-----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, Pj3N+ukDZtAPnJ9DOqZeqdC0Qx7C640JCWoUg5sp47n/XVDiuIpg994oQ9MqOJQI 1Xwr7T+niKui+nW26YhhQw== 0000034616-97-000011.txt : 19971110 0000034616-97-000011.hdr.sgml : 19971110 ACCESSION NUMBER: 0000034616-97-000011 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19970831 FILED AS OF DATE: 19971107 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: SEC FILE NUMBER: 001-11629 FILM NUMBER: 97710295 BUSINESS ADDRESS: STREET 1: 3315 N FARMLAND TRAFFICWAY STREET 2: DEPT 140 CITY: KANSAS CITY STATE: MO ZIP: 64116-0005 BUSINESS PHONE: 816-459-68 FORMER COMPANY: FORMER CONFORMED NAME: CONSUMERS COOPERATIVE ASSOCIATION DATE OF NAME CHANGE: 19681201 10-K 1 FORM 10-K FOR FISCAL YEAR ENDING AUG 31 1997 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, 1997 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 OAK TRAFFICWAY, KANSAS CITY, MISSOURI 64116-0005 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code: 816-459-6000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ 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 in 1929, Farmland has grown from revenues of $310,000 during its first year of operation to over $9.1 billion during 1997. 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 Oak Trafficway, Kansas City, Missouri 64116 (telephone 816-459-6000). Unless the context requires otherwise, (i) "Farmland" or the "Company" herein refers to Farmland Industries, Inc. and its consolidated subsidiaries, (ii) all references herein to "year" or "years" are to fiscal years ended August 31, and (iii) all references herein to "tons" are to United States short tons. MEMBERSHIP Membership requirements are determined by Farmland's Articles of Incorporation and the Board of Directors of Farmland (the ''Board of Directors''). VOTING MEMBERS As of August 31, 1997, 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) actively transact business with Farmland on a patronage basis (a member is deemed to be inactive when he or she does not transact business with Farmland for two consecutive years); 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; and (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; (2) not be a significant direct competitor of Farmland in any business line 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, 1997, Farmland's membership, associate membership and patrons eligible for patronage refunds consisted of approximately 1,400 cooperative associations of farmers and ranchers and 13,000 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 1997, Farmland had export sales in excess of $1.3 billion to customers in over 80 countries. Substantially all of the Company's foreign sales are invoiced and collected 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, and by-products of petroleum refining. Principal products of the crop production division are nitrogen-, phosphate- and potash-based fertilizers ("plant nutrients") and, through the Company's ownership in WILFARM, L.L.C. (a 50%-owned venture formed in 1995) ("WILFARM") and Omnium, LLC (a 50%-owned venture formed in 1997) ("Omnium"), 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 1997 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 1997 was sold at wholesale to farm cooperative associations which are members of Farmland. These farm cooperative associates 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 and marketing of grain. In 1997, approximately 63% of the hogs processed, 20% of the beef cattle processed and 53% 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 1997 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 11 of the Notes to Consolidated Financial Statements included herein. The principal businesses of the Company are highly seasonal. Historically, the majority of revenues related to crop production, beef and grain occur during the spring, summer and fall, respectively. Revenues related to crop production and beef are lowest during the winter, while sales related to the grain and feed businesses tend to be lowest during the spring and summer, respectively. 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-based 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 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 $243.2 million through August 31, 1997), or $329.0 million (before tax benefits of the interest deduction) in the aggregate at August 31, 1997. 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 $8.1 million), or $13.1 million in the aggregate at August 31, 1997. 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 Syndicated Credit Facility (the "Facility"), 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, 1997, Farmland's borrowing capacity under the Facility was adequate at that time to finance the liability. However, Farmland's continued ability to finance such an adverse decision depends substantially on the financial effects of future operating events on its borrowing capacity under the Facility. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Financial Condition, Liquidity and Capital Resources" included herein. EXTERNAL FACTORS THAT MAY AFFECT THE COMPANY The Company's revenues, margins, net income and cash flow may be volatile due to factors beyond the Company's control. External factors that affect agricultural conditions and Farmland's results of operations include: 1.REGULATORY: The Company's ability to grow through acquisitions and investments in ventures may be adversely affected by regulatory delays or other unforeseeable factors beyond the Company's control. Various federal and state regulations to protect the environment have encouraged, and are likely to continue to encourage, farmers to reduce the amount of fertilizer and other chemical applications that they use. 2.COMPETITION: Competitors may have better access to equity capital markets than the Company and may offer more varied products or possess greater resources than the Company. 3.IMPORTS AND EXPORTS: Specific factors which may affect the level of agricultural products imported or exported include foreign trade and monetary policies, laws and regulations, political and governmental changes, inflation and exchange rates, taxes, operating conditions and world demand. Fluctuations in the level of agricultural product imports and exports will likely impact the Company's operations. 4.WEATHER: Weather conditions, both domestic and global, affect the Company's operations. Weather conditions may either increase or decrease demand and, thereby, affect prices related to the Company's farm supply operation (crop production, petroleum and feed). Weather conditions also may increase or decrease the supply of products and, thereby, affect costs related to the Company's pork and beef processing and marketing and grain storage and marketing. 5.RAW MATERIALS COST: Historically, changes in the costs of raw materials have not necessarily resulted in corresponding changes in the prices at which finished products have been sold by the Company. 6.OTHER FACTORS: Domestic variables, such as crop failures, federal agricultural programs and production efficiencies, and global variables, such as embargoes, political instabilities and local conflicts, affect the supply, demand and price of crude oil, refined fuels, natural gas and other commodities and may unfavorably impact the Company's operations. Management cannot determine the extent to which these factors may impact future operations of the Company. The Company's revenues, margins, net income and cash flow 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, 1995, 1996, and 1997" and "Business and Properties - Business - Raw Materials" and "Crop Production - Raw Materials" included herein. LIMITED ACCESS TO EQUITY CAPITAL MARKETS As a cooperative, the Company cannot sell its voting 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 (earned surplus). 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, including those governing the use, storage, discharge and disposal of hazardous materials, or which may impose liability for cleanup of environmental contamination. The Company uses hazardous materials and generates hazardous wastes in the ordinary course of its manufacturing processes. The Company recognizes liabilities, without offset for potential recoveries, related to remediation of contaminated properties when the related costs are probable and can be reasonably estimated. Estimates of these liabilities are based upon currently enacted laws and regulations, available facts, existing technology and undiscounted site specific costs. Environmental 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. 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 27 grain elevators and 62 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 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 owners or operators 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 25 properties under CERCLA and/or the state and federal hazardous waste management laws. During 1995, 1996 and 1997, the Company paid approximately $3.2 million, $1.8 million and $4.6 million, respectively, for environmental investigation and remediation. The Company currently is aware of probable obligations for environmental matters at 33 properties. As of August 31, 1997, the Company has an environmental accrual in its Consolidated Balance Sheet for probable and reasonably estimated cost for remediation of contaminated property of $16.9 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, 1997. In the opinion of management, it is reasonably possible for such additional costs to be approximately $17.5 million. See "Business and Properties - Business - Matters Involving the Environment" included herein. PETROLEUM MARKETING The principal products of this business segment are refined fuels, propane and by-products of the petroleum refinery. Approximately 60% of petroleum refined fuels products sold in 1997 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 and, through the Company's ownership in Triton Tire & Battery, L.L.C. (a 33.3%-owned venture formed subsequent to year-end), car, truck and tractor tires, batteries and accessories. Sales of petroleum products as a percent of the Company's consolidated sales for 1995, 1996 and 1997 were 12%, 11% and 15%, 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, 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 1995, 1996 and 1997 was as follows: Barrels of Crude Oil Processed Daily Average Based on 365 Days per year 1995 1996 1997 (barrels) Coffeyville, Kansas 66,367 64,276 81,397 The refinery produced approximately 26 million barrels of motor fuels, heating fuels and other petroleum products in 1995, 25 million barrels in 1996, and 32 million barrels in 1997. 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, enabling the Company to increase production during 1997 compared with 1995 and 1996. Approximately 73% of refined fuel sales in 1997 represented products produced at this location. RAW MATERIALS Farmland's refinery was 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 the cost and decreased the availability of raw material relative to such cost and availability for coastal refineries with the capacity for processing and access to lower quality crude with high sulfur content ("sour crude"). In 1997, the Company's pipeline/trucking gathering system collected approximately 19% of its crude oil supplies from producers near its refinery. Additional supplies are acquired from diversified sources. Modifications are being made to the Coffeyville refinery to increase its capability to efficiently process crude oil streams containing greater amounts of sour crude. In 1996, Farmland entered into various 20-year agreements with Tessenderlo KERLEY Inc. ("TKI") whereby TKI would build two 50-ton per day sulfur processing facilities at the refinery. The first plant was completed during 1997. The second unit will be completed during 1998. Under the agreements, Farmland will provide high sulfur gas streams, a refinery by- product, to the sulfur processing plants. 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 advance sales contracts of refined products, are hedged utilizing petroleum futures contracts. See "Business and Properties - Business - Business Risk Factors - External Factors That May Affect the Company" 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 includes plant nutrients and, through the Company's ownership in WILFARM and Omnium, 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 1995, 1996 and 1997 were 16%, 14% 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 over 150 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 multinational 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 operates seven anhydrous ammonia production plants, three of which are leased under long-term lease arrangements, at six locations in Kansas, Iowa, Nebraska, Oklahoma and Louisiana. For fiscal years 1995, 1996 and 1997, annual production approximated 2.7 million tons, 2.8 million tons and 2.8 million tons, respectively. 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 five plants, two of which are leased under long-term lease arrangements, at four locations in Kansas, Oklahoma and Nebraska. Production of such value-added products from anhydrous ammonia for 1995, 1996 and 1997 approximated 1.6 million tons, 1.5 million tons and 1.6 million tons, respectively. 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 of ammonium phosphate approximated 64,000 tons, 65,000 tons and 44,000 tons in 1995, 1996 and 1997, respectively, and production of feed grade phosphate approximated 159,000 tons, 160,000 tons and 163,000 tons in 1995, 1996 and 1997, respectively. 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-based 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 (and is in addition to the aforementioned Florida phosphate rock owned by the Company). The Company provides management and administrative services and Norsk Hydro a.s. provides marketing services to Hydro. Hydro's plant produces phosphate fertilizer products such as super phosphoric acid, diammonium phosphate and monoammonium phosphate. Annual production in tons of such products for 1995, 1996 and 1997 was 1,471,000, 1,459,000 and 1,504,000, 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. In view of the availability of adequate supplies of phosphate rock from alternative sources, neither the Company nor Hydro plan to develop their respective phosphate rock reserves within the next year. The Company and J.R. Simplot Company are each 50% owners of a 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 phosphoric acid with annual production in tons for 1995, 1996 and 1997 of 409,000, 483,000 and 409,000, respectively. Under the venture agreement, the Company and J.R. Simplot Company purchase the production of the 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. Construction is 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. 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 - External Factors That May Affect the Company" 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 cases, 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, livestock and animal health products. The primary components of feed products are grain and grain by-products, which are generally available in the region in which the Company operates. This business segment's sales were approximately 6%, 6% and 7% of consolidated sales for the years 1995, 1996 and 1997, respectively. Approximately 51% of the feed business segment's sales in 1997 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 a premix plant located in Eagle Grove, Iowa, a premix plant in Marion, Ohio and a pet food plant in Muncie, Kansas. Feed production for 1995, 1996 and 1997 was as follows:
Approximate Annual Production 1995 1996 1997 (tons) 26 feed mills (combined)... 1,112,000 1,103,000 1,165,000
The Company conducts research in animal health and nutrition. 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 12 food processing facilities. These facilities are primarily located in the Midwest and include facilities at Topeka, Kansas and Dubuque, Iowa, which were purchased during 1996, and a leased facility in Albert Lea, Minnesota. 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 and Dubuque, Iowa, Monmouth, Illinois 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. The facility located in Omaha, Nebraska, prepares primal beef and pork products into case-ready cuts of meat which can be shipped directly to retailers. The Company's total weekly production approximated 12.6 million pounds, 16.2 million pounds and 16.8 million pounds, and total weekly head slaughtered approximated 120,000, 111,000 and 132,000 in 1995, 1996 and 1997, respectively. 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 Farmland National Beef Packing Company, L.P. ("FNBPC"), which was formed in April 1993, and at September 1, 1997, 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 1995, 1996 and 1997, the two plants slaughtered an aggregate of 1.9 million, 2.1 million and 2.1 million cattle, respectively. The Company has agreed to sell up to a 25% interest in FNBPC to an unrelated party, U.S. Premium Beef, LTD. ("USPB"). Therefore, the Company's ownership in FNBPC could be reduced to 50%. At this time, there is no assurance USPB will raise the capital necessary to consummate part or all of this transaction. MARKETING Products in the Company's beef processing and marketing operations include fresh and frozen 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, product differentiation and customer service. GRAIN MARKETING The Company markets wheat, corn, soybeans, milo, barley and oats, with wheat and corn constituting the majority of the marketing business. The Company's North American Grain Division ("NAGD") purchases grain from members and nonmembers located in the Midwestern part of the United States and assumes all risks related to selling such grain. Grain is priced in the United States principally through bids based on organized commodity 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. Generally, 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 grain positions as is possible. During 1995, 1996 and 1997, the Company maintained hedges on approximately 97.9%, 94.8% and 92.9%, respectively, of its grain positions. Based on total assets at the beginning and end of 1997, 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. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations - Financial Condition, Liquidity and Capital Resources - Results of Operations for Years Ended August 31, 1995, 1996 and 1997 - Grain Marketing" included herein. In 1997, approximately 41% of grain revenues were from export sales or sales to domestic customers for export. In 1995 and 1996, export sales or sales to domestic customers for export accounted for approximately 47% and 42%, respectively, of 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. The Company's international grain trading subsidiaries (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 and its sales of grain are mostly done against confirmed letters of credit. For purposes of the Company's Consolidated Financial Statements, the Company recognizes as sales the net margin on grain merchandised by Tradigrain rather than the gross value of such products merchandised. Furthermore, Tradigrain may take long or short grain positions. These positions are accounted for on a mark-to-market basis and the gain or loss is recognized as a component of net sales. PROPERTY The Company currently operates, through either ownership or lease, 26 inland elevators and one export elevator in the United States with a total capacity of approximately 120.6 million bushels of grain. RESEARCH The Company operates a research and development farm for the primary purpose of improving nutrition, genetic selection and animal health practices related to livestock and pets. The Company also conducts research at its pork processing facilities directed toward product development and process improvement. Expenditures related to Company-sponsored product research and process improvements amounted to $2.3 million, $2.4 million and $2.1 million for 1995, 1996, and 1997, respectively. CAPITAL EXPENDITURES AND INVESTMENTS IN VENTURES In 1997, the Company made capital expenditures and investments in ventures totaling $187.9 million. The Company has approved expenditures (of which $39.2 million was committed as of August 31, 1997) of $197.0 million for capital additions and improvements and $5.0 million for investments in ventures during the years 1998 and 1999. The majority of these expenditures are in the crop production, food processing and marketing and petroleum businesses and are primarily for plant improvements. From time to time, management may recommend additional capital projects to Farmland's Board of Directors for approval. The Company intends to fund its capital program with cash from operations, through borrowings or through other capital market transactions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition, Liquidity and Capital Resources" included herein. YEAR 2000 The Company has assessed key financial, informational and operational systems. Management does not anticipate that the Company will encounter significant operational issues related to Year 2000. Furthermore, the financial impact of making required systems changes is not expected to be material to the Company's consolidated financial position, results of operations or cash flows. 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 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 27 grain elevators and 62 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 substances found at the property. The Company is investigating or remediating contamination at 25 properties under CERCLA and/or the state and federal hazardous waste management laws. During 1995, 1996 and 1997, the Company paid approximately $3.2 million, $1.8 million and $4.6 million, respectively, for environmental investigation and remediation. The Company currently is aware of probable obligations for environmental matters at 33 properties. As of August 31, 1997, the Company has an environmental accrual in its Consolidated Balance Sheet for probable and reasonably estimated cost for remediation of contaminated property of $16.9 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, 1997. In the opinion of management, it is reasonably possible for such additional costs to be approximately $17.5 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 $5.1 million at August 31, 1997 (and is in addition to the $17.5 million discussed in the prior paragraph). The Company accrues these liabilities when plans for termination of plant operations have been made. 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. There can be no assurance that the environmental matters described above, or environmental matters which may develop in the future, will not have a material adverse effect on the Company's business, financial condition or results of operations. 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 1995, 1996 and 1997, the Company had capital expenditures of approximately $4.7 million, $10.9 million and $8.4 million, respectively, to improve the environmental compliance and efficiency of its operations. 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 believes that its operating procedures conform to the intent of these laws and 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, food processing and marketing and grain storage and marketing operations. In 1996, the Federal Agriculture Improvement and Reform Act ("FAIR") was signed into law. FAIR represents the most significant change in government farm programs in more than 60 years. Under FAIR, the former system of variable price-linked deficiency payments to farmers has been replaced by a program of fixed payments which decline over a seven-year period. In addition, FAIR eliminates federal planting restrictions and acreage controls. The Company believes that FAIR was intended to accelerate 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 market access opportunities for U.S. agriculture is increased. The U.S. Congress is currently deliberating legislation, commonly referred to as "fast track", which would authorize the President to submit a trade agreement to Congress with the assurance that it will be voted on within 90 days and not be subject to amendments. The Company believes that fast-track legislation could be beneficial to U.S. agricultural interests, as it may open markets, increase exports and expand trade opportunities with countries which import agricultural products. If Congress were to fail to ratify the fast-track legislation, or if Congress were to modify the pending legislation in any significant respect, the Company's access to international markets may be adversely impacted. 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, 1997, the Company had approximately 14,600 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 March 2001. PATRONAGE REFUNDS AND DISTRIBUTION OF ANNUAL EARNINGS For purposes of this section, annual earnings 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 determines its annual net earnings from transactions with members ("member-sourced earnings"). For this purpose, annual net earnings is before income tax determined in accordance with generally accepted accounting principles. Losses, including patronage allocation unit losses, if any, are handled in accordance with the Company's bylaws. The remaining member-sourced earnings are returned to members as patronage refunds in the form of qualified or nonqualified written notice of patronage refund allocation. 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. The patronage refunds may be paid in the form of qualified or nonqualified written notices of allocation or cash. The qualified patronage refund, if any, must be paid at least 20% in cash and is deductible by the Company for federal income tax purposes. The portion of the qualified patronage refund not paid in cash (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 qualified patronage refund is determined annually by the Board of Directors, but is limited to no more than 80% of the total qualified patronage refund. The nonqualified patronage refund, if any, is recorded as book credits in the form of 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 record the nonqualified patronage refund in any other form or forms of nonpreferred equities. The nonqualified patronage refund is deductible by the Company for federal income tax purposes only upon redemption of the equity or equities issued. 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 year ended August 31, 1997, the Board of Directors determined that the Company would retain $13.5 million of member-sourced losses for disposition at a later date. For the years ended 1995, 1996 and 1997, patronage refunds authorized by the Board of Directors were:
Cash or Cash Equivalent Portion of Patronage Non-Cash Portion of Total Patronage Refunds Patronage Refunds Refunds (Amounts in thousands) 1995............... $ 33,061 $ 61,356 $ 94,417 1996............... $ 32,719 $ 60,776 $ 93,495 1997............... $ 40,228 $ 68,079 $ 108,307
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, 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. 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 (hereinafter referred to as 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 shares or associate member common shares 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) 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 may be changed at any time or from time to time at the sole and absolute discretion of the Board of Directors. The special equity redemption plans are 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 special equity redemption plans. The special equity redemption plans are designed to return cash to members or former members of Farmland or Farmland Foods by a systematic method for redemption of outstanding equity which may not be 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 of Farmland and Farmland Foods under the base capital plan, the estate settlement plan, and special equity redemption plans for each of the years in the five-year period ended 1997. Substantially all amounts approved for redemptions are paid in cash in the year following approval.
Base Capital Plan Estate Settlement Redemptions Plan Redemptions Special Equity Total Plan Redemption(A) Redemptions (Amounts in Thousands) 1995.......... $ 14,159 $ 128 $ 13,451 $ 27,738 1996.......... $ 14,024 $ 138 $ 11,277 $ 25,439 1997.......... $ 17,228 $ 141 $ 11,351 $ 28,720
(A) 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, as explained in Note 6 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. ITEM 4. SUBMISSION OF MATTERS TO VOTE ON SECURITIES HOLDERS No matter was submitted during the fourth quarter of the fiscal year covered by this report to a vote of equity 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 voting 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 common stock, associate member common stock and capital credits are not transferable without consent of the Farmland Board of Directors. 3.the amount of 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 not on the amount of equity held. 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 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, 1997 there are approximately 3,500 holders of common shares, 670 holders of associate member shares, and 10,400 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, 1997 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, 1996 and 1997 and for each of the years in the three-year period ended August 31, 1997 (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 1993 1994 1995 1996 1997 (Amounts in Thousands) SUMMARY OF OPERATIONS:(1) Net Sales..................... $ 4,722,940 $ 6,677,933 $ 7,256,869 $ 9,788,587 $ 9,147,507 Operating Income of Industry Segments.................... 86,579 154,799 295,933 241,666 242,963 Interest Expense.............. 36,764 51,485 53,862 62,445 62,335 Net Income (Loss)............. (30,400) 73,876 162,799 126,418 135,423 DISTRIBUTION OF NET INCOME (LOSS): Patronage Refunds: Allocated Equity............ $ 1,155 $ 44,032 $ 61,356 $ 60,776 $ 68,079 Cash and Cash Equivalents................. 495 26,580 33,061 32,719 40,228 Earned Surplus and Other Equities.................... (32,050) 3,264 68,382 32,923 27,116 $ (30,400) $ 73,876 $ 162,799 $ 126,418 $ 135,423 BALANCE SHEETS: Working Capital............... $ 260,519 $ 290,704 $ 319,513 $ 322,050 $ 242,211 Property, Plant and Equipment, Net.............. 504,378 501,290 592,145 717,224 783,108 Total Assets.................. 1,719,981 1,926,631 2,185,943 2,568,446 2,645,312 Long-Term Borrowings (excluding current maturities)......... 482,112 506,531 469,718 616,258 580,665 Capital Shares and Equities.................... 561,707 585,013 687,287 755,331 821,993
[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. 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 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 or series of debt security offered and by options of Farmland to call for redemption certain of its outstanding debt securities. During the year ended August 31, 1997, the outstanding balance of demand certificates increased by $10.4 million and the outstanding balance of subordinated debt certificates increased by $48.9 million. In May 1996, Farmland entered into a five year Syndicated Credit Facility (the "Facility") with various participating banks. The Facility provides a $1.1 billion credit, subject to compliance with financial covenants as set forth in the Facility, 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 Facility 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 Facility'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 Facility are reviewed and/or renewed annually. The next scheduled review date is in May 1998. The revolving term provisions of the Facility expire in May 2001. At August 31, 1997, the Company had $185.5 million of short-term borrowing under the Facility and $160.0 million of revolving term borrowings; additionally, $44.2 million of the Facility was being utilized to support letters of credit issued on behalf of Farmland. As of August 31, 1997, under the short-term credit provisions, the Company had capacity to finance additional current assets of $425.6 million and, under the long-term credit provisions, the Company had capacity to borrow up to an additional $284.7 million. FNBPC 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, 1997, $90.0 million was available under this facility of which $29.1 million was borrowed and $0.6 million was utilized to support letters of credit. In addition, FNBPC has certain long-term borrowings from Farmland. FNBPC has pledged certain assets to Farmland and such group of banks to support its borrowings. Leveraged leasing has been utilized to finance railcars and a significant portion of the Company's fertilizer production equipment. The Company maintains other borrowing arrangements with banks and financial institutions. Under such agreements, at August 31, 1997, $40.8 million was borrowed. 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, 1997, such borrowings totaled $72.8 million. 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. In the normal course of business, the Company utilizes derivative commodity instruments, primarily related to grain, to hedge its exposure to price volatility. These instruments consist mainly of grain contracts traded on organized exchanges and forward purchase and sales contracts in cash markets. These hedging activities limit both the risk of loss and the potential for gain which otherwise could result from changes in market prices. Also, in the ordinary course of its international grain trading business, the Company may take long or short grain positions. Such positions are accounted for on a mark- to-market basis and the gain or loss is recognized currently as a component of net earnings. See "Business and Properties - Business - Grain Marketing". Farmland operates on a cooperative basis. In accordance with its bylaws, Farmland determines its annual net earnings from transactions with members ("member-sourced earnings"). For this purpose, annual net earnings is before income tax determined in accordance with generally accepted accounting principles. Losses (including patronage allocation unit losses), if any, are handled in accordance with the Company's bylaws. The remaining member-sourced earnings are returned to members as patronage refunds in the form of qualified or nonqualified written notice of patronage refund allocation. 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. Other income is classified as either nonmember-sourced income (earnings attributed to transactions with persons not eligible to receive patronage refunds, i.e. nonmembers) or nonpatronage income or loss (income or loss from activities not directly related to the cooperative marketing or purchasing activities of Farmland) and is subject to income taxes. Nonpatronage and nonmember after-tax earnings are transferred to earned surplus. Under Farmland's bylaws, patronage refunds, determined as stated above, are distributed to members unless the earned surplus account after such distribution 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, the patronage refund 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 patronage refund income is so reduced is treated as nonmember-sourced income. The patronage refund income remaining is distributed to members as in the form of qualified or nonqualified written notices of allocation. For the years 1995, 1996 and 1997, the earned surplus account exceeded the required amount by $62.8 million, $84.7 million and $101.7 million, respectively. The patronage refunds may be paid in the form of qualified or nonqualified written notices of allocation or cash. The qualified patronage refund, if any, must be paid at least 20% in cash and is deductible by the Company for federal income tax purposes. The portion of the qualified patronage refund not paid in cash (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 qualified patronage refund is determined annually by the Board of Directors, but is limited to no more than 80% of the total qualified patronage refund. The nonqualified patronage refund, if any, is recorded as book credits in the form of 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 record the nonqualified patronage refund in any other form or forms of nonpreferred equities. The nonqualified patronage refund is deductible by the Company for federal income tax purposes only upon redemption of the equity or equities issued. The nonqualified patronage refund and the allocated equity portion of the qualified patronage refund are sources of funds from operations which are retained for use in the business and which increase 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 also 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. Major sources of cash during 1997 include: $222.3 million from operating activities; $55.2 million from cash distributions from ventures; $59.1 million of net proceeds from issuance of subordinated debt and demand loan certificates; and $24.8 million from the sale of investments and collection of long-term notes receivable. Major uses of cash during 1997 include: $184.4 million for capital expenditures and acquisition of other long-term assets; $89.7 million for net payments on bank loans and notes payable; $46.2 million for acquisition of investments and notes receivable; $32.5 million for cash patronage refunds distributed from income of the 1996 fiscal year; and $25.4 million for the redemption of equities under the Farmland base capital and other equity redemption plans. 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 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 $243.2 million through August 31, 1997), or $329.0 million (before tax benefits of the interest deduction) in the aggregate at August 31, 1997. 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 $8.1 million), or $13.1 million in the aggregate at August 31, 1997. 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 Syndicated Credit Facility (the "Facility") 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, 1997, Farmland's borrowing capacity under the Facility 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 Facility. 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, 1995, 1996 AND 1997 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 1997, 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 1995, 1996 and 1997 follows the table.
Change in Sales Change in Net Income 1995 1996 1997 1995 1996 1997 Compared Compared Compared Compared Compared Compared with 1994 with 1995 with 1996 with 1994 with 1995 with 1996 (Amounts in Millions) INCREASE (DECREASE) OF INDUSTRY SEGMENT SALES AND OPERATING INCOME OR LOSS: Petroleum.................. $ 21 $ 181 $ 274 $ (35) $ 13 $ 31 Crop Production............ 8 165 (73) 73 (20) (20) Feed....................... (60) 102 48 (7) 3 (6) Food Processing and Marketing ............. 337 528 338 56 (11) (22) Grain Marketing............ 279 1,563 1,230) 52 (36) 25 Other...................... (6) (7) 2 2 (3) (7) $ 579 $ 2,532 $ (641) $ 141 $ (54) $ 1 CORPORATE EXPENSES AND OTHER: General corporate expenses (increase) decrease....................... $ (17) $ (11) $ 8 Interest expense (increase) decrease................................. (2) (8) -0- Other income and deductions increase (decrease)...................... (6) 9 (1) Equity in net income of investees increase (decrease)................ 12 18 1 Minority owners' interest in net income of subsidiaries (increase) decrease ............................................... (14) 2 (1) Income taxes (increase) decrease..................................... (25) 8 1 Net income increase (decrease)....................................... $ 89 $ (36) $ 9
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 $273.5 million, or 25.8%, in 1997 compared with 1996. This increase was primarily attributable to expansion of the refinery's capacity, which resulted in increased unit sales of gasoline, distillates and diesel fuel, as well as to increased unit prices for these products. 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. OPERATING INCOME Operating income of the petroleum business increased $31.3 million in 1997 compared with 1996. This increase was primarily a result of higher margins coupled with increased unit sales. The higher margins are primarily attributable to an increase in the difference between crude oil prices and finished product prices, the ability of the refinery to process crude oil streams containing a higher proportion of sulfur and to higher production efficiencies resulting from increased refinery capacity. 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 loss was attributable to increased crude oil costs (approximately 9%) without corresponding increases in finished product selling prices. CROP PRODUCTION SALES Crop production sales, consisting primarily of plant nutrients, decreased $72.7 million, or 5.4%, in 1997 compared with 1996. This decrease was primarily a result of lower unit sales of phosphate and nitrogen fertilizers and lower phosphate prices partially offset by higher nitrogen prices. Crop production sales 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 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 WILFARM. OPERATING INCOME Operating income of the Company's crop production business decreased $20.0 million, or 11.2%, in 1997 compared with 1996. This decrease was primarily a result of higher natural gas costs which resulted in lower nitrogen unit margins, partially offset by higher unit margins related to the distribution of phosphate fertilizers. Crop production's share of net income from the Company's phosphate manufacturing and WILFARM ventures decreased slightly in 1997 to $41.2 million compared with $41.9 million in 1996. 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. 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 prices on unit margins and contributed significantly to the Company's increased net income in 1995. FEED SALES Sales of the feed business increased $48.1 million in 1997 compared with 1996. This increase resulted primarily from higher unit prices of feed ingredients combined with a slight increase in volume. Sales of feed products increased 21.9% to $569.9 million in 1996 compared with $467.7 million in 1995. The increase was primarily attributable to higher unit prices which reflected 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 reflected 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. OPERATING INCOME Operating income of the feed business decreased $6.3 million in 1997 compared with 1996. This decrease was primarily attributable to declining sales through traditional local cooperative channels and an increase in sales to lower margin commercial accounts. Operating income of the feed business increased $2.9 million in 1996 compared with 1995. This increase was 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 decrease was attributable to decreased unit sales in traditional markets with cooperatives combined with a net loss on sales to commercial accounts. FOOD PROCESSING AND MARKETING SALES The Company's food processing and marketing business sales increased $338.3 million in 1997 compared with 1996. This increase was largely attributable to increased unit volume primarily resulting from the operations of pork processing plants acquired during the third and fourth quarters of 1996. Unit price increases of approximately 4% also contributed to the increase in 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 FNBPC'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 FNBPC's plant. Sales of pork decreased $13.3 million reflecting the net effect of lower wholesale pork prices, partly offset by higher unit sales. OPERATING INCOME Operating income of the Company's food processing and marketing business decreased $21.9 million in 1997 compared with 1996. This decrease was primarily attributable to the increased cost to acquire live hogs and to the increased selling and administrative expenses related to the food processing business, partially offset by increased beef unit margins. Operating income of the food processing and marketing business of $66.0 million in 1996 represented an $11.1 million decrease compared to 1995. This decrease primarily resulted from decreased margins on fresh pork and increased 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 included 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 FNBPC) increased $5.2 million compared with 1994. These increases reflected increased unit margins (mostly a result of lower cattle and hog market prices) and an increased number of cattle and hogs processed. GRAIN MARKETING SALES AND OPERATING INCOME The Company's grain marketing sales decreased $1.2 billion in 1997 compared with 1996. This decrease resulted from decreases in both unit sales (primarily due to a reduction in export sales) and unit prices. The grain marketing business had operating income of $6.8 million in 1997 compared with an operating loss of $18.2 million in 1996. This increase in operating income was primarily attributable to higher margins combined with increased storage income. Grain sales increased $1.6 billion, or 82%, in 1996 compared to 1995 principally owing to a 40% increase in units sold combined with increased grain prices. Grain had a $18.2 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 NAGD, increased volume of international grain brokered by Tradigrain and more favorable unit margins which developed as market prices increased in response to decreased worldwide production in 1995. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses ("SG&A") increased $40.4 million, or 11%, in 1997 compared with 1996. SG&A directly associated with business segments increased $48.8 million (primarily the food processing and marketing segment) and has been included in the determination of the operating income of business segments. General corporate expenses not identified to business segments decreased $8.4 million primarily as a result of lower employee-related costs. 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 food processing and marketing and grain segments) 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), included 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 food processing and marketing and grain segments) 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), reflected higher variable compensation, pension and other employee costs and higher costs for legal services. OTHER INCOME (DEDUCTIONS) INTEREST EXPENSE Interest expense decreased $0.1 million in 1997 compared with 1996, reflecting lower average borrowings offset by a slight increase in the average interest rate. 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, partly offset by a lower amount of average borrowings. 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 Consolidated Statement of Operations. See Note 15 of the Notes to Consolidated Financial Statements included herein. CAPITAL EXPENDITURES See "Business and Properties - Business - Capital Expenditures and Investments in Ventures" 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 1997, the FASB issued Statement No. 130, "Reporting Comprehensive Income," and Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information." These statements, which are effective for periods beginning after December 15, 1997, expand or modify disclosures and, accordingly, will have no impact on the Company's reported financial position, results of operations or cash flows. 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 to make applicable and take advantage of the "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 are 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. Such forward looking statements include, without limitation, statements regarding the seasonal effects upon the Company's business, the effects of actual and pending legislation and regulation upon the Company's business (including, but not limited to, the effects of FAIR, "fast-track" and certain environmental laws), the anticipated expenditures for environmental remediation, the consequences of an adverse judgment in certain litigations (including the Terra litigation), the Company's ability to fully and timely complete modifications and expansions with respect to certain of the Company's manufacturing facilities, the redemption of the Company's various equities, the adequacy of certain raw material reserves and supplies, the Company's objectives with respect to certain strategic acquisitions and dispositions and the Company's ability to resolve Year 2000 issues with respect to its financial, informational and operational systems. Discussion containing such forward- looking statements is found in the material set forth under "Business and Properties" (including, without limitation, "Business Risk Factors"), "Market for the Registrant's Common Equity and Related Stockholder Matters", "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Notes to Consolidated Financial Statements", as well as within this Form 10-K generally. 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 amounts accrued. 9. The factors identified in "Business and Properties - Business - Business Risk Factors" included herein. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information specified under Item 7A is not required for fiscal 1997, because of the Company's market capitalization was less than $2.5 billion as of January 28, 1997. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FARMLAND CONSOLIDATED FINANCIAL STATEMENTS Independent Auditors' Report ...............................32 Consolidated Balance Sheets, August 31, 1996 and 1997 .......................................................33 Consolidated Statements of Operations for each of the years in the three-year period ended August 31, 1997 ...................................................35 Consolidated Statements of Cash Flows for each of the years in the three-year period ended August 31, 1997 ................36 Consolidated Statements of Capital Shares and Equities for each of the years in the three-year period ended August 31, 1997 ...............................38 Notes to Consolidated Financial Statements .................39 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, 1996 and 1997, 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, 1997. 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, 1996 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended August 31, 1997, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Kansas City, Missouri October 17, 1997 FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
August 31 1996 1997 (Amounts in Thousands) Current Assets: Accounts receivable - trade........................................ $ 624,002 $ 589,028 Inventories (Note 2)............................................... 736,620 745,301 Other current assets............................................... 101,748 94,239 Total Current Assets.......................................... $ 1,462,370 $ 1,428,568 Investments and Long-Term Receivables (Note 3)....................... $ 241,124 $ 266,554 Property, Plant and Equipment (Notes 4 and 5): Property, plant and equipment, at cost............................. $ 1,506,460 $ 1,585,824 Less accumulated depreciation and amortization..................... 789,236 802,716 Net Property, Plant and Equipment.................................. $ 717,224 $ 783,108 Other Assets......................................................... $ 147,728 $ 167,082 Total Assets......................................................... $ 2,568,446 $ 2,645,312 FN> See accompanying Notes to Consolidated Financial Statements.
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS LIABILITIES AND EQUITIES
August 31 1996 1997 (Amounts in Thousands) Current Liabilities: Demand loan certificates............................................... $ 40,099 $ 50,523 Short-term notes payable (Note 5)...................................... 315,428 258,342 Current maturities of long-term debt (Note 5).......................... 41,080 91,643 Accounts payable - trade............................................... 392,436 366,345 Accrued payroll........................................................ 48,893 57,754 Other current liabilities.............................................. 302,384 361,750 Total Current Liabilities......................................... $ 1,140,320 $ 1,186,357 Long-Term Liabilities (Note 5): Long-term borrowings (excluding current maturities).................... $ 616,258 $ 580,665 Other long-term liabilities............................................ 35,983 33,480 Total Long-Term Liabilities....................................... $ 652,241 $ 614,145 Deferred Income Taxes (Note 6)........................................... $ 6,709 $ 3,974 Minority Owners' Equity in Subsidiaries (Note 7)......................... $ 13,845 $ 18,843 Capital Shares and Equities (Note 8): Preferred shares, $25 par value--Authorized 8,000,000 shares, 2,886 shares issued and outstanding (50,565 shares in 1996).............................................. $ 1,264 $ 72 Common shares, $25 par value--Authorized 50,000,000 shares, 17,680,493 shares issued and outstanding (16,580,112 shares in 1996) ......................................... 414,503 442,012 Associate member common shares (nonvoting), $25 par value --Authorized 2,000,000 shares, 889,913 shares issued and outstanding (623,058 shares in 1996) ..................... 15,576 22,248 Earned surplus and other equities...................................... 323,988 357,661 Total Capital Shares and Equities................................. $ 755,331 $ 821,993 Contingent Liabilities and Commitments (Notes 5, 6 and 9) Total Liabilities and Equities............................................. $ 2,568,446 $ 2,645,312 See accompanying Notes to Consolidated Financial Statements.
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended August 31 1995 1996 1997 (Amounts in Thousands) Sales....................................................... $ 7,256,869 $ 9,788,587 $ 9,147,507 Cost of sales............................................... 6,699,178 9,272,002 8,580,826 Gross income................................................ $ 557,691 $ 516,585 $ 566,681 Selling, general and administrative expenses................ $ 344,364 $ 368,954 $ 409,378 Other income (deductions): Interest expense......................................... $ (53,862) $ (62,445) $ (62,335) Interest income.......................................... 8,334 5,021 5,352 Other, net (Note 15)..................................... 11,600 24,257 22,486 Total other income (deductions)............................. $ (33,928) $ (33,167) $ (34,497) Income before income taxes and equity in net income of investees and minority owners' interest in net income of subsidiaries................... $ 179,399 $ 114,464 $ 122,806 Income tax expense (Note 6)................................. 29,628 21,755 20,907 Income before equity in net income of investees and minority owners' interest in net income of subsidiaries......... $ 149,771 $ 92,709 $ 101,899 Equity in net income of investees (Note 3)................................................. 22,785 41,092 42,108 Minority owners' interest in net income of subsidiaries.......................................... (9,757) (7,383) (8,584) Net income ................................................. $ 162,799 $ 126,418 $ 135,423 Distribution of net income (Note 8): Patronage refunds: Farm supply patrons.................................. $ 74,557 $ 83,739 $ 101,262 Pork marketing patrons............................... 16,087 6,998 -0- Beef marketing patrons............................... 2,488 2,753 6,458 Grain marketing patrons.............................. 1,285 -0- 585 Livestock production................................. -0- 5 2 $ 94,417 $ 93,495 $ 108,307 Earned surplus and other equities (Note 8)............... 68,382 32,923 27,116 $ 162,799 $ 126,418 $ 135,423 See accompanying Notes to Consolidated Financial Statements.
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended August 31 1995 1996 1997 (Amounts in Thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income.................................................... $ 162,799 $ 126,418 $ 135,423 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............................... 69,138 77,741 90,351 Equity in net income of investees........................... (22,785) (41,092) (42,108) Minority owners' equity in net income of subsidiaries.................................... 9,757 7,383 8,584 (Gain) on disposition of investments........................ -0- (11,300) (552) (Gain) loss on disposition of fixed assets.................. 1,882 (967) (1,390) Patronage refunds received in equities...................... (2,025) (2,244) (1,830) Proceeds from redemption of patronage equities.............. 3,776 5,112 5,106 Deferred income taxes....................................... 6,161 11,034 (1,469) Other....................................................... 412 (2,335) 3,341 Changes in assets and liabilities (exclusive of assets and liabilities of businesses acquired): Accounts receivable....................................... (70,413) (175,991) 27,644 Inventories............................................... (186,570) 47,220 (9,343) Other assets.............................................. 38,889 (40,774) 6,249 Accounts payable.......................................... 782 140,721 (26,091) Other liabilities......................................... 35,684 41,194 28,393 Net cash provided by operating activities..................... $ 47,487 $ 182,120 $ 222,308 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures.......................................... $ (124,722) $ (168,272) $ (158,655) Distributions from joint ventures............................. 513 22,239 55,238 Acquisition of investments and notes receivable............... (26,789) (51,923) (46,243) Acquisition of other long-term assets......................... (2,141) (23,768) (25,724) Proceeds from sale of investments and collection of notes receivable.......................... 39,780 31,003 24,758 Proceeds from sale of fixed assets............................ 3,828 5,996 6,895 Acquisition of businesses..................................... -0- (39,536) (3,515) Other......................................................... -0- (6,803) -0- Net cash used in investing activities......................... $ (109,531) $ (231,064) $ (147,246) CASH FLOWS FROM FINANCING ACTIVITIES: Payments of patronage refunds and dividends................... $ (26,648) $ (32,781) $ (32,515) Payments for redemption of equities........................... (12,431) (27,470) (25,440) Proceeds from bank loans and notes payable.................... 522,916 597,959 337,407 Payments of bank loans and notes payable...................... (513,672) (526,814) (427,139) Proceeds from issuance of subordinated debt certificates.............................................. 46,715 67,965 86,132 Payments for redemption of subordinated debt certificates......................................... (26,866) (43,803) (37,455) Net increase (decrease) in checks and drafts outstanding.................................... 37,088 (6,144) 16,299 Net increase (decrease) in demand loan certificates........... (9,634) 26,575 10,424 Other, increase (decrease).................................... 492 (6,543) (2,775) Net cash provided by (used in) financing activities........... $ 17,960 $ 48,944 $ (75,062) Net decrease in cash and cash equivalents..................... $ (44,084) $ -0- $ -0- Cash and cash equivalents at beginning of year................ 44,084 -0- -0- Cash and cash equivalents at end of year...................... $ -0- $ -0- $ -0- SUPPLEMENTAL SCHEDULE OF CASH PAID FOR INTEREST AND INCOME TAXES Interest...................................................... $ 50,551 $ 58,125 $ 57,650 Income taxes (net of refunds)................................. $ 30,422 $ 27,943 $ 14,399 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Equities and minority owners' interest called for redemption............................................ $ 27,738 $ 25,214 $ 28,579 Transfer of assets in exchange for investment in joint ventures............................................ $ 2,061 $ -0- $ 10,292 Appropriation of current year's net income as patronage refunds......................................... $ 94,417 $ 93,495 $ 108,307 Acquisition of businesses: Fair value of net assets acquired......................... $ -0- $ 52,401 $ -0- Goodwill.................................................. -0- 3,181 2,550 Minority owners' investment............................... -0- -0- 965 Cash paid................................................. -0- (39,536) (3,515) Liabilities assumed........................................... $ -0- $ 16,046 $ -0- See accompanying Notes to Consolidated Financial Statements.
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CAPITAL SHARES AND EQUITIES
Years Ended August 31, 1995, 1996 and 1997 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, 1994......................... $ 3,702 $ 363,562 $ 9,268 $208,481 $ 585,013 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 qualified 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- Issue, redemption and cancellation of equities..... -0- (51) 332 (990) (709) BALANCE AT AUGUST 31, 1995......................... $ 2,453 $ 385,409 $11,133 $288,292 $ 687,287 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........................... -0- (13,922) (103) -0- (14,025) Other equity redemptions transferred to current liabilities........................... (1,190) (6,578) (287) (3,272) (11,327) Prior year qualified 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- Issue, redemption and cancellation of equities..... 1 (166) (6) 29 (142) BALANCE AT AUGUST 31, 1996 $ 1,264 $ 414,503 $15,576 $323,988 $ 755,331 Appropriation of current year's net income......... -0- -0- -0- 135,423 135,423 Patronage refund payable in cash transferred to current liabilities........................... -0- -0- -0- (40,228) (40,228) Base capital redemptions transferred to current liabilities........................... -0- (16,783) (444) -0- (17,227) Other equity redemptions transferred to current liabilities........................... (1,189) (6,737) (302) (2,963) (11,191) Prior year qualified patronage refund allocation... -0- 53,269 5,640 (59,103) (194) Dividends on preferred stock....................... -0- -0- -0- (4) (4) Exchange of common stock, associate member common stock and other equities.................. -0- (2,566) 1,929 637 -0- Issue, redemption and cancellation of equities..... (3) BALANCE AT AUGUST 31, 1997 $ 72 $ 442,012 $22,248 $357,661 $ 821,993 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 as 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. 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 and measures impairment, if any, by determining whether the unamortized balance can be recovered over its remaining life through undiscounted future operating cash flows. Goodwill is reflected in the accompanying Consolidated Balance Sheets net of accumulated amortization of $10.3 million and $12.9 million, respectively, at August 31, 1996 and 1997. Sales -- The Company's policy is to recognize sales at the time product is shipped. Net margins on grain merchandised by the Company's international grain trading subsidiaries (collectively referred to as "Tradigrain"), rather than the gross value of such products merchandised, are included in net sales. The gross value of grain merchandised by Tradigrain in 1995, 1996 and 1997 was $1.6 billion, $2.6 billion and $2.3 billion, respectively. Derivative Commodity Instruments -- The Company uses derivative commodity instruments, including forward contracts, futures contracts, purchased options and collars, primarily to reduce its exposure to risk of loss from changes in commodity prices. Derivative commodity instruments which are designated as hedges and for which changes in value exhibit "high" correlation to changes in value of the underlying position are accounted for as hedges. Gains and losses on hedges of inventory are deferred as part of the carrying amount of the related inventories and, upon sale of the inventory, recognized in cost of sales. Gains and losses related to qualifying hedges of firm commitments or anticipated transactions also are deferred and are recognized as an adjustment to the carrying amounts of the commodities when the underlying hedged transaction occurs. When a qualifying hedge is terminated or ceases to meet the specified criteria for use of hedge accounting, any deferred gains or losses through that date continue to be deferred. To the extent an anticipated transaction is no longer likely to occur, related hedges are closed with gains or losses charged to operations. Tradigrain uses derivative commodity instruments to establish positions for trading purposes. Instruments used for this purpose are marked-to-market and all related gains and losses are included in operations. Cash flows from commodity instruments are classified in the same category as cash flows from the hedged commodities in the Consolidated Statements of Cash Flows. 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 qualified patronage refunds. Farmland files consolidated federal and state income tax returns. (2) INVENTORIES Major components of inventories are as follows: August 31 1996 1997 (Amounts in Thousands) Finished and in-process products...................$620,794 $625,577 Materials.................. 58,526 62,001 Supplies................... 57,300 57,723 $736,620 $745,301 The carrying values of crude oil and refined petroleum inventories stated under the lower of LIFO cost or market at August 31, 1996 and 1997, were $111.8 million and $125.5 million, respectively. Replacement cost approximated the LIFO carrying values of inventories at both August 31, 1996 and 1997. The carrying values of beef inventories stated under the lower of LIFO or market at August 31, 1996 and 1997, were $32.3 million and $37.0 million, respectively. At both August 31, 1996 and 1997, market value was lower than LIFO and, accordingly, such inventories were valued at market. (3) INVESTMENTS AND LONG-TERM RECEIVABLES Investments and long-term receivables are as follows:
August 31 1996 1997 (Amounts in Thousands) Investments accounted for by the equity method................ $ 147,028 $ 177,994 Investments in and advances to other cooperatives............. 45,267 43,585 National Bank for Cooperatives ............................... 24,913 20,958 Other investments and long-term receivables................... 22,473 24,017 Notes receivable from ventures, 20% to 50% owned.............. 1,443 -0- $ 241,124 $ 266,554
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, 1996 and 1997, 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 1996 1997 (Amounts in Thousands) Current Assets................................................ $ 228,883 $ 269,565 Long-Term Assets.............................................. 319,166 492,966 Total Assets.............................................. $ 548,049 $ 762,531 Current Liabilities........................................... $ 191,632 $ 214,662 Long-Term Liabilities......................................... 57,208 186,344 Total Liabilities......................................... $ 248,840 $ 401,006 Net Assets.................................................... $ 299,209 $ 361,525 Year Ended August 31 1995 1996 1997 (Amounts in Thousands) Net sales.................................. $ 1,212,592 $ 1,154,195 $ 1,366,038 Net income................................. $ 46,803 $ 83,075 $ 84,536 Farmland's equity in net income............ $ 22,785 $ 41,092 $ 42,108
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. At August 31, 1997, undistributed earnings from all ventures accounted for by the equity method totaled $58.9 million. (4) PROPERTY, PLANT AND EQUIPMENT A summary of cost for property, plant and equipment is as follows:
August 31 1996 1997 (Amounts in Thousands) Land and improvements..................... $ 50,800 $ 51,586 Buildings................................. 278,097 275,835 Machinery and equipment................... 880,152 947,836 Automotive equipment...................... 67,754 67,021 Furniture and fixtures.................... 61,426 53,391 Capital leases............................ 50,562 54,467 Leasehold improvements.................... 24,539 28,981 Other..................................... 8,837 8,283 Construction in progress.................. 84,293 98,424 $ 1,506,460 $ 1,585,824
(5) BANK LOANS, SUBORDINATED DEBT CERTIFICATES AND NOTES PAYABLE Bank loans, subordinated debt certificates and notes payable are as follows:
August 31 1996 1997 (Amounts in Thousands) Subordinated capital investment certificates --6% to 9.5%, maturing 1998 through 2014....................... $ 245,792 $ 284,493 Subordinated monthly income certificates --6.25% to 9.25%, maturing 1998 through 2007................... 78,313 88,546 Syndicated Credit Facility --5.84% to 6.28%, maturing 2001................................ 175,000 160,000 Other bank notes--6.5% to 10.75%, maturing 1998 through 2008..................................... 88,704 69,943 Industrial revenue bonds--6.75% to 9.25%, maturing 1998 through 2007..................................... 18,930 17,430 Promissory notes--7% to 8.5%, maturing 1998 through 2005..................................... 16,917 11,707 Other--3% to 14.92%............................................... 33,682 40,189 $ 657,338 $ 672,308 Less current maturities........................................... 41,080 91,643 $ 616,258 $ 580,665
The Company has a $1.1 billion Syndicated Credit Facility with a group of domestic and international banks ("the Facility"). The Facility provides revolving short-term credit of up to $650.0 million to finance seasonal operations and inventory, and revolving term credit of up to $450.0 million. At August 31, 1997, the Company had $185.5 million of revolving short-term borrowings under the Facility and $160.0 million of revolving term borrowings; additionally, $44.2 million of the Facility was being utilized to support letters of credit issued on behalf of the Company. The Company pays commitment fees under the Facility of 1/10 of 1% annually on the unused portion of the revolving 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 Facility'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 Facility are reviewed and/or renewed annually. The next review date is in May 1998. The revolving term provisions of the Facility expire in May 2001. Farmland National Beef Packing Company, L.P. ("FNBPC") maintains a $90.0 million borrowing agreement with a group of banks which provides financing support for its beef packing operations. The provisions of this agreement expire in May 1998. Such borrowings are nonrecourse to Farmland or Farmland's other affiliates (except to the extent of $10 million). At August 31, 1997, $29.1 million was borrowed under this agreement and $0.6 million was utilized to support letters of credit. In addition, FNBPC has certain long-term borrowings from Farmland. FNBPC has pledged certain assets to Farmland and such group of banks to support its borrowings. The Company maintains other borrowing arrangements with banks and financial institutions. At August 31, 1997, $40.8 million was borrowed under such agreements. 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, 1997, such short-term borrowings totaled $72.8 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 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 indenture, the Company has options to redeem certain subordinated capital investment certificates in advance of scheduled maturities. Additionally, upon written request the Company redeems subordinated capital investment certificates and subordinated monthly income certificates in the case of death of an owner. Outstanding subordinated debt certificates are subordinated to senior indebtedness ($459.8 million at August 31, 1997) and additional financings (principally long-term operating leases). See Note 9. At August 31, 1997, under industrial revenue bonds and other agreements, property, plant and equipment with a carrying value of $14.1 million have been pledged. Borrowings from CoBank, totaling $93.6 million at August 31, 1997, are partially secured by liens on the equity investment held by the Company in CoBank. See Note 3. Bank loans, subordinated debt certificates and notes payable mature during future fiscal years ending August 31 in the following amounts: (Amounts in Thousands) 1998................. $ 91,643 1999................. 38,272 2000................. 30,467 2001................. 211,736 2002................. 66,662 2003 and after....... 233,528 $ 672,308 At August 31, 1996 and 1997, the Company had demand loan certificates and short-term bank debt outstanding of $355.5 million (weighted average interest rate of 6.29%) and $308.9 million (weighted average interest rate of 6.07%), respectively. During 1995, 1996 and 1997, the Company capitalized interest of $0.7 million, $1.6 million and $4.0 million, respectively. (6) 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 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 $243.2 million through August 31, 1997), or $329.0 million (before tax benefits of the interest deduction) in the aggregate at August 31, 1997. 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 $8.1 million), or $13.1 million in the aggregate at August 31, 1997. 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 Syndicated Credit Facility (the "Facility"), 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, 1997, Farmland's borrowing capacity under the Facility 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 Facility. 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 (benefit) is comprised of the following:
Year Ended August 31 1995 1996 1997 (Amounts in Thousands) Federal: Current.................................. $ 18,533 $ 7,322 $ 18,712 Deferred................................. 4,255 9,430 (1,129) $ 22,788 $ 16,752 $ 17,583 State: Current................................. $ 3,356 $ 1,292 $ 3,303 Deferred................................ 665 1,664 (199) $ 4,021 $ 2,956 $ 3,104 Foreign: Current................................. $ 1,578 $ 2,107 $ 361 Deferred................................ 1,241 (60) (141) $ 2,819 $ 2,047 $ 220 Total income tax expense................... $ 29,628 $ 21,755 $ 20,907
Income tax expense differs from the "expected" income tax expense using a statutory rate of 35% as follows:
Year Ended August 31 1995 1996 1997 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 ....................... (18.3) (20.4) (22.4) State income tax expense net of federal income tax effect.............. 2.2 2.5 1.6 Other, net .............................. (2.4) 1.9 2.8 Income tax expense......................... 16.5 % 19.0 % 17.0 %
The tax effect of temporary differences that give rise to significant portions of deferred tax liabilities and deferred tax assets at August 31, 1996 and 1997 are as follows:
August 31 1996 1997 (Amounts in Thousands) Deferred tax liabilities: Property, plant and equipment, principally due to differences in depreciation......................... $ 40,182 $ 51,632 Prepaid pension cost ....................... 21,500 19,242 Income from foreign subsidiaries ........... -0- 3,765 Basis differences in pass-through ventures................................ -0- 3,929 Other ...................................... 2,080 3,144 Total deferred tax liabilities.......... $ 63,762 $ 81,712 Deferred tax assets: Safe harbor leases ......................... $ 4,699 $ 4,143 Accrued expenses ........................... 47,140 49,747 Benefit of nonqualified written notices......................... -0- 19,456 Accounts receivable, principally due to allowance for doubtful accounts......... 1,971 1,844 Other ...................................... 3,243 2,548 Total deferred tax assets .................. $ 57,053 $ 77,738 Net deferred tax liability ................. $ 6,709 $ 3,974
A valuation allowance of $1.5 million and $1.6 million for deferred tax assets was provided at August 31, 1996 and 1997, respectively. The valuation allowance was provided because of limitations imposed by the tax laws on the Company's ability to realize the benefit of income tax credits obtained through an acquisition. At August 31, 1997, Farmland has member-sourced loss carryforwards, expiring in 2012, amounting to $13.5 million available to offset future member- sourced income. No deferred tax asset has been established for these carryforwards since member-sourced losses offset future patronage refunds. (7) MINORITY OWNERS' EQUITY IN SUBSIDIARIES A summary of the equity in subsidiaries owned by others is as follows:
August 31 1996 1997 (Amounts in Thousands) Farmland National Beef Packing Company, L.P................ $ 6,455 $ 11,491 Farmland Foods, Inc. ...................................... 4,594 4,423 Other subsidiaries......................................... 2,796 2,929 $ 13,845 $ 18,843
The Company has agreed to sell up to a 25% interest in FNBPC to an unrelated party, U.S. Premium Beef, LTD. ("USPB"). Therefore, the Company's ownership in FNBPC could be reduced to 50%. At this time, there is no assurance USPB will raise the capital necessary to consummate part or all of this transaction. (8) PREFERRED STOCK, EARNED SURPLUS AND OTHER EQUITIES A summary of preferred stock is as follows:
August 31 1996 1997 (Amounts in Thousands) Preferred shares, $25 par value - Authorized 8,000,000 shares: 6% - 570 shares issued and outstanding (608 shares in 1996).................... $ 15 $ 14 5-1/2% - 2,316 shares issued and outstanding (2,412 shares in 1996)................................. 60 58 Series F - -0- shares issued and outstanding (47,545 shares in 1996)................................ 1,189 -0- $ 1,264 $ 72
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, preferred stock holders are entitled to the par value thereof and any declared or unpaid earned dividends. A summary of earned surplus and other equities is as follows:
August 31 1996 1997 (Amounts in Thousands) Earned surplus............................................ $ 230,340 $ 257,044 Patronage refund allocable in equities.................... 60,776 68,079 Capital credits........................................... 31,237 30,879 Additional paid-in surplus................................ 1,616 1,616 Currency translation adjustment........................... 19 43 $ 323,988 $ 357,661
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. In 1997, a portion of the patronage refund was paid in the form of qualified written notices of allocation and a portion was paid in the form of nonqualified written notices of allocation. The qualified patronage refund was paid 70% in cash and the remainder was distributed in the form of common shares, associate member common shares or capital credits, depending on the patron's status. The member or patron must take the total amount of the qualified patronage refund into income for income tax purposes in the year issued. The nonqualified patronage refund was recorded as book credits in the form of common shares, associate member common shares or capital credits, depending on the member or patron's status. The nonqualified distribution is not taxable income to the member or patron until redeemed in cash. 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 no longer meet qualifications for membership or associate membership in Farmland. Additional paid-in surplus results from members donating Farmland equity to Farmland. 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. Under this plan, the cash portion of the patronage refund payable to voting members or associate members depends 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 Board of Directors at its sole discretion. At August 31, 1996 and 1997, common stock and associate member common stock with an aggregate par value of $14.0 million and $17.2 million, respectively, were approved for redemption by the Board of Directors under the base capital plan and such amounts have been included in "Other current liabilities" in the Consolidated Balance Sheets at August 31, 1996 and 1997, 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, 1996 and 1997, certain equities with a face amount of $11.4 million and $11.5 million were approved by the Board of Directors for redemption under the estate settlement, preferred shares and other special equity redemption plans and such amounts have been included in "Other current liabilities" in the Consolidated Balance Sheets at August 31, 1996 and 1997, respectively. 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. (9) CONTINGENT LIABILITIES AND COMMITMENTS The Company leases various equipment and real properties under long-term operating leases, and also has certain throughput and take-or-pay agreements for processing services and raw material supplies. For 1995, 1996 and 1997, rental expenses and purchases under the throughput and take-or-pay agreements totaled $44.6 million, $42.1 million and $55.7 million, respectively. Rental expense is reduced for sublease income, primarily mileage credits received on leased railroad cars ($1.8 million in 1995, $1.4 million in 1996 and $5.4 million in 1997). The lease and throughput and take-or-pay agreements have various remaining terms ranging from one year to twenty years. Some agreements are renewable, at the Company's option, for additional periods. The minimum required payments for these agreements during the fiscal years ending August 31 are as follows: (Amounts in Thousands) 1998...........................$ 72,234 1999........................... 63,477 2000........................... 53,477 2001........................... 45,786 2002........................... 30,981 2003 and after................. 121,019 $ 386,974 Commitments for capital expenditures and investments in joint ventures aggregated $39.2 million at August 31, 1997. 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 estimable obligations for resolution of environmental matters at NPL and other sites was $18.9 million and $16.9 million at August 31, 1996 and 1997, 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 estimable at August 31, 1997. In the opinion of management, it is reasonably possible for such costs to approximate an additional $17.5 million. In the ordinary course of conducting international grain trading, Tradigrain, as of August 31, 1997, was contingently liable in the amount of $56.0 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, except for the tax litigation relating to Terra as explained in Note 6, the ultimate resolution of these litigation issues will not have a material adverse effect on the Company's Consolidated Financial Statements. (10) EMPLOYEE BENEFIT PLANS The Farmland Industries, Inc. Employee Retirement Plan (the "Plan") is a defined benefit plan in which substantially all employees of the Company who meet minimum age and length-of-service requirements are eligible to participate. 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 strategy 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:
Year Ended August 31 1995 1996 1997 (Amounts in Thousands) Service cost - benefits earned during the period................... $ 10,336 $ 10,886 $ 11,333 Interest cost on projected benefit obligation...................... 16,707 18,843 19,816 Actual return on Plan assets....................................... (27,422) (46,630) (37,816) Net amortization and deferral...................................... 8,677 24,634 12,252 Pension expense.................................................... $ 8,298 $ 7,733 $ 5,585
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, 1995, 1996 and 1997. The following table sets forth the Plan's funded status and amounts recognized in the Company's Consolidated Balance Sheets at August 31, 1996 and 1997. Such prepaid pension cost is based on the Plan's funded status as of May 31, 1996 and 1997.
Year Ended August 31 1996 1997 (Amounts in Thousands) Actuarial present value of benefit obligations: Vested benefits.................................................... $ 180,253 $ 196,063 Nonvested benefits................................................. 12,024 16,730 Accumulated benefit obligation..................................... $ 192,277 $ 212,793 Increase in benefits due to future compensation increases.......... 56,030 51,730 Projected benefit obligation....................................... $ 248,307 $ 264,523 Estimated fair value of Plan assets................................ 301,504 331,822 Plan assets in excess of projected benefit obligation.............. $ 53,197 $ 67,299 Unrecognized net (gain) loss from past experience different from that assumed and effects of changes in assumptions.................................................. 450 (15,405) Unrecognized prior service cost.................................... 871 621 Prepaid pension cost at end of year.................................. $ 54,518 $ 52,515
During 1997, certain employees transferred to a newly formed venture and were no longer eligible to participate in the Plan. As a result of such transfer, the Company recognized a curtailment gain of $3.6 million. (11) 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 and by-products of petroleum refining. Principal products of the crop production division are nitrogen-, phosphate- and potash-based fertilizers, and, through the Company's ownership in the WILFARM, LLC and Omnium L.L.C. joint ventures, 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, 1995, 1996 and 1997.
Unallocated Corporate Farm Supply Marketing and Inter- Crop and Processing Other Segment Petroleum Production Feed Foods Grain Operations Eliminations Consolidated (Amounts in Thousands) 1995 Sales to unaffiliate customers......... $876,776 $1,171,389 $467,695 $2,692,892 $1,906,164 $ 141,953 $ -0- $ 7,256,869 Tansfers between segments.......... 6,549 18,368 5,982 3,100 13,164 80,891 (128,054) -0- Total sales and transfers......... $883,325 $1,189,757 $473,677 $2,695,992 $1,919,328 $ 222,844 $(128,054) $ 7,256,869 Operating income (loss) of industry segments.......... $ (8,029) $ 198,575 $ 9,773 $ 77,060 $ 17,936 $ 618 $ 295,933 Equity in net income (loss) of investee (Note 3).......... $ 168 $ 22,096 $ 130 $ 823 $ 688 $ (1,120) $ 22,785 General corporate expenses.......... (83,039) Other corporate income............ 20,367 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 $ 503,670 $ 80,470 $ 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 unaffiliated customers........$1,058,258 $1,336,307 $569,869 $3,220,996 $3,468,686 $ 134,471 $ -0- $ 9,788,587 Transfers between segments......... 7,895 16,392 13,672 2,959 72,819 93,144 (206,881) -0- Total sales and transfers........$1,066,153 $1,352,699 $583,541 $3,223,955 $3,541,505 $ 227,615 $(206,881) $ 9,788,587 Operating income (loss) of industry segments.........$ 4,990 $ 179,008 $ 12,952 $ 65,953 $ (18,234) $ (3,003) $ 241,666 Equity in net income (loss) of investees (Note 3).........$ (98) $ 41,899 $ 382 $ -0- $ (10) $ (1,081) $ 41,092 General corporate expenses......... (94,035) 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 $ 455,044 $ 102,278 $ 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 $ 5,010 $ 6,766 $ 7,081 $ 77,741 Capital expenditure (Including $29.9 million of capital assets of businesses acquired)........$ 42,075 $ 37,296 $ 5,083 $ 84,493 $ 6,643 $ 19,044 $ 27,342 $ 221,976 1997 Sales to unaffiliated customers........$1,331,786 $1,263,566 $618,000 $3,559,305 $2,238,695 $ 136,155 $ -0- $ 9,147,507 Transfers between segments......... 5,153 15,752 18,134 7,362 160,313 108,192 (314,906) -0- Total sales and transfers........$1,336,939 $1,279,318 $636,134 $3,566,667 $2,399,008 $ 244,347 $(314,906) $ 9,147,507 Operating income (loss) of industry segments.........$ 36,314 $ 158,992 $ 6,658 $ 44,072 $ 6,783 $ (9,856) $ 242,963 Equity in net income of investees (Note 3).........$ 101 $ 41,213 $ 342 $ -0- $ 241 $ 211 $ 42,108 General corporate expenses......... (85,657) Other corporate income........... 27,835 Interest expense.. (62,335) Minority interest.. (8,584) Income tax expense. (20,907) Net income......... $ 135,423 Identifiable assets at August 31, 1997..$ 449,045 $ 465,014 $107,536 $ 647,395 $ 494,176 $ 88,936 $ 2,252,102 Investment in and advances to investees........$ 706 $ 158,549 $ 3,185 $ 18 $ 3,901 $ 11,635 $ 177,994 Corporate assets... 215,216 Total assets....... $ 2,645,312 Provision for depreciation and amortization.....$ 13,828 $ 17,705 $ 4,959 $ 31,581 $ 4,934 $ 9,421 $ 7,923 $ 90,351 Capital expenditures .....$ 22,838 $ 78,859 $ 3,167 $ 38,106 $ 2,646 $ 12,172 $ 30,106 $ 187,894
Export sales from the Company's United States operations to unaffiliated customers were as follows:
Year Ended August 31 1995 1996 1997 (Amounts in Thousands) Asia................................. $ 788,583 $ 705,905 $ 549,404 Latin and South America.............. 216,059 695,404 441,912 Canada............................... 58,740 61,217 53,567 Other................................ 224,386 527,770 308,412 Total................................ $ 1,287,768 $ 1,990,296 $ 1,353,295
(12) 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 3. (13) 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, 1996 August 31, 1997 Carrying Carrying Amount Fair Value Amount Fair Value (Amounts in Thousands) FINANCIAL ASSETS: Investments: National Bank for Cooperatives.............. $ 24,913 $ **** $ 20,958 $ **** Other cooperatives: Equities.................................. 27,160 **** 27,871 **** Notes receivable.......................... 18,107 17,073 15,714 15,010 FINANCIAL LIABILITIES: Subordinated capital investment certificates and subordinated monthly income certificates........................... $ (324,105) $ (317,476) $ (373,039) $ (376,891)
****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 estimated by discounting future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings. 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. (14) 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 protection products, WILFARM, LLC. During 1995, 1996 and 1997, the Company purchased $106.2 million, $117.4 million and $109.7 million, respectively, of product from these ventures. Accounts payable includes $2.9 million and $9.6 million due to these ventures at August 31, 1996 and 1997, respectively. The Company also has notes receivable from these ventures in the amount of $12.9 million and $8.9 million at August 31, 1996 and 1997, respectively. During 1997, the Company entered into an agreement with OneSystem Group, LLC ("OSG"), a 50% owned venture, to provide information technology services for a monthly fee plus certain other expenses. Fees and expenses for these services amounted to $22.2 million for the year ended August 31, 1997. Accounts payable of $0.3 million were due to OSG at August 31, 1997. (15) 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. 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: Expiration Total Years Age as of Positions of Present of Service August 31, Held With Term as as Board Name 1997 Farmland Director Member Business Experience During Last Five Years Albert J. Shivley 54 Chairman of 1998 13 General Manager--American Pride Co-op the Board Association, Brighton, Colorado, a local cooperative association of farmers and ranchers. H. D. Cleberg 58 President and 1997 7 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 66 Vice Chairman 1997 14 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. 46 1998 5 General Manager--Cooperative Grain and Supply, Hillsboro, Kansas, a local cooperative association of farmers and ranchers. Ronald J. Amundson 53 1997 9 General Manager--Central Iowa Cooperative, Jewell, Iowa, a local cooperative association of farmers and ranchers. Baxter Ankerstjerne 61 1999 7 Producer--Peterson, Iowa. Mr. Ankerstjerne serves as Director of First Cooperative Association, Cherokee, Iowa, a local cooperative association of farmers and ranchers. From 1988 to 1997, he served as Chairman of the Board of Directors of Farmers Cooperative Association, Marathon, Iowa. Jody Bezner 56 1997 6 Producer--Texline, Texas. Richard L. Detten 63 1999 10 Producer--Ponca City, Oklahoma. Steven Erdman 47 1998 5 Producer--Bayard, Nebraska. Harry Fehrenbacher 49 1999 1 Producer--Newton, Illinois. Mr. Fehrenbacher serves as President of the Board of Directors of Effingham Equity, Effingham, Illinois, a local cooperative association of farmers and ranchers. Warren Gerdes 49 1998 4 General Manager--Farmers Cooperative Elevator Company, Buffalo Lake, Minnesota, a local cooperative association of farmers and ranchers. Ben Griffith 48 1998 8 General Manager--Central Cooperatives, Inc., Pleasant Hill, Missouri, a local cooperative association of farmers and ranchers. Gail D. Hall 55 1997 9 General Manager--Lexington Cooperative Oil Company, Lexington, Nebraska, a local cooperative association of farmers and ranchers. Barry Jensen 52 1999 7 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 59 1998 2 General Manager-Agri Co-op in Holdrege, Nebraska, a local cooperative association of farmers and ranchers. William F. Kuhlman 48 1999 1 Producer--Oakley, Kansas. Mr. Kuhlman serves on the Boards of Directors of Kansas Retail Venture Group and Northwest Kansas Ground Water Management. Formerly, he was President and CEO of Cooperative Agricultural Services, Inc., Oakley, Kansas and General Manager of Menlo-Rexford Cooperative, local cooperative associations of farmers and ranchers. Greg Pfenning 48 1997 5 Producer--Hobart, Oklahoma. Director of Hobart & Roosevelt Cooperative, a local cooperative association of farmers and ranchers. Monte Romohr 44 1999 7 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 45 1999 4 General Manager--Dacoma Farmers Cooperative, Inc., Dacoma, Oklahoma, a local cooperative association of farmers and ranchers. E. Kent Stamper 51 1999 1 Producer--Plainville, Kansas. Mr. Stamper serves as Director and Vice President of the Board of Directors of Midland Marketing Coop, Hays, Kansas, a local cooperative association of farmers and ranchers. He is a member of the Director Development Committee of the Kansas Cooperative Council. Formerly, he served as Director and Secretary of the Board of Directors of Union Equity Cooperative Exchange, Enid, Oklahoma, a regional grain marketing cooperative. Eli F. Vaughn 48 1997 * General Manager--Farm Service Cooperative, Afton, Iowa, a local cooperative association of farmers and ranchers. Frank Wilson 49 1998 2 General Manager-Elkhart Farmers Co-op Association, Elkhart, Texas, a local cooperative association of farmers and ranchers. *Appointed to the Board of Directors in April, 1997
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 as follows:
Age as of August 31, Name 1997 Principal Occupation and Other Positions J. F. Berardi 54 Executive Vice President and Chief Operating Officer, Grain and Grain Businesses - Mr. Berardi joined Farmland in 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 47 Executive Vice President and Chief Financial Officer - Mr. Campbell joined Farmland in 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 58 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 54 Executive Vice President, Corporate Relations, Communications & International Services - 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 53 Executive Vice President and Chief Operating Officer, Meats Group - Mr. Evans has been with Farmland since 1971. He was appointed to his present position in July 1997. He held the same position in the Meat and Livestock Businesses from September 1995 until July 1997. 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 54 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 56 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.
ITEM 11. 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 1995, 1996 and 1997.
Long-Term Annual Compensation Compensation Employee Year Variable Ending Compensation Other Annual LTIP Name and Principal Position August 31 Salary Plan Compensation Payouts H. D. Cleberg, 1995 $ 456,218 $ 346,944 $ -0- $ -0- President and 1996 $ 497,713 $ 356,485 $ -0- $ 1,296,482 Chief Executive Officer 1997 $ 540,292 $ 469,954 $ -0- $ 514,999 G. E. Evans, 1995 $ 283,988 $ 217,761 $ -0- $ -0- Executive Vice President and 1996 $ 298,848 $ 216,121 $ -0- $ 648,241 Chief Operating Officer 1997 $ 317,568 $ 245,352 $ -0- $ 257,499 Meats Group R. W. Honse, 1995 $ 280,248 $ 210,337 $ -0- $ -0- Executive Vice President and 1996 $ 303,364 $ 216,121 $ -0- $ 648,241 Chief Operating Officer 1997 $ 322,125 $ 245,352 $ -0- $ 257,499 Ag Input Businesses J. F. Berardi, 1995 $ 226,914 $ 150,241 $ -0- $ -0- Executive Vice President and 1996 $ 244,770 $ 154,372 $ -0- $ 549,204 Chief Operating Officer, 1997 $ 286,814 $ 245,352 $ -0- $ 243,194 Grain and Grain Businesses S. P. Dees, 1995 $ 211,000 $ 122,070 $ 127,878(A) $ -0- Executive Vice President 1996 $ 236,765 $ 125,427 $ 5,357(A) $ 459,171 Corporate Relations, 1997 $ 317,866 $ 165,044 $ -0- $ 182,395 Communications & International Services (A) Mr. Dees received a differential remuneration and reimbursements in 1995 and 1996 for taxes in connection with a foreign assignment. Mr. Dees' foreign assignment ended in September 1995.
An Annual Employee Variable Compensation Plan, a Management Long-Term Incentive Plan ("LTIP") 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 1997, under the Company's Management Long-Term Incentive Plan for 1997 through 1999, certain management employees, including those executives set forth below, became eligible for future payments contingent on satisfying the terms and conditions of the Plan as set forth below herein.
Estimated Future Payouts Under Non-Stock (A) (B) (C) Price Based Plans Number of Shares, Performance or Other Units or Other Period Until Maturation (D) (E) (F) Name Rights (1) or Payout Threshold Target (2) Maximum (2) (Amounts in Thousands) H. D. Cleberg 1997 - 1999 $ 504 G. E. Evans 1997 - 1999 $ 252 R. W. Honse 1997 - 1999 $ 252 J. F. Berardi 1997 - 1999 $ 252 S. P. Dees 1997 - 1999 $ 180 (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%, 5.7% 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 variable and incentive 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 1995, 1996 and 1997 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 7,630 active and 8,140 inactive employees were participants in the Plan on August 31, 1997. 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 strategy 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, 1995, 1996 and 1997 were $5.3 million, $12.2 million and $ -0-, 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 $160,000 annually and the maximum retirement benefit which may be paid by such plan is limited to $125,000 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 is 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 $160,000) or the amount of annual retirement benefit which may be paid by a qualified retirement plan (currently $125,000). 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, 1995, 1996 and 1997 were $0.6 million, $0.6 million and $0.6 million, respectively. The Company's obligation to pay supplemental retirement benefits under the SERP is limited to the aggregate cash value of the life insurance policies designated by the Administrative Committee as policies of the SERP. If the 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 $160,000, 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 $160,000, 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 47,950 63,933 79,917 95,900 250,000 55,388 73,850 92,313 110,775 300,000 62,825 83,767 104,708 125,650 350,000 70,263 93,683 117,104 140,525 400,000 77,700 103,600 129,500 155,400 450,000 85,138 113,517 141,896 170,275 500,000 92,575 123,433 154,292 185,150 600,000 107,450 143,267 179,083 214,900 700,000 122,325 163,100 203,875 244,650 800,000 137,200 182,933 228,667 274,400 900,000 152,075 202,767 253,458 304,150 1,000,000 166,950 222,600 278,250 333,900
The following table sets forth the credited years of service for certain executive officers of the Company at August 31, 1997. Name Years of Creditable Service H. D. Cleberg 32 G. E. Evans 23 R. W. Honse 23 J. F. Berardi 5 S. P. Dees 13 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 1997: Messrs. Otis Molz, Lyman Adams, Jody Bezner, Harry Fehrenbacher and Joe Royster. Mr. Molz was Chairman of the Board of the Company from December 1991 to December 1992 and has served as Vice Chairman and Vice President of the Board of the Company from December 1992 to the current date. 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 Farmland business (including, for example, board and committee meetings, and other similar activities), plus reimbursement of necessary expenses incurred in connection with their official duties. In addition, annual retainers of $30,000 for the Chairman; $25,000 for each member of the Executive Committee, other than the Chairman and President; and $20,000 for all other directors shall be paid. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Farmland's equity consists of preferred shares, common shares, associate member common shares and capital credits. Only the common shares have voting rights. At August 31, 1997, no person was known by Farmland to be the beneficial owner of more than five percent of Farmland's common shares. At August 31, 1997, 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 members. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A) Listing of Financial Statements, Financial Schedules and Exhibits (1) FINANCIAL STATEMENTS Consolidated Balance Sheets, August 31, 1996 and 1997 Consolidated Statements of Operations for each of the years in the three-year period ended August 31, 1997 Consolidated Statements of Cash Flows for each of the years in the three-year period ended August 31, 1997 Consolidated Statements of Capital Shares and Equities for each of the years in the three-year period ended August 31, 1997 Notes to Consolidated Financial Statements (2) FINANCIAL STATEMENT SCHEDULES All schedules are omitted as the required information is inapplicable or the information is presented in the Consolidated Financial Statements or related notes. (3) EXHIBITS Exhibit No. Description of Exhibits ARTICLES OF INCORPORATION AND BYLAWS: 3.A Articles of Incorporation and Bylaws of Farmland Industries, Inc. effective December 5, 1996. (Incorporated by Reference - Form 10-Q, filed January 14, 1997) 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 Syndicated Credit Facility between Farmland Industries, Inc. and various banks dated May 15, 1996, (Incorporated by Reference - Form 10-Q filed July 15, 1996) 4.(ii)A(1) First Amendment dated May 14, 1997 (including Exhibits A, B, C, D and Schedule 101A) to Syndicated Credit Facility dated May 15, 1996 between Farmland Industries, Inc. and various banks. 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 Employee Variable Compensation Plan (September 1, 1997 - August 31, 1998) 10.(iii)B Farmland Industries, Inc. Management Long-Term Incentive Plan (Effective September 1, 1993) (Incorporated by Reference - Form 10-K, filed November 28, 1995) 10.(iii)B(1) Exhibit E (Fiscal years 1997 through 1999) 10.(iii)B(2) Exhibit F (Fiscal years 1998 through 2000) 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 A (Incorporated by Reference - Form 10-K, filed November 27, 1996) 10.(iii)D Farmland Industries, Inc. Executive Deferred Compensation Plan (As Amended and Restated Effective November 1, 1996) (Incorporated by Reference - Form 10-K, filed November 27, 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 the report. (C) The exhibits required by Item 601 of Regulation S-K are filed herewith or have been filed with the Securities and Exchange Commission and are incorporated by reference as a part of this Form 10-K. SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT As of the filing of this Form 10-K, no annual report covering the Registrant's last fiscal year, and no proxy statement, form of proxy or other proxy soliciting material, has been sent to holders of the Registrant's securities. At such time as any such annual report or proxy soliciting material is sent to holders of the Registrant's securities subsequent to the filing of this Form 10-K, four copies of the same will be furnished to the Commission as and to the extent required by the Instructions to Form 10-K. SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES 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, IN THE CITY OF KANSAS CITY, STATE OF MISSOURI ON NOVEMBER 7, 1997. 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 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 22, 1997.
Signature Title Date * Chairman of Board November 7, 1997 Albert J. Shivley and Director * H. D. Cleberg Chief Executive Officer November 7, 1997 and Director (Principal Executive Officer) * Vice Chairman of Board November 7, 1997 Otis H. Molz and Director * Director November 7, 1997 Lyman L. Adams, Jr. * Director October 22 , 1997 Ronald J. Amundson * Director November 7, 1997 Baxter Ankerstjerne * Director November 7, 1997 Jody Bezner * Director November 7, 1997 Richard L. Detten * Director November 7, 1997 Steven Erdman * Director November 7, 1997 Harry Fehrenbacher * Director November 7, 1997 Warren Gerdes * Director November 7, 1997 Ben Griffith * Director November 7, 1997 Gail D. Hall * Director November 7, 1997 Barry Jensen * Director November 7, 1997 Ron Jurgens * Director November 7, 1997 William F. Kuhlman * Director November 7, 1997 Greg Pfenning * Director November 7, 1997 Monte Romohr * Director November 7, 1997 Joe Royster * Director November 7, 1997 E. Kent Stamper * Director November 7, 1997 Eli F. Vaughn * Director November 7, 1997 Frank Wilson
/s/ TERRY M. CAMPBELL Executive Vice President November 7, 1997 Terry M. Campbell and Chief Financial Officer (Principal Financial Officer) /s/ MERL DANIEL Vice President and November 7, 1997 Merl Daniel Controller (Principal Accounting Officer) *BY /s/ TERRY M. CAMPBELL Terry M. Campbell Attorney-In-Fact EX-99 2 EXHIBIT INDEX EXHIBIT 99 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 ________________ EXHIBITS To Form 10-K August 31, 1997 Under The Securities Exchange Act of 1934 ___________________ Farmland Industries, Inc. EXHIBIT INDEX The following exhibits are filed as a part of this Form 10-K Registration Statement. Certain of these exhibits are incorporated by reference as indicated. Items marked with an asterisk (*) are filed herein. ARTICLES OF INCORPORATION AND BYLAWS: 3.A Articles of Incorporation and Bylaws of Farmland Industries, Inc. effective December 5, 1996. (Incorporated by Reference - Form 10-Q, filed January 14, 1997) 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 Syndicated Credit Facility between Farmland Industries, Inc. and various banks dated May 15, 1996, (Incorporated by Reference - Form 10-Q filed July 15, 1996) * 4.(ii)A(1) First Amendment dated May 14, 1997 (including Exhibits A, B, C, D and Schedule 101A) to Syndicated Credit Facility dated May 15, 1996 between Farmland Industries, Inc. and various banks. 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 Employee Variable Compensation Plan (September 1, 1997 - August 31, 1998) 10.(iii)B Farmland Industries, Inc. Management Long-Term Incentive Plan (Effective September 1, 1993) (Incorporated by Reference - Form 10-K, filed November 28, 1995) * 10.(iii)B(1) Exhibit E (Fiscal years 1997 through 1999) * 10.(iii)B(2) Exhibit F (Fiscal years 1998 through 2000) 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 A (Incorporated by Reference - Form 10-K, filed November 27, 1996) 10.(iii)D Farmland Industries, Inc. Executive Deferred Compensation Plan (As Amended and Restated Effective November 1, 1996) (Incorporated by Reference - Form 10-K, filed November 27, 1996) *21 Subsidiaries of the Registrant *24 Power of Attorney *27 Financial Data Schedule EX-4.(III)A(1) 3 FIRST AMENDMENT TO CREDIT AGREEMENT EXHIBIT 4.(iii)A(1) FIRST AMENDMENT TO CREDIT AGREEMENT THIS FIRST AMENDMENT TO CREDIT AGREEMENT is made as of May 14, 1997 among FARMLAND INDUSTRIES, INC., a Kansas cooperative corporation ("Borrower"), COBANK, ACB ("CoBank"), COOPERATIEVE CENTRALE RAIFFEISEN-BOERENLENBANK B.A. "RABOBANK NEDERLAND", NEW YORK BRANCH ("Rabobank"), ABN AMRO BANK N.V., THE BANK OF NOVA SCOTIA, THE CHASE MANHATTAN BANK (successor by merger to The Chase Manhattan Bank, N.A.), UNION BANK OF SWITZERLAND, BANQUE NATIONALE DE PARIS, NATIONSBANK, N.A. (MID-WEST)(formerly known as Boatmen's First National Bank of Kansas City), THE SANWA BANK, LIMITED, CHICAGO BRANCH, CAISSE NATIONALE DE CREDIT AGRICOLE, BANQUE FRANCAISE DU COMMERCE EXTERIEUR, COMMERCE BANK, N.A., CREDIT LYONNAIS CHICAGO BRANCH, DG BANK DEUTSCHE GENOSSENSCHAFTSBANK, CAYMAN ISLAND BRANCH ("DG Bank"), SUN TRUST BANK, ATLANTA, THE DAI-ICHI KANGYO BANK, LTD., CHICAGO BRANCH, THE MITSUBISHI TRUST AND BANKING CORPORATION-CHICAGO BRANCH, THE SUMITOMO BANK LTD., CHICAGO BRANCH (each a "Bank" and collectively, the "Banks"), CoBank, as administrative agent for the Banks (in such capacity, together with its successors in such capacity, "Administrative Agent"), CoBank, as syndication agent for the Banks (in such capacity, together with its successors in such capacity, "Syndication Agent"), Rabobank, as syndication agent for the Banks (in such capacity, together with its successors in such capacity, "Syndication Agent"), and CoBank, as bid agent for the Banks (in such capacity, together with its successors in such capacity, "Bid Agent"). RECITALS A. As of May 15, 1996, CoBank, Rabobank, the Banks and NBD Bank ("NBD") entered into a Credit Agreement ("Credit Agreement") with FARMLAND INDUSTRIES, INC. ("Borrower"). B. On January 29, 1997, CoBank and Rabobank, as Syndication Agents, gave written notification ("Renewal Notice") to the Banks and to NBD seeking renewed commitments to the 364 Day Facility pursuant to the provisions of Section 13.14 of the Credit Agreement. The Renewal Notice enclosed a copy of a revised Pricing Schedule 1.01A (the "1997 Pricing Schedule"), which was to become effective when the 364 Day Facility was renewed. C. Pursuant to the provisions of Section 13.14 of the Credit Agreement and as referenced in the Renewal Notice, all Banks receiving the Renewal Notice were to submit written confirmation of renewal to CoBank by March 15, 1997. In accordance with the provisions of Section 13.14, the failure of a Bank to give notice by such date shall be deemed to be a rejection of such extension by such Bank. D. Commerce Bank, N.A. submitted its determination to renew to CoBank on March 21, 1997, and Credit Lyonnais Chicago Branch submitted its determination to renew to CoBank on March 18, 1997. Both submitted determinations were received after the date required in the Credit Agreement and thus such Banks were deemed to have rejected the renewal extension. E. Commerce Bank, N.A. and Credit Lyonnais Chicago Branch both desire to continue their participation as a Bank under the provisions of the Credit Agreement at the dollar amounts as set forth therein. F. NBD has formally elected not to renew its Individual 364 Day Facility Commitment, which Individual 364 Day Facility Commitment represents $29,250,000 of the 364 Day Facility Commitment or 4.5% of such 364 Day Facility Commitment. G. In order to replace and refinance the Individual 364 Day Facility Commitment of NBD, CoBank desires to increase its Individual 364 Day Facility Commitment by $19,250,000 and DG Bank desires to increase its Individual 364 Day Facility Commitment by $10,000,000. H. The parties hereto desire to amend the Credit Agreement (i) reflecting the continuing participation as a Bank by Commerce Bank, N.A. and Credit Lyonnais Chicago Branch, (ii) the renewal of the 364 Day Facility by the Banks, (iii) the increase in the Individual 364 Day Facility Commitments of CoBank and DG Bank, and (iv) the adoption of the 1997 Pricing Schedule. NOW, THEREFORE, in consideration of the mutual promises and agreements contained herein, the parties hereto hereby agree as follows: 1. RENEWAL OF 364 DAY FACILITY COMMITMENT. Pursuant to the provisions of Section 13.14 of the Credit Agreement, the 364 Day Facility Commitment is renewed as of the Effective Date (hereinafter defined) in an amount equal to the original 364 Day Facility Commitment. The amount of the Individual 364 Day Facility Commitment for each Bank is set forth opposite such Bank's name on the signature page hereto. The 364 Day Facility Note and the Bid Note each dated May 15, 1996 for the benefit of Commerce Bank, N.A. and the 364 Day Facility Note and the Bid Note each dated May 15, 1996 for the benefit of Credit Lyonnais Chicago Branch shall remain in full force and effect as if the deemed rejection of the renewal extension by such Banks had not occurred. The Borrower agrees to execute and deliver to (i) CoBank an amended and restated 364 Day Facility Note and Bid Note in the face amount of $146,975,000 in the forms of Exhibits "A" and "B" attached hereto and made a part hereof and (ii) DG Bank an amended and restated 364 Day Facility Note and Bid Note in the face amount of $24,625,000 in the forms of Exhibits "C" and "D" attached hereto and made a part hereof. 2. ADOPTION OF 1997 PRICING SCHEDULE. Schedule 1.01A of the Credit Agreement is amended and replaced in its entirety by the 1997 Pricing Schedule, attached hereto as Exhibit "A", which shall be effective as of the Effective Date. 3. EFFECTIVE DATE OF AMENDMENT. This Amendment shall become effective on May 14, 1997 (the "Effective Date"), provided, however, on or before that date the Administrative Agent receives: (1) an original copy of this Amendment (or original counterparts thereof) duly executed by each party hereto; (2) the original 364 Day Facility Note and Bid Note dated May 14, 1997 for the benefit of CoBank in the face amount of $146,975,000; (3) the original 364 Day Facility Note and Bid Note dated May 14, 1997 for the benefit of DG Bank in the face amount of $24,625,000; and (4) a certificate signed by a duly authorized officer of the Borrower dated the date hereof stating that, after giving effect to this Amendment and the transactions contemplated hereby: (a) The representations and warranties contained in the Credit Agreement and in each of the other Loan Documents are correct on and as of the date hereof as though made on and as of such date in all material respects if such representation and warranty is not subject to a Material Adverse Change exception, and if such representation and warranty is subject to such an exception, is correct; and (b) No Default or Event of Default has occurred and is continuing; and Upon the satisfaction of all conditions precedent hereto, the Administrative Agent will notify each party hereto in writing and will provide copies of all documentation in connection herewith. 4. REFERENCE TO AND EFFECT ON THE LOAN DOCUMENTS. (a) Upon the effectiveness of paragraphs 1 and 2 hereof, on and after the date hereof each reference in the Credit Agreement to "this Agreement", "hereunder", "hereof", "herein" or words of like import, and each reference in the other Loan Documents to the Credit Agreement, shall mean and be a reference to the Credit Agreement as amended hereby. (b) The execution, delivery and effectiveness of this Amendment shall not operate as a waiver of any right, power or remedy of any Bank Party under any of the Loan Documents, nor constitute a waiver of any provision of any of the Loan Documents, and the Credit Agreement and each other Loan Document shall remain in full force and effect and are hereby ratified and confirmed. 5. COSTS, EXPENSES AND TAXES. The Borrower agrees to reimburse the Administrative Agent and the Bid Agent on demand for all out-of-pocket costs, expenses and charges (including, without limitation, all fees and charges of external legal counsel for the Administrative Agent and the Bid Agent) incurred by the Administrative and the Bid Agent in connection with the preparation, reproduction, execution and delivery of this Amendment and any other instruments and documents to be delivered hereunder. 6. GOVERNING LAW. This Amendment shall be governed by and construed in accordance with the laws of the State of New York. 7. COUNTERPARTS. This Amendment may be executed in any number of counterparts and by different parties to this Amendment in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 8. CONFIRMATION. To the extent not inconsistent herewith, all other terms and conditions of the Credit Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their duly authorized officers as of the date shown above. FARMLAND INDUSTRIES, INC. By: _____________________________________ Name: Terry M. Campbell Title: Executive Vice President and Chief Financial Officer CoBANK, ACB, as Syndication Agent, Administrative Agent, Bid Agent and Bank 364-Day Facility Commitment: $146,975,000 By: __________________________________ Name: Greg Somerhalder Title: Vice President COOPERATIEVE CENTRALE RAIFFEISEN-BOERENLEENBANK B.A., "RABOBANK NEDERLAND", New York Branch, as Syndication Agent and Bank 364-Day Facility Commitment: $58,500,000 By: __________________________________ Name: __________________________________ Title: ____________________________ By: _________________________________ Name: __________________________________ Title: ____________________________ ABN AMRO BANK N.V., as Managing Agent and Bank 364-Day Facility Commitment: $32,500,000 By: __________________________________ Name: __________________________________ Title: __________________________________ By: __________________________________ Name: __________________________________ Title: __________________________________ THE BANK OF NOVA SCOTIA, as Managing Agent and Bank 364-Day Facility Commitment: $46,681,818.18 By: _________________________________ Name: _________________________________ Title: _________________________________ THE CHASE MANHATTAN BANK, as Managing Agent and Bank 364-Day Facility Commitment: $58,500,000 By: _________________________________ Name: _________________________________ Title: _________________________________ UNION BANK OF SWITZERLAND, as Managing Agent and Bank 364-Day Facility Commitment: $58,500,000 By: __________________________________ Name: __________________________________ Title: __________________________________ By: __________________________________ Name: __________________________________ Title: __________________________________ BANQUE NATIONALE de PARIS, Chicago Branch, as Co-Agent and Bank 364-Day Facility Commitment: $43,875,000 By: __________________________________ Name: __________________________________ Title: __________________________________ NATIONSBANK, N.A. (MID-WEST) as Agent and Bank 364-Day Facility Commitment: $29,250,000 By: __________________________________ Name: __________________________________ Title: __________________________________ THE SANWA BANK, LIMITED, Chicago Branch, as Agent and Bank 364-Day Facility Commitment: $29,250,000 By: __________________________________ Name: __________________________________ Title: __________________________________ CAISSE NATIONALE de CREDIT AGRICOLE, as Bank 364-Day Facility Commitment: $23,400,000 By: __________________________________ Name: __________________________________ Title: __________________________________ SUNTRUST BANK, ATLANTA, as Bank 364-Day Facility Commitment: $16,250,000 By: __________________________________ Name: __________________________________ Title: __________________________________ By: __________________________________ Name: __________________________________ Title: __________________________________ BANQUE FRANCAISE du COMMERCE EXTERIEUR, as Bank 364-Day Facility Commitment: $14,625,000 By: __________________________________ Name: __________________________________ Title: __________________________________ By: __________________________________ Name: __________________________________ Title: __________________________________ COMMERCE BANK, N.A., as Bank 364-Day Facility Commitment: $14,625,000 By: __________________________________ Name: __________________________________ Title: __________________________________ CREDIT LYONNAIS Chicago Branch, as Bank 364-Day Facility Commitment: $14,625,000 By: __________________________________ Name: _______________________________ Title: _______________________________ DG BANK DEUTSCHE GENOSSENSCHAFTSBANK, Cayman Island Branch, as Bank 364-Day Facility Commitment:$24,625,000 By: _________________________________ Name: _________________________________ Title: _________________________________ THE SUMITOMO BANK, LTD., Chicago Branch, as Bank 364-Day Facility Commitment:$13,000,000 By: _________________________________ Name: _________________________________ Title: _________________________________ THE MITSUBISHI TRUST AND BANKING CORPORATION - Chicago Branch, as Bank 364-Day Facility Commitment:$13,000,000 By: _________________________________ Name: _________________________________ Title: _________________________________ THE DAI-ICHI KANGYO BANK, LTD., Chicago Branch, as Bank 364-Day Facility Commitment:$11,818,181.82 By: _________________________________ Name: _________________________________ Title: _________________________________ EXHIBIT "A" Schedule 1.01A Pricing Schedule "Applicable Margin" means (1) with respect to each 364 Day Facility Loan which is a LIBOR Loan: (a) If the Selected Credit Ratings are in effect on the first day of the Interest Period for such a Loan, then the interest margin for such Loan shall be the margin specified below for the Selected Credit Ratings specified below in effect on the first day of the Interest Period for such Loan: CREDIT RATINGS MARGINS S&P MOODY'S D&P FITCH A- A3 A- A- 25 basis points BBB+ Baa1 BBB+ BBB+ 30 basis points BBB Baa2 BBB BBB 35 basis points BBB- Baa3 BBB- BBB- 45 basis points BB+ Ba1 BB+ BB+ 65 basis points BB Ba2 BB BB 70 basis points BB- Ba3 BB- BB- 80 basis points provided, however, if the two (2) Selected Credit Ratings do not have the same Margin, then the Applicable Margin will be the average of the two Margins. To illustrate, if the Selected Credit Ratings are S&P and Moody's and as of the first day of the applicable Interest Period their respective Credit Ratings are BBB and Baa3, then the Applicable Margin for such Advance is 40 basis points (the sum of 35 and 45 divided by 2). (b) If the Selected Required Credit Ratings are not in effect on the first day of the Interest Period for such Loan and a Terra Tax Event (Final) has not occurred or a Terra Tax Event (Final) has occurred, but the ratio (expressed as a percentage) of Total Tangible Capital Shares and Equities to Total Capitalization as of the most recently completed fiscal quarter of Borrower for which Borrower has delivered financial statements to the Banks in accordance with the terms of this Agreement is greater than 45%, then the interest margin for such Loan shall be the margin specified below for the ratio specified below as of the most recently completed fiscal quarter of Borrower for which Borrower has delivered financial statements to the Banks in accordance with the terms of this Agreement. RATIO OF LONG-TERM DEBT TO AVERAGE CASH FLOW MARGIN Pounds 1.50 25 basis points > 1.50 and Pounds 2.00 30 basis points > 2.00 and Pounds 2.50 35 basis points > 2.50 and Pounds 3.00 45 basis points > 3.00 and Pounds 3.50 65 basis points > 3.50 and Pounds 4.00 70 basis points > 4.00 80 basis points (c) If the Selected Credit Ratings are not in effect on the first day of the Interest Period for such Loan and if both the Terra Tax Event (Final) has occurred and the ratio (expressed as a percentage) of Total Tangible Capital Shares and Equities to Total Capitalization as of the most recently completed fiscal quarter of Borrower for which Borrower has delivered financial statements to the Banks in accordance with the terms of this Agreement is less than 45%, then the interest margin for such Loan shall be the margin specified above plus an additional 10 basis points for the ratio specified above as of the most recently completed fiscal quarter of Borrower for which Borrower has delivered financial statements to the Banks in accordance with the terms of this Agreement. (d) If the Selected Credit Ratings are not in effect on the first day of the Interest Period for such a Loan and the Borrower has failed to deliver its most recently required financial statements in accordance with the terms of Section 6.09(2) or (3) of this Agreement, the Margin is 90 basis points. (2) with respect to each 5 Year Facility Loan which is a LIBOR Loan: (a) If the Selected Credit Ratings are in effect on the first day of the Interest Period for such Loan, then the interest margin for such Loan shall be the margin specified below for the Selected Credit Ratings specified below in effect on the first day of the Interest Period for such Loan: CREDIT RATINGS MARGINS S&P MOODY'S D&P FITCH A- A3 A- A- 25 basis points BBB+ Baa1 BBB+ BBB+ 35 basis points BBB Baa2 BBB BBB 40 basis points BBB- Baa3 BBB- BBB- 50 basis points BB+ Ba1 BB+ BB+ 70 basis points BB Ba2 BB BB 80 basis points BB- Ba3 BB- BB- 90 basis points provided, however, if the two (2) Selected Credit Ratings do not have the same Margin, then, as noted above, the Applicable Margin will be the average of the two Margins. (b) If the Selected Required Credit Ratings are not in effect on the first day of the Interest Period for such Loan and a Terra Tax Event (Final) has not occurred or a Terra Tax Event (Final) has occurred, but the ratio (expressed as a percentage) of Total Tangible Capital Shares and Equities to Total Capitalization as of the most recently completed fiscal quarter of Borrower for which Borrower has delivered financial statements to the Banks in accordance with the terms of this Agreement is greater than 45%, then the interest margin for such Loan shall be the margin specified below for the ratio specified below as of the most recently completed fiscal quarter of Borrower for which Borrower has delivered financial statements to the Banks in accordance with the terms of this Agreement. RATIO OF LONG-TERM DEBT TO AVERAGE CASH FLOW MARGIN Pounds 1.50 25 basis points > 1.50 and Pounds 2.00 35 basis points > 2.00 and Pounds 2.50 40 basis points > 2.50 and Pounds 3.00 50 basis points > 3.00 and Pounds 3.50 70 basis points > 3.50 and Pounds 4.00 80 basis points > 4.00 90 basis points (c) If the Selected Credit Ratings are not in effect on the first day of the Interest Period for such Loan and if both the Terra Tax Event (Final) has occurred and the ratio (expressed as a percentage) of Total Tangible Capital Shares and Equities to Total Capitalization as of the most recently completed fiscal quarter for which Borrower has delivered financial statements to the Banks in accordance with the terms of this Agreement is less than 45%, then the interest margin for such Loan shall be the margin specified above plus an additional 10 basis points for the ratio specified above as of the most recently completed fiscal quarter of Borrower for which Borrower has delivered financial statements to the Banks in accordance with the terms of this Agreement. (d) If the Selected Credit Ratings are in effect on the first day of the Interest Period for such a Loan and the Borrower has failed to deliver its most recently required financial statements in accordance with the terms of Section 6.09(2) or (3) of this Agreement, the Margin is 90 basis points. For purposes of this definition the Selected Credit Ratings shall be those most recently advised to Administrative Agent and the Banks by Borrower. EXHIBIT A 364 DAY FACILITY NOTE $146,975,000 Kansas City, Missouri May 14, 1997 FOR VALUE RECEIVED, FARMLAND INDUSTRIES, INC., a Kansas cooperative corporation ("Borrower"), HEREBY PROMISES TO PAY to the order of COBANK, ACB ("Bank") at Administrative Agent's Office, for the account of the appropriate Applicable Lending Office, the principal sum of ONE HUNDRED FORTY-SIX MILLION NINE HUNDRED SEVENTY-FIVE THOUSAND AND NO/100 DOLLARS ($146,975,000) or, if less, the aggregate unpaid principal amount of all 364 Day Facility Advances made by Bank to Borrower pursuant to Section 2.01 of the Credit Agreement referred to below, in lawful money of the United States of America and in immediately available funds, on the 364 Day Facility Maturity Date. Borrower also promises to pay interest on the unpaid principal balance hereof, for the period such balance is outstanding, at said office for the account of said Applicable Lending Office, in like money, at the rates of interest as provided in the Credit Agreement referred to below, on the dates and in the manner provided in said Credit Agreement. Any amount of principal hereof which is not paid when due, whether at stated maturity, by acceleration, or otherwise, shall bear interest from the date when due until said principal amount is paid in full, payable on demand, at a rate per annum equal at all times to the Default Rate. Borrower hereby authorizes Bank to endorse on the Schedule annexed to this 364 Day Facility Note the amount and type of all 364 Day Facility Advances made to Borrower by Bank, the applicable Interest Periods, and all continuations, conversions and payments of principal amounts in respect of such 364 Day Facility Advances, which endorsements shall, in the absence of manifest error, be conclusive as to the outstanding principal amount of all 364 Day Facility Advances owed to Bank, provided, however, that the failure to make such notation with respect to any 364 Day Facility Advance or payment shall not limit or otherwise affect the obligation of Borrower under the Credit Agreement or this 364 Day Facility Note. This is one of the 364 Day Facility Notes referred to in that certain Credit Agreement (as amended from time to time, the "Credit Agreement") dated as of May 15, 1996, originally among Borrower, CoBank, ACB ("CoBank"), Cooperatieve Centrale Raiffeisen-Boerenlenbank B.A. "Rabobank Nederland", New York Branch ("Rabobank"), ABN AMRO Bank N.V., The Bank of Nova Scotia, The Chase Manhattan Bank, N.A., Union Bank of Switzerland, Banque Nationale de Paris, Boatmen's First National Bank of Kansas City, NBD Bank, The Sanwa Bank, Limited, Chicago Branch, Caisse Nationale de Credit Agricole, Banque Francaise du Commerce Exterieur, Commerce Bank, N.A., Credit Lyonnais Chicago Branch, DG Bank Deutsche Genossenschaftsbank, Cayman Island Branch and each other lender which may hereafter execute and deliver an Assignment and Assumption Agreement pursuant to the Credit Agreement (each a "Bank" and, collectively, the "Banks"), CoBank, as administrative agent for Banks, CoBank, as syndication agent for Banks, Rabobank, as syndication agent for Banks, and CoBank, as bid agent for Banks, and evidences the 364 Day Facility Advances made by Bank thereunder. All capitalized terms used herein and not defined herein shall have the meanings given to them in the Credit Agreement. The Credit Agreement provides for the acceleration of the maturity of principal upon the occurrence of an Event of Default and for prepayments on the terms and conditions specified therein. Borrower hereby waives presentment, notice of dishonor, protest and any other notice or formality with respect to this 364 Day Facility Note. This 364 Day Facility Note shall be governed by, and interpreted and construed in accordance with, the laws of the State of New York, provided, that, as to the maximum rate of interest which may be charged or collected if the Laws applicable to Bank permit it to charge or collect a higher rate than the Laws of the State of New York, then such Laws applicable to Bank shall apply to Bank under this 364 Day Facility Note. This 364 Day Facility Note amends and replaces that certain 364 Day Facility Note dated May 15, 1996 in the face amount of $127,725,000. FARMLAND INDUSTRIES, INC. By: Name: Title: SCHEDULE TO 364 DAY FACILITY NOTE Date 364 Day Facility Advance Unpaid Made, Type of Amount of Principal Continued, 364 364 Balance of Name of Converted Day Day Applicable Amount of 364 Day Person or Facility Facility Interest Principal Facility Making Paid Advance Advance Period Prepaid Note Notation EXHIBIT B BID NOTE $146,975,000 Kansas City, Missouri May 14, 1997 FOR VALUE RECEIVED, FARMLAND INDUSTRIES, INC., a Kansas cooperative corporation ("Borrower"), HEREBY PROMISES TO PAY to the order of COBANK, ACB ("Bank") at Administrative Agent's Office, for the account of the appropriate Applicable Lending Office, the principal sum of each Bid Advance made by Bank to Borrower pursuant to Section 2.03 of the Credit Agreement referred to below, in lawful money of the United States of America and in immediately available funds, on the applicable Bid Maturity Date for such Bid Advance. Borrower also promises to pay interest on each unpaid Bid Advance owed to Bank, for the period such balance is outstanding, at said office for the account of said Applicable Lending Office, in like money, at the applicable Bid Rate for such Bid Advance (such rates of interest to be provided on the Schedule annexed to this Bid Note), on the dates provided in said Schedule and in the manner provided in said Credit Agreement. Any amount of principal hereof which is not paid when due, whether at stated maturity, by acceleration, or otherwise, shall bear interest from the date when due until said principal amount is paid in full, payable on demand, at a rate per annum equal at all times to the Default Rate. Borrower hereby authorizes Bank to endorse on the Schedule annexed to this Bid Note the amount of all Bid Advances made to Borrower by Bank and all Bid Rates for Bid Advances, each Bid Maturity Date, and payments of principal amounts in respect of such Bid Advances, which endorsements shall, in the absence of manifest error, be conclusive as to the outstanding principal amount of all Bid Advances owed to Bank, provided, however, that the failure to make such notation with respect to any Bid Advance or payment shall not limit or otherwise affect the obligation of Borrower under the Credit Agreement or this Bid Note. This is one of the Bid Notes referred to in that certain Credit Agreement (as amended from time to time, the "Credit Agreement") dated as of May 15, 1996, originally among Borrower, CoBank, ACB ("CoBank"), Cooperatieve Centrale Raiffeisen-Boerenlenbank B.A. "Rabobank Nederland", New York Branch ("Rabobank"), ABN AMRO Bank N.V., The Bank of Nova Scotia, The Chase Manhattan Bank, N.A., Union Bank of Switzerland, Banque Nationale de Paris, Boatmen's First National Bank of Kansas City, NBD Bank, The Sanwa Bank, Limited, Chicago Branch, Caisse Nationale de Credit Agricole, Banque Francaise du Commerce Exterieur, Commerce Bank, N.A., Credit Lyonnais Chicago Branch, DG Bank Deutsche Genossenschaftsbank, Cayman Island Branch and each other lender which may hereafter execute and deliver an Assignment and Assumption Agreement pursuant to the Credit Agreement (each a "Bank" and, collectively, the "Banks"), CoBank, as administrative agent for Banks, CoBank, as syndication agent for Banks, Rabobank, as syndication agent for Banks, and CoBank, as bid agent for Banks, and evidences the Bid Advances made by Bank thereunder. All capitalized terms used herein and not defined herein shall have the meanings given to them in the Credit Agreement. The Credit Agreement provides for the acceleration of the maturity of principal upon the occurrence of an Event of Default and for prepayments on the terms and conditions specified therein. Borrower hereby waives presentment, notice of dishonor, protest and any other notice or formality with respect to this Bid Note. This Bid Note shall be governed by, and interpreted and construed in accordance with, the laws of the State of New York, provided, that, as to the maximum rate of interest which may be charged or collected if the Laws applicable to Bank permit it to charge or collect a higher rate than the Laws of the State of New York, then such Laws applicable to Bank shall apply to Bank under this Bid Note. This Bid Note amends and replaces that certain Bid Note dated May 15, 1996 in the face amount of $127,725,000. FARMLAND INDUSTRIES, INC. By: Name: Title: SCHEDULE TO BID NOTE Date Bid Amount Interest Maturity Name of Advance of Rate Date Amount of Person Made Bid for Bid for Bid Principal Making or Paid Advance Advance Advance Repaid Notation EXHIBIT C 364 DAY FACILITY NOTE $24,625,000 Kansas City, Missouri May 14, 1997 FOR VALUE RECEIVED, FARMLAND INDUSTRIES, INC., a Kansas cooperative corporation ("Borrower"), HEREBY PROMISES TO PAY to the order of DG BANK DEUTSCHE GENOSSENSCHAFTSBANK, CAYMAN ISLAND BRANCH ("Bank") at Administrative Agent's Office, for the account of the appropriate Applicable Lending Office, the principal sum of TWENTY-FOUR MILLION SIX HUNDRED TWENTY-FIVE THOUSAND AND NO/100 DOLLARS ($24,625,000) or, if less, the aggregate unpaid principal amount of all 364 Day Facility Advances made by Bank to Borrower pursuant to Section 2.01 of the Credit Agreement referred to below, in lawful money of the United States of America and in immediately available funds, on the 364 Day Facility Maturity Date. Borrower also promises to pay interest on the unpaid principal balance hereof, for the period such balance is outstanding, at said office for the account of said Applicable Lending Office, in like money, at the rates of interest as provided in the Credit Agreement referred to below, on the dates and in the manner provided in said Credit Agreement. Any amount of principal hereof which is not paid when due, whether at stated maturity, by acceleration, or otherwise, shall bear interest from the date when due until said principal amount is paid in full, payable on demand, at a rate per annum equal at all times to the Default Rate. Borrower hereby authorizes Bank to endorse on the Schedule annexed to this 364 Day Facility Note the amount and type of all 364 Day Facility Advances made to Borrower by Bank, the applicable Interest Periods, and all continuations, conversions and payments of principal amounts in respect of such 364 Day Facility Advances, which endorsements shall, in the absence of manifest error, be conclusive as to the outstanding principal amount of all 364 Day Facility Advances owed to Bank, provided, however, that the failure to make such notation with respect to any 364 Day Facility Advance or payment shall not limit or otherwise affect the obligation of Borrower under the Credit Agreement or this 364 Day Facility Note. This is one of the 364 Day Facility Notes referred to in that certain Credit Agreement (as amended from time to time, the "Credit Agreement") dated as of May 15, 1996, originally among Borrower, CoBank, ACB ("CoBank"), Cooperatieve Centrale Raiffeisen-Boerenlenbank B.A. "Rabobank Nederland", New York Branch ("Rabobank"), ABN AMRO Bank N.V., The Bank of Nova Scotia, The Chase Manhattan Bank, N.A., Union Bank of Switzerland, Banque Nationale de Paris, Boatmen's First National Bank of Kansas City, NBD Bank, The Sanwa Bank, Limited, Chicago Branch, Caisse Nationale de Credit Agricole, Banque Francaise du Commerce Exterieur, Commerce Bank, N.A., Credit Lyonnais Chicago Branch, DG Bank Deutsche Genossenschaftsbank, Cayman Island Branch and each other lender which may hereafter execute and deliver an Assignment and Assumption Agreement pursuant to the Credit Agreement (each a "Bank" and, collectively, the "Banks"), CoBank, as administrative agent for Banks, CoBank, as syndication agent for Banks, Rabobank, as syndication agent for Banks, and CoBank, as bid agent for Banks, and evidences the 364 Day Facility Advances made by Bank thereunder. All capitalized terms used herein and not defined herein shall have the meanings given to them in the Credit Agreement. The Credit Agreement provides for the acceleration of the maturity of principal upon the occurrence of an Event of Default and for prepayments on the terms and conditions specified therein. Borrower hereby waives presentment, notice of dishonor, protest and any other notice or formality with respect to this 364 Day Facility Note. This 364 Day Facility Note shall be governed by, and interpreted and construed in accordance with, the laws of the State of New York, provided, that, as to the maximum rate of interest which may be charged or collected if the Laws applicable to Bank permit it to charge or collect a higher rate than the Laws of the State of New York, then such Laws applicable to Bank shall apply to Bank under this 364 Day Facility Note. This 364 Day Facility Note amends and replaces that certain 364 Day Facility Note dated May 15, 1996 in the face amount of $14,624,000. FARMLAND INDUSTRIES, INC. By: Name: Title: SCHEDULE TO 364 DAY FACILITY NOTE Date 364 Day Facility Advance Unpaid Made, Type of Amount of Principal Continued, 364 364 Balance of Name of Converted Day Day Applicable Amount of 364 Day Person or Facility Facility Interest Principal Facility Making Paid Advance Advance Period Prepaid Note Notation EXHIBIT D BID NOTE $24,625,000 Kansas City, Missouri May 14, 1997 FOR VALUE RECEIVED, FARMLAND INDUSTRIES, INC., a Kansas cooperative corporation ("Borrower"), HEREBY PROMISES TO PAY to the order of DG BANK DEUTSCHE GENOSSENSCHAFTSBANK, CAYMAN ISLAND BRANCH ("Bank") at Administrative Agent's Office, for the account of the appropriate Applicable Lending Office, the principal sum of each Bid Advance made by Bank to Borrower pursuant to Section 2.03 of the Credit Agreement referred to below, in lawful money of the United States of America and in immediately available funds, on the applicable Bid Maturity Date for such Bid Advance. Borrower also promises to pay interest on each unpaid Bid Advance owed to Bank, for the period such balance is outstanding, at said office for the account of said Applicable Lending Office, in like money, at the applicable Bid Rate for such Bid Advance (such rates of interest to be provided on the Schedule annexed to this Bid Note), on the dates provided in said Schedule and in the manner provided in said Credit Agreement. Any amount of principal hereof which is not paid when due, whether at stated maturity, by acceleration, or otherwise, shall bear interest from the date when due until said principal amount is paid in full, payable on demand, at a rate per annum equal at all times to the Default Rate. Borrower hereby authorizes Bank to endorse on the Schedule annexed to this Bid Note the amount of all Bid Advances made to Borrower by Bank and all Bid Rates for Bid Advances, each Bid Maturity Date, and payments of principal amounts in respect of such Bid Advances, which endorsements shall, in the absence of manifest error, be conclusive as to the outstanding principal amount of all Bid Advances owed to Bank, provided, however, that the failure to make such notation with respect to any Bid Advance or payment shall not limit or otherwise affect the obligation of Borrower under the Credit Agreement or this Bid Note. This is one of the Bid Notes referred to in that certain Credit Agreement (as amended from time to time, the "Credit Agreement") dated as of May 15, 1996, originally among Borrower, CoBank, ACB ("CoBank"), Cooperatieve Centrale Raiffeisen-Boerenlenbank B.A. "Rabobank Nederland", New York Branch ("Rabobank"), ABN AMRO Bank N.V., The Bank of Nova Scotia, The Chase Manhattan Bank, N.A., Union Bank of Switzerland, Banque Nationale de Paris, Boatmen's First National Bank of Kansas City, NBD Bank, The Sanwa Bank, Limited, Chicago Branch, Caisse Nationale de Credit Agricole, Banque Francaise du Commerce Exterieur, Commerce Bank, N.A., Credit Lyonnais Chicago Branch, DG Bank Deutsche Genossenschaftsbank, Cayman Island Branch and each other lender which may hereafter execute and deliver an Assignment and Assumption Agreement pursuant to the Credit Agreement (each a "Bank" and, collectively, the "Banks"), CoBank, as administrative agent for Banks, CoBank, as syndication agent for Banks, Rabobank, as syndication agent for Banks, and CoBank, as bid agent for Banks, and evidences the Bid Advances made by Bank thereunder. All capitalized terms used herein and not defined herein shall have the meanings given to them in the Credit Agreement. The Credit Agreement provides for the acceleration of the maturity of principal upon the occurrence of an Event of Default and for prepayments on the terms and conditions specified therein. Borrower hereby waives presentment, notice of dishonor, protest and any other notice or formality with respect to this Bid Note. This Bid Note shall be governed by, and interpreted and construed in accordance with, the laws of the State of New York, provided, that, as to the maximum rate of interest which may be charged or collected if the Laws applicable to Bank permit it to charge or collect a higher rate than the Laws of the State of New York, then such Laws applicable to Bank shall apply to Bank under this Bid Note. This Bid Note amends and replaces that certain Bid Note dated May 15, 1996 in the face amount of $14,625,000. FARMLAND INDUSTRIES, INC. By: Name: Title: SCHEDULE TO BID NOTE Date Bid Amount Interest Maturity Name of Advance of Rate Date Amount of Person Made Bid for Bid for Bid Principal Making or Paid Advance Advance Advance Repaid Notation EX-10.(III)A 4 VARIABLE COMPENSATION PLAN EXHIBIT 10(iii)A FY 98 STANDARD VARIABLE COMPENSATION PLAN (SEPTEMBER 1, 1997 - AUGUST 31, 1998) 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 98 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 5/31/98. (Waived if the employee is a former regular full time employee during FY 98. Payout is prorated.) . Regular part time employees with less than 500 hours of service during FY 98 . Temporary employees with less than 1000 hours of service during FY 98 . Employees terminated for cause prior to 8/31/98 . Employees who terminate voluntarily prior to 8/31/98 (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 9/1/97 but before 5/31/98 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 08/31/98 for the purpose of assuming a position with an Farmland system 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 Farmland system 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 98 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 98 STANDARD VARIABLE COMPENSATION PLAN V COMP CALCULATION THRESHOLD TARGET MAXIMUM EARNINGS POINT ** 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. Note: These scales remain unchanged from Fiscal Year 1997. 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 $826,445,000 and the ROE for threshold is expressed as 8%. This would correspond to Income of $66,115,600 (.08 times $826,455,000). However, the $66,115,600 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 $826,445,000 MILLION) ROE Required Income Threshold 8.0% $ 66,115,600 Target 14.0% $ 115,702,300 Maximum 20.0% $ 165,289,000 * Actual FY 97 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. DETAIL ON DETERMINATION OF PAYOUT NON-EXEMPT EMPLOYEES: Payout is determined as a percentage of eligible gross wages paid from 9/1/97 to 8/31/98. Note: Eligible gross wages may exclude some lump sums. EXEMPT/MANAGEMENT EMPLOYEES: Payout is determined as a percentage of the V Comp Calculation Point based on eligible gross wages from 9/1/97 to 8/31/98. Exhibit B grid lists the percentage opportunities assigned to each V Comp Calculation Point.** NOTE: Lump Sum amounts given during the fiscal year will not be included in Eligible gross wages unless they were given in lieu of merit increase. **V Comp Calculation Point and designated percentage will be used unless comparison to FY96 salary range midpoint and grade determined percentage compute a higher payout amount. Individuals who are hired, promoted or demoted after 9/1/96 are ineligible for this comparison. EX-10.(III)B(1) 5 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, for the entire three-year period, as shown in the table below. Performance goals and amounts funding the payout pool include the following: Performance Level Aggregate Income % of Net Earnings to Pool Below Target Below $541,768,000 0% Target $541,768,000 .83% of earnings Above Target Above $541,768,000 .83% of earnings During the FY 97 - 99 cycle, Farmland Industries, Inc. must return to its members at least $147,285,000 in cash, 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. 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. 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)B(2) 6 EXHIBIT F TO MANAGEMENT LONG-TERM INCENTIVE PLAN EXHIBIT 10(iii)B(2) EXHIBIT F Performance criteria for FY 1998 - FY 2000 cycle include the following: Aggregate Income, defined as the targeted income, before taxes and extraordinary items, 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 Pool Level Below Target Below $498,327,000 0% Target $498,327,000 .83% of earnings Above Target Above $498,327,000 .83% of earnings During the FY 1998 - 2000 cycle, Farmland Industries, Inc. must return to its members at least $168,912,000 in cash, 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. 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. 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-21 7 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Agronomy Service Bureau, L.L.C., a 56%-owned subsidiary, was formed under the laws of the State of Mississippi. Agronomy Service Bureau 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. 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. 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. 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. 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 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 Foods, Inc., a 99%-owned subsidiary, was incorporated under the laws of the State of Kansas. Farmland Foods, Inc. has been included in the Consolidated Financial Statements filed in this registration. Farmland 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. 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. 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. Farmland 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. Farmland Pipeline Company, a wholly-owned subsidiary, was incorporated under the laws of the State of Kansas. Farmland Pipeline 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. 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. Farmland-Harvest States, L.L.C., an 80%-owned subsidiary, was incorporated under the laws of the State of Delaware. Farmland-Harvest States, L.L.C. 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. 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 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. 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. 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. 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. 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 GmbH, a wholly-owned subsidiary, was formed under the laws of Germany. Tradigrain GmbH has been included in the Consolidated Financial Statements filed in this registration. Tradigrain LTD., a wholly-owned subsidiary, was formed under the laws of Great Britain. Tradigrain LTD. has been included in the Consolidated Financial Statements filed in this registration. Tradigrain S.A., a wholly-owned subsidiary, was formed under the laws of 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 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, 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. 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 1997 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. This Power of Attorney may be executed in multiple counterparts, each of which shall be deemed an original, but which taken together shall constitute one instrument.
Signature Title Date /s/ ALBERT J. SHIVLEY Chairman of Board October 22, 1997 Albert J. Shivley and Director /s/ H. D. CLEBERG H. D. Cleberg Chief Executive Officer October 22, 1997 and Director (Principal Executive Officer) /s/ OTIS H. MOLZ Vice Chairman of Board October 22, 1997 Otis H. Molz and Director /s/ LYMAN L. ADAMS, JR. Director October 22, 1997 Lyman L. Adams, Jr. /s/ RONALD J. AMUNDSON Director October 22 , 1997 Ronald J. Amundson /s/ BAXTER ANKERSTJERNE Director October 22, 1997 Baxter Ankerstjerne /s/ JODY BEZNER Director October 22, 1997 Jody Bezner /s/ RICHARD L. DETTEN Director October 22, 1997 Richard L. Detten /s/ STEVEN ERDMAN Director October 22, 1997 Steven Erdman /s/ HARRY FEHRENBACHER Director October 22, 1997 Harry Fehrenbacher /s/ WARREN GERDES Director October 22, 1997 Warren Gerdes /s/ BEN GRIFFITH Director October 22, 1997 Ben Griffith /s/ GAIL D. HALL Director October 22, 1997 Gail D. Hall /s/ BARRY JENSEN Director October 22, 1997 Barry Jensen /s/ RON JURGENS Director October 22, 1997 Ron Jurgens /s/ WILLIAM F. KUHLMAN Director October 22, 1997 William F. Kuhlman /s/ GREG PFENNING Director October 22, 1997 Greg Pfenning /s/ MONTE ROMOHR Director October 22, 1997 Monte Romohr /s/ JOE ROYSTER Director October 22, 1997 Joe Royster /s/ E. KENT STAMPER Director October 22, 1997 E. Kent Stamper /s/ ELI F. VAUGHN Director October 22, 1997 Eli F. Vaughn /s/ FRANK WILSON Director October 22, 1997 Frank Wilson
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, 1997 and is qualified in its entirety by reference to such financial statements. 1,000 YEAR AUG-31-1997 SEP-01-1996 AUG-31-1997 0 0 589,028 0 745,301 1,428,568 1,585,824 802,716 2,645,312 1,186,357 580,665 0 72 442,012 379,909 2,645,312 9,013,923 9,147,507 8,489,681 8,580,826 0 0 62,335 122,806 20,907 135,423 0 0 0 135,423 0 0
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