-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OK1gNn5//4OHXUsO0siU+StQBNHM5UsCGXR1eF79XnWRTeLg5qGU3xkFcX+Ml2XL UtGZYCRwYW0QJXyIsRPCYg== 0000034616-95-000031.txt : 19951130 0000034616-95-000031.hdr.sgml : 19951130 ACCESSION NUMBER: 0000034616-95-000031 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19950831 FILED AS OF DATE: 19951128 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 002-07250 FILM NUMBER: 95596959 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 8/31/95 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, 1995 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 (I.R.S. Employer Identification No.) of Incorporation or Organization) 3315 North Farmland 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 is an agricultural farm supply and processing and marketing cooperative headquartered in Kansas City, Missouri that is primarily owned by its members and operates on a cooperative basis. Founded originally in 1929, Farmland has grown from revenues of $310,000 during its first year of operation to over $7.2 billion during 1995. Members are entitled to receive patronage refunds distributed by Farmland from its member-sourced annual net earnings. Unless the context otherwise requires, the term "member" herein means (i) any voting member, (ii) any associate member, or (iii) any other person with which Farmland is a party to a currently effective patronage refund agreement (a "patron"). See "Business - Patronage Refunds and Distribution of Net Earnings". Farmland was formally incorporated in Kansas in 1931. Its principal executive offices are at 3315 North Farmland Trafficway, Kansas City, Missouri 64116 (telephone 816-459-6000). Unless the context requires otherwise, (i) "Farmland" or the "Company" herein refers to Farmland Industries, Inc. and its consolidated subsidiaries, (ii) all references herein to "year" or "years" are to fiscal years ended August 31, and (iii) all references herein to "tons" are to United States short tons. MEMBERSHIP Membership requirements are determined by Farmland's Articles of Incorporation and the Board of Directors of Farmland (the ''Board of Directors''). VOTING MEMBERS As of August 31, 1995, Farmland's requirements for voting membership were as follows: (1) Voting 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) Voting members must maintain a minimum investment of $1,000 in par value of Farmland common stock. (3) A cooperative must have open membership (an open membership cooperative is open to anyone i.e. non-discriminatory) limit voting to agricultural producers and conduct a majority of its business with voting producers. ASSOCIATE MEMBERS Farmland's associate members have all the rights of membership except that they do not have voting rights. As of August 31, 1995, Farmland's requirements for associate membership were: Associate members must maintain a minimum investment of $1,000 in par value of Farmland associate member common stock and meet any one of the following four criteria: (a) be a person meeting the requirements for voting membership; (b) be a non-cooperative business entity owned 100%, directly or indirectly, by Farmland or Farmland's members or associate members; (c) be an association, other than one owned 100% by Farmland or Farmland's voting members or associate members, which conducts business on a cooperative basis and has a minimum of 25 active members; and (d) be a hog and/or cattle feeding business which derives a majority of earned income from such feeding business and agrees to provide Farmland with the information it 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. As of August 31, 1995, Farmland's membership, associate membership and patrons eligible for patronage refunds consisted of approximately 1,800 cooperative associations of farmers and ranchers and 11,500 pork or beef producers or associations of such producers. See ''Business - Patronage Refunds and Distribution of Net Earnings''. 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 The Company is one of the largest cooperatives in the United States in terms of revenues. In 1995, Farmland had exports to approximately 72 countries, and derived 47% of its grain revenues from export sales. Substantially all of the Company's foreign grain sales are paid in U.S. Dollars. The Company conducts business primarily in two operating areas: agricultural 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 divisions - petroleum, 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-based fertilizers, and, through the Company's ownership in the WILFARM (a 50%-owned venture formed in 1995)("WILFARM"), 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. Over 50% of the Company's farm supply products sold in 1995 was produced in plants owned by the Company or operated by the Company under long-term lease arrangements. Approximately 64% of the Company's farm supply products sold in 1995 were sold at wholesale 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 processing of pork and beef, the marketing of fresh pork, processed pork and fresh beef and the storage and marketing of grain. In December 1995, the Company plans to commence processing wheat into gluten for use primarily in the commercial baking and pet food industries and starch for numerous industrial purposes. In 1995, approximately 68% of the hogs processed and 49% of the grain marketed were supplied to the Company by its members. Substantially all of the Company's pork and beef products sold in 1995 were processed in plants owned by the Company. No material part of the business of any segment of the Company is dependent on a single customer or a few customers. Financial information about the Company's industry segments is presented in Note 12 of the Notes to Consolidated Financial Statements included herein. 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 a large variety of competitive participants. PETROLEUM MARKETING The principal product of this business segment is refined fuels. Approximately 66% of refined fuels product sales in 1995 resulted from transactions with Farmland's members. The balance of the Company's refined fuels product sales were principally through retailing chains in urban areas. 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 1993, 1994 and 1995 were 19%, 13% and 12%, 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 refineries at Coffeyville, Kansas and at Phillipsburg, Kansas. The refinery at Phillipsburg, Kansas is closed. A loading terminal located at the refinery remains in operation. The carrying value of this refinery at August 31, 1995 was approximately $1.6 million. The Company is evaluating alternative uses for this facility and cannot at this time determine the extent of losses, if any, related to the closure of the refinery, but such losses are expected not to be significant. Production volume for 1993, 1994 and 1995 is as follows: Barrels of Crude Oil Processed Daily Average Based on 365 Days per Year Location 1993 1994 1995 (barrels) Coffeyville, Kansas . . . . . . 53,000 64,211 66,965 The Coffeyville refinery produced 20 million barrels of motor fuels and heating fuels in 1993, 25 million barrels in 1994, and 26 million barrels in 1995. Approximately 67% of petroleum product sales in 1995 represented products produced at this location. Management terminated negotiations with a potential purchaser of the Coffeyville refinery in 1994 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 included herein. In July 1994, the Company acquired a mothballed refinery in Texas which is being reassembled at the Coffeyville refinery site. When reassembly is complete in 1996, crude oil processing capacity is expected to increase. 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 to increase its capability to process efficiently 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 to be 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 if a crude oil shortage were to develop. CROP PRODUCTION MARKETING The Company's crop production business segment includes nitrogen-, phosphate-, and potash-based fertilizer products ("plant nutrients") and, through the Company's ownership in the WILFARM joint venture, 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 1993, 1994 and 1995 were 19%, 17% and 16%, 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 dry blending, liquid mixing, storage and distribution facilities at 33 locations throughout its trade territory. The Company's sales of crop production products are primarily at wholesale to local cooperative associations (members and customers of the Company). In view of this member/customer relationship, management believes that, with respect to such customers, the Company has a slight competitive advantage. Domestic competition, mainly from other regional cooperatives and integrated crop production companies, is intense 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 supplies (the principal raw material in nitrogen-based fertilizer products). In certain cases, foreign producers of fertilizer for export to the United States may be subsidized by their respective governments. PRODUCTION The Company manufactures nitrogen-based crop production products. Based on total production capacity, the Company is one of the largest producers of anhydrous ammonia fertilizer in the United States. The Company owns and produces nitrogen-based products at four anhydrous ammonia plants and operates three anhydrous ammonia plants under long-term lease arrangements. The Company owns and produces phosphate-based products at one plant and has 50% ownership interest in two ventures which produce phosphate-based products. Nitrogen fertilizer production information for 1993, 1994 and 1995 is as follows:
Actual Annual Production Anhydrous Ammonia Plant Location 1993 1994 1995 (tons) Lawrence, Kansas . . . . . . . . . . . . 375,000 443,000 430,000 Dodge City, Kansas . . . . . . . . . . . 241,000 257,000 276,000 Fort Dodge, Iowa . . . . . . . . . . . . 232,000 256,000 258,000 Beatrice, Nebraska . . . . . . . . . . . 243,000 277,000 281,000 Enid, Oklahoma (2 plants)(A) . . . . . . 969,000 985,000 998,000 Pollock, Louisiana(A) . . . . . . . . . . 490,000 526,000 497,000 (a) Leased plants
Natural gas is the major raw material used in production of synthetic anhydrous ammonia. Synthetic anhydrous ammonia is the basic component of other commercially produced nitrogen-based crop production products including urea, ammonium nitrate, urea ammonium nitrate solutions and other products. The Company produces such value-added nitrogen-based products at four plants. Production of such value-added products from anhydrous ammonia for 1993, 1994 and 1995 is as follows:
Actual Annual Production Plant Location 1993 1994 1995 (tons) Lawrence, Kansas . . . . . . . . . . . . 661,000 654,000 719,000 Enid, Oklahoma . . . . . . . . . . . . . 473,000 433,000 473,000 Dodge City, Kansas . . . . . . . . . . . 205,000 163,000 202,000 Beatrice, Nebraska . . . . . . . . . . . 166,000 162,000 165,000
Ammonia also is 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 at the Joplin plant for 1993, 1994 and 1995 is as follows:
Actual Annual Production 1993 1994 1995 (tons) Ammonium Phosphate . . . . . . . . . . . 72,000 75,000 64,000 Feed Grade Phosphate . . . . . . . . . . 141,000 157,000 159,000
The Company and Norsk Hydro a.s. own a joint venture, Farmland Hydro, L.P. ("Hydro"), which is a manufacturer of 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. Annual production in tons of such products for 1993, 1994 and 1995 was 1,216,000, 1,437,000 and 1,471,000, respectively. 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 own a joint venture, SF Phosphates Limited Company, which operates 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 in tons for 1993, 1994 and 1995 of 440,000, 465,000 and 451,000, respectively. Under the joint venture agreement, the Company and J.R. Simplot Company purchase the production of the joint venture in proportion to their ownership. The Company and Mississippi Chemical Company have entered into a letter of intent to form a joint venture to develop, construct and operate a 1,850 metric ton per day ammonia production facility at the Brighton Industrial Site, at LaBrea in the Republic of Trinidad and Tobago. The partners expect the plant to be funded by a combination of nonrecourse project financing and equity. The Company expects to fund its equity position in the project (estimated to amount to approximately $67.0 million) from currently available sources of capital. Although production start up is expected early in 1998, there can be no assurance that production will commence at such time. Also, the recent change in the composition of the national government of the Republic of Trinidad and Tobago could delay the project; however, this is not expected. RAW MATERIALS Natural gas, the largest single component of nitrogen-based 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 service agreements which have been negotiated with each plant's delivering pipeline. Natural gas delivery to the plants could be curtailed under regulations of the Federal Energy Regulatory Commission if the pipeline's capacity were required to serve priority users such as residences, hospitals and schools. In such case, production could be curtailed. No significant production has been lost because of curtailments in transportation, and no such curtailment is anticipated. 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 10%, 8% and 6% of consolidated sales for the years 1993, 1994 and 1995, respectively. Approximately 51% of the feed business segment's sales in 1995 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, a premix plant in Marion, Ohio and a pet food plant in Muncie, Kansas. A new dairy feed mill is under construction in Artesia, New Mexico. Feed production is as follows:
Actual Annual Production 1993 1994 1995 (tons) 22 feed mills (combined) . . . . . . . . 1,030,000 1,118,000 1,112,000
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 1993, 1994 and 1995, approximately 113,000 pigs, 250,000 pigs and 298,000 pigs, respectively, were finished under this program. The majority of the finished pigs were sold to a 99%-owned subsidiary, Farmland Foods, Inc. ("Foods"), for processing. The Company owns less than a 50% interest in Alliance Farm Cooperative Association (formerly Yuma Feeder Pig Limited Liability Company) which operates swine 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. FOOD PROCESSING AND MARKETING PORK PROCESSING The Company's pork processing and marketing operations are conducted through Foods which 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, beef and chicken into hot dogs, dry sausage and other luncheon meats. 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 February 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 facility at San Leandro, California was closed on September 1, 1993. Production for 1993, 1994 and 1995 is as follows:
Actual Weekly Production 1993 1994 1995 (pounds) Crete, Nebraska . . . . . . . . .2,800,000 2,800,000 3,100,000 Denison, Iowa . . . . . . . . . .2,600,000 2,700,000 2,800,000 Wichita, Kansas . . . . . . . . .1,500,000 1,900,000 2,200,000 Monmouth, Illinois(A) . . . . . .1,400,000 1,400,000 1,900,000 Carroll, Iowa . . . . . . . . . .1,200,000 1,100,000 1,400,000 Springfield, Massachusetts . . . 650,000 750,000 725,000 Carey/Riegel, Ohio . . . . . . . 225,000 275,000 425,000 San Leandro, California(B) . . . 250,000 -0- -0- (A) Acquired February 1993 (B) Closed September 1, 1993 Actual Weekly Head Slaughtered 1993 1994 1995 Crete, Nebraska . . . . . . . . . . . 45,000 46,000 46,000 Denison, Iowa . . . . . . . . . . . . 37,000 40,000 41,000 Monmouth, Illinois . . . . . . . . . . 25,000 27,000 33,000
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 the 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 The Company's beef processing and marketing operations are conducted through National Beef Packing Company, L.P. ("NBPC"), which was formed in April 1993, and at August 31, 1995, was 68%-owned by Farmland (such ownership having increased thereafter to approximately 76%). The processing facilities for these beef operations are located in Liberal, Kansas and Dodge City, Kansas. These facilities function as beef abattoirs and have capabilities for processing fresh beef into primal cuts for additional processing into fabricated or boxed beef. During 1994 and 1995, the two plants slaughtered 1.7 million and 1.9 million cattle, respectively. 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 the 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 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 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. The Company is exposed to risk of loss in the market value of its grain inventory and fixed price purchase contracts if grain market prices decrease, and is exposed to loss on its fixed price sales contracts if grain market prices increase. To reduce the price change risk associated with holding positions in grain, the Company takes opposite and offsetting positions by entering into grain commodity futures contracts. Such contracts have terms of up to one year. The Company's strategy is to maintain hedged positions on as close to 100% of its position in grain as is possible. During 1994 and 1995, the Company maintained hedges on approximately 95.3% and 97.9%, respectively, of its grain positions. Based on total assets at the beginning and end of 1995, the average market value of grain positions not hedged during the year amounted to less than 1% of the Company's average total assets. While hedging activities reduce the risk of loss from changing market values of grain, such activities also limit the gain potential which otherwise could result from changes in market prices of grain. In 1995, approximately 47% of grain revenues were from export sales or sales to domestic customers for export. The five largest purchasers during 1995 in terms of total revenues from grain operations, were China (15%), Mexico (7%), Israel (6%), Egypt (6%), and Jordan (2%). In 1993 and 1994, export sales or sales to domestic customers for export accounted for approximately 60% and 37%, 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 generally are paid in U.S. Dollars. As of November 1995, Heartland Wheat Growers, L.P. (79%-owned by Farmland and 21%-owned by five cooperative members of Farmland) has completed construction and is in final start-up testing of a wheat processing plant located in Russell, Kansas. The plant will have capacity to process 4.2 million bushels of wheat annually and produce gluten for use primarily in the commercial baking and pet food industries and starch for numerous industrial purposes. TRADIGRAIN In December 1993, the Company acquired all the common stock of seven international grain trading companies (collectively referred to as "Tradigrain"). 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. For purposes of the Company's Consolidated Financial Statements, on Tradigrain transactions, the Company recognizes as revenues net margin on grain traded rather than the value of the commodities involved in the trades. PROPERTY The Company owns or leases 30 inland elevators and one export elevator with a total capacity of approximately 177,045,000 bushels of grain. The location, type, number and aggregate capacity in bushels of the elevators at August 31, 1995 are as follows: LOCATION AGGREGATE 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 2 4,266,000 Saginaw, Texas . . . . . . Inland 2 37,274,000 Topeka, Kansas . . . . . . Inland 1 12,055,000 Wichita, Kansas . . . . . Inland 1 10,503,000 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. Expenditures related to Company-sponsored product and process improvements amounted to $3.3 million, $2.7 million and $2.3 million for the years ended 1993, 1994 and 1995, respectively. CAPITAL EXPENDITURES AND INVESTMENTS IN VENTURES In 1995, the Company made capital expenditures of $124.7 million. These expenditures related principally to the ongoing expansion of the Coffeyville, Kansas refinery to a production level of 90,000 barrels per day. In addition, NBPC's facility in Liberal, Kansas was undergoing major expansion as was Foods' pork processing facility in Crete, Nebraska. Expenditures of the crop production division included upgrading several existing facilities to improve gas efficiencies and expanding urea ammonium nutrient ("UAN") facilities in Lawrence, Kansas and at several storage terminals. As of August 31, 1995, the Company was also constructing a wheat processing plant in Russell, Kansas. The Company plans expenditures for capital additions, improvements and investments in ventures of approximately $379.4 million during the years 1996 and 1997 as described in the following paragraphs. Of this amount, the Company plans expenditures of $315.1 million for capital additions and improvements and $64.3 million for investments in ventures. Capital expenditures and investments planned for the crop production business segment total $150.3 million and include: an investment in a venture organized to construct and operate an anhydrous ammonia plant in The Republic of Trinidad and Tobago and expenditures for operating efficiencies, environmental and safety issues and for operating necessities or betterments. Capital expenditures and investments planned for the feed business segment total $11.9 million and include an additional investment in a venture with Alliance Farms and expenditures for feed mill and livestock production efficiencies, operating necessities and replacements. Capital expenditures and investments planned for the petroleum business segment total $94.9 million and are to complete the expansion of daily crude oil processing capacity at the Coffeyville, Kansas refinery to 90,000 barrels per day and for operating necessities, increased operating efficiency and for environmental and safety issues. Capital expenditures and investments of approximately $85.3 million are planned for the food processing and marketing business segment. These expenditures include an expansion of NBPC's facility at Liberal, Kansas, the Crete, Nebraska and Wichita, Kansas plants and operational improvement and replacements. Capital expenditures and investments of approximately $6.7 million planned for the grain business segment are mainly for expansion and replacements. Capital expenditures and investments of $30.3 million are planned for the other operations and corporate groups. These expenditures include upgrades of management information services. The remaining expenditures are planned for operating necessities and improvements. The Company intends to fund its capital program with cash from operations or through borrowings. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources." MATTERS INVOLVING THE ENVIRONMENT The Company is subject to various stringent federal, state and local environmental laws and regulations, including those governing the use, storage, discharge and disposal of hazardous materials as the Company uses hazardous substances and generates hazardous wastes in the ordinary course of its manufacturing process. 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 wholly or jointly owns or operates 56 manufacturing properties and has potential responsibility for environmental conditions at a number of former manufacturing facilities and at waste disposal facilities operated by third parties. The Company is investigating or remediating contamination at 24 properties. The Company has also been identified as a PRP under the federal Comprehensive Environmental Response, Compensation, and Liability Act (''CERCLA'') at various National Priority List sites and has unresolved liability with respect to the past disposal of hazardous substances at five such sites. Such laws may impose joint and several liability on certain statutory classes of persons for the costs of investigation and remediation of contaminated properties, regardless of fault or the legality of the original disposal. These persons include the present and former owners or operators of a contaminated property, and companies that generated, disposed of, or arranged for the disposal of hazardous substance found at the property. During 1994 and 1995, the Company paid approximately $1.4 million and $3.2 million, respectively, for environmental investigation and remediation. The Company currently is aware of probable obligations for environmental matters at 32 properties. As of August 31, 1995, the Company has made an environmental accrual of $18.5 million. 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 August 31, 1995. In the opinion of management, it is reasonably possible for such costs to be approximately an additional $19.8 million. Under the Resource Conservation Recovery Act of 1976 (''RCRA''), the Company has five closure and five post-closure plans in place for six locations. Closure and post-closure plans also are in place for three landfills and two injection 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 costs are estimated to be $5.8 million at August 31, 1995 (and is in addition to the $19.8 million discussed in the prior paragraph). The Company is currently involved in three administrative proceedings brought by Region VII of the Environmental Protection Agency (''EPA'') with respect to alleged violations under the Clean Air Act, the Emergency Planning and Community Right-to-Know Act and RCRA at the Coffeyville refinery. The Company is currently negotiating with the EPA concerning these matters and believes that such negotiations may result in compromise settlements, including the possible implementation of a Supplemental Environmental Project in connection with the Clean Air Act proceeding. Absent such settlements, the Company intends to contest the EPA's allegations. Accordingly, no provision has been made in the Company's financial statements for these proposed penalties. See "Legal Proceedings". Protection of the environment requires the Company to incur expenditures for equipment or processes, which expenditures 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 expenditures provide future economic benefits. In 1994 and 1995, the Company had capital expenditures of approximately $2.6 million and $4.7 million, respectively, to prevent future discharges into the environment. The majority of such expenditures was for improvements at the Coffeyville refinery. Management believes the Company currently is 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 currently is in compliance with all such laws, the violation of which could have a material adverse effect on the Company. Certain policies may be implemented from time to time by the USDA, the Department of Energy or 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, 1995, the Company had approximately 12,700 employees. Approximately 43% 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 May 1998. There are no wage re-openers in any of the collective bargaining agreements. PATRONAGE REFUNDS AND DISTRIBUTION OF NET EARNINGS For purposes of this section, (1) annual earnings for 1994 and earlier years means earnings before income taxes determined in accordance with federal income tax law, and (2) annual earnings for 1995 and after means earnings before income taxes determined in accordance with generally accepted accounting principles. Farmland operates on a cooperative basis. In accordance with its bylaws, Farmland returns the member-sourced portion of its annual net earnings to its members as a patronage refund. Each member's portion of the annual patronage refund is determined by the quantity or value of business transacted by the member with Farmland during the year for which the patronage is paid in comparison with Farmland's total member-sourced earnings for such year in the patronage allocation unit for which the patronage is paid. Generally, a portion of the annual patronage refund is returned in cash and for the balance of the patronage refund (the "non-cash portion") the members receive Farmland common shares associate member common shares or capital credits (the equity type received is determined by the membership status). The non-cash portion of the patronage refund, also referred to herein as "allocated equity portion", is determined annually by the 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 of 1986, as amended, 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 the Board of Directors has complete discretion with respect to the handling and ultimate disposition of any member-sourced losses. For the years ended 1993, 1994 and 1995, Farmland returned the following patronage refunds:
Cash or Cash Equivalent Portion Non-Cash Portion Total Patronage of Patronage Refunds of Patronage Refunds Refunds (Amounts in thousands) 1993 . . . . $ -0- $ -0- $ -0- 1994 . . . . $ 26,552 $ 44,032 $ 70,584 1995 . . . . $ 33,038 $ 61,356 $ 94,394
Nonpatronage income or loss (income or loss from activities not directly related to the cooperative marketing or purchasing activities of Farmland) is subject to income taxes computed on the same basis as such taxes are computed on the income or loss of other corporations. ALLOCATED EQUITY REDEMPTION PLANS The Allocated Equity Redemption Plans described below, namely the Base Capital Plan (as defined below), the estate settlement plan and the special allocated equity redemption plans (collectively, 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 not redeem, any equities of the Company without regard to whether such action or inaction is in compliance with the Plans. 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 of Directors 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 ("Base Capital Plan"). The Base Capital Plan provides a mechanism for determining the Company's total capital requirements and each voting member's and associate member's share thereof (the base capital requirement). As part of the Base Capital Plan, the Board of Directors may, in its discretion, provide for redemption of Farmland common stock or associate member common stock held by voting members or associate members whose holdings of common shares or associate member shares exceed the voting members' or associate members' base capital requirement. The Base Capital Plan provides a mechanism under which the cash portion of the patronage refund payable to voting members or associate members will depend upon the degree to which such voting members or associate members meet their base capital requirements. ESTATE SETTLEMENT PLAN The estate settlement plan provides that in the event of the death of an individual (a natural person) allocated equity holder, the allocated equity holdings of the deceased will be redeemed at par value with the exception allocated equity which was purchased and held by the deceased 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 ALLOCATED EQUITY REDEMPTION PLANS From time to time, the Company has redeemed portions of its outstanding allocated equity under various special allocated equity redemption plans. Each such plan has been designed to return cash to members or former members of Farmland or Foods by redeeming certain types of outstanding allocated equity. The order in which each type of allocated equity is redeemed is determined by the Board of Directors. Except for preferred stock sold through a public offering in 1984, substantially all the redemptions under these plans were for allocated equities originally issued as the non-cash portion of the Company's patronage refunds. See "Patronage Refunds and Distribution of Net Earnings". Special allocated equity redemption plans are designed to provide a systematic method for redemption of outstanding allocated equity which is not subject to redemption through other Plans, such as the Base Capital Plan or the estate settlement plan. As of August 31, 1995, provisions of the current special allocated equity redemption plan include: 1. No special redemption will be made if the redemption may result in a violation of covenants in loan agreements and similar instruments; and 2. The targeted amount for special redemptions is a percentage of consolidated net income (member and nonmember). The percentage is determined based on the ratio of Funded Indebtedness to Capitalization (as defined in the special allocated equity redemption plan) before the special redemption but after giving effect to the distribution of cash and redemptions under the Base Capital Plan. Calculation for special redemptions is as follows: Total Special Allocated Equity Funded Indebtedness as Redemption as a Percent of as a Percent of Capitalization Consolidated Net Income > 50 % None 48 - 50 % 2.5 % 45 - 47 % 5.0 % 40 - 44 % 7.5 % < 40 % 10.0 % The targeted amount may be prorated between these levels. 3. The priority for redeeming equities under the Special Allocated Equity Redemption Plans is at the sole discretion of the Board of Directors of Farmland. Presented below are the amounts of allocated equity approved for redemption by the Board of Directors under the Base Capital Plan, the estate settlement plan and the special allocated equity redemption plans for each of the years in the five-year period ended 1995. The amounts approved for redemptions were paid in cash in the fiscal year following approval.
Base Capital Estate Special Equity Plan Settlement Plan Redemption Plans Total Plan Redemptions Redemptions Redemptions Redemptions (AMOUNTS IN THOUSANDS) 1991 2,300 4 5,351 7,655 1992 6,707 234 6,755 13,696 1993 -0- 127 12 139 1994 8,740 126 4,108 12,974 1995 14,159 128 13,451 27,738
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 that, based on the amounts involved or the defenses available to the Company, would have a material adverse effect on the financial position of the Company except for the pending tax litigation relating to Terra Resources, Inc. ("Terra"), a former subsidiary of the Company, as explained in Note 7 of the Notes to Consolidated Financial Statements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition, Liquidity and Capital Resources." In accordance with the Securities and Exchange Commission's Regulation S-K, the Company reports that it is currently involved in the following administrative proceedings in which violations of environmental laws are alleged and civil penalties in excess of $100,000 are sought. 1. COFFEYVILLE CERCLA/EPCRA FINE. On August 10, 1993, Region VII of the U.S. Environmental Protection Agency (the "EPA") issued against the Company an administrative complaint seeking $350,000 in civil penalties for alleged violations of notification requirements under the Comprehensive Environmental Response, Compensation and Liability Act and the Emergency Planning and Community Right to Know Act. The Company has been negotiating with the EPA concerning this matter, but no resolution has been reached to date. 2. COFFEYVILLE RCRA DOCKET NO. VII-94-H-0018. On August 2, 1994, Region VII of the EPA issued against the Company an administrative complaint seeking $1.4 million in civil penalties for alleged violations of the Resource Conservation and Recovery Act (RCRA) and of regulations issued thereunder. The Company has been negotiating with the EPA concerning this matter, but no resolution has been reached to date. 3. COFFEYVILLE CLEAN AIR ACT CIVIL PENALTY. On March 22, 1995, the U.S. Department of Justice ("DOJ") notified the Company of its intent to bring suit against the Company for alleged violations of the Clean Air Act. During July 1995, the Company was notified that, if suit is filed, the Government will seek civil penalties totaling $1.6 million. The Company has been negotiating with the DOJ and EPA concerning this matter but no resolution has been reached to date. 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 the holder being a voting member, an associate member or a patron. See "Business and Properties - The Company"; 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 "Business and Properties - Business - Patronage Refunds and Distribution of Net Earnings"; and 4) Farmland intends to redeem its equities only in accordance with provisions of the Plans which provisions are determined by the Farmland Board of Directors at its sole discretion. See "Business and Properties - Equity Redemption Plans". At August 31, 1995, there are approximately 2,939 holders of common shares, 696 holders of associate member shares, and 11,937 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, 1995 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 1995 and for each of the years in the three-year period ended August 31, 1995 (the "Consolidated Financial Statements"), and the independent auditors' report thereon, are included elsewhere herein. The information set forth below should be read in conjunction with information appearing 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 IRS relating to Terra.
Year Ended August 31 1991 1992 1993 1994 1995 (Amounts in Thousands except ratios) SUMMARY OF OPERATIONS:(1)(2) Net Sales . . . . . . . . . . $ 3,638,072 $ 3,429,307 $ 4,722,940 $ 6,677,933 $ 7,256,869 Operating Profit of Industry Segments . . . . . . . . . . 156,765 160,912 86,579 154,799 293,381 Interest Expense . . . . . . . 36,951 27,965 36,764 51,485 53,862 Income (Loss) From Continuing Operations . . . 42,693 61,046 (30,400) 73,876 162,799 Net Income (Loss) . . . . . . . $ 42,693 $ 62,313 $ (30,400) $ 73,876 $ 162,799 DISTRIBUTION OF NET INCOME (LOSS): Patronage Refunds: Allocated Equity . . . . . . $ 17,837 $ 1,038 $ 1,155 $ 44,032 $ 61,356 Cash and Cash Equivalents . 12,571 17,918 495 26,580 33,061 Earned Surplus and Other Equities . . . . . . . . . . 12,285 43,357 (32,050) 3,264 68,382 $ 42,693 $ 62,313 $ (30,400) $ 73,876 $ 162,799 BALANCE SHEETS: Working Capital . . . . . . . . $ 122,124 $ 208,629 $ 260,519 $ 290,704 $ 319,513 Property, Plant and Equipment, Net . . . . . . . . . . 490,712 446,002 504,378 501,290 592,145 Total Assets . . . . . . . . . 1,369,231 1,526,392 1,719,981 1,926,631 2,185,943 Long-Term Debt (excluding current maturities) . . . . 291,192 322,377 485,861 517,806 506,033 Capital Shares and Equities . . 497,364 588,129 561,707 585,013 687,287
(1) See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition, Liquidity and Capital Resources" for a discussion of the pending income tax litigation relating to Terra, a former subsidiary of the Company. (2) Acquisitions and Dispositions: (a) During 1994, the Company acquired 79% of the common stock of National Carriers, Inc. ("NCI") for a cash purchase price of $4.4 million. NCI is a trucking company located in Liberal, Kansas. NCI provides substantially all the trucking service needs of National Beef Packing Company, L.P. ("NBPC"), a limited partnership. See Note 2 of the Notes to Consolidated Financial Statements included herein. (b) 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 ($31.4 million) was paid in cash. See Note 2 of the Notes to Consolidated Financial Statements included herein. (c) During 1993, Farmland acquired a 58% interest in NBPC (having increased to 68% on March 31, 1995 and, subsequent to August 31, 1995, such interest having increased to approximately 76%). Effective April 15, 1993, NBPC acquired Idle Wild Foods, Inc.'s beef packing plant and feedlot located in Liberal, Kansas. See Note 2 of the Notes to Consolidated Financial Statements included herein. (d) On August 30, 1993, The Cooperative Finance Association ("CFA") purchased 10,113,000 shares of its voting common stock from Farmland as part of a recapitalization plan which established CFA as an independent finance association for its members. As a result of CFA's stock purchase and amendments to CFA's bylaws, Farmland did not have voting control of CFA at August 31, 1993 and, therefore, did not include CFA in its consolidated balance sheet at August 31, 1993. Farmland's remaining investment in CFA is being accounted for by the cost method. (e) The following unaudited financial information for the year ended August 31, 1993 presents pro forma results of operations of the Company as if the disposition of CFA and the acquisition of NBPC had occurred at the beginning of the period presented. The pro forma financial information includes adjustments for amortization of goodwill, additional depreciation expense, and increased interest expense both on recourse and nonrecourse 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 NBPC for the full year 1993. See Note 2 of the Notes to Consolidated Financial Statements included herein. August 31 1993 Unaudited (Amounts in Thousands) Net Sales . . . . . . . . . . . . . $ 5,357,867 Income (Loss) Before Extraordinary Item . . . . . . . (44,040) 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 year ended August 31, 1995, the outstanding balance of demand certificates decreased by $9.6 million and the outstanding balance of subordinated debt certificates increased by $19.9 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 August 31, 1995, short-term borrowings under the Credit Agreement were $250.8 million, revolving term borrowings were $85.0 million and $35.8 million was being utilized to support letters of credit issued on behalf of Farmland by participating banks. Farmland pays commitment fees under the Credit Agreement of 1/10 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 August 31, 1995, Farmland was in compliance with all covenants under the Credit Agreement. The Company and the bank participants annually renew the short-term commitments of the Credit Agreement. The next renewal date is in May 1996. Management expects that the short-term commitment will be renewed; however, at such annual renewal date, any bank participant may choose not to renew its portion of the short-term commitment. The revolving term loan facility will expire in May 1997. The Company maintains other borrowing arrangements with banks and financial institutions. Under such agreements, at August 31, 1995, $47.2 million was borrowed. Financial covenants of these arrangements generally are not more restrictive than under the Credit Agreement. The Company also has filed a registration statement with the Securities and Exchange Commission to issue $200.0 million of debt. No such securities have been issued by the Company. If issued, such debt would be unsecured and non-subordinated obligations of the Company and would rank on parity in right of payment with all other unsecured and non-subordinated indebtedness of the Company. 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 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 August 31, 1995, $90.0 million was available under this facility of which $32.0 million was borrowed and $1.0 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. At August 31, 1995, such borrowings totaled $70.3 million. 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 shares, associate member shares, 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 1993, 1994 and 1995, the earned surplus account exceeded the required amount by $3.8 million, $2.3 million and $62.8 million, respectively. Generally, a portion of the patronage refund is distributed in cash and the allocated equity 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 allocated equity portion in any other form or forms of equities. The allocated equity portion of the patronage refund is determined annually by the Board of Directors, but the allocated equity 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 allocated equity 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 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 Foods may be redeemed under other equity redemption plans. The base capital plan and other equity redemption plans are described under "Business - Equity Redemption Plans" included herein. Cash provided by operating activities totaled $44.7 million in 1995 compared with $106.0 million in 1994. This decrease reflects the cash effect of increased inventories and accounts receivable (principally in the output business, and mostly the grain business). Other major sources of cash include $42.5 million from disposition of investments and collections on long-term notes receivable, $37.1 million from an increase in checks and drafts outstanding which is attributable to the Company's cash management systems, $10.3 million from investors in demand loan and subordinated debt certificates and $9.2 million from bank loans and other notes. Major uses of cash during 1995 include $124.7 million for capital additions or improvements, $26.8 million for acquisition of investments and notes receivable, $26.6 million for patronage refunds and dividends distributed from 1994 earnings and $12.4 million for the redemption of allocated equities under the Farmland base capital plan and special allocated equity redemption plan. In July 1983, Farmland sold the stock of 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 $237.2 million for tax reporting purposes. On March 24, 1993, the IRS issued a statutory notice to Farmland asserting deficiencies in federal income taxes (exclusive of statutory interest thereon) in the aggregate amount of $70.8 million. The asserted deficiencies relate primarily to the Company's tax treatment of a $237.2 million gain resulting from its sale, in July 1983, 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 $14.6 million, and a loss of approximately $2.3 million, from dispositions 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. The case was tried on June 13-15, 1995. The parties submitted post-trial briefs to the court on September 14, 1995; reply briefs were submitted to the court on November 28, 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 $85.8 million plus accumulating statutory interest thereon (approximately $ 178.3 million, before tax benefits of the interest deduction, through August 31, 1995), or $264.1 million in the aggregate at August 31, 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 by approximately $5.0 million 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 financing 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 above described IRS claims. 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, that 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. RESULTS OF OPERATIONS FOR YEARS ENDED AUGUST 31, 1993, 1994 AND 1995 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 use of fertilizers and other chemicals. 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. The increase (decrease) in sales and operating income by business segment in each of the years in the three-year period ended 1995, compared with the respective prior year, is presented in the below table. Management's discussion of industry segment sales, operating income or loss and other factors affecting the Company's net income during 1993, 1994 and 1995 follows the table.
Change in Sales Change in Net Income 1993 1994 1995 1993 1994 1995 Compared Compared Compared Compared Compared Compared with 1992 with 1993 with 1994 with 1992 with 1993 with 1994 (Amounts in Millions) (Amounts in Millions) INCREASE (DECREASE) OF BUSINESS SEGMENT - SALES AND OPERATING INCOME OR LOSS: Petroleum . . . . . . . . . . $ (92) $ (32) $ 21 $ (13) $ 32 $ (35) Crop Production . . . . . . . (13) 278 8 (60) 74 73 Feed . . . . . . . . . . . . 34 49 (60) (1) (4) (7) Food Processing and Marketing 563 943 337 (8) 4 56 Grain Marketing . . . . . . . 798 674 279 1 (34) 52 Other . . . . . . . . . . . . 4 43 (6) 7 (4) -0- $ 1,294 $ 1,955 $ 579 $ (74) $ 68 $ 139 CORPORATE EXPENSES AND OTHER: General corporate expenses (increase) decrease . . . . . . . . . . . . $ 9 $ (9) $ (14) Other income and deductions (net) increase (decrease) . . . . . . . . . 7 14 (6) Interest expense (increase) decrease . . . . . . . . . . . . . . . . . (9) (15) (2) Equity in net income of investees increase (decrease) . . . . . . . . . (10) 23 11 Minority owners' interest in income of subsidiaries (increase) decrease . . . . . . . . . . . . . . . . (1) 5 (14) Provision for loss on disposition of assets (increase) decrease . . . . . . . . . . . . . . . . . . . (29) 29 -0- Income taxes (increase) decrease . . . . . . . . . . . . . . . . . . . 15 (11) (25) Net income increase (decrease) . . . . . . . . . . . . . . . . . . . . $ (92) $ 104 $ 89
In computing the operating income or loss of a business segment, none of the following have been added or deducted: corporate expenses (included in the statements of operations as selling, general and administrative expenses), which cannot practicably be identified or allocated to an industry segment, interest expense, interest income, equity in net income (loss) of investees, other income (deductions) and income taxes. PETROLEUM SALES Sales of the petroleum business increased $21.3 million in 1995 compared with 1994, or 2.5%. Sales of gasoline increased $42.1 million due to 9.6% higher unit sales and 2.4% higher prices. Sales of distillates and propane decreased $14.3 million and $3.0 million, respectively, and sales of other petroleum products decreased $3.5 million. Unit sales of distillates and propane decreased as a result of the mild winter and a wet spring. 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 in refined fuels and propane unit sales. Sales of the petroleum segment decreased $92.2 million in 1993 compared with 1992, primarily a result of a 12% decrease in unit sales of refined fuels (gasoline, diesel and distillates) and a 2% decline of the average selling price thereof. 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 a 27% increase in unit sales and 18% higher prices. OPERATING INCOME The petroleum business incurred an operating loss of $8.0 million in 1995 compared with operating income of $27.2 million in 1994. This was attributable to increased crude oil costs (approximately 9%) without corresponding increases in finished product selling prices. Results from petroleum operations increased $31.7 million in 1994 compared with 1993 primarily because unit margins on diesel fuels with low levels of sulfur (required by the Environmental Protection Agency ("EPA") for diesel fuel sold after September 30, 1993) were higher than the prior year. These margins, which were significantly higher immediately after the crossover to the low sulfur level diesel fuels, decreased to normal levels later in 1994. In addition, margins on other refined fuels improved in 1994 compared with 1993 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 income 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. CROP PRODUCTION SALES Sales of the crop production business increased $8.0 million in 1995 compared with 1994. Sales of plant nutrients increased $117.9 million due to higher selling prices. Unit sales of plant nutrients decreased slightly from the record level of 7.4 million tons set in 1994. Sales of crop protection products reflect a decrease of $109.9 million as a result of placing the Company's crop protection operations in a 50%-owned joint venture on January 1, 1995. Crop production sales in 1994 increased $278.5 million compared with 1993 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 $64.7 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. OPERATING INCOME Operating income of the crop production business increased $72.7 million in 1995 compared with 1994. In addition, the Company's share of the net income of joint ventures engaged in phosphate manufacturing increased $4.6 million and the Company's share of net income of WILFARM was $2.2 million. The increased operating results from crop production operations was principally attributable to the effect of higher selling price on unit margins and contributed significantly to the Company's increased net income in 1995. Operating income 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 income in this segment approximately $66.8 million. Unit sales increased over one million tons (18%) which increased operating income by 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 income of the crop production segment decreased $60.3 million in 1993 compared with 1992, primarily because of a 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 natural 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 Consolidated Statement of Operations in the caption "Equity in net income (loss) of investees") was $8.1 million in 1993 compared with a loss of $1.3 million in 1992. FEED SALES Sales of the feed business decreased $60.1 million in 1995 compared with 1994. This decrease reflects lower unit sales in traditional markets for beef, dairy and swine feed partly offset by increased commercial (bulk) feed sales. Unit sales of dairy feed decreased because the number of dairy cattle on feed programs in the Company's trade territory decreased in 1995. Beef and swine feed unit sales decreased because the relatively low market prices available to livestock producers encouraged such producers to reduce input costs wherever possible and such efforts were aided by the mild winter during which pastures in most of the Company's trade area remained open and provided suitable grazing for beef cattle. 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 $18.1 million. In addition, sales of animal health products increased $2.0 million. Lower formula feed selling prices partly offset the effect of higher unit sales. OPERATING INCOME Operating income of the feed business decreased $7.0 million in 1995 compared with 1994. This decease is attributable to decreased unit sales in traditional markets with cooperatives combined with a net loss on sales to commercial accounts. Operating income 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, feed sales, marketing and administration expenses increased $3.2 million primarily due to higher commissions and other variable compensation plans. Operating income 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. FOOD PROCESSING AND MARKETING SALES Sales of the food processing and marketing business increased $337.3 million in 1995 compared with 1994. Sales of beef increased $350.6 million. Approximately $235.0 million of this increase resulted from NBPC's purchase of assets from Hyplains Beef L.C. (formerly 50%-owned by Farmland). The balance of the increased sales of beef resulted primarily from increased volume (approximately 16%) at NBPC's plant. Sales of pork decreased $13.3 million reflecting the net effect of lower wholesale pork prices, partly offset by higher unit sales. Sales of the food processing and marketing business increased $943.0 million in 1994 compared with 1993. Sales of beef increased $747.0 million principally because NBPC has been included in the Company's 1994 results for the full year. NBPC was acquired in April 1993. Pork sales increased $195.9 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 Company's Carando division increased $13.0 million. Food processing and marketing sales increased $562.5 million in 1993 compared with 1992, primarily due to business acquisitions. In April 1993, the Company and partners organized NBPC. Farmland acquired a 58% ownership interest in NBPC (such interest having increased to 68% effective March 31, 1995 and, subsequent to August 31, 1995, such interest having increased to 76%) 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 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. OPERATING INCOME Operating income of the food processing and marketing business increased $56.5 million in 1995 compared with 1994. This increase includes increased operating income of $43.5 million in beef operations and $13.0 million in pork operations. In addition, the Company's share of net income of Hyplains in 1995 (for the period prior to its acquisition by NBPC) increased $5.2 million compared with 1994. These increases reflect increased unit margins (mostly a result of lower cattle and hog market prices) and an increased number of cattle and hogs processed. Operating income in the food processing and marketing 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 income of the pork business partly offset by an $8.9 million decrease of operating income of the beef business. Operating income from pork processing and marketing operations increased primarily due to higher volume and higher margins on fresh pork, branded pork, hams and specialty meats of the Carando division. Operating income of the beef business decreased owing to weak consumer demands for beef and industry price competition. Operating income of the food processing and marketing segment decreased $8.7 million in 1993 compared with 1992. The decrease is primarily due to a 4.6% increase in live hog costs. 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 the 4.6% increase in live hog costs which could not be fully recovered through increased wholesale prices of fresh and processed pork products and by higher selling and administrative expenses. GRAIN MARKETING SALES AND OPERATING INCOME Sales of grain increased $279.0 million in 1995 compared with 1994. This increase resulted from higher grain prices and unit sales, primarily export sales. Operating income of the grain business totaled $17.9 million in 1995 compared with a loss of $33.5 million in 1994. The increase in operating results was attributable to approximately 59.0 million bushels higher export volume by the North American grain division increased volume of international grain brokered by Tradigrain and as a result of more favorable unit margins which developed as market prices increased in response to decreased worldwide production in 1995. 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 grain 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 income 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 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 $39.1 million in 1995 compared with 1994. Approximately $25.3 million of the increase was directly connected to business segments (primarily the grain and pork businesses) and has been included in the determination of the operating income of business segments. The increase of general corporate expenses, not identified to business segments ($13.8 million), reflects higher variable compensation, pension and other employee costs and higher costs for legal services. 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 NCI 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 due to 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 $9.3 million in 1993 compared with 1992. OTHER INCOME (DEDUCTIONS) INTEREST EXPENSE Interest expense increased $2.4 million in 1995 compared with 1994, reflecting a higher average interest rate (approximately 1/2% higher), partly offset by a lower amount of average borrowings. 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 NCI 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. 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 1993 included a $20.0 million provision for loss on the sale of the refinery. Accordingly, the net carrying value of property, plant and equipment was reduced by $20.0 million 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 $6.2 million from the sale. Accordingly, at August 31, 1993, the carrying value of the dragline was written down by $6.2 million 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 $3.3 million to an estimated disposal value. CAPITAL EXPENDITURES See "Business - Capital Expenditures and Investments in Ventures" included herein. OTHER, NET In June 1993, the Company filed a lawsuit against 43 insurance carriers and other parties (the "Defendants") seeking declaratory judgments regarding the Defendants' insurance coverage obligations for environmental remediation costs. In 1994 and 1995, the Company negotiated settlements with 20 and 2 insurance companies, respectively, and, as part of the settlements, the Company provided the Defendants with releases of various possible environmental obligations. As a result of these settlements, the Company received cash payments of $13.6 million and $.3 million in 1994 and 1995, respectively, and has included such amounts in the caption "Other income (deductions): Other, net" in the Company's and Consolidated Statement of Operations for the year then ended. See Note 16 of the Notes to Consolidated Financial Statements included herein. MATTERS INVOLVING THE ENVIRONMENT See "Business - Matters Involving the Environment" included herein. RECENT ACCOUNTING PRONOUNCEMENTS 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. 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. Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and For Long-Lived Assets to be Disposed of," was issued by the Financial Accounting Standards Board ("FASB") in March 1995 and is effective for fiscal years beginning after December 15, 1995 (the Company's 1997 fiscal year). Statement 121 establishes accounting standards for the impairment of long-lived assets, certain identifiable intangible, and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of. Management expects that the adoption of Statement 121 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 FINANCIAL STATEMENTS Independent Auditors' Report . . . . . . . . . . . . . . 30 Consolidated Balance Sheets, August 31, 1994 and 1995 . . . . . . . . . . . . . . 31 Consolidated Statements of Operations for each of the years in the three-year period ended August 31, 1995 . . . . . 33 Consolidated Statements of Cash Flows for each of the years in the three-year period ended August 31, 1995 . . . . . . . . . . . . 34 Consolidated Statements of Capital Shares and Equities for each of the years in the three-year period ended August 31, 1995 . . . . . 36 Notes to Consolidated Financial Statements . . . . . . . 37 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 1995, 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, 1995. These Consolidated Financial Statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these Consolidated Financial Statements 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 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended August 31, 1995, in conformity with generally accepted accounting principles. 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, 1983 and 1984, 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 20, 1995 FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
August 31 1994 1995 (Amounts in Thousands) Current Assets: Cash and cash equivalents . . . . . . . . . . . $ 44,084 $ -0- Accounts receivable - trade . . . . . . . . . . 360,560 446,232 Inventories (Note 3) . . . . . . . . . . . . . 572,660 772,528 Other current assets . . . . . . . . . . . . . 119,139 60,883 Total Current Assets . . . . . . . . . . . $ 1,096,443 $ 1,279,643 Investments and Long-Term Receivables (Notes 4 and 14) . . . . . . . . . . . . . . . $ 189,601 $ 185,687 Property, Plant and Equipment (Notes 5 and 6): Property, plant and equipment, at cost . . . . $ 1,202,159 $ 1,334,849 Less accumulated depreciation and amortization 700,869 742,704 Net Property, Plant and Equipment . . . . . . . $ 501,290 $ 592,145 Other Assets . . . . . . . . . . . . . . . . . . . $ 139,297 $ 128,468 Total Assets . . . . . . . . . . . . . . . . . . . $ 1.926,631 $ 2,185,943 See accompanying Notes to Consolidated Financial Statements.
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS LIABILITIES AND EQUITIES
August 31 1994 1995 (Amounts in Thousands) Current Liabilities: Demand loan certificates . . . . . . . . . . . . $ 23,158 $ 13,524 Short-term notes payable (Note 6) . . . . . . . 279,137 346,133 Current maturities of long-term debt (Note 6) . 27,840 42,394 Accounts payable - trade . . . . . . . . . . . . 246,181 245,905 Accrued payroll . . . . . . . . . . . . . . . . 52,816 50,337 Other current liabilities . . . . . . . . . . . 176,607 261,837 Total Current Liabilities . . . . . . . $ 805,739 $ 960,130 Long-Term Debt (excluding current maturities) (Note 6) . . . . . . . . . . . . . . $ 517,806 $ 506,033 Deferred Income Taxes (Note 7) . . . . . . . . . . $ 6,340 $ 12,501 Minority Owners' Equity in Subsidiaries (Note 8) . $ 11,733 $ 19,992 Capital Shares and Equities (Note 9): Preferred shares, $25 par value--Authorized 8,000,000 shares, 98,113 shares issued and outstanding (148,069 shares in 1994) . . . $ 3,702 $ 2,453 Common shares, $25 par value -- Authorized 50,000,000 shares, 15,416,370 shares issued and outstanding (14,542,478 shares in 1994) . . . . . . . . . 363,562 385,409 Associate member common shares (nonvoting), $25 par value -- Authorized 2,000,000 shares, 445,323 shares issued and outstanding (370,707 shares in 1994) . . . . . 9,268 11,133 Earned surplus and other equities . . . . . . . 208,481 288,292 Total Capital Shares and Equities . . . $ 585,013 $ 687,287 Contingent Liabilities and Commitments (Notes 6, 7 and 10) Total Liabilities and Equities . . . . . . . . . . $ 1,926,631 $ 2,185,943 See accompanying Notes to Consolidated Financial Statements.
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended August 31 1993 1994 1995 (Amounts in Thousands) Sales . . . . . . . . . . . . . . $ 4,722,940 $ 6,677,933 $ 7,256,869 Cost of sales . . . . . . . . . . . . . 4,470,290 6,284,084 6,699,178 Gross income . . . . . . . . . . . . . $ 252,650 $ 393,849 $ 557,691 Selling, general and administrative expenses . . . . . . . . . . . . . $ 223,792 $ 305,279$ 344,364 Other income (deductions): Interest expense . . . . . . . . . $ (36,764) $ (51,485) $ (53,862) Interest income . . . . . . . . . . 4,189 6,170 8,334 Other, net (Note 16) . . . . . . . 9,536 20,111 11,600 Provision for loss and disposition of assets (Note 17) . . . . . . (29,430) -0- -0- Total other income (deductions) . . . . $ (52,469) $ (25,204) $ (33,928) Income (loss) before income taxes and equity in net income (loss) of investees and minority owners' interest in net (income) loss of subsidiaries . $ (23,611) $ 63,366 $ 179,399 Income tax (expense) benefit (Note 7) . 6,433 (4,890) (29,628) Income (loss) before equity in net income (loss) of investees and minority owners' interest in net (income) loss of subsidiaries . $ (17,178) $ 58,476 $ 149,771 Equity in net income (loss) of investees (Note 4) . . . . . . . . (12,394) 10,878 22,785 Minority owners' interest in net (income) loss of subsidiaries (Note 8) . . . (828) 4,522 (9,757) Net income (loss) . . . . . . . . . . $ (30,400) $ 73,876 $ 162,799 Distribution of net income (Note 9): Patronage refunds: Farm supply patrons . . . . . . $ -0- $ 59,685 $ 74,557 Pork marketing patrons . . . . -0- 10,927 16,087 Beef marketing patrons . . . . -0- -0- 2,488 Grain marketing patrons . . . . -0- -0- 1,285 The Cooperative Finance Association's patrons . . . 1,650 -0- -0- $ 1,650 $ 70,612 $ 94,417 Earned surplus and other equities (Note 9) . . . . . . . . . . . . . (32,050) 3,264 68,382 $ (30,400) $ 73,876 $ 162,799 See notes to Consolidated Financial Statements
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended August 31 1993 1994 1995 (Amounts in Thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) . . . . . . . . . . . . . . . . . . . $ (30,400) $ 73,876 $ 162,799 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization . . . . . . . . . . 57,730 62,960 69,138 Provision for loss on disposition of assets . . . 29,430 -0- -0- (Gain) loss on disposition of fixed assets . . . (385) (1,794) 1,882 Patronage refunds received in equities . . . . . (2,241) (2,171) (2,025) Proceeds from redemption of patronage equities . 1,731 573 1,026 Equity in net (income) loss of investees . . . . 12,394 (10,878) (22,785) Deferred income tax (benefit) expense . . . . . . (3,463) (5,034) 6,161 Minority owners' equity in income (loss) of subsidiaries . . . . . . . 828 (4,522) 9,757 Other . . . . . . . . . . . . . . . . . . . 6,776 5,292 412 Changes in assets and liabilities (exclusive of assets and liabilities of businesses acquired): Accounts receivable . . . . . . . . . . . . (92,024) (12,079) (70,413) Inventories . . . . . . . . . . . . . . . . (65,402) (4,692) (186,570) Other assets . . . . . . . . . . . . . . . . (30,154) (45,990) 38,889 Accounts payable . . . . . . . . . . . . . . 19,630 17,884 782 Other liabilities . . . . . . . . . . . . . (17,981) 32,617 35,684 Net cash provided by (used in) operating activities . . $ (113,531) $ 106,042 $ 44,737 CASH FLOWS FROM INVESTING ACTIVITIES: Advances to borrowers by finance companies . . . . . . $ (624,618) $ -0- $ -0- Collections from borrowers by finance companies . . . . 631,668 -0- -0- Acquisition of businesses . . . . . . . . . . . . . . . (10,500) (35,790) -0- Proceeds from disposal of investments and notes receivable . . . . . . . . . . . . . . . . 12,115 34,577 42,530 Acquisition of investments and notes receivable . . . . (50,378) (22,117) (26,789) Capital expenditures . . . . . . . . . . . . . . . . . (98,238) (69,776) (124,722) Proceeds from sale of fixed assets . . . . . . . . . . 10,900 14,785 3,828 Distribution from joint venture, net . . . . . . . . . -0- -0- -0- Proceeds from sale of assets to joint venture partner . . . . . . . . . . . . . . -0- 2,310 -0- Proceeds from disposition of subsidiary (Note 2) . . . 87,227 -0- -0- Other . . . . . . . . . . . . . . . . . . . (2,140) 5,547 (1,628) Net cash used in investing activities . . . . . . . . . $ (43,964) $ (70,464) $ (106,781) CASH FLOWS FROM FINANCING ACTIVITIES: Net decrease of demand loan certificates . . . . . . . $ (13,224) $ (6,702) $ (9,634) Proceeds from bank loans and notes payable . . . . . . 916,799 888,088 522,916 Payments of bank loans and notes payable . . . . . . . (777,268) (924,731) (513,672) Proceeds from issuance of subordinated debt certificates . . . . . . . . . . . . . . . 72,423 57,636 46,715 Payments for redemption of subordinated debt certificates . . . . . . . . . . . . . . . (16,490) (33,034) (26,866) Checks and drafts outstanding . . . . . . . . . . . . . -0- 37,088 Payments for redemption of equities . . . . . . . . . . (13,505) (3,244) (12,431) Payments of patronage refunds and dividends . . . . . . (17,946) -0- (26,648) Other . . . . . . . . . . . . . . . . . . . . . . . . . 340 2,120 492 Net cash provided by (used in) financing activities . . $ 151,129 $ (19,867) $ 17,960 Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . $ (6,366) $ 15,711 $ (44,084) Cash and cash equivalents at beginning of year . . . . 34,739 28,373 44,084 Cash and cash equivalents at end of year . . . . . . . $ 28,373 $ 44,084 $ -0- SUPPLEMENTAL SCHEDULE OF CASH PAID FOR INTEREST AND INCOME TAXES: Interest . . . . . . . . . . . . . . . . . . . . . . . $ 41,136 $ 43,645 $ 49,885 Income taxes (net of refunds) . . . . . . . . . . . . . $ 1,479 $ 9,746 $ 30,006 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Equities and minority owners' interest called for redemption . . . . . . . . . . . . . . $ -0- $ 12,935 $ 27,738 Transfer of assets in exchange for investment in joint ventures . . . . . . . . . . $ -0- $ 309 $ 2,061 Appropriation of current year's net income as patronage refunds . . . . . . . . . . . . . . $ -0- $ 70,612 $ 94,417 Acquisition of businesses: Fair value of net assets acquired . . . . . . . $ 114,519 $ 131,847 $ -0- Goodwill . . . . . . . . . . . . . . . . . . . . 16,086 1,094 -0- Minority owners' investment . . . . . . . . . . . (7,000) (843) -0- Cash Paid . . . . . . . . . . . . . . . . . . . . (10,500) (35,790) -0- Liabilities Assumed . . . . . . . . . . . . . . . . . . $ 113,105 $ 96,308 $ -0- See accompanying Notes to Consolidated Financial Statements.
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CAPITAL SHARES AND EQUITIES
Years Ended August 31, 1993, 1994 and 1995 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, 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 -0- (355) 17 (3,397) (3,735) 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 . . . . . . . . (6) (9) -0- (3,440) (3,455) 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 Issue, redemption and cancellation of equities -0- (51) 332 (990) (709) Appropriation of current year's net income . -0- -0- -0- 162,799 162,799 Patronage refund payable in cash transferred to current liabilities . . . . . . . . -0- -0- -0- (33,061) (33,061) Base capital redemptions transferred to current liabilities . . . . . . . . -0- (13,939) (220) -0- (14,159) Other equity redemptions transferred to current liabilities . . . . . . . . (1,249) (30) -0- (11,477) (12,756) Prior year patronage refund allocation . . . -0- 35,940 1,508 (37,284) 164 Dividends on preferred stock . . . . . . . . -0- -0- -0- (4) (4) Exchange of common stock, associate member common stock and other equities . . . . -0- (73) 245 (172) -0- BALANCE AT AUGUST 31, 1995 . . . . . . . . . $ 2,453 $ 385,409 $ 11,133 $ 288,292 $ 687,287 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., 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 Industries, Inc. and all its majority-owned subsidiaries ("Farmland" or the "Company", unless the context requires otherwise). All significant intercompany accounts and transactions have been eliminated. The Company's fiscal year ends August 31. Accordingly, all references to "year" or "years" are to fiscal years ended August 31. Cash and Cash Equivalents -- Investments with maturities of less than three months are included in "Cash and cash equivalents." Investments -- Investments in companies over which the Company exercises significant influence (20% to 50% voting control) are accounted for by the equity method. Other investments are stated at cost, less provision for impairment (other than temporary impairment). 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 common shares 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. Property, Plant and Equipment -- Assets, including assets under capital leases, are stated at cost. Depreciation and amortization are computed principally using the straight-line method over the estimated useful lives of the assets and the remaining terms of the capital leases, respectively. 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. The Company assesses the recoverability of goodwill by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows. Goodwill is reflected in the accompanying Consolidated Balance Sheets net of accumulated amortization of $3.3 million and $6.9 million, respectively at August 31, 1994 and 1995. Sales -- The Company's policy is to recognize sales at the time product is shipped. Net margins on international grain merchandised, rather than the value of such products, are included in net sales. The gross value of international grain merchandised in 1994 and 1995 was $590.2 million and $1,552.4 million, respectively. 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. Federal Income Taxes -- Farmland is subject to income taxes on all income not distributed to patrons as patronage refunds. Farmland files consolidated federal and state income tax returns. Effective September 1, 1993, Farmland adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Farmland accounted for income taxes using the deferred method under APB Opinion 11 for the year ended August 31, 1993. Reclassification -- Certain prior-year amounts have been reclassified to conform with the current year presentations. (2) ACQUISITIONS AND DISPOSITIONS During 1993, the Company and partners organized National Beef Packing Company, L.P. ("NBPC"). Farmland retained a 58% ownership interest (having increased to 68% effective March 31, 1995 and, subsequent to August 31, 1995, such interest having increased to 76%) in NBPC by investing $10.5 million 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 $130.6 million (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 10.1 million shares of its voting common stock from the Company for a purchase price comprised of $1.5 million in cash, equities of Farmland Industries, Inc. (with a par value of $2.4 million) held by CFA and a $6.2 million subordinated promissory note payable to the Company bearing interest of 5.3%. In addition, during 1993, CFA: 1) repaid its operating loan from the Company ($25.2 million); and, 2) purchased the lending operations and assets of Farmland Financial Services Company for a cash payment of $60.5 million and a $2.1 million, 6.0% subordinated note payable to the Company. The Company repaid $87.2 million 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, The Company'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 1993, presents pro forma results of operations of the Company as if the disposition of CFA and the acquisitions of NBPC had occurred at the beginning of the 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 NBPC for the full year 1993.
August 31, 1993 (Unaudited) (Amounts in Thousands) Net sales . . . . . . . . . . . . . $ 5,357,867 Income (loss) before extraordinary item . . . . . . . $ (44,040)
During 1994, the Company acquired approximately 79% of the common stock of National Carriers, Inc. ("NCI") for a cash purchase price of $4.4 million. NCI is a trucking company located in Liberal, Kansas. NCI provides substantially all the trucking service needs of National Beef Packing Company, L.P. ("NBPC"). 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 ($31.4 million) 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 1995 (Amounts in Thousands) Grain . . . . . . . . . . . . . . . . . . $ 170,699 $ 312,202 Beef . . . . . . . . . . . . . . . . . . 21,116 30,179 Materials . . . . . . . . . . . . . . . . . 51,428 39,399 Supplies . . . . . . . . . . . . . . . . . 43,036 50,328 Finished and in-process products . . . . . 286,381 340,420 $ 572,660 $ 772,528
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 1995 were $86.2 million and $82.6 million, respectively. If the lower of first-in, first-out ("FIFO") cost or market had been used to value these products, the carrying values of inventories at August 31, 1994 and 1995 would have been lower by $4.1 million and $7.9 million, respectively. The carrying values of beef inventories stated under LIFO at August 31, 1994 and 1995 were $21.1 million and $30.2 million, respectively. The LIFO method of accounting for beef inventories had no effect on the carrying value of inventories or on the results of operations reported in 1993, 1994 and 1995, as market value of these inventories was lower than LIFO and approximated FIFO cost. (4) INVESTMENTS AND LONG-TERM RECEIVABLES Investments and long-term receivables are as follows:
August 31 1994 1995 (Amounts in Thousands) Investments accounted for by the equity method $ 52,478 $ 88,786 Investments in and advances to other cooperatives 42,744 47,320 National Bank for Cooperatives . . . . . . . . 28,786 26,999 Other investments and long-term receivables . . 16,638 18,363 Notes receivable from ventures, 20% to 50% owned 48,955 4,219 $ 189,601 $ 185,687
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 and 1995, Farmland's investment in CoBank approximated its requirement. This investment is pledged to secure borrowings from CoBank. See Note 14. Summarized financial information of investees accounted for by the equity method is as follows: August 31 1994 1995 (Amounts in Thousands) Current Assets . . . . . . . . . . . . $ 105,981 $ 243,259 Long-Term Assets . . . . . . . . . . . 252,704 238,297 Total Assets . . . . . . . . . . . . $ 358,685 $ 481,556 Current Liabilities . . . . . . . . . . $ 111,077 $ 205,713 Long-Term Liabilities . . . . . . . . . 144,255 94,029 Total Liabilities . . . . . . . . . $ 255,332 $ 299,742 Net Assets . . . . . . . . . . . . . . $ 103,353 $ 181,814
Year Ended August 31 1993 1994 1995 (Amounts in Thousands) Net sales . . . . . . . . . . . . . . . . . . . $ 601,194 $ 803,516 $ 1,212,592 Net income (loss) . . . . . . . . . . . . . . . $ (22,755) $ 24,285 $ 46,803 Farmland's equity in net income (loss) . . . . $ (12,394) $ 10,878 $ 22,785
The Company's investments accounted for by the equity method consist principally of 50% equity interests in two phosphate fertilizer manufacturing ventures (Farmland Hydro, L.P. and SF Phosphates Limited Company) and, through March 31, 1995, a 50% interest in Hyplains Beef, L.C. (such interest being contributed to NBPC in return for an additional 10% ownership interest by the Company in NBPC). Effective September 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The cumulative effect of this change in the use of fair value accounting and reporting for certain investments in debt and equity securities was immaterial. (5) PROPERTY, PLANT AND EQUIPMENT A summary of cost for property, plant and equipment is as follows:
August 31 1994 1995 (Amounts in Thousands) Land and improvements. . . .. . $ 42,261 $ 42,355 Buildings . . . . . . . . .. . . 224,767 245,460 Machinery and equipment . .. . . 716,683 765,383 Automotive equipment . . .. . . 65,986 67,124 Furniture and fixtures . .. . . 48,613 54,888 Capital leases . . . . . .. . . 50,956 49,241 Leasehold improvements . .. . . 15,085 21,763 Other . . . . . . . . . .. . . 7,045 7,124 Construction in progress .. . . 30,763 81,511 $ 1,202,159 $ 1,334,849
During 1993, 1994 and 1995, the Company capitalized construction period interest of $1.6 million, $.4 million and $.7 million, respectively. (6) BANK LOANS, SUBORDINATED DEBT CERTIFICATES AND NOTES PAYABLE Bank loans, subordinated debt certificates and notes payable are as follows:
August 31 1994 1995 (Amounts in Thousands) Subordinated certificates of investment and capital investment certificates --6% to 9.5%, maturing 1996 through 2014 . . . $ 210,054 $ 225,132 Subordinated monthly interest certificates --6.25% to 12%, maturing 1996 through 2014 . . 70,057 74,863 National Bank for Cooperatives --6.22% to 9.2%, maturing 1996 through 2001 . . 74,278 68,444 Other bank notes--6.1% to 8.75%, maturing 1996 through 2001 . . . . . . . . . . 117,813 88,054 Industrial revenue bonds--5.75% to 8%, maturing 1996 through 2007 . . . . . . . . . . 25,055 21,750 Promissory notes--7% to 10%, maturing 1996 through 2002 . . . . . . . . . . 18,684 14,794 Other--5% to 13% . . . . . . . . . . . . . . . . . 29,705 55,390 $ 545,646 $ 548,427 Less current maturities . . . . . . . . . . . . . . 27,840 42,394 $ 517,806 $ 506,033
The Company 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 August 31, 1995, the Company had $250.8 million of short-term borrowings under the Credit Agreement, $85.0 million of revolving term borrowings and $35.8 million was being utilized to support letters of credit issued on behalf of the Company by participating banks. The Company pays commitment fees under the Credit Agreement of 1/10 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, the Company 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 August 31, 1995, the Company was in compliance with all covenants under the Credit Agreement. The short-term provisions of the Credit Agreement are reviewed and/or renewed annually. The next review date is in May 1996. The revolving term provisions of this agreement expire in May 1997. The Company maintains other borrowing arrangements with banks and financial institutions. At August 31, 1995, $47.2 million was borrowed under such agreements. Financial covenants of these arrangements generally are not more restrictive than under the Credit Agreement. NBPC maintains a $90.0 million borrowing agreement with a group of banks which provides financing support for its beef packing operations. Such borrowings are nonrecourse to Farmland or Farmland's other affiliates. At August 31, 1995, $32.0 million was borrowed under this agreement and $1.0 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. At August 31, 1995, such short-term borrowings totaled $70.3 million. Obligations of Tradigrain under these loan agreements are nonrecourse to Farmland or Farmland's other affiliates. Subordinated debt certificates have been issued under several different indentures. The Company may redeem subordinated certificates of investments and capital investment certificates in advance of scheduled maturities. Additionally, the Company may redeem subordinated certificates of investments, capital investment certificates and subordinated monthly interest certificates upon death of the holder. Outstanding subordinated debt certificates are subordinated to senior indebtedness. At August 31, 1995, senior indebtedness included $441.7 million for money borrowed, and additional financings (principally long-term operating leases) require aggregate payments over 15 years of approximately $115.7 million. Under industrial revenue bonds and other agreements, property, plant and equipment with a carrying value of $23.9 million 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) 1996 . . . . . . . . . . . . . . . . . . $ 42,394 1997 . . . . . . . . . . . . . . . . . . 146,131 1998 . . . . . . . . . . . . . . . . . . 81,429 1999 . . . . . . . . . . . . . . . . . . 27,465 2000 . . . . . . . . . . . . . . . . . . 31,719 2001 and after . . . . . . . . . . . . . 219,289 $ 548,427 At August 31, 1994 and 1995, the Company had demand loan certificates and short-term bank debt outstanding of $305.0 million (weighted average interest rate of 5.1%) and $365.3 million (weighted average interest rate of 6.4%), respectively. (7) INCOME TAXES A. TERRA RESOURCES, INC. 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 $237.2 million 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 $70.8 million. The asserted deficiencies relate primarily to the Company's tax treatment of the $237.2 million gain resulting from its sale, in July 1983, 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 $14.6 million, and a loss of approximately $2.3 million, from dispositions 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. The case was tried on June 13-15, 1995. The parties submitted post-trial briefs to the court on September 14 1995; reply briefs are due in 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 $85.8 million plus accumulating statutory interest thereon (approximately $178.3 million, before tax benefits of the interest deduction, through August 31, 1995), or $264.1 million in the aggregate at August 31, 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 by approximately $5.0 million 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 financing 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. The Company believes that it has meritorious positions with respect to all of these claims. In the opinion of Bryan Cave, the Company's special tax counsel, it is more likely than not that the courts will ultimately conclude that the Company's treatment of the Terra sale gain was substantially, if not entirely, correct. Such counsel has further advised, however, that 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 the Company on any of these issues. B. OTHER INCOME TAX MATTERS Income tax expense (benefit) attributable to income from continuing operations is comprised of the following:
Year Ended August 31 1993 1994 1995 (Amounts in Thousands) Federal: Current . . . . . . . . . . $ (2,502) $ 10,076 $ 18,533 Deferred . . . . . . . . . (2,944) (3,217) 4,255 $ (5,446) $ 6,859 $ 22,788 State: Current . . . . . . . . . . $ (468) $ 1,965 $ 3,356 Deferred . . . . . . . . . (519) (755) 665 $ (987) $ 1,210 $ 4,021 Foreign: Current . . . . . . . . . . $ -0- $ (2,117) $ 1,578 Deferred . . . . . . . . . -0- (1,062) 1,241 $ -0- $ (3,179) $ 2,819 $ (6,433) $ 4,890 $ 29,628
Income (loss) before income tax expense from foreign sources amounted to ($14.3 million) and $19.3 million for 1994 and 1995, respectively. 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), as follows:
Year Ended August 31 1993 1994 1995 Computed "expected" income tax expense (benefit) on income (loss) before income taxes . . . . . .(34.0) % 35.0 % 35.0 % Increase (reduction) in income tax expense (benefit) attributable to: Patronage refunds . . . . . . . . . . . . . . . . (4.0) (33.3) (18.3) Patronage-sourced items for which no benefit is available . . . . . . . 26.5 -0- -0- State income tax expense (benefit) net of federal income tax effect . . . . . . . . . (2.2) 1.1 2.2 Benefit associated with exempt income of foreign sales corporation . . . . . . . . . (1.4) -0- -0- Other, net . . . . . . . . . . . . . . . . . . . (2.7) 3.8 (2.4) Income tax expense (benefit) . . . . . . . . . . . . .(17.8) % 6.6 % 16.5 %
The tax effect of temporary differences that give rise to significant portions of deferred tax liabilities and deferred tax assets at August 31, 1994 and 1995 are as follows: August 31 1994 1995 (Amounts in Thousands) Deferred tax liabilities: Property, plant and equipment, principally due to differences in depreciation . $ 20,242 $ 26,009 Prepaid pension cost . . . . . . . . . 21,124 19,807 Other . . . . . . . . . . . . . . . . . 14,021 15,065 Total gross deferred liabilities . . $ 55,387 $ 60,881 Deferred tax assets: Safe harbor leases . . . . . . . . . . $ 5,391 $ 5,096 Accrued expenses . . . . . . . . . . . 27,017 29,394 Accounts receivable, principally due to allowance for doubtful accounts . . 4,394 2,300 Other . . . . . . . . . . . . . . . . . 12,245 11,590 Total gross deferred assets . . . . $ 49,047 $ 48,380 Net deferred tax liability . . . . . . . . $ 6,340 $ 12,501 A valuation allowance for deferred tax assets was not necessary at August 31, 1994 or 1995. The significant components of deferred income tax expense (benefit) attributable to income from continuing operations for the years ended August 31, 1994 and 1995 are as follows:
August 31 1994 1995 (Amounts in Thousands) Deferred tax expense (benefit) . . . . . . . . . . . . . . $ (8,044) $ 6,161 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 -0- $ (5,034) $ 6,161
Deferred income taxes for the year ended August 31, 1993 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 1993 (Amounts in Thousands) Depreciation . . . . . . . . . . . . . . . $ 473 Safe harbor lease rentals . . . . . . . . . (378) Provision for loss on proposed sale of assets . . . . . . . . . . . . (3,454) Unfunded pension expense . . . . . . . . . (355) Other, net . . . . . . . . . . . . . . . . 251 $ (3,463)
The tax benefit for the year ended August 31, 1993 resulted 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 $7.5 million to reduce goodwill for financial reporting purposes by $3.0 million. No such carryforwards were available at August 31, 1995. At August 31, 1994, the Company had alternative minimum tax credit carryforwards of approximately $7.0 million which were utilized during 1995. (8) MINORITY OWNERS' EQUITY IN SUBSIDIARIES A summary of the equity of subsidiaries owned by others is as follows:
August 31 1994 1995 (Amounts in Thousands) National Beef Packing Company, L.P. and G.P. . . $ 2,925 $ 12,473 Farmland Foods, Inc. . . . . . . . . . . . . . . 5,618 4,682 Heartland Wheat Growers, L.P. and G.P. . . . . . 2,100 2,295 Other subsidiaries . . . . . . . . . . . . . . . 1,090 542 $ 11,733 $ 19,992
(9) PREFERRED STOCK, EARNED SURPLUS AND OTHER EQUITIES A summary of preferred stock is as follows:
August 31 1994 1995 (Amounts in Thousands) Preferred shares, $25 par value - Authorized 8,000,000 shares: 6% - 608 shares issued and outstanding (608 shares in 1994) . . . . . . . . . . . . . . . . . . . . . . $ 15 $ 15 5-1/2% - 2,436 shares issued and outstanding (2,592 shares in 1994) . . . . . . . . . . . . . . . . . . . . . 65 61 Series F - 95,069 shares issued and outstanding (144,869 shares in 1994) . . . . . . . . . . . . . . . . . . . . 3,622 2,377 $ 3,702 $ 2,453
The 5-1/2% and 6% preferred stocks have preferential liquidation rights over the Series F nondividend bearing 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. 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 1995 (Amounts in Thousands) Earned surplus . . . . . . . . . . . . . . . . $ 130,250 $ 197,666 Patronage refund payable in equities . . . . . 44,032 61,356 Nonmember capital . . . . . . . . . . . . . . . 103 -0- Capital credits . . . . . . . . . . . . . . . . 32,547 27,645 Additional paid-in surplus . . . . . . . . . . 1,603 1,603 Currency translation adjustment . . . . . . . . (54) 22 $ 208,481 $ 288,292
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. 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 equity of Farmland 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 Participant's allocated equity exceeds the Participant's Base Capital Requirement. This plan provides that the relationship between the Participant's allocated 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 and 1995, common stock and associate member common stock with an aggregate par value of $8.7 million and $14.2 million, respectively, were 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 and 1995, respectively. 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 special allocated equity redemption plans 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 and 1995, certain equities of Farmland with a face amount of $3.5 million and $12.8 million, respectively, and capital equity fund certificates held by certain members of Farmland Foods, Inc. in the amount of $.7 million and $.8 million, respectively, have been approved by the Board of Directors for redemption under the estate settlement and special allocated equity redemption plans and such amounts have been included in "Other current liabilities" in the Consolidated Balance Sheet at August 31, 1994 and 1995. 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. 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 1993, 1994 and 1995, rental expenses totaled $41.1 million, $41.8 million and $44.6 million, respectively. Rental expense is reduced for mileage credits received on leased railroad cars ($1.9 million in 1993, $1.9 million in 1994 and $1.8 million in 1995). The leases have various remaining terms ranging from one year to fifteen years. Some leases are renewable, at the Company's option, for additional periods. The minimum required payments for these leases during the fiscal years ending August 31 are as follows: (Amounts in Thousands) 1996 . . . . . . . . . . . $ 48,126 1997 . . . . . . . . . . . 44,302 1998 . . . . . . . . . . . 35,493 1999 . . . . . . . . . . . 27,529 2000 . . . . . . . . . . . 22,313 2001 and after . . . . . . 86,391 . . . . . . . . . . . . . $ 264,154 The Company is 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 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 accrued liability for probable and reasonably determinable obligations for resolution of environmental matters at NPL and other sites was $7.2 million and $18.5 million at August 31, 1994 and 1995, respectively. 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, 1995. In the opinion of management, it is reasonably possible for such costs to approximate an additional $19.8 million. Under the Resource Conservation Recovery Act of 1976 (''RCRA''), the Company has five closure and five post-closure plans in place for six locations. Closure and post-closure plans also are in place for three landfills and two injection 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 costs are estimated to be $5.8 million at August 31, 1995 (and is in addition to the $19.8 million discussed in the prior paragraph). The Cooperative Finance Association has loans receivable from customers engaged in pork production operations and from cooperative associations which are guaranteed by the Company. At August 31, 1995, such guarantees amounted to $8.7 million. Farmland has issued letters of credit totaling $15.5 million to support nonrecourse borrowing arrangements of subsidiaries. (11) EMPLOYEE BENEFIT PLANS The Farmland Industries, Inc. Employee Retirement Plan ("the Plan") is a defined benefit plan covering substantially all employees of the Company 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 1993 1994 1995 (Amounts in Thousands) Service cost - benefits earned during the period . . . $ 7,449 $ 8,663 $ 10,336 Interest cost on projected benefit obligation . . . . 12,134 15,292 16,707 Actual return on Plan assets . . . . . . . . . . . . . (15,842) (10,949) (27,422) Net amortization and deferral . . . . . . . . . . . . (374) (7,860) 8,677 Pension expense . . . . . . . . . . . . . . . . . . $ 3,367 $ 5,146 $ 8,298
The discount rate and the rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligations were 8.5% and 5.0% at August 31, 1993, and 8.0% and 4.5% at both August 31, 1994 and 1995. At August 31, 1993, 1994 and 1995, the expected long-term rate of return on assets was 8.5%. 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 1995. Such prepaid pension cost is based on the Plan's funded status as of May 31, 1994 and 1995.
August 31 1994 1995 (Amounts in Thousands) Actuarial present value of benefit obligations: Vested benefits . . . . . . . . . . . . . . . . . . . . . . . . . . $ 148,648 $ 170,105 Nonvested benefits . . . . . . . . . . . . . . . . . . . . . . . . 9,163 11,584 Accumulated benefit obligation . . . . . . . . . . . . . . . . . . $ 157,811 $ 181,689 Increase in benefits due to future compensation increases . . . . . 53,533 56,353 Projected benefit obligation . . . . . . . . . . . . . . . . . . . $ 211,344 $ 238,042 Estimated fair value of Plan assets . . . . . . . . . . . . . . . . 226,681 259,262 Plan assets in excess of projected benefit obligation . . . . . . . $ 15,337 $ 21,220 Unrecognized net loss from past experience different from that assumed and effects of changes in assumptions . . . . . . . . . . . . . . . . . . . . . . . . 37,332 27,750 Unrecognized net transition asset being recognized over 10 years . . . . . . . . . . . . . . . . . . . (933) -0- Unrecognized prior service cost . . . . . . . . . . . . . . . . . . 1,308 1,089 Prepaid pension cost at end of year . . . . . . . . . . . . . . . . . . . $ 53,044 $ 50,059
Effective September 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 112, "Employer's Accounting for Postemployment Benefits." The cumulative effect of this change in accounting for the estimated cost of benefits provided to former or inactive employees was immaterial. Prior years' financial statements have not been restated to apply the provisions of Statement 112. In 1994, the Company adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions", and the effect was insignificant. (12) INDUSTRY SEGMENT INFORMATION The Company conducts business primarily in two operating areas: agricultural 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 divisions - petroleum, 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. On the output side, the Company's processing and marketing operations include the processing of pork and beef, the marketing of fresh pork, processed pork and fresh beef and the storage and marketing of grain. Other operations include farm supply stores and services such as computer services, accounting, financial, management and transportation. 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 have 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, equity in net income (loss) of investees, and income taxes Corporate assets include cash, investments in other cooperatives, the Company's corporate headquarters and certain other assets. Following is a summary of industry segment information as of and for the years ended August 31, 1993, 1994 and 1995. Export sales to unaffiliated customers from U.S. operations for the years ended August 31, 1993, 1994 and 1995 were $690.2 million, $842.5 million and $1,287.8 million, respectively.
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) 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 net 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) -0- (3,253) -0- -0- (29,430) General corporate expenses (57,721) Other corporate income . 13,725 Interest expense . . . . (36,764) Minority interest . . . . (828) Income tax benefit . . . 6,433 Net (loss) . . . . . . . $ (30,400) 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 $ -0- $ 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 $48.4 million of capital assets of business acquired) . $ 35,629 $ 17,972 $ 6,590 $ 73,561 $ 1,894 $ 3,613 $ 7,341 $ 146,600 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- 19,467 (38,902) -0- Total sales and transfers $860,322 $1,172,870 $529,936 $2,358,606 $1,627,156 $167,945 $(38,902) $6,677,933 Operating income (loss) of industry segments . . . $ 27,172 $ 126,047 $ 17,019 $ 20,608 $ (33,637) $ (2,410) $ 154,799 Equity in net income (loss) of investees (Note 4) . $ (41) $ 15,466 $ 155 $ (4,404) $ -0- $ (298) $ 10,878 General corporate expenses (66,229) Other corporate income . 26,281 Interest expense . . . . (51,485) Minority interest . . . . 4,522 Income tax expense . . . (4,890) Net income . . . . . . . $ 73,876 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 $ 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 $16.9 million of capital assets of businesses acquired) $ 14,399 $ 14,136 $ 4,508 $ 19,040 $ 6,256 $ 26,051 $ 2,274 $ 86,664 1995 Sales to unaffiliated customers $876,776 $1,171,389 $467,695 $2,692,892 $1,906,191 $141,926 $ -0- $7,256,869 Transfers between segments 2,877 6,547 940 3,100 -0- 29,100 (42,564) -0- Total sales and transfers $879,653 $1,177,936 $468,635 $2,695,992 $1,906,191 $171,026 $(42,564) $7,256,869 Operating income (loss) of industry segments . . . $ (8,029) $ 198,720 $ 10,061 $ 77,060 $ 17,942 $ (2,373) $ 293,381 Equity in net income (loss) of investees (Note 4) . $ 168 $ 22,096 $ 130 $ 823 $ 688 $ (1,120) $ 22,785 General corporate expenses (80,054) Other corporate income . 19,934 Interest expense . . . . (53,862) Minority interest . . . . (9,757) Income tax expense . . . (29,628) Net income . . . . . . . $ 162,799 Identifiable assets at August 31, 1995 . . . . $313,478 $ 410,979 $ 93,438 $ 491,257 $ 525,032 $ 59,108 $1,893,292 Investment in and advances to investees . . . . . . . $ 953 $ 80,805 $ 1,497 $ 325 $ 120 $ 9,305 $ 93,005 Corporate assets . . . . 199,646 Total assets . . . . . . $2,185,943 Provision for depreciation and amortization . . . . . $ 9,858 $ 15,530 $ 4,319 $ 21,891 $ 5,156 $ 5,308 $ 7,076 $ 69,138 Capital expenditures . . $ 27,638 $ 23,845 $ 5,766 $ 32,219 $ 905 $ 7,504 $ 26,845 $ 124,722
(13) SIGNIFICANT GROUP CONCENTRATION OF CREDIT RISK The Company extends credit to its customers on terms no more favorable than standard terms of the industries it serves. A substantial portion of the Company'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. The Company 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. (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:
August 31, 1994 August 31, 1995 Carrying Fair Carrying Fair Amount Value Amount Value (Amounts in Thousands) FINANCIAL ASSETS: Investments and long-term receivables: Notes receivable from investees, 20% to 50% owned . . . . . . . $ 48,955 $ 45,414 $ 4,519 $ 4,047 National Bank for Cooperatives . 28,786 **** 26,999 **** Other cooperatives: Equities . . . . . . . . . . 28,214 **** 27,720 **** Notes receivable . . . . . . 14,530 13,385 19,600 17,327 FINANCIAL LIABILITIES: Long-term debt: Subordinated certificates of investment, capital investment certificates and subordinated monthly interest certificates . . . . . $ (280,111) $ (284,523) $ (299,994) $ (304,450) ****Investments in National Bank for Cooperatives and other cooperatives' equities which have been purchased are carried at cost and equities 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 equities because there is no established market for these equities and estimated future cash flows, which are largely dependent on the future redemptions policy of each cooperative, are not determinable.
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. (15) RELATED PARTY TRANSACTIONS The Company has a 50% interest in Farmland Hydro, L.P. and SF Phosphates Limited Company. Both ventures are manufacturers and distributors of phosphate products. During 1993, 1994 and 1995, the Company purchased $66.5 million, $83.1 million and $106.2 million, respectively, of product from these ventures. Accounts payable includes $1.4 million and $4.8 million due to these ventures at August 31, 1994 and 1995, respectively. The Company also has notes receivable from these ventures in the amount of $29.6 million and $6.6 million at August 31, 1994 and 1995, respectively. (16) OTHER INCOME In June 1993, the Company filed a lawsuit against 43 insurance carriers and other parties (the "Defendants") seeking declaratory judgments regarding the Defendants' insurance coverage obligations for environmental remediation costs. The Company negotiated settlements with 20 and 2 insurance companies in 1994 and 1995, respectively. As part of the settlements, the Company provided the Defendants with releases of various possible environmental obligations. As a result of these settlements, the Company received cash payments in 1994 and 1995 of $13.6 million and $.3 million, respectively, and included such amounts in the caption "Other income" in the Consolidated Statement of Operations for the years 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 $20.0 million for loss on the sale of the refinery. Accordingly, the net carrying value of property, plant and equipment was reduced by $20.0 million 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 $6.2 million from the sale. Accordingly, at August 31, 1993, the carrying value of the dragline was written down by $6.2 million 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 $3.3 million 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 Age as of of Service August 31 Positions Present as , Held With Term as Board Name 1995 Farmland Director Member Business Experience During Last Five Years Albert J. Shivley 52 Chairman 1995 11 General Manager--American Pride Co-op of the Association, Brighton, Colorado, a local Board cooperative association of farmers and ranchers. H. D. Cleberg 56 President 1997 5 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 64 Vice 1997 12 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. 44 1995 3 General Manager--Cooperative Grain and Supply, Hillsboro, Kansas, a local cooperative association of farmers and ranchers. Ronald J. Amundson 51 1997 7 General Manager--Central Iowa Cooperative, Jewell, Iowa, a local cooperative association of farmers and ranchers. Baxter Ankerstjerne 59 1996 5 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 54 1997 4 Producer--Texline, Texas. Richard L. Detten 61 1996 8 Producer--Ponca City, Oklahoma. Steven Erdman 45 1995 3 Producer--Bayard, Nebraska. Warren Gerdes 47 1995 2 General Manager--Farmers Cooperative Elevator Company, Buffalo Lake, Minnesota, a local cooperative association of farmers and ranchers. Ben Griffith 46 1995 6 General Manager--Central Cooperatives, Inc., Pleasant Hill, Missouri, a local cooperative association of farmers and ranchers. Gail D. Hall 53 1997 7 General Manager--Lexington Cooperative Oil Company, Lexington, Nebraska, a local cooperative association of farmers and ranchers. Jerome Heuertz 54 1997 1 General Manager--Farm Service Cooperative, Council Bluffs, Iowa, a local cooperative association of farmers and ranchers. Barry Jensen 50 1996 5 Producer--White River, South Dakota. Mr. Jensen currently serves as a Director, and was President from May 1989 to May 1993, of Farmers Co-op Oil Association, Winner, South Dakota, a local cooperative association of farmers and ranchers. Greg Pfenning 46 1997 3 Producer--Hobart, Oklahoma. Director of Hobart & Roosevelt Cooperative, a local cooperative association of farmers and ranchers. Vonn Richardson 62 1996 8 Producer--Plains, Kansas. President of The Plains Equity Exchange and Cooperative Union, Plains, Kansas, a local cooperative association of farmers and ranchers. Monte Romohr 42 1996 5 Producer--Gresham, Nebraska. From March 1988, to March 1991, Mr. Romohr served as President of Farmers Co-op Business Association, Shelby, Nebraska, a local cooperative association of farmers and ranchers. Joe Royster 43 1996 2 General Manager--Dacoma Farmers Cooperative, Inc., Dacoma, Oklahoma, a local cooperative association of farmers and ranchers. Paul Ruedinger 65 1995 12 Producer--Van Dyne, Wisconsin. Raymond J. Schmitz 64 1996 8 Producer--Baileyville, Kansas Theodore J. Wehrbein 50 1995 9 Producer--Plattsmouth, Nebraska. Past Director of Nehawka Farmers Cooperative Company, Nehawka, Nebraska, a local cooperative association of farmers and ranchers. Robert Zinkula 65 1996 5 Producer--Mount Vernon, Iowa. Secretary and Treasurer of Linn Cooperative Oil Company, Marion, Iowa, a local cooperative association of farmers and ranchers.
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, Otis Molz, Monte Romohr, Albert Shivley and H. D. Cleberg. With the exception of H.D. Cleberg, President and Chief Executive Officer, members of the executive committee serve as chairman of standing committees of the Board of Directors as follows: Ronald Amundson, corporate responsibility committee; Ben Griffith, audit committee; Otis Molz, compensation committee; Monte Romohr, finance committee; and Albert Shivley, nominating committee. The executive officers of Farmland are:
Age as of August 31, Name 1995 Principal Occupation and Other Positions J. F. Berardi 52 Executive Vice President and Chief Financial Officer - Mr. Berardi joined Farmland March 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. H. D. Cleberg 56 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. Prior to April 1989 he held several executive management positions with Farmland. S. P. Dees 52 Executive Vice President, Business Development - Mr. Dees joined Farmland in 1984, serving as Vice President and General Counsel, Law and Administration. He was appointed to his present position in September 1995. From September 1993 to September 1995 he served as Executive Vice President, Farmland and Director General of Farmland Industrias, S.A. de C.V. From October 1990 to September 1993 he served as Executive Vice President, Administrative Group and General Counsel. G. E. Evans 51 Group Vice President, Meat and Livestock Businesses - Mr. Evans has been with Farmland since 1971. He was appointed to his present position in September 1995. From January 1992 to September 1995 he served as Senior Vice President, Agricultural Production Marketing/Processing. 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. R. W. Honse 52 Group Vice President, Ag Input Businesses - Mr. Honse has been with Farmland since 1983. He was appointed to his present position in September 1995. From January 1992 to September 1995, he served as Executive Vice President, Agricultural Inputs Operations. From October 1990 to January 1992 he served as Executive Vice President, Agricultural Operations. A. H. Lewis 48 Group Vice President, Grain and Grain Processing Businesses - Mr. Lewis joined Farmland August 1994 to serve as Vice President, Grain Marketing. He was appointed to his current position in September 1995. From 1985 to 1994, Mr. Lewis worked for CONAGRA as the President, Klein-Berger Companies in San Francisco, California. B. L. Sanders 54 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.
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 1993, 1994 and 1995.
Annual Compensation Employee Variable Name and Year Ending Compensation Other Annual Principal Position August 31 Salary Plan Compensation H. D. Cleberg, . . . . . . . . . . 1993 $ 433,506 President and . . . . . . . . . . 1994 $ 439,728 $ 338,481 Chief Executive Officer 1995 $ 456,218 $ 346,944 G. E. Evans, . . . . . . . . . . 1993 $ 278,304 Group Vice President, 1994 $ 278,304 $ 217,761 Meat and Livestock 1995 $ 283,988 $ 217,761 Businesses R. W. Honse, . . . . . . . . . . 1993 $ 231,964 Group Vice President, 1994 $ 251,532 $ 205,206 Ag Input Businesses 1995 $ 280,248 $ 210,337 J. F. Berardi, . . . . . . . . . . 1993 $ 206,016 Executive Vice President 1994 $ 216,252 $ 146,576 and Chief Financial Officer 1995 $ 226,914 $ 150,241 S. P. Dees, . . . . . . . . . . 1993 $ 205,366 Executive Vice President, 1994 $ 205,066 $ 119,093 $ 124,138(a) Business Development 1995 $ 211,000 $ 122,070 $ 127,878(a) (a) Mr. Dees received a differential remuneration and reimbursements in 1994 and 1995 for taxes in connection with foreign assignments.
An Annual Employee Variable Compensation Plan, a Management Long-Term 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, 1993, 1994 and 1995 amounted to $ -0-, $17.8 million and $35.5 million, respectively. Distributions under this plan are made annually after the close of each fiscal year.
Information as to awards made in 1995 under the Company's Management Long-Term Incentive Plan, which awards relate to the three year period 1995 to 1997, is set forth below. Estimated Future Payouts Under Non-Stock Price-Based Plans (A) (B) (C) mounts in Thousands) Performance or Other Period Number of Until Shares, Units or Maturation or (D) (E) (F) Name Other Rights (1) Payout Threshold Target (2) Maximum (2) H. D. Cleberg 1995 - 1997 $ 234 G. E. Evans 1995 - 1997 $ 117 R. W. Honse 1995 - 1997 $ 117 J. F. Berardi 1995 - 1997 $ 83 S. P. Dees 1995 - 1997 $ 83 (1) Rights in the incentive pool are expressed as a minimum percentage of the total pool. See discussion contained below herein. (2) Not applicable as payouts are based on a percentage of aggregate income; the plan does not specify a target or maximum payment. See discussion contained below herein.
Under the Management Long-Term Incentive Plan, the Company's executive management employees are paid cash incentive amounts determined by a formula which takes into account the level of management and the aggregate income of the Company over a three year period. The Management Long-Term Incentive Plan provides for three year performance and reward cycles and, in general, participants must be active employees of the Company at the end of the cycle in order to receive payment of the award with respect to such cycle. Periods currently covered by the Management Long-Term Incentive Plan are: 1994 through 1996 ("1996 Plan"); 1995 through 1997 ("1997 Plan"); and, 1996 through 1998 ("1998 Plan"). The income threshold ("Threshold") for the three year period of the 1996 Plan, the 1997 Plan and the 1998 Plan is $192,810,000, $235,043,000 and $393,481,000, respectively. For each plan, if the aggregate income is less than the Threshold or if the sum of the cash returned to members during the 1996 Plan, the 1997 Plan and the 1998 Plan, as patronage refunds, redemptions under the base capital plan, estate settlement plans and special allocated equity redemption plans is less than $65,030,000, $61,938,000 and $90,000,000, respectively, subject to the following sentence, no payment will occur with respect to such plan. The Board of Directors of the Company may, in its sole discretion, amend or discontinue the Management Long-Term Incentive Plan, adjust or cancel any awards otherwise payable thereunder should the Company incur a loss in the final year of any performance cycle or impact the goals and rewards of the plan by approving for inclusion or exclusion in the calculation of performance results, the financial results of extraordinary events occurring during the cycle. Subject to the preceding sentence, if aggregate income equals or exceeds the Threshold and the cash returned to members equals or exceeds the specified amounts, then 2.5%, .83% and .83% of aggregate income for the 1996 Plan, the 1997 Plan and the 1998 Plan, respectively, is allocated to an incentive pool for each such plan from which awards to management will be paid. Of the amount, if any, allocated to the incentive pools for the 1996 Plan, the 1997 Plan and the 1998 Plan, Messrs. Cleberg, Evans, Honse, Berardi, and Dees, will receive at least 12%, 6%, 6%, 4.25%, and 4.25%, respectively, absent a significant change in their status, in which event such percentages may be adjusted. 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 1993, 1994 and 1995 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 1,000 hours per year. Participation in the Plan is optional prior to age 34, but mandatory thereafter. Approximately 6,400 active and 6,630 inactive employees were participants in the Plan on August 31, 1995. 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 years ended August 31, 1993, 1994 and 1995 were $ -0-, $2.9 million and $5.3 million, respectively. Payments to participants in the Plan are based upon length of participation and compensation reported to the Plan for the four highest of the last ten years of employment. Compensation for this purpose includes base salary and compensation earned under the Company's Annual Employee Variable Compensation Plan discussed above. However, at the present time, the maximum compensation (per participant) which may be covered by a qualified pension plan is limited to $150,000 annually and the maximum retirement benefit which may be paid by such plan is limited to $120,000 annually by the Tax Equity and Fiscal Responsibility Act (TEFRA). 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 ($120,000). 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 charged to operations for the eight months ended August 31, 1994 and for the year ended August 31, 1995 were $.4 million and $.6 million, respectively. 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. The following table sets forth, for compensation levels up to $150,000, 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. The following table also sets forth, for compensation levels exceeding $150,000, the combined estimated annual benefits payable under the Retirement Plan and SERP for each of the first 10 years following retirement (no SERP payouts are to be made after 10 years) assuming: retirement occurs after age 55; the employer's portion of the benefit lost (due to TEFRA limitations) by the employee is 85%; the employee lives for 10 years after retirement; and, the aggregate payments under the SERP are less than the cash value of life insurance policies designated (see above) as SERP policies.
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 78,750 200,000. .. 46,813 62,417 78,021 93,625 250,000. .. 54,250 72,333 90,417 108,500 300,000. .. 61,688 82,250 102,813 123,375 350,000. .. 69,125 92,167 115,209 138,250 400,000. .. 76,563 102,083 127,604 153,125 450,000. .. 84,000 112,000 140,000 168,000 500,000. .. 91,437 121,917 152,396 182,875 600,000. .. 106,313 141,750 177,188 212,626 700,000. .. 121,188 161,584 201,980 242,376 800,000. .. 136,063 181,417 226,771 272,126 900,000. .. 150,938 201,251 251,564 301,876 1,000,000. .. 165,813 221,083 276,355 331,626
The following table sets forth the credited years of service for the executive officers of the Company at August 31, 1995. Name Years of Creditable Service H. D. Cleberg . . . . . . . . . . . . 30 G. E. Evans . . . . . . . . . . . . . 21 R. W. Honse . . . . . . . . . . . . . 21 J. F. Berardi . . . . . . . . . . . . 2 S. P. Dees . . . . . . . . . . . . . . 10 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The following persons, none of whom, except as indicated below, is either currently or formerly an officer or employee of the Company or any of its subsidiaries, served as members of the Company's compensation committee during 1995: Messrs. Jody Bezner, Warren Gerdes, Gail Hall, Greg Pfenning and Otis Molz. Mr. Molz was Chairman of the Board of the Company from December 1991 to December 1992. No executive officer of the Company (i) served as a member of a compensation committee (or other board committee performing equivalent functions or, in the absence of such committee, the entire board of directors) of another entity, one of whose executive officers served on the compensation committee of the Company, (ii) served as a director of another entity, one of whose executive officers served on the compensation committee of the Company, or (iii) served as a member of a compensation committee (or other board committee performing equivalent functions or, in the absence of such committee, the entire board of directors) of another entity, one of whose executive officers served as a director of the Company. COMPENSATION OF DIRECTORS Directors' compensation consists of payment of three hundred dollars ($300.00) per day of attendance at the Board of Directors or committee meetings, plus reimbursement of necessary expenses incurred in connection with their official duties. 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 1995 Consolidated Statements of Operations for each of the years in the three-year period ended August 31, 1995 Consolidated Statements of Cash Flows for each of the years in the three-year period ended August 31, 1995 Consolidated Statements of Capital Shares and Equities for each of the years in the three-year period ended August 31, 1995 Notes to Consolidated Financial Statements (2) FINANCIAL STATEMENT SCHEDULES All 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, 1994. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES: 4.(i)A 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.(i)B 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.(i)B(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, dated December 3, 1991) 4.(i)C 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.(i)C(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, dated December 3, 1991) 4.(i)D 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.(i)E 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) 4.(ii)A 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.(ii)A(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, dated December 3, 1991) 4.(ii)B 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.(ii)B(1) 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.(i)A Leveraged lease dated September 6, 1991, among 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. in the amount of $73,153,000. (Incorporated by Reference - Form SE, filed December 3, 1991) 10.(i)B Leveraged lease dated March 17, 1977, among the First National Bank of Commerce as Trustee for General Electric Credit Corporation as Beneficiary and Farmland Industries, Inc. in the amount of $51,909,257.90. (Incorporated by Reference - Form S-1, No.2-60372, effective December 22, 1977) MANAGEMENT REMUNERATIVE PLANS: 10.(iii)A Annual Employee Variable Compensation Plan (September 1, 1995- August 31, 1996) 10.(iii)B Farmland Industries, Inc. Management Long-Term Incentive Plan (Effective September 1, 1995) 10.(iii)C Farmland Industries, Inc. Supplemental Executive Retirement Plan (Effective January 1, 1994) 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 (68%-owned effective March 31, 1995), 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, Inc. 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 S.A. of Switzerland 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 Shipping S.A. 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 S.A. of France 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 GmbH 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 LTD. 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 S.A. of Argentina has been included in the Consolidated Financial Statements filed in this registration. 24. Power of Attorney 27. Financial Data Schedule (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. SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, 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 28, 1995. FARMLAND INDUSTRIES, INC. BY JOHN F. BERARDI John F. Berardi Executive Vice President and Chief Financial Officer BY ROBERT B. TERRY Robert B. Terry Vice President and General Counsel 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 25, 1995.
Signature Title Date ALBERT J. SHIVLEY Chairman of Board, November 28, 1995 Albert J. Shivley Director H. D. CLEBERG President, Chief Executive November 28, 1995 H. D. Cleberg Officer and Director (Principal Executive Officer) OTIS H. MOLZ Vice Chairman of Board November 28, 1995 Otis H. Molz Vice President and Director LYMAN ADAMS, JR. Director November 28, 1995 Lyman Adams, Jr. RONALD J. AMUNDSON Director November 28, 1995 Ronald J. Amundson BAXTER ANKERSTJERNE Director November 28, 1995 Baxter Ankerstjerne JODY BEZNER Director November 28, 1995 Jody Bezner RICHARD L. DETTEN Director November 28, 1995 Richard L. Detten STEVEN ERDMAN Director November 28, 1995 Steven Erdman WARREN GERDES Director November 28, 1995 Warren Gerdes BEN GRIFFITH Director November 28, 1995 Ben Griffith GAIL D. HALL Director November 28, 1995 Gail D. Hall JEROME HEUERTZ Director November 28, 1995 Jerome Heuertz BARRY JENSEN Director November 28, 1995 Barry Jensen GREG PFENNING Director November 28, 1995 Greg Pfenning VONN RICHARDSON Director November 28, 1995 Vonn Richardson MONTE ROMOHR Director November 28, 1995 Monte Romohr JOE ROYSTER Director November 28, 1995 Joe Royster PAUL RUEDINGER Director November 28, 1995 Paul Ruedinger RAYMOND J. SCHMITZ Director November 28, 1995 Raymond J. Schmitz THEODORE J. WEHRBEIN Director November 28, 1995 Theodore J. Wehrbein ROBERT ZINKULA Director November 28, 1995 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, 1994. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES: 4.(i)A 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.(i)B 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.(i)B(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, dated December 3, 1991) 4.(i)C 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.(i)C(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, dated December 3, 1991) 4.(i)D 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.(i)E 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) 4.(ii)A 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.(ii)A(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, dated December 3, 1991) 4.(ii)B 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.(ii)B(1) 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.(i)A Leveraged lease dated September 6, 1991, among 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. in the amount of $73,153,000. (Incorporated by Reference - Form SE, filed December 3, 1991) 10.(i)B Leveraged lease dated March 17, 1977, among the First National Bank of Commerce as Trustee for General Electric Credit Corporation as Beneficiary and Farmland Industries, Inc. in the amount of $51,909,257.90. (Incorporated by Reference - Form S-1, No.2-60372, effective December 22, 1977) MANAGEMENT REMUNERATIVE PLANS: *10.(iii)A Annual Employee Variable Compensation Plan (September 1, 1995- August 31, 1996) *10.(iii)B Farmland Industries, Inc. Management Long-Term Incentive Plan (Effective September 1, 1995) *10.(iii)C Farmland Industries, Inc. Supplemental Executive Retirement Plan (Effective January 1, 1994) *21. Subsidiaries of the Registrant *24. Power of Attorney *27. Financial Data Schedule EX-3.A 3 ARTICLES AND BYLAWS EXHIBIT 3.A ARTICLES OF INCORPORATION AND BYLAWS OF FARMLAND INDUSTRIES, INC. Kansas City, Missouri (Effective 12-1-94) 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) -- 1 directors; and District 9 (Texas and New Mexico) -- 2 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.III.A 4 EMPLOYEE VARIABLE COMPENSATION EXHIBIT 10.(iii)A FY 96 STANDARD VARIABLE COMPENSATION PLAN (SEPTEMBER 1, 1995 - AUGUST 31, 1996) 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 96 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 100% Corporate Return on Equity and Corporate Unit 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: o Employees whose terms and conditions of employment are subject to collective bargaining. o Employees hired after 5/31/96. (Waived if the employee is a former regular full time employee during FY 96. Payout is prorated.) o Regular part time employees with less than 500 hours of service during FY 96 o Temporary employees with less than 1000 hours of service during FY 96 o Employees terminated for cause prior to 8/31/96 o Employees who terminate voluntarily prior to 8/31/96 (Employees who terminate to accept a position with a member cooperative may be eligible for a prorated payout.) o Employees included invariable 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 Hired after 9/1/95 but before 5/31/96 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 08/31/96 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 96 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 A FY 96 PERFORMANCE CRITERIA AND GOALS CORPORATE: Threshold Target Maximum Return on Equity 8% 11.5% 15% Business Unit: TRANSPORTATION Threshold Target Maximum TRUCK OPERATIONS Cash Flow 757,000 1,082,000 1,407,000 Return on Assets 27.52% 39.32% 51.12% Earnings after 1,013,000 1,447,000 1,881,000 interest FTI Cash Flow 924,000 1,320,000 1,716,000 Return on Assets 34.04% 48.63% 63.22% Earnings after 1,203,000 1,719,000 2,235,000 interest EXHIBIT A FY 96 PERFORMANCE CRITERIA AND GOALS CORPORATE: Threshold Target Maximum Return on Equity 8% 11.5% 15% Business Unit: CROP PRODUCTION Threshold Target Maximum Cash Flow 41,061,000 82,122,000 123,183,000 Return on Assets 16.03% 32.05% 48.08% Earnings after 78,876,000 157,752,000 236,628,000 interest EXHIBIT A FY 96 PERFORMANCE CRITERIA AND GOALS CORPORATE: Threshold Target Maximum Return on Equity 8% 11.5% 15% Business Unit: PETROLEUM Threshold Target Maximum Cash Flow (79,095,000) (60,842,000) (42,589,000) Return on Assets 2.08% 2.97% 3.86% Earnings after 6,419,000 9,170,000 11,921,000 interest EXHIBIT A FY 96 PERFORMANCE CRITERIA AND GOALS CORPORATE: Threshold Target Maximum Return on Equity 8% 11.5% 15% Business Unit: FEED Threshold Target Maximum Cash Flow 6,567,000 9,382,000 12,196,000 Return on Assets 10.05% 14.36% 18.67% Earnings after 9,293,000 13,276,000 17,259,000 interest EXHIBIT A FY 96 PERFORMANCE CRITERIA AND GOALS CORPORATE: Threshold Target Maximum Return on Equity 8% 11.5% 15% Business Unit: FOODS, INCLUDING CARANDO Threshold Target Maximum Cash Flow 1,093,000 1,562,000 2,031,000 Return on Assets 3.70% 5.80% 7.90% Earnings after 9,884,000 15,495,000 21,106,000 interest EXHIBIT A FY 96 PERFORMANCE CRITERIA AND GOALS CORPORATE: Threshold Target Maximum Return on Equity 8% 11.5% 15% Business Unit: HEARTLAND DATA SERVICES Threshold Target Maximum Cash Flow 218,000 272,000 326,000 Return on Assets 12.08% 15.10% 18.12% Earnings after 322,000 402,000 482,000 interest EXHIBIT A FY 96 PERFORMANCE CRITERIA AND GOALS CORPORATE: Threshold Target Maximum Return on Equity 8% 11.5% 15% Business Unit: PRINT OPERATIONS Threshold Target Maximum Cash Flow (39,000) (30,000) (21,000) Return on Assets 23.10% 33.00% 42.90% Earnings after 562,000 802,000 1,043,000 interest EXHIBIT A FY 96 PERFORMANCE CRITERIA AND GOALS CORPORATE: Threshold Target Maximum Return on Equity 8% 11.5% 15% Business Unit: GRAIN Threshold Target Maximum Cash Flow Return on Assets Earnings after interest EXHIBIT B FY 96 STANDARD VARIABLE COMPENSATION PLAN
Category Management Corporate Employees Business Unit Employees Thr. Target Max. Grades Level Basis for Payout Basis for Payout 1 Non-Mgmt. 100% Corporate 100% Corporate Return on Equity 3% 5% 8% 0-72 Return on Equity 2 Managers & 100% Corporate 50% Corporate Return on Equity 5% 8% 15% Production Supv & Above Return on Equity 50% Business Unit Measures o Cashflow 6% 12% 20% 73-74 o Return on Assets 75-77 o Earnings after interest 8% 18% 34% 78-79 3 Managers & 100% Corporate 30% Corporate Return on Equity 10% 22% 40% 80+ (Non- Directors Return on Equity 70% Business Unit Measures Farmland o Cash Flow Industries, o Return on Assets Inc. VPs) o Earnings After Interest 4 Vice (All Senior Management, (Business Unit VP s) 15% 31% 52% FII VPs & Presidents Corporate, & Regional 30% Corporate Return on Equity Designated Sr & Senior VP s) 70% Business Unit Measures 20% 40% 64% Mgmt Management 100% Corporate o Cash Flow Designated Sr Return on Equity o Return on Assets Mgmt Cash Patronage Qualifier o Earnings After interest 25% 45% 70% o Cash Patronage Qualifier CEO 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 $686,849,000 and the ROE for threshold is expressed as 8%. This would correspond to Income of $54,948,000 (.08 times $686,849,000). However, the $54,948,000 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 $686,849,000 MILLION) ROE Required Income Threshold 8.0% $ 54,948,000 Target 11.5% $ 78,988,000 Maximum 15.0% $ 103,027,000 * Actual FY 95 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: o 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. o Non-recurring (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. o The gain or loss on the disposal of a major asset, group of assets, or investments. o 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. o The impact of adjustments resulting from LIFO inventory computations or reserves. o 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-10.III.B 5 MANAGEMENT LONG-TERM INCENTIVE PLAN EXHIBIT 10.(iii)B Farmland Industries, Inc. Management Long Term Incentive Plan A. EFFECTIVE DATE AND PLAN PURPOSE 1. The Management Long Term Incentive Plan (the Plan) is effective September 1, 1993. a. The Plan provides incentive compensation opportunities for designated management employees of Farmland Industries, Inc. (the Company) based on the attainment of highly focused multi-year performance goals. (See Exhibit A for performance criteria and goals.) b. The Plan's initial performance and reward cycle covers fiscal years 1994 through 1996, inclusive, the period from September 1, 1993 through August 31, 1996. c. The Plan's subsequent performance and reward cycles will begin each subsequent year thereafter for a three year time span. The Plan's second performance and reward cycle covers fiscal years 1995 through 1997, the Plan's third performance and reward cycle covers fiscal years 1996 through 1998, etc. d. It is the Company's intent to continue this Plan indefinitely, but the Company reserves the right to amend or discontinue the Plan at any time if such action is deemed in the best interests of the Company and the Membership. 2. The key purposes of the Plan are set forth below. a. To attract and retain high quality management personnel that can produce the level of sustained results needed to allow the Company to attain its mission on a continuous basis for the immediate and ongoing benefit of its Membership. (See Exhibit B for a list of participants.) b. To provide a long term incentive element which includes "ownership type" motivation for those employees most responsible for strategic results. c. To provide a competitive program of total cash compensation in appropriate marketplaces with an emphasis on variable, pay-for- performance opportunities linked to the accomplishment of demonstrated results. d. To focus key employees on key strategic results and motivate those actions which reinforce the attainment of the Company's business plan over a sustained period of time. B. DESCRIPTION OF PLAN IN OPERATION 1. The Plan shall establish multi-year performance and award cycles (Plan cycle). a. The initial cycle is from 9/1/93 through 8/31/96. b. Subsequent plan cycles shall commence each year thereafter and contain a three year performance cycle., e.g. 9/1/94 through 8/31/97 9/1/95 through 8/31/98 To continue as management determines valid. 2. Participation shall be as designated by the CEO for each cycle (except that the CEO's participation shall be approved by the Board of Directors), and shall be limited to management positions which have a significant impact on long term, strategic results. Position and/or individuals participate at the discretion of the CEO. 3. Multi-year performance goals shall be established each cycle which shall focus on one, or a very few, key, measurable results of strategic financial importance to the Company. 4. An incentive pool from which participant awards can be paid shall be created each cycle based on results achieved against goals. The pool shall be equal to an increasing percentage share of Company gains as results improve. For results above the maximum goal level, the percentage share shall remain fixed at the maximum level, but the incentive pool shall be an open-ended, uncapped amount to provide participants with an "ownership interest" in maximizing results. 5. Performance goals and the share of results used to produce the incentive pool can vary from cycle to cycle, but generally be established under the following criteria: Level Share of Awards Payable - Approximate Achieved Results To Resulting Compensation Odds of Pool Level in Marketplace Attainment < Threshold None None - Uncompetitive - Threshold Small Meaningful - Below Average 8 in 10 Target More Significant - Desired (Average) 5 in 10 Maximum Maximum Large - Very Competitive 2 in 10 > Maximum Same, set share Open-ended "ownership" share of - outstanding results 6. Each cycle the Company shall establish a Basic Award Percentage (pool portion) for each participant in the Plan. Such Basic Award Percentages shall: a. be communicated to participants by the Company; b. remain unchanged during a cycle unless a participant's status shall significantly change; and c. in total, be approximately 10-15% less than the total incentive pool. The remaining 10-15% portion of the incentive pool for each Part of the Plan shall be a Reserve Incentive Pool available for discretionary use by the CEO and/or for allocation for new participants as selected by the CEO. 7. Each cycle, the CEO may distribute all or some portion of the Plan's Reserve Incentive Pool to participants for any of these reasons: a. to recognize outstanding individual performance or contributions to overall Company results; b. to recognize changes in status during a cycle where a participant's position is significantly increased; or c. to permit participation by a person hired or promoted into a participating position during a cycle. If additional participants caused the incentive pool to be more than 100% allocated, the CEO would determine the amount of reduction to each participant's pool portion. Such distribution can consist of an additional dollar award at cycle end, or a new or increased Base Share Award determined during the cycle. 8. Total awards can not exceed the size of the incentive pool generated each cycle. No awards are payable if no money has been generated based on plan formulas. 9. A participant's total award shall be the sum of his (or her) Basic Award Percentage plus any additional amount awarded by the CEO from the Reserve Incentive Pool. Total awards shall be payable as soon as practical at the end of the cycle subject to (10) and (11) below. a. About mid-December, 1996 for the initial cycle. b. About mid-December, following the end of each successive cycle. 10. Awards shall be payable in cash and subject to all applicable withholding. 11. Participants may voluntarily elect to irrevocably defer receipt of awards otherwise payable in accordance with rules and procedures established by the Company in the Farmland Industries, Inc. Executive Deferred Compensation Plan. 12. Exhibit A lists the Performance criteria and Goals, and the amount by which the pool is to be funded for each level of performance. Exhibit B lists participants and their Basic Award Percentage assigned. C. VESTING AND FORFEITURE OF AWARDS 1. A participant must be an active employee of the Company at the end of each cycle in order to receive an award for such cycle unless active employment ceased for reasons of death, total disability, or retirement. 2. In the event of a participant's death, total disability, or retirement during a cycle, awards otherwise payable shall be prorated on the basis of full months of active participation in relation to the length of the cycle. 3. In the event of a participant's change of status to a non- participating position during a cycle, awards otherwise payable shall be prorated and/or adjusted depending upon the reason for the change, but generally on the basis of full months participation in relation to the length of the cycle. 4. If a participant's employment is terminated with the Company for reasons other than death, total disability or retirement during a cycle, such participant shall forfeit all rights to any award otherwise payable. 5. Decisions regarding proration and award adjustment shall be made by the CEO and, barring highly unusual circumstances, on the basis of full months of active participation in relation to the months within the cycle. The Board and CEO authorities and guidelines for specific situations are set for in Section D. D. APPROVAL AUTHORITY FOR KEY ACTIONS 1. The Plan was approved by the Board in August 1993. The Board, in its sole judgement, has the authority for all the following actions. a. Amendment or discontinuance of the Plan. b. Adjustment or cancellation of any awards otherwise payable should the Company suffer an operating loss in the final fiscal year of any performance cycle. c. Approval for any cycle for all the following: (i) performance goals; and (ii) award payout procedures which are not specifically delegated to the Compensation Committee of the Board (the Committee), the CEO or the Company. d. Approval of all of the following with respect to the CEO for any given Plan cycle: (i) The CEO's portion of any incentive award pool generated by the Plan; (ii) An appropriate prorata portion of any award otherwise payable in the event of termination of employment by the CEO during a cycle due to death, total disability, or retirement; (iii) An appropriate prorata award for a CEO hired or promoted into such position during a cycle; and (iv) A determination of the CEO's personal performance during a cycle, with authority to deny, or adjust, any award otherwise payable should such performance be deemed, in the Board's majority judgement, wholly unsatisfactory. e. Approval for the inclusion or exclusion of major, extraordinary financial results or transactions occurring during the cycle in the calculation of performance results impacting Plan goals and awards. Such decisions will be made on a case-by-case basis with the basic standard of judgement being the best interests of the company and its Membership and the purposes of the Plan. f. Delegation to the Committee of the power to review or decide any issue relative to the Plan. 2. The Committee shall be responsible for monitoring the Plan, reviewing all major aspects in detail, analyzing Company requests for Plan actions or approvals, recommending Plan amendments or actions to the Board, and reporting to the Board such information as it may reasonably request. 3. The Company shall be responsible for administering the Plan, establishing appropriate accounting reserves to recognize award liabilities, communicating all appropriate details to participants in a timely manner, recommending necessary plan amendments or actions to the Committee, and reporting such information to the Committee and the Board as they may request. 4. The CEO is specifically authorized to take the following actions with respect to all other participants. a. Approval for any cycle for the following: (i) participants (ii) levels of opportunity and incentive pool calculations b. Distribution on a subjective, discretionary basis of the Plan's Reserve Incentive Pool, if any. (i) Distribution can be made in any amount the CEO shall determine, and need not be consistent with the distribution of Basic Award Percentages. (ii) The total distribution cannot exceed the funds in the Reserve Incentive Pools but the total Reserve need not be spent and any unused funds shall not be carried over to subsequent cycles but shall revert to the Company. c. Approval of appropriate prorata awards and/or Basic Award Percentages from the Incentive Pool to a participant in the event of any of the following circumstances. (i) A participant's death, total disability, or retirement at any time during a Plan Cycle. (ii) A participant's change of status during a Plan cycle which is sufficiently significant to either (a) render further participation inappropriate, or (b) render the originally designated Basic Award Percentage inappropriate relative to those applicable to other participants in positions of similar responsibility and impact. (iii) The hiring, or promotion, of an employee during a cycle into a position for which Plan participation is appropriate. Such decisions shall be subjective, discretionary judgements made on a case-by-case basis, but the CEO shall generally follow these guidelines: (a) Prorata awards and prorata assignment of Basic Award Percentages shall generally be mathematically determined on the basis of full months of active participation in the applicable position divided by the number of months within the Plan cycle. (b) If a participant's status is reduced to a position where Plan participation is no longer appropriate, a prorata award will generally be determined in accordance with (ii) above if the change was due to reorganization or similar Company instigated action. The CEO will determine appropriate action if a participant leaves the plan due to individual performance or personal choice. E. ADMINISTRATIVE ISSUES 1. Participation in the Plan is not a guarantee of employment, nor does participation in one cycle guarantee participation in subsequent cycles. 2. Plan awards shall not be considered as compensation for any Company benefit plan whatsoever. 3. For purposes of the Plan, the following definitions shall apply: a. "Retirement" shall mean the cessation of Company employment at or after age 55 and immediate retirement under the Company's primary qualified retirement plan applicable to the participant whether or not retirement benefits are then commenced. The CEO in his sole discretion may make an exception for an individual over 55 who has not vested in the retirement plan. b. "Total Disability" shall mean the cessation of Company employment for reasons of physical or mental impairment which on the basis of evidence provided to the CEO or Board (as appropriate) is, in the CEO's or Board (as appropriate) sole judgement, expected to last at least 12 months. 4. In the event of a substantial change of ownership in which the Company, as constituted on the Effective Date, is not a surviving entity, the Plan shall continue in effect and insure to the benefit of the new entity. 5. The Basic Award Percentages originally assigned to any participant but subsequently forfeited or otherwise reduced for such participant during a Plan cycle may be reassigned to any other participant. The Board may make such assignment with respect to the CEO, and the CEO may make such assignment with respect to any other participant. 6. The total awards payable under the Plan for any cycle can not exceed the total incentive pools generated by the Plan for such cycle, and any unused incentive pool funds shall revert to the Company at cycle end. 7. All participants shall designate a beneficiary under the Plan in accordance with policies and procedures established by the Company from time to times, and it is a participant's responsibility to keep such designation up to date. In the event of a participant's death, the Company shall pay any award payable on behalf of such participant to such designated beneficiary or, if such beneficiary is no longer living or can not be located, to the participant's estate. EXHIBIT A Performance criteria for FY 1994 - FY 1996 cycle include the following: Aggregate Income, defined as the targeted income, before taxes and extraordinary items(1), for the entire three-year period, as shown in the table below. Performance goals and amounts funding the payout pool include the following: Performance Level Aggregate Income % of Net Earnings to Pool Below Target Below $192,810,000 0% Target $192,810,000 2.5% of earnings Above Target Above $192,810,000 2.5% of earnings During the FY 94-96 cycle, Farmland Industries, Inc. must return to its members at least $65,030,000 in cash(2), squared or no payout will occur under this plan. In order to ensure the integrity of Farmland's financial strength, a limit on funded indebtedness as a percent of capitalization is incorporated into this plan. In the event that a the indebtedness ratio is above the level which is established by bank covenants at the end of the cycle, no payout will occur under this plan. (1) Guidelines for "Extraordinary" Designation were issued on September 1, 1990, and updated on September 1, 1992. These guidelines state that 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: o Income or losses that pertain to discontinued operations or activities which have been nonoperational through a fiscal year-end. o 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. o Nonrecurring (one-time) adjustments to income or expense such as the gain from settlement of the retirement plan r a write-down of a major fixed asset. o The gain or loss on the disposal of a major asset or a group of assets. o 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. ADDITIONAL ITEM EXCLUDED FROM CALCULATION OF VARIABLE COMPENSATION INCOME o The impact of adjustments to income resulting form LIFO inventory computations will not be included in income for variable compensation purposes. (2) Cash Returned to Members includes cash patronage, equity redemptions, additional equity redemptions due to tax savings on net operating losses (NOL), ownership retirements, capital credits, preferred stock dividends and preferred stock redemption and Cooperative Finance Company cash patronage refund. EXHIBIT B TITLE OF PARTICIPANT President and CEO Executive Vice President, Inputs Senior Vice President, Outputs Executive Vice President and CFO Executive Vice President and President Farmland, Mexico Senior Vice President and Corporate Secretary Vice President, Region 1 Vice President, Region 2 Vice President, Region 3 Vice President, Region 4 Vice President, Region 5 Vice President, Crop Production Vice President, Feed Vice President, Petroleum Vice President, Farmland Foods Vice President, Grain Vice President, International/Transportation Vice President, Transportation Vice President, MFS/IS Vice President, and Controller Vice President and Treasurer Vice President and General Counsel Vice President, Human Resources Vice President, Corporate Administrative Services Director, Planning EXHIBIT C Performance criteria for FY 1995 - FY 1997 cycle include the following: Aggregate Income, defined as the targeted income, before taxes and extraordinary items(1), for the entire three-year period, as shown in the table below. Performance goals and amounts funding the payout pool include the following: Performance Level Aggregate Income % of Net Earnings to Pool Below Target Below $235,043,000 0% Target $235,043,000 .83% of earnings Above Target Above $235,043,000 .83% of earnings During the FY 95-97 cycle, Farmland Industries, Inc. must return to its members at least $61,938,000 in cash (2), squared or no payout will occur under this plan. In order to ensure the integrity of Farmland's financial strength, a limit on funded indebtedness as a percent of capitalization is incorporated into this plan. In the event that a the indebtedness ratio is above the level which is established by bank covenants at the end of the cycle, no payout will occur under this plan. (1) 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: o 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. o 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. o The gain or loss on the disposal of a major asset, group of assets, or investments. o The impact of adjustments resulting from LIFO inventory computations or reserves. o 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. (2) Cash Returned to Members includes cash patronage, equity redemptions, additional equity redemptions due to tax savings on net operating losses (NOL), ownership retirements, capital credits, preferred stock dividends, preferred stock redemptions, and estate settlements. EXHIBIT D Performance criteria for FY 1996 - FY 1998 cycle include the following: Aggregate Income, defined as the targeted income, before taxes and extraordinary items,(1) for the entire three-year period, as shown in the table below. Performance goals and amounts funding the payout pool include the following: Performance Level Aggregate Income % of Net Earnings to Pool Below Target Below $393,481,000 0% Target $393,481,000 .83% of earnings Above Target Above $393,481,000 .83% of earnings During the FY 96 - 98 cycle, Farmland Industries, Inc. must return to its members at least $90,000,000 in cash,(2) or no payout will occur under this plan. In order to ensure the integrity of Farmland's financial strength, a limit on funded indebtedness as a percent of capitalization is incorporated into this plan. In the event that the indebtedness ratio is above the level which is established by bank covenants at the end of the cycle, not payout will occur under this plan. (1) The Chief Financial Officer and the Chief Executive Officer must approve the classification of any item as "extraordinary." Transaction deemed as "extraordinary" and therefore excluded in the determination of Income for variable compensation include: o 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. o 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. o The gain or loss on the disposal of a major asset, group of assets, or investments. o The impact of adjustments resulting from LIFO inventory computations or reserves. o 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 Chief Executive Officer. (2) Cash Returned to Members includes cash patronage, equity redemptions, additional equity redemptions due to tax savings on net operating losses (NOL), ownerships retirements, capital credits, preferred stock dividends, preferred stock redemptions, and estate settlements. EX-10.III.C 6 SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN EXHIBIT 10.(iii)C FARMLAND INDUSTRIES, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN TABLE OF CONTENTS 1. Name of Plan . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2. Effective Date . . . . . . . . . . . . . . . . . . . . . . . . . 1 3. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 (a) Deferred Compensation Plan . . . . . . . . . . . . . . . . 1 (b) Retirement Plan . . . . . . . . . . . . . . . . . . . . . . 1 (c) Retirement Plan Benefit . . . . . . . . . . . . . . . . . . 1 (d) (i) Actuarial Equivalent . . . . . . . . . . . . . . . . 1 (ii) Accumulated Retirement Annuity . . . . . . . . . . . 1 (iii) Beneficiary . . . . . . . . . . . . . . . . . . . . . 1 (iv) Deferred Retirement Date . . . . . . . . . . . . . . 1 (v) Early Retirement Annuity . . . . . . . . . . . . . . 1 (vi) Early Retirement Date . . . . . . . . . . . . . . . . 1 (vii) Final Average Wage Base . . . . . . . . . . . . . . . 1 (viii) Normal Retirement Date . . . . . . . . . . . . 1 4. Participants . . . . . . . . . . . . . . . . . . . . . . . . . . 1 5. Supplemental Retirement Benefit . . . . . . . . . . . . . . . . . 1 (a) Form of Benefit . . . . . . . . . . . . . . . . . . . . . . 1 (b) Amount of Benefit: Normal or Deferred Retirement Date . . 2 (c) Early Retirement Benefit . . . . . . . . . . . . . . . . . 3 6. Limitation on Benefits: Life Insurance . . . . . . . . . . . . . 3 7. Death Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . 3 (a) Death Before Retirement . . . . . . . . . . . . . . . . . . 3 (b) Death After Retirement . . . . . . . . . . . . . . . . . . 3 8. Forfeiture for Violating Standards of Conduct . . . . . . . . . . 4 9. Participants' Rights Unsecured . . . . . . . . . . . . . . . . . 4 10. Payments to Incompetent Persons . . . . . . . . . . . . . . . . . 4 11. Amendments to the Plan . . . . . . . . . . . . . . . . . . . . . 4 12. Termination of the Plan . . . . . . . . . . . . . . . . . . . . . 4 13. Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 14. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 15. Plan Administrator . . . . . . . . . . . . . . . . . . . . . . . 5 16. Interpretation and Governing Law . . . . . . . . . . . . . . . . 5 17. Administrative Committee . . . . . . . . . . . . . . . . . . . . 5 FARMLAND INDUSTRIES, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN Farmland Industries, Inc. (the "Corporation") hereby establishes a deferred compensation plan for certain of its employees, under the terms set forth below: 1. Name of Plan. This Plan shall be known as the "Farmland Industries, Inc. Supplemental Executive Retirement Plan." It may be referred to in this document simply as the "Plan." 2. Effective Date. The Plan shall be effective January 1, 1994. 3. Definitions. The following terms shall have the meaning given them below: (a) Deferred Compensation Plan means the Corporation's Executive Deferred Compensation Plan, as it may be amended from time to time. (b) Retirement Plan means the Farmland Industries, Inc. Employee Retirement Plan, as it may be amended from time to time. (c) Retirement Plan Benefit means the amount of benefit payable from the Retirement Plan to a Participant in the form of a single life annuity. (d) The following terms shall have the meaning set forth in the Retirement Plan: (i) Actuarial Equivalent; (ii) Accumulated Retirement Annuity; (iii) Beneficiary; (iv) Deferred Retirement Date; (v) Early Retirement Annuity; (vi) Early Retirement Date; (vii) Final Average Wage Base; and (viii) Normal Retirement Date. 4. Participants. The employees listed in Appendix A shall be Participants in the Plan. Appendix A may be revised from time to time by the Board of Directors of the Corporation. 5. Supplemental Retirement Benefit. Each Participant (a) whose employment with the Corporation terminates on or after his or her 55th birthday, and (b) who has earned a fully vested employer-provided benefit under the Retirement Plan, shall be eligible to receive a Supplemental Retirement Benefit under this Plan. (a) Form of Benefit. A Participant's Supplement Retirement Benefit determined under this Plan shall be paid in annual installments. Annual installments shall be paid during the first 15 days of January, beginning with the January immediately following the Participant's termination of employment with the Corporation. Payments shall be made for the shorter of (i) the Participant's lifetime, or (ii) ten years. No more than ten annual payments shall be made in any event. (b) Amount of Benefit: Normal or Deferred Retirement Date. The annual Supplemental Retirement Benefit payable at a Participant's Normal Retirement Date or Deferred Retirement Date shall be two-thirds of the following annual benefit payment: (i) The employer-provided portion of the Participant's Accumulated Retirement Annuity under the Retirement Plan (expressed as an annual amount), as modified under rules set forth below, less (ii) The employer-provided portion of the actual Normal Retirement or Deferred Retirement benefit (whichever is applicable) payable to the Participant in a single life annuity under the Retirement Plan (expressed as an annual amount), and less (iii) The employer-provided portion of the Participant's benefit payable, in a single life annuity, at the Participant's Normal Retirement Date or Deferred Retirement Date (whichever is applicable) under the Deferred Compensation Plan (expressed as an annual amount). Rules for Calculating (i) Above. In calculating the amount in (i) above, the Participant's Accumulated Retirement Annuity under the Retirement Plan shall be modified. It shall be modified by including as wages (for purposes of calculating the Participant's Final Average Wage Base) all deferrals made by the Participant under the Deferred Compensation Plan. It shall also be modified by disregarding the limitations imposed by Sections 401(a)(17) and 415 of the Internal Revenue Code of 1986, as they may be amended. These adjustments shall have no impact on the benefit actually paid to the Participant under the Retirement Plan. This shall instead affect only the calculation of the Participant's Supplemental Retirement Benefit under this Plan. Determining Employer-Provided Portion of Benefits. In calculating the amount in (ii) above, the employer-provided portion of a Participant's actual Normal or Deferred Retirement benefit shall be the portion considered to be derived from employer contributions under Section 411(c)(1) of the Internal Revenue Code of 1986, as that Section may be amended. In calculating the amount in (i) above, the employer-provided portion of a Participant's Accumulated Retirement Benefit shall be the Participant's Accumulated Retirement Benefit multiplied by a fraction. The fraction shall have as its numerator the employer-provided portion of the Participant's Accumulated Retirement Annuity on the Participant's Normal Retirement Date or Deferred Retirement Date (whichever is applicable). The denominator shall be the Participant's full Accumulated Retirement Annuity determined on the Participant's Normal Retirement Date or Deferred Retirement Date (whichever is applicable). Early Retirement "Window" Enhancements Disregarded. In calculating a Participant's Accumulated Retirement Annuity under the Retirement Plan, any enhancement of benefits for early retirement available only to those retiring during a "window" of time which is no longer than two years in length, shall not be taken into account. (c) Early Retirement Benefit. The annual Supplemental Retirement Benefit payable at a Participant's Early Retirement Date shall be equal to the benefit determined under the preceding provisions of this Section, but adjusted by applying to that benefit the Early Retirement Annuity factors applicable under the Retirement Plan. 6. Limitation on Benefits: Life Insurance. The Corporation intends to purchase an insurance policy or policies on the lives of some or all the Participants under this Plan. All such policies shall be owned by the Corporation, and the Corporation shall be entitled to designate the beneficiaries under those policies, which may be the Corporation. Participants must fully cooperate with the Corporation in applying for and obtaining insurance on the Participants' lives. The Corporation's obligation to pay benefits under this Plan for any Participant shall, in the aggregate, be limited at all times to the aggregate cash value of those life insurance policies designated by the Administrative Committee. The initial list of policies designated by the Administrative Committee for this purpose is set forth in Appendix B. The Corporation is under no obligation (a) to establish or maintain cash values under the life insurance policies in any particular amount, (b) to make life insurance premium payments in any particular amount (or to make any payments at all), or (c) to obtain or maintain policies insuring the lives of any particular Participant or Participants (or any Participants at all). If the benefit payments under this Plan for a year would, when added to all prior benefit payments made from this Plan, exceed (a) the total cash value, on August 31 of the preceding year, of the policies designated by the Administrative Committee, increased by (b) any previous reductions in cash value caused by withdrawals from the policies by the Corporation, each Participant's payment shall be reduced. A Participant's reduced payment shall be the product of (a) the total amount available for the payment of benefits for the year, and (b) a fraction, the numerator of which is the Participant's full payment due for the year and the denominator of which is the total full payment due to all Participants for the year. 7. Death Benefit. (a) Death Before Retirement. If a Participant dies (i) before his employment with the Corporation terminates, (ii) after attaining age 55, and (iii) after having earned a fully vested employer-provided benefit under the Retirement Plan, a death benefit shall be paid to the Participant's Beneficiary. That Beneficiary shall be entitled to one annual payment. The annual payment shall be in an amount equal to the annual benefit the Participant would have received if he or she had retired on the date of the Participant's death, and shall be paid in the January following the Participant's death. (b) Death After Retirement. If a Participant entitled to a benefit under this Plan dies after his employment terminates, the Participant's Beneficiary shall receive the next annual payment to which the Participant would have been entitled if the Participant had survived. The payment shall be made in the January following the Participant's death. The Beneficiary of a Participant who received ten annual payments shall not, however, be entitled to any further payment. 8. Forfeiture for Violating Standards of Conduct. Unless the Board of Directors of the Corporation, in its sole discretion, chooses otherwise, no benefit shall be payable to a Participant if one of the reasons for the Participant's termination of employment is the Corporation's reasonable belief that the Participant has committed a criminal act or has violated the Corporation's standards of conduct set forth in the Corporation's employee handbook. 9. Participants' Rights Unsecured. The right of a Participant, or any beneficiary, to receive a distribution under this Plan shall be an unsecured claim against the general assets of the Corporation. Neither the Participant nor his or her beneficiaries shall have any right to enter against any specific assets of the Corporation. The Participants shall have the status of general unsecured creditors to the Corporation. This Plan constitutes a mere promise by the Corporation to make benefit payments in the future. Benefits under this Plan may not in any way be encumbered or assigned by a Participant or any beneficiary. 10. Payments to Incompetent Persons. Every person receiving or claiming a benefit under the Plan shall be presumed to be mentally competent and of age until the Administrative Committee receives reliable, written notice that such person is incompetent or a minor. Payments otherwise due a minor shall be paid to any custodial parent of such minor. Payments otherwise due any other incompetent person shall be paid to the guardian, conservator, or other legal representative of such person. In the event that the Administrative Committee is unable to locate a parent, guardian, conservator, or other legal representative of an incompetent person who is otherwise entitled to payment under the Plan, such payment shall be made to the individual determined by the Administrative Committee to have assumed financial responsibility for the care of such person. Before the initial payment is made to an individual designated in this section, the minor or other legally incompetent person shall be notified of the Administrative Committee's intent to make such payment to that other individual. Any payment of a benefit in accordance with the provisions of this Section shall be a complete discharge of any liability to make such payment. 11. Amendments to the Plan. The Board of Directors of the Corporation (the "Board") may amend the Plan at any time, without the consent of the Participants or their Beneficiaries, provided, however, that no amendment shall divest any Participant or Beneficiary of his or her Supplemental Retirements Benefits already accrued. For this purpose, the Supplemental Retirement Benefits accrued to the date the Plan is amended, when added to the benefits previously paid to Participants and Beneficiaries, shall, however, be limited to the aggregate cash values on the date the Plan is amended of the life insurance policies referred to in Section 6, increased by any previous reductions in cash value caused by withdrawals from the policies by the Corporation. 12. Termination of the Plan. The Board may terminate the Plan at any time. No additional benefits shall be credited following termination of the Plan, and benefits shall be limited to the aggregate cash values on the date the Plan is terminated of the life insurance policies referred to in Section 6, increased by any previous reductions in cash value caused by withdrawals from the policies by the Corporation. Upon termination of the Plan, distribution of Participants' benefits shall be made in the manner and at the time described under the Plan's normal provisions. 13. Expenses. Costs of administration of the Plan shall be paid by the Corporation. 14. Notices. Any Notice or election required or permitted to be given hereunder shall be in writing, in the form prescribed by the Administrative Committee, and shall be deemed to be filed: (a) On the date it is personally delivered to the Administrative Committee (or its designee), or (b) Three business days after it is sent by registered or certified mail, addressed to the Administrative Committee (or its designee) at the Corporation's address. 15. Plan Administrator. The Administrative Committee shall be the Plan Administrator for the Plan. 16. Interpretation and Governing Law. This Plan is established in the state of Missouri. To the extent federal law does not apply, any questions arising under the Plan will be determined under the laws of the state of Missouri. 17. Administrative Committee. The Board shall appoint an administrative committee of no more than ten members (the "Administrative Committee") to administer this Plan. The Administrative Committee shall have the power to interpret the Plan and to determine all questions that arise under it. Such power includes, for example, the administrative discretion necessary to determine whether an individual meets the Plan's written eligibility requirements, and to interpret any other term contained in this document. All payments of benefits under the Plan shall be made by the Corporation in accordance with the written direction of the Administrative Committee. The decision of the Administrative Committee upon all matters within the scope of its authority shall be final and binding on all parties. IN WITNESS WHEREOF, the Corporation hereby adopts this Supplemental Executive Retirement Plan this 23rd day of February, 1994. FARMLAND INDUSTRIES, INC. By: H. D. CLEBERG H. D. Cleberg Title: President and CEO ATTEST: BERNARD L. SANDERS Bernard L. Sanders APPENDIX A Allen, W. Baldwin, M. Berardi, J. Campbell, T. Carter, H. Cleberg, H. Daniel, M. Daugherty, T. Dees, S. Douglass, R. Evans, G. Filson, D. Grazier, G. Hodges, C. Honse, R. Kimble, D. Morris, C. Morrison, G. Otwell, K. Pardun, R. Richter, G. Rieman, S. Sadler, M. Sander, D. Sanders, B. Schrodt, F. Shepard, R. Sweat, M. Vickers, K. Wallace, E. APPENDIX B (List of life insurance policies whose cash values serve as a cap on benefits.) EX-21 7 SUBSIDIARIES OF THE 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 (68%-owned effective March 31, 1995), 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, Inc. 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 S.A. of Switzerland 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 Shipping S.A. 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 S.A. of France 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 GmbH 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 LTD. 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 S.A. of Argentina has been included in the Consolidated Financial Statements filed in this registration. EX-24 8 POWER OF ATTORNEY Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS THAT EACH PERSON WHOSE SIGNATURE APPEARS BELOW CONSTITUTES AND APPOINTS ROBERT B. TERRY 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 1995 ANNUAL REPORT PREPARED, PURSUANT TO SECTIONS 13 OR 15D OF THE SECURITIES ACT OF 1934, (INCLUDING ANY AMENDMENTS THERETO), 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 ANY OF THEM OR HIS SUBSTITUTE OR SUBSTITUTES, MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF. Signature Title Date ALBERT J. SHIVLEY Chairman of Board, October 25, 1995 Albert J. Shivley Director H. D. CLEBERG President, Chief Executive October 25, 1995 H. D. Cleberg Officer and Director (Principal Executive Officer) OTIS H. MOLZ Vice Chairman of Board October 25, 1995 Otis H. Molz and Director LYMAN ADAMS, JR. Director October 25, 1995 Lyman Adams, Jr. RONALD J. AMUNDSON Director October 25, 1995 Ronald J. Amundson BAXTER ANKERSTJERNE Director October 25, 1995 Baxter Ankerstjerne JODY BEZNER Director October 25, 1995 Jody Bezner RICHARD L. DETTEN Director October 25, 1995 Richard L. Detten STEVEN ERDMAN Director October 25, 1995 Steven Erdman WARREN GERDES Director October 25, 1995 Warren Gerdes BEN GRIFFITH Director October 25, 1995 Ben Griffith GAIL D. HALL Director October 25, 1995 Gail D. Hall JEROME HEUERTZ Director October 25, 1995 Jerome Heuertz BARRY JENSEN Director October 25, 1995 Barry Jensen GREG PFENNING Director October 25, 1995 Greg Pfenning VONN RICHARDSON Director October 25, 1995 Vonn Richardson MONTE ROMOHR Director October 25, 1995 Monte Romohr JOE ROYSTER Director October 25, 1995 Joe Royster PAUL RUEDINGER Director October 25, 1995 Paul Ruedinger RAYMOND J. SCHMITZ Director October 25, 1995 Raymond J. Schmitz THEODORE J. WEHRBEIN Director October 25, 1995 Theodore J. Wehrbein ROBERT ZINKULA Director October 25, 1995 Robert Zinkula EX-27 9 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from Form 10-K for the fiscal year ending August 31, 1995 and is qualified in its entirety by reference to such Form 10-K. 1,000 12-MOS AUG-31-1995 SEP-01-1994 AUG-31-1995 0 0 446,232 0 772,528 1,279,643 1,334,849 742,704 2,185,943 960,130 506,033 385,409 0 2,453 299,425 2,185,943 7,119,550 7,256,869 6,657,686 6,699,178 0 0 53,862 179,399 29,628 162,799 0 0 0 162,799 0 0
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