-----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, QAj2qA+j7t1ivncem1FnKFPdkXvXODv/z0U3+t51g3PVuvPtRojP/qlovhQZQlXY 5xsJ92UaDdXOrxBA4T1L2A== 0000034616-96-000012.txt : 19961202 0000034616-96-000012.hdr.sgml : 19961202 ACCESSION NUMBER: 0000034616-96-000012 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19960831 FILED AS OF DATE: 19961127 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: 001-11629 FILM NUMBER: 96673180 BUSINESS ADDRESS: STREET 1: 3315 N FARMLAND TRAFFICWAY STREET 2: DEPT 140 CITY: KANSAS CITY STATE: MO ZIP: 64116-0005 BUSINESS PHONE: 816-459-6882 FORMER COMPANY: FORMER CONFORMED NAME: CONSUMERS COOPERATIVE ASSOCIATION DATE OF NAME CHANGE: 19681201 10-K 1 FORM 10-K FOR THE FISCAL YEAR ENDING 8-31-96 UNITED STATES 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, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 2-60372 FARMLAND INDUSTRIES, INC. (Exact Name of Registrant as Specified in Its Charter) KANSAS 44-0209330 (State or Other Jurisdiction of Incorporation or Organization)(I.R.S. Employer Identification No.) 3315 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. [ X ] 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 I 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 $9.7 billion during 1996. 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 and Properties - Business - Patronage Refunds and Distribution of Annual Earnings" included herein. 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, (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, 1996, Farmland's requirements for voting membership were as follows: the voting member must (1) own a minimum of $1,000 of Farmland's common stock; and (2) transact business with Farmland on a patronage basis; and (3) not be a significant direct competitor with Farmland in any of Farmland's major business lines; and (4) (a) be a natural person, a family farm corporation or a family farm partnership that (i) derives a majority of earned income from a farming operation (excluding any earned income of a spouse from other sources) and (ii) is a vendor of livestock to Farmland and/or a contract producer of livestock for Farmland; or (b) be an association of producers of agricultural products that (i) is organized and conducts business on a cooperative basis; (ii) distributes its earnings based on patronage; and (iii) is controlled directly by its voting producer members. ASSOCIATE MEMBERS To qualify for associate membership in Farmland, all of the following conditions must be met: the associate member must (1) own a minimum of $1,000 of Farmland's associate member common stock; and (2) not be a significant direct competitor of Farmland in any of the business line(s) in which the associate member expects to conduct patronage business with Farmland; and (3)(a) be a natural person, a family farm corporation, or a family farm partnership that (i) derives a majority of earned income from a farming operation (excluding any earned income of a spouse from other sources) and (ii) is a vendor of livestock to Farmland and/or a contract producer of livestock for Farmland; or (b) be an association conducting business on a cooperative basis; or (c) be a business entity owned 100%, directly or indirectly, by Farmland or its members or associate members; or (d) be a hog-and/or cattle-feeding business entity that agrees to provide Farmland with the information it needs to pass on patronage refunds from Farmland's hog- and/or cattle-marketing operations to those agricultural producer-members of Farmland who have conducted business with the entity. PATRONAGE AGREEMENTS WITH PATRONS All existing patronage agreements with patrons will remain in force until such time as either (a) the patron has been inactive with Farmland during any single fiscal year; or (b) the patronage agreement is canceled by mutual consent. No new patronage agreements will be authorized without prior approval by the Board of Directors. As of August 31, 1996, Farmland's membership, associate membership and patrons eligible for patronage refunds consisted of approximately 1,800 cooperative associations of farmers and ranchers and 11,800 pork or beef producers or associations of such producers. See ''Business and Properties - Business - Patronage Refunds and Distribution of Annual Earnings''. included herein 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, 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 1996, Farmland had exports to approximately 70 countries, and derived approximately 42% 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 car, truck and tractor tires, batteries and accessories. Principal products of the crop production division are nitrogen-, phosphate- and potash-based fertilizers ("plant nutrients"), and, through the Company's ownership in 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 1996 was produced in plants owned by the Company or operated by the Company under long-term lease arrangements. Approximately 60% of the Company's farm supply products sold in 1996 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 operations include the processing of pork and beef, the marketing of fresh pork, processed pork and fresh beef and the storage, marketing and processing of grain. In 1996, approximately 66% of the hogs processed, 14% of the beef cattle processed and 45% of the grain marketed by the Company were supplied to the Company by its members. Substantially all of the Company's pork and beef products sold in 1996 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 principal businesses of the Company are highly seasonal. Historically, the majority of sales of farm supply products occur in the spring. Revenues in the beef business and in grain marketing historically have been concentrated in the summer, and summer is the lowest sales period for pork products. 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 (some of which are cooperatives) of nitrogen and phosphate fertilizers and product importers and brokers. The feed, pork and beef industries are comprised of a large variety of competitive participants. BUSINESS RISK FACTORS INCOME TAX MATTERS 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 in September 1995 and reply briefs were submitted to the court 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 $209.2 million, before tax benefits of the interest deduction, through August 31, 1996), or $295.0 million in the aggregate at August 31, 1996. 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 accumulating statutory interest thereon (approximately $6.6 million), or $11.6 million in the aggregate at August 31, 1996. The asserted federal and state income tax liabilities and accumulated interest thereon 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 by the United States Tax Court would be charged to current earnings and would have a material adverse effect on the Company. In the event of such an adverse determination of the Terra tax issue, certain financial covenants of the Company's Credit Agreement (the "Agreement"), dated May 15, 1996, become less restrictive. Had the United States Tax Court decided in favor of the IRS on all unresolved issues, and had all related additional federal and state income taxes and accumulated interest thereon been due and payable on August 31, 1996, Farmland's borrowing capacity under the Agreement was adequate at that time to finance the liability. However, Farmland's ability to finance such an adverse decision depends substantially on the financial effects of future operating events on its borrowing capacity under the Agreement. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Financial Condition, Liquidity and Capital Resources" included herein. GENERAL FACTORS AFFECTING THE BUSINESS 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 and other factors. In addition, various federal and state regulations to protect the environment encourage farmers to reduce the amount of fertilizer and other chemical applications that they use. 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. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations for Years Ended August 31, 1994, 1995 and 1996" and "Business and Properties - Business - Petroleum - Raw Materials" and" - Crop Production - Raw Materials" included herein. LIMITED ACCESS TO EQUITY CAPITAL MARKETS As a cooperative, the Company cannot sell its common equity to traditional public or private markets. Instead, equity is raised largely from cooperative voting members, associate members and patrons. Farmland's equity results from payment of the noncash portion of patronage refunds with common stock, associate member common stock and capital credits and from net income on transactions with nonmembers (retained earnings). See ''Business and Properties - Business - Patronage Refunds and Distribution of Annual Earnings'' and '' - Equity Redemption Plans" included herein. ENVIRONMENTAL MATTERS The Company is subject to various stringent federal, state and local environmental laws and regulations in the United States which regulate the Company's petroleum operations, farm supply manufacturing and distribution operations, its food processing and marketing operations and its grain marketing operations, or which may impose liability for the cleanup of environmental contamination. The Company has incurred and will continue to incur substantial capital expenditures and operating costs related to these laws and regulations. The Company cannot, however, predict the impact of new or amended laws or regulations, nor can it predict with certainty how existing laws and regulations will be enforced or interpreted. See ''Business and Properties - Business - Matters Involving the Environment'' included herein. Many of the Company's current and former facilities have been in operation for many years and, over such time, the Company and other predecessor operators of such facilities have generated, used, stored, or disposed of substances or wastes that are or might be considered hazardous under applicable environmental laws. As a result of such operations, the soil and groundwater at or under certain of the Company's current and former facilities have been contaminated. Material expenditures may be required by the Company in the future to remediate contamination from past or future releases of hazardous substances or wastes. The Company wholly or jointly owns or operates 34 grain elevators and 58 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 also has been identified as a potentially responsible party (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. CERCLA 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 owner or operator of a contaminated property, and companies that generated, disposed of, or arranged for the disposal of hazardous substances found at the property. The Company is investigating or remediating contamination at 28 properties. During 1994, 1995 and 1996, the Company paid approximately $1.4 million, $3.2 million and $1.8 million, respectively, for environmental investigation and remediation. The Company currently is aware of probable obligations for environmental matters at 39 properties. As of August 31, 1996, the Company has an environmental accrual in its Consolidated Balance Sheet for probable and reasonably estimated costs for remediation of contaminated property of $18.9 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 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, 1996. In the opinion of management, it is reasonably possible for such costs to be approximately an additional $20.6 million. See "Business and Properties - Business - Matters Involving the Environment" included herein. PETROLEUM MARKETING The principal product of this business segment is refined fuels. Approximately 58% of refined fuels products sold in 1996 resulted from transactions with Farmland's members. The balance of the Company's refined fuels products sales were principally to retailing chains in urban areas. Other petroleum products include lube oil, grease, by-products of petroleum refining and car, truck and tractor tires, batteries and accessories. Sales of petroleum products as a percent of the Company's consolidated sales for 1994, 1995 and 1996 were 13%, 12% and 11%, respectively. Competitive methods in the petroleum industry include service, product quality and prices. 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 mid-continent refiner and as a wholesale distributor of petroleum products. PRODUCTION The Company owns a refinery at Coffeyville, Kansas. Production volume for 1994, 1995 and 1996 was as follows: Barrels of Crude Oil Processed Daily Average Based on 365 Days per year 1994 1995 1996 (barrels) Coffeyville, Kansas 63,872 66,367 64,276 The Coffeyville refinery produced approximately 25 million barrels of motor fuels, heating fuels and other petroleum products in 1994, 26 million barrels in 1995, and 25 million barrels in 1996. Production at the refinery reflects a decrease in 1996 compared with 1995 primarily because production was suspended for 35 days for scheduled maintenance during that year. Approximately 65% of petroleum product sales in 1996 represented products produced at this location. In July 1994, the Company acquired a mothballed refinery in Texas for reassembly at the Coffeyville refinery site. Reassembly was completed during the fourth quarter of 1996 which expanded crude oil processing capacity to 95,000 barrels per day. RAW MATERIALS Farmland's refinery at Coffeyville, Kansas presently 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. In 1996, the Company's pipeline/trucking gathering system collected approximately 25% 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. In October 1996, Farmland entered into various 20-year agreements with Tessenderlo KERLEY Inc. ("TKI") whereby TKI will build, own and operate a sulfur processing plant at the Coffeyville refinery (the Company anticipates the plant will be completed by the first quarter of 1998). Under the agreements, Farmland will provide high sulfur gas streams to TKI's plant. High sulfur gas streams, a by-product of Farmland's refinery, will be utilized by TKI's plant as a source of feedstock to manufacture sulfur. TKI's facility will have the capacity to process 100 tons sulfur per day. The refinery operations currently include a sour gas stripper and sulfur plant but additional sulfur handling capacity will be required to accommodate any additional expansion of refinery capacity. 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. See "Business and Properties - Business - Business Risk Factors - General Factors Affecting the Business" included herein. 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. 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 plant nutrients and, through the Company's ownership in WILFARM, a complete line of crop protection products such as insecticides, herbicides and mixed chemicals. Sales of the crop production business segment as a percent of consolidated sales for 1994, 1995 and 1996 were 17%, 16% and 14%, 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. The Company maintains a significant capital investment in distribution assets and a seasonal investment in inventory to enhance its manufacturing and distribution operations. The Company owns or leases plant nutrient custom dry blending, liquid mixing, storage and distribution facilities at 177 locations throughout its trade territory to conform delivery capacity more closely to customer demands for delivery services. The Company's sales of crop production products are primarily at wholesale to local cooperative associations who are members of Farmland. 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 interests in two ventures which produce phosphate-based products. Nitrogen fertilizer production information for 1994, 1995 and 1996 is as follows: Actual Annual Production Anhydrous Ammonia Plant Location 1994 1995 1996 (tons) Lawrence, Kansas............ 443,000 430,000 431,000 Dodge City, Kansas.......... 257,000 276,000 285,000 Fort Dodge, Iowa............ 256,000 258,000 263,000 Beatrice, Nebraska.......... 277,000 281,000 276,000 Enid, Oklahoma (2 plants)(A) 985,000 998,000 1,005,000 Pollock, Louisiana(A)....... 526,000 497,000 508,000 (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, urea ammonium nitrate ("UAN") 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 1994, 1995 and 1996 was as follows: Actual Annual Production Plant Location 1994 1995 1996 (tons) Lawrence, Kansas............ 654,000 719,000 710,000 Enid, Oklahoma (2 plants)(A) 433,000 473,000 475,000 Dodge City, Kansas.......... 163,000 202,000 187,000 Beatrice, Nebraska.......... 162,000 165,000 161,000 (A) Leased plants 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 land in Florida which contains an estimated 40 million tons of phosphate rock and a phosphate chemical plant located in Joplin, Missouri. 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 1994, 1995 and 1996 was as follows: Actual Annual Production 1994 1995 1996 (tons) Ammonium Phosphate........... 75,000 64,000 65,000 Feed Grade Phosphate......... 157,000 159,000 160,000 The Company and Norsk Hydro a.s. are each 50% owners of a joint venture, Farmland Hydro, L.P. ("Hydro"), which is a manufacturer of phosphate fertilizer products for distribution principally 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. Hydro's plant produces phosphoric acid products such as super acid, diammonium phosphate and monoammonium phosphate. Annual production in tons of such products for 1994, 1995 and 1996 was 1,437,000, 1,471,000 and 1,494,000, respectively. The phosphate rock required to operate Hydro'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 are each 50% owners of a joint venture, SF Phosphates Limited Company ("SF Phosphates"), 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 1994, 1995 and 1996 of 465,000, 451,000 and 506,000, 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. Based on current recovery methods and the levels of plant production in recent years, the Company estimates that the phosphate rock reserves owned by SF Phosphates are adequate to provide the phosphate rock requirements of the plant for approximately 75 years. The Company and Mississippi Chemical Company are each 50% owners of a joint venture formed to develop, construct and operate a 1,850 metric ton per day ammonia production facility in The Republic of Trinidad and Tobago. The plant construction is 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. Construction is tentatively scheduled to be completed in 1998. See "Business and Properties - Business - Capital Expenditures and Investments in Ventures" included herein. 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. See "Business and Properties - Business - Business Risk Factors - General Factors Affecting the Business" included herein. 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 a delivering pipeline's capacity was 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 pipeline 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 and animal health products. The primary component of feed products is grain and grain by- products, which are generally available in the region in which the company operates. This business segment's sales were approximately 8%, 6% and 6% of consolidated sales for the years 1994, 1995 and 1996, respectively. Approximately 56% of the feed business segment's sales in 1996 was attributable to products manufactured in the Company's feed mills. The Company operates feed mixing plants at 22 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. Feed production for 1994, 1995 and 1996 was as follows: Actual Annual Production 1994 1995 1996 (tons) 25 feed mills 1,118,000 1,112,000 1,103,000 (combined)............ 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 a 99%-owned subsidiary, Farmland Foods, Inc. ("Foods"), which operates 11 food processing facilities including facilities at Topeka, Kansas, Albert Lea, Minnesota and Dubuque, Iowa which were purchased during 1996. Meat processing facilities at Springfield, Massachusetts, Carey, Ohio, and New Riegel, Ohio produce Italian-style specialty meats and ham products. Plants in Wichita and Topeka, Kansas and Albert Lea, Minnesota process fresh pork into a variety of products including ham, bacon and sausage. Additionally, the Wichita, Kansas facility processes pork, beef and chicken into hot dogs, dry sausage and other luncheon meats. Facilities in Denison, Iowa, Monmouth, Illinois, Dubuque, Iowa and Crete, Nebraska function as pork abattoirs and have additional capabilities for processing pork into bacon, ham and smoked meats. 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 plant located in Carroll, Iowa is primarily a packaging facility for canned or cook-in-bag products. Production for 1994, 1995 and 1996 is as follows: Actual Weekly Production 1994 1995 1996 (pounds) Crete, Nebraska.............. 2,800,000 3,100,000 3,300,000 Denison, Iowa................ 2,700,000 2,800,000 2,700,000 Wichita, Kansas.............. 1,900,000 2,200,000 2,600,000 Monmouth, Illinois........... 1,400,000 1,900,000 1,900,000 Carroll, Iowa................ 1,100,000 1,400,000 1,200,000 Springfield, Massachusetts... 750,000 725,000 782,619 Carey/New Riegel, Ohio....... 275,000 425,000 434,996 Dubuque, Iowa(A)............. n/a n/a 1,200,000 Albert Lea, Minnesota (A).... n/a n/a 1,300,000 Topeka, Kansas (a) .......... n/a n/a 810,000 (A) Actual weekly averages since acquisition of the plant by the Company. Actual Weekly Head Slaughtered 1994 1995 1996 Crete, Nebraska.............. 46,000 46,000 43,000 Denison, Iowa................ 40,000 41,000 37,000 Monmouth, Illinois........... 27,000 33,000 31,000 MARKETING The Company's products 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 a variety of brand names including: Farmland, Farmstead, OhSe, Maple River, Carando, Roegelein, Regal and Marco Polo. Product distribution is through national and regional retail food chains, food service accounts, distributors and through international marketing brokers. Pork marketing is a highly competitive industry with many suppliers of fresh and processed pork products competing for shelf space in retail food stores. 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 September 1, 1996, was 75%-owned by Farmland. The processing facilities for these beef operations are located in Liberal, Kansas and Dodge City, Kansas. These facilities function as beef abattoirs and process fresh beef into primal cuts for additional processing into fabricated or boxed beef. During 1994, 1995 and 1996, the two plants slaughtered an aggregate of 1.7 million, 1.9 million and 2.1 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 as well as under the Farmland Black Angus Beef label. In addition, certain beef products are distributed in international markets. Beef marketing is a highly competitive industry with many suppliers of fresh and boxed 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 corn and 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, the 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, 1995 and 1996, the Company maintained hedges on approximately 95.3%, 97.9% and 94.8%, respectively, of its grain positions. Based on total assets at the beginning and end of 1996, 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 1996, approximately 42% of grain revenues were from export sales or sales to domestic customers for export. In 1994 and 1995, export sales or sales to domestic customers for export accounted for approximately 37% and 47%, respectively, of consolidated grain revenues. 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. Heartland Wheat Growers, L.P. (79%-owned by Farmland and 21%-owned by five cooperative members of Farmland), which processes wheat into gluten for use primarily in commercial baking and pet food markets and starch for numerous industrial purposes, started commercial operations during May 1996. The plant has capacity to process 4.3 million bushels of wheat annually; actual production for 1996 was approximately 0.6 million bushels of wheat. PROPERTY The Company owns or leases 33 inland elevators and one export elevator in North America with a total capacity of approximately 179.2 million bushels of grain, six of which elevators (with an aggregate capacity of 55.5 million bushels of grain) are temporarily closed due to current demand for grain holding and storage facilities. TRADIGRAIN Eight international grain trading subsidiaries of Farmland (collectively referred to as "Tradigrain") import, export and ship 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 merchandised rather than the gross value of such products merchandised. 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, breeding and feeding practices of livestock and pets. Expenditures related to Company-sponsored product research and process improvements amounted to $2.7 million, $2.3 million and $2.4 million for 1994, 1995 and 1996, respectively. CAPITAL EXPENDITURES AND INVESTMENTS IN VENTURES In 1996, the Company made capital expenditures and investments in ventures totaling $233.5 million. See "Business and Properties - Business - Petroleum", " - Crop Production", " - Feed"," - Food Processing and Marketing" and " - Grain" included herein. The Company plans expenditures for capital additions, improvements and investments in ventures of an aggregate of approximately $278.3 million during the years 1997 and 1998 (of which $61.0 million was committed as of August 31, 1996) as described in the following paragraphs. Of this amount, the Company plans expenditures of $248.6 million for capital additions and improvements and $29.7 million for investments in ventures. Capital expenditures and investments planned for the crop production business segment total approximately $127.7 million and include: an investment in a 50%-owned venture organized to construct and operate an anhydrous ammonia plant in The Republic of Trinidad and Tobago, construction of a 525,000 ton per year UAN facility in Ft. Dodge, Iowa 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 approximately $11.5 million for feed mill efficiencies, operating necessities and replacements. Capital expenditures and investments planned for the petroleum business segment total approximately $39.4 million and are for operating necessities, increased operating efficiency and for environmental and safety issues. Capital expenditures and investments of approximately $72.8 million are planned for the food processing and marketing business segment. These expenditures are primarily for operating necessities and improvements. Capital expenditures and investments of approximately $6.3 million planned for the grain business segment are mainly for expansion and replacements. Capital expenditures and investments of approximately $20.6 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 - Financial Condition, Liquidity and Capital Resources" included herein. 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 processes. 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 34 grain elevators and 58 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 also has been identified as a PRP under CERCLA at various National Priority List sites and has unresolved liability with respect to the past disposal of hazardous substances at five such sites. CERCLA 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. The Company is investigating or remediating contamination at 28 properties under CERCLA and/or the state and federal hazardous waste management laws. During 1994, 1995 and 1996, the Company paid approximately $1.4 million, $3.2 million and $1.8 million, respectively, for environmental investigation and remediation. The Company currently is aware of probable obligations for environmental matters at 39 properties. As of August 31, 1996, the Company has an environmental accrual in its Consolidated Balance Sheet for probable and reasonably estimated cost for remediation of contaminated property of $18.9 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 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, 1996. In the opinion of management, it is reasonably possible for such costs to be approximately an additional $20.6 million. Under the Resource Conservation Recovery Act of 1976 (''RCRA''), the Company has four closure and four 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. Such closure and post-closure costs are estimated to be $5.2 million at August 31, 1996 (and is in addition to the $20.6 million discussed in the prior paragraph). 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. The Company and the Environmental Protection Agency (''EPA'') reached an agreement to settle three proceedings brought by Region VII of the 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 major terms of the settlement are: (1) the Company does not acknowledge liability or fault; (2) the Company will spend approximately $4.3 million to implement Supplemental Environmental Projects; and (3) the Company will pay penalties of approximately $1.5 million. The penalties have been included in the Company's August 31, 1996 environmental accrual of $18.9 million. 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, 1995 and 1996, the Company had capital expenditures of approximately $2.6 million, $4.7 million and $10.7 million, respectively, to prevent future discharges into the environment. The majority of such expenditures were 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 United States Department of Agriculture, 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 food processing and marketing operations. The Federal Agriculture Improvement and Reform Act of 1996 ("FAIR") represents the most significant change in government farm programs in more than 60 years. FAIR greatly accelerates the trend toward greater market orientation and reduced Government influence on the agricultural sector. As a result, the Company expects the number of acres under cultivation to increase. This increase could favorably impact demand of producers for the Company's plant nutrients and crop protection products and fuels. Whether demand for the Company's products is favorably impacted depends in a large part on whether U.S. agriculture becomes more competitive in world markets as this industry moves toward greater market orientation, the extent which governmental actions expand international trade agreements and whether markets access opportunities for U.S. agriculture is increased. Management is not aware of any newly implemented or pending policies, other than as discussed above, having a significant impact or which may have a significant impact on operations of the Company. EMPLOYEE RELATIONS At August 31, 1996, the Company had approximately 14,700 employees. Approximately 50% of the Company's employees were represented by unions having national affiliations. The Company considers its relationship with employees 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 February 1999. PATRONAGE REFUNDS AND DISTRIBUTION OF ANNUAL 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. Member-sourced earnings are the earnings attributed to transactions with members. Each member's portion of the annual patronage refund is determined by the earnings of Farmland attributed to the quantity or value of business transacted by the member with Farmland during the year for which the patronage is paid. Generally, the members receive a portion of the annual patronage refund 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 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 1994, 1995 and 1996, Farmland returned the following patronage refunds: Cash or Cash Equivalent Non-Cash Total Portion of Portion of Patronage Patronage Patronage Refunds Refunds Refunds (Amounts in thousands) 1994......... $ 26,552 $ 44,032 $ 70,584 1995......... $ 33,038 $ 61,356 $ 94,394 1996......... $ 32,719 $ 60,776 $ 93,495 Nonmember-sourced income (earnings attributed to transactions with persons not eligible to receive patronage refunds, i.e. nonmembers) and 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. EQUITY REDEMPTION PLANS The Equity Redemption Plans described below, namely the Base Capital Plan (as defined below), the estate settlement plan and the special 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 accordance 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, the Company's results of operations, financial position, cash flow, capital requirements, long-term financial planning needs, income and other tax considerations 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 owners 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 equity holdings of deceased natural persons (except for equity purchased and held for less than five years) will be redeemed at par value. This provision is subject to a limitation of $1.0 million in any one fiscal year without further authorization by the Board of Directors for such year. SPECIAL EQUITY REDEMPTION PLANS From time to time, the Company has redeemed portions of its outstanding equity under various special equity redemption plans. The special 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 accordance compliance with the Plans. The special equity redemption plans are designed to return cash to members or former members of Farmland or Foods by a systematic method for redemption of outstanding equity which is not subject to redemption through other Plans, such as the Base Capital Plan or the estate settlement plan. The order in which each type of equity is redeemed is determined by the Board of Directors. Presented below are the amounts of equity approved for redemption by the Board of Directors under the Base Capital Plan, the estate settlement plan, special equity redemption plans and redemptions of Foods equities for each of the years in the five-year period ended 1996. Substantially all amounts approved for redemptions are paid in cash in the year following approval.
Base Capital Plan Estate Settlement Special Equity Total Plan Redemptions Plan Redemptions Redemption(A) Redemptions (Amounts in Thousands) 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 1996........... $ 14,024 $ 138 $ 11,277 $ 25,439
(A) Included in 1995 and 1996 are redemptions of preferred stock. ITEM 3. LEGAL PROCEEDINGS The Company believes 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 "Business and Properties - Business - Business Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition, Liquidity and Capital Resources" included herein. In accordance with Securities and Exchange Commission regulations, the Company reports that, during the fourth quarter, it resolved (see "Business and Properties - Business - Matters Involving the Environment" included herein) the following civil and administrative proceedings in which violations of environmental laws were alleged and civil penalties in excess of $100,000 were sought. 1. COFFEYVILLE CERCLA/EPCRA PENALTIES. Administrative complaint issued August 10, 1993, by Region VII of the EPA seeking $350,000 in civil penalties for alleged violations of notification requirements under the CERCLA and the Emergency Planning and Community Right to Know Act. 2. COFFEYVILLE RCRA DOCKET NO. VII-94-H-0018. Administrative compliant issued August 2, 1994, by Region VII of the EPA seeking $1.4 million in civil penalties for alleged violations of the RCRA and of regulations issued thereunder. 3. COFFEYVILLE CLEAN AIR ACT CIVIL PENALTY. Federal civil complaint filed August 15, 1996, by the U.S. Department of Justice for alleged violations of the Clean Air Act. 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. The Company believes that it is unlikely that a public market for these equities will develop, in the foreseeable future, for the following reasons: 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" included herein; 3.the amount of patronage refunds (including any cash patronage refunds) a holder, who is eligible to receive patronage refunds, may receive is dependent on the earnings of Farmland attributable to the quantity or value of business such holder transacts with Farmland and the amount by which the equity of Farmland held by a holder varies from such holder's base capital requirement. See "Business and Properties - Business - Patronage Refunds and Distribution of Annual Earnings" included herein; and 4.Farmland intends to redeem its equities in accordance with provisions of the Plans which provisions may be changed at any time or from time to time at the sole and absolute discretion of the Board of Directors and which may be amended or otherwise changed at any time by the Board of Directors. See "Business and Properties - Business - Equity Redemption Plans" included herein. At August 31, 1996 there are approximately 3,200 holders of common shares, 660 holders of associate member shares, and 10,700 holders of capital credits based on holders of record. 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, 1996 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, 1995 and 1996 and for each of the years in the three-year period ended August 31, 1996 (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" and the Consolidated Financial Statements and related notes.
Year Ended August 31 1992 1993 1994 1995 1996 (Amounts in Thousands except ratios) SUMMARY OF OPERATIONS:(1)(2) Net Sales........................... $ 3,429,307 $ 4,722,940 $ 6,677,933 $ 7,256,869 $ 9,788,587 Operating Income of Industry Segments.......................... 160,912 86,579 154,799 293,381 238,825 Interest Expense.................... 27,965 36,764 51,485 53,862 62,445 Income (Loss) From Continuing Operations ............ 61,046 (30,400) 73,876 162,799 126,418 Net Income (Loss)................... $ 62,313 $ (30,400) $ 73,876 $ 162,799 $ 126,418 DISTRIBUTION OF NET INCOME (LOSS): Patronage Refunds: Allocated Equity.................. $ 1,038 $ 1,155 $ 44,032 $ 61,356 $ 60,776 Cash and Cash Equivalents......... 17,918 495 26,580 33,061 32,719 Earned Surplus and Other Equities.......................... 43,357 (32,050) 3,264 68,382 32,923 $ 62,313 $ (30,400) 73,876 $ 162,799 $ 126,418 BALANCE SHEETS: Working Capital..................... $ 208,629 $ 260,519 $ 290,704 $ 319,513 $ 322,050 Property, Plant and Equipment, Net.................... 446,002 504,378 501,290 592,145 717,224 Total Assets........................ 1,526,392 1,719,981 1,926,631 2,185,943 2,568,446 Long-Term Borrowings (excluding current maturities)............... 296,297 482,112 506,531 469,718 616,258 Capital Shares and Equities......... 588,129 561,707 585,013 687,287 755,331
[FN] (1) See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition, Liquidity and Capital Resources", included herein, for a discussion of the pending income tax litigation relating to Terra, a former subsidiary of the Company. (2) Acquisitions and Dispositions: (a) In December 1993, the Company acquired all the common stock of seven (subsequently increased to eight) 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. (b) During 1993, the Company and partners NBPC. Farmland retained a 58% ownership interest in NBPC by investing $10.5 million in cash. The partnership interest was increased to 68% effective March 31, 1995 and to 75% effective September 1, 1996). 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. 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 excess of liabilities assumed over the fair value of the net identifiable assets acquired has been recorded as goodwill. (c) 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. (d) Effective June 30, 1992, Farmland acquired substantially all the business and assets of Union Equity Co-Operative Exchange ("Union Equity") in exchange for 2,051,880 shares of Farmland common stock with a par value of $51.3 million and Farmland's assumption of substantially all of Union Equity's liabilities. The acquisition has been accounted for as a purchase and, accordingly, the results of operations of Union Equity have been included in the Company's Consolidated Financial Statements from June 30, 1992. The excess of the purchase price over the fair value of the net identifiable assets ($21.0 million) acquired has been recorded as goodwill and is being amortized on a straight-line basis over 25 years. (e) The following unaudited financial information for the years ended August 31, 1992 and 1993 present pro forma results of operations of the Company as if the disposition of CFA and the acquisitions of Union Equity and NBPC had occurred at the beginning of each period presented. The pro forma financial information includes adjustments for amortization of goodwill, additional depreciation expense, and increased interest expense 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 Union Equity and NBPC for the full years 1992 and 1993. August 31 (Unaudited) 1992 1993 (Amounts in Thousands) Net Sales............................ $ 5,441,303 $ 5,357,867 Income (Loss) Before Extraordinary Item................................$ 47,225 $ (44,040) ITEM 7. 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 subordinated debt and demand loan 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, 1996, the outstanding balance of demand certificates increased by $26.6 million and the outstanding balance of subordinated debt certificates increased by $24.1 million. In May 1996, Farmland entered into a five year Credit Agreement (the "Agreement") with various participating banks. The Agreement provides a $1.1 billion facility, subject to compliance with financial covenants as set forth in the Agreement, consisting of an annually renewable short-term credit of up to $650.0 million and a long-term credit of up to $450.0 million. Farmland pays commitment fees under the Agreement equal to 1/10 of 1% annually on the unused portion of the short-term credit and 1/4 of 1% annually on the unused portion of the long-term credit. In addition, Farmland must comply with the Agreement's financial covenants regarding working capital, the ratio of certain debts to average cash flow, and the ratio of equity to total capitalization, all as defined therein. The short-term credit provisions of the Agreement are subject to review and renewal annually by the lenders and the Company. The next renewal date is in May 1997. The Agreement matures in May 2001. At August 31, 1996, under the Agreement the Company had short-term borrowings of $236.6 million, long-term borrowings of $175.0 million and $69.5 million was being utilized to support letters of credit issued on behalf of Farmland by participating banks. As of August 31, 1996, under the short-term credit provisions, the Company had capacity to finance additional working capital of $386.7 million and, under the long-term credit provisions, the Company had capacity to borrow up to an additional $232.2 million. 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 (except to the extent of $10.0 million). At August 31, 1996, $90.0 million was available under this facility of which $47.0 million was borrowed and $0.6 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 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, 1996, such borrowings totaled $78.8 million. The Company maintains other borrowing arrangements with banks and financial institutions. Under such agreements, at August 31, 1996, $18.0 million was borrowed. 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. 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 shares, associate member common shares, capital credits or cash. For this purpose, net income or loss is determined in accordance with the requirements of federal income tax law up to 1994 and is determined in accordance with generally accepted accounting principles in 1995 and after. Other income is treated as "nonmember-sourced income". Nonmember-sourced income is subject to income tax and after-tax earnings are transferred to earned surplus. Under Farmland's bylaws, the member-sourced income is distributed to members as patronage refunds unless the earned surplus account, at the end of that year, is lower than 30% of the sum of the prior year-end balance of outstanding common shares, associate member shares, capital credits 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 1994, 1995 and 1996, the earned surplus account exceeded the required amount by $2.3 million, $62.8 million and $45.5 million, respectively. Generally, a portion of the patronage refund is distributed in cash and the balance (the allocated equity portion) is distributed in common shares, associate member common shares 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 shares and associate member common shares may be redeemed by cash payments from Farmland to holders thereof who participate in Farmland's base capital plan. Common stock, associate member common stock, 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 and Properties - Business - Equity Redemption Plans" included herein. Cash provided by operating activities totaled $182.1 million in 1996 compared with $47.5 million in 1995. This increase is primarily the result of the cash effect of changes in working capital as cash generated through a reduction in inventories and an increase in accounts payable were partially offset by increased levels of accounts receivable and other current assets. Other major sources of cash include $53.2 million from distributions from joint ventures, sale of investments and collection of long-term notes receivable, $50.7 million from investors in demand loan and subordinated debt certificates and $71.1 million from bank loans and other notes. Major uses of cash during 1996 include $192.0 million for capital additions and other long-term assets, $51.9 million for acquisition of investments and notes receivable, $39.5 million for acquisition of pork processing businesses and facilities, $32.8 million for patronage refunds and dividends distributed from 1995 earnings and $27.5 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 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 in September 1995 and reply briefs were submitted to the court 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 $209.2 million, before tax benefits of the interest deduction, through August 31, 1996), or $295.0 million in the aggregate at August 31, 1996. 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 accumulating statutory interest thereon (approximately $6.6 million), or $11.6 million in the aggregate at August 31, 1996. The asserted federal and state income tax liabilities and accumulated interest thereon 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 by the United States Tax Court would be charged to current earnings and would have a material adverse effect on the Company. In the event of such an adverse determination of the Terra tax issue, certain financial covenants of the Company's Credit Agreement (the "Agreement") become less restrictive. Had the United States Tax Court decided in favor of the IRS on all unresolved issues, and had all related additional federal and state income taxes and accumulated interest thereon been due and payable on August 31, 1996, Farmland's borrowing capacity under the Agreement was adequate at that time to finance the liability. However, Farmland's ability to finance such an adverse decision depends substantially on the financial effects of future operating events on its borrowing capacity under the Agreement. 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 LLP, 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. RESULTS OF OPERATIONS FOR YEARS ENDED AUGUST 31, 1994, 1995 AND 1996 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 1996, 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 1994, 1995 and 1996 follows the table.
Change in Sales Change in Net Income 1994 1995 1996 1994 1995 1996 Compared Compared Compared Compared Compared Compared with 1993 with 1994 with 1995 with 1993 with 1994 with 1995 (Amounts in Millions) INCREASE (DECREASE) OF INDUSTRY SEGMENT SALES AND OPERATING INCOME OR LOSS: Petroleum.................. $ (32) $ 21 $ 181 $ 32 $ (35) $ 13 Crop Production............ 278 8 165 74 73 (20) Feed....................... 49 (60) 102 (4) (7) 3 Food Processing and Marketing ............. 943 337 528 4 56 (11) Grain Marketing............ 674 279 1,566 (34) 52 (37) Other...................... 43 (6) (10) (4) -0- (3) $ 1,955 $ 579 $ 2,532 $ 68 $ 139 $ (55) CORPORATE EXPENSES AND OTHER: General corporate expenses (increase) decrease....................... $ (9) $ (14) $ (11) Interest expense (increase) decrease................................. (15) (2) (8) Other income and deductions increase (decrease)...................... 14 (6) 10 Equity in net income of investees increase (decrease)................ 23 11 18 Minority owners' interest in net income of subsidiaries (increase) decrease ............................................... 5 (14) 2 Provision for loss on disposition of assets (increase) decrease ............................................... 29 -0- -0- Income taxes (increase) decrease..................................... (11) (25) 8 Net income increase (decrease)....................................... $ 104 $ 89 $ (36)
In computing the operating income or loss of an industry segment, none of the following have been added or deducted: corporate expenses (included in the Consolidated Statements of Operations as selling, general and administrative expenses) which cannot be identified or allocated, practicably, 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 $181.5 million in 1996 compared with 1995. This increase was primarily the result of increased fuel (gasoline, distillate, diesel and propane) prices and unit sales of approximately 11% and 9.5%, respectively. 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. OPERATING INCOME The petroleum business had operating income of $5.0 million in 1996 compared to an operating loss of $8.0 million in 1995. This improvement was primarily attributable to higher unit margins resulting from seasonal demand pressure on product price movements. In addition, petroleum realized some margin improvement resulting from increased production capacity at the Company's refinery. 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. CROP PRODUCTION SALES Crop production sales, consisting primarily of plant nutrients, increased $164.9 million or 14.1% in 1996 compared with 1995. This increase was primarily a net result of increased unit sales of phosphate and nitrogen fertilizers and higher phosphate prices, partly offset by a slight decline of nitrogen prices. 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%. OPERATING INCOME Operating income of the Company's crop production business reflects a decrease of $19.7 million in 1996 compared with 1995. However, the aggregate contribution to net income from all crop production operations (including joint ventures) was at about the same level in 1996 as in 1995. The Company's crop production operations reflect a decrease primarily because of lower fertilizer margins. The approximately $6.0 million, or 2.8%, decrease in nitrogen fertilizer margins was the result of lower average unit selling prices combined with higher raw material costs. Unit margins from the Company's phosphate fertilizer operations decreased approximately $17.0 million. The effect of these decreases were largely offset by an increase of approximately $17.1 million in the Company's share of net income from joint ventures engaged in phosphate fertilizer manufacturing operations and an increase of approximately $2.4 million in the Company's share of net income from WILFARM (a joint venture engaged in the distribution of crop protection products). 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. FEED SALES Sales of feed products increased 21.9% to $569.9 million in 1996 compared with $467.7 million in 1995. The increase is primarily attributable to higher unit prices which reflects higher cost of raw materials. In addition, unit sales of formula feed and feed ingredients increased approximately 2% and 10%, respectively. 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. OPERATING INCOME Operating income of the feed business increased $2.9 million in 1996 compared with 1995. This increase is attributable primarily to increased unit margins on feed grade phosphate and to increased sales of feed ingredients. 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 $0.5 million reflecting lower margins on feed ingredients and pet food of $0.8 million and $0.4 million, respectively, partly offset by $0.7 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. FOOD PROCESSING AND MARKETING SALES Sales of the food processing and marketing business increased $528.1 million in 1996 compared with 1995. Beef sales increased $308.7 million due primarily to the effect of including operations of the Hyplains Beef L.C. ("Hyplains") beef plant in the Company's financial statements for a full year in 1996. The Company acquired a majority ownership in this plant in March 1995. Pork sales increased $219.4 million primarily as a result of higher unit sales of branded products mostly as a result of acquisitions (OhSe and Farmstead brands). 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 (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. OPERATING INCOME Operating income of the food processing and marketing business of $66.0 million represents an $11.1 million decrease compared to 1995. This decrease primarily results from decreased margins on fresh pork and increased pork administrative expenses, partially offset by increased beef unit sales. 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. GRAIN MARKETING SALES AND OPERATING INCOME Grain sales increased $1.6 billion, or 82%, principally owing to a 40% increase in units sold combined with increased grain prices. Grain had a $19.0 million operating loss in 1996 compared with $17.9 million operating income in 1995. The operating loss was principally attributable to drought conditions in certain major wheat producing regions of the United States which resulted in both shortages of and significantly higher prices for wheat. Due to this shortage, the Company had to source wheat (in order to meet contractual obligations), from domestic geographic areas further from the Company's Gulf coast export elevator than expected, resulting in higher than anticipated purchase prices and transportation charges. The Company's policy is to hedge its exposure to price fluctuations. However, in order to avoid influencing price movement in certain commodity futures markets, significant contracts are hedged over a period of time, but as soon as practical, after such contracts are written. In 1996, the Company entered into a significant fixed price sales contract. During the time required to fully hedge this contract, the market for wheat was relatively volatile but generally trended upward. The joint effect of these factors contributed to the loss in the Company's grain operations. 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 resulted primarily from negative unit margins on international grain transactions and higher domestic operating expenses. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses ("SG&A") increased $24.6 million, or 7.1%, in 1996 compared with 1995. Approximately $13.5 million of the increase was directly connected to business segments (primarily the pork and grain 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 ($11.1 million), includes higher expenses from improving the management information systems and higher employee related costs. 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 acquisitions of subsidiaries 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. OTHER INCOME (DEDUCTIONS) INTEREST EXPENSE Interest expense increased $8.6 million in 1996 compared with 1995, reflecting higher average borrowings, partly offset by a slight decline in the average interest rate. 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 National Carriers, Inc. and Tradigrain in May 1994 and by higher interest rates. CAPITAL EXPENDITURES See "Business and Properties - Business - Capital Expenditures and Investments in Ventures" included herein. OTHER, NET In May 1996, the Company sold its interest in a communications joint venture, Broadcast Partners. The sale resulted in a gain before income taxes of $10.9 million, which has been included in the caption "Other income (deductions): Other, net" in the Company's 1996 Consolidated Statement of Operations. See Note 16 of the Notes to Consolidated Financial Statements included herein. 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, 1995 and 1996, the Company negotiated settlements with 20, 2 and 3 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, $0.3 million and $0.5 million in 1994, 1995 and 1996, 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 and Properties - Business - Business Risk Factors" and " - 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" ("Statement 121") was issued by 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. CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The Company is including the following cautionary statement in this Form 10-K to make applicable and take advantage of the new "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statement made by, or on behalf of, the Company. The factors identified in this cautionary statement important factors (but not necessarily all important factors) that could cause actual results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, the Company. Where any such forward-looking statement includes a statement of the assumptions or basis underlying such forward-looking statement, the Company cautions that, while it believes such assumptions or basis to be reasonable and makes them in good faith, assumed facts or basis almost always vary from actual results, and the differences between assumed facts or basis and actual results can be material, depending upon the circumstances. Where, in any forward- looking statement, the Company, or its management, expresses an expectation or belief as to future results, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will result or be achieved or accomplished. The words "believe", "expect" and "anticipate" and similar expressions identify forward-looking statements. Taking into account the foregoing, the following are identified as important factors that could cause actual results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, the Company: 1.Weather patterns (flood, drought, frost, etc.) or crop failure. 2.Federal or state regulations regarding agricultural programs and production efficiencies. 3.Federal or state regulations regarding the amounts of fertilizer and other chemical applications used by farmers. 4.Factors affecting the export of U.S. agricultural produce (including foreign trade and monetary policies, laws and regulations, political and governmental changes, inflation and exchange rates, taxes, operating conditions and world demand). 5.Factors affecting supply, demand and price of crude oil, refined fuels, natural gas and other commodities. 6.Regulatory delays and other unforeseeable obstacles beyond the Company's control that may affect growth strategies through acquisitions and investments in joint ventures. 7.Competitors in various segments which may be larger than the Company, offer more varied products or possess greater resources. 8.Unusual or unexpected events such as, among other things, litigation settlements, adverse rulings or judgments, and environmental remediation costs in excess of reserves. 9.The factors identified in "Business and Properties - Business - Business Risk Factors". ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FARMLAND CONSOLIDATED FINANCIAL STATEMENTS Independent Auditors' Report ...............................16 Consolidated Balance Sheets, August 31, 1995 and 1996 .......................................................18 Consolidated Statements of Operations for each of the years in the three-year period ended August 31, 1996 ...................................................26 Consolidated Statements of Cash Flows for each of the years in the three-year period ended August 31, 1996 ................30 Consolidated Statements of Capital Shares and Equities for each of the years in the three-year period ended August 31, 1996 ...............................36 Notes to Consolidated Financial Statements .................42 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, 1995 and 1996, 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, 1996. 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, 1995 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended August 31, 1996, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Kansas City, Missouri October 18, 1996 FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
August 31 1995 1996 (Amounts in Thousands) Current Assets: Accounts receivable - trade........................................ $ 446,232 $ 624,002 Inventories (Note 3)............................................... 772,528 736,620 Other current assets............................................... 60,883 101,748 Total Current Assets.......................................... $ 1,279,643 $ 1,462,370 Investments and Long-Term Receivables (Note 4)....................... $ 185,687 $ 241,124 Property, Plant and Equipment (Notes 5 and 6): Property, plant and equipment, at cost............................. $ 1,334,849 $ 1,506,460 Less accumulated depreciation and amortization..................... 742,704 789,236 Net Property, Plant and Equipment.................................. $ 592,145 $ 717,224 Other Assets......................................................... $ 128,468 $ 147,728 Total Assets......................................................... $ 2,185,943 $ 2,568,446 FN> See accompanying Notes to Consolidated Financial Statements.
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS LIABILITIES AND EQUITIES
August 31 1995 1996 (Amounts in Thousands) Current Liabilities: Demand loan certificates............................................... $ 13,524 $ 40,099 Short-term notes payable (Note 6)...................................... 346,133 315,428 Current maturities of long-term debt (Note 6).......................... 42,394 41,080 Accounts payable - trade............................................... 245,905 392,436 Accrued payroll........................................................ 50,337 48,893 Other current liabilities.............................................. 261,837 302,384 Total Current Liabilities......................................... $ 960,130 $ 1,140,320 Long-Term Liabilities (Note 6): Long-term borrowings (excluding current maturities).................... $ 469,718 $ 616,258 Other long-term liabilities............................................ 36,315 35,983 Total Long-Term Liabilities....................................... $ 506,033 $ 652,241 Deferred Income Taxes (Note 7)........................................... $ 12,501 $ 6,709 Minority Owners' Equity in Subsidiaries (Note 8)......................... $ 19,992 $ 13,845 Capital Shares and Equities (Note 9): Preferred shares, $25 par value--Authorized 8,000,000 shares, 50,565 shares issued and outstanding (98,113 shares in 1995).............................................. $ 2,453 $ 1,264 Common shares, $25 par value--Authorized 50,000,000 shares, 16,580,112 shares issued and outstanding (15,416,370 shares in 1995)......................................... 385,409 414,503 Associate member common shares (nonvoting), $25 par value --Authorized 2,000,000 shares, 623,058 shares issued and outstanding (445,323 shares in 1995)...................... 11,133 15,576 Earned surplus and other equities...................................... 288,292 323,988 Total Capital Shares and Equities............................ $ 687,287 $ 755,331 Contingent Liabilities and Commitments (Notes 6, 7 and 10) Total Liabilities and Equities............................................. $ 2,185,943 $ 2,568,446 See accompanying Notes to Consolidated Financial Statements.
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended August 31 1994 1995 1996 (Amounts in Thousands) Sales........................................................ $ 6,677,933 $ 7,256,869 $ 9,788,587 Cost of sales................................................ 6,284,084 6,699,178 9,272,002 Gross income................................................. $ 393,849 $ 557,691 $ 516,585 Selling, general and administrative expenses................. $ 305,279 $ 344,364 $ 368,954 Other income (deductions): Interest expense.......................................... $ (51,485) $ (53,862) $ (62,445) Interest income........................................... 6,170 8,334 5,021 Other, net (Note 16)...................................... 20,111 11,600 24,257 Total other income (deductions).............................. $ (25,204) $ (33,928) $ (33,167) Income before income taxes and equity in net income of investees and minority owners' interest in net (income) loss of subsidiaries............ $ 63,366 $ 179,399 $ 114,464 Income tax expense (Note 7)................................. 4,890 29,628 21,755 Income before equity in net income of investees and minority owners' interest in net (income) loss of subsidiaries............................ $ 58,476 $ 149,771 $ 92,709 Equity in net income of investees (Note 4).................................................. 10,878 22,785 41,092 Minority owners' interest in net (income) loss of subsidiaries...................................... 4,522 (9,757) (7,383) Net income .................................................. $ 73,876 $ 162,799 $ 126,418 Distribution of net income (Note 9): Patronage refunds: Farm supply patrons....................................... $ 59,685 $ 74,557 $ 83,739 Pork marketing patrons.................................... 10,927 16,087 6,998 Beef marketing patrons.................................... -0- 2,488 2,753 Grain marketing patrons................................... -0- 1,285 -0- Livestock production...................................... -0- -0- 5 $ 70,612 $ 94,417 $ 93,495 Earned surplus and other equities (Note 9)................ 3,264 68,382 32,923 $ 73,876 $ 162,799 $ 126,418 See accompanying Notes to Consolidated Financial Statements.
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended August 31 1994 1995 1996 (Amounts in Thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income..................................................... $ 73,876 $ 162,799 $ 126,418 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................................ 62,960 69,138 77,741 Gain on disposition of investments........................... -0- -0- (11,300) (Gain) loss on disposition of fixed assets................... (1,794) 1,882 (967) Patronage refunds received in equities....................... (2,171) (2,025) (2,244) Proceeds from redemption of patronage equities............... 573 3,776 5,112 Equity in net income of investees............................ (10,878) (22,785) (41,092) Deferred income tax (benefit) expense........................ (5,034) 6,161 11,034 Minority owners' equity in net income (loss) of subsidiaries.............................. (4,522) 9,757 7,383 Other........................................................ 5,292 412 (2,335) Changes in assets and liabilities (exclusive of assets and liabilities of businesses acquired): Accounts receivable........................................ (12,079) (70,413) (175,991) Inventories................................................ (4,692) (186,570) 47,220 Other assets............................................... (34,873) 38,889 (40,774) Accounts payable........................................... 17,884 782 140,721 Other liabilities.......................................... 32,617 35,684 41,194 Net cash provided by operating activities...................... $ 117,159 $ 47,487 $ 182,120 CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of businesses...................................... $ (35,790) $ -0- $ (39,536) Proceeds from sale of investments and collection of notes receivable........................... 34,577 39,780 31,003 Acquisition of investments and notes receivable................ (22,117) (26,789) (51,923) Capital expenditures........................................... (69,776) (124,722) (168,272) Acquisition of other long-term assets.......................... (11,117) (2,141) (23,768) Proceeds from sale of fixed assets............................. 14,785 3,828 5,996 Distribution from joint venture............................... -0- 513 22,239 Proceeds from sale of assets to joint venture partner....................................... 2,310 -0- -0- Other.......................................................... 5,547 -0- (6,803) Net cash used in investing activities.......................... $ (81,581) $ (109,531) $ (231,064) See accompanying Notes to Consolidated Financial Statements.
Year Ended August 31 1994 1995 1996 (Amounts in Thousands) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in demand loan $ (6,702) $ (9,634) $ 26,575 certificates................................ Proceeds from bank loans and notes payable.. 888,088 522,916 597,959 Payments of bank loans and notes payable....(924,731) (513,672) (526,814) Proceeds from issuance of subordinated debt 57,636 46,715 67,965 certificates................................ Payments for redemption of subordinated debt certificates......................... (33,034) (26,866) (43,803) Net increase (decrease) in checks and drafts outstanding.................... -0- 37,088 (6,144) Payments for redemption of equities......... (3,244) (12,431) (27,470) Payments of patronage refunds and dividends. -0- (26,648) (32,781) Other, increase (decrease).................. 2,120 492 (6,543) Net cash provided by (used in) financing $(19,867) $ 17,960 $ 48,944 activities.................................. Net increase (decrease) in cash and cash $ 15,711 $(44,084) $ -0- equivalents................................. Cash and cash equivalents at beginning of 28,373 44,084 -0- year........................................ Cash and cash equivalents at end of year....$ 44,084 $ -0- $ -0- SUPPLEMENTAL SCHEDULE OF CASH PAID FOR INTEREST AND INCOME TAXES: Interest....................................$ 43,419 $ 50,551 $ 58,125 Income taxes (net of refunds)...............$ 9,746 $ 30,422 $ 27,943 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Equities and minority owners' interest called for redemption............................$ 12,935 $ 27,738 $ 25,214 Transfer of assets in exchange for investment in joint ventures............................$ 309 $ 2,061 $ -0- Appropriation of current year's net income as patronage refunds......................$ 70,612 $ 94,417 $ 93,495 Acquisition of businesses: Fair value of net assets acquired.........$131,847 $ -0- $ 52,401 Goodwill.................................. 1,094 -0- 3,181 Minority owners' investment............... (843) -0- -0- Cash Paid................................. (35,790) -0- (39,536) Liabilities assumed.........................$ 96,308 $ -0- $ 16,046
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CAPITAL SHARES AND EQUITIES
Years Ended August 31, 1994, 1995 and 1996 Associate Earned Total Member Surplus and Capital Preferred Common Common Other Shares and Shares Shares Shares Equities Equities (Amounts in Thousands) 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 Issue, redemption and cancellation of equities..... 1 (166) (6) 29 (142) Appropriation of current year's net income......... -0- -0- -0- 126,418 126,418 Patronage refund payable in cash transferred to current liabilities........................... -0- -0- -0- (32,719) (32,719) Base capital redemptions transferred to current liabilities........................... (1,190) (13,922) (103) -0- (14,025) Other equity redemptions transferred to current liabilities........................... -0- (6,578) (287) (3,272) (11,327) Prior year patronage refund allocation............. -0- 49,644 6,493 (56,294) (157) Dividends on preferred stock....................... -0- -0- -0- (4) (4) Exchange of common stock, associate member common stock and other equities.................. -0- 116 (1,654) 1,538 -0- BALANCE AT AUGUST 31, 1996 $ 1,264 $ 414,503 $15,576 $ 323,988 $ 755,331 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, customer-focused and profitable agricultural supply to consumer foods cooperative system. General -- The consolidated financial statements include the accounts of Farmland Industries, Inc. and all of its majority-owned subsidiaries ("Farmland" or the "Company", unless the context requires otherwise). All significant intercompany accounts and transactions have been eliminated. When necessary, the financial statements include amounts based on informed estimates and judgments of management. 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 any provision for impairment (other than temporary impairment). Accounts Receivable -- The Company uses the allowance method to account for doubtful accounts and notes. Pursuant to the Company's right to offset, as contained in its bylaws, 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 ("LIFO") cost or market. Other inventories are valued at the lower of first-in, first-out ("FIFO") cost or market. Supplies are valued at cost. 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 $6.9 million and $10.3 million, respectively at August 31, 1995 and 1996. Sales -- The Company's policy is to recognize sales at the time product is shipped. Net margins on international grain merchandised, rather than the gross value of such products merchandised, are included in net sales. The gross value of international grain merchandised in 1994, 1995 and 1996 was $590.2 million, $1.6 billion and $2.6 billion, respectively. Environmental Expenditures -- 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 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. Reclassification -- Certain prior-year amounts have been reclassified to conform with the current year presentation. (2) ACQUISITIONS 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 acquisition of Tradigrain has been accounted for by the purchase method of accounting and, accordingly, the operating results have been included in the Company's Consolidated Financial Statements from the date 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 effect of the acquisition of Tradigrain on the Consolidated Financial Statements is not significant. (3) INVENTORIES Major components of inventories are as follows: August 31 1995 1996 (Amounts in Thousands) Finished and in-process products..... $ 682,801 $ 620,794 Materials............................ 39,399 58,526 Supplies............................. 50,328 57,300 $ 772,528 $ 736,620 The carrying values of crude oil and refined petroleum inventories stated under the lower of LIFO cost or market at August 31, 1995 and 1996 were $82.6 million and $111.8 million, respectively. Replacement cost approximated the LIFO carrying values of inventories at both August 31, 1995 and 1996. The carrying values of beef inventories stated under the lower of LIFO or market at August 31, 1995 and 1996 were $30.2 million and $32.3 million, respectively. At both August 31, 1995 and 1994, market value was lower than LIFO and, accordingly, such inventories were valued at market. (4) INVESTMENTS AND LONG-TERM RECEIVABLES Investments and long-term receivables are as follows: August 31 1995 1996 (Amounts in Thousands) Investments accounted for by the equity method $ 88,786 $ 147,028 Investments in and advances to other cooperatives 47,328 44,944 National Bank for Cooperatives ............ 27,000 24,913 Other investments and long-term receivables 18,355 22,796 Notes receivable from ventures, 20% to 50% owned 4,218 1,443 $185,687 $241,124 National Bank for Cooperatives ("CoBank") requires its borrowers 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, 1995 and 1996, Farmland's investment in CoBank approximated its requirement. CoBank maintains a statutory lien on the investment held by the Company in CoBank. Summarized financial information of investees accounted for by the equity method is as follows: August 31 1995 1996 (Amounts in Thousands) Current Assets............................. $243,259 $228,883 Long-Term Assets........................... 238,297 319,166 Total Assets............................ $481,556 $548,049 Current Liabilities........................ $ 205,713 $191,632 Long-Term Liabilities...................... 94,029 57,208 Total Liabilities....................... $299,742 $248,840 Net Assets................................. $181,814 $299,209 Year Ended August 31 1994 1995 1996 (Amounts in Thousands) Net sales..................... $ 803,516 $1,212,592 $1,154,195 Net income.................... $ 24,285 $ 46,803 $ 83,075 Farmland's equity in net income.....................$ 10,878 $ 22,785 $ 41,092 The Company's investments accounted for by the equity method consist principally of 50% equity interests in three manufacturers of crop production products, Farmland Hydro, L.P., SF Phosphates Limited Company and Farmland MissChem, Limited (expected to commence production in 1998) and a 50% equity interest in a distributor of crop protection products, WILFARM, LLC. 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 1995 1996 (Amounts in Thousands) Land and improvements...... $ 42,355 $ 50,800 Buildings.................. 245,460 278,097 Machinery and equipment.... 765,383 880,152 Automotive equipment....... 67,124 67,754 Furniture and fixtures..... 54,888 61,426 Capital leases............. 49,241 50,562 Leasehold improvements..... 21,763 24,539 Other...................... 7,124 8,837 Construction in progress... 81,511 84,293 $1,334,849 $1,506,460 During 1994, 1995 and 1996, the Company capitalized construction period interest of $0.4 million, $0.7 million and $1.6 million, respectively. (6) BANK LOANS, SUBORDINATED DEBT CERTIFICATES AND NOTES PAYABLE Bank loans, subordinated debt certificates and notes payable are as follows: August 31 1995 1996 (Amounts in Thousands) Subordinated capital investment certificates --6% to 9.5%, maturing 1997 through 2004 $ 225,132 $ 245,792 Subordinated monthly income certificates --6.25% to 10.5%, maturing 1997 through 2006 74,863 78,313 Syndicated Credit Facility --5.73% to 6.05%, maturing 2001....... 85,000 175,000 Other bank notes--7.2% to 10.75%, maturing 1997 through 2001............ 71,498 88,704 Industrial revenue bonds--6.75% to 9.25%, maturing 1997 through 2007............ 21,750 18,930 Promissory notes--7% to 8.5%, maturing 1997 through 2002............ 17,210 16,917 Other--5% to 14.92%..................... 16,659 33,682 512,112 657,338 Less current maturities................. 42,394 41,080 $ 469,718 $ 616,258 The Company has a $1.1 billion Credit Agreement ("the Agreement"). The Agreement provides short-term credit of up to $650.0 million to finance seasonal operations and inventory, and revolving term credit of up to $450 million. At August 31, 1996, the Company had $236.6 million of short-term borrowings under the Agreement, $175.0 million of revolving term borrowings and $69.5 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 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 comply with the Agreement's financial covenants regarding working capital, the ratio of certain debt to average cash flow and the ratio of equity to total capitalization, all as defined therein. The short-term provisions of the Credit Agreement are reviewed and/or renewed annually. The next review date is in May 1997. The revolving term provisions of this agreement expire in May 2001. The Company maintains other borrowing arrangements with banks and financial institutions. At August 31, 1996, $18.0 million was borrowed under such agreements. National Beef Packing Company, L.P. ("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 (except to the extent of $10 million). At August 31, 1996, $47.0 million was borrowed under this agreement and $0.6 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 has borrowing agreements with various international banks which provide financing and letters of credit to support current international grain trading transactions. At August 31, 1996, such short-term borrowings totaled $78.8 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. Certain subordinated capital investment certificates may be redeemed prior to maturity at the option of the owner in accordance with the indenture. Subject to limitations in the Agreement, the Company has an option to redeem certain subordinated capital investment certificates in advance of scheduled maturities. Additionally, the Company may redeem subordinated capital investment certificates and subordinated monthly interest certificates upon death of the holder. Outstanding subordinated debt certificates are subordinated to senior indebtedness ($522.6 million at August 31, 1996) and additional financings (principally long-term operating leases). See Note 10. Under industrial revenue bonds and other agreements, property, plant and equipment with a carrying value of $20.5 million have been pledged. Borrowings from CoBank, totaling $94.3 million at August 31, 1996, are partially secured by liens on the equity investment held by the Company in CoBank. See Note 4. Bank loans, subordinated debt certificates and notes payable mature during the fiscal years ending August 31 in the following amounts: (Amounts in Thousands) 1997................. $ 41,080 1998................. 132,769 1999................. 22,016 2000................. 31,070 2001................. 226,551 2002 and after....... 203,852 $ 657,338 At August 31, 1995 and 1996, the Company had demand loan certificates and short-term bank debt outstanding of $365.3 million (weighted average interest rate of 6.4%) and $355.5 million (weighted average interest rate of 6.29%), 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 in September 1995 and reply briefs were submitted to the court 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 $209.2 million, before tax benefits of the interest deduction, through August 31, 1996), or $295.0 million in the aggregate at August 31, 1996. 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 accumulating statutory interest thereon (approximately $6.6 million), or $11.6 million in the aggregate at August 31, 1996. The asserted federal and state income tax liabilities and accumulated interest thereon 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 by the United States Tax Court would be charged to current earnings and would have a material adverse effect on the Company. In the event of such an adverse determination of the Terra tax issue, certain financial covenants of the Company's Credit Agreement (the "Agreement"), dated May 15, 1996, become less restrictive. Had the United States Tax Court decided in favor of the IRS on all unresolved issues, and had all related additional federal and state income taxes and accumulated interest thereon been due and payable on August 31, 1996, Farmland's borrowing capacity under the Agreement was adequate at that time to finance the liability. However, Farmland's ability to finance such an adverse decision depends substantially on the financial effects of future operating events on its borrowing capacity under the Agreement. 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 LLP, 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 is comprised of the following: Year Ended August 31 1994 1995 1996 (Amounts in Thousands) Federal: Current............... $ 10,076 $ 18,533 $ 7,322 Deferred.............. (3,217) 4,255 9,430 $ 6,859 $ 22,788 $ 16,752 State: Current.............. $ 1,965 $ 3,356 $ 1,292 Deferred............. (755) 665 1,664 $ 1,210 $ 4,021 $ 2,956 Foreign: Current.............. $ (2,117) $ 1,578 $ 2,107 Deferred............. (1,062) 1,241 (60) $ (3,179) $ 2,819 $ 2,047 Total income tax expense $ 4,890 $ 29,628 $ 21,755 During the year ended August 31, 1994, a charge in lieu of taxes, resulting from initial recognition of acquired tax benefits that are allocated to reduce goodwill related to the acquired entity, decreased Farmland's deferred tax benefit by $3.0 million. Income (loss) before income tax expense from foreign sources amounted to ($14.3 million), $19.3 million and $13.5 million for 1994 , 1995 and 1996, respectively. Income tax expense attributable to income from continuing operations differs from the "expected" income tax expense using statutory rate of 35% as follows: Year Ended August 31 1994 1995 1996 (Amounts in Thousands) Computed "expected" income tax expense on income before income taxes ........ 35.0 % 35.0% 35.0 % Increase (reduction) in income tax expense attributable to: Patronage refunds............. (33.3) (18.3) (20.4) State income tax expense net of federal income tax effect .. 1.1 2.2 2.5 Other, net.................... 3.8 (2.4) 1.9 Income tax expense............ 6.6 % 16.5% 19.0 % The tax effect of temporary differences that give rise to significant portions of deferred tax liabilities and deferred tax assets at August 31, 1995 and 1996 are as follows: August 31 1995 1996 (Amounts in Thousands) Deferred tax liabilities: Property, plant and equipment, principally due to differences in depreciation............ $ 26,009 $40,182 Prepaid pension cost ....... 19,807 21,500 Other ...................... 15,065 2,080 Total deferred tax $ 60,881 $63,762 liabilities ................ Deferred tax assets: Safe harbor leases ......... $ 5,096 $ 4,699 Accrued expenses ........... 29,394 47,140 Accounts receivable, principally due to allowance for doubtful accounts.......... 2,300 1,971 Other ...................... 11,590 3,243 Total deferred tax assets .. $ 48,380 $57,053 Net deferred tax liability.... $ 12,501 $ 6,709 A valuation allowance for deferred tax assets was not necessary at August 31, 1995 or 1996. (8) MINORITY OWNERS' EQUITY IN SUBSIDIARIES A summary of the equity of subsidiaries owned by others is as follows: August 31 1995 1996 (Amounts in Thousands) National Beef Packing Company, L.P. and $12,473 $6,455 G.P. $ ................................. Farmland Foods, Inc. .................... 4,682 4,594 Other subsidiaries....................... 2,837 2,796 $19,992 $13,845 (9) PREFERRED STOCK, EARNED SURPLUS AND OTHER EQUITIES A summary of preferred stock is as follows: August 31 1995 1996 (Amounts in Thousands) Preferred shares, $25 par value - Authorized 8,000,000 shares: 6% - 608 shares issued and outstanding, 6% - 608 shares issued and outstanding, (608 shares in 1995)... $ 15 $ 15 5-1/2% - 2,412 shares issued and outstanding (2,436 shares in 1995).............. 61 60 Series F - 47,545 shares issued and outstanding (95,069 shares in 1995).............. 2,377 1,189 $ 2,453 $ 1,264 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 1995 1996 (Amounts in Thousands) Earned surplus......................... $ 197,666 $ 230,340 Patronage refund payable in equities... 61,356 60,776 Capital credits........................ 27,645 31,237 Additional paid-in surplus............. 1,603 1,616 Currency translation adjustment........ 22 19 $ 288,292 $ 323,988 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 Participant's "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 amount of such equity held by the Participant exceeds the Participant's Base Capital Requirement. This 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. The Base Capital Requirement is determined annually by the Farmland Board of Directors at its sole discretion. At August 31, 1995 and 1996, common stock and associate member common stock with an aggregate par value of $14.2 million and $14.0 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 Sheets at August 31, 1995 and 1996, respectively. Farmland maintains an estate settlement plan for redemption of equities held by estates of deceased individuals (except purchased equities held less than five years) and special equity redemption plans. 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. At August 31, 1995 and 1996, certain equities of Farmland with a face amount of $12.8 million and $11.3 million, respectively, and capital equity fund certificates held by certain members of Farmland Foods, Inc. in the amount of $0.8 million and $0.1 million, respectively, have been approved by the Board of Directors for redemption under the estate settlement and special allocated equity redemption plan and such amounts have been included in "Other current liabilities" in the Consolidated Balance Sheets at August 31, 1995 and 1996, respectively. 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 1994, 1995 and 1996, rental expenses totaled $41.8 million, $44.6 million and $43.6 million, respectively. Rental expense is reduced for mileage credits received on leased railroad cars ($1.9 million in 1994, $1.8 million in 1995 and $1.4 million in 1996). The leases have various remaining terms ranging from one year to fourteen years. Some leases are renewable, at the Company's option, for additional periods. The minimum required payments for these leases during the fiscal years ending August 31 are as follows: (Amounts in Thousands) 1997...........................$ 46,750 1998........................... 50,498 1999........................... 43,847 2000........................... 39,296 2001........................... 36,143 2002 and after................. 92,296 $ 308,830 Commitments for capital expenditures and investments in joint ventures aggregated $61.0 million at August 31, 1996. The Company has been designated by the Environmental Protection Agency as a potentially responsible party ("PRP") under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), at various National Priority List ("NPL") sites. In addition, the Company is aware of possible obligations associated with environmental matters at other sites, including sites where no claim or assessment has been made. The Company's accrued liability for probable and reasonably determinable obligations for resolution of environmental matters at NPL and other sites was $18.5 million and $18.9 million at August 31, 1995 and 1996, respectively. The ultimate costs of resolving certain 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, 1996. In the opinion of management, it is reasonably possible for such costs to approximate an additional $20.6 million. In the ordinary course of conducting international grain trading, Tradigrain, as of August 31, 1996, was contingently liable in respect of $114.2 million of guarantees, performance and bid bonds, and letters of credit. The Company is involved in various lawsuits arising in the normal course of business. 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. (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 1994 1995 1996 (Amounts in Thousands) Service cost - benefits earned during the period $ 8,663 $10,336 $10,886 Interest cost on projected benefit obligation. 15,292 16,707 18,843 Actual return on Plan assets.................. (10,949) (27,422) (46,630) Net amortization and deferral................. (7,860) 8,677 24,634 Pension expense............................... $ 5,146 $8,298 $ 7,733
The discount rate, the rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligations and the expected long-term rate of return on assets were 8.0%, 4.5% and 8.5%, respectively, at August 31, 1994, 1995 and 1996. The following table sets forth the Plan's funded status and amounts recognized in the Company's Consolidated Balance Sheets at August 31, 1995 and 1996. Such prepaid pension cost is based on the Plan's funded status as of May 31, 1995 and 1996. August 31 1995 1996 (Amounts in Thousands) Actuarial present value of benefit obligations: Vested benefits.............................. $ 170,105 $180,253 Nonvested benefits........................... 11,584 12,024 Accumulated benefit obligation............... $ 181,689 $192,277 Increase in benefits due to future compensation increases.........................56,353 56,030 Projected benefit obligation................. $ 238,042 $248,307 Estimated fair value of Plan assets.......... 259,262 301,504 Plan assets in excess of projected benefit obligation....................................$ 21,220 $ 53,197. Unrecognized net loss from past experience different from that assumed and effects of changes in assumptions....................... 27,750 450 Unrecognized prior service cost.............. 1,089 871 Prepaid pension cost at end of year............ $ 50,059 $ 54,518 (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, jet fuels, by-products of petroleum refining and 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 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 primarily includes livestock production and services such as computer services, accounting, financial, management, printing 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 has been added or deducted: interest expense, interest income, other income (deductions) or corporate expenses (included in the statements of operations as selling, general and administrative expenses), which cannot practicably be identified or allocated by industry segment. 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, 1994, 1995 and 1996 Export sales to unaffiliated customers from U.S. operations for the years ended August 31, 1994, 1995 and 1996 were $842.5 million, $1.3 billion and $2.0 billion, respectively.
Unallocated Corporate Items Cooperative Farm Supply Cooperative Marketing and Inter- Crop and Processing Other Segment Petroleum Production Feed Foods Grain Operations Eliminations Consolidated (Amounts in Thousands) 1994 Sales to unaffiliated customers........$855,479 $1,163,357 $527,864 $2,355,599 $1,627,156 $ 148,478 $ -0- $6,677,933 Transfers between segments......... 4,843 9,513 2,072 3,007 -0- 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 $ 9,304 $ 93,004 Corporate assets.... 199,647 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 $ 28,986 $ 126,863 1996 Sales to affiliated customers......$1,058,258 $1,336,307 $569,869 $3,220,996 $3,472,009 $ 131,148 $ -0- $9,788,587 Transfers between segments......... 3,351 1,402 923 2,959 -0- 33,255 (41,890) -0- Total sales and transfers........$1,061,609 $1,337,709 $570,792 $3,223,955 $3,472,009 $ 164,403 $ (41,890) $9,788,587 Operating income (loss) of industry segments.........$ 4,990 $ 179,008 $ 12,952 $ 65,953 $ (18,993) $ (5,085) $ 238,825 Equity in net income (loss) of investees (Note 4).........$ (98) $ 41,899 $ 382 $ -0- $ (10) $ (1,081) $ 41,092 General corporate expenses......... (91,194) Other corporate income........... 29,278 Interest expense.. (62,445) Minority interest.. (7,383) Income tax expense. (21,755) Net income......... $ 126,418 Identifiable assets at August 31, 1996..$433,352 $ 438,559 $107,267 $ 618,122 $ 492,919 $ 64,403 $2,154,622 Investment in and advances to investees........$ 611 $ 136,959 $ 3,399 $ 18 $ 468 $ 7,016 $ 148,471 Corporate assets... 265,353 Total assets....... $2,568,446 Provision for depreciation and amortization.....$ 11,024 $ 16,797 $ 4,625 $ 26,438 $ 5,729 $ 6,171 $ 6,957 $ 77,741 Capital expenditures (Including $29.9 million of capital assets of businesses acquired)........$ 42,075 $ 37,296 $ 5,083 $ 84,493 $ 15,084 $ 10,603 $ 27,342 $ 221,976
(13) SIGNIFICANT GROUP CONCENTRATION OF CREDIT RISK The Company extends credit to its customers on terms generally no more favorable than standard terms of sale for the industries it serves. A substantial portion of the Company's receivables are concentrated in the agricultural industry. Collection of these receivables may be dependent upon economic returns from farm crop and livestock production. The Company's credit risks are continually reviewed and management believes that adequate provisions have been made for doubtful accounts. 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, 1995 August 31, 1996 Carrying Carrying Amount Fair Value Amount Fair Value (Amounts in Thousands) FINANCIAL ASSETS: Notes receivable from investees, 20% to 50% owned............................ $ 4,218 $ 3,747 $ 1,443 $ 1,454 National Bank for Cooperatives................ 27,000 **** 24,913 **** Other cooperatives: Equities.................................... 27,728 **** 27,187 **** Notes receivable............................ 19,600 17,327 17,757 17,073 FINANCIAL LIABILITIES: Subordinated capital investment certificates and subordinated monthly income certificates........................... $ (299,995) $ (304,450) $ (324,105) $ (317,476)
****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 equity 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 a discount rate equal to the interest rate on subordinated debt certificates with similar maturities currently offered for sale by the Company. The carrying amounts of the Company's other debt borrowings approximate their fair market value. (15) RELATED PARTY TRANSACTIONS The Company has a 50% interest in two manufacturers of phosphate products, Farmland Hydro, L.P. and SF Phosphates Limited Company, and a 50% interest in a distributor of crop production products, WILFARM, LLC. During 1994, 1995 and 1996, the Company purchased $83.1 million, $106.2 million and $117.4 million, respectively, of product from these ventures. Accounts payable includes $4.8 million and $2.9 million due to these ventures at August 31, 1995 and 1996, respectively. The Company also has notes receivable from these ventures in the amount of $16.6 million and $12.9 million at August 31, 1995 and 1996, respectively. (16) OTHER INCOME In May 1996, the Company sold its interest in a communications joint venture, Broadcast Partners. The sale resulted in a gain before income taxes of $10.9 million, which has been included in the caption "Other income (deductions): Other, net" in the Company's 1996 Consolidated Statement of Operations. 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, 2 and 3 insurance companies in 1994, 1995 and 1996, 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, 1995 and 1996 of $13.6 million, $0.3 million and $0.5 million, respectively, and included such amounts in the caption "Other income (deductions): Other, net" in the Consolidated Statement of Operations for the years ended. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors of Farmland are as follows: Total Years Expiration of Age as of Positions of Present Service August 31, Held With Term as as Board Name 1996 Farmland Director Member Business Experience During Last Five Years Albert J. Shivley 53 Chairman of 1998 12 General Manager--American Pride Co-op the Board Association, Brighton, Colorado, a local cooperative association of farmers and ranchers. H. D. Cleberg 57 President and 1997 6 Mr. Cleberg has been with Farmland since Chief 1968. He was named as president-elect in Executive February 1991 and became President in April Officer 1991. From 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 65 Vice Chairman 1997 13 Producer--Deerfield, Kansas. Mr. Molz has and Vice served as Chairman of the Board of the President National Bank for Cooperatives since January 1993. He served as 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. 45 1998 4 General Manager--Cooperative Grain and Supply, Hillsboro, Kansas, a local cooperative association of farmers and ranchers. Ronald J. Amundson 52 1997 8 General Manager--Central Iowa Cooperative, Jewell, Iowa, a local cooperative association of farmers and ranchers. Baxter Ankerstjerne 60 1996 6 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 55 1997 5 Producer--Texline, Texas. Richard L. Detten 62 1996 9 Producer--Ponca City, Oklahoma. Steven Erdman 46 1998 4 Producer--Bayard, Nebraska. Warren Gerdes 48 1998 3 General Manager--Farmers Cooperative Elevator Company, Buffalo Lake, Minnesota, a local cooperative association of farmers and ranchers. Ben Griffith 47 1998 7 General Manager--Central Cooperatives, Inc., Pleasant Hill, Missouri, a local cooperative association of farmers and ranchers. Gail D. Hall 54 1997 8 General Manager--Lexington Cooperative Oil Company, Lexington, Nebraska, a local cooperative association of farmers and ranchers. Jerome Heuertz 55 1997 2 General Manager--Farm Service Cooperative, Council Bluffs, Iowa, a local cooperative association of farmers and ranchers. Barry Jensen 51 1996 6 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. Ron Jurgens 58 1998 1 General Manager-Agri Co-op in Holdrege, Nebraska, a local cooperative association of farmers and ranchers. Greg Pfenning 47 1997 4 Producer--Hobart, Oklahoma. Director of Hobart & Roosevelt Cooperative, a local cooperative association of farmers and ranchers. Vonn Richardson 63 1996 9 Producer--Plains, Kansas. President of The Plains Equity Exchange and Cooperative Union, Plains, Kansas, a local cooperative association of farmers and ranchers. Monte Romohr 43 1996 6 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 44 1996 3 General Manager--Dacoma Farmers Cooperative, Inc., Dacoma, Oklahoma, a local cooperative association of farmers and ranchers. Raymond J. Schmitz 65 1996 9 Producer--Baileyville, Kansas. Frank Wilson 50 1998 1 General Manager-Elkhart Farmers Co-op Association, Elkhart, Texas, a local cooperative association of farmers and ranchers. Robert Zinkula 66 1996 6 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 the Board of Directors is elected each year. H. D. Cleberg is serving as director-at-large; the remaining 21 directors were elected from nine geographically defined districts. 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 1996 Principal Occupation and Other Positions J. F. Berardi 53 Executive Vice President and Chief Operating Officer, Grain Businesses - Mr. Berardi joined Farmland March 1992, serving as Executive Vice President and Chief Financial Officer. He was appointed to his present position in July 1996. He 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. T. M. Campbell 46 Executive Vice President and Chief Financial Officer - Mr. Campbell jointed Farmland August 1992, serving as Vice President and Treasurer. He was appointed to his present position in August 1996. He served as Vice President and Assistant Treasurer of Harcourt Brace Jovanovich, Inc., a diversified Fortune 200 company, from 1986 to 1992. H. D. Cleberg 57 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 53 Executive Vice President, Business Development and International Marketing - 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 52 Executive Vice President and Chief Operating Officer, Livestock and Meat 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 53 Executive Vice President and Chief Operating Officer, 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. B. L. Sanders 55 Senior 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 1994, 1995 and 1996.
Long-Term Annual Compensation Compensation Year Employee Other Annual LTIP Name and Principal Position Ending Salary Variable Compensation Payouts August 31 Compensation Plan H. D. Cleberg, 1994 $ 439,728 $ 338,481 $ -0- $ -0- President and 1995 $ 456,218 $ 346,944 $ -0- $ -0- Chief Executive Officer 1996 $ 497,713 $ 356,485 $ -0- $ 1,296,482 G. E. Evans, 1994 $ 278,304 $ 217,761 $ -0- $ -0- Executive Vice President and 1995 $ 283,988 $ 217,761 $ -0- $ -0- Chief Operating Officer 1996 $ 298,848 $ 216,121 $ -0- $ 648,241 Livestock and Meat Businesses R. W. Honse, 1994 $ 251,532 $ 205,206 $ -0- $ -0- Executive Vice President and 1995 $ 280,248 $ 210,337 $ -0- $ -0- Chief Operating Officer 1996 $ 303,364 $ 216,121 $ -0- $ 648,241 Ag Input Businesses J. F. Berardi, 1994 $ 216,252 $ 146,576 $ -0- $ -0- Executive Vice President and 1995 $ 226,914 $ 150,241 $ -0- $ -0- Chief Operating Officer, 1996 $ 244,770 $ 154,372 $ -0- $ 549,204 Grain Businesses S. P. Dees, 1994 $ 205,066 $ 119,093 $ 124,138(a) $ -0- Executive Vice President 1995 $ 211,000 $ 122,070 $ 127,878(a) $ -0- Business Development and 1996 $ 236,765 $ 125,427 $ 5,357(a) $ 459,171 International Marketing (a)Mr. Dees received a differential remuneration and reimbursements in 1994, 1995 and 1996 for taxes in connection with foreign assignments. Mr. Dees' foreign assignment ended in September 1995.
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 threshold performance level as 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. Distributions under this plan are made annually after the close of each fiscal year. During 1996, under the Company's Management Long-Term Incentive Plan for 1996 through 1998, certain management employees became eligible for future payments (contingent on satisfying the terms and conditions of the Plan as set forth below herein) including those executives set forth below.
(A) (B) (C) Estimated Future Payouts Under Non-Stock Price Based Plans Number of Shares, Performance or Other (D) (E) (F) Name Units or Other Period Until Maturation Threshold Target (2) Maximum (2) Rights (1) or Payout (Amounts in Thousands) H. D. Cleberg 1996 - 1998 $ 392 G. E. Evans 1996 - 1998 $ 196 R. W. Honse 1996 - 1998 $ 196 J. F. Berardi 1996 - 1998 $ 153 S. P. Dees 1996 - 1998 $ 139 (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, certain of the Company's 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: 1995 through 1997 ("1997 Plan"); 1996 through 1998 ("1998 Plan") and 1997 through 1999 ("1999 Plan"). The income threshold ("Threshold") for the three year period of the 1997 Plan, the 1998 Plan and 1999 Plan is $235,043,000, $393,481,000 and $541,768,000, 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 1997 Plan, the 1998 Plan and the 1999 Plan, as patronage refunds, redemptions under the base capital plan, estate settlement plans and special allocated equity redemption plans is less than $61,938,000, $90,000,000 and $147,285,000, respectively, subject to the following sentence, no payment will occur with respect to such plan. The Board of Directors 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 .83% of aggregate income for the 1997 Plan, the 1998 Plan and the 1999 Plan is allocated to an incentive pool for each such plan from which awards to management will be paid. Absent a significant change in their status, in which event such percentages may be adjusted, of the amount, if any, allocated to the incentive pool Messrs. Cleberg, Evans, Honse, Berardi and Dees will receive at least : 12%, 6% 6%, 5.6% and 4.25%, respectively, for the 1997 Plan; 12%, 6%, 6%, 6% and 4.25%, respectively, for the 1998 Plan; and 11.2%, 5.6%, 5.6%, 5.6% and 4.0%, respectively, for the 1999 Plan. 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 years 1994, 1995 and 1996 are included in the cash compensation table. The Company established the Farmland Industries, Inc. Employee Retirement Plan (the "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 6,890 active and 7,640 inactive employees were participants in the Plan on August 31, 1996. 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, 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, 1994, 1995 and 1996 were $2.9 million, $5.3 million and $12.2 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 ($160,000 for the plan year beginning in 1997) annually and the maximum retirement benefit which may be paid by such plan is limited to $120,000 ($125,000 for the limitation year beginning in 1997) annually by the Internal Revenue Code ("IRC"). 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 IRC on the amount of annual salary which can be included in the computation of retirement income (currently $150,000) or the amount of annual retirement benefit which may be paid by a qualified retirement plan (currently $120,000). The Board of Directors has appointed an Administrative Committee to administer the SERP. The Company purchased cash value life insurance polices on the lives of certain plan participants to recover its cost of providing benefits under the SERP. The Company owns these insurance policies and has the sole right to name policy beneficiaries. The total SERP premiums charged to operations for the years ended August 31, 1994, 1995 and 1996 were $0.4 million, $0.6 million and $-0-, 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 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. The following table sets forth, for compensation levels up to $150,000, the estimated annual benefits payable at age 62 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 on or after age 62; the portion of the employee's benefit lost (due to the IRC limitations), which would have been provided by the employer's contribution to the Retirement Plan, 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.
Final Average Years of Service Wage 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 certain executive officers of the Company at August 31, 1996. Name Years of Creditable Service H. D. Cleberg 31 G. E. Evans 22 R. W. Honse 22 J. F. Berardi 4 S. P. Dees 12 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 1996. Messrs. Lyman Adams, Jody Bezner, Warren Gerdes, Gail Hall 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. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Farmland's equity consists of preferred shares, common shares, associate common shares and capital credits. Only the common shares have voting rights. At August 31, 1996, no person was known by Farmland to be the beneficial owner of more than five percent of Farmland's common shares. At August 31, 1996, none of the directors of Farmland and the executive officers listed under the first table under "Executive Compensation" above, either individually or as a group, beneficially owned in excess of one percent of any class of Farmland's equity. 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 and Exhibits (1) FINANCIAL STATEMENTS Consolidated Balance Sheets, August 31, 1995 and 1996 Consolidated Statements of Operations for each of the years in the three-year period ended August 31, 1996 Consolidated Statements of Cash Flows for each of the years in the three-year period ended August 31, 1996 Consolidated Statements of Capital Shares and Equities for each of the years in the three-year period ended August 31, 1996 Notes to Consolidated Financial Statements (2) EXHIBITS ARTICLES OF INCORPORATION AND BYLAWS: 3.A Articles of Incorporation and Bylaws of Farmland Industries, Inc. effective December 1, 1994. (Incorporated by Reference - Form 10-K, filed November 28, 1995) 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 Credit Agreement between Farmland Industries, Inc. and various banks dated May 15, 1996, (Incorporated by Reference - Form 10-Q filed July 15, 1996) The Registrant agrees to furnish to the Commission upon request copies of any instrument defining the rights of holders of long-term debt of the Registrant and its consolidated subsidiaries that does not exceed 10 percent of the total assets of the Registrant and its consolidated subsidiaries. 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, 1996-August 31, 1997) 10.(iii)B Farmland Industries, Inc. Management Long-Term Incentive Plan (Effective September 1, 1994)(Incorporated by Reference - Form 10-K, filed November 28, 1995) 10.(iii)B(1) Exhibit E (Fiscal years 1997 through 1999) 10.(iii)C Farmland Industries, Inc. Supplemental Executive Retirement Plan (Effective January 1, 1994) (Incorporated by Reference - Form 10-K, filed November 28, 1995) 10.(iii)C(1) Resolution Approving the Revision of Appendix A and Appendix 10.(iii)D Farmland Industries, Inc. Executive Deferred Compensation Plan (As Amended and Restated Effective November 1, 1996) 21. Subsidiaries of the Registrant 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 SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, FARMLAND INDUSTRIES, INC. HAS DULY CAUSED THIS REPORT ON FORM 10-K TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED ON NOVEMBER 27, 1996. FARMLAND INDUSTRIES, INC. BY /s/ TERRY M. CAMPBELL Terry M. Campbell Executive Vice President and Chief Financial Officer BY /s/ ROBERT B. TERRY Robert B. Terry Vice President and General Counsel PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS FORM 10-K HAS BEEN SIGNED FOR THE FOLLOWING PERSONS ON BEHALF OF FARMLAND INDUSTRIES, INC. AND IN THE CAPACITIES AND ON THE DATE INDICATED PURSUANT TO VALID POWER OF ATTORNEY EXECUTED ON OCTOBER 23, 1996.
Signature Title Date * Chairman of Board November 27, 1996 Albert J. Shivley and Director * President, November 27, 1996 H. D. Cleberg Chief Executive Officer and Director (Principal Executive Officer) * Vice Chairman of Board November 27, 1996 Otis H. Molz and Director * Director November 27, 1996 Lyman Adams, Jr. * Director November 27, 1996 Ronald J. Amundson * Director November 27, 1996 Baxter Ankerstjerne * Director November 27, 1996 Jody Bezner * Director November 27, 1996 Richard L. Detten * Director November 27, 1996 Steven Erdman * Director November 27, 1996 Warren Gerdes * Director November 27, 1996 Ben Griffith * Director November 27, 1996 Gail D. Hall * Director November 27, 1996 Jerome Heuertz * Director November 27, 1996 Barry Jensen * Director November 27, 1996 Ron Jurgens * Director November 27, 1996 Greg Pfenning * Director November 27, 1996 Vonn Richardson * Director November 27, 1996 Monte Romohr * Director November 27, 1996 Joe Royster * Director November 27, 1996 Raymond J. Schmitz * Director November 27, 1996 Frank Wilson * Director November 27, 1996 Robert Zinkula /s/ TERRY M. CAMPBELL Executive Vice President November 27, 1996 Terry M. Campbell and Chief Financial Officer (Principal Financial Officer) /s/ MERL DANIEL Vice President and Controller November 27, 1996 Merl Daniel (Principal Accounting Officer) *BY /s/ TERRY M. CAMPBELL Terry M. Campbell Attorney-in-Fact
EX-99 2 EXHIBIT INDEX Exhibit 99 EXHIBIT INDEX The following exhibits are filed as a part of this Form S-1 Registration Statement. Certain of these exhibits are incorporated by reference as indicated. Items marked with an asterisk (*) are filed herein. Exhibit No. Description of Exhibits ARTICLES OF INCORPORATION AND BYLAWS: 3.A Articles of Incorporation and Bylaws of Farmland Industries, Inc. effective December 1, 1994. (Incorporated by Reference - Form 10-K, filed November 28, 1995) 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 Credit Agreement between Farmland Industries, Inc. and various banks dated May 15, 1996, (Incorporated by Reference - Form 10-Q filed July 15, 1996) The Registrant agrees to furnish to the Commission upon request copies of any instrument defining the rights of holders of long-term debt of the Registrant and its consolidated subsidiaries that does not exceed 10 percent of the total assets of the Registrant and its consolidated subsidiaries. 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, 1996- August 31, 1997) 10.(iii)BFarmland Industries, Inc. Management Long-Term Incentive Plan (Effective September 1, 1994) (Incorporated by Reference - Form 10-K, filed November 28, 1995) * 10.(iii)B(1) Exhibit E (Fiscal years 1997 through 1999) 10.(iii)CFarmland Industries, Inc. Supplemental Executive Retirement Plan (Effective January 1, 1994) (Incorporated by Reference - Form 10-K, filed November 28, 1995) * 10.(iii)C(1) Resolution Approving the Revision of Appendix A and Appendix *10.(iii)D Farmland Industries, Inc. Executive Deferred Compensation Plan (As Amended and Restated Effective November 1, 1996) *21. Subsidiaries of the Registrant *24. Power of Attorney *27. Financial Data Schedule EX-10.(III)A 3 EMPLOYEE VARIABLE COMPENSATION EXHIBIT 10.(iii)A FY 97 STANDARD VARIABLE COMPENSATION PLAN (SEPTEMBER 1, 1996 - AUGUST 31, 1997) 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 schedule of payout opportunities by earnings level 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 97 to eligible employees for the attainment of corporate and unit objectives. The corporate standard measure is Return On Equity (ROE). The standard business unit measures, in addition to corporate ROE, are Return On Assets (ROA), earnings after interest, and cash flow, in approximately equal weighting. With Senior Management approval, including the Chief Executive Officer, a business unit may be based completely on corporate ROE. Alternatively, a business unit may be based on corporate ROE and on fewer than all three of the standard unit measures, with full Senior Management approval. These splits do NOT apply if the business unit variable payout is based solely upon corporate ROE. Corporate employee payout under this plan results entirely from corporate ROE. Business unit employees shall also be based 100% on corporate results unless they are either (A) direct members of a unit head's management team, or (B) direct reports to a member of the management team, and with management responsibilities themselves, either for other employees or for major processes. If in (A), the split for payout is 30% corporate and 70% business unit; if in (B), the split is 50 % corporate and 50% business unit. A further requirement for payout to Farmland Industries, Inc. Vice Presidents and above serving on the Management Council is that cash patronage payments to members must occur; if not, this group will receive no payout under the terms of this plan. ELIGIBILITY The following types of employees are ineligible for payout under the Standard Variable Compensation Plan: Employees whose terms and conditions of employment are subject to collective bargaining. Employees hired after 5/31/97. (Waived if the employee is a former regular full time employee during FY 97. Payout is prorated.) Regular part time employees with less than 500 hours of service during FY 97 Temporary employees with less than 1000 hours of service during FY 97 Employees terminated for cause prior to 8/31/97 Employees who terminate voluntarily prior to 8/31/97 (Employees who terminate to accept a position with a member cooperative may be eligible for a prorated payout.) Employees included in variable compensation plans other than the standard variable compensation plan. Exceptions must be approved by Senior Management of the affected area and by the VP, Human Resources. Certain classes of employees who terminate prior to the end of the fiscal year will receive payout based on their eligible earnings during the year: Death/Disability Retirement Reduction in Force Focus Team member obtaining outside employment Layoff Leave of Absence Hired after 9/1/96 but before 5/31/97 Involuntary separations, other than for reasons included in the list above, which are not for performance or for cause, may result in prorated payout. Employees who voluntarily terminate prior to 08/31/97 for the purpose of assuming a position with an MCA cooperative may be eligible to receive a 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 eligible gross wages or salary paid during the fiscal year. Business unit or corporate performance measurements are labeled "threshold", "target", and "maximum". Threshold - The minimal performance level required for the plan to pay out. No payout occurs for achievement below threshold. Target - Identifies the actual performance objective. Maximum - A performance level exceeding target at which the payout as a percentage of eligible gross wages or salary is frozen. 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 President and CEO EXHIBIT A FY 97 PERFORMANCE CRITERIA AND GOALS CORPORATE: Threshold Target Maximum Return on Equity 8% 14% 20% **Business Unit: Threshold Target Maximum Cash Flow Return on Assets Earnings after interest ** If Business unit measures are used, then key unit personnel are paid variable pay on the following basis: A. Direct members of the unit head's management team - 30% corporate/ 70% unit B. Direct reports to members of the management team who have management responsibilities, either for Farmland employees, for major processes, or both - 50% corporate/50% business unit. EXHIBIT B FY 97 STANDARD VARIABLE COMPENSATION PLAN
THRESHOLD TARGET MAXIMUM EARNINGS V COMP CALCULATION POINT ** c> 3 5 8 All Non-Exempt/Truck Drivers Any Earnings 3 5 8 Below $35,000 Exempt Actual Earnings 3 6 10 $ 35,000 - $ 38,499 $ 36,750 4 7 12 $ 38,500 - $ 42,349 $ 40,425 5 8 15 $ 42,350 - $ 48,699 $ 45,525 5 10 18 $ 48,700 - $ 55,999 $ 52,350 6 12 22 $ 56,000 - $ 64,399 $ 60,200 7 15 27 $ 64,400 - $ 74,059 $ 69,230 8 18 33 $ 74,060 - $ 85,169 $ 79,615 10 22 40 $ 85,170 - $ 97,949 $ 91,560 12 25 46 $ 97,950 - $112,639 $105,295 12 25 46 $112,640 - $129,539 $121,090 12 25 46 $129,540 - $148,969 $139,255 14 28 52 $148,970 + Actual Earnings (Non - FII Exec) ** I.E., for any exempt employee whose earnings fall within a particular range, the payout is calculated on this middle value. EXECUTIVES THRESHOLD TARGET MAXIMUM EARNINGS V COMP CALCULATION POINT** 18 36 67 Designated FII Executives 22 45 83 Designated FII Executives 25 50 92 President and CEO $ 90,000 - $107,999 $ 99,000 $108,000 - $129,599 $118,800 $129,600 - $155,519 $142,560 $155,520 - $186,619 $171,070 $186,620 - $223,939 $205,280 $223,940 - $268,729 $246,335 $268,730 - $322,479 $295,605 $322,480 - $386,979 $354,730 $386,980 - $464,379 $425,680 $464,380 - $557,259 $510,820 $557,260 - $668,709 $612,985 $668,710 - $802,449 $735,605 $802,450 + Actual Earnings ** I.E., for any exempt employee whose earnings fall within a particular range, the payout is calculated on this middle value.
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 $762,011,000 and the ROE for threshold is expressed as 8%. This would correspond to Income of $60,960,880 (.08 times $762,011,000). However, the $60,960,880 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 $762,011,000 MILLION) ROE Required Income Threshold 8.0% $ 60,960,880 Target 14.0% $ 106,681,540 Maximum 20.0% $ 152,402,200 * Actual FY 96 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 (See the definition of management employees in the main plan document and in Exhibit "A"). This also applies to management level employees who participate in customized plans. Employees on sales incentive plans, with base pay administered at a lower level, are NOT affected by this provision unless specific portions of their plans are tied to corporate performance. GUIDELINES FOR "EXTRAORDINARY" DESIGNATION The Chief Financial Officer and the Chief Executive Officer must approve the classification of any item as "extraordinary." Transactions deemed as "extraordinary" and therefore excluded in the determination of Income for variable compensation include: The punitive portion of litigation results in favor of or against Farmland, excluding redemptive payments on normal business matter where the intent is to substantially restore net income to where it would have been had the incident not occurred. 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. The gain or loss on the disposal of a major asset, group of assets, or investments. The gain or loss from any new business activity or business unit added subsequent to the approval of the Business Plan, provided that the acquisition was such that it required specific Board of Director approval outside of the business plan. The impact of adjustments resulting from LIFO inventory computations or reserves. Other items as approved. Specific requests by an operating unit for treatment of an item as "extraordinary" must be approved by the Senior Management representative before review by the Chief Financial Officer and the Chief Executive Officer. EX-10.(III)B(1) 4 EXHIBIT E TO MANAGEMENT LONG-TERM INCENTIVE PLAN Exhibit 10.(iii)B(1) EXHIBIT E Performance criteria for FY 1997 - FY 1999 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 Aggregate Income % of Net Earnings to Level Pool Below Target Below 0% $541,768,000 Target $541,768,000 .83% of earnings Above Target Above .83% of earnings $541,768,000 During the FY 97 - 99 cycle, Farmland Industries, Inc. must return to its members at least $147,285,000 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: . The punitive portion of litigation results in favor of or against Farmland, excluding redemptive payments on normal business matter where the intent is to substantially restore net income to where it would have been had the incident not occurred. . Nonrecurring (one-time) adjustments to income or expense such as the gain from settlement of the retirement plan. Any such items would generally be reported as extraordinary items on Farmland financial statements under generally accepted accounting principles. . The gain or loss on the disposal of a major asset, group of assets, or investments. . The impact of adjustments resulting from LIFO inventory computations or reserves. . Other items as approved. Specific requests by an operating unit for treatment of an item as "extraordinary" must be approved by the Senior Management representative before review by the Chief Financial Officer and 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(1) 5 RESOLUTION AND APPENDIX A TO SERP Exhibit 10.(iii)C(1) PROPOSED RESOLUTION APPROVING REVISION OF APPENDIX A OF THE FARMLAND INDUSTRIES, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN RESOLUTION WHEREAS, Section 4 of the Farmland Industries, Inc. Supplemental Executive Retirement Plan provides that Appendix A of the Plan may be revised from time to time by the Board of Directors of Farmland Industries, Inc. NOW THEREFORE BE IT RESOLVED, that in accordance with that provision, the Appendix A , the list of Participants in the Plan, shall be revised by making the following additions and deletions: Additions: William J. Adams Bruce A. Benschoter G. Gary Cannavo David A. Fulton George W. Haney Holly D. McCoy Kent G. Nunn Gregg L. Parvin Paul J. Prijatel Jeffrey R. Roberts Leon Stonechipher Robert B. Terry Curtis V. Walther Jerry B. Waters Bryce C. Wells Deletions: Harold A. Carter Edwin D. Wallace Carl Morris APPENDIX A TO FARMLAND INDUSTRIES, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN Allen, William Shepard, R. Adams, William J. Stonecipher, Leon Baldwin, Mark Sweat, Mike Benschoter, Bruce A. Terry, Robert B. Berardi, John Vickers, Keith Campbell, Terry Walther, Curtis V. Cannavo, Gary Waters, Jerry B. Cleberg, Harry Wells, Bryce Daniel, Merl Daugherty, Tim Dees, Steve Douglass, Robert Evans, Gary Filson, Dave Fulton, David A. Grazier, George Haney, George W. Hodges, Chris Honse, Robert Kimble, Donald McCoy, Holly D. Morrison, Gary Nunn, Kent G. Otwell, Kenneth Pardun, Ray Parvin, Gregg L. Prijatel, Paul John Richter, George Rieman, Stan Roberts, Jeffrey R. Sadler, Michael Sander, D. Sanders, Bernard Schrodt, Fred EX-10.(III)D 6 EXECUTIVE DEFERRED COMPENSATION EXHIBIT 10.(iii)D FARMLAND INDUSTRIES, INC. EXECUTIVE DEFERRED COMPENSATION PLAN (As Amended and Restated Effective November 1, 1996) Section 1. Establishment FARMLAND INDUSTRIES, INC. hereby establishes, effective as of January 1, 1971, or at such time as determined by the Board of Directors, a deferred compensation plan for executives as described herein, which shall be known as the "FARMLAND INDUSTRIES, INC. EXECUTIVE DEFERRED COMPENSATION PLAN" (hereinafter called the "Plan"). Section 2. Definitions 2.1 Definitions. Whenever used herein, the following terms shall have the meanings set forth below: (a) The term "Company" means Farmland Industries, Inc., a Kansas corporation, and any successor thereto that adopts the Plan. (b) The term "Board" means the Board of Directors of the Company. (c) The term "Committee" means the Compensation Committee of the Board. (d) The term "Employer" means (i) the Company; (ii) any affiliate of the Company which is not designated by the Board as ineligible to become a party to and participate in the Plan, and which affirmatively adopts the Plan; and (iii) any other corporation or unincorporated trade or business, provided such other entity is designated by the Board as eligible to become a party to and participate in the Plan, and such other entity affirmatively adopts the Plan. For purposes of this Subsection, the term "affiliate" means a corporation or unincorporated trade or business which is a member, with the Company, of the same controlled group of corporations, the same group of trades or businesses under common control, or the same affiliated service group (within the meaning of Internal Revenue Code Section 414(b), 414(c) or 414(m), respectively). (e) The term "Executive" means an employee of an Employer who is in a select group of management or highly compensated employees, and who is exempt from the minimum wage and maximum hour requirements of the Fair Labor Standards Act, as described in 29 U.S.C. Section 213(a) and regulations promulgated thereunder. (f) The term "Participant" means an Executive who meets the qualifications established by the Board for participation in the Plan and who has an account under the Plan. (g) The term "Compensation" with respect to an Executive means the sum of (i) the Executive's base salary rate in effect on October 31 of the calendar year preceding the calendar year with respect to which the relevant irrevocable deferral election relates, and (ii) the Executive's target variable compensation, as determined by the Employer, for the year with respect to which the relevant irrevocable deferral election relates, irrespective of whether the target variable compensation is ultimately paid. For this purpose, "base salary rate" means an Executive's stated salary rate as reported to the Company's human resources representatives, plus geographic differential pay, bridge differential pay (e.g., payments due to or in accordance with downgrades resulting from restructuring or developmental moves, temporary assignments of relatively long duration, etc.), and industry differential pay. The Committee shall resolve all questions concerning amounts which should be considered "base pay," pursuant to its authority granted in Section 10. (h) The term "Beneficiary" means the person or persons designated pursuant to Section 7 who are to receive upon a Participant's death the distribution that otherwise would have been paid to the Participant. (i) The term Retirement @ means the date on which a Participant is entitled to receive an early, normal or late retirement annuity under the Employers qualified defined benefit pension plan, or similar retirement benefit under another of the Employer's qualified retirement plans. The term shall not mean entitlement to a termination benefit under the Employer's retirement plan(s) where the benefit would be paid prior to the Participant's attainment of age 55. 2.2 Gender and Number. Except when otherwise indicated by the context, any masculine terminology used herein shall also include the feminine gender, and the definition of any term herein in the singular shall also include the plural. Section 3. Eligibility for Participation An Executive shall be eligible to participate in the Plan if he: (a) has Compensation of at least $85,000 per year; and (b) is expected to be among the top paid two percent of all employees (or the top paid employee, where there are 50 or fewer employees) of his Employer as measured by the Executive's Compensation for the year with respect to which the relevant deferral election relates. For purposes of this Subsection 3.1(b), where the Executive is employed by the Company or an affiliate (within the meaning of Subsection 2.1(d)), this determination shall be made as though his Employer employed all employees of the Company and its affiliates. An Executive shall be eligible to participate in the Plan on the date that he satisfies the requirements set forth in (a) and (b) above and executes an irrevocable deferral election described in Section 4.1 of this Plan. The Committee shall have the power, authority, and discretion to resolve any and all questions concerning eligibility, and its decisions shall be binding on all parties. The Company shall periodically compile a list of those Executives who are eligible to participate in the Plan. Such lists shall be compiled as necessary to allow proper administration of the Plan. If at a future date a Participant no longer meets the requirements for participation in this Plan, the Participant shall become an inactive Participant, retaining all of the rights afforded to Participants by this Plan, except the right to make additional deferrals pursuant to Subsection 4.1. Such an individual shall remain an inactive Participant unless and until he again becomes an active Participant. Section 4. Deferral of Income 4.1 Deferral Procedure. At the times and in the manner specified below, an active Participant or an eligible Executive may make an irrevocable election in writing to defer a portion of his remuneration until a specified date, subject to limitations described below, in any future calendar year: (a) Prior to December 31 of any calendar year, any amount, in multiples of $100 per pay period, of his Compensation to be paid in the following calendar year. (b) Prior to August 31 of any calendar year, any additional amount, in multiples of $100 per pay period, of his Compensation to be paid during the remainder of the calendar year from September 1 until December 31. (c) Prior to December 31 of any calendar year, all or part, stated as a percentage or in some other clearly identifiable manner, of any award payable between January 1 and August 31 of the following calendar year from an Employer-sponsored incentive plan, provided that the amount of the incentive award has not been precisely determined at the time of the irrevocable election. (d) Prior to August 31 of any calendar year, all or part, stated as a percentage or in some other clearly identifiable manner, of any award payable between September 1 and December 31 of that calendar year from an Employer-sponsored incentive plan, provided that the amount of the incentive award has not been precisely determined at the time of the irrevocable election. Amounts deferred pursuant to Subsections (a) and (b) above shall be deducted on a uniform basis for each remaining pay period during the pertinent calendar year. Subject to limitations described below, at the time of each deferral election the active Participant or eligible Executive shall elect both the time at which, and the form in which, he wishes to receive payment of the sum of the deferred amount and the accrued interest on such amount. 4.2 Electing the Time of Payment. The active Participant or eligible Executive may, in his deferral election, elect to receive payment of the deferred amount (with interest) at Retirement, or on a specified deferral ending date in a calendar year after the calendar year with respect to which the deferral election relates; provided, however, that with respect to a deferral election executed on or after November 1, 1996, the active Participant or eligible Executive may elect to receive payment of the deferred amount (plus interest) (i) at Retirement; (ii) on a specified deferral ending date which must be the first day of a calendar quarter in any calendar year after the calendar year to which the deferral election relates; or (iii) if the election form so provides, the earlier of Retirement and a specified deferral ending date described in (ii) above. EXAMPLE: Participant A completes a deferral election on December 1, 1996, for deferral of a portion of his Compensation payable for 1997. Participant A elects to receive his deferred compensation on July 1, 1998. The election is permissible because his deferral ending date is a date certain, after the 1997 calendar year, which is the first day of a calendar quarter. Participant B similarly completes a deferral election form, but elects to receive her deferred compensation on retirement. The election is permissible. Participant C similarly completes a deferral election form and, like Participant A, selects a deferral ending date of July 1, 1988. But Participant C further elects to receive his deferred compensation on the earlier of his retirement or the July 1, 1988, deferral ending date. The election is permissible. 4.3 Electing the Form of Payment. The active Participant or eligible Executive may elect to receive payment of the deferred amount (and interest thereon) in a single sum or in ten equal annual installments; provided, however, that with respect to deferral elections made on or after November 1, 1996, if payment of the deferred amount pursuant to Subsection 6.3 occurs while the Participant is still employed by the Employer, the deferred amount (and interest thereon) shall be paid in a single sum, notwithstanding the election to receive the deferred amount in ten equal annual installments. A Participant will be deemed to still be employed by his Employer on the deferral payment date if the Participant was employed by the Company or one of its affiliates (as defined in Subsection 2.1(d)) when he made his deferral election, and on the deferral payment date is employed by the Company or one of its affiliates. EXAMPLE: Participant A elects to receive payment of his deferred amount in ten annual installments. On his deferral payment date, however, he is still employed by his Employer. Payment of his deferred amount will be made in a single sum, even though he elected to receive his payment in ten annual installments. That's because the Plan will not make payment in installments to a Participant who is still employed by his Employer. Participant B elects to receive payment of her deferred amount in ten annual installments. On her deferral payment date, she is not employed by her Employer (that is, she is either retired or employed elsewhere). Payment of her deferred amount will be made in ten annual installments. Section 5. Crediting of Deferred Compensation 5.1 Participants' Accounts. The Company shall establish a bookkeeping account for each Participant, which shall be credited as of each date the Participant's Compensation or incentive pay award is deferred in the manner he elects pursuant to Section 4 of this Plan. Benefit payments under the terms of this Plan shall be the financial responsibility of the Participant's Employer and shall be paid based upon the bookkeeping accounts maintained by the Company. 5.2 Amounts Deferred. Amounts deferred during the current calendar year, and amounts deferred in prior years (and any interest credited thereto in a prior year as herein provided) shall be credited with simple interest for the period that such amounts were actually deferred during the year at a rate equal to the highest rate of interest on certificates of investment sold by the Company during the year. This interest adjustment shall be made at the end of each calendar year. However, where deferred amounts are distributed other than in the month of January, the amounts deferred during the calendar year in which the distribution occurs (and amounts deferred in prior years, and interest credited thereto for prior years) will be credited with interest from January 1 of the calendar year in which the distribution occurs to the date of distribution, at a rate equal to the highest rate of interest on certificates of investment sold by the Company between such January 1 and the date of distribution. EXAMPLE: Assume that in December, 1995, a newly eligible Participant deferred $12,000 of Compensation payable over 24 pay periods in 1996 ($500 per pay period), with the first pay period being January 15, 1996. In January, 1997, the Participant takes a single sum distribution of his deferred amounts. The highest rate of interest on certificates of investment sold by the Company during 1996 was 12.52 percent. At the end of the 1996 calendar year, the Participant's account is credited with $12,000 in deferred compensation. Interest is then credited by calculating the rate creditable to each $500 contribution to the Plan over the course of the calendar year. The maximum period for which interest is creditable is 11.5 months (since the first pay period was January 15). The 12.52 percent interest rate is multiplied by the quotient of 11.5 and 12, to obtain a maximum annual yield of 12 percent for the $500 deferral made on January 15 (that is, the 12.52 percent rate is adjusted to account for the fact that interest will not be credited for a full 12 months, but for 11.5 months at most). This 12 percent is then divided by the 24 pay periods, to obtain the rate (.5 percent) creditable for each payroll period. The first deferral of $500 is thus credited with the full 12 percent interest (.5 percent times 24 pay periods); the January 31 deferral is credited with 11.5 percent interest (.5 percent times 23 pay periods); the February 15 deferral is credited with 11 percent interest, etcetera. Note that if the Participant had maintained a $12,000 account balance at the beginning of 1996, and took no distribution of that balance in 1996, his beginning 1996 account balance would be credited at the close of the 1996 calendar year with the full 12.52 percent interest rate, resulting in an interest credit of $1,502. His account would be increased to $13,502, plus deferrals made in 1996, and the interest on those deferrals. Because the Participant took a single sum distribution of his account balance in January, 1997, no interest is creditable to his account for 1997, and this is true even if his distribution date is as late as January 31. However, if the Participant took his distribution on, say, July 1, 1997, his beginning 1997 account balance, and deferrals made in 1997, would be credited with interest, in the manner described above, to the date of distribution. The interest rate would be the highest rate of interest on certificates of investment sold by the Company between January 1, 1997, and the date of distribution. Section 6. Distribution of Deferred Compensation 6.1 Distribution of Amounts Deferred Pursuant to an Irrevocable Election Executed Prior to September 15, 1987. All amounts in a Participant's account which were deferred pursuant to an irrevocable election executed prior to September 15, 1987 (plus accumulated interest) shall be distributed to him (or to his Beneficiary) in the manner set forth below upon the occurrence of one of the following: (a) Retirement of the participant; or (b) Death or disability (as "disability" is defined in the Social Security Act) of the Participant at any age. In the event a Participant's employment with his Employer is terminated by voluntary resignation or discharge by the Employer, no payments under this Subsection 6.1 shall be made to the Participant until he attains age 65, except as provided in Subsection 6.5. At such time as an event set forth above occurs, the dollar value of amounts deferred by a Participant pursuant to an irrevocable election executed prior to September 15, 1987 (plus accumulated interest) shall be determined as of the December 31 coincident with or next following the date of occurrence, and shall be distributed to the Participant (or to his Beneficiary, in case of his death) as follows: One-tenth of the value thereof shall be paid by the Company as soon as practicable during the calendar year next following the calendar year during which an event set forth above occurs, and the same amount as soon as practicable after the beginning of each succeeding calendar year thereafter until one hundred percent (100%) of such value has been distributed. With each of the ten annual payments, an additional amount shall be paid which shall be obtained by multiplying the net balance in the Participant's account by a percentage equal to the highest rate of interest on certificates of investment sold by the Company during the calendar year preceding payment, before charging the account with the distribution for such year. Upon completion of the installment payments (with interest) provided herein, the Participant's account shall be closed. In the event that a Participant who has retired pursuant to Subsection 6.1(a) is later re-employed by an Employer, any distribution that he was receiving under this Plan shall be suspended until such time as he again experiences a distributable event described in Subsection 6.1(a) or 6.1(b). Re- employment by an entity other than the Participant's Employer shall not result in the suspension of payments under the Plan. 6.2 Distribution of Amounts Deferred Pursuant to an Irrevocable Election Executed After September 15, 1987 but Before November 1, 1996. Any active Participant or eligible Executive deferring Compensation pursuant to an irrevocable election executed after September 15, 1987, but before November 1, 1996, shall be entitled to receive payment of the amount deferred upon the earliest occurrence of one of the following: (a) The deferral ending date specified in the Participant's or Executive's written irrevocable election for deferral of Compensation, executed pursuant to Section 4 of this Plan; (b) Death of the Participant; (c) Disability (as that term is defined in the Social Security Act) of the Participant; or (d) Retirement of the Participant. 6.3 Distribution of Amounts Deferred Pursuant to an Irrevocable Election Executed on or After November 1, 1996. Any active Participant or eligible Executive making an irrevocable deferral election, pursuant to Section 4 of this Plan, on or after November 1, 1996, shall be entitled, subject to limitations described below with respect to annual installment payments, to receive payment of the deferred amount (and interest thereon) on the date specified in the deferral election (i.e., upon Retirement or the specific deferral ending date selected by the Participant or Executive in the deferral election, or, if the election so reflects, on the earlier of those two dates). However, in the event the Participant's Retirement, death or disability (as defined in the Social Security Act) precedes a specific deferral ending date reflected in the deferral election, the Participant (or, in the case of his death, his Beneficiary) shall be entitled to payment of the deferred amount (and interest thereon) upon his Retirement, death or disability, notwithstanding the specific deferral ending date specified in the deferral election. The Committee or its designee may require proof to its satisfaction of the Participant's death or disability. Where an active Participant or eligible Executive elects, in his deferral election, to receive payment of the deferred amount in a single sum, payment of the amount deferred (and interest thereon) shall be made in a single sum on, or as soon as practicable following, the Participant's Retirement, specific deferral ending date, death or disability. Where the Participant or Executive elects, in his deferral election, to receive payment of the deferred amount in ten equal annual installments, payment of the installments shall begin in the month of January coincident with or first following his Retirement, specific deferral ending date (or, if the election so provides, the earlier of those two dates), death or disability; provided, however, that in the case of the Participant's death or disability, the Participant (or, in the case of his death, his Beneficiary) may elect to receive payment of the amount deferred (and interest thereon) in a single sum on, or as soon as practicable following, the death or disability. Notwithstanding the foregoing, the Plan shall pay deferred amounts (and interest thereon) in a single sum, irrespective of the Participant's or Executive's election to the contrary, under the circumstances described in Subsection 4.3 (i.e., where payment occurs while the Participant is still employed). 6.4 Additional Distribution. If amounts deferred under this Plan are not counted as compensation in determining benefits under the Employer's qualified defined benefit pension plan, a supplemental payment of equivalent actuarial value shall be made by the Employer if necessary, with each distribution (which will be in addition to the amounts distributed under Subsections 6.1, 6.2 and/or 6.3 hereof) to compensate the Participant for any reduction in benefits suffered under any of the Employer's qualified defined benefit pension plans as a result of deferring Compensation under this Plan. (a) The retirement adjustment amount paid will be the difference between (i) the pension benefit calculated by using the four highest total wage amounts for the latest ten years, including amounts deferred; and (ii) the pension benefit calculated in a normal manner. Amounts deferred will, however, be included in the calculation of (i) above only to the extent that inclusion of those amounts does not cause the wages taken into account in calculating the retirement benefit to exceed the limitation on compensation under Section 401(a)(17) of the Internal Revenue Code of 1986 (as it may be amended from time to time). (b) Amounts deferred under this Plan, and amounts paid out under this Plan, will not be included in the calculation of the employee's wage base under the pension plan. The Employer shall also make supplemental payments for any similar reduction in benefits under any of the Company's other plans providing retirement, death, or disability benefits either now in existence or adopted after the effective date of this Plan. 6.5 Distribution for Hardship. In the event of great financial hardship or emergency occurring in the personal affairs of the Participant, or his Beneficiary in the case of the Participant's death, the President of the Company, with the approval of the Committee, may accelerate the payout of the Participant's deferred account. A great financial hardship or emergency will be deemed to have occurred in the event of (i) the Participant's death, (ii) unemployment of the Participant or employment at a salary fifty percent (50%) or less than his prior Compensation with the Employer, (iii) serious illness of the Participant or his Beneficiary, (iv) bankruptcy of the Participant, or (v) other events of a similar magnitude. 6.6 Cost. Payment of a Participant's deferred compensation under this Plan, and interest thereon, shall be the responsibility and liability of the Employer which employed that Participant for the period(s) with respect to which the Participant's deferral(s) relate. Section 7. Designation of Beneficiaries A Participant may designate a Beneficiary or Beneficiaries who are to receive upon his death the distributions that otherwise would have been paid to him. All designations shall be in writing and shall be effective only if and when delivered to the Secretary of the Company, or his authorized designee, during the lifetime of the Participant. If a Participant designates a Beneficiary without providing in the designation that the Beneficiary must be living at the time of each distribution, the designation shall vest in the Beneficiary all of the distributions, whether payable before or after the Beneficiary's death, and any distributions remaining upon the Beneficiary's death shall be made to the Beneficiary's estate. A Participant may, from time to time during his lifetime, change his Beneficiary or Beneficiaries by a written instrument delivered to the Secretary of the Company or his authorized designee. The term "Beneficiary" may include a trust, so long as the trust survives the Participant's death. In the event that a Participant does not designate a Beneficiary or Beneficiaries as aforesaid, or if for any reason such designation shall be ineffective in whole or in part, the distribution that otherwise would have been paid to such Participant shall be paid to his estate, and in such event the term "Beneficiary" shall include his estate. Section 8. Dissolution, Liquidation, Merger, Consolidation and Sale of Assets 8.1 Dissolution or Liquidation of the Company. Notwithstanding anything herein to the contrary, upon the dissolution or liquidation of the Company or an Employer, the account of each affected Participant shall be valued as of the date preceding dissolution or liquidation, each affected Participant's employment with his Employer shall be deemed to have terminated on the date preceding such dissolution or liquidation, and the account of each affected Participant shall be distributed in the form of a lump sum payment equal to the value of the account as of such date. In connection with such liquidation or dissolution, the Company may place in trust, escrow or other fund, an amount equal to the total dollar amount of the accounts of all affected Participants in the Plan, together with any sum required under Subsection 6.4, and the same shall be distributed in the same manner as provided in Subsections 6.1, 6.2 and/or 6.3 hereof. 8.2 Merger, Consolidation, and Sale of Assets. Notwithstanding anything herein to the contrary, in the event that an Employer desires to consolidate with, merge into, or transfer all or substantially all of its assets to another entity (hereinafter referred to as a "Successor Employer"), the Company and such Successor Employer may agree that the Successor Employer shall assume the Employer's obligation under this Plan in whole or in part. In connection with such an assumption, the Company may in its sole discretion amend the Plan so that the value of the accounts of affected Participants is determined and frozen as of the date of the consolidation, merger, or transfer of assets; provided that in the event such assets are frozen, the Successor Employer shall credit the account of each Participant with an amount determined by applying the prime interest rate then in effect to the balance in the Participant's account before charging the account with any distribution. Notwithstanding anything herein to the contrary, in the event that an Employer is sold to another corporation or other party(ies) ("New Shareholder"), the Company may agree with such Employer or New Shareholder that the Employer shall assume obligations under this Plan in whole or in part and, in connection with such assumption, that the value of the accounts of Participants shall be determined and frozen as of the date of the sale of such Employer; provided that in the event that such accounts are frozen and the obligations under this Plan are assumed by such Employer, the Employer shall credit an affected account following such sale with an interest rate to be fixed by such Employer from time to time before charging such account with any distribution. Section 9. Rights of Participants No Participant or Beneficiary shall have any interest in any fund or in any specific asset or assets of an Employer by reason of any account maintained for him under the Plan. See Subsections 5.1 and 6.6 regarding the Employer's liability for payment of compensation deferred under this Plan. It is intended that an Employer has merely a contractual obligation to make payments when due hereunder and it is not intended that an Employer hold any funds in reserve or trust to secure payments hereunder. No Participant may assign, pledge, or encumber his interest under the Plan, or any part thereof, except that a Participant may designate a Beneficiary as provided in the Plan. Notwithstanding any other provisions of the Plan, benefits shall be paid in accordance with any qualified domestic relations orders. Section 10. Administration The President of the Company or his authorized designee shall be responsible for the general administration of the Plan. The President may from time to time establish rules for the administration of the Plan that are not inconsistent with the provisions of the Plan. The Committee shall have the power to interpret and construe the terms of this Plan, and the determination of the Committee as to any dispute question arising under the Plan, shall be final, binding and conclusive upon all persons. Section 11. Amendments The Board in its absolute discretion, without notice, at any time and from time to time, may modify or amend, in whole or in part, any or all of the provisions of the Plan, or suspend or terminate it entirely. No such modification, amendment, suspension, or termination may, without the consent of a Participant (or his Beneficiary in the case of his death) reduce the right of a Participant (or his Beneficiary) to the payment or distribution of any amount based upon the value in his accounts under the Plan for any calendar year ended prior to the effective date of such modification, amendment, suspension, or termination. Section 12. Applicable Laws The Plan shall be construed, administered, and governed in all respects under and by the laws of the State of Missouri. Section 13. Incompetency Every person receiving or claiming payments under this Plan shall be conclusively presumed to be mentally competent until the date on which the President of the Company receives a written notice, in a form and manner acceptable to the President, that such person is incompetent and that a guardian, conservator, or other person legally vested with the care of his estate has been appointed. In the event a guardian or conservator of the estate of any person receiving or claiming payments under this Plan shall be appointed by a court of competent jurisdiction, benefit payments may be made to such guardian or conservator, provided that proper proof of appointment and continuing qualification are furnished in a form and manner acceptable to the President. Any such payment so made shall be a complete discharge of any liability therefor. 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. FDL Foods, Inc., a wholly-owned subsidiary was incorporated under the laws of the State of Iowa. FDL 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 76%-owned subsidiary was formed under the laws of the State of Delaware. National Beef Packing Company has been included in the Consolidated Financial Statements filed in this registration. NBPCo, L.L.C., a wholly-owned subsidiary, was formed under the laws of the State of Kansas. NBPCo, L.L.C. 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 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. FI Mankato Energy, Inc., a wholly-owned subsidiary, was incorporated under the laws of the State of Minnesota. Mankato Energy, Inc. has been included in the Consolidated Financial Statements filed in this registration. FII Communications, L.L.C., a wholly-owned subsidiary, was incorporated under the laws of the State of Missouri. FII Communications, L.L.C. 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. 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, L.P. 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 S.A. de C.V. 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, Inc. 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, Inc. 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 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. 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 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 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. 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 Terry M. Campbell, 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 1996 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 23, 1996 Albert J. Shivley and Director H. D. CLEBERG President, October 23, 1996 H. D. Cleberg Chief Executive Officer and Director (Principal Executive Officer) OTIS H. MOLZ Vice Chairman of Board October 23, 1996 Otis H. Molz and Director LYMAN ADAMS, JR. Director October 23, 1996 Lyman Adams, Jr. RONALD J. AMUNDSON Director October 23, 1996 Ronald J. Amundson BAXTER ANKERSTJERNE Director October 23, 1996 Baxter Ankerstjerne JODY BEZNER Director October 23, 1996 Jody Bezner RICHARD L. DETTEN Director October 23, 1996 Richard L. Detten STEVEN ERDMAN Director October 23, 1996 Steven Erdman WARREN GERDES Director October 23, 1996 Warren Gerdes BEN GRIFFITH Director October 23, 1996 Ben Griffith GAIL D. HALL Director October 23, 1996 Gail D. Hall JEROME HEUERTZ Director October 23, 1996 Jerome Heuertz BARRY JENSEN Director October 23, 1996 Barry Jensen RON JURGENS Director October 23, 1996 Ron Jurgens GREG PFENNING Director October 23, 1996 Greg Pfenning VONN RICHARDSON Director October 23, 1996 Vonn Richardson MONTE ROMOHR Director October 23, 1996 Monte Romohr JOE ROYSTER Director October 23, 1996 Joe Royster RAYMOND J. SCHMITZ Director October 23, 1996 Raymond J. Schmitz FRANK WILSON Director October 23, 1996 Frank Wilson ROBERT ZINKULA Director October 23, 1996 Robert Zinkula
EX-27 9 FINANCIAL DATA SCHEDULE
5 The schedule contains summary financial information extracted from the Form 10-K for the fiscal year ending August 31, 1996 and is qualified in its entirety by reference to such financial statements. 1,000 YEAR AUG-31-1996 SEP-01-1995 AUG-31-1996 0 0 624,002 0 736,620 1,462,370 1,506,460 789,236 2,568,446 1,140,320 616,258 0 1,264 414,503 339,564 2,568,446 9,651,297 9,788,587 9,213,952 9,272,002 0 0 62,445 114,464 21,755 126,418 0 0 0 126,418 0 0
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