the extent to which these factors will continue to favorably affect the Company's business. The Company's cash flow and income may continue to be volatile as conditions affecting agriculture, costs and markets for the Company's products change. Selling, general and administrative expenses increased $9.4 million in the three months ended November 30, 1994 compared with the corresponding period the prior year. Approximately $6.6 million of the increase was directly connected to business segments, primarily the output businesses (grain, beef and pork) and related to increased sales. Corporate general expenses, not identified to business segments, increased $2.8 million ensuing primarily from higher cost of variable compensation plans and employee pension expenses. The estimated effective tax rate for the three months ended November 30, 1994 is based on historical effective rates. The actual effective tax rate may be subject to subsequent refinement or revision. The effective tax rate for fiscal year 1994 has been used to provide income taxes for the three months ended November 30, 1993. Recent Accounting Pronouncements In the first quarter of 1995, the Company adopted the provisions of Statement of Financial Accounting Standards No. 112, ''Employer's Accounting for Postemployment Benefits'' (''Statement 112''), which was issued by FASB in November 1992. Statement 112 establishes standards of accounting and reporting for the estimated cost of benefits provided to former or inactive employees. The effect of the Company's implementation of Statement 112 at September 1, 1994 was insignificant. In the first quarter of 1995, the Company adopted the provisions of Statement of Financial Accounting Standards No. 115, ''Accounting for Certain Investments in Debt and Equity Securities'' (''Statement 115''), which was issued by the Financial Accounting Standards Board (''FASB'') in May 1993. Statement 115 expands the use of fair value accounting and the reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. The effect of the Company's implementation of Statement 115 at September 1, 1994 was insignificant. PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits The exhibits listed below are filed as part of Form 10-Q/A Amendment No. 2 for quarter ended November 30, 1994. None (b) No reports on Form 8-K were filed during the quarter ended November 30, 1994. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. FARMLAND INDUSTRIES, INC. (Registrant) By: /s/ JOHN F. BERARDI ------------------------- John F. Berardi Executive Vice President and Chief Financial Officer Date: September 19, 1995