-----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, PwLfOaZlf22g/C6EiLHfKFlbIEfsNcABGeUrTLOYKLNu8Z6OHdCC7DCL8nVRnTbU 7ZVxeNfuctDOhcQBHjvTNA== 0000034616-97-000014.txt : 19971210 0000034616-97-000014.hdr.sgml : 19971210 ACCESSION NUMBER: 0000034616-97-000014 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19971209 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: S-1/A SEC ACT: SEC FILE NUMBER: 333-40759 FILM NUMBER: 97734652 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 S-1/A 1 AMEND NO 1 TO FORM S-1 Registration Statement No. 333-40759 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 FARMLAND INDUSTRIES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) KANSAS 44-0209330 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 2011 (PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE NUMBER) 3315 NORTH OAK TRAFFICWAY, KANSAS CITY, MISSOURI 64116-0005 816-459-6000 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) TERRY M. CAMPBELL EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER FARMLAND INDUSTRIES, INC. 3315 NORTH OAK TRAFFICWAY, KANSAS CITY, MISSOURI 64116-0005 816-459-6348 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to time after the effective date of this Registration Statement, as determined by market conditions. IF ANY OF THE SECURITIES BEING REGISTERED ON THIS FORM ARE TO BE OFFERED ON A DELAYED OR CONTINUOUS BASIS PURSUANT TO RULE 415 UNDER THE SECURITIES ACT OF 1933 CHECK THE FOLLOWING BOX. [ X ] IF THIS FORM IS FILED TO REGISTER ADDITIONAL SECURITIES FOR AN OFFERING PURSUANT TO RULE 462(B) UNDER THE SECURITIES ACT, PLEASE CHECK THE FOLLOWING BOX AND LIST THE SECURITIES ACT REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE REGISTRATION STATEMENT FOR THE SAME OFFERING. [ ] IF THIS FORM IS A POST-EFFECTIVE AMENDMENT FILED PURSUANT TO RULE 462(C) UNDER THE SECURITIES ACT, CHECK THE FOLLOWING BOX AND LIST THE SECURITIES ACT REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE REGISTRATION STATEMENT FOR THE SAME OFFERING. [ ] IF THIS FORM IS A POST-EFFECTIVE AMENDMENT FILED PURSUANT TO RULE 462(D) UNDER THE SECURITIES ACT, CHECK THE FOLLOWING BOX AND LIST THE SECURITIES ACT REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE REGISTRATION STATEMENT FOR THE SAME OFFERING. [ ] IF DELIVERY OF THE PROSPECTUS IS EXPECTED TO BE MADE PURSUANT TO RULE 434, PLEASE CHECK THE FOLLOWING BOX. [ ]
CALCULATION OF REGISTRATION FEE PROPOSED MAXIMUM AGGREGATE OFFERING OR AMOUNT OF TITLE OF EACH CLASS OF SECURITY BEING REGISTERED EXCHANGE PRICE REGISTRATION FEE DEMAND LOAN CERTIFICATES $ 100,000,000 $ 30,303 SUBORDINATED DEBENTURE BONDS $ 205,000,000 $ 62,121 TOTAL $ 305,000,000 $ 92,424*
*PREVIOUSLY PAID. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. (The following text is a Red Herring positioned landscape on the left edge of the cover page) The information in this prospectus is not complete and may be amended. We may not sell these securities until the registration statement filed with the SEC is effective. This prospectus is not an offer to sell nor is it seeking any offer to buy these securities in any state where the offer or sale is not permitted. SUBJECT TO COMPLETION, DATED DECEMBER 9, 1997 Farmland Industries' Logo is positioned in the upper right-hand corner under the text "Subject to Completion, Dated December 9, 1997" FARMLAND INDUSTRIES, INC. PROSPECTUS $205,000,000 SUBORDINATED DEBENTURE BONDS (SERIES A - H) $100,000,000 DEMAND LOAN CERTIFICATES TERMS OF SALE If all the securities offered are sold, we will receive $100,000,000 from the sale of demand loan certificates and at least $125,000,000 from the sale of subordinated debenture bonds. Also, we will exchange subordinated debenture bonds with a face amount of up to $80,000,000 for other subordinated debt securities. If more than $125,000,000 is sold for cash a lesser amount will be available for exchange. We will pay approximately $5,900,000 in commissions and $1,400,000 in other expenses. Our agents will use their best efforts to sell these securities but are not obligated to sell any of them. SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DESCRIPTION OF CERTAIN RISK FACTORS THAT YOU SHOULD CONSIDER BEFORE YOU INVEST IN THESE SECURITIES. MINIMAL INITIAL INVESTMENT SERIES $1,000.......................... Ten-Year, Series A Five-Year, Series C $5,000.......................... Ten-Year Monthly Income, Series E Five-Year Monthly Income, Series G $100,000........................ Ten-Year, Series B Five-Year, Series D Ten-Year Monthly Income, Series F Five-Year Monthly Income, Series H $1,000.......................... Demand Loan Certificates For interest rate information, call 1-800-821-8000, ext. 6360. These investments have not been approved by the SEC or any state securities commission, nor have they determined that this prospectus is accurate or complete. Any representation to the contrary is a criminal offense. FARMLAND SECURITIES COMPANY AMERICAN HEARTLAND INVESTMENT, INC. Agents December ____, 1997 INFORMATION AVAILABLE ABOUT FARMLAND The Securities Exchange Act of 1934, as amended (the "Exchange Act") requires our company to file annual and quarterly reports, as well as certain other information, with the SEC. These reports may be read and copied at the SEC's public reference rooms in Washington, D.C., New York, New York and Chicago, Illinois. You can request copies of these documents, upon payment of a duplication fee, by writing to the SEC's Public Reference Section. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference rooms. Our SEC filings are also available to the public on the SEC Internet site (http://www.sec.gov). REPORTS TO SECURITY HOLDERS You may request a copy of our latest annual report as filed with the SEC, at no cost, by writing or telephoning us at the address shown on page 4. INFORMATION AVAILABLE FROM NASD The National Association of Securities Dealers, Inc. ("NASD") instituted a program which provides information regarding the disciplinary history of NASD members and their associated persons. You may obtain an investor brochure which includes information describing this program by contacting the NASD, The NASD hotline number is 1-800-289-9999. The NASD website is http://www.nasdr.com/2000.htm. YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS OR ANY PROSPECTUS SUPPLEMENT. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH ANY INFORMATION THAT IS DIFFERENT. THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR IS IT SEEKING AN OFFER TO BUY THESE SECURITIES IN ANY STATE OR JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. FURTHERMORE, YOU SHOULD NOT ASSUME THAT THE INFORMATION IN THIS PROSPECTUS OR ANY PROSPECTUS SUPPLEMENT IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THOSE DOCUMENTS. TABLE OF CONTENTS Page Prospectus Summary........................................4 Risk Factors.............................................10 Selected Consolidated Financial Data.....................18 Management's Discussion And Analysis Of Financial Condition And Results Of Operations............................22 Determination Of Interest Rates..........................48 Use Of Proceeds..........................................50 Plan Of Distribution.....................................51 Exchange Offer...........................................53 How To Accept Exchange Offer.............................55 How To Transfer Ownership................................56 Description Of Debt Securities...........................57 The Company..............................................89 Business.................................................93 Patronage Refunds And Distribution Of Annual Earnings...115 Equity Redemption Plans.................................119 Legal Proceedings.......................................123 Management..............................................124 Executive Compensation..................................133 Security Ownership Of Certain Beneficial Owners And Management...............................144 Certain Relationships and Related Transactions..........144 Legal Matters...........................................145 Experts.................................................145 Qualified Independent Underwriter.......................146 Index To Farmland Consolidated Financial Statements......68 PROSPECTUS SUMMARY Because this is a summary, it does not contain all the information that may be important to you. You should read this entire document before making a decision. All references in this Prospectus to a "year" refer to Farmland's fiscal year ended on August 31, unless the context otherwise requires. Kansas City, Missouri is the location of our world headquarters. Our mailing address and telephone number are as follows: Farmland Industries, Inc. P.O. Box 7305 Kansas City, Missouri 64116-0005 816-459-6000 FARMLAND'S BUSINESS Founded in 1929, we are an agricultural farm supply and processing and marketing cooperative. As a cooperative, our members are also our owners. As of August 31, 1997, our membership consisted of 1,400 cooperative associations and 13,000 pork or beef producers. Based on sales, we are one of the largest cooperatives in the United States. In 1997, we had sales of $9.1 billion, including export sales in excess of $1.3 billion to customers in over 80 countries. Farmland competes with many companies, including other cooperatives. These competitors are of various sizes and have various levels of vertical integration. We sell to a large number of customers and no single customer is material to our business. Our business is focused on two areas: Agricultural inputs and outputs. AGRICULTURAL INPUTS In this area, we operate as a farm supply cooperative. Our three main farm supply product divisions are as follows: . Petroleum . Crop Production . Feed Each of these divisions manufactures products and then distributes them primarily to wholesalers or retailers. Company owned or operated plants produced over 50% of the farm supply products we sold in 1997. Member cooperative associations purchased approximately 60% of the farm supply products we sold in 1997. These cooperatives distribute products primarily to farmers and ranchers who are the end users of the products we manufacture and sell. AGRICULTURAL OUTPUTS In this area, we operate as a processing and marketing cooperative. Our operations are organized into two areas: . The processing and marketing of pork and beef . The storage, processing and marketing of grain In 1997, our members supplied about 63% of the hogs we processed, 20% of the cattle we processed and 53% of the grain we marketed. Substantially all of the pork and beef products we sold in 1997 was processed in company owned plants. THE OFFERING DESCRIPTION OF SECURITIES We are offering $100 million of Demand Loan Certificates for sale and $205 million of Subordinated Debenture Bonds for sale or to exchange for certain Farmland subordinated debt securities. The Subordinated Debenture Bonds are available in several series. Minimum Series Initial Investment Ten-Year, Series A.........................$ 1,000 Ten-Year, Series B ........................$ 100,000 Five-Year, Series C........................$ 1,000 Five-Year, Series D........................$ 100,000 Ten-Year Monthly Income, Series E..........$ 5,000 Ten-Year Monthly Income, Series F..........$ 100,000 Five-Year Monthly Income, Series G.........$ 5,000 Five-Year Monthly Income, Series H.........$ 100,000 The terms and conditions of the debt securities which we are offering for sale or exchange are more fully described in the section "Description of Debt Securities" which begins on page 57. UNDERWRITING DISCOUNTS AND COMMISSIONS We will pay FSC and AHI a commission of 4% or less of the sales price of the Subordinated Debenture Bonds and a commission of 1/2 of 1% or less of the sales price of the Demand Loan Certificates. We also pay FSC for all expenses it incurs related to the sale of these securities. However, this additional payment is limited to no more than 3% of the total sales price of the securities being offered. PURPOSE OF THE EXCHANGE OFFER The purpose of the exchange offer is to extend the period of time we utilize funds borrowed from an investor in our subordinated debt securities. For additional information regarding the exchange offer, including how to accept an exchange offer, please see "Exchange Offer" on page 53 of this Prospectus. SELLING PRICE The debt securities, if sold for cash, will be sold for 100% of the face amount. USE OF PROCEEDS Proceeds received from the sale of the debt securities will be used for general corporate purposes, including repayment of long-term debt and the funding of capital expenditures. MATURITY The Subordinated Debenture Bonds mature 10 years or 5 years from the date of original issuance. The Demand Loan Certificates are payable upon demand. INTEREST RATES The interest rates on the various debt securities which are available at the date of this Prospectus can be found under "Determination of Interest Rates" on page 48. When those rates change, we will include them in a prospectus supplement. You may obtain information about the interest rates available at any particular time by calling Farmland Securities Company, 1-800-821-8000, Extension 6360. PROVISIONS FOR EARLY REDEMPTION Holders of record ("Holders") of the Ten-Year, Series A and Series B, and the Five-Year, Series C and Series D Subordinated Debenture Bonds may redeem their investments prior to maturity under certain restricted conditions. However, we will not redeem any Subordinated Debenture Bond if, at the time of the redemption or as a result of that redemption, we would not comply with agreements we have with holders of indebtedness that is senior to the Subordinated Debenture Bonds. For detailed information regarding early redemption and limitations on early redemptions, please refer to "Limited Redemption Prior to Maturity of Subordinated Debenture Bonds" beginning on page 70 of this Prospectus and to the subcaptions "Redemption by Farmland", "Redemption by the Holder" and "IRA Redemption" within "Subordinated Debenture Bonds" beginning on page 63 of this Prospectus. The following are the general conditions under which we will redeem, prior to maturity at the request of the Holder, the Subordinated Debt Securities. To qualify for early redemption under (a) below, a Ten-Year Bond, Series A or B, must have been held at least three years and a Five-Year Bond, Series C or D, must have been held at least two years. A minimum holding period is not required for early redemption under (b), (c) and (d) below. a) We will make available each month, on a first come, first serve basis, a limited sum of money for early redemption of Series A, B, C and D Bonds. b) Series A, B, C and D Bonds held by a trustee or custodian in an IRA may be redeemed, upon request, as necessary to satisfy mandatory withdrawals from the IRA. c) Series A, B, C and D Bonds will be redeemed, upon request, on death of the holder. d) Series E, F, G and H Monthly Income Bonds will be redeemed prior to maturity only on death of the holder. RISK FACTORS You should consider carefully the following risk factors in addition to the other information contained in this Prospectus. INCOME TAX MATTERS -- LITIGATION In July 1983, we sold the stock of Terra Resources, Inc. ("Terra"), a 100% owned subsidiary engaged in oil and gas exploration and production operations. 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, excluding statutory interest, of $70.8 million. The asserted deficiencies relate primarily to our tax treatment of the Terra sale gain as income against which certain patronage-sourced operating losses could be offset. The statutory notice also claims that Farmland incorrectly characterized for tax purposes $14.6 million of gains and a $2.3 million loss related to dispositions of certain other assets. On June 11,1993, Farmland filed a petition in the United States Tax Court contesting the claimed 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 of about $85.8 million plus statutory interest. Through August 31, 1997, statutory interest, before tax benefits of the interest deduction, totaled about $243.2 million. Therefore, the total potential liability resulting from a loss of this tax case is approximately $329.0 million. 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 that year's federal and state income taxes and related statutory interest (through August 31, 1997) by approximately $13.1 million. The asserted federal and state income tax liabilities and accumulated statutory interest would become immediately due and payable unless the Company appealed the decision and posted the bond required to postpone 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 an adverse determination of the Terra tax issue, certain financial covenants of the Company's Syndicated Credit Facility (the "Credit Facility"), dated May 15, 1996, become less restrictive. If we assume the United States Tax Court had decided in favor of the IRS on all unresolved issues, and that all related additional federal and state income taxes and accumulated statutory interest had been due and payable on August 31, 1997, Farmland's borrowing capacity under the Credit Facility was adequate at that time to finance the liability. However, Farmland's ability to finance an adverse decision depends substantially on the financial effects of future operating events on its borrowing capacity under the Credit Facility. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Financial Condition, Liquidity and Capital Resources", beginning on page 22 of this Prospectus. SUBORDINATION AND ADDITIONAL DEBT The Subordinated Debenture Bonds offered by this Prospectus for sale and for exchange are unsecured obligations of Farmland and are subordinated in right of payment to all existing and future Senior Indebtedness. Senior Indebtedness of Farmland includes the Demand Loan Certificates, money borrowed from financial institutions and amounts due and payable under any instrument which provides that such amounts are to be Senior Indebtedness. The Demand Loan Certificates are unsecured and non-subordinated obligations of Farmland and have the same right of payment as all other unsecured and non- subordinated indebtedness of Farmland. In addition, the Subordinated Debenture Bonds and the Demand Loan Certificates will be effectively subordinated to all obligations of Farmland's subsidiaries. Any right of Farmland to receive assets from any subsidiary which liquidates or re-capitalizes will be subject to the claims of such subsidiary's creditors. As a result, the right of Holders of the Subordinated Debenture Bonds and the Demand Loan Certificates to participate in those assets is also subject to the claims of such subsidiary's creditors. Accordingly, the Subordinated Debenture Bonds and the Demand Loan Certificates will be effectively subordinated to all indebtedness and other liabilities, including trade accounts payable, of our subsidiaries. As of August 31, 1997: 1. Farmland had outstanding $480.8 million of Senior Indebtedness, 2. Farmland had outstanding $373.0 million aggregate principal amount of other subordinated indebtedness, and 3. Certain Farmland subsidiaries had outstanding $132.7 million aggregate principal amount of indebtedness, of which $109.2 million was nonrecourse to Farmland. The indentures under which the Subordinated Debenture Bonds and the Demand Loan Certificates are issued do not contain any provision that would limit the ability of Farmland or any of its affiliates to incur indebtedness of any type or that would afford Holders of the Subordinated Debenture Bonds or the Demand Loan Certificates protection in the event of a highly leveraged transaction, restructuring, change in control, merger, sale of substantially all the Company's assets or similar transaction involving Farmland. In the event of these transactions, no assurances can be given as to whether or not Farmland or any successor would be able to repay, from continuing operations or from proceeds of any such transaction, holders of our debt securities. EVENT OF DEFAULT ON SENIOR INDEBTEDNESS The Credit Facility contains financial covenants. Violation of these financial covenants or any other breach relating to Senior Indebtedness, including payment defaults, would create a default on our Senior Indebtedness. If default occurs, payment of principal and interest on the Subordinated Debenture Bonds, as well as our other subordinated debt, will stop. Payments will begin again when the breach or violation is resolved. RESTRICTED REDEMPTION RIGHTS OF HOLDERS OF SUBORDINATED DEBENTURE BONDS Holders of Subordinated Debenture Bonds may redeem their investments prior to maturity only under restricted conditions. These restricted conditions are more fully described under the caption "Limited Redemption Prior to Maturity of Subordinated Debenture Bonds" starting on page 70 of this Prospectus. Depending on your investment objectives, these restricted redemption rights may make these Subordinated Debenture Bonds an unsuitable investment for you. PAY AMOUNT OF INTEREST AND PRINCIPAL FROM GENERAL CORPORATE FUNDS We have not and do not intend to establish special cash reserves, escrow accounts or trusts for payment of principal or interest on the securities offered in this Prospectus. We have relied on, and plan to continue to rely on, general corporate funds provided through operations, sale of assets and other borrowings to make all principal and interest payments when due. EXTERNAL FACTORS MAY AFFECT OUR BUSINESS Our financial success depends largely on factors which affect agricultural, production and marketing conditions. These factors, which are outside of Farmland's control, often change agricultural conditions in an unpredictable manner. Therefore, we cannot determine the future impact on our operations from changes in these external factors. We expect demand for our products will continue to be volatile as agricultural conditions change. External factors that affect agricultural conditions and Farmland's financial results include: (A) REGULATORY: Our ability to grow through acquisitions and investments in joint ventures may be affected by regulatory delays. Also, various federal and state regulations to protect the environment encourage farmers to use less fertilizer and other chemical applications. (B) COMPETITION: Competitors may offer more varied products and may possess greater resources than our company. Competitors may also have better access to equity capital markets than Farmland. (C) IMPORTS AND EXPORTS: The following factors may affect the amount of agricultural products imported or exported: (1) Foreign trade and monetary policies; (2) Laws and regulations; (3) Political and governmental changes; (4) Inflation and exchange rates; (5) Taxes; (6) Operating conditions; and (7) World demand. (D) WEATHER: Global weather conditions may cause: (1) Shifts in demand that result in price changes for agricultural input products; and (2) Shifts in supply that result in cost changes for agricultural output products. (E) RAW MATERIALS COST: Historically, we are limited in our ability to increase our products' selling prices in order to pass through the price increases in our raw materials. (F) OTHER FACTORS: Other domestic and global factors may have an impact on the supply, demand and price of our products. The following are examples of these factors. (1) Domestic factors 1. Crop failures; 2. Federal agricultural programs; and 3. Production efficiencies. (2) Global factors 1. Embargoes; 2. Political instabilities; and 3. Local conflicts and civil disruptions. LIMITED ACCESS TO EQUITY CAPITAL MARKETS As a cooperative, we raise equity primarily through the reinvestment of a portion of patronage refunds as stock or capital credits and through retention of net income (retained earnings) generated from transactions with non-members. ENVIRONMENTAL MATTERS Various federal, state and local environmental laws and regulations impose requirements on our operations. Furthermore, some of these laws and regulations impose liability on Farmland for the cleanup of environmental contamination. Our capital expenditures and operating costs related to compliance with these laws and regulations have been substantial over the years. Although we cannot predict the enforcement or interpretations of existing laws and regulations or the impact of new or amended laws or regulations, we anticipate that capital expenditures and operating costs related to environmental laws and regulations are likely to continue to be substantial. Many of our current and former facilities have been in operation for many years. Over this time, Farmland and other prior operators of these facilities have generated, used, stored or disposed of substances or wastes that may be considered hazardous under current or future applicable environmental laws. As a result of these operations, the soil and groundwater at many of our current and former facilities have been contaminated. Material expenditures may be required in the future to remediate contamination from past or future releases of hazardous substances or wastes. We own or operate, either wholly or jointly, 27 grain elevators and 62 manufacturing properties. We also have potential responsibility for environmental conditions at a number of former manufacturing facilities and at waste disposal facilities operated by other companies. We have been identified as a potentially responsible party (a "PRP") under the federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") at various National Priority List sites and have unresolved liability with respect to the past disposal of hazardous substances at five of these 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 whether the original disposal was legal. These persons include the present and former owner or operator of a contaminated property, and companies that generated, disposed of or arranged for the disposal of, hazardous substances found at the property. Farmland currently is aware of probable obligations for environmental matters at 33 properties and is investigating or remediating contamination at 25 properties. During 1995, 1996 and 1997, we paid approximately $3.2 million, $1.8 million and $4.6 million, respectively, for environmental investigation and remediation. Farmland has accrued all costs which, in management's opinion, are probable and which costs are reasonably estimable at August 31, 1997 amounting to $16.9 million. It is possible that the costs of resolution of these matters may exceed the liabilities which have been accrued. In the opinion of management, it is reasonably possible for these costs to be an additional $17.5 million. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations-Matters Involving the Environment" beginning on page 43 and "Business-Matters Involving the Environment" beginning on page 111. ABSENCE OF PUBLIC MARKET A trading market does not exist for our debt securities. Also, it is unlikely that a secondary market for the securities offered under this Prospectus will develop. We do not plan to list any of the securities on any securities exchange. AFFILIATED UNDERWRITER FSC is our wholly owned subsidiary. FSC's business is limited to the offer and sale of securities issued by our company. The offering complies with the terms of a partial exemption from requirements of Schedule E of the NASD bylaws. This partial exemption requires, among other things, that a minimum of 80 percent of the dollar amount of sales be to a defined group as approved by the NASD. Only persons associated with us or FSC participated in determining the terms, including price, of the securities offered in this Prospectus. POTENTIAL TAXABLE GAINS OR LOSSES FROM THE EXCHANGE Exchanging subordinated debt which you now hold for Subordinated Debenture Bonds, as permitted by this Prospectus, could result in taxable gains and losses to the holder. 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 except ratios) 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 RATIO OF EARNINGS TO FIXED CHARGES (2)........... Note 2 2.1 4.0 3.0 3.0 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. (2) The ratios of earnings to fixed charges have been computed by dividing fixed charges into the sum of (a) income (loss) before taxes for the enterprise as a whole, less capitalized interest and with adjustments to appropriately reflect the Company's majority-owned, 50%-owned, and less-than- 50%-owned affiliates, and (b) fixed charges. Fixed charges consist of interest on all indebtedness (including amortization of debt issuance expenses) and the component of operating rents determined to be interest, with adjustments as appropriate to reflect the Company's 50%-owned and less- than-50%-owned affiliates. Income was inadequate to cover fixed charges for the year ended August 31, 1993. The dollar amount of the coverage deficiency was $36.6 million. 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 with various participating banks. The Credit Facility provides a $1.1 billion credit (subject to compliance with certain financial covenants) 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 Credit 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 Credit 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 Credit Facility are reviewed and/or renewed annually. The next scheduled review date is in May 1998. The revolving term provisions of the Credit Facility expire in May 2001. At August 31, 1997, the Company had $185.5 million of short-term borrowing under the Credit Facility and $160.0 million of revolving term borrowings; additionally, $44.2 million of the Credit 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. Farmland National Beef Packing Company, L.P. ("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 credit 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. The Company's international grain trading subsidiaries (collectively referred to as "Tradigrain") have 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. 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 Credit 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 Credit 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 Credit 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 (as defined below). 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 was 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 were 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 feed ingredients increased approximately 10% and unit sales of formula feed and basic ingredients increased approximately 2%. 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 North American Grain Division ("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 $22.3 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 ($16.8 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 - Capital Expenditures and Investments in Ventures" included herein. MATTERS INVOLVING THE ENVIRONMENT The Company is subject to various stringent federal, state and local environmental laws and regulations, including those governing the use, storage, discharge and disposal of hazardous materials, as the Company uses hazardous substances and generates hazardous wastes in the ordinary course of its manufacturing processes. The Company recognizes liabilities related to remediation of contaminated properties when the related costs are probable and can be reasonably estimated. Estimates of these costs are based upon currently available facts, existing technology, undiscounted site specific costs and currently enacted laws and regulations. In reporting environmental liabilities, no offset is made for potential recoveries. Such liabilities include estimates of the Company's share of costs attributable to potentially responsible parties 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. 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 Prospectus 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, the 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 (as defined below), "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 "Risk Factors", "Business", "Use of Proceeds", "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Notes to Consolidated Financial Statements", as well as within this Prospectus 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 "Risk Factors" included herein. DETERMINATION OF INTEREST RATES The interest rate with respect to any series of Subordinated Debenture Bonds (each a "Bond Interest Rate") is the interest rate per annum for such series, as determined by Farmland, from time to time, after giving consideration to the current rates of interest established by various money markets, and Farmland's need for funds. Any change in the Bond Interest Rate will not affect the BIR on any Subordinated Debenture Bonds for which the full purchase price was received prior to the change. The interest rate for Demand Loan Certificates (the "Certificate Interest Rate") is determined, from time to time, by Farmland. Except as hereinafter provided, each Demand Loan Certificate shall earn interest at the Certificate Interest Rate in effect on the date of issuance of such Demand Loan Certificate for a period of six (6) months only; provided, however, that if during such six (6) month period the Certificate Interest Rate for Demand Loan Certificates is increased to a rate higher than that currently in effect for a Demand Loan Certificate, then each such Demand Loan Certificate shall earn interest at the increased rate from the effective date of the increase to the end of such Demand Loan Certificate's then current six (6) month period. Six (6) months from the date of issuance of each Demand Loan Certificate and each six (6) month anniversary date thereafter, such Demand Loan Certificate shall, if not redeemed, earn interest at the Certificate Interest Rate for Demand Loan Certificates in effect on such anniversary date, but only for a six (6) month period from such anniversary date, subject to the escalation provisions previously set forth. A decrease in the Certificate Interest Rate for Demand Loan Certificates will have no effect on the Certificate Interest Rate of any Demand Loan Certificate issued prior to the decrease unless such decreased rate is in effect on the first day of the next subsequent six (6) month period of such outstanding Demand Loan Certificate. If redeemed by a Farmland member cooperative during a one (1) month period or by any other purchaser during a six (6) month period immediately following the Date of Original Issuance (as defined below), the Demand Loan Certificates shall bear interest from Date of Original Issuance to date of redemption at a rate 2% below the Certificate Interest Rate (the "Demand Rate"). Thus, if the Certificate Interest Rate is 6% per year, the Demand Rate would be 4% per year. On the date of this Prospectus, the Bond Interest Rate was 7.75%, 7.90%, 7.75% and 7.90% on Ten-Year, Series A, Series B, Series E and Series F Bonds, respectively, and 7.25%, 7.40%, 7.25% and 7.40% on Five-Year, Series C, Series D, Series G and Series H Bonds, respectively. On the date of this Prospectus, the Certificate Interest Rate was 5.5% on Demand Loan Certificates. Whenever the Bond Interest Rate or Certificate Interest Rate is changed, this Prospectus shall be amended to specify the interest rate in effect, after the effective date of the change as specified in the amendment, on the Subordinated Debenture Bonds and Demand Loan Certificates, as applicable, to be offered pursuant to such Prospectus. Whenever the Bond Interest Rate or Certificate Interest Rate is changed, each respective Holder of Subordinated Debenture Bonds or Demand Loan Certificates is notified in writing of the change as specified in the amendment. Information concerning the Bond Interest Rate and Certificate Interest Rate can be obtained from the Prospectus or from Farmland Securities Company, Post Office Box 7305, Kansas City, Missouri 64116 (telephone 1-800-821-8000, extension 6360). See "Description of Debt Securities - Demand Loan Certificates - Interest" and the subcaption "Bond Interest Rates" within the description of each type of Subordinated Debenture Bonds included herein. USE OF PROCEEDS The offering is made on a best efforts basis with no established minimum amount of Subordinated Debenture Bonds and Demand Loan Certificates (collectively the "Offered Debt Securities") that must be sold. No assurance can be provided as to the amount of net proceeds the Company may receive as a result of this offering. Assuming that all of the Subordinated Debenture Bonds and Demand Loan Certificates offered hereby are sold for cash, net proceeds to the Company will be approximately $297.6 million after deducting estimated commissions and expenses. To the extent Subordinated Debenture Bonds are exchanged pursuant to the exchange offer, net cash proceeds will be reduced by the face amount of Subordinated Debenture Bonds exchanged, up to $80.0 million. Any proceeds to the Company from this offering may be used: 1) to fund portions of the Company's capital expenditures and investments in ventures which are estimated to be approximately $202.2 million through the two-year period ending August 31, 1999; 2) to refinance approximately $41.5 million of subordinated debt with interest rates of 7.25% to 10.5% which mature at various times prior to August 31, 1999; or 3) to redeem subordinated debt prior to maturity at owners' requests, as permitted by the respective trust indentures pursuant to which such subordinated debt was issued. To the extent that proceeds from sales of the securities offered hereby are less than amounts required for these purposes, such insufficient amounts may be obtained from operations, from bank or other borrowings or from other financing arrangements. It is also possible that the Company will have funded certain of such proposed user from other sources of financing prior to the time, if ever, that funds become available from this offering. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition, Liquidity and Capital Resources", included herein, "Business - Capital Expenditures and Investments in Ventures", included herein, and the subcaptions "Redemption by Farmland" and "Redemption by the Holder" within the description of each type of Subordinated Debenture Bond included herein. PLAN OF DISTRIBUTION The securities offered by this Prospectus for cash and for exchange are offered by FSC and AHI, and may be offered by other broker-dealers selected by Farmland. The offering is on a best efforts basis. There is no requirement that any minimum amount of securities offered hereby must be sold. The offering shall be for an indeterminate period of time not expected to be in excess of two years. FSC, located at 3315 North Oak Trafficway, Kansas City, Missouri, is a wholly-owned subsidiary of Farmland organized for the sole purpose of offering Farmland's Demand Loan Certificates and subordinated debt for sale to the general public and/or for exchange and to solicit offers therefor which are subject to acceptance by Farmland. FSC is a member of the NASD and the Securities Investor Protection Corporation (SIPC). FSC's involvement in this offering is in compliance with terms of a partial exemption from requirements of Schedule E of the NASD Bylaws; no persons, other than persons associated with Farmland or FSC, participated in determining the price and other terms of the securities offered hereby. FSC is under no firm commitment or obligation to solicit offers for any specified amount of such debt securities. FSC's commitment is to use its best efforts to solicit such orders. Farmland will pay commissions to FSC not to exceed 4% of the aggregate price of the Offered Debt Securities. Farmland will pay all expenses and liabilities incurred by FSC, limited to an amount not to exceed 3% of the aggregate sales price of the Offered Debt Securities. FSC is a registered broker-dealer under the Exchange Act as amended, but has only limited authority to engage in the offer and sale of securities issued by Farmland. Farmland will indemnify FSC for certain liabilities under the Securities Act of 1933, as amended (the "Securities Act"). FSC, AHI and other brokers-dealers, if any, selected by Farmland have or will agree to deliver a current prospectus to prospective investors at the time of or prior to any offering of such certificates for sale or for exchange. The Company has engaged AHI, located at 110 E. Iron, P. O. Box 1303, Salina, Kansas 67402, to offer Farmland's Offered Debt Securities to the general public and for exchange and to solicit offers therefore which are subject to acceptance by Farmland. Farmland may engage other broker-dealers that are qualified to offer and sell Offered Debt Securities in a particular state and that are members of the National Association of Securities Dealers, Inc. AHI and each broker-dealer participating in this offering shall be held responsible for complying with all statutes, rules and regulations of all jurisdictions in which each participating broker-dealer offers the Offered Debt Securities for sale. Farmland will pay to AHI and may pay to other selected broker-dealers for their services a sales commission of not more than 4% of the face amount of Subordinated Debenture Bonds and not more than 1/2 of 1% of the face amount of Demand Loan Certificates which AHI and other selected broker-dealers sell. In addition, Farmland will pay to AHI and may pay to other selected broker-dealers an unallocated due diligence and marketing fee of not more than 1/2 of 1% of the face amount of the Subordinated Debt Securities the broker-dealers sell. Farmland may indemnify AHI and other selected broker-dealers for certain liabilities arising out of violations by Farmland of blue sky laws, or the Securities Act. Interstate/Johnson Lane Corporation, a member of the NASD, participated as a qualified independent underwriter in the "due diligence" review with respect to the preparation of this Prospectus and received approximately $45,000 for such participation. As discussed above, Interstate/Johnson Lane Corporation will not be participating in the pricing of the Offered Debt Securities. EXCHANGE OFFER Farmland is offering: 1) to the owners of its outstanding Subordinated Capital Investment Certificates, as well as any Ten-Year or Five-Year Bonds, Series A, B, C or D offered and sold hereunder, the right to exchange such certificates for an equivalent principal amount of Monthly Income Bonds, Series E, F, G or H ($5,000 or $100,000 minimum, as applicable) which, at the time of the exchange, is being offered by this Prospectus. The option to exchange a Subordinated Capital Investment Certificate, Ten-Year Bond (as defined below) or Five-Year Bond (as defined below) into a Monthly Income Bond, Series E, F, G or H is not affected by the period of time the Subordinated Capital Investment Certificate, Ten-Year Bond or Five- Year Bond has been held. Farmland will not redeem Monthly Income Bonds prior to maturity except upon death of the owner. 2) to the owners of its Subordinated Capital Investment Certificates which have been held until eligible for redemption prior to maturity at the option of the owner, the right to exchange such certificates for an equivalent principal amount of any Ten-Year Bond or Five-Year Bond which, at the time of the exchange, is being offered by this Prospectus. This option to exchange into Ten-Year Bonds or Five-Year Bonds is affected by the period of time the outstanding certificate has been held. The required holding period is as follows: If, at the time of Then, to be eligible issuance the maturity for exchange, the period of the certificate must have certificate held was: been held for: (In Years) (In Years) 5 2 10 3 15 5 20 5 An exchange will be made effective on the day certificates eligible for exchange are received at Farmland's office in Kansas City, Missouri; provided, however, that any certificates received within a fifteen (15) day period preceding the record date of such certificates, the exchange shall be made effective as of the first day following such record date. The exchange is irrevocable after the effective date, but is revocable at any time prior to the effective date. Notice of an owner's revocation may be in writing, delivered to the address given below (see "How to Accept Exchange Offer" included herein) or by telephone to (816) 459-6360. This exchange offer will expire at 12:00 P.M. Eastern Standard Time on December 31, 1998, unless terminated prior to such date. Owners of certificates or bonds eligible for exchange shall be notified by letter from Farmland at least 30 days prior to the effective date of Farmland's termination of this exchange offer. Any interest accrued on a certificate or bond being exchanged will be paid on the day the exchange is made effective. The following discussion is a brief summary of the principal United States Federal income tax consequences under current Federal income tax laws relating to exchanges of certificates. This summary is the opinion of Robert B. Terry, General Counsel for Farmland and is not intended to be exhaustive and, among other things, does not describe state, local or foreign income and other tax consequences. Generally, the exchange of certificates would be considered as taxable exchanges. The basis for determining a taxable gain or loss on a taxable exchange is for an owner to take into account as gain or loss the difference between the fair market value of the security being received and his basis (usually cost) in the security being exchanged. As a practical matter, most owners should have no gain or loss since the securities were sold at 100% of face amount and are being exchanged at 100% of face amount. However, since it is possible for a prior owner to have sold his certificate to another person at a cost which is more or less than he had paid for it, a subsequent owner could have a different cost than the original issued cost. Any gain or loss recognized on a taxable exchange would be taken into account for purpose of federal income taxes as a gain or loss from the sale or disposition of a capital asset; assuming the security exchanged is held as a capital asset Characterization of the gain or loss as short-term or long-term will depend on the length of time the certificate had been held by the owner as of the date of the exchange. Owners of these certificates should seek advice from their tax advisor before accepting the exchange offer. HOW TO ACCEPT EXCHANGE OFFER The exchange offer may be accepted by delivering any of the Subordinated Capital Investment Certificates or Ten-Year Bonds or Five-Year Bonds, as applicable, which are eligible for exchange (see "Exchange Offer" immediately above), to Farmland Securities Company, P.O. Box 7305, Kansas City, Missouri 64116 or American Heartland Investments, Inc. P. O. Box 1303, Salina, Kansas, 67402. The certificates should be assigned to Farmland in the transfer section (on the reverse side of the certificate) and endorsed by all of the persons whose names appear on the face of the certificate. Should any registered owner be incapable of endorsing the certificate, additional documentation may be necessary. Call (816) 459-6036 or write to the above address for specific information. Should registered owners wish to have the new certificate issued to persons other than as shown on the certificate being surrendered in the exchange, the endorsement signatures must be guaranteed by a commercial bank or trust company officer or a NASD member firm representative. The exchange offer must be accompanied by a completed "Order and Receipt for Investment" form supplied by FSC or AHI. The U.S. Treasury Form W-9, Backup Withholding Certificate, included on the order form must be completed and signed by the principal owner of the new certificate. HOW TO TRANSFER OWNERSHIP To transfer ownership of the Offered Debt Securities, the certificates should be assigned to the new owner(s) in the transfer section on the reverse side of the certificate and endorsed by all persons named on the face of the certificate. Should any registered owner be incapable of endorsing the certificate, additional documentation may be necessary. Call (816) 459-6360 or write Farmland Industries, Inc., P.O. Box 7305, Kansas City, Mo. 64116, Dept. 79 for specific information. All transfer requests require that endorsement signatures be guaranteed by a commercial bank or trust company officer or an NASD member firm representative. Requests for transfer should be accompanied by a completed transfer form supplied by Farmland. The U.S. Treasury Form W-9 Backup Withholding Certificate included with or on the transfer form must be completed and signed by the new principal owner. The transfer will be made effective on the day certificates to be transferred are received at Farmland's office in Kansas City, Missouri; provided, however, that for any certificates received within a fifteen (15) day period preceding the record date of such certificates, the transfer shall be made effective as of the first day following such record date. DESCRIPTION OF DEBT SECURITIES Under this Prospectus, Farmland is offering the following Offered Debt Securities, namely: Demand Loan Certificates Subordinated Debenture Bonds issuable in series, as follows: Minimum Series Initial Investment Ten-Year, Series A.........................$ 1,000 Ten-Year, Series B ........................$ 100,000 Five-Year, Series C........................$ 1,000 Five-Year, Series D........................$ 100,000 Ten-Year Monthly Income, Series E..........$ 5,000 Ten-Year Monthly Income, Series F..........$ 100,000 Five-Year Monthly Income, Series G.........$ 5,000 Five-Year Monthly Income, Series H.........$ 100,000 The Demand Loan Certificates are herein called the "Demand Loan Certificates" and various series of Subordinated Debenture Bonds referred to above are herein collectively called the "Subordinated Debenture Bonds". The Demand Loan Certificates will rank equally with all other unsecured and unsubordinated debt of Farmland and will be issued under an indenture between UMB Bank, National Association, and the Company (the "Senior Indenture"). The Demand Loan Certificates are direct obligations of Farmland. As described below, the Senior Indenture permits the issuance of unsubordinated debt in series, of which the Demand Loan Certificates are a series. Each series of Subordinated Debenture Bonds will be subordinate and junior in right of payment to all Senior Indebtedness (as defined below) of Farmland and will be issued under an indenture between Commerce Bank, National Association, and the Company (the "Subordinated Indenture"). As described below, the Subordinated Indenture permits the issuance of subordinated debt in series, of which each series of Subordinated Debenture Bonds offered hereby is a series. The Senior Indenture and the Subordinated Indenture are herein referred to collectively as the "Indentures" and individually as an "Indenture". The unsubordinated debt issuable under the Senior Indenture and the subordinated debt issuable under the Subordinated Indenture are referred to collectively as the "Debt Securities". Each series of Debt Securities issued pursuant to an Indenture will be issued pursuant to an amendment or supplemental indenture or pursuant to an Officers' Certificate, in each case delivered pursuant to resolutions of the Board of Directors of Farmland and in accordance with the provisions of Section 3.01 of the applicable Indenture. The terms of the Debt Securities include those stated in the applicable Indenture and those made part of the applicable Indenture by reference to the Trust Indenture Act of 1939, as amended (the "TIA"). The Debt Securities are subject to all such terms and the Holders of Debt Securities are referred to the Indentures and the TIA for a statement of such terms. The following summaries of certain provisions of each Indenture, the Debt Securities and the Offered Debt Securities are not complete and are qualified in their entirety by reference to the provisions of the applicable Indenture, including the definitions of capitalized terms used herein without definition. Numerical references in parentheses are to sections in the applicable Indenture and, unless otherwise indicated, capitalized terms have the meanings given them in the Indentures. GENERAL Neither Indenture limits the amount of Debt Securities, debentures, notes or other evidences of indebtedness that may be issued by Farmland or any of its subsidiaries. Furthermore, neither Indenture affords Holders of Debt Securities protection in the event of a highly leveraged transaction, restructuring, change in control, merger or similar transaction involving the Company that may adversely affect Holders of Debt Securities. Each Indenture provides that Debt Securities may be issued from time to time in one or more series. Under each Indenture, Farmland has the authority to establish as to each series (i) the title of the Debt Securities of the series; (ii) any limit upon the aggregate principal amount of the Debt Securities of the series; (iii) the date or dates on which the principal of or premium, if any, on the Debt Securities of the series shall be payable or the methods for the determination thereof; (iv) the rate or rates at which such Debt Securities will bear interest, if any, or the method or methods of calculating such rate or rates of interest, the date or dates from which such interest shall accrue or the method or methods by which such date or dates shall be determined, the interest payment dates on which any such interest shall be payable, the right, if any, of Farmland to defer or extend an interest payment date, the record date, if any, for the interest payable on any Interest Payment Date, and the basis upon which interest shall be calculated if other than that of a 365-day year; (v) the place or places where such Debt Securities shall be payable or surrendered for registration of transfer or exchange; (vi) the period or periods within which, the price or prices at which, and the other terms and conditions upon which, such Debt Securities may be redeemed, in whole or in part, at the option of Farmland; (vii) the obligation, if any, of Farmland to redeem or purchase such Debt Securities pursuant to any sinking fund or analogous provisions or upon the happening of a specified event or at the option of a Holder thereof and the period or periods within which, the price or prices at which and the other terms and conditions upon which, such Debt Securities shall be redeemed or purchased, in whole or in part, pursuant to such obligation; (viii) the denominations in which such Debt Securities shall be issuable; (ix) if other than the entire principal amount thereof, the portion of the principal amount of Debt Securities of the series which shall be payable upon declaration of acceleration thereof upon an event of default; (x) provisions, if any, granting special rights to the holders of Debt Securities of the series upon the occurrence of specified events; (xi) any deletions from, modifications of or additions to the events of default specified in the applicable Indenture or covenants of Farmland specified in the applicable Indenture; (xii) the forms of such Debt Securities and interest coupons, if any, of the series; (xiii) the applicability, if any, to the Debt Securities and interest coupons, if any, of the series of defeasance provisions; (xiv) if other than Farmland, the identity of the Registrar and any paying agent; (xv) any restrictions on the registration, transfer or exchange of such Debt Securities; and (xvi) any other terms of the series including any terms which may be required by or advisable under United States laws or regulations or advisable (as determined by Farmland) in connection with the marketing of Debt Securities of the series. (Section 3.01) Unless otherwise indicated as to a series of Debt Securities, the Debt Securities will be issued only in fully registered form without coupons and Debt Securities denominated in U.S. dollars will be issued in denominations of not less than $1000. (Section 3.02) The indentures permit Farmland to determine to issue any series in book entry form. If Farmland so determines, the relevant procedures will be set forth in a prospectus supplement. Unless otherwise indicated as to a series of Debt Securities, the principal of, and any premium or interest on, any series of Debt Securities will be payable at the principal executive offices of Farmland in Kansas City, Missouri, provided that, at the option of Farmland, payment of interest may be made by check mailed to the address of the Holder entitled thereto as it appears in the related security register or by electronic funds transfer or similar means to an account maintained by the Holder entitled thereto as it appears in the related security register (Sections 3.05, 3.07, 6.02). The office address of Farmland is 3315 North Oak Trafficway, Kansas City, Missouri, 64116-0005. In any case where the date fixed for payment of the principal of or interest on or the date fixed for redemption of any Debt Security shall be a Saturday or a Sunday or shall, in Kansas City, Missouri, be a legal holiday or a day on which banking institutions are authorized by law to close, then payment of interest or principal need not be made on such date, but in any such case may be made on the next succeeding day not a Saturday or a Sunday or a legal holiday or a day on which banking institutions are authorized by law to close with the same force and effect as if made on the date of maturity or the date fixed for redemption, and no interest shall accrue for the period after such date. Farmland will issue the Offered Debt Securities on the day (the "Date of Original Issuance") on which it receives (or is deemed to receive) and has accepted payment of the full purchase price. Any payments (other than by electronic funds transfer or similar means) received after noon shall be deemed received by Farmland on the next business day. Electronic funds transfers are effective when funds are received. No Offered Debt Security shall be valid or obligatory for any purpose unless there appears on such Offered Debt Security a certificate of authentication substantially in the form provided for in the applicable Indenture duly executed by the applicable Trustee by manual signature of one of its authorized officers. (Sections 2.02, 3.03) DEMAND LOAN CERTIFICATES INTEREST Except as hereinafter provided, each Demand Loan Certificate shall earn interest at the Certificate Interest Rate in effect on the Date of Original Issuance of such Demand Loan Certificate for a period of six (6) months only; provided, however, that if during such six (6) month period the Certificate Interest Rate is increased to a rate higher than that currently in effect for the Demand Loan Certificates, then each such Demand Loan Certificate shall earn interest at the increased rate from the effective date of the increase to the end of such Demand Loan Certificate's then current six (6) month period. Commencing six (6) months from the Date of Original Issuance of each Demand Loan Certificate and on each six (6) month anniversary date thereafter, such Demand Loan Certificate shall, if not redeemed, earn interest at the Certificate Interest Rate in effect on such anniversary date, but only for a six (6) month period from such anniversary date, subject to the escalation provisions previously set forth. A decrease in the Certificate Interest Rate will have no effect on any Demand Loan Certificate issued prior to the decrease until the first day of the next subsequent six (6) month period of such outstanding Demand Loan Certificate. Holders of Demand Loan Certificates are notified of the effective date of any change of the Certificate Interest Rate which affects the Demand Loan Certificates held. If redeemed by a Farmland voting member cooperative during a one (1) month period or by any other purchaser during a six (6) month period immediately following the Date of Original Issuance, the Demand Loan Certificates shall bear interest from Date of Original Issuance to date of redemption at a Demand Rate 2% below the Certificate Interest Rate. Thus, if the Certificate Interest Rate is 6% per year, the Demand Rate would be 4% per year. Interest on the principal amount of any Demand Loan Certificates held longer than six (6) months will be computed at the effective Certificate Interest Rate and is payable in one of the following ways at the option of the Holder, made at the time of purchase and irrevocable as to the purchaser: (i) six (6) months after the Date of Original Issuance and at the end of each and every six (6) month period thereafter until the Demand Loan Certificate is surrendered for redemption, or (ii) only at the date of redemption compounded semi-annually at the effective Certificate Interest Rate. See "-Tax Consequences of Interest Election". Any interest not punctually paid or duly provided for on any interest payment date and interest on such defaulted interest ("Defaulted Interest") on any Demand Loan Certificate will not be payable to the Holder thereof on the applicable payment date but instead may either be paid to the person in whose name such Demand Loan Certificate is registered at the close of business on a special record date for the payment of such Defaulted Interest to be fixed by the Trustee, notice of which shall be given to the Holder of such Demand Loan Certificate not less than ten (10) days prior to such special record date, or may be paid at any time in any other lawful manner, all as more completely provided in the Senior Indenture. (Section 3.07) REDEMPTION The Demand Loan Certificates cannot be called for redemption by Farmland at any time prior to maturity. Farmland will redeem the Demand Loan Certificates at any time upon written request of the Holder. No partial redemptions will be permitted. If the Demand Loan Certificate is surrendered for redemption by a Farmland member cooperative during a one (1) month period or by any other Holder during a six (6) month period immediately following the Date of Original Issuance, interest computed at the applicable Demand Rate from Date of Original Issuance to date of redemption will be paid at the time of redemption of the Demand Loan Certificate. If the Demand Loan Certificate is held for a period longer than six (6) months from Date of Original Issuance, interest from the last previous date on which interest was paid to the date of redemption computed at the applicable Certificate Interest Rate will be paid upon redemption. Any interest held for compounding by Farmland in accordance with an interest option made by the purchaser will be paid upon redemption of the Demand Loan Certificate. SUBORDINATED DEBENTURE BONDS TEN-YEAR, SERIES A AND B MATURITY DATE The maturity date for Subordinated Debenture Bonds, Ten-Year, Series A and Ten-Year, Series B (hereinafter referred to individually as "Series A Bonds" and "Series B Bonds" and collectively as the "Ten-Year Bonds") is ten (10) years from the Date of Original Issuance. The payment of the principal will be made at maturity upon presentation and surrender of the Subordinated Debenture Bonds, properly endorsed. INTEREST RATES The interest rates for the Ten-Year Bonds will be determined, from time to time, by Farmland. See "Determination of Interest Rates". SERIES A BONDS The Bond Interest Rate for any Series A Bond issued will be the rate per year stated on the face of the bond. The Series A Bonds (which require a minimum initial investment of $1000) will bear interest at the applicable Bond Interest Rate as in effect on the Date of Original Issuance, but any change of the Bond Interest Rate for later issued Series A Bonds will not affect the Bond Interest Rate on any Series A Bond for which the full purchase price was received prior to the change. SERIES B BONDS The Bond Interest Rate for any Series B Bond issued will be the rate per year stated on the face of the bond. The Series B Bonds (which require a minimum initial investment of $100,000) will bear interest at the applicable Bond Interest Rate as in effect on the Date of Original Issuance. Farmland anticipates that the Bond Interest Rate for Series B Bonds on a particular day may exceed by up to 1/4 of 1% per year the Bond Interest Rate for a Series A Bond issued on that day. Any change of the Bond Interest Rate for later issued Series B Bonds will not affect the Bond Interest Rate on any Series B Bond for which the full purchase price was received prior to the change. INTEREST PAYMENTS Interest is payable on the principal of the Ten-Year Bonds from the Date of Original Issuance at the election of the purchaser, made at the time of purchase, in one of the following ways: (i) semiannually on January 1 and July 1, to Holders of record on the last preceding December 15 and June 15, respectively (or, if originally issued between the record date and the payment date, to the Holder on the Date of Original Issuance); or (ii) at maturity or at the date of redemption if redeemed prior to maturity, compounded semiannually, on December 31 and June 30 at the applicable Bond Interest Rate. Any election to receive payment of the interest semiannually is irrevocable. The election to receive payment of the interest at maturity, or at the date of redemption if redeemed prior to maturity, will be terminated upon written request of the Holder, such termination to be effective as of the last previous interest compounding date. Such termination is irrevocable and, at the same time, is an election to receive payment of the interest semiannually thereafter. Any interest attributable to periods starting with the Date of Original Issuance and ending with the effective date of the written request of the Holder to terminate the election to receive payment of the interest at maturity or at the date of redemption if redeemed prior to maturity will be paid upon receipt of the written request to terminate the election. Farmland shall have the right at any time by notice to the Holder to terminate any obligation to continue retaining the interest of any Holder. Such termination shall be effective as of the opening of business on the day following the first interest compounding date after such notice is mailed to the Holder, and the Holder will be paid all the interest accrued to the Holder's account on the effective date. See "-Tax Consequences of Interest Election". Any Defaulted Interest on any Ten-Year Bond will not be payable to the Holder thereof on the applicable record date but instead may either be paid to the person in whose name such Ten-Year Bond is registered at the close of business on a special record date for the payment of such Defaulted Interest to be fixed by the Trustee, notice of which shall be given to the Holder of such Ten-Year Bond not less than ten (10) days prior to such special record date, or may be paid at any time in any other lawful manner, all as more completely provided in the Subordinated Indenture. (Section 3.07) REDEMPTION BY FARMLAND The Ten-Year Bonds may be redeemed, after two (2) years from the Date of Original Issuance, at the option of Farmland at any time prior to maturity, on at least fifteen (15) days written notice, at face value plus accrued interest to the date of redemption. The Subordinated Indenture permits Farmland to select in any manner at its discretion the bonds to be redeemed. (Section 4.01) REDEMPTION BY THE HOLDER Farmland will redeem limited amounts of the Ten-Year, Series A Bonds and Series B Bonds prior to maturity at the option of the Holder as described under the caption "Limited Redemption Prior to Maturity of Subordinated Debenture Bonds" on page 70. FIVE-YEAR, SERIES C AND D MATURITY DATE The maturity date for Subordinated Debenture Bonds, Five-Year, Series C and Five-Year, Series D (hereinafter referred to individually as "Series C Bonds" and "Series D Bonds" and collectively as the "Five-Year Bonds") is five (5) years from the Date of Original Issuance. The payment of the principal will be made at maturity upon presentation and surrender of the Subordinated Debenture Bonds, properly endorsed. INTEREST RATES The interest rates for the Five-Year Bonds will be determined, from time to time, by Farmland. See "Determination of Interest Rates". SERIES C BONDS The Bond Interest Rate for any Series C Bond issued will be the rate per year stated on the face of the bond. The Series C Bonds (which require a minimum initial investment of $1000) will bear interest at the applicable Bond Interest Rate as in effect on the Date of Original Issuance, but any change of the Bond Interest Rate for later issued Series C Bonds will not affect the Bond Interest Rate on any Series C Bond for which the full purchase price was received prior to the change. SERIES D BONDS The Bond Interest Rate for any Series D Bond issued will be the rate per year stated on the face of the bond. The Series D Bonds (which require a minimum initial investment of $100,000) will bear interest at the applicable Bond Interest Rate as in effect on the Date of Original Issuance. Farmland anticipates that the Bond Interest Rate for Series D Bonds on a particular day may exceed by up to 1/4 of 1% per year the Bond Interest Rate for a Series C Bond issued on that day. Any change of the Bond Interest Rate for later issued Series D Bonds will not affect the Bond Interest Rate on any Series D Bonds for which the full purchase price was received prior to the change. INTEREST PAYMENTS Interest is payable on the principal of the Five-Year Bonds from the Date of Original Issuance at the election of the purchaser, made at the time of purchase, in one of the following ways: (i) semiannually on January 1 and July 1, to Holders of record on the last preceding December 15 and June 15, respectively (or, if originally issued between the record date and the payment date, to the Holder on the Date of Original Issuance); or (ii) at maturity or at the date of redemption if redeemed prior to maturity, compounded semiannually, on December 31 and June 30 at the applicable Bond Interest Rate. Any election to receive payment of the interest semiannually is irrevocable. The election to receive payment of the interest at maturity, or at the date of redemption if redeemed prior to maturity, will be terminated upon written request of the Holder, such termination to be effective as of the last previous interest compounding date. Such termination is irrevocable and, at the same time, is an election to receive payment of the interest semiannually thereafter. Any interest attributable to periods starting with the Date of Original Issuance and ending with the effective date of the written request of the Holder to terminate the election to receive payment of the interest at maturity or at the date of redemption if redeemed prior to maturity will be paid upon receipt of the written request to terminate the election. Farmland shall have the right at any time by notice to the Holder to terminate any obligation to continue retaining the interest of any Holder. Such termination shall be effective as of the opening of business on the day following the first interest compounding date after such notice is mailed to the Holder and the Holder will be paid all the interest accrued to the Holder's account on the effective date. See "-Tax Consequences of Interest Election". Any Defaulted Interest on any Five-Year Bonds will not be payable to the Holder thereof on the applicable record date but instead may either be paid to the person in whose name such Five-Year Bond is registered at the close of business on a special record date for the payment of such Defaulted Interest to be fixed by the Trustee, notice of which shall be given to the Holder of such Five-Year Bond not less than ten (10) days prior to such special record date, or may be paid at any time in any other lawful manner, all as more completely provided in the Subordinated Indenture. (Section 3.07) REDEMPTION BY FARMLAND The Five-Year Bonds may be redeemed, after two (2) years from the Date of Original Issuance, at the option of Farmland at any time prior to maturity, on at least fifteen (15) days written notice, at face value plus accrued interest to the date of redemption only. The Subordinated Indenture permits Farmland to select in any manner at its discretion the bonds to be redeemed. (Section 4.01) REDEMPTION BY THE HOLDER Farmland will redeem limited amounts of the Five-Year Bonds prior to maturity at the option of the Holder as described under the caption "Limited Redemption Prior to Maturity of Subordinated Debenture Bonds". LIMITED REDEMPTION PRIOR TO MATURITY OF SUBORDINATED DEBENTURE BONDS (A) Farmland will redeem each month, on a first come, first serve basis (as evidenced by the time stamped or otherwise recorded as received by Farmland), a limited amount of Ten-Year, Series A Bonds, Ten-Year, Series B Bonds, Five-Year, Series C Bonds and Five-Year, Series D Bonds prior to maturity and any other subordinated debt securities to which Farmland determines to extend this redemption right. To be eligible for redemption, a Ten-Year, Series A Bond or Ten-Year, Series B Bond must have been held three (3) years from Date of Original Issuance and a Five-Year, Series C Bond or Five-Year, Series D Bond must have been held two (2) years from Date of Original Issuance. Subject to the carryover discussed below, the aggregate maximum amount that Farmland will redeem of Ten-Year, Series A Bonds, Ten-Year, Series B Bonds, Five-Year, Series C Bonds, Five-Year, Series D Bonds and other subordinated debt to which Farmland determines to extend this redemption right and which, in each case, meets the requirements for redemption prior to maturity, will be the greater of: (1) $1,500,000 or, (2) 1/2 of 1% of the combined total principal balance outstanding of all such Ten-Year Bonds, Five-Year Bonds and other bonds to which this redemption right applies. If the amount determined pursuant to the foregoing formula in any month (including any carryover from the prior month) exceeds the total amount requested for redemption prior to maturity in that month, such excess is carried over to the next month and added to the amount available for redemption prior to maturity in that month; provided, however, that any excess will not be carried beyond the end of Farmland's fiscal year. If any series has a total balance outstanding less than $5,000,000 at the end of a given month, then in the following month any subordinated debt security of that series which is eligible for early redemption under the provision (A) above will be redeemed at the request of the Holder without regard to the above dollar limitation. (B) In addition to the amounts made available for redemption prior to maturity at the option of the Holder as described in (A) above, redemption will be made in the case of death of a Holder of Ten-Year Bonds and Five-Year Bonds upon written request and delivery of satisfactory proof of death and other documentation and in accordance with applicable laws. As described below, redemption on death of the Holder also applies to Ten-Year Monthly Income Bonds and to Five-Year Monthly Income Bonds. (C) IRA Redemption In addition to the amounts made available for redemption prior to maturity at the option of the Holder as described in (A) and (B) above, if Ten-Year Bonds or Five-Year Bonds are held in an Individual Retirement Account (an "IRA") established under Section 408 of the Internal Revenue Code of 1986, as amended (the "IRC"), Farmland will redeem, upon written request, such Ten-Year Bonds and Five-Year Bonds to the extent necessary to satisfy mandatory withdrawals from the IRA which are required by the IRC. Such redemption will be made only upon sufficient proof to Farmland that a mandatory withdrawal from the IRA is required. In general, as presently in effect, the IRC requires mandatory withdrawals from an IRA to commence on April 1 following the calendar year in which the beneficiary reaches the age of seventy and one-half (701/2) years. (D) The foregoing redemption privileges described in this section are subject to the condition, as provided under the subordination provisions applicable to the Subordinated Debenture Bonds, that Farmland cannot redeem any of the Subordinated Debenture Bonds if, at the time of or immediately after giving effect to such redemption, there shall exist under any indenture or loan or other agreement pursuant to which any Senior Indebtedness is issued any default or any condition, event or act, which with notice or lapse of time, or both, would constitute a default. Redemption prior to maturity will be made upon the surrender of eligible Ten-Year Bonds and Five-Year Bonds properly endorsed and accompanied by written requests for early redemption to Farmland. Redemption prior to maturity will be made at the face value of the bonds plus accrued interest to the date of redemption. Amounts available for redemption prior to maturity are not set aside in a separate fund. TEN-YEAR MONTHLY INCOME, SERIES E AND F MATURITY DATE The maturity date for Subordinated Debenture Bonds, Ten-Year Monthly Income, Series E and Ten-Year Monthly Income, Series F (hereinafter shall be referred to individually as the "Series E Bonds" and the "Series F Bonds" and collectively as the "Ten-Year Monthly Income Bonds") is ten (10) years from the Date of Original Issuance. The payment of the principal will be made at maturity upon presentation and surrender of the Subordinated Debenture Bonds, properly endorsed. INTEREST RATES The interest rates for the Ten-Year Monthly Income Bonds will be determined by Farmland, from time to time. See "Determination of Interest Rates". SERIES E BONDS The Bond Interest Rate for any Series E Bond issued will be the rate per year stated on the face of the bond. The Series E Bonds (which require a minimum initial investment of $5,000, and subsequent investments require a minimum investment of $1,000) will bear interest at the applicable Bond Interest Rate as in effect on the Date of Original Issuance, but any change of the Bond Interest Rate for later issued Series E Bonds will not affect the Bond Interest Rate on any Series E Bond for which the full purchase price was received prior to the change. SERIES F BONDS The Bond Interest Rate for any Series F Bond issued will be the rate per year stated on the face of the bond. The Series F Bonds (which require a minimum initial investment of $100,000) will bear interest at the applicable Bond Interest Rate as in effect on the Date of Original Issuance. Farmland anticipates that the Bond Interest Rate for Series F Bonds on a particular day may exceed by up to 1/4 of 1% per year the Bond Interest Rate for a Series E Bond issued on that day. Any change of the Bond Interest Rate for later issued Series F Bonds will not affect the Bond Interest Rate on any Series F Bond for which the full purchase price was received prior to the change. INTEREST PAYMENTS Interest on the principal sum is payable monthly on the first day of each month to Holders of record on the last day of the preceding month, commencing on the first day of the month, following the month in which a Ten-Year Monthly Income Bond is issued. Any Defaulted Interest on any Ten-Year Monthly Income Bonds will not be payable to the Holder thereof on the applicable record date but instead may either be paid to the person in whose name such Ten-Year Monthly Income Bond is registered at the close of business on a special record date for the payment of such Defaulted Interest to be fixed by the Trustee, notice of which shall be given to the Holder of such Ten-Year Monthly Income Bond not less than ten (10) days prior to such special record date, or may be paid at any time in any other lawful manner, all as more completely provided in the Subordinated Indenture. (Section 3.07) REDEMPTION BY FARMLAND The Ten-Year Monthly Income Bonds cannot be called for redemption by Farmland any time prior to maturity. REDEMPTION BY THE HOLDER Except as provided in this paragraph, Farmland will not redeem the Ten-Year Monthly Income Bonds prior to maturity upon the request of the Holder. Redemptions will be made in the case of death of a Holder of Ten-Year Monthly Income Bonds, upon written request and delivery of satisfactory proof of death and other documentation and in accordance with applicable laws. Redemptions prior to maturity will be made at the face value of the bonds plus accrued interest to the date of redemption only. Amounts available for redemption prior to maturity are not set aside in a separate fund. The restriction on redemption stated in paragraph (D) under "-Limited Redemption Prior to Maturity of Subordinated Debenture Bonds" applies also to the redemption described in this paragraph. IRA REDEMPTION The Ten-Year Monthly Income Bonds will not, under any circumstances, be sold to an IRA and an IRA trustee or custodian will not be permitted to be the registered owner of a Ten-Year Monthly Income Bond. Therefore, unlike the Ten- Year Bonds and the Five-Year Bonds, the Ten-Year Monthly Income Bonds do not contain any special redemption rights for the benefit of an IRA or its trustee or custodian. FIVE-YEAR MONTHLY INCOME, SERIES G AND H MATURITY DATE The maturity date for Subordinated Debenture Bonds, Five-Year Monthly Income, Series G and Five-Year Monthly Income, Series H (hereinafter shall be referred to individually as the "Series G Bonds" and the "Series H Bonds" and collectively as the "Five-Year Monthly Income Bonds") is five (5) years from the Date of Original Issuance. The payment of the principal will be made at maturity upon presentation and surrender of the Subordinated Debenture Bonds, properly endorsed. INTEREST RATES The interest rates for the Five-Year Monthly Income Bonds will be determined by Farmland, from time to time. See "Determination of Interest Rates." SERIES G BONDS The Bond Interest Rate for any Series G Bond issued will be the rate per year stated on the face of the bond. The Series G Bonds (which require a minimum initial investment of $5,000, and subsequent investments require a minimum investment of $1,000) will bear interest at the applicable Bond Interest Rate as in effect on the Date of Original Issuance, but any change of the Bond Interest Rate for later issued Series G Bonds will not affect the Bond Interest Rate on any Series G Bond for which the full purchase price was received prior to the change. SERIES H BONDS The Bond Interest Rate for any Series H Bond issued will be the rate per year stated on the face of the bond. The Series H Bonds (which require a minimum initial investment of $100,000) will bear interest at the applicable Bond Interest Rate as in effect on the Date of Original Issuance. Farmland anticipates that the Bond Interest Rate for Series H Bonds on a particular day may exceed by up to 1/4 of 1% per year the Bond Interest Rate for a Series G Bond issued on that day. Any change of the Bond Interest Rate for later issued Series H Bonds will not affect the Bond Interest Rate on any Series H Bonds for which the full purchase price was received prior to the change. INTEREST PAYMENTS Interest on the principal sum is payable monthly on the first day of each month to Holders of record on the last day of the preceding month, commencing on the first day of the month, following the month in which a Ten-Year Monthly Income Bond is issued. Any Defaulted Interest on any Five-Year Monthly Income Bonds will not be payable to the Holder thereof on the applicable record date but instead may either be paid to the person in whose name such Five-Year Monthly Income Bond is registered at the close of business on a special record date for the payment of such Defaulted Interest to be fixed by the Trustee, notice of which shall be given to the Holder of such Five-Year Monthly Income Bond not less than ten (10) days prior to such special record date, or may be paid at any time in any other lawful manner, all as more completely provided in the Subordinated Indenture. (Section 3.07) REDEMPTION BY FARMLAND The Five-Year Monthly Income Bonds cannot be called for redemption by Farmland any time prior to maturity. REDEMPTION BY THE HOLDER Except as provided in this paragraph, Farmland will not redeem the Five- Year Monthly Income Bonds prior to maturity upon the request of the Holder. Redemptions will be made in the case of death of a Holder of Five-Year Monthly Income Bonds, upon written request and delivery of satisfactory proof of death and other documentation and in accordance with applicable laws. Redemptions prior to maturity will be made at the face value of the bonds plus accrued interest to the date of redemption only. Amounts available for redemption prior to maturity are not set aside in a separate fund. The restriction on redemption stated in paragraph (D) under "-Limited Redemption Prior to Maturity of Subordinated Debenture Bonds" applies also to the redemption described in this paragraph. IRA REDEMPTION The Five-Year Monthly Income Bonds will not, under any circumstances, be sold to an IRA and an IRA trustee or custodian will not be permitted to be the registered owner of a Five-Year Monthly Income Bond. Therefore, unlike the Ten- Year Bonds and the Five-Year Bonds, the Five-Year Monthly Income Bonds do not contain any special redemption rights for the benefit of an IRA or its trustee or custodian. SUBORDINATION The payment of the principal of (and premium, if any) and interest on Subordinated Debenture Bonds is, to the extent set forth in the Subordinated Indenture, subordinated in right of payment to the prior payment in full of all Senior Indebtedness, whether now outstanding or hereafter incurred. "Senior Indebtedness" is defined as (a) the principal of (and premium, if any) and interest on indebtedness of Farmland (other than the indebtedness of Farmland with respect to its Subordinated Capital Investment Certificates issued under indentures dated July 29, 1974, and under an indenture dated November 29, 1976, and under an indenture dated October 24, 1978, and under an indenture dated October 24, 1979, and under an indenture dated November 8, 1984; and with respect to Subordinated Monthly Income Capital Investment Certificates issued under an indenture dated November 8, 1984, and under an indenture dated November 11, 1985; and with respect to its Subordinated Individual Retirement Account Certificates issued under an indenture dated November 8, 1984) for money borrowed from or guaranteed to banks, trust companies, insurance companies, or pension trusts or evidenced by securities issued under the provisions of an indenture or similar instrument between Farmland and a bank or trust company other than indebtedness evidenced by instruments which expressly provide that such indebtedness is not superior in right of payment to the Debt Securities issued under the Subordinated Indenture, and (b) indebtedness created after the date of the Subordinated Indenture, as to which the instrument creating or evidencing the indebtedness provides that such indebtedness is superior in right of payment to Debt Securities issued under the Subordinated Indenture. The Demand Loan Certificates will be Senior Indebtedness under the foregoing definition. By reason of the subordination provisions of the Subordinated Indenture, no payment on account of principal of (or premium, if any) or interest on the Subordinated Debenture Bonds shall be made, and no Subordinated Debenture Bonds shall be purchased, either directly or indirectly, by Farmland or any of its subsidiaries, unless full payment of amounts then due for principal of (and premium, if any) and interest (including interest on overdue principal and interest, to the extent permitted by law) on Senior Indebtedness has been made or duly provided for. In addition, no payment on account of principal of (or premium, if any) or interest on the Subordinated Debenture Bonds shall be made, and no Subordinated Debenture Bonds shall be purchased, either directly or indirectly, by Farmland or any of its subsidiaries, if, at the time of such payment or purchase or immediately after giving effect thereto, there shall exist under any Senior Indebtedness or any indenture or agreement pursuant to which any Senior Indebtedness is issued any default or any condition, event or act, which, with notice or lapse of time, or both, would constitute a default. In the event that any Subordinated Debenture Bond is declared due and payable before its stated maturity because of an Event of Default (as herein defined) or upon any other acceleration of payment of the principal of the Subordinated Debenture Bonds because of an Event of Default or upon any payment or distribution of assets of Farmland, whether in cash, property or securities, to creditors upon any dissolution, winding up, total or partial liquidation, reorganization, assignment for the benefit of creditors, or other marshaling of assets, whether voluntary or involuntary or in bankruptcy, insolvency, receivership or other proceedings, all principal of (and premium, if any) and interest (including interest on overdue principal and interest) due or to become due upon all Senior Indebtedness shall first be paid in full before the Holders of Subordinated Debenture Bonds, or the Trustee under the Subordinated Indenture, shall be entitled to retain any assets (other than shares of stock of Farmland as reorganized or readjusted or securities of Farmland or any other corporation provided for by a plan of reorganization or readjustment, the payment of which is subordinated, at least to the same extent as the Subordinated Debenture Bonds, to the payment of all Senior Indebtedness which at the time may be outstanding, provided that the rights of the owners of the Senior Indebtedness are not altered by such reorganization or readjustment) so paid or distributed in respect of the Subordinated Debenture Bonds (for principal, premium, if any, or interest); and upon any such dissolution, winding up, liquidation, reorganization, assignment or marshaling, any payment or distribution of assets of Farmland, whether in cash, property or securities (other than as set forth above), to which the Holders of Subordinated Debenture Bonds or the Trustee would otherwise be entitled, shall be paid by Farmland or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other person making such payment or distribution, or by the Holders of Subordinated Debenture Bonds or the Trustee under the Subordinated Indenture if received by them or it, directly to the owners of Senior Indebtedness (pro rata to each such owner on the basis of the respective amounts of Senior Indebtedness held by such owner) or their representatives, to the extent necessary to pay all Senior Indebtedness in full, after giving effect to any concurrent payment or distribution to or for the owners of Senior Indebtedness, before any payment or distribution is made to the Holders of Subordinated Debenture Bonds or to the Trustee under the Subordinated Indenture. By reason of such subordination, in the event of Farmland's insolvency, holders of Senior Indebtedness may receive more, ratably, and Holders of Subordinated Debenture Bonds may receive less, ratably, than other creditors of Farmland. The Subordinated Indenture does not limit the amount of Senior Indebtedness that may be issued by Farmland. As of August 31, 1997, (i) Farmland had outstanding $480.8 million aggregate principal amount of Senior Indebtedness, (ii) Farmland had outstanding $373.0 million aggregate principal amount of other subordinated indebtedness and (iii) certain of Farmland's subsidiaries had outstanding $132.7 million aggregate principal amount of indebtedness, of which $109.2 million was nonrecourse to Farmland. See "Risk Factors -- Subordination and Additional Debt." EVENTS OF DEFAULT Each Indenture provides that the following shall constitute "Events of Default" with respect to any series of Debt Securities issued thereunder (including, as applicable, the Demand Loan Certificates and the Subordinated Debenture Bonds): (a) failure to pay principal of (or any installment of the principal of) or any premium on any Debt Securities of that series, after such principal or premium shall have become due and payable; (b) failure to pay interest of any Debt Securities of that series or any interest coupon appertaining thereto for a period of 60 days after such interest shall have become due or payable; (c) certain events of bankruptcy, insolvency or reorganization; (d) failure to perform any other covenant or agreement contained in the Indenture or in any supplemental indenture or in any Debt Security of that series for a period of 90 days following the mailing by the Trustee to Farmland of a written demand that such failure be cured, such failure not having been cured in the meantime, and (e) any other Event of Default established for the series as contemplated by Section 3.01 with respect to Debt Securities of that series (the Offered Debt Securities have no additional Events of Default of the type permitted by this clause (e)). No Event of Default with respect to a particular series of Debt Securities issued under either Indenture necessarily constitutes an Event of Default with respect to any other series of Debt Securities issued thereunder. (Section 8.01) Each Indenture provides that if an Event of Default specified therein shall occur and be continuing, either the Trustee or the Holders of at least 50% in aggregate principal amount of the Debt Securities of such series then outstanding may declare the principal amount of the Debt Securities of such series and all interest accrued thereon to be due and payable immediately upon written notice thereof to Farmland. Notwithstanding the foregoing, in the case of an Event of Default arising from certain events of bankruptcy, insolvency or reorganization with respect to Farmland, all Debt Securities will become due and payable without further action or notice. (Section 8.03) The agreements governing certain of Farmland's outstanding indebtedness contain provisions to the effect that certain Events of Default under each Indenture would constitute an event of default under such agreements which, among other things, could cause an acceleration of the indebtedness thereunder. Each Indenture provides that the Trustee shall within 90 days after the occurrence of a default, not including periods of grace, give the Holders of the affected series notice of all defaults known to it unless such defaults have been cured; provided that, except in the case of default in the payment of principal of or interest on any of the Debt Securities, the Trustee shall be protected in withholding such notice if and so long as the Trustee determines that the withholding of such notice is in the interests of such Holders. (Section 8.02) Each Indenture provides that the Trustee may sue Farmland in the case of default in payment of the principal of any Debt Security when the same shall become due and payable, or in the case of a default in the payment of the interest on any Debt Security for any period of 60 days after such interest shall become due and payable. (Section 8.04) Each Indenture further provides that the right of any Holder to receive payment of the principal of and interest on any Debt Security, or to institute a suit for the enforcement of such payment, may not be impaired without the consent of such Holder, unless, with regard to overdue interest payments, 75% in principal amount of the outstanding Debt Securities of the affected series consent on behalf of the Holders of all the Debt Securities of the affected series to the postponement of such overdue interest payment. (Sections 8.05 and 8.06) Each Indenture also provides that the Holders of not less than a majority in principal amount of the outstanding Debt Securities of each series have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or to consent, on behalf of the Holders of all Debt Securities of such series, to the waiver of any past default and its consequences, except for a default in the payment of principal or interest. (Section 8.06) Each Indenture requires Farmland to file with the Trustee annually an Officers' Certificate as to the absence of certain defaults under the terms of the applicable Indenture. (Section 7.05) CONCERNING THE TRUSTEES UMB Bank, National Association, Kansas City, Missouri, is the Trustee under the Senior Indenture and Commerce Bank, National Association, Kansas City, Missouri, is the Trustee under the Subordinated Indenture. Each Trustee is to perform only the duties as are specifically set forth in the applicable Indenture and in the case of an Event of Default (which has not been cured) to exercise such of the rights and powers vested in it by the applicable Indenture, and to use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. Each Trustee, before taking any action under the applicable Indenture, may require that satisfactory indemnity be furnished to it by the Holders of the Securities or other persons for the reimbursement of all reasonable costs and expenses to which it may be put and to protect it against all liability which it may incur in or by reason of such action, except liability which is adjudicated to have resulted from its negligence or willful misconduct. CONSOLIDATION OR MERGER OF OR WITH FARMLAND Nothing contained in either Indenture prevents any consolidation or merger of Farmland with or into any other corporation or entity (whether or not affiliated with Farmland), or successive consolidation or mergers in which Farmland or its successor or successors shall be a party or parties, or prevents any sale or conveyance of the property of Farmland as an entirety or substantially as an entirety to any other corporation or entity (whether or not affiliated with Farmland) authorized to acquire and operate the same; provided, however, that upon any such consolidation, merger, sale or conveyance, the due and punctual payment of the principal of and interest on all the Debt Securities (including the Demand Loan Certificates and the Subordinated Debenture Bonds) and the due and punctual performance and observance of all of the covenants and conditions under each Indenture to be performed or observed by Farmland, shall be expressly assumed, by supplemental indentures satisfactory in form to the Trustees and executed and delivered to the Trustees by the corporation or entity formed by such consolidation, or into which Farmland shall have been merged, or by the corporation or entity which shall have acquired such property. In case of any such consolidation, merger, sale or conveyance and upon any such assumption by the successor corporation, such successor corporation or entity shall succeed to and be substituted for Farmland, as if it had been the signatory to the Indentures. (Sections 13.01, 13.02) MODIFICATION OF THE INDENTURE Each Indenture contains provisions permitting Farmland and the Trustee to enter into one or more supplemental indentures without the consent of the Holders of any of the Debt Securities issued thereunder (including, as applicable, the Demand Loan Certificates and the Subordinated Debenture Bonds) in order (i) to evidence the succession of another corporation to Farmland and the assumption by any such successor of the covenants and obligations of Farmland therein and in the Debt Securities issued thereunder and any interest coupons appertaining thereto; (ii) to add to the covenants of Farmland for the benefit of the Holders of all or any series of Debt Securities issued thereunder (and if such covenants are to be for the benefit of less than all series of Debt Securities, stating that such covenants are expressly being included solely for the benefit of such series) or to surrender any right or power conferred upon Farmland; (iii) to add any additional Events of Default with respect to all or any series of Debt Securities issued thereunder; (iv) to change or eliminate any of the provisions of the Indentures in respect of one or more series of Debt Securities issued thereunder, provided that any such change or elimination shall become effective only when there are no Debt Securities outstanding of any series created prior to the execution of such supplemental indenture which is entitled to the benefit of such provision; (v) to establish the form or terms of Debt Securities of any series issued thereunder; (vi) to evidence and provide for the acceptance of appointment thereunder by a successor Trustee with respect to the issued thereunder Debt Securities and to add to or change any of the provisions of the Indenture as shall be necessary to provide for or facilitate the administration of the trusts thereunder by more than one Trustee; (vii) to cure any ambiguity, to correct or supplement any provision therein which may be inconsistent with any other provision therein or to make any other provisions with respect to matters or questions arising under the Indenture which shall not be inconsistent with the provisions of such Indenture, provided such action shall not adversely affect in any material respect the interests of the Holders of any series issued thereunder; (viii) to modify, eliminate or add to the provisions of the Indenture to such extent as shall be necessary to effect the qualification of the Indenture under the Trust Indenture Act or under any similar federal statute subsequently enacted, and to add to the Indenture such other provisions as may be expressly required under the Trust Indenture Act; or (ix) to enable the issuance of uncertificated Debt Securities and to permit registration, transfer and exchange of Debt Securities by book-entry. (Section 12.01) Each Indenture also contains provisions permitting Farmland and the respective Trustee, with the consent of the Holders of a majority in aggregate principal amount of the outstanding Debt Securities of each series issued thereunder and affected by such supplemental indenture, to execute supplemental indentures adding any provisions to or changing or eliminating any of the provisions of such Indenture or any supplemental indenture or modifying the rights of the Holders of such series, except that, without the consent of the each Holder so affected, no such supplemental indenture may: (i) change the stated maturity of the principal of, or premium, if any, on, or any installment of principal of or premium, if any, or interest on, any such Debt Security, or reduce the principal amount thereof or the rate of interest thereon or any premium payable upon the redemption thereof, or change the manner in which the amount of any principal thereof or premium, if any, or interest thereon is determined, or impair the right to institute suit for the enforcement of any such payment on or after the stated maturity thereof (or, in the case of redemption, on or after the redemption date); (ii) reduce the percentage in principal amount of the outstanding Debt Securities of any series, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver (of compliance with certain provisions of each Indenture or of certain defaults hereunder and their consequences) provided for in such Indenture; (iii) change any obligation of Farmland to maintain an office or agency in the places at which Debt Securities may be presented for transfer, exchange, redemption and payment, and where notices and demand to or upon Farmland may be served; or (iv) modify the provisions that set forth the provisions in each Indenture that may not be changed without the consent of the Holder of each Debt Security affected thereby. The Subordinated Indenture also provides that certain provisions with respect to the subordination of outstanding Debt Securities may not be modified in a manner adverse to the Holders thereof without the consent of each Holder of such outstanding Debt Securities affected thereby. (Section 12.02) SATISFACTION, DISCHARGE AND DEFEASANCE Each Indenture provides that it ceases to be of further effect with respect to the Debt Securities of, or within, any series (except for certain specified surviving obligations, including (i) certain obligations to register the transfer or exchange of Debt Securities and (ii) the rights of Holders of Debt Securities to receive payments of principal thereof and interest thereon upon the stated maturity thereof) upon the satisfaction of certain conditions, including that (a) all Debt Securities of such series not theretofore delivered to the Trustee for cancellation: (i) have become due and payable, (ii) will become due and payable at their stated maturity within one year or (iii) are to be called for redemption within one year and (b) Farmland has irrevocably deposited or caused to be deposited with the Trustee money in an amount sufficient to pay and discharge the entire indebtedness on such Debt Securities for principal, premium, if any, and interest, with respect thereto, to the date of such deposit (in the case of Debt Securities which have become due and payable) or to the stated maturity or redemption date, as the case may be. (Section 14.01) Each Indenture also contains defeasance provisions under which, unless otherwise specified with respect to the Debt Securities of any series issued thereunder, Farmland, at its option (i) will be discharged from any and all obligations in respect of the Debt Securities of such series (except with regard to certain specified surviving obligations, including (a) certain obligations to register the transfer or exchange of Debt Securities and (b) the rights of Holders of Debt Securities to receive payments of principal thereof and interest thereon upon the stated maturity thereof) or (ii) will not be subject to certain covenants and Events of Default, in each case, upon the compliance with certain conditions, including the deposit with the relevant Trustee, in trust, or money and/or Government Obligations which through the payment of interest and principal in respect thereof in accordance with their terms will provide money in an amount sufficient to pay (x) the principal of, premium, if any, and each installment of interest on such Debt Securities at the maturity of such payments and (y) any mandatory sinking fund payments applicable to such series on the day on which such payments are due and payable in accordance with the terms of the applicable Indenture and such Debt Securities. Such defeasance provisions do not apply to the Demand Loan Certificates and the Subordinated Debenture Bonds. (Sections 14.03, 14.04, 14.05, 14.06) TAX CONSEQUENCE OF INTEREST ELECTION Holders of Demand Loan Certificates and Subordinated Debenture Bonds should be aware that the election to receive interest on the payment date or to have the interest compounded semi-annually and paid at the date of redemption of the related security will not affect the reporting of interest for federal income tax purposes. All interest whether paid on the payment date or left to accumulate and be paid at the date of redemption of the related security will be credited to the Holder's account on the payment or compounding date. All interest credited to the Holder's account will be reported on a Form 1099 INT to the Holder and the Internal Revenue Service ("IRS") as interest income for the calendar year in which such interest is credited to the Holder's account. Therefore, a Holder who elects to have interest paid at the date of redemption of the related security may have taxable income for a year and not receive such interest income in cash. However, the Holder could terminate the election to have interest paid at the date of redemption. On the effective date of such termination, the Holder would receive payment of all interest accumulated through the date of termination. 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 - 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). 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 - 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 total sales of $9.1 billion and 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. 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 "Risk Factors - External Factors May Affect Our Business". 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 "-Capital Expenditures and Investments in Ventures". 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 "Risk Factors - External Factors May Affect Our Business". 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" and " - 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". 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 recently deliberated, and postponed until 1998, further consideration of 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 adopt 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. There can be no assurance that fast track legislation in any form will be adopted. 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) Included in 1995, 1996 and 1997 are redemptions of preferred stock. 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, a former subsidiary of the Company, as explained in Note 6 of the Notes to Consolidated Financial Statements. See "Risk Factors - Income Tax Matters" and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition, Liquidity and Capital Resources" included herein. MANAGEMENT
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 2000 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. Jody Bezner 56 Vice Chairman 2000 6 Producer--Texline, Texas. and Vice President 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 2000 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. 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. Martie Floyd 49 2000 * Producer--Johnson, Kansas. Mr. Floyd is currently serving as director and secretary of the Board for Johnson Cooperative Grain Co., Inc., Johnson, Kansas, 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 2000 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 2000 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 2000 ** 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. * Elected to the Board of Directors December 4, 1997 **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, Jody Bezner, Ben Griffith, 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; Jody Bezner, compensation committee, Ben Griffith, audit 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. Mr. Dees has announced his intention to retire during 1998. 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 1973. 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.
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. Lyman Adams, Jody Bezner, Harry Fehrenbacher and Joe Royster. Mr. Jody Bezner was appointed Vice Chairman and Vice President of the Board of the Company on December 4, 1997. 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. 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. 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. LEGAL MATTERS Robert B. Terry, Vice President and General Counsel of Farmland, has given an opinion upon the legality of the Offered Debt Securities. EXPERTS The Consolidated Financial Statements of Farmland as of August 31, 1996 and 1997 and for each of the years in the three-year period ended August 31, 1997 included herein and elsewhere in the Registration Statement, have been included herein and in the Registration Statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein and upon the authority of such firm as experts in accounting and auditing. QUALIFIED INDEPENDENT UNDERWRITER Interstate/Johnson Lane Corporation, a member of the NASD, has participated as a qualified independent underwriter in the "due diligence" review with respect to the preparation of this Prospectus. As discussed under "Plan of Distribution", the qualified independent underwriter will not be participating in the pricing of the Offered Debt Securities. INDEX TO FARMLAND CONSOLIDATED FINANCIAL STATEMENTS Page No. Independent Auditors' Report ............................... 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 ................. 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 "Credit Facility"). The Credit 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 Credit Facility was being utilized to support letters of credit issued on behalf of the Company. The Company pays commitment fees under the Credit 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 Credit 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 Credit Facility are reviewed and/or renewed annually. The next review date is in May 1998. The revolving term provisions of the Credit 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, in July 1983, of the stock of Terra and the IRS's contention that Farmland incorrectly treated the Terra sale gain as income against which certain patronage-sourced operating losses could be offset. The statutory notice further asserts that Farmland incorrectly characterized for tax purposes gains aggregating approximately $14.6 million, and a loss of approximately $2.3 million, from dispositions of certain other assets. On June 11, 1993, Farmland filed a petition in the United States Tax Court contesting the asserted deficiencies in their entirety. The case was tried on June 13-15, 1995. The parties submitted post-trial briefs to the court in September 1995 and reply briefs were submitted to the court in November 1995. If the United States Tax Court decides in favor of the IRS on all unresolved issues raised in the statutory notice, Farmland would have additional federal and state income tax liabilities aggregating approximately $85.8 million plus accumulating statutory interest thereon (approximately $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 "Credit 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 Credit 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 Credit 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 Items 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. PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The expenses (excluding commissions) to be incurred in connection with the issuance and distribution of the securities to be offered are estimated as follows and will be borne by the Company: Estimated Item Expense Federal and state registration fees $ 135,000 .................................. State taxes and fees.............. 6,000 Printing and engraving............ 236,000 Accounting and legal.............. 118,000 Trustee fee....................... 10,000 Advertising and administration.... 980,000 $1,485,000 ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 6002(b) of Chapter 17 of the Kansas Statutes (1987), permits the following provision to be included in the articles of incorporation of the Company: a provision eliminating or limiting the personal liability of a director to the corporation or its stockholders, policyholders or members for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director (A) for any breach of the director's duty of loyalty to the corporation or its stockholders, policyholders or members, (B) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (C) under the provision of K.S.A. 17-6424 and amendments thereto or (D) for any transaction from which the director derived an improper personal benefit. No such provision shall eliminate or limit the liability of a director for any act or omission occurring prior to the date when such provision becomes effective. All references in this subsection to a director shall be deemed also to refer to a member of the governing body of a corporation which is not authorized to issue capital stock. Section 6002(c) provides that "It shall not be necessary to set forth in the articles of incorporation any of the powers conferred on corporations by this act." Article VII of the Articles of Incorporation of Farmland reads as follows: ARTICLE VII - INDEMNIFICATION Section 1. Indemnification. The Association may agree to the terms and conditions upon which any director, officer, employee or agent accepts his office or position and in its bylaws, by contract or in any other manner may agree to indemnify and protect any director, officer, employee or agent of the Association, or any person who serves at the request of the Association as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, to the fullest extent permitted by the laws of the State of Kansas. Section 2. Limitation of Liability. Without limiting the generality of the foregoing provisions of this ARTICLE VII, to the fullest extent permitted or authorized by the laws of the State of Kansas, including, without limitation, the provisions of subsection (b)(8) of Kan. Stat. Ann. Sec. 17-6002 (1981) as now in effect and as it may from time to time hereafter be amended, no person who is currently or shall hereinafter become a director of the Association shall have personal liability to the Association for monetary damages for breach of fiduciary duty as a director for any act or omission occurring subsequent to the date this provision becomes effective. If the Kansas General Corporation Code is amended after approval of this provision by the shareholders of the Association, to authorize corporate action further limiting or eliminating the personal liability of directors, then the liability of a director of the Association shall be limited or eliminated to the fullest extent permitted by the Kansas General Corporation Code, as so amended. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES The Company did not sell any unregistered securities during the three years ended August 31, 1997. ITEM 16. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (A) EXHIBITS The following exhibits are filed as a part of this Amendment No. 1 to the Registration Statement on Form S-1. Certain of these exhibits are incorporated by reference. Exhibit No. Description of Exhibits UNDERWRITING AGREEMENT: 1.A Underwriting Agreement between Farmland Industries, Inc. and Farmland Securities Company, dated December 6, 1989. (Incorporated by Reference - Form S-1 No. 33-56821 filed December 12, 1994) 1.A(1) Amendment, dated December 5, 1994, to the agreement, dated December 6, 1989 between Farmland Industries, Inc. and Farmland Securities Company. (Incorporated by Reference - Form S-1 No. 33-56821, filed December 12, 1994) 1.B Sales Agency Agreement between Farmland Industries, Inc. and American Heartland Investment, Inc., dated December 29, 1993.(Incorporated by Reference - Form S-1 No. 33-56821, filed December 12, 1994) 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 Form of Trust Indenture with UMB Bank, National Association, providing for issuance of unsubordinated debt securities, including form of Demand Loan Certificates. * 4.(i)B Form of Trust Indenture with Commerce Bank, National Association, providing for issuance of subordinated debt securities, including forms of Ten-Year Bond, Series A, Ten-Year Bond, Series B, Five-Year Bond, Series C, Five-Year Bond, Series D, Ten-Year Monthly Income Bond, Series E, Ten-Year Monthly Income Bond, Series F, Five-Year Monthly Income Bond, Series G and Five- Year Monthly Income Bond, Series H. 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. (Incorporated by Reference - Form 10-K filed November 7, 1997) Certain instruments relating to long-term debt not being registered have been omitted in accordance with Item 601(b)(4)(iii) of Regulation S-K. Registrant will furnish a copy of any such instrument to the Commission upon its request. *5 Opinion of Robert B. Terry, Vice President and General Counsel of Farmland Industries, Inc. re Legality 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). (Incorporated by Reference - Form 10-K filed November 7, 1997) 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) (Incorporated by Reference - Form 10-K filed November 7, 1997) 10.(iii)B(2) Exhibit F (Fiscal years 1998 through 2000) (Incorporated by Reference - Form 10-K filed November 7, 1997) 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) **12 Computation of Ratios (Incorporated by Reference - Form S-1, No.333-40759 filed November 21, 1997) 21 Subsidiaries of the Registrant . (Incorporated by Reference - Form 10-K filed November 7, 1997) CONSENTS OF EXPERTS AND COUNSEL: *23.A Independent Auditors' Consent *23.B Consent of Special Tax Counsel *23.C Consent of Qualified Independent Underwriter *23.D Consent of Robert B. Terry, Vice President and General Counsel of Farmland Industries, Inc. (included in Exhibit 5) **24 Power of Attorney **25.A Statement of Eligibility of Trustee and Qualification of UMB Bank, National Association Trustee, Form T-1. **25.B Statement of Eligibility of Trustee and Qualification of Commerce Bank, National Association as Trustee, Form T-1. * Filed herewith ** Previously filed (Form S-1, No. 333-40759 filed November 21, 1997) (B) 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 included herein. ITEM 17. UNDERTAKINGS The undersigned registrant hereby undertakes: (a) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) (Section 230.424(b)) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective Registration Statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; (b) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (c) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (d) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, FARMLAND INDUSTRIES, INC. HAS DULY CAUSED THIS AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT ON FORM S-1 TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF KANSAS CITY, STATE OF MISSOURI ON December 9, 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 1933, THIS AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT ON FORM S-1 HAS BEEN SIGNED FOR THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
Signature Title Date * Chairman of Board, December 9, 1997 Albert J. Shivley Director * President, December 9, 1997 H. D. Cleberg Chief Executive Officer and Director (Principal Executive Officer) * Vice Chairman of Board December 9, 1997 Jody Bezner Vice President and Director * Director December 9, 1997 Lyman L. Adams, Jr. * Director December 9, 1997 Ronald J. Amundson * Director December 9, 1997 Baxter Ankerstjerne * Director December 9, 1997 Richard L. Detten * Director December 9, 1997 Steven Erdman * Director December 9, 1997 Harry Fehrenbacher Director December 9, 1997 Martie Floyd * Director December 9, 1997 Warren Gerdes * Director December 9, 1997 Ben Griffith * Director December 9, 1997 Gail D. Hall * Director December 9, 1997 Barry Jensen * Director December 9, 1997 Ron Jurgens Director December 9, 1997 William F. Kuhlman * Director December 9, 1997 Greg Pfenning * Director December 9, 1997 Monte Romohr * Director December 9, 1997 Joe Royster Director December 9, 1997 E. Kent Stamper * Director December 9, 1997 Eli F. Vaughn * Director December 9, 1997 Frank Wilson /s/ TERRY M. CAMPBELL Executive Vice President December 9, 1997 Terry M. Campbell and Chief Financial Officer (Principal Financial Officer) /s/ MERL DANIEL Vice President and December 9, 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 EXHIBIT INDEX The following exhibits are filed as a part of this Amendment No. 1 to the Registration Statement on Form S-1. Certain of these exhibits are incorporated by reference. Exhibit No. Description of Exhibits Page No. UNDERWRITING AGREEMENT: 1.A Underwriting Agreement between Farmland Industries, Inc. and Farmland Securities Company, dated December 6, 1989. (Incorporated by Reference - Form S-1 No. 33-56821 filed December 12, 1994) 1.A(1) Amendment, dated December 5, 1994, to the agreement, dated December 6, 1989 between Farmland Industries, Inc. and Farmland Securities Company. (Incorporated by Reference - Form S-1 No. 33-56821, filed December 12, 1994) 1.B Sales Agency Agreement between Farmland Industries, Inc. and American Heartland Investment, Inc., dated December 29, 1993.(Incorporated by Reference - Form S-1 No. 33-56821, filed December 12, 1994) 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 Form of Trust Indenture with UMB Bank, National Association, providing for issuance of unsubordinated debt securities, including form of Demand Loan Certificates. * 4.(i)B Form of Trust Indenture with Commerce Bank, National Association, providing for issuance of subordinated debt securities, including forms of Ten-Year Bond, Series A, Ten-Year Bond, Series B, Five-Year Bond, Series C, Five-Year Bond, Series D, Ten-Year Monthly Income Bond, Series E, Ten-Year Monthly Income Bond, Series F, Five-Year Monthly Income Bond, Series G and Five- Year Monthly Income Bond, Series H. 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. (Incorporated by Reference - Form 10-K filed November 7, 1997) Certain instruments relating to long-term debt not being registered have been omitted in accordance with Item 601(b)(4)(iii) of Regulation S-K. Registrant will furnish a copy of any such instrument to the Commission upon its request. *5 Opinion of Robert B. Terry, Vice President and General Counsel of Farmland Industries, Inc. re Legality 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). (Incorporated by Reference - Form 10-K filed November 7, 1997) 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) (Incorporated by Reference - Form 10-K filed November 7, 1997) 10.(iii)B(2) Exhibit F (Fiscal years 1998 through 2000) (Incorporated by Reference - Form 10-K filed November 7, 1997) 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) **12 Computation of Ratios 21 Subsidiaries of the Registrant . (Incorporated by Reference - Form 10-K filed November 7, 1997) CONSENTS OF EXPERTS AND COUNSEL: *23.A Independent Auditors' Consent *23.B Consent of Special Tax Counsel *23.C Consent of Qualified Independent Underwriter *23.D Consent of Robert B. Terry, Vice President and General Counsel of Farmland Industries, Inc. (included in Exhibit 5) **24 Power of Attorney **25.A Statement of Eligibility of Trustee and Qualification of UMB Bank, National Association Trustee, Form T-1. **25.B Statement of Eligibility of Trustee and Qualification of Commerce Bank, National Association as Trustee, Form T-1. * Filed herewith ** Previously filed (Form S-1, No. 333-40759 filed November 21, 1997) EX-4.(I)A 3 INDENTURE WITH UMB BANK, DEMAND LOAN CERT EXHIBIT 4.(i)A FARMLAND INDUSTRIES, INC. AND UMB BANK, NATIONAL ASSOCIATION TRUSTEE INDENTURE Dated as of December 4, 1997 Providing for Issuance of Debt Securities in Series FARMLAND INDUSTRIES. INC. Cross Reference Sheet Showing the Location in the Indenture of the Provisions Inserted Pursuant to Section 310 through 318(a) Inclusive of the Trust Indenture Act of 1939 SECTION NUMBER OF TRUST INDENTURE ACT OF 1939 INDENTURE SECTION SEC. 310 - ELIGIBILITY AND DISQUALIFICATION OF TRUSTEE (a)(1)...............................Sec. 6.03 (2)...............................Sec. 9.01 (3)...............................Not applicable (4)...............................Not applicable (b) ................................Sec. 9.14 SEC. 311 - PREFERENTIAL COLLECTION OF CLAIMS AGAINST OBLIGOR (a) ................................Sec 9.15 (b) ................................Sec. 9.15 SEC. 312 - BONDOWNERS' LISTS (a) ................................Sec. 7.01 (b) ................................Sec. 7.02(b) (c) ................................Sec. 7.02(c) SEC. 313 - REPORTS BY INDENTURE TRUSTEE (a) ................................Sec. 7.03 (b) ................................ 7.03 (c) ................................ 7.03 (d) ................................ 7.03 SEC. 314 - REPORTS BY OBLIGOR; EVIDENCE OF COMPLIANCE WITH INDENTURE PROVISIONS (a) ................................Sec. 7.04; 7.05 (b) ................................Not applicable (c)(1)...............................Sec. 16.06 (c)(2)...............................Sec. 16.06 (c)(3)...............................Not applicable (d) ................................Not applicable (e) ................................Sec. 16.06 SEC. 315 - DUTIES AND RESPONSIBILITY OF THE TRUSTEE (a) ................................Sec. 9.02; 9.03; 9.04 (b) ................................Sec. 8.02 (c) ................................Sec. 9.02 (d) ................................Sec. 9.04 (1)...............................Sec. 9.04(a); 9.04(b) (2)...............................Sec. 9.04(c) (3)...............................Sec. 9.04(d) (e) ................................deemed contained in Indenture pursuant to Trust Indenture Act SEC. 316 - DIRECTIONS AND WAIVERS BY BONDOWNERS; PROHIBITION OF IMPAIRMENT OF HOLDER'S RIGHT TO PAYMENT (a) ................................Sec. 8.06 (1)...............................Sec. 8.06 (2)...............................Sec. 8.06 (b) ................................Sec. 8.05 (c) ................................deemed contained in Indenture pursuant to Trust Indenture Act SEC. 317 - SPECIAL POWERS OF TRUSTEE; DUTIES OF PAYING AGENTS (a) ................................Sec. 8.04 (1)...............................Sec. 8.04 (2)...............................Sec. 8.04 (b) ................................Sec. 6.04; 9.09 SEC. 318 - EFFECT OF PRESCRIBED INDENTURE PROVISIONS (a) ................................Sec. 16.08 (c) ................................Sec. 16.08 TABLE OF CONTENTS Page RECITALS........................................................1 ARTICLE ONE.....................................................2 DEFINITIONS.....................................................2 Section 1.01 Definitions. ....................................2 ARTICLE TWO.....................................................9 SECURITY FORMS..................................................9 Section 2.01. Forms Generally. ...............................9 Section 2.02. Form of Trustee's Certificate of Authentication. .....................................11 Section 2.03. Uncertificated Securities .....................11 ARTICLE THREE..................................................12 THE SECURITIES.................................................12 Section 3.01. Amount Unlimited; Issuable in Series. .........12 Section 3.02. Denominations. ................................16 Section 3.03. Execution, Authentication, Delivery and Dating. .............................................16 Section 3.04. Temporary Securities. .........................17 Section 3.05. Registration, Transfer and Exchange. ..........18 Section 3.06. Replacement Securities. .......................20 Section 3.07. Payment of Interest; Interest Rights Preserved. ..........................................22 Section 3.08. Cancellation. .................................23 Section 3.09. CUSIP Numbers. ................................24 ARTICLE FOUR...................................................24 REDEMPTION BY ASSOCIATION......................................24 Section 4.01. Securities Subject to Redemption. .............24 Section 4.02. Notice of Redemption. .........................25 Section 4.03. Securities Payable on Redemption Date. ........25 Section 4.04. Securities Redeemed in Part. ..................26 ARTICLE FIVE...................................................26 REDEMPTION BY HOLDER...........................................26 Section 5.01. Redemption by Holder. .........................26 Section 5.02. Securities Redeemed in Part. ..................27 Section 5.03. No Set-Aside. .................................27 ARTICLE SIX....................................................27 PARTICULAR COVENANTS OF THE ASSOCIATION........................27 Section 6.01. Payments of Principal and Interest. ...........27 Section 6.02. Maintenance of Office or Agency. ..............28 Section 6.03. Appointment of Trustee. .......................28 Section 6.04. Appointment of Duties of Paying Agent. ........28 Section 6.05. Report to Trustee. ............................29 ARTICLE SEVEN..................................................31 HOLDERS' LISTS AND REPORTS BY TRUSTEE AND ASSOCIATION..........31 Section 7.01. Association to Furnish Trustee Names and Addresses of Holders. ...............................31 Section 7.02. Preservation of Information, Communications to Holders. .........................................31 Section 7.03. Reports by Trustee. ...........................32 Section 7.04. Reports by the Association. ...................32 Section 7.05. Annual Review Certificate. ....................33 ARTICLE EIGHT..................................................33 REMEDIES IN EVENT OF DEFAULT...................................33 Section 8.01. Event of Default Defined. .....................33 Section 8.02. Trustee to Notify Holder of Defaults. .........35 Section 8.03. Acceleration Upon Default. ....................36 Section 8.04. Right of Trustee to Sue Association Upon Default. ............................................37 Section 8.05. Right of Holder to Receive Payment or Sue. ....38 Section 8.06. Right of Holders to Direct Time, Method and Place of Conducting Proceeding for Remedy Available to Trustee. ...............................38 Section 8.07. Notice of Defaults. ...........................39 ARTICLE NINE...................................................39 CONCERNING THE TRUSTEE.........................................39 Section 9.01. Qualification of Trustee. .....................39 Section 9.02. Acceptance and Undertaking of Trustee. ........39 Section 9.03. Examination of Evidence by Trustee. ...........40 Section 9.04. Trustee not Relieved of Liability for Own Negligence or Willful Misconduct. ...................40 Section 9.05. Trustee May Rely on Recitals of Fact. .........42 Section 9.06. Right of Trustee to Rely on Certain Documents. ..........................................42 Section 9.07. Trustee Not Responsible for Approval of Any Expert. .............................................43 Section 9.08. Right of Trustee to Become Owner or Pledgee of Securities. ......................................43 Section 9.09. Monies Received by Trustee to be Held in Trust. ..............................................44 Section 9.10. Compensation of Trustee. ......................44 Section 9.11. Enforcement by Trustee of Right to Compensation. .......................................45 Section 9.12. Trustee May Rely Upon Certificate of Association. ........................................48 Section 9.13. Right of Trustee to Give Notice of Action. ....48 Section 9.14. Conflicting Interest of Trustee. ..............49 Section 9.15. Duties of Trustee if it Becomes Creditor of Association. ........................................49 Section 9.16. Resignation and Discharge of Trustee. .........49 Section 9.17. Removal of Trustee. ...........................50 Section 9.18. Filling Vacancy. ..............................50 Section 9.19. Duties of Successor Trustee. ..................52 Section 9.20. Merger or Consolidation of or with Trustee. ...53 Section 9.21. Duties of Trustee Governed by Laws of Missouri. ...........................................53 ARTICLE TEN....................................................54 CONCERNING THE HOLDERS.........................................54 Section 10.01. Proof of Action by Holders. ..................54 Section 10.02. What Constitutes a Writing. ..................54 Section 10.03. Holder Named in Certificate Treated as Absolute Owner. .....................................54 Section 10.04. Securities Owned by Association to be Disregarded in Computing Requisite Amount of Securities. .........................................55 Section 10.05. Holders May Revoke Prior Action. .............55 ARTICLE ELEVEN.................................................56 HOLDERS MEETINGS..............................................56 Section 11.01. Purpose of Meetings. .........................56 Section 11.02. Call of Meeting and Notice Required. .........57 Section 11.03. Request of Trustee to Call Meeting. ..........57 Section 11.04. Who May Vote at Meeting. .....................58 Section 11.05. Regulations Made by Trustee. .................58 Section 11.06. Form of and Recording Vote. ..................59 ARTICLE TWELVE.................................................60 SUPPLEMENTAL INDENTURES........................................60 Section 12.01. Supplemental Indentures Without Consent of Holders. ............................................60 Section 12.02. Supplemental Indentures With Consent of Holders. ............................................62 Section 12.03. Compliance with Trust Indenture Act. .........63 Section 12.04. Execution of Supplemental Indentures. ........63 Section 12.05. Reference in Securities to Supplemental Indentures. .........................................64 ARTICLE THIRTEEN...............................................65 CONSOLIDATION, MERGER, SALE OR CONVEYANCE......................65 Section 13.01. Consolidation or Merger of or with Association. ........................................65 Section 13.02. Rights and Duties of Successor Corporation or Entity. ..........................................65 Section 13.03. Opinion of Counsel. ..........................66 ARTICLE FOURTEEN...............................................67 SATISFACTION, DISCHARGE AND DEFEASANCE.........................67 Section 14.01. Termination of Association's Obligations Under the Indenture. ................................67 Section 14.02. Application of Trust Funds. ..................69 Section 14.03. Applicability of Defeasance Provisions; Association's Option to Effect Defeasance or Covenant Defeasance. ................................69 Section 14.04. Defeasance and Discharge. ....................70 Section 14.05. Covenant Defeasance. .........................70 Section 14.06. Conditions to Defeasance or Covenant Defeasance. .........................................71 Section 14.07. Deposited Money and Government Obligations to Be Held in Trust. ................................74 Section 14.08. Repayment to Association. ....................75 Section 14.09. Indemnity for Government Obligations. ........75 Section 14.10. Reinstatement. ...............................76 ARTICLE FIFTEEN................................................76 IMMUNITY OF INCORPORATORS, STOCKHOLDERS,.......................76 OFFICERS AND DIRECTORS.........................................77 Section 15.01. No Recourse. .................................77 ARTICLE SIXTEEN................................................78 MISCELLANEOUS PROVISIONS.......................................78 Section 16.01. Covenants of Association Bind its Successors and Assigns. .............................78 Section 16.02. Acts by Successor Corporation. ...............78 Section 16.03. Surrender of Rights and Powers Reserved to Association. ........................................78 Section 16.04. Service of Notice on Association. ............79 Section 16.05. Indenture Governed by Laws of Missouri. ......79 Section 16.06. Officers' Certificate and Opinion of Counsel. ............................................79 Section 16.07. Due Date on Saturday, Sunday or Legal Holiday. ............................................80 Section 16.08. Conflict with Trust Indenture Act. ...........81 Section 16.09. Indenture Executed in Counterparts. ..........81 THIS INDENTURE (the "Indenture"), dated as of the _______day of ___________, 1997, between FARMLAND INDUSTRIES, INC., a corporation duly organized and existing under the laws of the State of Kansas (hereinafter sometimes referred to as the "Association"), party of the first part, and UMB BANK, NATIONAL ASSOCIATION, a corporation duly organized and existing under the law of the United States of America (hereinafter sometimes referred to as the "Trustee"), party of the second part. RECITALS The Association has duly authorized the execution and delivery of this Indenture to provide for the issuance from time to time of its unsecured debentures, notes or other evidences of indebtedness ("Securities") to be issued in one or more series as herein provided. All things necessary to make the Securities, when executed by the Association and authenticated and delivered hereunder and duly issued by the Association have been done. For and in consideration of the premises and the purchase of the Securities by the Holders thereof, it is mutually covenanted and agreed as follows for the equal and ratable benefit of the Holders of the Securities or of any series thereof: All acts and things necessary to make the Securities, when executed by the Association and authenticated and delivered by the Trustee as in this Indenture provided, the valid, binding and legal obligations of the Association, and to constitute these presents a valid Indenture and agreement according to its terms, have been done and performed, and the execution of this Indenture and the issue hereunder of the Securities have in all respects been duly authorized, and the Association, in the exercise of legal right and power in it vested, executes this Indenture and proposes to make, execute, issue and deliver the Securities. ARTICLE ONE DEFINITIONS Section 1.01 Definitions. The terms defined in this Section 1.01 (except as herein otherwise expressly provided or unless the context otherwise requires) for all purposes of this Indenture and of any indenture supplemental hereto shall have the respective meanings specified in this Section 1.01. All other terms used in this Indenture which are defined in the Trust Indenture Act of 1939 or which are by reference therein defined in the Securities Act of 1933, as amended (except as herein otherwise expressly provided or unless the context otherwise requires), shall have the meanings assigned to such terms in said Trust Indenture Act and in said Securities Act as in force at the date of this Indenture as originally executed. Association: The term "Association" shall mean Farmland Industries, Inc., and subject to the provisions of Article Thirteen, shall also include its successors and assigns. Association Order and Association Request: The terms "Association Order" and "Association Request" shall mean, respectively, a written order or request signed in the name of the Association by two officers, one of whom must be the Chairman of the Board, the President, the Chief Executive Officer, the Chief Operating Officer, the Chief Financial Officer, a Vice President, the Treasurer or the Secretary of the Association. Authorized Newspaper: The term "authorized newspaper" shall mean a newspaper printed in the English language and customarily published at least once a day for at least five days in each calendar week and of general circulation in the city in which it is published. Board of Directors: The term "Board of Directors", when used with the reference to the Association, shall mean the Board of Directors of the Association, or the Executive Committee of such Board. Board Resolution: The term "Board Resolution" shall mean a copy of a resolution certified by the Secretary or an Assistant Secretary of the Association to have been duly adopted by its Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Trustee. Default: The term "Default" shall have the meaning specified in Section 8.02. Defaulted Interest: The term "Defaulted Interest" shall have the meaning specified in Section 3.07. Event of Default: The term "Event of Default" shall mean any event specified in Section 8.01. Government Obligations: The term "Government Obligations" shall mean securities that are (x) direct obligations of the United States of America, for the payment of which its full faith and credit is pledged or (y) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case (x) or (y), are not callable or redeemable at the option of the issuer thereof, and shall also include a depository receipt issued by a bank (as defined in Section 3(a)(2) of the Securities Act of 1933, as amended) as custodian with respect to any such Government Obligation or a specific payment of principal of or interest on any such Government Obligation held by such custodian for the account of the holder of such depository receipt, provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the Government Obligation or the specific payment of principal of or interest on the Government Obligation evidenced by such depository receipt. Holder: The term "Holder" means a Person in whose name a Security of any series is registered in the Register. Indenture: The term "Indenture" shall mean this Instrument as originally executed and as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof, including, for all purposes of this instrument and any such supplemental indenture, the provisions of the Trust Indenture Act that are deemed to be a part of and govern this instrument and any such supplemental indenture, respectively. The term "Indenture" shall also include the terms of particular series of Securities established as contemplated by Section 3.01. Interest Payment Date: The term "Interest Payment Date", with respect to any security, shall mean the Stated Maturity of an installment of interest on such security. Officers' Certificate: The term "Officers' Certificate" shall mean a certificate signed by the President and/or any Vice President and by an accountant who may be the Controller, any Assistant Controller or any other accounting officer of the Association. Each such certificate shall include the statements provided for in Section 16.06, if and to the extent required by the provisions thereof. Opinion of Counsel: The term "Opinion of Counsel" shall mean an opinion in writing signed by legal counsel, who shall be satisfactory to the Trustee and who may be an employee of or of counsel to the Association. Each such opinion shall include the statements provided for in Section 16.06, if and to the extent required by the provisions thereof. Outstanding: The term "Outstanding" when used with reference to Securities, shall, subject to the provisions of Section 10.04, mean, as of any particular time, all Securities authenticated and delivered by the Trustee under this Indenture, except (a) Securities theretofore cancelled by the Trustee or delivered to the Trustee cancelled or for cancellation; (b) Securities for the payment or redemption of which monies in the necessary amount shall have been deposited in trust with the Trustee or shall have been set aside and segregated in trust by the Association, provided, however, that if such Securities are to be redeemed, notice of such redemption shall have been given as provided in Article Four, or provision satisfactory to the Trustee shall have been made for giving such notice; and (c) Securities in lieu of or in substitution for which other Securities shall have been authenticated and delivered pursuant to the terms of Section 3.06. Register: The term "Register" has the meaning specified in Section 3.05. Registrar: The term "Registrar" has the meaning specified in Section 3.05. Responsible Officer: The term "Responsible Officer", when used with respect to the Trustee, shall mean the President, any Vice President, the Secretary, the Treasurer, any trust officer, or any other officer or assistant officer of the Trustee customarily performing functions similar to those performed by the persons who at the time shall be such officers, respectively, or one to whom any corporate trust matter is referred because of his knowledge of and familiarity with the particular subject. Security or Securities: The term "Security" or "Securities" has the meaning stated in the first recital of this Indenture and more particularly means a Security or Securities of the Association issued, or a certificate evidencing ownership thereof, authenticated and delivered under this Indenture. Special Record Date: The term "Special Record Date" for the payment of any Defaulted Interest means a date fixed by the Trustee pursuant to Section 3.07. Stated Maturity: The term "Stated Maturity", when used with respect to any Security or any installment of principal thereof or interest thereon, means the date specified in such Security or in an interest coupon representing such installment of interest as the fixed date on which the principal of such Security or such installment of principal or interest is due and payable. Trustee: The term "Trustee" shall mean the UMB Bank, National Association and, subject to the provisions of Article Nine hereof, shall also include its successors and assigns. Trust Indenture Act of 1939: The term "Trust Indenture Act of 1939" (except as herein otherwise expressly provided or unless the context otherwise requires) shall mean the Trust Indenture Act of 1939 as in force at the date of this Indenture when originally executed. Uncertificated Securities: The term "Uncertificated Securities" shall mean a Security that is not represented by a certificate. ARTICLE TWO SECURITY FORMS Section 2.01. Forms Generally. The Securities of each series and the Trustee's certificate of authentication and the interest coupons, if any, to be attached shall be in substantially such form as shall be established by or pursuant to a Board Resolution or in one or more indentures supplemental hereto, in each case with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture, and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with the rules of any applicable securities exchange, organizational document, governing instrument or law or as may, consistently herewith, be determined by the officers executing such Securities and interest coupons, if any, to be attached thereto, as evidenced by their execution of the Securities and interest coupons, if any. If temporary Securities of any series are issued as permitted by Section 3.04, the form thereof also shall be established as provided in the preceding sentence. If the forms of Securities and interest coupons, if any, of any series are established by, or by action taken pursuant to, a Board Resolution, a copy of the Board Resolution together with an appropriate record of any such action taken pursuant thereto, including a copy of the approved form of Securities or interest coupons, if any, shall be delivered to the Trustee at or prior to the delivery of the Association Order contemplated by Section 3.03 for the authentication and delivery of such Securities. Any portion of the text of any Security may be set forth on the reverse thereof, with an appropriate reference thereto on the face of the Security. The definitive Securities and interest coupons, if any, may be printed, typewritten, lithographed or engraved, or may be produced in any other manner, all as determined by the officers executing such Securities and interest coupons, if any, as evidenced by their execution of such Securities and interest coupons, if any. Section 2.02. Form of Trustee's Certificate of Authentication. Unless otherwise provided as contemplated by Section 3.01, the Trustee's certificate of authentication shall be included on the Securities and shall be substantially in the form as follows: TRUSTEE'S CERTIFICATE OF AUTHENTICATION. This is one of the Securities referred to in the within-mentioned Indenture. UMB BANK, NATIONAL ASSOCIATION. __________________________________ As Trustee By: Authorized Signatory Section 2.03. Uncertificated Securities (a) In lieu of issuing certificates to evidence ownership of Securities, the Association may determine to issue the Securities of any series, including any series which has previously been issued in certificated form, as Uncertificated Securities. Any Uncertificated Securities shall be treated as "uncertificated securities" as the term is used in Article 8 of the Uniform Commercial Code as in effect in the State of Missouri, and such Article 8, to the maximum extent permitted by law, shall govern the Uncertificated Securities. Notwithstanding any provision of this Indenture to the contrary, the registration on the Register of any Security which is in uncertificated form, whether upon original issuance or transfer, shall be deemed to constitute an authentication of such Security by the Trustee, and no further authentication shall be necessary. In addition, whenever any provision of this Indenture shall require that a Security be surrendered, that requirement shall not apply to a Security in uncertificated form, to the extent that such provision requires surrender of a physical certificate. (b) The Association may establish any rules, regulations, procedures and forms for the purpose of noting ownership of Uncertificated Securities, for registration of transfers, exchanges, and surrenders of Uncertificated Securities and for other matters pertaining to the issuance of Securities in uncertificated form as the Association, in its discretion, shall deem necessary or desirable. ARTICLE THREE THE SECURITIES Section 3.01. Amount Unlimited; Issuable in Series. (a) The aggregate principal amount of Securities which may be authenticated and delivered under this Indenture is unlimited. The Securities may be issued from time to time in one or more series. (b) The following matters shall be established with respect to each series of Securities issued hereunder (i) by a Board Resolution, (ii) by action taken pursuant to a Board Resolution and (subject to Section 3.03) set forth, or determined in the manner provided, in an Officers' Certificate or (iii) in one or more indentures supplemental hereto: (1) the title of the Securities of the series (which title shall distinguish the Securities of the series from all other series of Securities); (2) any limit upon the aggregate principal amount of the Securities of the series which may be authenticated and delivered under this Indenture which limit shall not pertain to Securities authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Securities of the series pursuant to Section 3.04, 3.05 or 3.06; (3) the date or dates on which the principal of and premium, if any, on the Securities of the series shall be payable or the method or methods of determination thereof; (4) the rate or rates at which the Securities of the series shall bear interest, if any, or the method or methods of calculating such rate or rates of interest, the date or dates from which such interest shall accrue or the method or methods by which such date or dates shall be determined, the Interest Payment Dates on which any such interest shall be payable, the right, if any, of the Association to defer or extend an Interest Payment Date, the record date, if any, for the interest payable on any Interest Payment Date, and the basis upon which interest shall be calculated if other than that of a 365-day year; (5) the place or places where the principal of, premium, if any, and interest, if any, on Securities of the series shall be payable, any Securities of the series may be surrendered for registration of transfer, any Securities of the series may be surrendered for exchange, and notices and demands to or upon the Association in respect of the Securities of the series and this Indenture may be served and where notices to Holders may be sent. (6) the period or periods within which, the price or prices at which, and the other terms and conditions upon which, Securities of the series may be redeemed, in whole or in part, at the option of the Association and, if other than as provided in Article Four, the manner in which the particular Securities of such series (if less than all Securities of such series are to be redeemed) are to be selected for redemption; (7) the obligation, if any, of the Association to redeem or purchase Securities of the series pursuant to any sinking fund or analogous provisions or upon the happening of a specified event or at the option of a Holder thereof and the period or periods within which, the price or prices at which and the other terms and conditions upon which, Securities of the series shall be redeemed or purchased, in whole or in part, pursuant to such obligation; (8) the denominations in which Securities of the series shall be issuable; (9) if other than the entire principal amount thereof, the portion of the principal amount of Securities of the series which shall be payable upon declaration of acceleration thereof pursuant to Section 8.03 or the method by which such portion shall be determined; (10) provisions, if any, granting special rights to the Holders of Securities of the series upon the occurrence of such events as may be specified; (11) any deletions from, modifications of or additions to the Events of Default set forth in Section 8.01 or covenants of the Association set forth in Article Six pertaining to the Securities of the series; (12) the forms of the Securities and interest coupons, if any, of the series; (13) the applicability, if any, to the Securities and interest coupons, if any, of the series of Sections 14.04 and 14.05, or such other means of defeasance or covenant defeasance as may be specified for the Securities and interest coupons, if any, of such series; (14) if other than the Association, the identity of any Registrar and any Paying Agent; (15) any restrictions on the registration, transfer or exchange of the Securities of the series; and (16) any other terms of the series including any terms which may be required by or advisable under United States laws or regulations or advisable (as determined by the Association) in connection with the marketing of Securities of the series. (c) Subject to any controlling provision of the Trust Indenture Act, in the event of any inconsistency between the terms of this Indenture and the terms applicable to a series of Securities established in the manner permitted by Section 3.01, the (i) Board Resolution, (ii) Officers' Certificate or (iii) supplemental indenture setting forth such conflicting term shall prevail. (d) All Securities of any one series and interest coupons, if any, appertaining thereto shall be substantially identical except as to denomination and except as may otherwise be provided (i) by a Board Resolution, (ii) by action taken pursuant to a Board Resolution and (subject to Section 3.03) set forth, or determined in the manner provided, in the related Officers' Certificate or (iii) in an indenture supplemental hereto. All Securities of any one series need not be issued at the same time and, unless otherwise provided, additional Securities of any series may be issued from time to time, without the consent of the then Holders of Securities of that series. (e) If any of the terms of the Securities of any series are established by action taken pursuant to a Board Resolution, a copy of such Board Resolution shall be delivered to the Trustee at or prior to the delivery of the Officers' Certificate setting forth, or providing the manner for determining, the terms of the Securities of such series, and an appropriate record of any action taken pursuant thereto in connection with the issuance of any Securities of such series shall be delivered to the Trustee prior to the authentication and delivery thereof. Section 3.02. Denominations. Unless otherwise provided as contemplated by Section 3.01, any Securities of a series denominated in Dollars shall be issuable in denominations of not less than U.S. $1,000. Section 3.03. Execution, Authentication, Delivery and Dating. (a) The Securities, upon the execution of this Indenture, or from time to time thereafter, may be executed by the Association and delivered to the Trustee for authentication, and, upon Association Order, the Trustee shall thereupon authenticate and deliver said Securities. (b) Unless otherwise provided as contemplated by Section 3.01, the Securities shall be dated the first day in which the payment of the full purchase price thereof is received by the Association at its offices in Kansas City, Missouri. (c) The Securities will be signed on behalf of the Association by its President or Vice President, under its corporate seal, attested by its Secretary or Assistant Secretary. The signatures of such officers and the corporate seal of the Association may be facsimile signatures. (d) Only such Securities as shall bear thereon a certificate of authentication substantially in the form hereinbefore recited, executed by the Trustee, shall be entitled to the benefits of this Indenture or be valid or obligatory for any purposes. Such certificate by the Trustee upon any Security executed by the Association shall be conclusive evidence that the Security so authenticated has been duly authenticated and delivered hereunder and that the Holder is entitled to the benefits of this Indenture. (e) In case any officer of the Association who shall have signed any of the Securities shall cease to be such officer before the Securities so signed shall have been authenticated and delivered by the Trustee, or disposed of by the Association, such Securities nevertheless may be authenticated and delivered or disposed of as though the person who signed such Securities had not ceased to be such officer of the Association; and any Securities may be signed on behalf of the Association by such persons as, at the actual date of the execution of such Security, shall be the proper officers of the Association, although at the date of the execution of this Indenture any such person was not such officer. Section 3.04. Temporary Securities. Pending the preparation of definitive Securities of any series, the Association may execute and, upon Association Order, the Trustee shall authenticate and deliver temporary Securities of such series which are printed, lithographed, typewritten, mimeographed or otherwise produced, in any authorized denomination, substantially of the tenor and form, with or without interest coupons, of the definitive Securities in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Securities may determine, as conclusively evidenced by their execution of such Securities and interest coupons, if any. If temporary Securities of any series are issued, the Association will cause definitive Securities of such series to be prepared without unreasonable delay. After preparation of definitive Securities of such series, the temporary Securities of such series shall be exchangeable for definitive Securities of such series upon surrender of the temporary Securities of such series at the office or agency of the Association pursuant to Section 6.02 for such series, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Securities of any series (accompanied by any unmatured interest coupons appertaining thereto), the Association shall execute and the Trustee shall authenticate and deliver in exchange therefor a like principal amount of definitive Securities of the same series of authorized denominations and of like tenor. Until so exchanged, the temporary Securities of any series shall in all respects be entitled to the same benefits under this Indenture as definitive Securities of such series except as otherwise specified as contemplated by Section 3.01. Section 3.05. Registration, Transfer and Exchange. The Association shall cause to be kept at the office or agency to be maintained by the Association in accordance with Section 6.02 a register (the "Register") in which, subject to such reasonable regulations as it may prescribe, the Association shall provide for the registration of Securities and the registration of transfers of Securities. The Register shall be in written form or any other form capable of being converted into written form within a reasonable time. The Association is hereby initially appointed "Registrar" for the purpose of registering Securities and transfers of Securities as herein provided. Upon surrender for registration of transfer of any Security of any series at the office or agency maintained pursuant to Section 6.02 for that series, the Association shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Securities of the same series, of any authorized denominations and of a like aggregate principal amount and tenor and containing identical terms and provisions. At the option of the Holder, Securities of any series may be exchanged for other Securities of the same series, of any authorized denominations, of a like aggregate principal amount and tenor and containing identical terms and provisions, upon surrender of the Securities to be exchanged at such office or agency. Whenever any Securities are so surrendered for exchange, the Association shall execute, and the Trustee shall authenticate and deliver, the Securities which the Holder making the exchange is entitled to receive. All Securities issued upon any registration of transfer or upon any exchange of Securities shall be the valid obligations of the Association, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Securities surrendered upon such registration of transfer or exchange. Every Security presented or surrendered for registration of transfer or for exchange shall (if so required by the Association, the Registrar or the Trustee) be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Association, the Registrar and the Trustee duly executed by the Holder thereof or his attorney duly authorized in writing. No service charge shall be made for any registration of transfer or for any exchange of Securities, but the Association may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration or transfer or exchange of Securities, other than exchanges pursuant to Section 3.04 or Section 12.05 not involving any transfer. The Association shall not be required (i) to issue, register the transfer of, or exchange the Securities of any series for a period beginning at the opening of business 15 days before any selection for redemption of Securities of such series and ending at the close of business on the earliest date on which the relevant notice of redemption is deemed to have been given to all Holders of such series to be redeemed; or (ii) to register the transfer of or exchange any Security so selected for redemption, in whole or in part, except the unredeemed portion of any Security being redeemed in part. Pursuant to Section 3.01, the foregoing provisions relating to registration, transfer and exchange may be modified, supplemented or superseded with respect to any series of Securities by a Board Resolution or in one or more indentures supplemental hereto. Section 3.06. Replacement Securities. In case any Security shall become mutilated or be destroyed, lost or stolen, the Association in its discretion may execute, and upon its request the Trustee shall authenticate and deliver, a new Security bearing a number not contemporaneously Outstanding, in exchange and substitution for the mutilated Security, or in lieu of and substitution for the Security so destroyed, lost or stolen. In every case the applicant for a substituted Security shall furnish to the Association and to the Trustee such security or indemnity as may be required by them to save each of them harmless, and, in every case of destruction, loss or theft, the applicant shall also furnish to the Association and to the Trustee evidence to their satisfaction of the destruction, loss or theft of such Security and of the ownership thereof. The Trustee may authenticate any such Security and deliver the same upon the written request or authorization of any officer of the Association. Upon the issuance of any substituted Security, the Association may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses connected therewith and, in addition, a further sum not exceeding Two Dollars ($2.00) for each Security so issued in substitution. In case any Security which has matured or is about to mature shall become mutilated or be destroyed, lost or stolen, the Association may, instead of issuing a substitute Security, pay the same (without surrender thereof except in the case of a mutilated Security) if the applicant for such payment shall furnish the Association and any Registrar with such security or indemnity as it may require to save it harmless, and, in every case of destruction, loss or theft, the applicant shall also furnish to the Association and to the Trustee evidence to their satisfaction of the destruction, loss or theft. Every substituted Security issued pursuant to the provisions of this Section 3.06 by virtue of the fact that any Security is destroyed, lost or stolen shall, with respect to such Security, constitute an additional contractual obligation of the Association, whether or not the destroyed, lost or stolen Security shall be found at any time, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Securities duly issued hereunder. All Securities shall be held and owned upon the express condition that the foregoing provisions are exclusive with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities, and shall preclude any and all other rights or remedies, notwithstanding any law or statute existing or hereafter enacted to the contrary with respect to the replacement or payment of securities without their surrender. Section 3.07. Payment of Interest; Interest Rights Preserved. Unless otherwise provided pursuant to Section 3.01, interest on any Security of a series which is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the person in whose name that Security of that series is registered at the close of business on the record date for such interest. Unless otherwise provided pursuant to Section 3.01, any interest on any Security of a series which is payable, but is not punctually paid or duly provided for, on any Interest Payment Date and interest on such defaulted interest at the then applicable interest rate borne by the Securities of that series, to the extent lawful (such defaulted interest and interest thereon herein collectively called "Defaulted Interest") shall forthwith cease to be payable to the Holder on the record date; and such Defaulted Interest may be paid by the Association, at its election in each case, as provided in Subsection (a) or (b) below: (a) The Association may elect to make payment of any Defaulted Interest to the persons in whose names the Securities of that series are registered at the close of business on a Special Record Date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Association shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each Security of that series and the date (not less than 30 days after such notice) of the proposed payment, and at the same time the Association shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the persons entitled to such Defaulted Interest as in this Subsection provided. Thereupon the Trustee shall fix a Special Record Date for the payment of such Defaulted Interest which shall be not more than 15 days and not less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Association in writing of such Special Record Date. In the name and at the expense of the Association, the Trustee shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be mailed, first-class postage prepaid, to each Holder at his address as it appears in the Register, not less than 10 days prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been so mailed, such Defaulted Interest shall be paid to the persons in whose names the Securities of that series are registered on such Special Record Date and shall no longer be payable pursuant to the following Subsection (b). (b) The Association may make payment of any Defaulted Interest in any other lawful manner if, after written notice given by the Association to the Trustee of the proposed payment pursuant to this Section 3.07, such payment shall be deemed practicable by the Trustee. Subject to the foregoing provisions of this Section 3.07, each Security of any series delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Security of the same series shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Security of the same series. Section 3.08. Cancellation. All Securities surrendered for payment, redemption, exchange or transfer shall, if surrendered to the Association, be cancelled and delivered to the Trustee, or, if surrendered to the Trustee, shall be cancelled by it, and no Security shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Indenture. On request of the Association, the Trustee shall deliver to the Association a certificate of cancellation, including such cancelled Securities held by the Trustee. If the Association shall acquire any of the Securities, such acquisition shall not operate as a redemption or satisfaction of the indebtedness represented by such Securities unless and until the same are delivered to the Trustee cancelled or for cancellation. Section 3.09. CUSIP Numbers. The Association in issuing the Securities may use "CUSIP" numbers (if then generally in use and in addition to the other identification numbers printed on the Securities), and, in such case, the Trustee shall use "CUSIP" numbers in notices of redemption as a convenience to Holders; provided that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Securities or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Securities, and any such redemption shall not be affected by any defect in or omission of such numbers. ARTICLE FOUR REDEMPTION BY ASSOCIATION Section 4.01. Securities Subject to Redemption. To the extent, if any, provided pursuant to Section 3.01, the Association may, from time to time, redeem any Outstanding Security of any series by payment of the face amount thereof, plus accrued interest to the date of such payment, upon not less than fifteen (15) days written notice mailed to the Holder named in the Register, at the address designated therein, by ordinary first class United States mail, properly addressed and stamped and deposited in the United States. Section 4.02. Notice of Redemption. Unless otherwise provided as contemplated by Section 3.01, each such notice of redemption shall specify the date fixed for redemption and shall state that payment of the redemption price of the Security or Securities to be redeemed will be made at the office to be maintained by the Association in accordance with the provisions of Section 6.02 upon presentation and surrender of such Security or Securities, that interest accrued to the date fixed for redemption will be paid, and that on and after said date interest thereon will cease to accrue. Section 4.03. Securities Payable on Redemption Date. Unless otherwise provided as contemplated by Section 3.01, if the giving of notice of redemption shall have been completed as above provided, the Security or Securities specified in such notice shall become due and payable on the date and at the place stated in such notice at the face amount thereof, together with interest accrued to the date fixed for redemption, and on and after such date fixed for redemption (unless the Association shall default in the payment of such Security or Securities at the face amount thereof, together with interest accrued to date fixed for redemption) interest on the Security or Securities so called for redemption shall cease to accrue. On presentation and surrender of such Security or Securities at the place of payment in said notice specified, the said Security or Securities shall be paid or redeemed by the Association at the face amount thereof, together with interest accrued thereon to the date fixed for redemption. Section 4.04. Securities Redeemed in Part. Any Security which is to be redeemed only in part pursuant to this Article Four shall be surrendered to the office to be maintained by the Association in accordance with the provisions of Section 6.02, and the Association shall execute, and the Trustee shall authenticate and deliver to the Holder of such Security without service charge, a new Security or Securities of the same series, of any authorized denomination as requested by such Holder in aggregate principal amount equal to, and in exchange for, the unredeemed portion of the principal of the Security of that series so surrendered that is not redeemed or purchased. ARTICLE FIVE REDEMPTION BY HOLDER Section 5.01. Redemption by Holder. To the extent, if any, provided pursuant to Section 3.01, the Association agrees to redeem Securities of any series prior to maturity by payment of the principal thereof, plus interest to the date of such payment only, at the place and at the rate specified pursuant to Section 3.01, upon surrender of such Securities, accompanied by a written request for early redemption to the Association and such other documentation as shall be specified pursuant to Section 3.01. Section 5.02. Securities Redeemed in Part. Any Security which is to be redeemed only in part pursuant to this Article Five shall be surrendered to the office to be maintained by the Association in accordance with the provisions of Section 6.02, and the Association shall execute, and the Trustee shall authenticate and deliver to the Holder of such Security without service charge, a new Security or Securities of the same series, of any authorized denomination as requested by such Holder in aggregate principal amount equal to, and in exchange for, the unredeemed portion of the principal of the Security of that series so surrendered that is not redeemed or purchased. Section 5.03. No Set-Aside. The amounts available for the redemption of Securities prior to maturity pursuant to this Section Five shall not be set aside in a separate fund or held in trust. ARTICLE SIX PARTICULAR COVENANTS OF THE ASSOCIATION Section 6.01. Payments of Principal and Interest. The Association will duly and punctually pay or cause to be paid the principal of and interest on each of the Securities at the respective times and place and in the manner provided in the Securities. The principal of and interest on the Securities shall be payable only to or upon the written order of the Holder named in the Securities. Section 6.02. Maintenance of Office or Agency. The Association will maintain an office or agency in the City of Kansas City, State of Missouri, where the Securities of each series may be presented for transfer, exchange, redemption and payment, and where notices and demands to or upon the Association with respect to the Securities of each series or to this Indenture may be served. The Association will give to the Trustee notice of the location of such office or agency and of any change of location thereof. In case the Association shall fail to maintain such office or agency or shall fail to give such notice of the location or of any change in the location thereof, presentations and demands may be made and notices may be served at the principal office of the Trustee. Section 6.03. Appointment of Trustee. The Association covenants and agrees that whenever necessary to avoid or fill a vacancy in the office of the Trustee, the Association will in the manner provided in Section 9.18 appoint a Successor Trustee so that there shall at all times be a Trustee hereunder which shall at all times be a bank or trust company, which shall at all times be a corporation or banking association organized and doing business under the laws of the United States or of any State or Territory or of the District of Columbia, with a capital and surplus of at least $25,000,000, and authorized under such laws to exercise corporate trust powers and subject to supervision or examination by Federal, State, Territorial or District of Columbia authority. Section 6.04. Appointment of Duties of Paying Agent. (a) Whenever the Association shall appoint a paying agent other than the Trustee or the Association, it will cause such paying agent to execute and deliver to the Trustee an instrument in which such agent shall agree with the Trustee, subject to the provisions of this Section 6.04, that: (1) it will hold all sums held by it as agent for the payment of the principal of or interest on the Securities of any series (whether such sums have been paid to it by the Association or by any other obligor on the Securities of such series) in trust for the benefit of the Holders of the Securities of such series; and (2) it will give the Trustee notice of any failure by the Association (or by any other obligor on the Securities of such series) to make any payment of the principal of or interest on the Securities of such series when the same shall be due and payable. (b) If the Association shall act as its own paying agent, it will, on or before each due date of the principal of or interest on the Securities of any series, set aside, segregate and hold in trust for the benefit of the holders of the Securities of such series a sum sufficient to pay such principal of and interest so becoming due. The Association will promptly notify the Trustee of any failure to take such action. (c) Anything in this Section 6.04 to the contrary notwithstanding, the Association may, at any time, for the purpose of obtaining a satisfaction and discharge of this Indenture, or for any other reason, pay or cause to be paid to the Trustee all sums held in trust by it, or by any paying agent hereunder, as required by this Section 6.04, such sums to be held by the Trustee upon the trusts herein contained. (d) Anything in this Section 6.04 to the contrary notwithstanding, the agreement to hold sums in trust as provided in this Section 6.04 is subject to the provisions of Article Fourteen. Section 6.05. Report to Trustee. To the extent provided pursuant to Section 3.01, the Association covenants and agrees to report in writing to the Trustee as soon as practicable the interest rate per annum determined to be payable on the Securities and the effective date of such rate of interest. Section 6.06. Unclaimed Monies. Any money deposited with the Trustee or any paying agent, or then held by the Association, in trust for the payment of any principal of or premium or interest on any Security of any series and remaining unclaimed for two years after such principal, premium, if any, or interest has become due and payable shall be paid, without liability for interest thereon, to the Association on Association Request, or (if then held by the Association) shall be discharged from such trust; and the Holder of such Security and interest coupon, if any, shall thereafter, as an unsecured general creditor, look only to the Association for payment thereof of the amount, without liability for interest thereon, and all liability of the Trustee or such paying agent with respect to such trust money, and all liability of the Association as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such paying agent, before being required to make any such repayment, may in the name and at the expense of the Association cause to be published once, in an Authorized Newspaper in each place where the office or agency of the Association pursuant to Section 6.02 is located with respect to such series, or cause to be mailed by first-class mail to such Holder, notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such money then remaining will be repaid to the Association. ARTICLE SEVEN HOLDERS' LISTS AND REPORTS BY TRUSTEE AND ASSOCIATION Section 7.01. Association to Furnish Trustee Names and Addresses of Holders. The Association will furnish or cause to be furnished to the Trustee: (a) semi-annually, not more than 15 days after May 1 and November 1 of each year, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Holders of Securities on such dates; and (b) at such other times as the Trustee may request in writing, within 30 days after the receipt by the Association of any such request, a list of similar form and content for any or all series as of a date not more than 15 days prior to the time such list is furnished; excluding from any such list, with respect to (a) and (b) above, names and addresses possessed by the Trustee in its capacity as Registrar. Section 7.02. Preservation of Information, Communications to Holders. (a) The Trustee shall preserve, in as current a form as is reasonably practicable, the names and addresses of Holders of Securities contained in the most recent list furnished to the Trustee as provided in Section 7.01 and the names and addresses of Holders of Securities received by the Trustee in its capacity as Registrar. The Trustee may destroy any list furnished to it as provided in Section 7.01 upon receipt of a new list so furnished. (b) The rights of Holders of Securities to communicate with other Holders with respect to their rights under this Indenture or under the Securities, and the corresponding rights and privileges of the Trustee, shall be as provided in the Trust Indenture Act. (c) Every Holder of Securities and interest coupons appertaining thereto, by receiving and holding the same, agrees with the Association and the Trustee that neither the Association nor the Trustee nor any agent of any of them shall be held accountable by reason of the disclosure of information as to the names and addresses of the Holders of Securities made pursuant to the Trust Indenture Act. Section 7.03. Reports by Trustee. (a) The Trustee shall transmit to Holders of Securities such reports concerning the Trustee and its actions under this Indenture as may be required pursuant to Section 313 of the Trust Indenture Act, at the times and in the manner provided pursuant thereto. (b) Reports so required to be transmitted at stated intervals of not more than 12 months shall be transmitted no later than July 15 in each calendar year, commencing with the first July 15 after the first issuance of Securities under this Indenture. Section 7.04. Reports by the Association. The Association shall file with the Trustee and the Commission, and transmit to the Holders, such information, documents and other reports, and such summaries thereof, as may be required pursuant to Section 314 of the Trust Indenture Act at the times and in the manner provided pursuant to the Trust Indenture Act; provided that any such information, documents or reports required to be filed with the Commission pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 shall be filed with the Trustee within 15 days after the same is so required to be filed with the Commission. Notwithstanding anything contrary herein, the Trustee shall have no duty to review such documents for purposes of determining compliance with any provisions of this Indenture. Section 7.05. Annual Review Certificate. The Association covenants and agrees to deliver to the Trustee, within 120 days after the end of each fiscal year of the Association, a certificate in substantially the same form prescribed by Section 16.06 hereof from the principal executive officer, principal financial officer or principal accounting officer of the Association stating that a review of the activities of the Association during such year and of performance under this Indenture has been made under his or her supervision and to the best of his or her knowledge, based on such review, the Association has fulfilled all of its obligations under this Indenture throughout such year, or, if there has been a default in the fulfillment of any such obligation, specifying each such default known to him or her and the nature and status thereof. For purposes of this Section 7.05, such compliance shall be determined without regard to any period of grace or requirement of notice provided under this Indenture. ARTICLE EIGHT REMEDIES IN EVENT OF DEFAULT Section 8.01. Event of Default Defined. Unless otherwise provided pursuant to Section 3.01, "Event of Default", wherever used herein with respect to the Securities of any series, means any one of the following events which has occurred and is continuing (whatever the reason for such Event of Default and whether it be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree, order of any court or any order, rule or regulation of any administrative or government body): (a) Failure to pay principal of (or any installment of the principal of) or any premium on any Security of that series, after such principal or premium shall have become due and payable; (b) Failure to pay interest of any Security of that series or any interest coupon appertaining thereto for a period of 60 days after such interest shall have become due or payable; and (c) The expiration of a period of 90 days following: (1) the adjudication of the Association as a bankrupt by any court of competent jurisdiction; (2) the entry of an order approving a petition seeking reorganization of the Association under the Federal Bankruptcy Code or any other applicable law or statute of the United States of America, or any State thereof; or (3) the appointment of a trustee or a receiver of all or substantially all of the property of the Association; unless, with respect to (1), (2), and (3) above, during such period such adjudication, order or appointment of a receiver or trustee shall be vacated; (d) The filing by the Association of a voluntary petition in bankruptcy or the making of an assignment for the benefit of creditors; the consenting by the Association to the appointment of a receiver or trustee of all or any part of its property; the filing by the Association of a petition or answer seeking reorganization under the Federal Bankruptcy Code, or any other applicable law or statute of the United States of America, or of any State thereof; or the filing by the Association of a petition to take advantage of any insolvency act; (e) Failure to perform any other covenant or agreement contained herein or in any indenture supplemental hereto or in any Security of that series for a period of 90 days following the mailing by the Trustee to the Association of a written demand that such failure be cured, such failure not having been cured in the meantime. The Trustee may, and, if requested in writing by the Holders of a majority in principal amount of the Securities of that series then outstanding, shall make such demand. (f) Any other Event of Default provided as contemplated by Section 3.01 with respect to Securities of that series. Section 8.02. Trustee to Notify Holder of Defaults. The Trustee shall, within 90 days after the occurrence thereof, give to the Holders of the affected series notice of all Defaults known to it, unless such Defaults shall have been cured before the giving of such notice (the term "Default" being hereby defined to be the events specified in subsections (a), (b). (c), (d), (e) and (f) of Section 8.01 not including any periods of grace provided for in said subsections and irrespective of the written demand specified in subsection (e) of Section 8.01); provided that, except in the case of Default in the payment of the principal of or interest on any of the Securities, or in the payment of any sinking or purchase fund installment, if any, the Trustee shall be protected in withholding such notice if and so long as the board of directors or responsible officers, or both, of the Trustee, in good faith determine that the withholding of such notice is in the interests of such Holders. Section 8.03. Acceleration Upon Default. Upon the occurrence of an Event of Default, the Trustee may, and upon the written request of the Holders of at least a majority in principal amount of the affected series of Securities then Outstanding shall, by notice in writing given to the Association, declare the principal of all Securities of the affected Series then Outstanding and the interest accrued thereon immediately due and payable, and upon any such declaration the same shall become and shall be immediately due and payable, anything in this Indenture or in the Securities contained to the contrary notwithstanding; provided, however, that upon the occurrence of an Event of Default specified in subsection (c) or (d) of Section 8.01, the principal of the Securities and the interest accrued thereon shall be immediately due and payable without any further action or notice. This provision, however, is subject to the condition that if, at any time after the principal of the Securities shall have been so declared due and payable and before any judgment or decree for the payment of the monies due shall have been obtained or entered as hereinafter provided, the Association shall pay or shall deposit with the Trustee a sum sufficient to pay all maturing installments of interest upon all of the Securities of the affected series and the principal of any and all of the Securities of the affected series which shall have become due otherwise than by acceleration (with interest upon such principal and on overdue installments of interest to the date of such payment or deposit) and such amount as shall be sufficient to cover reasonable compensation to the Trustee, its agents, attorneys and counsel, and all other expenses and liabilities incurred, and all advances made by the Trustee, except as a result of its negligence or bad faith, and any and all Events of Default under the Indenture, other than the nonpayment of the principal of Securities which shall have become due by acceleration, shall have been remedied, then and in every such case the holders of a majority in aggregate principal amount of the Securities of the affected series then Outstanding, by written notice to the Association and to the Trustee, may waive all Events of Default and rescind and annul such declaration and its consequences; but no such waiver or rescission and annulment shall extend to or shall affect any subsequent Event of Default or shall impair any right consequent thereon. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case the Association, the Trustee and the Holders shall, subject to any determination in such proceeding, be restored severally and respectively to their former positions hereunder, and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. Section 8.04. Right of Trustee to Sue Association Upon Default. In the case of a default in payment of the principal of any Security of any series, when the same shall become due and payable, or in the case of a default in the payment of the interest on any Security of any series for a period of 60 days after such interest shall become due and payable, the Trustee may recover judgment, in its own name and as trustee of an express trust, against the Association or other obligor for the whole amount of such principal and interest remaining unpaid, together with interest upon the overdue principal and premium, if any, and to the extent the payment of such interest shall be legally enforceable, upon overdue installments of interest, if any, at the rate borne by Securities of that series. The Trustee may file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee and of the Holders allowed in any judicial proceedings relative to the Association or any other obligor on the Securities or its creditors, or its properties. Section 8.05. Right of Holder to Receive Payment or Sue. Notwithstanding any other provision of this Indenture, the right of any Holder of any Security to receive payment of the principal of and interest on such Security, on or after the respective due dates expressed on such Security, or to institute suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such Holder, except as to a postponement of an interest payment consented to as provided in Section 8.06. Section 8.06. Right of Holders to Direct Time, Method and Place of Conducting Proceeding for Remedy Available to Trustee. The Holders of not less than a majority in principal amount of the Outstanding Securities of each series affected (with each such series voting as a class) shall have the right to: (a) direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture; or (b) on behalf of the Holders of all such Securities of such series, consent to the waiver of any past Default and its consequences, except an Event of Default in the payment of principal or interest, provided that: (1) such direction shall not be in conflict with any rule of law or with this Indenture or expose the Trustee to personal liability and (2) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction. The Holders of not less than 75 per centum in principal amount of the Outstanding Securities of each series may consent on behalf of the Holders of all the Outstanding Securities of such series to the postponement of any interest payment for a period not exceeding three years from its due date. Section 8.07. Notice of Defaults. The Trustee shall not be required to take notice or deemed to have notice of any Default or Event of Default hereunder, unless the Trustee shall have received specific notice in writing of such Default or Event of Default from the Association or the Holders of not less than 10% in principal amount of any series of Securities Outstanding, and in the absence of any such notice so received, the Trustee may conclusively assume that no Default or Event of Default exists. ARTICLE NINE CONCERNING THE TRUSTEE Section 9.01. Qualification of Trustee. The Trustee shall at all times be a bank or trust company eligible under Section 6.03 and have a combined capital and surplus of not less than $25,000,000. If the Trustee publishes reports of condition at least annually, pursuant to law or to the requirements of any supervising or examining authority referred to in Section 6.03, then for the purpose of this Section the combined capital and surplus of the Trustee shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. Section 9.02. Acceptance and Undertaking of Trustee. The Trustee hereby accepts the trust hereby created. The Trustee undertakes, prior to an Event of Default, and after the curing of all Events of Default which may have occurred, to perform such duties and only such duties as are specifically set forth in this Indenture, and in case of an Event of Default (which has not been cured) to exercise such of the rights and powers vested in it by this Indenture, and to use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. Section 9.03. Examination of Evidence by Trustee. The Trustee, upon receipt of evidence furnished to it by or on behalf of the Association pursuant to any provision of this Indenture, will examine the same to determine whether or not such evidence conforms to the requirements of this Indenture. Section 9.04. Trustee not Relieved of Liability for Own Negligence or Willful Misconduct. No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (a) prior to an Event of Default hereunder and after the curing of all Events of Default which may have occurred, the Trustee shall not be liable except for the performance of such duties as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee but the duties and obligations of the Trustee, prior to an Event of Default and after the curing of all Events of Default which may have occurred, shall be determined solely by the express provisions of this Indenture; (b) prior to an Event of Default hereunder and after the curing of all Events of Default which may have occurred, and in the absence of bad faith on the part of the Trustee, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon resolutions, requests, letters, reports, notices, consents, certificates, opinions or other documents conforming to the requirements of this Indenture; (c) the Trustee shall not be personally liable for any error of judgment made in good faith by a responsible officer or officers of the Trustee unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; (d) the Trustee shall not be personally liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of not less than a majority in principal amount of the Securities of each affected series at the time Outstanding relating to the time, method, and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture; (e) notwithstanding anything elsewhere in this Indenture, before taking any action under this Indenture, the Trustee may require that satisfactory indemnity be furnished to it by the Holders of the Securities or other persons for the reimbursement of all reasonable costs and expenses to which it may be put and to protect it against all liability which it may incur in or by reason of such action, except liability which is adjudicated to have resulted from its negligence or willful misconduct by reason of any action so taken; (f) the permissive right of the Trustee to do things enumerated in the Indenture shall not be construed as a duty and the Trustee shall not be answerable for other than its own negligent action, its own negligent failure to act or its own willful misconduct; (g) the Trustee shall not be required to give any bond or security in respect of the execution of the trusts and powers granted hereunder or otherwise in respect of this Indenture; (h) whether or not therein expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or conveying rights and duties affording protection to the Trustee whether in its capacities as Trustee, paying agent, Registrar or in any other capacity shall be subject to the provisions of this Article Nine. Section 9.05. Trustee May Rely on Recitals of Fact. The recitals of fact contained herein, in the Securities, and in any prospectus or other document shall be taken as the statements of the Association, and the Trustee assumes no responsibility for the correctness of the same. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Securities issued hereunder. Section 9.06. Right of Trustee to Rely on Certain Documents. To the extent permitted by Sections 9.02, 9.03 and 9.04: (a) The Trustee may rely and shall be protected in acting upon any resolution, certificate, opinion, notice, request, consent, order, appraisal, report, bond, or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; and (b) The Trustee may consult with counsel and the opinion of such counsel shall be full and complete authorization and protection in respect of any action taken or suffered by it hereunder in good faith and in accordance with the opinion of such counsel. Section 9.07. Trustee Not Responsible for Approval of Any Expert. The Trustee shall not be under any responsibility for the approval of any expert, attorney, accountant, or agent for any of the purposes expressed in this Indenture, except that nothing in this Section 9.07 contained shall relieve the Trustee of its obligation to exercise reasonable care with respect to the approval of independent experts, attorneys, accountants, or agents who may furnish opinions or certificates to the Trustee pursuant to any provisions of this Indenture. Any resolution of the Board of Directors or Executive Committee of the Association shall be evidenced to the Trustee by a copy thereof certified by the Secretary or an Assistant Secretary of the Association to have been duly adopted, and the Trustee may rely upon such copy as conclusive evidence of the adoption of such resolution. Nothing contained in this Section 9.07 shall be deemed to modify the obligation of the Trustee to exercise after an Event of Default the rights and powers vested in it by this Indenture with the degree of care and skill specified in Section 9.02. Section 9.08. Right of Trustee to Become Owner or Pledgee of Securities. The Trustee, in its individual or any other capacity, may become the Holder or pledgee of Securities with the same rights it would have if it were not a Trustee. Section 9.09. Monies Received by Trustee to be Held in Trust. Subject to the provisions of Section 6.06, all monies received by the Trustee whether as Trustee or paying agent shall, until used or applied as herein provided, be held in trust for the purposes for which they were paid, but need not be segregated from other funds except to the extent required by law. The Trustee shall have no liability for interest on any monies received by it hereunder except as may be agreed upon in writing with the Association from time to time and as may be permitted by law. Section 9.10. Compensation of Trustee. The Association covenants and agrees to pay to the Trustee from time to time, and the Trustee shall be entitled to reasonable compensation for all services rendered by it in the execution of the trusts hereby created and in the exercise and performance of any of the powers and duties hereunder to the Trustee, which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust, and the Association will reimburse the Trustee for all advances made by the Trustee in accordance with any of the provisions of this Indenture and will pay to the Trustee from time to time its expenses and disbursements (including, without limitation, the reasonable compensation and the expenses and disbursements of its counsel and of all persons not regularly in its employ). The Association also covenants to indemnify the Trustee for, and to hold it harmless against, any loss, liability or expense incurred without negligence or bad faith on the part of the Trustee, arising out of or in connection with the acceptance or administration of this trust, including the costs and expenses of defending against any claim of liability in the premises. The Association further covenants and agrees to pay interest to the Trustee at the rate of one hundred fifty percent (150%) of the prime commercial lending rate of the Trustee upon all amounts paid, advanced or disbursed by the Trustee for which it is entitled to reimbursement or indemnity as herein provided. The obligations of the Association to the Trustee under this Section 9.10 shall constitute additional indebtedness subject to this Indenture. Such additional indebtedness shall be secured by a lien prior to that of the Securities upon the trust estate, including all property or funds held or collected by the Trustee as such. Section 9.11. Enforcement by Trustee of Right to Compensation. In order to further assure the Trustee that it will be compensated, reimbursed and indemnified as provided in Section 9.10 and that the prior lien provided for in Section 9.10 upon the trust estate to secure the payment of such compensation, reimbursement and indemnity will be enforced for the benefit of the Trustee, all parties to this Indenture agree, and each Holder of any Security by his acceptance thereof shall be deemed to have agreed that in the event of: (a) the adjudication of the Association as a bankrupt by any court of competent jurisdiction, (b) the filing of any petition seeking the reorganization of the Association under the Federal Bankruptcy Code or any other applicable law or statute of the United States of America or of any State thereof, (c) the appointment of one or more trustees or receivers of all or substantially all of the property of the Association, (d) the filing of any bill to foreclose this Indenture, (e) the filing by the Association of a petition to take advantage of any insolvency act, or (f) the institution of any other proceeding wherein it shall become necessary or desirable to file or present claims against the Association, the Trustee may file from time to time in any such proceeding or proceedings one or more claims, supplemental claims and amended claims as a secured creditor for its reasonable compensation for all services rendered by it (including services rendered during the course of any such proceeding or proceedings) and for reimbursement of all advances, expenses and disbursements (including, without limitation, the reasonable compensation and the expenses and disbursements of its counsel and of all persons not regularly in its employ) made or incurred by it in the execution of the trusts hereby created and in the exercise and performance of any of the powers and duties herein of the Trustee, and for any and all amounts to which the Trustee is entitled as indemnity as provided in Section 9.10; and the Trustee and its counsel and agents may file in any such proceeding or proceedings applications or petitions for compensation for such services rendered, for reimbursement for such advances, expenses and disbursements, and for such indemnity. The claim or claims of the Trustee filed in any such proceeding or proceedings shall be reduced by the amount of compensation for services, reimbursement for advances, expenses and disbursements, and indemnity paid to it following final allowance to it and to its counsel and agents by the court in any such proceeding as an expense of administration or in connection with a plan of reorganization or readjustment. To the extent that compensation, reimbursement and indemnity are denied to the Trustee or to its counsel or other agents because of not being rendered or incurred in connection with a plan of reorganization or readjustment, approved as required by law, because such services were not rendered in the interests of and with benefit to the estate of the Association as a whole but in the interests of and with benefit to the Holders of the Securities in the execution of the trusts hereby created or in the exercise and performance of any of the powers and duties hereunder of the Trustee or because of any other reason, the court may, to the extent permitted by law, allow such claim, as supplemented and amended, in any such proceeding or proceedings and for the purposes of any reorganization or readjustment of the Association's obligations, classify the Trustee as a secured creditor of a class separate and distinct from that of other creditors of a class having priority and precedence over the class in which the Holders of Securities are placed by reason of having a lien, prior and superior to that of the Holders of the Securities, as such. The amount of the claim or claims of the Trustee for services rendered and for advances, expenses and disbursements, including, without limitation, the reasonable compensation and expenses and disbursements of its counsel and of all persons not regularly in its employ which are not allowed and paid in any such proceeding, but for which the Trustee is entitled to the allowance of a secured claim as herein provided, may be fixed by the court or judge in any such proceeding or proceedings to the extent that such court or judge has or exercises jurisdiction over the amount of any such claim or claims. If, and to the extent that the Trustee and its counsel and other persons not regularly in its employ do not receive compensation for services rendered, reimbursement of its or their advances, expenses and disbursements, or indemnity, as herein provided, as the result of allowances made in any such proceeding or by any plan of reorganization or readjustment or obligations of the Association, the Trustee shall be entitled, in priority to the Holders of Securities, to receive any distributions of any securities, dividends or other disbursements which would otherwise be made to the Holders of Securities in any such proceeding or proceedings and is hereby constituted and appointed, irrevocably, the attorney-in-fact for the Holders of the Securities and each of them to collect and receive, in their name, place and stead, such distributions, dividends or other disbursements, to deduct therefrom the amounts due to the Trustee, its counsel and other persons not regularly in its employ on account of services rendered, advances, expenses, and disbursements made or incurred, or indemnity, and to pay and distribute the balance, pro rata, to the Holders of the Securities. The Trustee shall have a lien upon any securities or other considerations to which Holders of Securities may become entitled pursuant to any such plan of reorganization or readjustment of obligations, or in any such proceeding or proceedings; and the court or judge in any such proceeding or proceedings may determine the terms and conditions under which any such lien shall exist and be enforced. Section 9.12. Trustee May Rely Upon Certificate of Association. Whenever in the administration of the trusts of this Indenture, prior to an Event of Default hereunder, the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or suffering any action hereunder, such matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a certificate in substantially the form prescribed by Section 16.06 hereof signed by the President or Vice President of the Association and delivered to the Trustee, and such certificate shall be full warrant to the Trustee for any action taken or suffered by it under the provisions of this Indenture upon the faith thereof. Section 9.13. Right of Trustee to Give Notice of Action. Whenever it is provided in this Indenture that the Trustee shall take any action upon the happening of a specified event or upon the fulfillment of any action or upon the request of the Association or of Holders, the Trustee taking such action shall have full power to give any and all notices and to do any and all acts and things incidental to such action. Section 9.14. Conflicting Interest of Trustee. If the Trustee has or shall acquire a conflicting interest within the meaning of Section 310(b) of the Trust Indenture Act, the Trustee shall either eliminate such conflicting interest or resign, to the extent and in the manner provided by, and subject to the provisions of, the Trust Indenture Act and this Indenture. To the extent permitted by the Trust Indenture Act, the Trustee shall not be deemed to have a conflicting interest by virtue of being a trustee under this Indenture with respect to Securities of more than one series or a trustee under the indenture dated November 20, 1981, as amended January 4, 1982. Section 9.15. Duties of Trustee if it Becomes Creditor of Association. If and when the Trustee shall be or become a creditor of the Association (or other obligor under the Securities of any series), the Trustee shall be subject to the provisions of the Trust Indenture Act regarding the collection of claims against the Association (or any such other obligor). A Trustee who has resigned or been removed shall be subject to the Trust Indenture Act Section 311(a) to the extent indicated therein. Section 9.16. Resignation and Discharge of Trustee. The Trustee may at any time resign and be discharged of the trusts hereby created by giving written notice to the Association specifying the day upon which such resignation shall take effect and thereafter publishing notice thereof, in one newspaper printed in the English language and customarily published on each business day and of general circulation in the City of Kansas City, State of Missouri, once in each of three successive calendar weeks, in each case on any business day of the week, and such resignation shall take effect upon the day specified in such notice unless previously a successor trustee shall have been appointed by the Holders or the Association in the manner hereinafter provided in Section 9.18, and in such event such resignation shall take effect immediately on the appointment of such successor trustee. This Section shall not be applicable to resignations pursuant to Section 9.14. Section 9.17. Removal of Trustee. The Trustee may be removed at any time by an instrument or concurrent instruments in writing filed with the Trustee and signed and acknowledged by the Holders of a majority in principal amount of the Securities then Outstanding or by their attorneys in fact duly authorized. In case at any time the Trustee shall cease to be eligible in accordance with the provisions of Section 9.01, then the Trustee shall resign immediately in the manner and with the effect specified in Section 9.16; and, in the event that the Trustee does not resign immediately in such case, then it may be removed forthwith by an instrument or concurrent instruments in writing filed with the Trustee and either (a) signed by the President or Vice President of the Association with its corporate seal attested by the Secretary or Assistant Secretary of the Association or (b) signed and acknowledged by the Holders of ten per centum in principal amount of the Securities then outstanding of a particular series or by their attorneys in fact duly authorized. Section 9.18. Filling Vacancy. In case at any time the Trustee shall resign or shall be removed or shall become incapable of acting, or shall be adjudged a bankrupt or insolvent, or if the receiver of the Trustee or of its property shall be appointed, or if any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, a vacancy shall be deemed to exist in the office of Trustee, and a successor or successors may be appointed by the Holders of a majority in principal amount of the Securities then Outstanding hereunder, by an instrument or concurrent instruments in writing signed and acknowledged by such Holders or by their attorneys in fact duly authorized, and delivered to such new trustee, notification thereof being given to the Association and the retiring trustee, provided, nevertheless, that until a new trustee shall be appointed by the Holders as aforesaid, the Association, by instrument executed by order of its Board of Directors or Executive Committee and duly acknowledged by its President or Vice President, may appoint a trustee to fill such vacancy until a new trustee shall be appointed by the Holders as herein authorized. The Association shall publish notice of any such appointment made by it in the manner provided in Section 9.16. Any new trustee appointed by the Association shall, immediately and without further act, be superseded by a trustee appointed by the Holders, as above provided if such appointment by the Holders be made prior to the expiration of one year after the first publication of notice of the appointment of the new trustee by the Association. If no appointment of a successor trustee shall be made pursuant to the foregoing provisions of this section within six months after a vacancy shall have occurred in the office of trustee, the Holder of any Security Outstanding hereunder or any retiring trustee may apply to any court of competent jurisdiction to appoint a successor trustee. Said court may thereupon after such notice, if any, as such court may deem proper and prescribe, appoint a successor trustee. If the Trustee resigns because of a conflict of interest as provided in subsection (a) of Section 9.14 and a successor has not been appointed by the Association or the Holders or, if appointed, has not accepted the appointment within thirty days after the date of such resignation, the resigning Trustee may apply to any court of competent jurisdiction for the appointment of a successor trustee. Any trustee appointed under the provisions of this Section in succession to the Trustee shall be a bank or trust company eligible under Section 6.03 and 9.01 and qualified under Section 9.14. Any trustee which has resigned or been removed shall nevertheless retain the lien upon the trust estate, including all property or funds held or collected by the trustee as such, to secure the amounts due to the trustee as compensation, reimbursements, expenses and indemnity, afforded to it by Section 9.10 and retain the rights afforded to it by Section 9.11. Section 9.19. Duties of Successor Trustee. Any successor trustee appointed hereunder shall execute, acknowledge and deliver to his or its predecessor trustee, and also to the Association, an instrument accepting such appointment hereunder, and thereupon such successor trustee, without any further act, deed or conveyance, shall become fully vested with all the estates, properties, rights, powers, trusts, duties and obligations of his or its predecessor in trust hereunder, with like effect as if originally named as Trustee herein and the obligations and duties of the Trustee ceasing to act shall cease and terminate; but the trustee ceasing to act shall nevertheless, on the written request of the Association, or of the successor trustee, or of the Holders of 10 per centum in principal amount of the Securities then Outstanding hereunder, execute, acknowledge and deliver such instruments of conveyance and further assurances and do such other things as may reasonably be required for more fully and certainly vesting and confirming in such successor trustee all the right, title and interest of the Trustee to which he or it succeeds under this Indenture, and such rights, powers, trusts, duties, and obligations, and the Trustee ceasing to act shall also, upon like request, pay over, assign and deliver to the successor trustee any money or other property subject to the lien of this Indenture. Should any deed, conveyance or instrument in writing from the Association be required by the new trustee for more fully and certainly vesting in and confirming to such new trustee such estates, properties, rights, powers, trusts and duties, any and all such deeds, conveyances and instruments in writing shall, on request, be executed, acknowledged and delivered by the Association. Section 9.20. Merger or Consolidation of or with Trustee. Any corporation into which the Trustee may be merged or with which it may be consolidated or any corporation resulting from any merger or consolidation to which the Trustee shall be a party or any corporation to which substantially all the corporate trust business and assets of the Trustee may be transferred, provided such corporation shall be eligible under the provisions of Sections 6.03 and 9.01 and qualified under Section 9.14, shall be the successor trustee under this Indenture, without the execution or filing of any paper or the performance of any further act on the part of any other parties hereto, anything herein to the contrary notwithstanding. In case any of the Securities contemplated to be issued hereunder shall have been authenticated but not delivered, any such successor to the Trustee may, subject to the same terms and conditions as though such successor to the Trustee had itself authenticated such Securities, adopt the certificate of authentication of the original Trustee or of any successor to it as trustee hereunder, and deliver the said Securities so authenticated; and in case any of said Securities shall not have been authenticated, any successor to the Trustee may authenticate such Securities either in the name of any predecessor hereunder or in the name of the successor trustee, and in all such cases such certificates shall have the full force which it is anywhere in said Securities or in the Indenture provided that the certificate of the Trustee shall have; provided, however, that the right to authenticate Securities in the name of the Trustee shall apply only to its successor or successors by merger or consolidation or sale as aforesaid. Section 9.21. Duties of Trustee Governed by Laws of Missouri. The duties, liabilities, rights, privileges and immunities of the Trustee in relation to the Holders of the Securities shall be governed exclusively by the laws of the State of Missouri. ARTICLE TEN CONCERNING THE HOLDERS Section 10.01. Proof of Action by Holders. Whenever in this Indenture it is provided that the Holders of a specified percentage in aggregate principal amount of the Securities of a particular series may take any action (including the making of any demand or request, the giving of any notice, consent or waiver or the taking of any other action) the fact that at the time of taking any such action the Holders of such specified percentage have joined therein may be evidenced (a) by any instrument or any number of instruments of similar tenor executed by Holders in person or by agent or proxy appointed in writing, or (b) by the record of the Holders of Securities voting in favor thereof at any meeting of Holders duly called and held in accordance with the provisions of Article Eleven, or (c) by a combination of such instrument or instruments and any such record of such a meeting of Holders. Section 10.02. What Constitutes a Writing. For the purposes hereof, a "writing" shall include tangible written text produced by telex, telefacsimile, computer retrieval, or other process by which electronic signals are transmitted by telephone or otherwise. Section 10.03. Holder Named in Certificate Treated as Absolute Owner. The Association, the Trustee and any paying agent may deem and treat the Holder or Holders named in the Register for any Outstanding Security as the absolute owner of such Security (whether or not such Security shall be overdue and notwithstanding any notation of ownership or other writing thereon made by anyone other than the Association) for the purpose of receiving payment thereof or on account thereof and for all other purposes, and neither the Association nor the Trustee nor any paying agent shall be affected by any notice to the contrary. Section 10.04. Securities Owned by Association to be Disregarded in Computing Requisite Amount of Securities. For the purposes of this section, and in every other instance of a direction or consent by Holders of Securities under this Indenture, in determining whether the Holders of the requisite aggregate principal amount of Securities have concurred in any direction, consent or waiver under this Indenture, Securities which are registered in the name of the Association or any other obligor on the Securities or by any person directly or indirectly controlling or controlled by or under direct or indirect common control with the Association or any other obligor on the Securities shall be disregarded and deemed not to be Outstanding for the purpose of any such determination, except that for the purpose of determining whether the Trustee shall be protected in relying on any such direction, consent or waiver only Securities in regard to which the Trustee shall have received written notice identifying such persons or obligors by name and address which the Trustee knows are so owned shall be so disregarded. Section 10.05. Holders May Revoke Prior Action. At any time prior to (but not after) the evidencing to the Trustee as provided in Section 10.01, of the taking of any action by the Holders of the percentage in aggregate principal amount of the Securities of any series specified in this Indenture in connection with such action, any Holder of a Security of such series which is shown by the evidence to be included in the Securities the Holders of which have consented to such action may, by filing written notice with the Trustee at its principal office and upon proof of owning as provided in Section 10.02, revoke such action so far as concerns such Security. Except as aforesaid any such action taken by the Holder of any Security shall be conclusive and binding upon such Holder and upon all future Holders of such Security and of any Security issued in exchange or substitution therefor, irrespective of whether or not any notation in regard thereto is made upon such Security. Any action taken by the Holders of the percentage in aggregate principal amount of the Securities of any series specified in this Indenture in connection with such action shall be conclusively binding upon the Association, the Trustee and the Holders of the Securities of such series. ARTICLE ELEVEN HOLDERS MEETINGS Section 11.01. Purpose of Meetings. A meeting of Holders of the Securities, or of the Securities of any series, may be called at any time and from time to time pursuant to the provisions of this Article Eleven for any of the following purposes: (a) to give any notice to the Association or to the Trustee, or to give any directions to the Trustee, or to consent to the waiving of any Default or Event of Default hereunder and its consequences, or to take any other action authorized to be taken by Holders pursuant to any of the provisions of Article Eight; (b) to remove the Trustee and appoint a successor Trustee pursuant to the provisions of Article Nine; (c) to consent to the execution of an Indenture or Indentures supplemental hereto pursuant to the provisions of Section 12.02; or (d) to take any other action authorized to be taken by or on behalf of the Holders of any specified aggregate principal amount of the Securities or of any series under any other provision of this Indenture or under applicable law. Section 11.02. Call of Meeting and Notice Required. The Trustee may at any time call a meeting of Holders to take any action specified in Section 11.01, to be held at such time and at such place in the City of Kansas City, State of Missouri, as the Trustee shall determine. Notice of every meeting of the Holders, setting forth the time and place of such meeting and in general terms the action proposed to be taken at such meeting, shall be mailed by ordinary first class mail, postage prepaid, to the Holders of all Outstanding Securities of the series affected, at their last known post office addresses as shown by the Register of the Association or Trustee, not less than twenty nor more than one hundred eight days prior to the date fixed for the meeting. Section 11.03. Request of Trustee to Call Meeting. In case at any time the Association, pursuant to a resolution of its Board of Directors, or the Holders of at least 10 per centum in aggregate principal amount of the Securities or of a particular series then Outstanding, shall have requested the Trustee to call a meeting of Holders to take any action authorized in Section 11.01, by written request setting forth in reasonable detail the action proposed to be taken at the meeting, and the Trustee shall not have mailed the notice of such meeting within twenty days after receipt of such request, then the Association or the Holders of Securities in the amount above specified may determine the time and the place in said City of Kansas City for such meeting and may call such meeting by mailing notice thereof as provided in Section 11.02. Section 11.04. Who May Vote at Meeting. To be entitled to vote at any meeting of Holders, a person shall be (a) a Holder of one or more Outstanding Securities entitled to vote at the meeting, or (b) a person appointed by an instrument in writing as proxy for a Holder or Holders of one or more Outstanding Securities entitled to vote at the meeting. The only persons who shall be entitled to be present or to speak at any meeting of Holders shall be the Persons entitled to vote at such meeting and their counsel, any representatives of the Trustee and its counsel and any representatives of the Association and its counsel. Section 11.05. Regulations Made by Trustee. Notwithstanding any other provisions of this Indenture, the Trustee may make such reasonable regulations as it may deem advisable for any meeting of Holders in regard to proof of the owning of Securities and of the appointment of proxies, and in regard to the appointment and duties of inspectors of votes, and submission and examination of proxies, certificates and other evidence of the right to vote, and such other matters concerning the conduct of the meeting as it shall think fit. The Trustee shall, by an instrument in writing, appoint a temporary chairman of the meeting, unless the meeting shall have been called by the Association or by Holders as provided in Section 11.03, in which case the Association or the Holders calling the meeting, as the case may be, shall in like manner appoint a temporary chairman. A permanent chairman and a permanent secretary of the meeting shall be elected by vote of the Holders of a majority in principal amount of the Securities represented at the meeting and entitled to vote. Subject to the provisions of Section 10.04, at any meeting each Holder or proxy shall be entitled to one vote for each $1000 or portion thereof in principal amount of Securities held or represented by him; provided, however, that no vote shall be cast or counted at any meeting in respect of any Security challenged as not Outstanding and ruled by the chairman of the meeting to be not Outstanding; and provided further, that any Holder of a Security or Securities, the aggregate principal amount of which is less than $100, shall nevertheless be entitled to one vote. The chairman of the meeting shall have no right to vote except as a Holder or proxy. Any meeting of Holders duly called pursuant to the provisions of Section 11.02 or 11.03 may be adjourned from time to time, and the meeting may be held as so adjourned without further notice. Section 11.06. Form of and Recording Vote. The vote upon any resolution submitted to any meeting of Holders shall be by written ballots on which shall be subscribed the signatures of the Holders or proxies. The permanent chairman of the meeting shall appoint two inspectors of votes who shall count all votes cast at the meeting for or against any resolution and who shall make and file with the secretary of the meeting their verified written reports in duplicate of all votes cast at the meeting. A record in duplicate of the proceedings of each meeting of Holders shall be prepared by the secretary of the meeting and there shall be attached to said record the original reports of the inspectors of votes on any vote by ballot taken thereat and affidavits by one or more persons having knowledge of the facts setting forth a copy of the notice of the meeting and showing that said notice was published as provided in Section 11.02. The record shall be signed and verified by the affidavits of the permanent chairman and secretary of the meeting and one of the duplicates shall be delivered to the Association and the other to the Trustee to be preserved by the Trustee, the latter to have attached hereto the ballots voted at the meeting. Any record so signed and verified shall be conclusive evidence of the matters therein stated. ARTICLE TWELVE SUPPLEMENTAL INDENTURES Section 12.01. Supplemental Indentures Without Consent of Holders. Without the consent of any Holders, the Association and the Trustee, at any time and from time to time, may enter into indentures supplemental hereto, in form reasonably satisfactory to the Trustee, for any of the following purposes: (a) to evidence the succession of another corporation or entity to the Association and the assumption by any such successor of the covenants and obligations of the Association herein and in the Securities and any interest coupons appertaining thereto; or (b) to add to the covenants of the Association for the benefit of the Holders of all or any series of Securities (and if such covenants are to be for the benefit of less than all series of Securities, stating that such covenants are expressly being included solely for the benefit of such series) or to surrender any right or power herein conferred upon the Association; or (c) to add any additional Events of Default with respect to all or any series of Securities; or (d) to change or eliminate any of the provisions of this Indenture in respect of one or more series of Securities, provided that any such change or elimination shall become effective only when there is no Security Outstanding of any series created prior to the execution of such supplemental indenture which is entitled to the benefit of such provision; or (e) to establish the form or terms of Securities of any series as permitted by Sections 2.01 and 3.01; or (f) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee with respect to the Securities pursuant to Section 9.18 and to add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee; or (g) to cure any ambiguity, to correct or supplement any provision herein which may be inconsistent with any other provision herein or to make any other provisions with respect to matters or questions arising under this Indenture which shall not be inconsistent with the provisions of this Indenture, provided such action shall not adversely affect in any material respect the interests of the Holders of Securities of any series; or (h) to modify, eliminate or add to the provisions of this Indenture to such extent as shall be necessary to effect the qualification of this Indenture under the Trust Indenture Act or under any similar federal statute subsequently enacted, and to add to this Indenture such other provisions as may be expressly required under the Trust Indenture Act; or (i) to enable the issuance of uncertificated Securities and to permit registration, transfer and exchange of securities by book-entry. Section 12.02. Supplemental Indentures With Consent of Holders. With the consent of the Holders of not less than a majority of the aggregate principal amount of the Outstanding Securities of each series affected by such supplemental indenture (treating all affected series as one series), the Association and the Trustee may enter into an indenture or indentures supplemental hereto to add any provisions to or to change in any manner or eliminate any provisions of this Indenture or of any other indenture supplemental hereto or to modify in any manner the rights of the Holders of Securities of any such series; provided, however, that without the consent of the Holder of each Outstanding Security affected thereby, an amendment under this Section may not: (a) change the Stated Maturity of the principal of, or premium, if any, on, or any installment of principal of or premium, if any, or interest on, any such Security, or reduce the principal amount thereof or the rate of interest thereon or any premium payable upon the redemption thereof, or change the manner in which the amount of any principal thereof or premium, if any, or interest thereon is determined, or impair the right to institute suit for the enforcement of any such payment on or after the Stated Maturity thereof (or, in the case of redemption, on or after the Redemption Date); (b) reduce the percentage in principal amount of the Outstanding Securities of any series, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver (of compliance with certain provisions of this Indenture or of certain Defaults hereunder and their consequences) provided for in this Indenture; (c) change any obligation of the Association to maintain an office or agency in the places and for the purposes specified in Section 6.02; or (d) make any change in this Section 12.02 except to increase any percentage or to provide that certain other provisions of this Indenture cannot be modified or waived with the consent of the Holders of each Outstanding Security affected thereby. A supplemental indenture which changes or eliminates any covenant or other provision of this Indenture which has expressly been included solely for the benefit of one or more particular series of Securities, or which modifies the rights of the Holders of Securities of such series with respect to such covenant or other provision, shall be deemed not to affect the rights under this Indenture of the Holders of Securities of any other series. It is not necessary under this Section 12.02 for the Holders to consent to the particular form of any proposed supplemental indenture, but it is sufficient if they consent to the substance thereof. Section 12.03. Compliance with Trust Indenture Act. Every amendment to this Indenture or the Securities of one or more series shall be set forth in a supplemental indenture that complies with the Trust Indenture Act as then in effect. Section 12.04. Execution of Supplemental Indentures. Upon the execution of any supplemental indenture pursuant to the provisions of this Article Twelve, this Indenture shall be and be deemed to be modified and amended in accordance therewith and the respective rights, limitation of rights, obligations, duties and immunities under this Indenture of the Trustee, the Association and the Holders of Securities shall thereafter be determined, exercised and enforced hereunder subject in all respects to such modifications and amendments, and all the terms and conditions of any such supplemental indenture shall be and be deemed to be part of the terms and conditions of this Indenture for any and all purposes. The Trustee, subject to the provisions of Article Nine, may receive and rely upon an Opinion of Counsel as conclusive evidence that any such supplemental indenture complies with the provisions of this Article Twelve. Section 12.05. Reference in Securities to Supplemental Indentures. Securities, including any interest coupons, of any series authenticated and delivered after the execution of any supplemental indenture pursuant to this Article may, and shall if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Association shall so determine, new Securities including any interest coupons of any series so modified as to conform, in the opinion of the Association, to any such supplemental indenture may be prepared and executed by the Association and authenticated and delivered by the Trustee in exchange for Outstanding Securities including any interest coupons of such series. ARTICLE THIRTEEN CONSOLIDATION, MERGER, SALE OR CONVEYANCE Section 13.01. Consolidation or Merger of or with Association. Nothing contained in this Indenture or in any of the Securities shall prevent any consolidation or merger of the Association with or into any other corporation or entity (whether or not affiliated with the Association), or successive consolidation or mergers in which the Association or its successor or successors shall be a party or parties, or shall prevent any sale or conveyance of the property of the Association as an entirety or substantially as an entirety to any other corporation or entity (whether or not affiliated with the Association) authorized to acquire and operate the same; provided, however, and the Association hereby covenants and agrees, that upon any such consolidation, merger, sale or conveyance, the due and punctual payment of the principal of and interest on all the Securities, according to their tenor, and the due and punctual performance and observance of all of the covenants and conditions of this Indenture to be performed or observed by the Association, shall be expressly assumed, by supplemental indentures satisfactory in form to the Trustee executed and delivered to the Trustee by the corporation or entity formed by such consolidation, or into which the Association shall have been merged, or by the corporation or entity which shall have acquired such property. Section 13.02. Rights and Duties of Successor Corporation or Entity. In case of any such consolidation, merger, sale or conveyance and upon any such assumption by the successor corporation or entity, such successor corporation or entity shall succeed to and be substituted for the Association, with the same effect as if it had been named herein as the party of the first part. Such successor corporation or entity thereupon may cause to be signed, and may issue either in its own name or in the name of Farmland Industries, Inc., any or all of the Securities issuable hereunder which theretofore shall not have been signed by the Association and delivered to the Trustee; and, upon the order of such successor corporation or entity, instead of the Association, and subject to all the terms, conditions and limitations in this Indenture prescribed, the Trustee shall authenticate and shall deliver any Securities which previously shall have been signed and delivered by the officers of the Association to the Trustee for authentication, and any Securities which such successor corporation or entity thereafter shall cause to be signed and delivered to the Trustee for that purpose. All the Securities so issued shall in all respects have the same legal rank and benefit under the Indenture as the Securities theretofore or thereafter issued in accordance with the terms of this Indenture as though all of such Securities had been issued at the date of the execution hereof. In case of any such consolidation, merger, sale or conveyance such changes in phraseology and form (but not in substance) may be made in the Securities thereafter to be issued as may be appropriate. Nothing contained in this Indenture or in any of the Securities shall prevent the Association from merging into itself any other corporation or entity (whether or not affiliated with the Association) or acquiring by purchase or otherwise all or any part of the property of any other corporation or entity (whether or not affiliated with the Association). Section 13.03. Opinion of Counsel. The Trustee, subject to the provisions of Article Nine, may receive and rely upon an Opinion of Counsel as conclusive evidence that any such consolidation, merger, sale or conveyance, and any such assumption, complies with the provisions of this Article Thirteen. ARTICLE FOURTEEN SATISFACTION, DISCHARGE AND DEFEASANCE Section 14.01. Termination of Association's Obligations Under the Indenture. This Indenture shall upon Association Request cease to be of further effect with respect to Securities of or within any series and any interest coupons appertaining thereto (except as to (i) rights of registration, transfer or exchange of such Securities, (ii) rights of replacement of such Securities which may have been lost, stolen or mutilated as herein expressly provided for, (iii) rights of holders of Securities to receive payments of principal thereof and interest thereon, upon the Stated Maturity thereof (but not upon acceleration), and rights of the Holders to receive mandatory sinking fund payments, if any, (iv) rights of holders of Securities to convert or exchange Securities, (v) rights, obligations, duties and immunities of the Trustee hereunder, (vi) any rights of the Holders of Securities of such series as beneficiaries hereof with respect to the property so deposited with the Trustee payable to all or any of them, and (vii) the obligations of the Association under Section 6.02) and the Trustee, upon payment of all amounts due it under Section 9.10, at the expense of the Association, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture with respect to such Securities and any interest coupons appertaining thereto when: (1) either (A) all such Securities previously authenticated and delivered and all interest coupons appertaining thereto (other than such Securities and interest coupons which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 3.06) have been delivered to the Trustee for cancellation or (B) all Securities of such series and, in the case of (i) or (ii) below, any interest coupons appertaining thereto not theretofore delivered to the Trustee for cancellation: (i) have become due and payable, or (ii) will become due and payable at their Stated Maturity within one year, or (iii) are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Association, and the Association, in the case of (i), (ii) or (iii) above, has irrevocably deposited or caused to be deposited with the Trustee as trust funds in trust for the purpose money in an amount sufficient to pay and discharge the entire indebtedness on such Securities and such interest coupons not theretofore delivered to the Trustee for cancellation, for principal, premium, if any, and interest, with respect thereto, to the date of such deposit (in the case of Securities which have become due and payable) or to the Stated Maturity or Redemption Date, as the case may be; (2) the Association has paid or caused to be paid all other sums payable hereunder by the Association; and (3) the Association has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture as to such series have been complied with. Notwithstanding the satisfaction and discharge of this Indenture, the obligation of the Association to the Trustee and any predecessor Trustee under Section 9.10, and, if money shall have been deposited with the Trustee pursuant to subclause (B) of clause (1) of this Section, the obligations of the Trustee under Section 6.06 and 14.02 shall survive. Section 14.02. Application of Trust Funds. Subject to the provisions of Section 6.06, all money deposited with the Trustee pursuant to Section 14.01 shall be held in trust and applied by it, in accordance with the provisions of the Securities, the interest coupons appertaining thereto, if any, and this Indenture, to the payment, either directly or through any paying agent (including the Association acting as its own paying agent) as the Trustee may determine, to the Persons entitled thereto, of the principal, premium, if any and any interest for whose payment such money has been deposited with or received by the Trustee, but such money need not be segregated from other funds except as otherwise provided herein and except to the extent required by law. Section 14.03. Applicability of Defeasance Provisions; Association's Option to Effect Defeasance or Covenant Defeasance. Except as otherwise specified as contemplated by Section 3.01 for the Securities of any series, the provisions of Sections 14.04 through 14.09 inclusive, with such modifications thereto as may be specified pursuant to Section 3.01 with respect to any series of Securities, shall be applicable to the Securities and any interest coupons appertaining thereto. Section 14.04. Defeasance and Discharge. On and after the date on which the conditions set forth in Section 14.06 are satisfied with respect to the Securities of or within any series, the Association shall be deemed to have paid and been discharged from its obligations with respect to such Securities and any interest coupons appertaining thereto (hereinafter "defeasance"). For this purpose, such defeasance means that the Association shall be deemed to have paid and discharged the entire indebtedness represented by such Securities and any interest coupons appertaining thereto which shall thereafter be deemed to be "Outstanding" only for the purposes of Sections 3.04, 3.05, 3.06, 6.02, 6.06, 14.07 and 14.09 and to have satisfied all its other obligations under such Securities and any interest coupons appertaining thereto and this Indenture insofar as such Securities and any interest coupons appertaining thereto are concerned (and the Trustee, upon payment of all amounts due it under Section 9.10, at the expense of the Association, shall on an Association Order execute proper instruments acknowledging the same). Subject to compliance with this Article Fourteen, the Association may defease the Securities of any series and any interest coupons appertaining thereto under this Section 14.04 notwithstanding a prior covenant defeasance (as defined herein) under Section 14.05 with respect to such Securities and any interest coupons appertaining thereto. Following a defeasance, payment of such Securities may not be accelerated because of an Event of Default. Section 14.05. Covenant Defeasance. On and after the date on which the conditions set forth in Section 14.06 are satisfied with respect to the Securities of or within any series, (i) the Association shall be released from its obligations under Section 6.01 and, if specified pursuant to Section 3.01, its obligations under any other covenant, with respect to such Securities and any interest coupons appertaining thereto and (ii) the occurrence of any event specified in Sections 8.01(e) or 8.01(f) (in each case, with respect to any of the obligations described in clause (i) above) or 8.01(a) or 8.01(b) shall be deemed not to be or result in a Default or Event of Default (hereinafter, "covenant defeasance"), and such Securities and any interest coupons appertaining thereto shall thereafter be deemed to be not "Outstanding" for the purposes of any request, demand, authorization, direction, notice, waiver, consent or declaration of Holders (and the consequences of any thereof) in connection with Section 6.01, such other covenant specified pursuant to Section 3.01, or Sections 8.01(e) or 8.01(f) (in each case, with respect to any of the obligations described in clause (i) above) or Sections 8.01(a) or 8.01(b), but shall continue to be deemed "Outstanding" for all other purposes hereunder. For this purpose, such covenant defeasance means that, with respect to such Securities and any interest coupons appertaining thereto, the Association may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in such Section or such other covenant, whether directly or indirectly, by reason of any reference elsewhere herein to such Section or such other covenant or by reason of reference in any such Section or such other covenant to any other provision herein or in any other document and such omission to comply shall not constitute a Default or an Event of Default under Sections 8.01(a), 8.01(b), 8.01(e), or 8.01(f) or otherwise, as the case may be, but, except as specified above, the remainder of this Indenture and such Securities and any interest coupons appertaining thereto shall be unaffected thereby. Section 14.06. Conditions to Defeasance or Covenant Defeasance. The following shall be the conditions to application of either Section 14.04 or Section 14.05 to the then Outstanding Securities of or within a series: (a) The Association shall irrevocably have deposited or caused to be deposited with the Trustee (or another trustee satisfying the requirements of Section 6.03 who shall agree to comply with the provisions of Sections 14.03 through 14.09 inclusive and Section 6.06 applicable to the Trustee, for purposes of such sections also a "Trustee") as trust funds in trust for the purpose of making the following payments, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of such Securities and any interest coupons appertaining thereto, (A) money in an amount, or (B) Government Obligations which through the scheduled payment of principal and interest in respect thereof in accordance with their terms will provide, not later than one day before the due date of any payment, money in an amount, or (C) a combination thereof, in an amount sufficient in the opinion of a nationally recognized firm of independent certified public accountants expressed in a written opinion with respect thereto delivered to the Trustee, to pay and discharge, and which shall be applied by the Trustee (or other qualifying trustee) to pay and discharge, (x) the principal of (premium, if any) and each installment of interest, if any, on the Outstanding Securities and any interest coupons appertaining thereto on the Stated Maturity of such principal or installment of interest and (y) any mandatory sinking fund payments applicable to such Securities on the day on which such payments are due and payable in accordance with the terms of this Indenture and of such Securities and any interest coupons appertaining thereto. (b) In the case of an election under Section 14.04, the Association shall have delivered to the Trustee an Opinion of Counsel stating that (x) the Association has received from, or there has been published by, the Internal Revenue Service a ruling, or (y) since the date of this Indenture there has been a change in the applicable Federal income tax law, in either case to the effect that, and based thereon such opinion shall confirm that, the Holders of the Outstanding Securities and any interest coupons appertaining thereto will not recognize gain or loss for Federal income tax purposes as a result of such deposit, defeasance and discharge and will be subject to Federal income tax on the same amount, in the same manner and at the same times as would have been the case if such deposit, defeasance and discharge had not occurred. (c) In the case of an election under Section 14.05, the Association shall have delivered to the Trustee an Opinion of Counsel to the effect that the Holders of the Outstanding Securities and any interest coupons appertaining thereto will not recognize gain or loss for Federal income tax purposes as a result of such deposit and covenant defeasance and will be subject to Federal income tax on the same amount, in the same manner and at the same times as would have been the case if such deposit and covenant defeasance had not occurred. (d) The Association shall have delivered to the Trustee an Officer's Certificate to the effect that the Securities, if then listed on any securities exchange or approved for trading in any automated quotation system, will not be delisted or disapproved for such trading as a result of such deposit. (e) At the time of such deposit: (A) no default in the payment of all or a portion of principal of (or premium, if any) or interest on any Senior Indebtedness of the Association shall have occurred and be continuing, and no event of default with respect to any Senior Indebtedness of the Association shall have occurred and be continuing and shall have resulted in such Senior Indebtedness becoming or being declared due and payable prior to the date on which it would otherwise have become due and payable and (B) no other event of default with respect to any Senior Indebtedness of the Association shall have occurred and be continuing permitting (after notice or the lapse of time, or both) the holders of such Senior Indebtedness (or a trustee on behalf of the holders thereof) to declare such Senior Indebtedness due and payable prior to the date on which it would otherwise have become due and payable, or, in the case of either Clause (A) or Clause (B) above, each such default or event of default shall have been cured or waived or shall have ceased to exist. (f) No Event of Default or event which with notice or lapse of time or both would become an Event of Default shall have occurred and be continuing on the date of such deposit or, insofar as Sections 8.01(c) or 8.01(d) are concerned, at any time during the period ending on the 91st day after the date of such deposit (it being understood that this condition shall not be deemed satisfied until the expiration of such period). (g) The Association shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent provided for relating to either the defeasance under Section 14.04 or the covenant defeasance under Section 14.05 (as the case may be) have been complied with. (h) Such defeasance or covenant defeasance shall not result in the trust arising from such deposit constituting an investment company as defined in the Investment Company Act of 1940, as amended from time to time, or such trust shall be registered under such act or exempt from registration thereunder. (i) Such defeasance or covenant defeasance shall be effected in compliance with any additional or substitute terms, conditions or limitations which may be imposed on the Association in connection therewith as contemplated by Section 3.01. Section 14.07. Deposited Money and Government Obligations to Be Held in Trust. Subject to the provisions of Section 6.06, all money and Government Obligations (or other property as may be provided pursuant to Section 3.01) (including the proceeds thereof) deposited with the Trustee pursuant to Section 14.06 in respect of any Securities of any series and any interest coupons appertaining thereto shall be held in trust and applied by the Trustee, in accordance with the provisions of such Securities and any interest coupons appertaining thereto and this Indenture, to the payment, either directly or through any paying agent (including the Association acting as its own paying agent) as the Trustee may determine, to the Holders of such Securities and any interest coupons appertaining thereto of all sums due and to become due thereon in respect of principal, premium, if any, and interest, if any, but such money need not be segregated from other funds except as provided herein and except to the extent required by law. Section 14.08. Repayment to Association. Subject to the delivery by the Association of any written certification required by the last paragraph of this Section 14.08, the Trustee (and any paying agent) shall promptly pay to the Association upon Association Request any excess money or securities held by them at any time. The provisions of Section 6.06 shall apply to any money or securities held by the Trustee or any paying agent under this Article Fourteen that remain unclaimed for two years after the Maturity of any series of Securities for which money or securities have been deposited pursuant to Section 14.06(a). Anything in this Article to the contrary notwithstanding, the Trustee shall deliver or pay to the Association from time to time upon Association Request any money or Government Obligations held by it as provided in Section 14.06 with respect to any Securities which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, are in excess of the amount thereof which would then be required to be deposited to effect the defeasance or covenant defeasance, as the case may be, with respect to such Securities. Section 14.09. Indemnity for Government Obligations. The Association shall pay, and shall indemnify the Trustee against, any tax, fee or other charge imposed on or assessed against Government Obligations deposited pursuant to this Article or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of the Outstanding Securities. Section 14.10. Reinstatement. If the Trustee (or paying agent) is unable to apply any money or Government Obligations in accordance with Section 14.06 by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the Association's obligations under this Indenture and the Securities shall be revived and reinstated, with present and prospective effect, as though no deposit had occurred pursuant to Section 14.06, until such time as the Trustee (or paying agent) is permitted to apply all such money or Government Obligations in accordance with Section 14.06; provided, however, that if the Association makes any payment to the Trustee (or paying agent) of principal, premium, if any, or interest on any Security following the reinstatement of its obligations, the Trustee (or paying agent) shall promptly pay any such amount to the Holders of the Securities and the Association shall be subrogated to the rights of the Holders of such Securities to receive such payment from the money and Government Obligations held by the Trustee (or paying agent). ARTICLE FIFTEEN IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS Section 15.01. No Recourse. No recourse under or upon any obligation, covenant or agreement of this Indenture, or of any Security, or for any claim based thereon or otherwise in respect thereof, shall be had against any incorporator, stockholder, officer or director, as such, past, present or future, of the Association or of any successor corporation, either directly or through the Association, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly understood that this Indenture and the obligations issued hereunder are solely corporate obligations, and that no such personal liability whatever shall attach to, or is or shall be incurred by, the incorporators, stockholders, officers or directors, as such of the Association or of any successor corporation, or any of them, because of the creation of the indebtedness hereby authorized, or under or by reason of the obligations, covenants or agreements contained in this Indenture or in any of the Securities or implied therefrom; and that any and all such personal liability, either at common law or in equity or by constitution or statute, of, and any and all such rights and claims against, every such incorporator, stockholder, officer or director, as such because of the creation of the indebtedness hereby authorized, or under or by reason of the obligations, covenants or agreements contained in this Indenture or in any of the Securities or implied therefrom, are hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture and the issue of such Securities. ARTICLE SIXTEEN MISCELLANEOUS PROVISIONS Section 16.01. Covenants of Association Bind its Successors and Assigns. All the covenants, stipulations, promises and agreements in this Indenture contained by or on behalf of the Association shall bind its successors and assigns, whether so expressed or not. Section 16.02. Acts by Successor Corporation. Any act or proceeding by any provision of this Indenture authorized or required to be done or performed by any board, committee or officer of the Association shall and may be done and performed with like force and effect by the like board, committee or officer of any corporation that shall at the time be the lawful sole successor of the Association. Section 16.03. Surrender of Rights and Powers Reserved to Association. The Association by instrument in writing executed by authority of two- thirds of its Board of Directors and delivered to the Trustee may surrender any of the powers or rights reserved to the Association and thereupon such powers or rights so surrendered shall terminate both as to the Association and as to any successor corporation. Section 16.04. Service of Notice on Association. Any notice or demand which by any provision of this Indenture is required or permitted to be given or served by the Trustee or by the Holders of Securities to or on the Association may be given or served by being deposited postage prepaid in a post office letter box addressed (until another address is filed by the Association with the Trustee pursuant to Section 6.02), as follows: Farmland Industries, Inc. P.O. Box 7305 Kansas City, Missouri, 64116-0005 Any notice, direction, request or demand by any Holder to or upon the Trustee shall be deemed to have been sufficiently given or made, for all purposes, upon receipt by a responsible officer at the principal office of the Trustee. Section 16.05. Indenture Governed by Laws of Missouri. THIS INDENTURE, THE SECURITIES AND ANY INTEREST COUPONS APPERTAINING THERETO SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF MISSOURI. Section 16.06. Officers' Certificate and Opinion of Counsel. Upon any application or demand by the Association to the Trustee to take any action under any of the provisions of this Indenture, the Association shall furnish to the Trustee an Officers' Certificate stating that all conditions precedent provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent have been complied with, except that in the case of any such application or demand as to which the furnishing of such documents is specifically required by any provisions of this Indenture relating to such particular application or demand, no additional certificate or opinion need be furnished. Each certificate or opinion provided for in this Indenture and delivered to the Trustee with respect to compliance with a condition or covenant provided for in this Indenture shall include (1) a statement that the person making such certificate or opinion has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with. Section 16.07. Due Date on Saturday, Sunday or Legal Holiday. In any case where the date of maturity of interest on or principal of the Securities or the date fixed for redemption of any Security shall be a Saturday or Sunday or shall, in the City of Kansas City, State of Missouri, be a legal holiday or a day on which banking institutions are authorized by law to close, then payment of interest or principal need not be made on such date, but in any such case may be made on the next succeeding day not a Saturday, Sunday or a legal holiday or a day on which banking institutions are authorized by law to close with the same force and effect as if made on the date of maturity or the date fixed for redemption, and no interest shall accrue for the period after such date. Section 16.08. Conflict with Trust Indenture Act. This Indenture is subject to the Trust Indenture Act and if any provision hereof limits, qualifies or conflicts with the Trust Indenture Act, the Trust Indenture Act shall control. Whether or not this Indenture is required to be qualified under the Trust Indenture Act, the provisions of the Trust Indenture Act required to be included in an indenture in order for such indenture to be so qualified shall be deemed to be included in this Indenture with the same effect as if such provisions were set forth herein and any provisions hereof which may not be included in an indenture which is so qualified shall be deemed to be deleted or modified to the extent such provisions would be required to be deleted or modified in an indenture so qualified. Section 16.09. Indenture Executed in Counterparts. This Indenture may be executed in any number of counterparts, each of which shall be an original; but such counterparts shall together constitute but one and the same instrument. UMB BANK, NATIONAL ASSOCIATION, the party of the second part, hereby accepts the trusts in this Indenture declared and provided, upon the terms and conditions hereinabove set forth. IN WITNESS WHEREOF, FARMLAND INDUSTRIES, INC., the party of the first part, has caused this Indenture to be signed and acknowledged by its [Financial Vice President and Treasurer], and its corporate seal to be affixed hereunto, and the same to be attested by its Secretary; and UMB BANK, NATIONAL ASSOCIATION, the party of the second part has caused this Indenture to be signed and acknowledged by one of its Vice Presidents, and its corporate seal to be affixed hereunto, and the same to be attested by its Secretary or Assistant Secretary. Executed and delivered in the City of Kansas City, State of Missouri, on ___________, 1997. (Corporate Seal) FARMLAND INDUSTRIES, INC. By Secretary Name: Title: (Corporate Seal) UMB BANK, NATIONAL ASSOCIATION By Name: Title: Assistant Secretary STATE OF MISSOURI ) ) ss. COUNTY OF ___________ ) On this _______ day of __________, 1997, before me personally appeared __________________, to be personally known, who, being by me duly sworn, did say that he is the _____________________of FARMLAND INDUSTRIES, INC., Kansas City, Missouri, that the seal affixed to this instrument is the corporate seal of said corporation and that the said instrument was signed and sealed in behalf of said corporation by authority of its Board of Directors, and said ________________________ acknowledged said instrument to be the free act and deed of said corporation. IN TESTIMONY WHEREOF, I have hereunto set my hand and affixed my official seal at my office in Kansas City, Missouri, the day and year last above written. (Notarial Seal) /s/ Notary Public My commission expires: STATE OF MISSOURI ) ) ss. COUNTY OF ___________) On this _________ day of ______________, 1997, before me personally appeared ____________________, to me personally known, who, being by me duly sworn, did say that he is a Vice President assigned to the Trust Division of UMB BANK, NATIONAL ASSOCIATION, Kansas City, Missouri, that the seal affixed to this instrument is the corporate seal of said corporation, and that the said instrument was signed and sealed in behalf of said corporation by authority of its board of directors and said ____________________ acknowledged said instrument to be the free act and deed of said corporation. IN TESTIMONY WHEREOF, I have hereunto set my hand and affixed my official seal at my office in Kansas City, Missouri, the day and year last above written. (Notarial Seal) /s/ Notary Public My commission expires: PRINCIPAL AMOUNT: CERTIFICATE NUMBER: FARMLAND INDUSTRIES, INC. Kansas City, Missouri 64116 DEMAND LOAN CERTIFICATES ___________________________ _______________________ Name Date of Original Issuance ___________________________ _______________________ Street Certificate Interest Rate At Date of Original Issuance ___________________________ City State Farmland Industries, Inc., a Kansas corporation ("Farmland"), which term includes any successor corporation under the Indenture referred to herein, for value received, hereby promises to pay to the owner named above or registered assigns (the "Holder"), the principal amount shown above in such coin or currency of the United States of America as at the time of payment shall be legal tender for payment of public and private debt, and to pay interest as described herein from the date of issuance (the "Date of Original Issuance") until date of redemption on said principal sum at the interest rate per annum (the "Certificate Interest Rate") as described herein, unless this Demand Loan Certificate is redeemed within a one (1) month period by a voting member cooperative of Farmland or within a six (6) month period by any other Holder, in which case the Demand Loan Certificate shall bear interest at a demand rate 2% below the Certificate Interest Rate. Such interest payments are to be made in one of the following ways at the option of the purchaser made at the time of purchase and irrevocable as to the purchaser: (i) six (6) months after the Date of Original Issuance and at the end of each and every six (6) month period thereafter until surrendered for redemption, or (ii) only at the date of redemption compounded semiannually at the Certificate Interest Rate. In addition, to the extent permitted by law, Farmland shall pay interest on overdue interest at the applicable Certificate Interest Rate. This Demand Loan Certificate shall not be valid or become obligatory for any purpose until the Certificate of Authentication herein shall have been signed by the Trustee under the Indenture mentioned on the reverse side hereof. ISSUED THIS DAY OF , 19 Attest: FARMLAND INDUSTRIES, INC. SECRETARY ________________________ BY PRESIDENT ____________________ Trustee's Certificate of Authentication This is one of the Certificates described in the Indenture mentioned on the back hereof. UMB BANK, NATIONAL ASSOCIATION As Trustee By ____________________________________________ Authorized Signature Farmland does not have a right to call any outstanding Demand Loan Certificate(s) for redemption at any time. This Certificate is one of a duly authorized issue of Certificates of Farmland designated as its Demand Loan Certificates (herein referred to as the "Certificates"), to be issued in amounts of $1,000 or more. The Certificate Interest Rate is the interest rate for the Certificates as determined, from time to time, by Farmland. Except as hereinafter provided, this Certificate shall earn interest at the Certificate Interest Rate in effect on the Date of Original Issuance of this Certificate for a period of six (6) months only; provided, however, that if during such six (6) month period the Certificate Interest Rate is increased to a rate higher than that currently in effect for this Certificate, then this Certificate shall earn interest at the increased rate from the effective date of the increase to the end of this Certificate's then current six (6) month period. Six (6) months from the Date of Original Issuance of this Certificate and each six (6) month anniversary date thereafter, this Certificate shall, if not redeemed, earn interest at the Certificate Interest Rate in effect on such anniversary date, but only for a six (6) month period from such anniversary date, subject to the escalation provisions previously set forth. A decrease in the Certificate Interest Rate will have no effect on any Certificate issued prior to the decrease until the first day of the next subsequent six month period of such outstanding Certificate. The Certificates may be redeemed, at face value plus interest to date of redemption, at the option of the Holder, at any time. If redeemed by a Farmland voting member cooperative purchaser during a one (1) month period or by any other Holder during a six (6) month period immediately following the Date of Original Issuance, this Certificate shall bear interest from Date of Original Issuance to date of redemption at a demand rate 2% below the Certificate Interest Rate. Interest on the principal amount of this Certificate is payable in one of the following ways at the option of the purchaser, made at the time of purchase and irrevocable as to the purchaser: (i) six months after the Date of Original Issuance and at the end of each and every six month period thereafter until this Certificate is surrendered for redemption, or (ii) only at the date of redemption compounded semiannually at the effective Certificate Interest Rate. Farmland shall have the right at any time by notice to the Holder to terminate any obligation to continue retaining the interest of any Holder pursuant to a Holder's option, which termination shall be effective as of the opening of business on the day following the first interest compounding date after such notice is mailed to the Holder and the Holder will be paid all the interest in the Holder's account on the effective date. Any interest which is payable, but is not punctually paid or duly provided for, on any interest payment date and interest on such defaulted interest at the then applicable interest rate borne by this Certificate, to the extent lawful (such defaulted interest and interest thereon herein collectively called "Defaulted Interest") will not be payable to the Holder on the payment date; and such Defaulted Interest may be paid by Farmland, at its election in each case, in the time and manner as provided for in the Indenture. Payment of the principal of, premium, if any, and interest on this Certificate will be made at the office or agency of Farmland in Kansas City, Missouri; provided, however, that at the option of Farmland payment of interest other than interest paid at maturity, redemption or repayment may be made by check mailed to the address of the person entitled thereto as such address shall appear in the Register or by electronic funds transfer or similar means to an account maintained by the person entitled thereto as specified in the Register. This Certificate is one of a duly authorized issue of securities (hereinafter called the "Securities") of Farmland issued and to be issued under an Indenture dated as of ____________________ (herein called the "Indenture") between Farmland and UMB Bank, National Association, Kansas City, Missouri, as Trustee (herein called the "Trustee", which term includes any successor trustee under the Indenture), to which the Indenture and all indentures supplemental thereto and the Officers' Certificate (as defined in the Indenture) setting forth the terms of this series of Securities reference is hereby made for a statement of the respective rights, limitation of rights, duties and immunities thereunder of Farmland, the Trustee and the Holders and the terms upon which the Certificates are, and are to be, authenticated and delivered. This Certificate is one of the series of Securities designated as "Demand Loan Certificates." The Certificates may bear different dates and interest rates, and may otherwise vary. If an Event of Default (as defined in the Indenture) with respect to the Certificates shall occur and be continuing, the Trustee or the Holders of not less than a majority in principal amount of the outstanding Certificates may declare the principal of and accrued interest on all the Certificates due and payable in the manner and with the effect and subject to the conditions provided in the Indenture. Upon certain events of bankruptcy, insolvency or reorganization of Farmland, the principal of and accrued interest on all of the Certificates shall become due and payable without any declaration by the Trustee or the Holders. The Indenture contains provisions permitting Farmland and the Trustee to enter into one or more supplemental indentures under certain situations without the consent of the Holders of any of the Certificates. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of Farmland and the rights of the Holders of the Securities of each series under the Indenture to be affected at any time by Farmland and the Trustee with the consent of the Holders of a majority in aggregate principal amount of the Outstanding Securities (as defined in the Indenture) of each series affected thereby. The Indenture also contains provisions permitting the Holders of specified percentages in aggregate principal amount of the Outstanding Securities of each series under the Indenture, on behalf of the Holders of all Securities of such series, to waive compliance by Farmland with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Certificate shall be conclusive and binding upon such Holder and upon all future Holders of this Certificate and of any Certificate issued upon the registration of transfer hereof or in exchange hereof or in lieu hereof, whether or not notation of such consent or waiver is made upon this Certificate. No reference herein to the Indenture and no provision of this Certificate or of the Indenture shall alter or impair the obligation of Farmland, which is absolute and unconditional, to pay the principal of and interest on this Certificate at the times, places, and rate, and in the coin or currency, herein prescribed. As provided in the Indenture, and subject to certain limitations therein set forth, the transfer of this Certificate may be registered on the Register upon surrender of this Certificate for registration of transfer at the office or agency of Farmland, in Kansas City, Missouri, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to Farmland duly executed by the Holder or by his attorney duly authorized in writing, and thereupon one or more new Certificates of this series having the same terms as this Certificate, of authorized denominations, having the same terms and conditions and for the same aggregate principal amount, will be issued to the designated transferee or transferees. The Certificates are issuable only in registered form, without coupons, in minimum denominations of not less than $1,000. As provided in the Indenture, and subject to certain limitations therein set forth, this Certificate is exchangeable for a like aggregate principal amount of Certificates having the same terms as this Certificate of different authorized denominations, as requested by the Holder surrendering the same. No service charge will be made for any such registration of transfer or exchange of Certificates, but Farmland may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith. Prior to due presentment of this Certificate for registration of transfer, Farmland, the Trustee and any agent of Farmland or the Trustee may treat the person in whose name this Certificate is registered as the owner hereof for all purposes, whether or not this Certificate be overdue, and neither Farmland, the Trustee nor any such agent shall be affected by notice to the contrary. All terms used in this Certificate which are defined in the Indenture shall have the meanings designated to them in the Indenture and all references in the Indenture to "Security" or "Securities" shall be deemed to include the Certificates. For value received, I, we and each of us hereby sell, assign and transfer the within Certificate and the indebtedness evidenced thereby to ____________________________________________________________ of _________________________________________________________ (ADDRESS) (CITY OR TOWN) STATE THIS ASSIGNMENT WILL BECOME EFFECTIVE ONLY WHEN MADE AND ENTERED ON THE BOOKS OF FARMLAND INDUSTRIES, INC. { __________ {___________________________________ DATE { (SIGNED) ENDORSEMENT { ___________________________________ (SIGNED) EX-4.(I)B 4 INDENTURE W/COMMERCE BANK, FORMS A,B,C,D,E,F,G EXHIBIT 4.(i)B FARMLAND INDUSTRIES, INC. AND COMMERCE BANK, NATIONAL ASSOCIATION TRUSTEE SUBORDINATED INDENTURE Dated as of December 4, 1997 Providing for Issuance of Subordinated Debt Securities in Series FARMLAND INDUSTRIES. INC. Cross Reference Sheet Showing the Location in the Indenture of the Provisions Inserted Pursuant to Section 310 through 318(a) Inclusive of the Trust Indenture Act of 1939 SECTION NUMBER OF TRUST INDENTURE ACT OF 1939 INDENTURE SECTION SEC. 310 - ELIGIBILITY AND DISQUALIFICATION OF TRUSTEE (a)(1)............................Sec. 6.03 (2)............................Sec. 9.01 (3)............................Not applicable (4)............................Not applicable (b) .............................Sec. 9.14 SEC. 311 - PREFERENTIAL COLLECTION OF CLAIMS AGAINST OBLIGOR (a) ............................Sec 9.15 (b) ............................Sec. 9.15 SEC. 312 - BONDOWNERS' LISTS (a) ............................Sec. 7.01 (b) ............................Sec. 7.02(b) (c) ............................Sec. 7.02(c) SEC. 313 - REPORTS BY INDENTURE TRUSTEE (a) ............................Sec. 7.03 (b) ............................ 7.03 (c) ............................ 7.03 (d) ............................ 7.03 SEC. 314 - REPORTS BY OBLIGOR; EVIDENCE OF COMPLIANCE WITH INDENTURE PROVISIONS (a) ............................Sec. 7.04; 7.05 (b) ............................Not applicable (c)(1)............................Sec. 16.06 (c)(2)............................Sec. 16.06 (c)(3)............................Not applicable (d) ............................Not applicable (e) ............................Sec. 16.06 SEC. 315 - DUTIES AND RESPONSIBILITY OF THE TRUSTEE (a) ............................Sec. 9.02; 9.03; 9.04 (b) ............................Sec. 8.02 (c) ............................Sec. 9.02 (d) ............................Sec. 9.04 (1)...........................Sec. 9.04(a); 9.04(b) (2)...........................Sec. 9.04(c) (3)...........................Sec. 9.04(d) (e) ............................deemed contained in Indenture pursuant to Trust Indenture Act SEC. 316 - DIRECTIONS AND WAIVERS BY BONDOWNERS; PROHIBITION OF IMPAIRMENT OF HOLDER'S RIGHT TO PAYMENT (a) ............................Sec. 8.06 (1)...........................Sec. 8.06 (2)...........................Sec. 8.06 (b) ............................Sec. 8.05 (c) ............................deemed contained in Indenture pursuant to Trust Indenture Act SEC. 317 - SPECIAL POWERS OF TRUSTEE; DUTIES OF PAYING AGENTS (a) ............................Sec. 8.04 (1)...........................Sec. 8.04 (2)...........................Sec. 8.04 (b) ............................Sec. 6.04; 9.09 SEC. 318 - EFFECT OF PRESCRIBED INDENTURE PROVISIONS (a) ............................Sec. 16.08 (c) ............................Sec. 16.08 TABLE OF CONTENTS Page RECITALS........................................................1 ARTICLE ONE.....................................................2 DEFINITIONS.....................................................2 Section 1.01 Definitions. ....................................2 ARTICLE TWO.....................................................9 SECURITY FORMS..................................................9 Section 2.01. Forms Generally. ...............................9 Section 2.02. Form of Trustee's Certificate of Authentication. .....................................10 Section 2.03. Uncertificated Securities .....................11 ARTICLE THREE..................................................12 THE SECURITIES.................................................12 Section 3.01. Amount Unlimited; Issuable in Series. .........12 Section 3.02. Denominations. ................................16 Section 3.03. Execution, Authentication, Delivery and Dating. .............................................16 Section 3.04. Temporary Securities. .........................17 Section 3.05. Registration, Transfer and Exchange. ..........18 Section 3.06. Replacement Securities. .......................20 Section 3.07. Payment of Interest; Interest Rights Preserved. ..........................................22 Section 3.08. Cancellation. .................................23 Section 3.09. CUSIP Numbers. ................................24 ARTICLE FOUR...................................................24 REDEMPTION BY ASSOCIATION......................................24 Section 4.01. Securities Subject to Redemption. .............24 Section 4.02. Notice of Redemption. .........................25 Section 4.03. Securities Payable on Redemption Date. ........25 Section 4.04. Securities Redeemed in Part. ..................26 ARTICLE FIVE...................................................26 REDEMPTION BY HOLDER...........................................26 Section 5.01. Redemption by Holder. .........................26 Section 5.02. Securities Redeemed in Part. ..................27 Section 5.03. No Set-Aside. .................................27 ARTICLE SIX....................................................27 PARTICULAR COVENANTS OF THE ASSOCIATION........................27 Section 6.01. Payments of Principal and Interest. ...........27 Section 6.02. Maintenance of Office or Agency. ..............28 Section 6.03. Appointment of Trustee. .......................28 Section 6.04. Appointment of Duties of Paying Agent. ........28 Section 6.05. Report to Trustee. ............................29 Section 6.07. Securities Subordinated to Senior Indebtedness. .......................................30 ARTICLE SEVEN..................................................37 HOLDERS' LISTS AND REPORTS BY TRUSTEE AND ASSOCIATION..........37 Section 7.01. Association to Furnish Trustee Names and Addresses of Holders. ...............................37 Section 7.02. Preservation of Information, Communications to Holders. .........................................38 Section 7.03. Reports by Trustee. ...........................38 Section 7.04. Reports by the Association. ...................39 Section 7.05. Annual Review Certificate. ....................39 ARTICLE EIGHT..................................................40 REMEDIES IN EVENT OF DEFAULT...................................40 Section 8.01. Event of Default Defined. .....................40 Section 8.02. Trustee to Notify Holder of Defaults. .........41 Section 8.03. Acceleration Upon Default. ....................42 Section 8.04. Right of Trustee to Sue Association Upon Default. ............................................43 Section 8.05. Right of Holder to Receive Payment or Sue. ....44 Section 8.06. Right of Holders to Direct Time, Method and Place of Conducting Proceeding for Remedy Available to Trustee. ...............................44 Section 8.07. Notice of Defaults. ...........................45 ARTICLE NINE...................................................46 CONCERNING THE TRUSTEE.........................................46 Section 9.01. Qualification of Trustee. .....................46 Section 9.02. Acceptance and Undertaking of Trustee. ........46 Section 9.03. Examination of Evidence by Trustee. ...........46 Section 9.04. Trustee not Relieved of Liability for Own Negligence or Willful Misconduct. ...................47 Section 9.05. Trustee May Rely on Recitals of Fact. .........49 Section 9.06. Right of Trustee to Rely on Certain Documents. ..........................................49 Section 9.07. Trustee Not Responsible for Approval of Any Expert. .............................................49 Section 9.08. Right of Trustee to Become Owner or Pledgee of Securities. ......................................50 Section 9.09. Monies Received by Trustee to be Held in Trust. ..............................................50 Section 9.10. Compensation of Trustee. ......................51 Section 9.11. Enforcement by Trustee of Right to Compensation. .......................................51 Section 9.12. Trustee May Rely Upon Certificate of Association. ........................................54 Section 9.13. Right of Trustee to Give Notice of Action. ....55 Section 9.14. Conflicting Interest of Trustee. ..............55 Section 9.15. Duties of Trustee if it Becomes Creditor of Association. ........................................56 Section 9.16. Resignation and Discharge of Trustee. .........57 Section 9.17. Removal of Trustee. ...........................57 Section 9.18. Filling Vacancy. ..............................58 Section 9.19. Duties of Successor Trustee. ..................59 Section 9.20. Merger or Consolidation of or with Trustee. ...60 Section 9.21. Duties of Trustee Governed by Laws of Missouri. ...........................................61 ARTICLE TEN....................................................61 CONCERNING THE HOLDERS.........................................61 Section 10.01. Proof of Action by Holders. ..................61 Section 10.02. What Constitutes a Writing. ..................62 Section 10.03. Holder Named in Certificate Treated as Absolute Owner. .....................................62 Section 10.04. Securities Owned by Association to be Disregarded in Computing Requisite Amount of Securities. .........................................62 Section 10.05. Holders May Revoke Prior Action. .............63 ARTICLE ELEVEN.................................................63 HOLDERS MEETINGS..............................................64 Section 11.01. Purpose of Meetings. .........................64 Section 11.02. Call of Meeting and Notice Required. .........64 Section 11.03. Request of Trustee to Call Meeting. ..........65 Section 11.04. Who May Vote at Meeting. .....................66 Section 11.05. Regulations Made by Trustee. .................66 Section 11.06. Form of and Recording Vote. ..................67 ARTICLE TWELVE.................................................68 SUPPLEMENTAL INDENTURES........................................68 Section 12.01. Supplemental Indentures Without Consent of Holders. ............................................68 Section 12.02. Supplemental Indentures With Consent of Holders. ............................................70 Section 12.03. Compliance with Trust Indenture Act. .........71 Section 12.04. Execution of Supplemental Indentures. ........72 Section 12.05. Reference in Securities to Supplemental Indentures. .........................................72 ARTICLE THIRTEEN...............................................73 CONSOLIDATION, MERGER, SALE OR CONVEYANCE......................73 Section 13.01. Consolidation or Merger of or with Association. ........................................73 Section 13.02. Rights and Duties of Successor Corporation or Entity. ..........................................73 Section 13.03. Opinion of Counsel. ..........................74 ARTICLE FOURTEEN...............................................76 SATISFACTION, DISCHARGE AND DEFEASANCE.........................76 Section 14.01. Termination of Association's Obligations Under the Indenture. ................................76 Section 14.02. Application of Trust Funds. ..................78 Section 14.03. Applicability of Defeasance Provisions; Association's Option to Effect Defeasance or Covenant Defeasance. ................................78 Section 14.04. Defeasance and Discharge. ....................79 Section 14.05. Covenant Defeasance. .........................79 Section 14.06. Conditions to Defeasance or Covenant Defeasance. .........................................80 Section 14.07. Deposited Money and Government Obligations to Be Held in Trust. ................................83 Section 14.08. Repayment to Association. ....................84 Section 14.09. Indemnity for Government Obligations. ........84 Section 14.10. Reinstatement. ...............................85 ARTICLE FIFTEEN................................................86 IMMUNITY OF INCORPORATORS, STOCKHOLDERS,.......................86 OFFICERS AND DIRECTORS.........................................86 Section 15.01. No Recourse. .................................86 ARTICLE SIXTEEN................................................87 MISCELLANEOUS PROVISIONS.......................................87 Section 16.01. Covenants of Association Bind its Successors and Assigns. .............................87 Section 16.02. Acts by Successor Corporation. ...............87 Section 16.03. Surrender of Rights and Powers Reserved to Association. ........................................87 Section 16.04. Service of Notice on Association. ............88 Section 16.05. Indenture Governed by Laws of Missouri. ......88 Section 16.06. Officers' Certificate and Opinion of Counsel. ............................................88 Section 16.07. Due Date on Saturday, Sunday or Legal Holiday. ............................................89 Section 16.08. Conflict with Trust Indenture Act. ...........90 Section 16.09. Indenture Executed in Counterparts. ..........90 THIS INDENTURE (the "Indenture"), dated as of the 4th day of December, 1997, between FARMLAND INDUSTRIES, INC., a corporation duly organized and existing under the laws of the State of Kansas (hereinafter sometimes referred to as the "Association"), party of the first part, and COMMERCE BANK, NATIONAL ASSOCIATION, a corporation duly organized and existing under the law of the United States of America (hereinafter sometimes referred to as the "Trustee"), party of the second part. RECITALS The Association has duly authorized the execution and delivery of this Indenture to provide for the issuance from time to time of its unsecured subordinated debentures, notes or other evidences of indebtedness ("Securities") to be issued in one or more series as herein provided. All things necessary to make the Securities, when executed by the Association and authenticated and delivered hereunder and duly issued by the Association have been done. For and in consideration of the premises and the purchase of the Securities by the Holders thereof, it is mutually covenanted and agreed as follows for the equal and ratable benefit of the Holders of the Securities or of any series thereof: All acts and things necessary to make the Securities, when executed by the Association and authenticated and delivered by the Trustee as in this Indenture provided, the valid, binding and legal obligations of the Association, and to constitute these presents a valid Indenture and agreement according to its terms, have been done and performed, and the execution of this Indenture and the issue hereunder of the Securities have in all respects been duly authorized, and the Association, in the exercise of legal right and power in it vested, executes this Indenture and proposes to make, execute, issue and deliver the Securities. ARTICLE ONE DEFINITIONS Section 1.01 Definitions. The terms defined in this Section 1.01 (except as herein otherwise expressly provided or unless the context otherwise requires) for all purposes of this Indenture and of any indenture supplemental hereto shall have the respective meanings specified in this Section 1.01. All other terms used in this Indenture which are defined in the Trust Indenture Act of 1939 or which are by reference therein defined in the Securities Act of 1933, as amended (except as herein otherwise expressly provided or unless the context otherwise requires), shall have the meanings assigned to such terms in said Trust Indenture Act and in said Securities Act as in force at the date of this Indenture as originally executed. Association: The term "Association" shall mean Farmland Industries, Inc., and subject to the provisions of Article Thirteen, shall also include its successors and assigns. Association Order and Association Request: The terms "Association Order" and "Association Request" shall mean, respectively, a written order or request signed in the name of the Association by two officers, one of whom must be the Chairman of the Board, the President, the Chief Executive Officer, the Chief Operating Officer, the Chief Financial Officer, a Vice President, the Treasurer or the Secretary of the Association. Authorized Newspaper: The term "authorized newspaper" shall mean a newspaper printed in the English language and customarily published at least once a day for at least five days in each calendar week and of general circulation in the city in which it is published. Board of Directors: The term "Board of Directors", when used with the reference to the Association, shall mean the Board of Directors of the Association, or the Executive Committee of such Board. Board Resolution: The term "Board Resolution" shall mean a copy of a resolution certified by the Secretary or an Assistant Secretary of the Association to have been duly adopted by its Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Trustee. Default: The term "Default" shall have the meaning specified in Section 8.02. Defaulted Interest: The term "Defaulted Interest" shall have the meaning specified in Section 3.07. Event of Default: The term "Event of Default" shall mean any event specified in Section 8.01. Government Obligations: The term "Government Obligations" shall mean securities that are (x) direct obligations of the United States of America, for the payment of which its full faith and credit is pledged or (y) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case (x) or (y), are not callable or redeemable at the option of the issuer thereof, and shall also include a depository receipt issued by a bank (as defined in Section 3(a)(2) of the Securities Act of 1933, as amended) as custodian with respect to any such Government Obligation or a specific payment of principal of or interest on any such Government Obligation held by such custodian for the account of the holder of such depository receipt, provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the Government Obligation or the specific payment of principal of or interest on the Government Obligation evidenced by such depository receipt. Holder: The term "Holder" means a Person in whose name a Security of any series is registered in the Register. Indenture: The term "Indenture" shall mean this Instrument as originally executed and as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof, including, for all purposes of this instrument and any such supplemental indenture, the provisions of the Trust Indenture Act that are deemed to be a part of and govern this instrument and any such supplemental indenture, respectively. The term "Indenture" shall also include the terms of particular series of Securities established as contemplated by Section 3.01. Interest Payment Date: The term "Interest Payment Date", with respect to any security, shall mean the Stated Maturity of an installment of interest on such security. Officers' Certificate: The term "Officers' Certificate" shall mean a certificate signed by the President and/or any Vice President and by an accountant who may be the Controller, any Assistant Controller or any other accounting officer of the Association. Each such certificate shall include the statements provided for in Section 16.06, if and to the extent required by the provisions thereof. Opinion of Counsel: The term "Opinion of Counsel" shall mean an opinion in writing signed by legal counsel, who shall be satisfactory to the Trustee and who may be an employee of or of counsel to the Association. Each such opinion shall include the statements provided for in Section 16.06, if and to the extent required by the provisions thereof. Outstanding: The term "Outstanding" when used with reference to Securities, shall, subject to the provisions of Section 10.04, mean, as of any particular time, all Securities authenticated and delivered by the Trustee under this Indenture, except (a) Securities theretofore cancelled by the Trustee or delivered to the Trustee cancelled or for cancellation; (b) Securities for the payment or redemption of which monies in the necessary amount shall have been deposited in trust with the Trustee or shall have been set aside and segregated in trust by the Association, provided, however, that if such Securities are to be redeemed, notice of such redemption shall have been given as provided in Article Four, or provision satisfactory to the Trustee shall have been made for giving such notice; and (c) Securities in lieu of or in substitution for which other Securities shall have been authenticated and delivered pursuant to the terms of Section 3.06. Register: The term "Register" has the meaning specified in Section 3.05. Registrar: The term "Registrar" has the meaning specified in Section 3.05. Responsible Officer: The term "Responsible Officer", when used with respect to the Trustee, shall mean the President, any Vice President, the Secretary, the Treasurer, any trust officer, or any other officer or assistant officer of the Trustee customarily performing functions similar to those performed by the persons who at the time shall be such officers, respectively, or one to whom any corporate trust matter is referred because of his knowledge of and familiarity with the particular subject. Security or Securities: The term "Security" or "Securities" has the meaning stated in the first recital of this Indenture and more particularly means a Security or Securities of the Association issued, or a certificate evidencing ownership thereof, authenticated and delivered under this Indenture. Senior Indebtedness: The term "Senior Indebtedness" has the meaning specified in Section 6.07. Special Record Date: The term "Special Record Date" for the payment of any Defaulted Interest means a date fixed by the Trustee pursuant to Section 3.07. Stated Maturity: The term "Stated Maturity", when used with respect to any Security or any installment of principal thereof or interest thereon, means the date specified in such Security or in an interest coupon representing such installment of interest as the fixed date on which the principal of such Security or such installment of principal or interest is due and payable. Trustee: The term "Trustee" shall mean the Commerce Bank, National Association and, subject to the provisions of Article Nine hereof, shall also include its successors and assigns. Trust Indenture Act of 1939: The term "Trust Indenture Act of 1939" (except as herein otherwise expressly provided or unless the context otherwise requires) shall mean the Trust Indenture Act of 1939 as in force at the date of this Indenture when originally executed. Uncertificated Securities: The term "Uncertificated Securities" shall mean a Security that is not represented by a certificate. ARTICLE TWO SECURITY FORMS Section 2.01. Forms Generally. The Securities of each series and the Trustee's certificate of authentication and the interest coupons, if any, to be attached shall be in substantially such form as shall be established by or pursuant to a Board Resolution or in one or more indentures supplemental hereto, in each case with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture, and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with the rules of any applicable securities exchange, organizational document, governing instrument or law or as may, consistently herewith, be determined by the officers executing such Securities and interest coupons, if any, to be attached thereto, as evidenced by their execution of the Securities and interest coupons, if any. If temporary Securities of any series are issued as permitted by Section 3.04, the form thereof also shall be established as provided in the preceding sentence. If the forms of Securities and interest coupons, if any, of any series are established by, or by action taken pursuant to, a Board Resolution, a copy of the Board Resolution together with an appropriate record of any such action taken pursuant thereto, including a copy of the approved form of Securities or interest coupons, if any, shall be delivered to the Trustee at or prior to the delivery of the Association Order contemplated by Section 3.03 for the authentication and delivery of such Securities. Any portion of the text of any Security may be set forth on the reverse thereof, with an appropriate reference thereto on the face of the Security. The definitive Securities and interest coupons, if any, may be printed, typewritten, lithographed or engraved, or may be produced in any other manner, all as determined by the officers executing such Securities and interest coupons, if any, as evidenced by their execution of such Securities and interest coupons, if any. Section 2.02. Form of Trustee's Certificate of Authentication. Unless otherwise provided as contemplated by Section 3.01, the Trustee's certificate of authentication shall be included on the Securities and shall be substantially in the form as follows: TRUSTEE'S CERTIFICATE OF AUTHENTICATION. This is one of the Securities referred to in the within-mentioned Indenture. COMMERCE BANK, NATIONAL ASSOCIATION. __________________________________ As Trustee By: Authorized Signatory Section 2.03. Uncertificated Securities (a) In lieu of issuing certificates to evidence ownership of Securities, the Association may determine to issue the Securities of any series, including any series which has previously been issued in certificated form, as Uncertificated Securities. Any Uncertificated Securities shall be treated as "uncertificated securities" as the term is used in Article 8 of the Uniform Commercial Code as in effect in the State of Missouri, and such Article 8, to the maximum extent permitted by law, shall govern the Uncertificated Securities. Notwithstanding any provision of this Indenture to the contrary, the registration on the Register of any Security which is in uncertificated form, whether upon original issuance or transfer, shall be deemed to constitute an authentication of such Security by the Trustee, and no further authentication shall be necessary. In addition, whenever any provision of this Indenture shall require that a Security be surrendered, that requirement shall not apply to a Security in uncertificated form, to the extent that such provision requires surrender of a physical certificate. (b) The Association may establish any rules, regulations, procedures and forms for the purpose of noting ownership of Uncertificated Securities, for registration of transfers, exchanges, and surrenders of Uncertificated Securities and for other matters pertaining to the issuance of Securities in uncertificated form as the Association, in its discretion, shall deem necessary or desirable. ARTICLE THREE THE SECURITIES Section 3.01. Amount Unlimited; Issuable in Series. (a) The aggregate principal amount of Securities which may be authenticated and delivered under this Indenture is unlimited. The Securities may be issued from time to time in one or more series. (b) The following matters shall be established with respect to each series of Securities issued hereunder (i) by a Board Resolution, (ii) by action taken pursuant to a Board Resolution and (subject to Section 3.03) set forth, or determined in the manner provided, in an Officers' Certificate or (iii) in one or more indentures supplemental hereto: (1) the title of the Securities of the series (which title shall distinguish the Securities of the series from all other series of Securities); (2) any limit upon the aggregate principal amount of the Securities of the series which may be authenticated and delivered under this Indenture which limit shall not pertain to Securities authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Securities of the series pursuant to Section 3.04, 3.05 or 3.06; (3) the date or dates on which the principal of and premium, if any, on the Securities of the series shall be payable or the method or methods of determination thereof; (4) the rate or rates at which the Securities of the series shall bear interest, if any, or the method or methods of calculating such rate or rates of interest, the date or dates from which such interest shall accrue or the method or methods by which such date or dates shall be determined, the Interest Payment Dates on which any such interest shall be payable, the right, if any, of the Association to defer or extend an Interest Payment Date, the record date, if any, for the interest payable on any Interest Payment Date, and the basis upon which interest shall be calculated if other than that of a 365-day year; (5) the place or places where the principal of, premium, if any, and interest, if any, on Securities of the series shall be payable, any Securities of the series may be surrendered for registration of transfer, any Securities of the series may be surrendered for exchange, and notices and demands to or upon the Association in respect of the Securities of the series and this Indenture may be served and where notices to Holders may be sent. (6) the period or periods within which, the price or prices at which, and the other terms and conditions upon which, Securities of the series may be redeemed, in whole or in part, at the option of the Association and, if other than as provided in Article Four, the manner in which the particular Securities of such series (if less than all Securities of such series are to be redeemed) are to be selected for redemption; (7) the obligation, if any, of the Association to redeem or purchase Securities of the series pursuant to any sinking fund or analogous provisions or upon the happening of a specified event or at the option of a Holder thereof and the period or periods within which, the price or prices at which and the other terms and conditions upon which, Securities of the series shall be redeemed or purchased, in whole or in part, pursuant to such obligation; (8) the denominations in which Securities of the series shall be issuable; (9) if other than the entire principal amount thereof, the portion of the principal amount of Securities of the series which shall be payable upon declaration of acceleration thereof pursuant to Section 8.03 or the method by which such portion shall be determined; (10) provisions, if any, granting special rights to the Holders of Securities of the series upon the occurrence of such events as may be specified; (11) any deletions from, modifications of or additions to the Events of Default set forth in Section 8.01 or covenants of the Association set forth in Article Six pertaining to the Securities of the series; (12) the forms of the Securities and interest coupons, if any, of the series; (13) the applicability, if any, to the Securities and interest coupons, if any, of the series of Sections 14.04 and 14.05, or such other means of defeasance or covenant defeasance as may be specified for the Securities and interest coupons, if any, of such series; (14) if other than the Association, the identity of any Registrar and any Paying Agent; (15) any restrictions on the registration, transfer or exchange of the Securities of the series; and (16) any other terms of the series including any terms which may be required by or advisable under United States laws or regulations or advisable (as determined by the Association) in connection with the marketing of Securities of the series. (c) Subject to any controlling provision of the Trust Indenture Act, in the event of any inconsistency between the terms of this Indenture and the terms applicable to a series of Securities established in the manner permitted by Section 3.01, the (i) Board Resolution, (ii) Officers' Certificate or (iii) supplemental indenture setting forth such conflicting term shall prevail. (d) All Securities of any one series and interest coupons, if any, appertaining thereto shall be substantially identical except as to denomination and except as may otherwise be provided (i) by a Board Resolution, (ii) by action taken pursuant to a Board Resolution and (subject to Section 3.03) set forth, or determined in the manner provided, in the related Officers' Certificate or (iii) in an indenture supplemental hereto. All Securities of any one series need not be issued at the same time and, unless otherwise provided, additional Securities of any series may be issued from time to time, without the consent of the then Holders of Securities of that series. (e) If any of the terms of the Securities of any series are established by action taken pursuant to a Board Resolution, a copy of such Board Resolution shall be delivered to the Trustee at or prior to the delivery of the Officers' Certificate setting forth, or providing the manner for determining, the terms of the Securities of such series, and an appropriate record of any action taken pursuant thereto in connection with the issuance of any Securities of such series shall be delivered to the Trustee prior to the authentication and delivery thereof. Section 3.02. Denominations. Unless otherwise provided as contemplated by Section 3.01, any Securities of a series denominated in Dollars shall be issuable in denominations of not less than U.S. $1,000. Section 3.03. Execution, Authentication, Delivery and Dating. (a) The Securities, upon the execution of this Indenture, or from time to time thereafter, may be executed by the Association and delivered to the Trustee for authentication, and, upon Association Order, the Trustee shall thereupon authenticate and deliver said Securities. (b) Unless otherwise provided as contemplated by Section 3.01, the Securities shall be dated the first day in which the payment of the full purchase price thereof is received by the Association at its offices in Kansas City, Missouri. (c) The Securities will be signed on behalf of the Association by its President or Vice President, under its corporate seal, attested by its Secretary or Assistant Secretary. The signatures of such officers and the corporate seal of the Association may be facsimile signatures. (d) Only such Securities as shall bear thereon a certificate of authentication substantially in the form hereinbefore recited, executed by the Trustee, shall be entitled to the benefits of this Indenture or be valid or obligatory for any purposes. Such certificate by the Trustee upon any Security executed by the Association shall be conclusive evidence that the Security so authenticated has been duly authenticated and delivered hereunder and that the Holder is entitled to the benefits of this Indenture. (e) In case any officer of the Association who shall have signed any of the Securities shall cease to be such officer before the Securities so signed shall have been authenticated and delivered by the Trustee, or disposed of by the Association, such Securities nevertheless may be authenticated and delivered or disposed of as though the person who signed such Securities had not ceased to be such officer of the Association; and any Securities may be signed on behalf of the Association by such persons as, at the actual date of the execution of such Security, shall be the proper officers of the Association, although at the date of the execution of this Indenture any such person was not such officer. Section 3.04. Temporary Securities. Pending the preparation of definitive Securities of any series, the Association may execute and, upon Association Order, the Trustee shall authenticate and deliver temporary Securities of such series which are printed, lithographed, typewritten, mimeographed or otherwise produced, in any authorized denomination, substantially of the tenor and form, with or without interest coupons, of the definitive Securities in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Securities may determine, as conclusively evidenced by their execution of such Securities and interest coupons, if any. If temporary Securities of any series are issued, the Association will cause definitive Securities of such series to be prepared without unreasonable delay. After preparation of definitive Securities of such series, the temporary Securities of such series shall be exchangeable for definitive Securities of such series upon surrender of the temporary Securities of such series at the office or agency of the Association pursuant to Section 6.02 for such series, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Securities of any series (accompanied by any unmatured interest coupons appertaining thereto), the Association shall execute and the Trustee shall authenticate and deliver in exchange therefor a like principal amount of definitive Securities of the same series of authorized denominations and of like tenor. Until so exchanged, the temporary Securities of any series shall in all respects be entitled to the same benefits under this Indenture as definitive Securities of such series except as otherwise specified as contemplated by Section 3.01. Section 3.05. Registration, Transfer and Exchange. The Association shall cause to be kept at the office or agency to be maintained by the Association in accordance with Section 6.02 a register (the "Register") in which, subject to such reasonable regulations as it may prescribe, the Association shall provide for the registration of Securities and the registration of transfers of Securities. The Register shall be in written form or any other form capable of being converted into written form within a reasonable time. The Association is hereby initially appointed "Registrar" for the purpose of registering Securities and transfers of Securities as herein provided. Upon surrender for registration of transfer of any Security of any series at the office or agency maintained pursuant to Section 6.02 for that series, the Association shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Securities of the same series, of any authorized denominations and of a like aggregate principal amount and tenor and containing identical terms and provisions. At the option of the Holder, Securities of any series may be exchanged for other Securities of the same series, of any authorized denominations, of a like aggregate principal amount and tenor and containing identical terms and provisions, upon surrender of the Securities to be exchanged at such office or agency. Whenever any Securities are so surrendered for exchange, the Association shall execute, and the Trustee shall authenticate and deliver, the Securities which the Holder making the exchange is entitled to receive. All Securities issued upon any registration of transfer or upon any exchange of Securities shall be the valid obligations of the Association, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Securities surrendered upon such registration of transfer or exchange. Every Security presented or surrendered for registration of transfer or for exchange shall (if so required by the Association, the Registrar or the Trustee) be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Association, the Registrar and the Trustee duly executed by the Holder thereof or his attorney duly authorized in writing. No service charge shall be made for any registration of transfer or for any exchange of Securities, but the Association may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration or transfer or exchange of Securities, other than exchanges pursuant to Section 3.04 or Section 12.05 not involving any transfer. The Association shall not be required (i) to issue, register the transfer of, or exchange the Securities of any series for a period beginning at the opening of business 15 days before any selection for redemption of Securities of such series and ending at the close of business on the earliest date on which the relevant notice of redemption is deemed to have been given to all Holders of such series to be redeemed; or (ii) to register the transfer of or exchange any Security so selected for redemption, in whole or in part, except the unredeemed portion of any Security being redeemed in part. Pursuant to Section 3.01, the foregoing provisions relating to registration, transfer and exchange may be modified, supplemented or superseded with respect to any series of Securities by a Board Resolution or in one or more indentures supplemental hereto. Section 3.06. Replacement Securities. In case any Security shall become mutilated or be destroyed, lost or stolen, the Association in its discretion may execute, and upon its request the Trustee shall authenticate and deliver, a new Security bearing a number not contemporaneously Outstanding, in exchange and substitution for the mutilated Security, or in lieu of and substitution for the Security so destroyed, lost or stolen. In every case the applicant for a substituted Security shall furnish to the Association and to the Trustee such security or indemnity as may be required by them to save each of them harmless, and, in every case of destruction, loss or theft, the applicant shall also furnish to the Association and to the Trustee evidence to their satisfaction of the destruction, loss or theft of such Security and of the ownership thereof. The Trustee may authenticate any such Security and deliver the same upon the written request or authorization of any officer of the Association. Upon the issuance of any substituted Security, the Association may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses connected therewith and, in addition, a further sum not exceeding Two Dollars ($2.00) for each Security so issued in substitution. In case any Security which has matured or is about to mature shall become mutilated or be destroyed, lost or stolen, the Association may, instead of issuing a substitute Security, pay the same (without surrender thereof except in the case of a mutilated Security) if the applicant for such payment shall furnish the Association and any Registrar with such security or indemnity as it may require to save it harmless, and, in every case of destruction, loss or theft, the applicant shall also furnish to the Association and to the Trustee evidence to their satisfaction of the destruction, loss or theft. Every substituted Security issued pursuant to the provisions of this Section 3.06 by virtue of the fact that any Security is destroyed, lost or stolen shall, with respect to such Security, constitute an additional contractual obligation of the Association, whether or not the destroyed, lost or stolen Security shall be found at any time, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Securities duly issued hereunder. All Securities shall be held and owned upon the express condition that the foregoing provisions are exclusive with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities, and shall preclude any and all other rights or remedies, notwithstanding any law or statute existing or hereafter enacted to the contrary with respect to the replacement or payment of securities without their surrender. Section 3.07. Payment of Interest; Interest Rights Preserved. Unless otherwise provided pursuant to Section 3.01, interest on any Security of a series which is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the person in whose name that Security of that series is registered at the close of business on the record date for such interest. Unless otherwise provided pursuant to Section 3.01, any interest on any Security of a series which is payable, but is not punctually paid or duly provided for, on any Interest Payment Date and interest on such defaulted interest at the then applicable interest rate borne by the Securities of that series, to the extent lawful (such defaulted interest and interest thereon herein collectively called "Defaulted Interest") shall forthwith cease to be payable to the Holder on the record date; and such Defaulted Interest may be paid by the Association, at its election in each case, as provided in Subsection (a) or (b) below: (a) The Association may elect to make payment of any Defaulted Interest to the persons in whose names the Securities of that series are registered at the close of business on a Special Record Date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Association shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each Security of that series and the date (not less than 30 days after such notice) of the proposed payment, and at the same time the Association shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the persons entitled to such Defaulted Interest as in this Subsection provided. Thereupon the Trustee shall fix a Special Record Date for the payment of such Defaulted Interest which shall be not more than 15 days and not less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Association in writing of such Special Record Date. In the name and at the expense of the Association, the Trustee shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be mailed, first-class postage prepaid, to each Holder at his address as it appears in the Register, not less than 10 days prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been so mailed, such Defaulted Interest shall be paid to the persons in whose names the Securities of that series are registered on such Special Record Date and shall no longer be payable pursuant to the following Subsection (b). (b) The Association may make payment of any Defaulted Interest in any other lawful manner if, after written notice given by the Association to the Trustee of the proposed payment pursuant to this Section 3.07, such payment shall be deemed practicable by the Trustee. Subject to the foregoing provisions of this Section 3.07, each Security of any series delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Security of the same series shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Security of the same series. Section 3.08. Cancellation. All Securities surrendered for payment, redemption, exchange or transfer shall, if surrendered to the Association, be cancelled and delivered to the Trustee, or, if surrendered to the Trustee, shall be cancelled by it, and no Security shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Indenture. On request of the Association, the Trustee shall deliver to the Association a certificate of cancellation, including such cancelled Securities held by the Trustee. If the Association shall acquire any of the Securities, such acquisition shall not operate as a redemption or satisfaction of the indebtedness represented by such Securities unless and until the same are delivered to the Trustee cancelled or for cancellation. Section 3.09. CUSIP Numbers. The Association in issuing the Securities may use "CUSIP" numbers (if then generally in use and in addition to the other identification numbers printed on the Securities), and, in such case, the Trustee shall use "CUSIP" numbers in notices of redemption as a convenience to Holders; provided that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Securities or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Securities, and any such redemption shall not be affected by any defect in or omission of such numbers. ARTICLE FOUR REDEMPTION BY ASSOCIATION Section 4.01. Securities Subject to Redemption. To the extent, if any, provided pursuant to Section 3.01, the Association may, from time to time, redeem any Outstanding Security of any series by payment of the face amount thereof, plus accrued interest to the date of such payment, upon not less than fifteen (15) days written notice mailed to the Holder named in the Register, at the address designated therein, by ordinary first class United States mail, properly addressed and stamped and deposited in the United States. Section 4.02. Notice of Redemption. Unless otherwise provided as contemplated by Section 3.01, each such notice of redemption shall specify the date fixed for redemption and shall state that payment of the redemption price of the Security or Securities to be redeemed will be made at the office to be maintained by the Association in accordance with the provisions of Section 6.02 upon presentation and surrender of such Security or Securities, that interest accrued to the date fixed for redemption will be paid, and that on and after said date interest thereon will cease to accrue. Section 4.03. Securities Payable on Redemption Date. Unless otherwise provided as contemplated by Section 3.01, if the giving of notice of redemption shall have been completed as above provided, the Security or Securities specified in such notice shall become due and payable on the date and at the place stated in such notice at the face amount thereof, together with interest accrued to the date fixed for redemption, and on and after such date fixed for redemption (unless the Association shall default in the payment of such Security or Securities at the face amount thereof, together with interest accrued to date fixed for redemption) interest on the Security or Securities so called for redemption shall cease to accrue. On presentation and surrender of such Security or Securities at the place of payment in said notice specified, the said Security or Securities shall be paid or redeemed by the Association at the face amount thereof, together with interest accrued thereon to the date fixed for redemption. Section 4.04. Securities Redeemed in Part. Any Security which is to be redeemed only in part pursuant to this Article Four shall be surrendered to the office to be maintained by the Association in accordance with the provisions of Section 6.02, and the Association shall execute, and the Trustee shall authenticate and deliver to the Holder of such Security without service charge, a new Security or Securities of the same series, of any authorized denomination as requested by such Holder in aggregate principal amount equal to, and in exchange for, the unredeemed portion of the principal of the Security of that series so surrendered that is not redeemed or purchased. ARTICLE FIVE REDEMPTION BY HOLDER Section 5.01. Redemption by Holder. To the extent, if any, provided pursuant to Section 3.01, and subject to the subordination provisions of Section 6.07, the Association agrees to redeem Securities of any series prior to maturity by payment of the principal thereof, plus interest to the date of such payment only, at the place and at the rate specified pursuant to Section 3.01, upon surrender of such Securities, accompanied by a written request for early redemption to the Association and such other documentation as should be specified pursuant to Section 3.01. Section 5.02. Securities Redeemed in Part. Any Security which is to be redeemed only in part pursuant to this Article Five shall be surrendered to the office to be maintained by the Association in accordance with the provisions of Section 6.02, and the Association shall execute, and the Trustee shall authenticate and deliver to the Holder of such Security without service charge, a new Security or Securities of the same series, of any authorized denomination as requested by such Holder in aggregate principal amount equal to, and in exchange for, the unredeemed portion of the principal of the Security of that series so surrendered that is not redeemed or purchased. Section 5.03. No Set-Aside. The amounts available for the redemption of Securities prior to maturity pursuant to this Section Five shall not be set aside in a separate fund or held in trust. ARTICLE SIX PARTICULAR COVENANTS OF THE ASSOCIATION Section 6.01. Payments of Principal and Interest. The Association will duly and punctually pay or cause to be paid the principal of and interest on each of the Securities at the respective times and place and in the manner provided in the Securities. The principal of and interest on the Securities shall be payable only to or upon the written order of the Holder named in the Securities. Section 6.02. Maintenance of Office or Agency. The Association will maintain an office or agency in the City of Kansas City, State of Missouri, where the Securities of each series may be presented for transfer, exchange, redemption and payment, and where notices and demands to or upon the Association with respect to the Securities of each series or to this Indenture may be served. The Association will give to the Trustee notice of the location of such office or agency and of any change of location thereof. In case the Association shall fail to maintain such office or agency or shall fail to give such notice of the location or of any change in the location thereof, presentations and demands may be made and notices may be served at the principal office of the Trustee. Section 6.03. Appointment of Trustee. The Association covenants and agrees that whenever necessary to avoid or fill a vacancy in the office of the Trustee, the Association will in the manner provided in Section 9.18 appoint a Successor Trustee so that there shall at all times be a Trustee hereunder which shall at all times be a bank or trust company, which shall at all times be a corporation or banking association organized and doing business under the laws of the United States or of any State or Territory or of the District of Columbia, with a capital and surplus of at least $25,000,000, and authorized under such laws to exercise corporate trust powers and subject to supervision or examination by Federal, State, Territorial or District of Columbia authority. Section 6.04. Appointment of Duties of Paying Agent. (a) Whenever the Association shall appoint a paying agent other than the Trustee or the Association, it will cause such paying agent to execute and deliver to the Trustee an instrument in which such agent shall agree with the Trustee, subject to the provisions of this Section 6.04, that: (1) it will hold all sums held by it as agent for the payment of the principal of or interest on the Securities of any series (whether such sums have been paid to it by the Association or by any other obligor on the Securities of such series) in trust for the benefit of the Holders of the Securities of such series; and (2) it will give the Trustee notice of any failure by the Association (or by any other obligor on the Securities of such series) to make any payment of the principal of or interest on the Securities of such series when the same shall be due and payable. (b) If the Association shall act as its own paying agent, it will, on or before each due date of the principal of or interest on the Securities of any series, set aside, segregate and hold in trust for the benefit of the holders of the Securities of such series a sum sufficient to pay such principal of and interest so becoming due. The Association will promptly notify the Trustee of any failure to take such action. (c) Anything in this Section 6.04 to the contrary notwithstanding, the Association may, at any time, for the purpose of obtaining a satisfaction and discharge of this Indenture, or for any other reason, pay or cause to be paid to the Trustee all sums held in trust by it, or by any paying agent hereunder, as required by this Section 6.04, such sums to be held by the Trustee upon the trusts herein contained. (d) Anything in this Section 6.04 to the contrary notwithstanding, the agreement to hold sums in trust as provided in this Section 6.04 is subject to the provisions of Article Fourteen. Section 6.05. Report to Trustee. To the extent provided pursuant to Section 3.01, the Association covenants and agrees to report in writing to the Trustee as soon as practicable the interest rate per annum determined to be payable on the Securities and the effective date of such rate of interest. Section 6.06. Unclaimed Monies. Any money deposited with the Trustee or any paying agent, or then held by the Association, in trust for the payment of any principal of or premium or interest on any Security of any series and remaining unclaimed for two years after such principal, premium, if any, or interest has become due and payable shall be paid, without liability for interest thereon, to the Association on Association Request, or (if then held by the Association) shall be discharged from such trust; and the Holder of such Security and interest coupon, if any, shall thereafter, as an unsecured general creditor, look only to the Association for payment thereof of the amount, without liability for interest thereon, and all liability of the Trustee or such paying agent with respect to such trust money, and all liability of the Association as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such paying agent, before being required to make any such repayment, may in the name and at the expense of the Association cause to be published once, in an Authorized Newspaper in each place where the office or agency of the Association pursuant to Section 6.02 is located with respect to such series, or cause to be mailed by first-class mail to such Holder, notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such money then remaining will be repaid to the Association. Section 6.07. Securities Subordinated to Senior Indebtedness. (a) The Association, for itself, its successors and assigns, covenants and agrees, and each Holder of Securities, by his acceptance thereof, likewise covenants and agrees, that the payment of the principal of (and premium, if any) and interest on the Securities issued hereunder shall be subordinated and subject, to the extent and in the manner herein set forth, in right of payment to the prior payment in full of all Senior Indebtedness. "Senior Indebtedness" means (i) any indebtedness of the Association outstanding on the date of execution of this Indenture as originally executed, or thereafter created, incurred or assumed, for the principal of and premium (if any) and interest on money borrowed from banks, trust companies, insurance companies, or pension trusts or evidenced by securities issued under the provisions of an indenture or similar trust instrument between the Association and a bank or trust company (other than the indebtedness of the Association with respect to the Securities issued under this Indenture and its Subordinated Certificates of Investment issued under Indentures dated July 29, 1974, as amended January 29, 1982, and Subordinated Capital Investment Certificates issued under an Indenture dated November 29, 1976, as amended January 29, 1982, and Subordinated Capital Investment Certificates issued under Indentures dated October 24, 1978, as amended December 21, 1978 and further amended January 29, 1982, and Subordinated Capital Investment Certificates issued under an Indenture dated October 24, 1979, as amended January 29, 1982, and Subordinated Capital Investment Certificates issued under an Indenture dated November 8, 1984, as amended January 3, 1985, and further amended December 3, 1991 and Subordinated Monthly Income Capital Investment Certificates issued under an Indenture dated November 8, 1984, and under an Indenture dated November 11, 1985, and Subordinated Individual Retirement Account Certificates issued under an Indenture dated November 8, 1984) for the payment of which the Association is directly or contingently liable or otherwise responsible, whether as principal obligor, as guarantor, as endorser or otherwise, and all renewals, extensions and refundings of any such indebtedness, other than indebtedness, however, as to which, in the instrument creating or evidencing the same or pursuant to which the same is outstanding or by which the Association incurred, assumed, guaranteed or otherwise became responsible therefor, it is expressly provided that such indebtedness, or such renewals, extension or refunding, is not superior in right of payment to the Securities and (ii) any indebtedness whatsoever of the Association not covered by (1) above which is created, incurred or assumed after the date of execution of this Indenture as originally executed and for the payment of which the Association is directly or contingently liable or otherwise responsible, whether as principal obligor, as guarantor, as endorser or otherwise, and all renewals, extensions, refundings and modifications thereof, as to which, in the instrument creating or evidencing such indebtedness or pursuant to which the same is outstanding or by which the Association incurred, assumed, guaranteed or otherwise became responsible therefor, it is expressly provided that such indebtedness, or such renewal, extension, refunding or modification, is superior in right of payment to the Securities. The provisions of this Section are made for the benefit of all owners of Senior Indebtedness and any such owner may proceed to enforce such provisions. (b) Payment Over of Proceeds Upon Dissolution, etc. No payment on account of principal of (or premium, if any) or interest on the Securities of any series shall be made, and no Securities of any series shall be purchased, either directly or indirectly, by the Association or any of its subsidiaries, unless full payment of amounts then due for principal of (and premium, if any) and interest (including interest on overdue principal and interest, to the extent permitted by law) on Senior Indebtedness has been made or duly provided for in money or money's worth. No payment on account of principal of (or premium, if any) or interest on the Securities shall be made, and no Securities shall be purchased, either directly or indirectly, by the Association or any of its subsidiaries, if, at the time of such payment or purchase or immediately after giving effect thereto, there shall exist under any Senior Indebtedness or any indenture or agreement pursuant to which any Senior Indebtedness is issued any default or any condition, event or act, which, with notice or lapse of time, or both, would constitute a default. In the event that any Security is declared due and payable before its stated maturity (herein defined as the date specified in such Security as the fixed date on which the principal of such Security is due and payable) because of an event of default hereunder or upon any other acceleration of the principal amount due on the Securities because of an event of default hereunder or upon any payment or distribution of assets of the Association of any kind or character, whether in cash, property or securities, to creditors upon any dissolution, winding up, total or partial liquidation, reorganization, assignment for the benefit of creditors or other marshaling of assets of the Association, whether voluntary or involuntary or in bankruptcy, insolvency, receivership or other proceedings, all principal of (and premium, if any) and interest (including interest on overdue principal and interest, to the extent permitted by law) due or to become due upon all Senior Indebtedness shall first be paid in full before the Holders of Securities, or the Trustee, shall be entitled to retain any assets (other than shares of stock of the Association as reorganized or readjusted or securities of the Association or any other corporation provided for by a plan of reorganization or readjustment, the payment of which is subordinated, at least to the same extent as the Securities, to the payment of all Senior Indebtedness which may at the time be outstanding, provided that the rights of the owners of the Senior Indebtedness are not altered by such reorganization or readjustment) so paid or distributed in respect of the Securities (for principal, premium, if any, or interest); and upon any such dissolution, winding up, liquidation, reorganization, assignment or marshaling, any payment or distribution of assets of the Association of any kind or character, whether in cash, property or securities (other than shares of stock of the Association as reorganized or readjusted or securities of the Association or any other corporation provided for by a plan of reorganization or readjustment, the payment of which is subordinated, at least to the same extent as the Securities, to the payment of all Senior Indebtedness which may at the time be outstanding, provided that the rights of the owners of the Senior Indebtedness are not altered by such reorganization or readjustment), to which the Holders of Securities or the Trustee would be entitled except for the provisions of this Section, shall be paid by the Association or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other person (herein defined as any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof) making such payment or distribution, or by the Holders of Securities or the Trustee if received by them or it, directly to the owners of Senior Indebtedness (pro rata to each such owner on the basis of the respective amounts of Senior Indebtedness held by such owner) or their representatives, to the extent necessary to pay all Senior Indebtedness in full, after giving effect to any concurrent payment or distribution to or for the owners of Senior Indebtedness, before any payment or distribution is made to the Holders of Securities or to the Trustee. No owner of Senior Indebtedness shall be prejudiced in his right to enforce subordination of the Securities by any act or failure to act on the part of the Association. Subject to the payment in full of all Senior Indebtedness, the Holders of Securities shall be subrogated (equally and ratably with the owners of all indebtedness of the Association which, by its express terms, ranks on a parity with the Securities and is entitled to like rights of subrogation) to the rights of the owners of Senior Indebtedness to receive payments or distributions of assets of the Association applicable to the Senior Indebtedness until the Securities shall be paid in full, and no payments or distributions on the Senior Indebtedness pursuant to this Section shall, as between the Association, its creditors other than the owners of Senior Indebtedness, and the Holders of the Securities, be deemed to be a payment by the Association to or on account of the Securities, it being understood that the provisions of this Section are and are intended solely for the purpose of defining the relative rights of the Holders of the Securities on the one hand, and the owners of Senior Indebtedness, on the other hand, and nothing contained in this Section or elsewhere in this Indenture or in the Securities is intended to or shall impair the obligation of the Association, which is unconditional and absolute, to pay the principal of (and premium, if any) and interest on the Securities as and when the same shall become due and payable in accordance with their terms, or to effect the relative rights of the Holders of Securities and creditors of the Association other than the owners of Senior Indebtedness, nor shall anything herein or therein prevent the Trustee or the Holder of any Securities from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Section, of the owners of Senior Indebtedness in respect of cash, property or securities of the Association otherwise payable or delivered to the Trustee or such Holder upon the exercise of any such remedy. Upon any payment or distribution pursuant to this Section, the Trustee and the Holder of the Securities shall be entitled to rely upon any order or decree of a court of competent jurisdiction in which any proceedings of the nature referred to in this Section are pending, and the Trustee, subject to the provisions of Section 9.03, and the Holders of Securities shall be entitled to rely upon a certificate of the liquidating trustee or agent or other person making such payment or distribution to the Trustee or to the Holders of Securities for the purpose of ascertaining the persons entitled to participate in such payment or distribution, the owners of the Senior Indebtedness and other indebtedness of the Association, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Section. In the event that the Trustee determines, in good faith, that evidence is required with respect to the right of any person as an owner of Senior Indebtedness to participate in any payment or distribution pursuant to this Section, the Trustee may request such person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of Senior Indebtedness held by such person, as to the extent to which such person is entitled to participate in such payment or distribution, and as to other facts pertinent to the rights of such persons under this Section, and if such evidence is not furnished, the Trustee may defer any payment to such person pending judicial determination as to the right of such person to receive such payment. (c) Trustee to Effectuate Subordination. The Holder of each Security by his acceptance thereof authorizes and directs the Trustee in his behalf to take such action as may be necessary or appropriate to acknowledge or effectuate the subordination as provided in this Section and appoints the Trustee as attorney- in-fact for any and all such purposes. (d) Trustee Not Charged with Knowledge of Prohibition. Notwithstanding the provisions of this Section or any other provision of this Indenture, but subject to the provisions of Section 9.03, the Trustee and any paying agent shall not be charged with knowledge of the existence of any Senior Indebtedness, or of any default in the payment of the principal of (or premium, if any) or interest on any Senior Indebtedness, or of any facts which would prohibit the making of any payment of moneys to or by the Trustee or any such paying agent, unless and until the Trustee or such paying agent shall have received written notice thereof from the Association or the owners of at least 10% in principal amount of any kind or category of any Senior Indebtedness or the representative or representatives of such owners; nor shall the Trustee or any such paying agent be charged with knowledge of the curing of any such default or of the elimination of the act or condition preventing any such payment unless and until the Trustee or such paying agent shall have received an Officers' Certificate to such effect. (e) Rights of Trustee as Owner of Senior Indebtedness. The Trustee shall be entitled to all the rights set forth in this Section with respect to any Senior Indebtedness; and nothing in this Indenture shall deprive the Trustee of any of its rights as such owner. (f) Trustee Not Fiduciary for Owners of Senior indebtedness. The Trustee shall not be deemed to owe any fiduciary duty to the owners of Senior Indebtedness and shall not be liable to any such owners if it shall mistakenly pay over or distribute to Holders of Securities or the Association or any other person monies or assets to which any owners of Senior Indebtedness shall be entitled by virtue of this Section or otherwise. (g) Section Applicable to Paying Agents. In case at any time any paying agent other than the Trustee shall have been appointed by the Association and be then acting hereunder, the term "Trustee" as used in this Section shall in such case (unless the context shall otherwise require) be construed as extending to and including such paying agent within its meaning as fully for all intents and purposes as if such paying agent were named in this Section in addition to or in place of the Trustee, provided, however, that paragraphs (d), (e) and (f) of this Section shall not apply to the Association if it acts as paying agent. ARTICLE SEVEN HOLDERS' LISTS AND REPORTS BY TRUSTEE AND ASSOCIATION Section 7.01. Association to Furnish Trustee Names and Addresses of Holders. The Association will furnish or cause to be furnished to the Trustee: (a) semi-annually, not more than 15 days after April 1 and October 1 of each year, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Holders of Securities on such dates; and (b) at such other times as the Trustee may request in writing, within 30 days after the receipt by the Association of any such request, a list of similar form and content for any or all series as of a date not more than 15 days prior to the time such list is furnished; excluding from any such list, with respect to (a) and (b) above, names and addresses possessed by the Trustee in its capacity as Registrar. Section 7.02. Preservation of Information, Communications to Holders. (a) The Trustee shall preserve, in as current a form as is reasonably practicable, the names and addresses of Holders of Securities contained in the most recent list furnished to the Trustee as provided in Section 7.01 and the names and addresses of Holders of Securities received by the Trustee in its capacity as Registrar. The Trustee may destroy any list furnished to it as provided in Section 7.01 upon receipt of a new list so furnished. (b) The rights of Holders of Securities to communicate with other Holders with respect to their rights under this Indenture or under the Securities, and the corresponding rights and privileges of the Trustee, shall be as provided in the Trust Indenture Act. (c) Every Holder of Securities and interest coupons appertaining thereto, by receiving and holding the same, agrees with the Association and the Trustee that neither the Association nor the Trustee nor any agent of any of them shall be held accountable by reason of the disclosure of information as to the names and addresses of the Holders of Securities made pursuant to the Trust Indenture Act. Section 7.03. Reports by Trustee. (a) The Trustee shall transmit to Holders of Securities such reports concerning the Trustee and its actions under this Indenture as may be required pursuant to Section 313 of the Trust Indenture Act, at the times and in the manner provided pursuant thereto. (b) Reports so required to be transmitted at stated intervals of not more than 12 months shall be transmitted no later than July 15 in each calendar year, commencing with the first July 15 after the first issuance of Securities under this Indenture. Section 7.04. Reports by the Association. The Association shall file with the Trustee and the Commission, and transmit to the Holders, such information, documents and other reports, and such summaries thereof, as may be required pursuant to Section 314 of the Trust Indenture Act at the times and in the manner provided pursuant to the Trust Indenture Act; provided that any such information, documents or reports required to be filed with the Commission pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 shall be filed with the Trustee within 15 days after the same is so required to be filed with the Commission. Notwithstanding anything contrary herein, the Trustee shall have no duty to review such documents for purposes of determining compliance with any provisions of this Indenture. Section 7.05. Annual Review Certificate. The Association covenants and agrees to deliver to the Trustee, within 120 days after the end of each fiscal year of the Association, a certificate in substantially the same form prescribed by Section 16.06 hereof from the principal executive officer, principal financial officer or principal accounting officer of the Association stating that a review of the activities of the Association during such year and of performance under this Indenture has been made under his or her supervision and to the best of his or her knowledge, based on such review, the Association has fulfilled all of its obligations under this Indenture throughout such year, or, if there has been a default in the fulfillment of any such obligation, specifying each such default known to him or her and the nature and status thereof. For purposes of this Section 7.05, such compliance shall be determined without regard to any period of grace or requirement of notice provided under this Indenture. ARTICLE EIGHT REMEDIES IN EVENT OF DEFAULT Section 8.01. Event of Default Defined. Unless otherwise provided pursuant to Section 3.01, "Event of Default", wherever used herein with respect to the Securities of any series, means any one of the following events which has occurred and is continuing (whatever the reason for such Event of Default and whether it shall be occasioned pursuant to the provisions of Section 6.07 or be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree, order of any court or any order, rule or regulation of any administrative or government body): (a) Failure to pay principal of (or any installment of the principal of) or any premium on any Security of that series, after such principal or premium shall have become due and payable; (b) Failure to pay interest of any Security of that series or any interest coupon appertaining thereto for a period of 60 days after such interest shall have become due or payable; and (c) The expiration of a period of 90 days following: (1) the adjudication of the Association as a bankrupt by any court of competent jurisdiction; (2) the entry of an order approving a petition seeking reorganization of the Association under the Federal Bankruptcy Code or any other applicable law or statute of the United States of America, or any State thereof; or (3) the appointment of a trustee or a receiver of all or substantially all of the property of the Association; unless, with respect to (1), (2), and (3) above, during such period such adjudication, order or appointment of a receiver or trustee shall be vacated; (d) The filing by the Association of a voluntary petition in bankruptcy or the making of an assignment for the benefit of creditors; the consenting by the Association to the appointment of a receiver or trustee of all or any part of its property; the filing by the Association of a petition or answer seeking reorganization under the Federal Bankruptcy Code, or any other applicable law or statute of the United States of America, or of any State thereof; or the filing by the Association of a petition to take advantage of any insolvency act; (e) Failure to perform any other covenant or agreement contained herein or in any indenture supplemental hereto or in any Security of that series for a period of 90 days following the mailing by the Trustee to the Association of a written demand that such failure be cured, such failure not having been cured in the meantime. The Trustee may, and, if requested in writing by the Holders of a majority in principal amount of the Securities of that series then outstanding, shall make such demand. (f) Any other Event of Default provided as contemplated by Section 3.01 with respect to Securities of that series. Section 8.02. Trustee to Notify Holder of Defaults. The Trustee shall, within 90 days after the occurrence thereof, give to the Holders of the affected series notice of all Defaults known to it, unless such Defaults shall have been cured before the giving of such notice (the term "Default" being hereby defined to be the events specified in subsections (a), (b). (c), (d), (e) and (f) of Section 8.01 not including any periods of grace provided for in said subsections and irrespective of the written demand specified in subsection (e) of Section 8.01); provided that, except in the case of Default in the payment of the principal of or interest on any of the Securities, or in the payment of any sinking or purchase fund installment, if any, the Trustee shall be protected in withholding such notice if and so long as the board of directors or responsible officers, or both, of the Trustee, in good faith determine that the withholding of such notice is in the interests of such Holders. Section 8.03. Acceleration Upon Default. Upon the occurrence of an Event of Default, the Trustee may, and upon the written request of the Holders of at least a majority in principal amount of the affected series of Securities then Outstanding shall, by notice in writing given to the Association, declare the principal of all Securities of the affected Series then Outstanding and the interest accrued thereon immediately due and payable, and upon any such declaration the same shall become and shall be immediately due and payable, anything in this Indenture or in the Securities contained to the contrary notwithstanding; provided, however, that upon the occurrence of an Event of Default specified in subsection (c) or (d) of Section 8.01, the principal of the Securities and the interest accrued thereon shall be immediately due and payable without any further action or notice. This provision, however, is subject to the condition that if, at any time after the principal of the Securities shall have been so declared due and payable and before any judgment or decree for the payment of the monies due shall have been obtained or entered as hereinafter provided, the Association shall pay or shall deposit with the Trustee a sum sufficient to pay all maturing installments of interest upon all of the Securities of the affected series and the principal of any and all of the Securities of the affected series which shall have become due otherwise than by acceleration (with interest upon such principal and on overdue installments of interest to the date of such payment or deposit) and such amount as shall be sufficient to cover reasonable compensation to the Trustee, its agents, attorneys and counsel, and all other expenses and liabilities incurred, and all advances made by the Trustee, except as a result of its negligence or bad faith, and any and all Events of Default under the Indenture, other than the nonpayment of the principal of Securities which shall have become due by acceleration, shall have been remedied, then and in every such case the holders of a majority in aggregate principal amount of the Securities of the affected series then Outstanding, by written notice to the Association and to the Trustee, may waive all Events of Default and rescind and annul such declaration and its consequences; but no such waiver or rescission and annulment shall extend to or shall affect any subsequent Event of Default or shall impair any right consequent thereon. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case the Association, the Trustee and the Holders shall, subject to any determination in such proceeding, be restored severally and respectively to their former positions hereunder, and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. Section 8.04. Right of Trustee to Sue Association Upon Default. In the case of a default in payment of the principal of any Security of any series, when the same shall become due and payable, or in the case of a default in the payment of the interest on any Security of any series for a period of 60 days after such interest shall become due and payable, the Trustee may recover judgment, in its own name and as trustee of an express trust, against the Association or other obligor for the whole amount of such principal and interest remaining unpaid, together with interest upon the overdue principal and premium, if any, and to the extent the payment of such interest shall be legally enforceable, upon overdue installments of interest, if any, at the rate borne by Securities of that series. The Trustee may file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee and of the Holders allowed in any judicial proceedings relative to the Association or any other obligor on the Securities or its creditors, or its properties. Section 8.05. Right of Holder to Receive Payment or Sue. Notwithstanding any other provision of this Indenture, the right of any Holder of any Security to receive payment of the principal of and interest on such Security, on or after the respective due dates expressed on such Security, or to institute suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such Holder, except as to a postponement of an interest payment consented to as provided in Section 8.06. Section 8.06. Right of Holders to Direct Time, Method and Place of Conducting Proceeding for Remedy Available to Trustee. The Holders of not less than a majority in principal amount of the Outstanding Securities of each series affected (with each such series voting as a class) shall have the right to: (a) direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture; or (b) on behalf of the Holders of all such Securities of such series, consent to the waiver of any past Default and its consequences, except an Event of Default in the payment of principal or interest, provided that: (1) such direction shall not be in conflict with any rule of law or with this Indenture or expose the Trustee to personal liability and (2) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction. The Holders of not less than 75 per centum in principal amount of the Outstanding Securities of each series may consent on behalf of the Holders of all the Outstanding Securities of such series to the postponement of any interest payment for a period not exceeding three years from its due date. Section 8.07. Notice of Defaults. The Trustee shall not be required to take notice or deemed to have notice of any Default or Event of Default hereunder, unless the Trustee shall have received specific notice in writing of such Default or Event of Default from the Association or the Holders of not less than 10% in principal amount of any series of Securities Outstanding, and in the absence of any such notice so received, the Trustee may conclusively assume that no Default or Event of Default exists. ARTICLE NINE CONCERNING THE TRUSTEE Section 9.01. Qualification of Trustee. The Trustee shall at all times be a bank or trust company eligible under Section 6.03 and have a combined capital and surplus of not less than $25,000,000. If the Trustee publishes reports of condition at least annually, pursuant to law or to the requirements of any supervising or examining authority referred to in Section 6.03, then for the purpose of this Section the combined capital and surplus of the Trustee shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. Section 9.02. Acceptance and Undertaking of Trustee. The Trustee hereby accepts the trust hereby created. The Trustee undertakes, prior to an Event of Default, and after the curing of all Events of Default which may have occurred, to perform such duties and only such duties as are specifically set forth in this Indenture, and in case of an Event of Default (which has not been cured) to exercise such of the rights and powers vested in it by this Indenture, and to use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. Section 9.03. Examination of Evidence by Trustee. The Trustee, upon receipt of evidence furnished to it by or on behalf of the Association pursuant to any provision of this Indenture, will examine the same to determine whether or not such evidence conforms to the requirements of this Indenture. Section 9.04. Trustee not Relieved of Liability for Own Negligence or Willful Misconduct. No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (a) prior to an Event of Default hereunder and after the curing of all Events of Default which may have occurred, the Trustee shall not be liable except for the performance of such duties as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee but the duties and obligations of the Trustee, prior to an Event of Default and after the curing of all Events of Default which may have occurred, shall be determined solely by the express provisions of this Indenture; (b) prior to an Event of Default hereunder and after the curing of all Events of Default which may have occurred, and in the absence of bad faith on the part of the Trustee, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon resolutions, requests, letters, reports, notices, consents, certificates, opinions or other documents conforming to the requirements of this Indenture; (c) the Trustee shall not be personally liable for any error of judgment made in good faith by a responsible officer or officers of the Trustee unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; (d) the Trustee shall not be personally liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of not less than a majority in principal amount of the Securities of each affected series at the time Outstanding relating to the time, method, and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture; (e) notwithstanding anything elsewhere in this Indenture, before taking any action under this Indenture, the Trustee may require that satisfactory indemnity be furnished to it by the Holders of the Securities or other persons for the reimbursement of all reasonable costs and expenses to which it may be put and to protect it against all liability which it may incur in or by reason of such action, except liability which is adjudicated to have resulted from its negligence or willful misconduct by reason of any action so taken; (f) the permissive right of the Trustee to do things enumerated in the Indenture shall not be construed as a duty and the Trustee shall not be answerable for other than its own negligent action, its own negligent failure to act or its own willful misconduct; (g) the Trustee shall not be required to give any bond or security in respect of the execution of the trusts and powers granted hereunder or otherwise in respect of this Indenture; (h) whether or not therein expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or conveying rights and duties affording protection to the Trustee whether in its capacities as Trustee, paying agent, Registrar or in any other capacity shall be subject to the provisions of this Article Nine. Section 9.05. Trustee May Rely on Recitals of Fact. The recitals of fact contained herein, in the Securities, and in any prospectus or other document shall be taken as the statements of the Association, and the Trustee assumes no responsibility for the correctness of the same. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Securities issued hereunder. Section 9.06. Right of Trustee to Rely on Certain Documents. To the extent permitted by Sections 9.02, 9.03 and 9.04: (a) The Trustee may rely and shall be protected in acting upon any resolution, certificate, opinion, notice, request, consent, order, appraisal, report, bond, or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; and (b) The Trustee may consult with counsel and the opinion of such counsel shall be full and complete authorization and protection in respect of any action taken or suffered by it hereunder in good faith and in accordance with the opinion of such counsel. Section 9.07. Trustee Not Responsible for Approval of Any Expert. The Trustee shall not be under any responsibility for the approval of any expert, attorney, accountant, or agent for any of the purposes expressed in this Indenture, except that nothing in this Section 9.07 contained shall relieve the Trustee of its obligation to exercise reasonable care with respect to the approval of independent experts, attorneys, accountants, or agents who may furnish opinions or certificates to the Trustee pursuant to any provisions of this Indenture. Any resolution of the Board of Directors or Executive Committee of the Association shall be evidenced to the Trustee by a copy thereof certified by the Secretary or an Assistant Secretary of the Association to have been duly adopted, and the Trustee may rely upon such copy as conclusive evidence of the adoption of such resolution. Nothing contained in this Section 9.07 shall be deemed to modify the obligation of the Trustee to exercise after an Event of Default the rights and powers vested in it by this Indenture with the degree of care and skill specified in Section 9.02. Section 9.08. Right of Trustee to Become Owner or Pledgee of Securities. The Trustee, in its individual or any other capacity, may become the Holder or pledgee of Securities with the same rights it would have if it were not a Trustee. Section 9.09. Monies Received by Trustee to be Held in Trust. Subject to the provisions of Section 6.06, all monies received by the Trustee whether as Trustee or paying agent shall, until used or applied as herein provided, be held in trust for the purposes for which they were paid, but need not be segregated from other funds except to the extent required by law. The Trustee shall have no liability for interest on any monies received by it hereunder except as may be agreed upon in writing with the Association from time to time and as may be permitted by law. Section 9.10. Compensation of Trustee. The Association covenants and agrees to pay to the Trustee from time to time, and the Trustee shall be entitled to reasonable compensation for all services rendered by it in the execution of the trusts hereby created and in the exercise and performance of any of the powers and duties hereunder to the Trustee, which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust, and the Association will reimburse the Trustee for all advances made by the Trustee in accordance with any of the provisions of this Indenture and will pay to the Trustee from time to time its expenses and disbursements (including, without limitation, the reasonable compensation and the expenses and disbursements of its counsel and of all persons not regularly in its employ). The Association also covenants to indemnify the Trustee for, and to hold it harmless against, any loss, liability or expense incurred without negligence or bad faith on the part of the Trustee, arising out of or in connection with the acceptance or administration of this trust, including the costs and expenses of defending against any claim of liability in the premises. The Association further covenants and agrees to pay interest to the Trustee at the rate of one hundred fifty percent (150%) of the prime commercial lending rate of the Trustee upon all amounts paid, advanced or disbursed by the Trustee for which it is entitled to reimbursement or indemnity as herein provided. The obligations of the Association to the Trustee under this Section 9.10 shall constitute additional indebtedness subject to this Indenture. Such additional indebtedness shall be secured by a lien prior to that of the Securities upon the trust estate, including all property or funds held or collected by the Trustee as such. Section 9.11. Enforcement by Trustee of Right to Compensation. In order to further assure the Trustee that it will be compensated, reimbursed and indemnified as provided in Section 9.10 and that the prior lien provided for in Section 9.10 upon the trust estate to secure the payment of such compensation, reimbursement and indemnity will be enforced for the benefit of the Trustee, all parties to this Indenture agree, and each Holder of any Security by his acceptance thereof shall be deemed to have agreed that in the event of: (a) the adjudication of the Association as a bankrupt by any court of competent jurisdiction, (b) the filing of any petition seeking the reorganization of the Association under the Federal Bankruptcy Code or any other applicable law or statute of the United States of America or of any State thereof, (c) the appointment of one or more trustees or receivers of all or substantially all of the property of the Association, (d) the filing of any bill to foreclose this Indenture, (e) the filing by the Association of a petition to take advantage of any insolvency act, or (f) the institution of any other proceeding wherein it shall become necessary or desirable to file or present claims against the Association, the Trustee may file from time to time in any such proceeding or proceedings one or more claims, supplemental claims and amended claims as a secured creditor for its reasonable compensation for all services rendered by it (including services rendered during the course of any such proceeding or proceedings) and for reimbursement of all advances, expenses and disbursements (including, without limitation, the reasonable compensation and the expenses and disbursements of its counsel and of all persons not regularly in its employ) made or incurred by it in the execution of the trusts hereby created and in the exercise and performance of any of the powers and duties herein of the Trustee, and for any and all amounts to which the Trustee is entitled as indemnity as provided in Section 9.10; and the Trustee and its counsel and agents may file in any such proceeding or proceedings applications or petitions for compensation for such services rendered, for reimbursement for such advances, expenses and disbursements, and for such indemnity. The claim or claims of the Trustee filed in any such proceeding or proceedings shall be reduced by the amount of compensation for services, reimbursement for advances, expenses and disbursements, and indemnity paid to it following final allowance to it and to its counsel and agents by the court in any such proceeding as an expense of administration or in connection with a plan of reorganization or readjustment. To the extent that compensation, reimbursement and indemnity are denied to the Trustee or to its counsel or other agents because of not being rendered or incurred in connection with a plan of reorganization or readjustment, approved as required by law, because such services were not rendered in the interests of and with benefit to the estate of the Association as a whole but in the interests of and with benefit to the Holders of the Securities in the execution of the trusts hereby created or in the exercise and performance of any of the powers and duties hereunder of the Trustee or because of any other reason, the court may, to the extent permitted by law, allow such claim, as supplemented and amended, in any such proceeding or proceedings and for the purposes of any reorganization or readjustment of the Association's obligations, classify the Trustee as a secured creditor of a class separate and distinct from that of other creditors of a class having priority and precedence over the class in which the Holders of Securities are placed by reason of having a lien, prior and superior to that of the Holders of the Securities, as such. The amount of the claim or claims of the Trustee for services rendered and for advances, expenses and disbursements, including, without limitation, the reasonable compensation and expenses and disbursements of its counsel and of all persons not regularly in its employ which are not allowed and paid in any such proceeding, but for which the Trustee is entitled to the allowance of a secured claim as herein provided, may be fixed by the court or judge in any such proceeding or proceedings to the extent that such court or judge has or exercises jurisdiction over the amount of any such claim or claims. If, and to the extent that the Trustee and its counsel and other persons not regularly in its employ do not receive compensation for services rendered, reimbursement of its or their advances, expenses and disbursements, or indemnity, as herein provided, as the result of allowances made in any such proceeding or by any plan of reorganization or readjustment or obligations of the Association, the Trustee shall be entitled, in priority to the Holders of Securities, to receive any distributions of any securities, dividends or other disbursements which would otherwise be made to the Holders of Securities in any such proceeding or proceedings and is hereby constituted and appointed, irrevocably, the attorney-in-fact for the Holders of the Securities and each of them to collect and receive, in their name, place and stead, such distributions, dividends or other disbursements, to deduct therefrom the amounts due to the Trustee, its counsel and other persons not regularly in its employ on account of services rendered, advances, expenses, and disbursements made or incurred, or indemnity, and to pay and distribute the balance, pro rata, to the Holders of the Securities. The Trustee shall have a lien upon any securities or other considerations to which Holders of Securities may become entitled pursuant to any such plan of reorganization or readjustment of obligations, or in any such proceeding or proceedings; and the court or judge in any such proceeding or proceedings may determine the terms and conditions under which any such lien shall exist and be enforced. Section 9.12. Trustee May Rely Upon Certificate of Association. Whenever in the administration of the trusts of this Indenture, prior to an Event of Default hereunder, the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or suffering any action hereunder, such matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a certificate in substantially the form prescribed by Section 16.06 hereof signed by the President or Vice President of the Association and delivered to the Trustee, and such certificate shall be full warrant to the Trustee for any action taken or suffered by it under the provisions of this Indenture upon the faith thereof. Section 9.13. Right of Trustee to Give Notice of Action. Whenever it is provided in this Indenture that the Trustee shall take any action upon the happening of a specified event or upon the fulfillment of any action or upon the request of the Association or of Holders, the Trustee taking such action shall have full power to give any and all notices and to do any and all acts and things incidental to such action. Section 9.14. Conflicting Interest of Trustee. (a) If the Trustee has or shall acquire a conflicting interest within the meaning of Section 310(b) of the Trust Indenture Act, the Trustee shall either eliminate such conflicting interest or resign, to the extent and in the manner provided by, and subject to the provisions of, the Trust Indenture Act and this Indenture. To the extent permitted by the Trust Indenture Act, the Trustee shall not be deemed to have a conflicting interest by virtue of being a trustee under this Indenture with respect to Securities of more than one series or a trustee under (i) the trust indentures dated July 29, 1974, between the Association and the Trustee, filed as Exhibits F(12), (13) (14), (15) and (16) of Registration Statement No. 2-51757 together with those certain supplemental trust indentures dated January 29, 1982; (ii) the trust indentures dated November 29, 1976, between the Association and Trustee, filed as Exhibits E(17) and (18) of Registration Statement No. 2-57765 together with those certain supplemental trust indentures dated January 29, 1982; (iii) the trust indenture dated October 24, 1978, between the Association and Trustee, filed as Exhibit E(19) of Registration Statement No. 2-63106; together with those certain supplemental trust indentures dated December 21, 1978 and January 29, 1982; (iv) the trust indentures dated October 24, 1979, between the Association and the Trustee, filed as Exhibits E(21), (22) and (23) of Registration Statement No. 2-66090 together with those certain supplemental trust indentures dated January 29, 1982; (v) the trust indentures dated November 8, 1984, between the Association and the Trustee, filed as Exhibits ___, ____, and ____ of Registration Statement No. ___________ together with certain supplemental indentures dated January 3, 1985 and December 3, 1991; (vi) the trust indenture dated November 11, 1985 between the Association and the Trustee, filed as Exhibit _______ of Registration Statement No. ________ to each and all of which reference is hereby made for a more detailed and complete description thereof, Section 9.15. Duties of Trustee if it Becomes Creditor of Association. If and when the Trustee shall be or become a creditor of the Association (or other obligor under the Securities of any series), the Trustee shall be subject to the provisions of the Trust Indenture Act regarding the collection of claims against the Association (or any such other obligor). A Trustee who has resigned or been removed shall be subject to the Trust Indenture Act Section 311(a) to the extent indicated therein. Section 9.16. Resignation and Discharge of Trustee. The Trustee may at any time resign and be discharged of the trusts hereby created by giving written notice to the Association specifying the day upon which such resignation shall take effect and thereafter publishing notice thereof, in one newspaper printed in the English language and customarily published on each business day and of general circulation in the City of Kansas City, State of Missouri, once in each of three successive calendar weeks, in each case on any business day of the week, and such resignation shall take effect upon the day specified in such notice unless previously a successor trustee shall have been appointed by the Holders or the Association in the manner hereinafter provided in Section 9.18, and in such event such resignation shall take effect immediately on the appointment of such successor trustee. This Section shall not be applicable to resignations pursuant to Section 9.14. Section 9.17. Removal of Trustee. The Trustee may be removed at any time by an instrument or concurrent instruments in writing filed with the Trustee and signed and acknowledged by the Holders of a majority in principal amount of the Securities then Outstanding or by their attorneys in fact duly authorized. In case at any time the Trustee shall cease to be eligible in accordance with the provisions of Section 9.01, then the Trustee shall resign immediately in the manner and with the effect specified in Section 9.16; and, in the event that the Trustee does not resign immediately in such case, then it may be removed forthwith by an instrument or concurrent instruments in writing filed with the Trustee and either (a) signed by the President or Vice President of the Association with its corporate seal attested by the Secretary or Assistant Secretary of the Association or (b) signed and acknowledged by the Holders of ten per centum in principal amount of the Securities then outstanding of a particular series or by their attorneys in fact duly authorized. Section 9.18. Filling Vacancy. In case at any time the Trustee shall resign or shall be removed or shall become incapable of acting, or shall be adjudged a bankrupt or insolvent, or if the receiver of the Trustee or of its property shall be appointed, or if any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, a vacancy shall be deemed to exist in the office of Trustee, and a successor or successors may be appointed by the Holders of a majority in principal amount of the Securities then Outstanding hereunder, by an instrument or concurrent instruments in writing signed and acknowledged by such Holders or by their attorneys in fact duly authorized, and delivered to such new trustee, notification thereof being given to the Association and the retiring trustee, provided, nevertheless, that until a new trustee shall be appointed by the Holders as aforesaid, the Association, by instrument executed by order of its Board of Directors or Executive Committee and duly acknowledged by its President or Vice President, may appoint a trustee to fill such vacancy until a new trustee shall be appointed by the Holders as herein authorized. The Association shall publish notice of any such appointment made by it in the manner provided in Section 9.16. Any new trustee appointed by the Association shall, immediately and without further act, be superseded by a trustee appointed by the Holders, as above provided if such appointment by the Holders be made prior to the expiration of one year after the first publication of notice of the appointment of the new trustee by the Association. If no appointment of a successor trustee shall be made pursuant to the foregoing provisions of this section within six months after a vacancy shall have occurred in the office of trustee, the Holder of any Security Outstanding hereunder or any retiring trustee may apply to any court of competent jurisdiction to appoint a successor trustee. Said court may thereupon after such notice, if any, as such court may deem proper and prescribe, appoint a successor trustee. If the Trustee resigns because of a conflict of interest as provided in subsection (a) of Section 9.14 and a successor has not been appointed by the Association or the Holders or, if appointed, has not accepted the appointment within thirty days after the date of such resignation, the resigning Trustee may apply to any court of competent jurisdiction for the appointment of a successor trustee. Any trustee appointed under the provisions of this Section in succession to the Trustee shall be a bank or trust company eligible under Section 6.03 and 9.01 and qualified under Section 9.14. Any trustee which has resigned or been removed shall nevertheless retain the lien upon the trust estate, including all property or funds held or collected by the trustee as such, to secure the amounts due to the trustee as compensation, reimbursements, expenses and indemnity, afforded to it by Section 9.10 and retain the rights afforded to it by Section 9.11. Section 9.19. Duties of Successor Trustee. Any successor trustee appointed hereunder shall execute, acknowledge and deliver to his or its predecessor trustee, and also to the Association, an instrument accepting such appointment hereunder, and thereupon such successor trustee, without any further act, deed or conveyance, shall become fully vested with all the estates, properties, rights, powers, trusts, duties and obligations of his or its predecessor in trust hereunder, with like effect as if originally named as Trustee herein and the obligations and duties of the Trustee ceasing to act shall cease and terminate; but the trustee ceasing to act shall nevertheless, on the written request of the Association, or of the successor trustee, or of the Holders of 10 per centum in principal amount of the Securities then Outstanding hereunder, execute, acknowledge and deliver such instruments of conveyance and further assurances and do such other things as may reasonably be required for more fully and certainly vesting and confirming in such successor trustee all the right, title and interest of the Trustee to which he or it succeeds under this Indenture, and such rights, powers, trusts, duties, and obligations, and the Trustee ceasing to act shall also, upon like request, pay over, assign and deliver to the successor trustee any money or other property subject to the lien of this Indenture. Should any deed, conveyance or instrument in writing from the Association be required by the new trustee for more fully and certainly vesting in and confirming to such new trustee such estates, properties, rights, powers, trusts and duties, any and all such deeds, conveyances and instruments in writing shall, on request, be executed, acknowledged and delivered by the Association. Section 9.20. Merger or Consolidation of or with Trustee. Any corporation into which the Trustee may be merged or with which it may be consolidated or any corporation resulting from any merger or consolidation to which the Trustee shall be a party or any corporation to which substantially all the corporate trust business and assets of the Trustee may be transferred, provided such corporation shall be eligible under the provisions of Sections 6.03 and 9.01 and qualified under Section 9.14, shall be the successor trustee under this Indenture, without the execution or filing of any paper or the performance of any further act on the part of any other parties hereto, anything herein to the contrary notwithstanding. In case any of the Securities contemplated to be issued hereunder shall have been authenticated but not delivered, any such successor to the Trustee may, subject to the same terms and conditions as though such successor to the Trustee had itself authenticated such Securities, adopt the certificate of authentication of the original Trustee or of any successor to it as trustee hereunder, and deliver the said Securities so authenticated; and in case any of said Securities shall not have been authenticated, any successor to the Trustee may authenticate such Securities either in the name of any predecessor hereunder or in the name of the successor trustee, and in all such cases such certificates shall have the full force which it is anywhere in said Securities or in the Indenture provided that the certificate of the Trustee shall have; provided, however, that the right to authenticate Securities in the name of the Trustee shall apply only to its successor or successors by merger or consolidation or sale as aforesaid. Section 9.21. Duties of Trustee Governed by Laws of Missouri. The duties, liabilities, rights, privileges and immunities of the Trustee in relation to the Holders of the Securities shall be governed exclusively by the laws of the State of Missouri. ARTICLE TEN CONCERNING THE HOLDERS Section 10.01. Proof of Action by Holders. Whenever in this Indenture it is provided that the Holders of a specified percentage in aggregate principal amount of the Securities of a particular series may take any action (including the making of any demand or request, the giving of any notice, consent or waiver or the taking of any other action) the fact that at the time of taking any such action the Holders of such specified percentage have joined therein may be evidenced (a) by any instrument or any number of instruments of similar tenor executed by Holders in person or by agent or proxy appointed in writing, or (b) by the record of the Holders of Securities voting in favor thereof at any meeting of Holders duly called and held in accordance with the provisions of Article Eleven, or (c) by a combination of such instrument or instruments and any such record of such a meeting of Holders. Section 10.02. What Constitutes a Writing. For the purposes hereof, a "writing" shall include tangible written text produced by telex, telefacsimile, computer retrieval, or other process by which electronic signals are transmitted by telephone or otherwise. Section 10.03. Holder Named in Certificate Treated as Absolute Owner. The Association, the Trustee and any paying agent may deem and treat the Holder or Holders named in the Register for any Outstanding Security as the absolute owner of such Security (whether or not such Security shall be overdue and notwithstanding any notation of ownership or other writing thereon made by anyone other than the Association) for the purpose of receiving payment thereof or on account thereof and for all other purposes, and neither the Association nor the Trustee nor any paying agent shall be affected by any notice to the contrary. Section 10.04. Securities Owned by Association to be Disregarded in Computing Requisite Amount of Securities. For the purposes of this section, and in every other instance of a direction or consent by Holders of Securities under this Indenture, in determining whether the Holders of the requisite aggregate principal amount of Securities have concurred in any direction, consent or waiver under this Indenture, Securities which are registered in the name of the Association or any other obligor on the Securities or by any person directly or indirectly controlling or controlled by or under direct or indirect common control with the Association or any other obligor on the Securities shall be disregarded and deemed not to be Outstanding for the purpose of any such determination, except that for the purpose of determining whether the Trustee shall be protected in relying on any such direction, consent or waiver only Securities in regard to which the Trustee shall have received written notice identifying such persons or obligors by name and address which the Trustee knows are so owned shall be so disregarded. Section 10.05. Holders May Revoke Prior Action. At any time prior to (but not after) the evidencing to the Trustee as provided in Section 10.01, of the taking of any action by the Holders of the percentage in aggregate principal amount of the Securities of any series specified in this Indenture in connection with such action, any Holder of a Security of such series which is shown by the evidence to be included in the Securities the Holders of which have consented to such action may, by filing written notice with the Trustee at its principal office and upon proof of owning as provided in Section 10.02, revoke such action so far as concerns such Security. Except as aforesaid any such action taken by the Holder of any Security shall be conclusive and binding upon such Holder and upon all future Holders of such Security and of any Security issued in exchange or substitution therefor, irrespective of whether or not any notation in regard thereto is made upon such Security. Any action taken by the Holders of the percentage in aggregate principal amount of the Securities of any series specified in this Indenture in connection with such action shall be conclusively binding upon the Association, the Trustee and the Holders of the Securities of such series. ARTICLE ELEVEN HOLDERS MEETINGS Section 11.01. Purpose of Meetings. A meeting of Holders of the Securities, or of the Securities of any series, may be called at any time and from time to time pursuant to the provisions of this Article Eleven for any of the following purposes: (a) to give any notice to the Association or to the Trustee, or to give any directions to the Trustee, or to consent to the waiving of any Default or Event of Default hereunder and its consequences, or to take any other action authorized to be taken by Holders pursuant to any of the provisions of Article Eight; (b) to remove the Trustee and appoint a successor Trustee pursuant to the provisions of Article Nine; (c) to consent to the execution of an Indenture or Indentures supplemental hereto pursuant to the provisions of Section 12.02; or (d) to take any other action authorized to be taken by or on behalf of the Holders of any specified aggregate principal amount of the Securities or of any series under any other provision of this Indenture or under applicable law. Section 11.02. Call of Meeting and Notice Required. The Trustee may at any time call a meeting of Holders to take any action specified in Section 11.01, to be held at such time and at such place in the City of Kansas City, State of Missouri, as the Trustee shall determine. Notice of every meeting of the Holders, setting forth the time and place of such meeting and in general terms the action proposed to be taken at such meeting, shall be mailed by ordinary first class mail, postage prepaid, to the Holders of all Outstanding Securities of the series affected, at their last known post office addresses as shown by the Register of the Association or Trustee, not less than twenty nor more than one hundred eight days prior to the date fixed for the meeting. Section 11.03. Request of Trustee to Call Meeting. In case at any time the Association, pursuant to a resolution of its Board of Directors, or the Holders of at least 10 per centum in aggregate principal amount of the Securities or of a particular series then Outstanding, shall have requested the Trustee to call a meeting of Holders to take any action authorized in Section 11.01, by written request setting forth in reasonable detail the action proposed to be taken at the meeting, and the Trustee shall not have mailed the notice of such meeting within twenty days after receipt of such request, then the Association or the Holders of Securities in the amount above specified may determine the time and the place in said City of Kansas City for such meeting and may call such meeting by mailing notice thereof as provided in Section 11.02. Section 11.04. Who May Vote at Meeting. To be entitled to vote at any meeting of Holders, a person shall be (a) a Holder of one or more Outstanding Securities entitled to vote at the meeting, or (b) a person appointed by an instrument in writing as proxy for a Holder or Holders of one or more Outstanding Securities entitled to vote at the meeting. The only persons who shall be entitled to be present or to speak at any meeting of Holders shall be the Persons entitled to vote at such meeting and their counsel, any representatives of the Trustee and its counsel and any representatives of the Association and its counsel. Section 11.05. Regulations Made by Trustee. Notwithstanding any other provisions of this Indenture, the Trustee may make such reasonable regulations as it may deem advisable for any meeting of Holders in regard to proof of the owning of Securities and of the appointment of proxies, and in regard to the appointment and duties of inspectors of votes, and submission and examination of proxies, certificates and other evidence of the right to vote, and such other matters concerning the conduct of the meeting as it shall think fit. The Trustee shall, by an instrument in writing, appoint a temporary chairman of the meeting, unless the meeting shall have been called by the Association or by Holders as provided in Section 11.03, in which case the Association or the Holders calling the meeting, as the case may be, shall in like manner appoint a temporary chairman. A permanent chairman and a permanent secretary of the meeting shall be elected by vote of the Holders of a majority in principal amount of the Securities represented at the meeting and entitled to vote. Subject to the provisions of Section 10.04, at any meeting each Holder or proxy shall be entitled to one vote for each $1000 or portion thereof in principal amount of Securities held or represented by him; provided, however, that no vote shall be cast or counted at any meeting in respect of any Security challenged as not Outstanding and ruled by the chairman of the meeting to be not Outstanding; and provided further, that any Holder of a Security or Securities, the aggregate principal amount of which is less than $100, shall nevertheless be entitled to one vote. The chairman of the meeting shall have no right to vote except as a Holder or proxy. Any meeting of Holders duly called pursuant to the provisions of Section 11.02 or 11.03 may be adjourned from time to time, and the meeting may be held as so adjourned without further notice. Section 11.06. Form of and Recording Vote. The vote upon any resolution submitted to any meeting of Holders shall be by written ballots on which shall be subscribed the signatures of the Holders or proxies. The permanent chairman of the meeting shall appoint two inspectors of votes who shall count all votes cast at the meeting for or against any resolution and who shall make and file with the secretary of the meeting their verified written reports in duplicate of all votes cast at the meeting. A record in duplicate of the proceedings of each meeting of Holders shall be prepared by the secretary of the meeting and there shall be attached to said record the original reports of the inspectors of votes on any vote by ballot taken thereat and affidavits by one or more persons having knowledge of the facts setting forth a copy of the notice of the meeting and showing that said notice was published as provided in Section 11.02. The record shall be signed and verified by the affidavits of the permanent chairman and secretary of the meeting and one of the duplicates shall be delivered to the Association and the other to the Trustee to be preserved by the Trustee, the latter to have attached hereto the ballots voted at the meeting. Any record so signed and verified shall be conclusive evidence of the matters therein stated. ARTICLE TWELVE SUPPLEMENTAL INDENTURES Section 12.01. Supplemental Indentures Without Consent of Holders. Without the consent of any Holders, the Association and the Trustee, at any time and from time to time, may enter into indentures supplemental hereto, in form reasonably satisfactory to the Trustee, for any of the following purposes: (a) to evidence the succession of another corporation or entity to the Association and the assumption by any such successor of the covenants and obligations of the Association herein and in the Securities and any interest coupons appertaining thereto; or (b) to add to the covenants of the Association for the benefit of the Holders of all or any series of Securities (and if such covenants are to be for the benefit of less than all series of Securities, stating that such covenants are expressly being included solely for the benefit of such series) or to surrender any right or power herein conferred upon the Association; or (c) to add any additional Events of Default with respect to all or any series of Securities; or (d) to change or eliminate any of the provisions of this Indenture in respect of one or more series of Securities, provided that any such change or elimination shall become effective only when there is no Security Outstanding of any series created prior to the execution of such supplemental indenture which is entitled to the benefit of such provision; or (e) to establish the form or terms of Securities of any series as permitted by Sections 2.01 and 3.01; or (f) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee with respect to the Securities pursuant to Section 9.18 and to add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee; or (g) to cure any ambiguity, to correct or supplement any provision herein which may be inconsistent with any other provision herein or to make any other provisions with respect to matters or questions arising under this Indenture which shall not be inconsistent with the provisions of this Indenture, provided such action shall not adversely affect in any material respect the interests of the Holders of Securities of any series; or (h) to modify, eliminate or add to the provisions of this Indenture to such extent as shall be necessary to effect the qualification of this Indenture under the Trust Indenture Act or under any similar federal statute subsequently enacted, and to add to this Indenture such other provisions as may be expressly required under the Trust Indenture Act; or (i) to enable the issuance of uncertificated Securities and to permit registration, transfer and exchange of securities by book-entry. Section 12.02. Supplemental Indentures With Consent of Holders. With the consent of the Holders of not less than a majority of the aggregate principal amount of the Outstanding Securities of each series affected by such supplemental indenture (treating all affected series as one series), the Association and the Trustee may enter into an indenture or indentures supplemental hereto to add any provisions to or to change in any manner or eliminate any provisions of this Indenture or of any other indenture supplemental hereto or to modify in any manner the rights of the Holders of Securities of any such series; provided, however, that without the consent of the Holder of each Outstanding Security affected thereby, an amendment under this Section may not: (a) change the Stated Maturity of the principal of, or premium, if any, on, or any installment of principal of or premium, if any, or interest on, any such Security, or reduce the principal amount thereof or the rate of interest thereon or any premium payable upon the redemption thereof, or change the manner in which the amount of any principal thereof or premium, if any, or interest thereon is determined, or impair the right to institute suit for the enforcement of any such payment on or after the Stated Maturity thereof (or, in the case of redemption, on or after the Redemption Date); (b) reduce the percentage in principal amount of the Outstanding Securities of any series, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver (of compliance with certain provisions of this Indenture or of certain Defaults hereunder and their consequences) provided for in this Indenture; (c) change any obligation of the Association to maintain an office or agency in the places and for the purposes specified in Section 6.02; (d) modify the provisions in Section 6.07 of this Indenture with respect to the subordination of Outstanding Securities in a manner adverse to the Holders thereof; or (e) make any change in this Section 12.02 except to increase any percentage or to provide that certain other provisions of this Indenture cannot be modified or waived with the consent of the Holders of each Outstanding Security affected thereby. A supplemental indenture which changes or eliminates any covenant or other provision of this Indenture which has expressly been included solely for the benefit of one or more particular series of Securities, or which modifies the rights of the Holders of Securities of such series with respect to such covenant or other provision, shall be deemed not to affect the rights under this Indenture of the Holders of Securities of any other series. It is not necessary under this Section 12.02 for the Holders to consent to the particular form of any proposed supplemental indenture, but it is sufficient if they consent to the substance thereof. Section 12.03. Compliance with Trust Indenture Act. Every amendment to this Indenture or the Securities of one or more series shall be set forth in a supplemental indenture that complies with the Trust Indenture Act as then in effect. Section 12.04. Execution of Supplemental Indentures. Upon the execution of any supplemental indenture pursuant to the provisions of this Article Twelve, this Indenture shall be and be deemed to be modified and amended in accordance therewith and the respective rights, limitation of rights, obligations, duties and immunities under this Indenture of the Trustee, the Association and the Holders of Securities shall thereafter be determined, exercised and enforced hereunder subject in all respects to such modifications and amendments, and all the terms and conditions of any such supplemental indenture shall be and be deemed to be part of the terms and conditions of this Indenture for any and all purposes. The Trustee, subject to the provisions of Article Nine, may receive and rely upon an Opinion of Counsel as conclusive evidence that any such supplemental indenture complies with the provisions of this Article Twelve. Section 12.05. Reference in Securities to Supplemental Indentures. Securities, including any interest coupons, of any series authenticated and delivered after the execution of any supplemental indenture pursuant to this Article may, and shall if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Association shall so determine, new Securities including any interest coupons of any series so modified as to conform, in the opinion of the Association, to any such supplemental indenture may be prepared and executed by the Association and authenticated and delivered by the Trustee in exchange for Outstanding Securities including any interest coupons of such series. ARTICLE THIRTEEN CONSOLIDATION, MERGER, SALE OR CONVEYANCE Section 13.01. Consolidation or Merger of or with Association. Nothing contained in this Indenture or in any of the Securities shall prevent any consolidation or merger of the Association with or into any other corporation or entity (whether or not affiliated with the Association), or successive consolidation or mergers in which the Association or its successor or successors shall be a party or parties, or shall prevent any sale or conveyance of the property of the Association as an entirety or substantially as an entirety to any other corporation or entity (whether or not affiliated with the Association) authorized to acquire and operate the same; provided, however, and the Association hereby covenants and agrees, that upon any such consolidation, merger, sale or conveyance, the due and punctual payment of the principal of and interest on all the Securities, according to their tenor, and the due and punctual performance and observance of all of the covenants and conditions of this Indenture to be performed or observed by the Association, shall be expressly assumed, by supplemental indentures satisfactory in form to the Trustee executed and delivered to the Trustee by the corporation or entity formed by such consolidation, or into which the Association shall have been merged, or by the corporation or entity which shall have acquired such property. Section 13.02. Rights and Duties of Successor Corporation or Entity. In case of any such consolidation, merger, sale or conveyance and upon any such assumption by the successor corporation or entity, such successor corporation or entity shall succeed to and be substituted for the Association, with the same effect as if it had been named herein as the party of the first part. Such successor corporation or entity thereupon may cause to be signed, and may issue either in its own name or in the name of Farmland Industries, Inc., any or all of the Securities issuable hereunder which theretofore shall not have been signed by the Association and delivered to the Trustee; and, upon the order of such successor corporation or entity, instead of the Association, and subject to all the terms, conditions and limitations in this Indenture prescribed, the Trustee shall authenticate and shall deliver any Securities which previously shall have been signed and delivered by the officers of the Association to the Trustee for authentication, and any Securities which such successor corporation or entity thereafter shall cause to be signed and delivered to the Trustee for that purpose. All the Securities so issued shall in all respects have the same legal rank and benefit under the Indenture as the Securities theretofore or thereafter issued in accordance with the terms of this Indenture as though all of such Securities had been issued at the date of the execution hereof. In case of any such consolidation, merger, sale or conveyance such changes in phraseology and form (but not in substance) may be made in the Securities thereafter to be issued as may be appropriate. Nothing contained in this Indenture or in any of the Securities shall prevent the Association from merging into itself any other corporation or entity (whether or not affiliated with the Association) or acquiring by purchase or otherwise all or any part of the property of any other corporation or entity (whether or not affiliated with the Association). Section 13.03. Opinion of Counsel. The Trustee, subject to the provisions of Article Nine, may receive and rely upon an Opinion of Counsel as conclusive evidence that any such consolidation, merger, sale or conveyance, and any such assumption, complies with the provisions of this Article Thirteen. ARTICLE FOURTEEN SATISFACTION, DISCHARGE AND DEFEASANCE Section 14.01. Termination of Association's Obligations Under the Indenture. This Indenture shall upon Association Request cease to be of further effect with respect to Securities of or within any series and any interest coupons appertaining thereto (except as to (i) rights of registration, transfer or exchange of such Securities, (ii) rights of replacement of such Securities which may have been lost, stolen or mutilated as herein expressly provided for, (iii) rights of holders of Securities to receive payments of principal thereof and interest thereon, upon the Stated Maturity thereof (but not upon acceleration), and rights of the Holders to receive mandatory sinking fund payments, if any, (iv) rights of holders of Securities to convert or exchange Securities, (v) rights, obligations, duties and immunities of the Trustee hereunder, (vi) any rights of the Holders of Securities of such series as beneficiaries hereof with respect to the property so deposited with the Trustee payable to all or any of them, and (vii) the obligations of the Association under Section 6.02) and the Trustee, upon payment of all amounts due it under Section 9.10, at the expense of the Association, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture with respect to such Securities and any interest coupons appertaining thereto when: (1) either (A) all such Securities previously authenticated and delivered and all interest coupons appertaining thereto (other than such Securities and interest coupons which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 3.06) have been delivered to the Trustee for cancellation or (B) all Securities of such series and, in the case of (i) or (ii) below, any interest coupons appertaining thereto not theretofore delivered to the Trustee for cancellation: (i) have become due and payable, or (ii) will become due and payable at their Stated Maturity within one year, or (iii) are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Association, and the Association, in the case of (i), (ii) or (iii) above, has irrevocably deposited or caused to be deposited with the Trustee as trust funds in trust for the purpose money in an amount sufficient to pay and discharge the entire indebtedness on such Securities and such interest coupons not theretofore delivered to the Trustee for cancellation, for principal, premium, if any, and interest, with respect thereto, to the date of such deposit (in the case of Securities which have become due and payable) or to the Stated Maturity or Redemption Date, as the case may be; (2) the Association has paid or caused to be paid all other sums payable hereunder by the Association; and (3) the Association has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture as to such series have been complied with. Notwithstanding the satisfaction and discharge of this Indenture, the obligation of the Association to the Trustee and any predecessor Trustee under Section 9.10, and, if money shall have been deposited with the Trustee pursuant to subclause (B) of clause (1) of this Section, the obligations of the Trustee under Section 6.06 and 14.02 shall survive. Section 14.02. Application of Trust Funds. Subject to the provisions of Section 6.06, all money deposited with the Trustee pursuant to Section 14.01 shall be held in trust and applied by it, in accordance with the provisions of the Securities, the interest coupons appertaining thereto, if any, and this Indenture, to the payment, either directly or through any paying agent (including the Association acting as its own paying agent) as the Trustee may determine, to the Persons entitled thereto, of the principal, premium, if any and any interest for whose payment such money has been deposited with or received by the Trustee, but such money need not be segregated from other funds except as otherwise provided herein and except to the extent required by law. Section 14.03. Applicability of Defeasance Provisions; Association's Option to Effect Defeasance or Covenant Defeasance. Except as otherwise specified as contemplated by Section 3.01 for the Securities of any series, the provisions of Sections 14.04 through 14.09 inclusive, with such modifications thereto as may be specified pursuant to Section 3.01 with respect to any series of Securities, shall be applicable to the Securities and any interest coupons appertaining thereto. Section 14.04. Defeasance and Discharge. On and after the date on which the conditions set forth in Section 14.06 are satisfied with respect to the Securities of or within any series, the Association shall be deemed to have paid and been discharged from its obligations with respect to such Securities and any interest coupons appertaining thereto (hereinafter "defeasance"). For this purpose, such defeasance means that the Association shall be deemed to have paid and discharged the entire indebtedness represented by such Securities and any interest coupons appertaining thereto which shall thereafter be deemed to be "Outstanding" only for the purposes of Sections 3.04, 3.05, 3.06, 6.02, 6.06, 14.07 and 14.09 and to have satisfied all its other obligations under such Securities and any interest coupons appertaining thereto and this Indenture insofar as such Securities and any interest coupons appertaining thereto are concerned (and the Trustee, upon payment of all amounts due it under Section 9.10, at the expense of the Association, shall on an Association Order execute proper instruments acknowledging the same). Subject to compliance with this Article Fourteen, the Association may defease the Securities of any series and any interest coupons appertaining thereto under this Section 14.04 notwithstanding a prior covenant defeasance (as defined herein) under Section 14.05 with respect to such Securities and any interest coupons appertaining thereto. Following a defeasance, payment of such Securities may not be accelerated because of an Event of Default. Section 14.05. Covenant Defeasance. On and after the date on which the conditions set forth in Section 14.06 are satisfied with respect to the Securities of or within any series, (i) the Association shall be released from its obligations under Section 6.01 and, if specified pursuant to Section 3.01, its obligations under any other covenant, with respect to such Securities and any interest coupons appertaining thereto, (ii) the occurrence of any event specified in Sections 8.01(e) or 8.01(f) (in each case, with respect to any of the obligations described in clause (i) above) or 8.01(a) or 8.01(b) shall be deemed not to be or result in a Default or Event of Default (hereinafter, "covenant defeasance"), and such Securities and any interest coupons appertaining thereto shall thereafter be deemed to be not "Outstanding" for the purposes of any request, demand, authorization, direction, notice, waiver, consent or declaration of Holders (and the consequences of any thereof) in connection with Section 6.01, such other covenant specified pursuant to Section 3.01, or Sections 8.01(e) or 8.01(f) (in each case, with respect to any of the obligations described in clause (i) above) or Sections 8.01(a) or 8.01(b), but shall continue to be deemed "Outstanding" for all other purposes hereunder and (iii) the provisions of Section 6.07 shall cease to be effective as to such Securities. For this purpose, such covenant defeasance means that, with respect to such Securities and any interest coupons appertaining thereto, the Association may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in such Section or such other covenant, whether directly or indirectly, by reason of any reference elsewhere herein to such Section or such other covenant or by reason of reference in any such Section or such other covenant to any other provision herein or in any other document and such omission to comply shall not constitute a Default or an Event of Default under Sections 8.01(a), 8.01(b), 8.01(e), or 8.01(f) or otherwise, as the case may be, but, except as specified above, the remainder of this Indenture and such Securities and any interest coupons appertaining thereto shall be unaffected thereby. Section 14.06. Conditions to Defeasance or Covenant Defeasance. The following shall be the conditions to application of either Section 14.04 or Section 14.05 to the then Outstanding Securities of or within a series: (a) The Association shall irrevocably have deposited or caused to be deposited with the Trustee (or another trustee satisfying the requirements of Section 6.03 who shall agree to comply with the provisions of Sections 14.03 through 14.09 inclusive and Section 6.06 applicable to the Trustee, for purposes of such sections also a "Trustee") as trust funds in trust for the purpose of making the following payments, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of such Securities and any interest coupons appertaining thereto, (A) money in an amount, or (B) Government Obligations which through the scheduled payment of principal and interest in respect thereof in accordance with their terms will provide, not later than one day before the due date of any payment, money in an amount, or (C) a combination thereof, in an amount sufficient in the opinion of a nationally recognized firm of independent certified public accountants expressed in a written opinion with respect thereto delivered to the Trustee, to pay and discharge, and which shall be applied by the Trustee (or other qualifying trustee) to pay and discharge, (x) the principal of (premium, if any) and each installment of interest, if any, on the Outstanding Securities and any interest coupons appertaining thereto on the Stated Maturity of such principal or installment of interest and (y) any mandatory sinking fund payments applicable to such Securities on the day on which such payments are due and payable in accordance with the terms of this Indenture and of such Securities and any interest coupons appertaining thereto. (b) In the case of an election under Section 14.04, the Association shall have delivered to the Trustee an Opinion of Counsel stating that (x) the Association has received from, or there has been published by, the Internal Revenue Service a ruling, or (y) since the date of this Indenture there has been a change in the applicable Federal income tax law, in either case to the effect that, and based thereon such opinion shall confirm that, the Holders of the Outstanding Securities and any interest coupons appertaining thereto will not recognize gain or loss for Federal income tax purposes as a result of such deposit, defeasance and discharge and will be subject to Federal income tax on the same amount, in the same manner and at the same times as would have been the case if such deposit, defeasance and discharge had not occurred. (c) In the case of an election under Section 14.05, the Association shall have delivered to the Trustee an Opinion of Counsel to the effect that the Holders of the Outstanding Securities and any interest coupons appertaining thereto will not recognize gain or loss for Federal income tax purposes as a result of such deposit and covenant defeasance and will be subject to Federal income tax on the same amount, in the same manner and at the same times as would have been the case if such deposit and covenant defeasance had not occurred. (d) The Association shall have delivered to the Trustee an Officer's Certificate to the effect that the Securities, if then listed on any securities exchange or approved for trading in any automated quotation system, will not be delisted or disapproved for such trading as a result of such deposit. (e) At the time of such deposit: (A) no default in the payment of all or a portion of principal of (or premium, if any) or interest on any Senior Indebtedness of the Association shall have occurred and be continuing, and no event of default with respect to any Senior Indebtedness of the Association shall have occurred and be continuing and shall have resulted in such Senior Indebtedness becoming or being declared due and payable prior to the date on which it would otherwise have become due and payable and (B) no other event of default with respect to any Senior Indebtedness of the Association shall have occurred and be continuing permitting (after notice or the lapse of time, or both) the holders of such Senior Indebtedness (or a trustee on behalf of the holders thereof) to declare such Senior Indebtedness due and payable prior to the date on which it would otherwise have become due and payable, or, in the case of either Clause (A) or Clause (B) above, each such default or event of default shall have been cured or waived or shall have ceased to exist. (f) No Event of Default or event which with notice or lapse of time or both would become an Event of Default shall have occurred and be continuing on the date of such deposit or, insofar as Sections 8.01(c) or 8.01(d) are concerned, at any time during the period ending on the 91st day after the date of such deposit (it being understood that this condition shall not be deemed satisfied until the expiration of such period). (g) The Association shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent provided for relating to either the defeasance under Section 14.04 or the covenant defeasance under Section 14.05 (as the case may be) have been complied with. (h) Such defeasance or covenant defeasance shall not result in the trust arising from such deposit constituting an investment company as defined in the Investment Company Act of 1940, as amended from time to time, or such trust shall be registered under such act or exempt from registration thereunder. (i) Such defeasance or covenant defeasance shall be effected in compliance with any additional or substitute terms, conditions or limitations which may be imposed on the Association in connection therewith as contemplated by Section 3.01. Section 14.07. Deposited Money and Government Obligations to Be Held in Trust. Subject to the provisions of Section 6.06, all money and Government Obligations (or other property as may be provided pursuant to Section 3.01) (including the proceeds thereof) deposited with the Trustee pursuant to Section 14.06 in respect of any Securities of any series and any interest coupons appertaining thereto shall be held in trust and applied by the Trustee, in accordance with the provisions of such Securities and any interest coupons appertaining thereto and this Indenture, to the payment, either directly or through any paying agent (including the Association acting as its own paying agent) as the Trustee may determine, to the Holders of such Securities and any interest coupons appertaining thereto of all sums due and to become due thereon in respect of principal, premium, if any, and interest, if any, but such money need not be segregated from other funds except as provided herein and except to the extent required by law. Section 14.08. Repayment to Association. Subject to the delivery by the Association of any written certification required by the last paragraph of this Section 14.08, the Trustee (and any paying agent) shall promptly pay to the Association upon Association Request any excess money or securities held by them at any time. The provisions of Section 6.06 shall apply to any money or securities held by the Trustee or any paying agent under this Article Fourteen that remain unclaimed for two years after the Maturity of any series of Securities for which money or securities have been deposited pursuant to Section 14.06(a). Anything in this Article to the contrary notwithstanding, the Trustee shall deliver or pay to the Association from time to time upon Association Request any money or Government Obligations held by it as provided in Section 14.06 with respect to any Securities which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, are in excess of the amount thereof which would then be required to be deposited to effect the defeasance or covenant defeasance, as the case may be, with respect to such Securities. Section 14.09. Indemnity for Government Obligations. The Association shall pay, and shall indemnify the Trustee against, any tax, fee or other charge imposed on or assessed against Government Obligations deposited pursuant to this Article or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of the Outstanding Securities. Section 14.10. Reinstatement. If the Trustee (or paying agent) is unable to apply any money or Government Obligations in accordance with Section 14.06 by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the Association's obligations under this Indenture and the Securities shall be revived and reinstated, with present and prospective effect, as though no deposit had occurred pursuant to Section 14.06, until such time as the Trustee (or paying agent) is permitted to apply all such money or Government Obligations in accordance with Section 14.06; provided, however, that if the Association makes any payment to the Trustee (or paying agent) of principal, premium, if any, or interest on any Security following the reinstatement of its obligations, the Trustee (or paying agent) shall promptly pay any such amount to the Holders of the Securities and the Association shall be subrogated to the rights of the Holders of such Securities to receive such payment from the money and Government Obligations held by the Trustee (or paying agent). ARTICLE FIFTEEN IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS Section 15.01. No Recourse. No recourse under or upon any obligation, covenant or agreement of this Indenture, or of any Security, or for any claim based thereon or otherwise in respect thereof, shall be had against any incorporator, stockholder, officer or director, as such, past, present or future, of the Association or of any successor corporation, either directly or through the Association, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly understood that this Indenture and the obligations issued hereunder are solely corporate obligations, and that no such personal liability whatever shall attach to, or is or shall be incurred by, the incorporators, stockholders, officers or directors, as such of the Association or of any successor corporation, or any of them, because of the creation of the indebtedness hereby authorized, or under or by reason of the obligations, covenants or agreements contained in this Indenture or in any of the Securities or implied therefrom; and that any and all such personal liability, either at common law or in equity or by constitution or statute, of, and any and all such rights and claims against, every such incorporator, stockholder, officer or director, as such because of the creation of the indebtedness hereby authorized, or under or by reason of the obligations, covenants or agreements contained in this Indenture or in any of the Securities or implied therefrom, are hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture and the issue of such Securities. ARTICLE SIXTEEN MISCELLANEOUS PROVISIONS Section 16.01. Covenants of Association Bind its Successors and Assigns. All the covenants, stipulations, promises and agreements in this Indenture contained by or on behalf of the Association shall bind its successors and assigns, whether so expressed or not. Section 16.02. Acts by Successor Corporation. Any act or proceeding by any provision of this Indenture authorized or required to be done or performed by any board, committee or officer of the Association shall and may be done and performed with like force and effect by the like board, committee or officer of any corporation that shall at the time be the lawful sole successor of the Association. Section 16.03. Surrender of Rights and Powers Reserved to Association. The Association by instrument in writing executed by authority of two- thirds of its Board of Directors and delivered to the Trustee may surrender any of the powers or rights reserved to the Association and thereupon such powers or rights so surrendered shall terminate both as to the Association and as to any successor corporation. Section 16.04. Service of Notice on Association. Any notice or demand which by any provision of this Indenture is required or permitted to be given or served by the Trustee or by the Holders of Securities to or on the Association may be given or served by being deposited postage prepaid in a post office letter box addressed (until another address is filed by the Association with the Trustee pursuant to Section 6.02), as follows: Farmland Industries, Inc. P.O. Box 7305 Kansas City, Missouri, 64116-0005 Any notice, direction, request or demand by any Holder to or upon the Trustee shall be deemed to have been sufficiently given or made, for all purposes, upon receipt by a responsible officer at the principal office of the Trustee. Section 16.05. Indenture Governed by Laws of Missouri. THIS INDENTURE, THE SECURITIES AND ANY INTEREST COUPONS APPERTAINING THERETO SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF MISSOURI. Section 16.06. Officers' Certificate and Opinion of Counsel. Upon any application or demand by the Association to the Trustee to take any action under any of the provisions of this Indenture, the Association shall furnish to the Trustee an Officers' Certificate stating that all conditions precedent provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent have been complied with, except that in the case of any such application or demand as to which the furnishing of such documents is specifically required by any provisions of this Indenture relating to such particular application or demand, no additional certificate or opinion need be furnished. Each certificate or opinion provided for in this Indenture and delivered to the Trustee with respect to compliance with a condition or covenant provided for in this Indenture shall include (1) a statement that the person making such certificate or opinion has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with. Section 16.07. Due Date on Saturday, Sunday or Legal Holiday. In any case where the date of maturity of interest on or principal of the Securities or the date fixed for redemption of any Security shall be a Saturday or Sunday or shall, in the City of Kansas City, State of Missouri, be a legal holiday or a day on which banking institutions are authorized by law to close, then payment of interest or principal need not be made on such date, but in any such case may be made on the next succeeding day not a Saturday, Sunday or a legal holiday or a day on which banking institutions are authorized by law to close with the same force and effect as if made on the date of maturity or the date fixed for redemption, and no interest shall accrue for the period after such date. Section 16.08. Conflict with Trust Indenture Act. This Indenture is subject to the Trust Indenture Act and if any provision hereof limits, qualifies or conflicts with the Trust Indenture Act, the Trust Indenture Act shall control. Whether or not this Indenture is required to be qualified under the Trust Indenture Act, the provisions of the Trust Indenture Act required to be included in an indenture in order for such indenture to be so qualified shall be deemed to be included in this Indenture with the same effect as if such provisions were set forth herein and any provisions hereof which may not be included in an indenture which is so qualified shall be deemed to be deleted or modified to the extent such provisions would be required to be deleted or modified in an indenture so qualified. Section 16.09. Indenture Executed in Counterparts. This Indenture may be executed in any number of counterparts, each of which shall be an original; but such counterparts shall together constitute but one and the same instrument. COMMERCE BANK, NATIONAL ASSOCIATION, the party of the second part, hereby accepts the trusts in this Indenture declared and provided, upon the terms and conditions hereinabove set forth. IN WITNESS WHEREOF, FARMLAND INDUSTRIES, INC., the party of the first part, has caused this Indenture to be signed and acknowledged by its [Financial Vice President and Treasurer], and its corporate seal to be affixed hereunto, and the same to be attested by its Secretary; and COMMERCE BANK, NATIONAL ASSOCIATION, the party of the second part has caused this Indenture to be signed and acknowledged by one of its Vice Presidents, and its corporate seal to be affixed hereunto, and the same to be attested by its Secretary or Assistant Secretary. Executed and delivered in the City of Kansas City, State of Missouri, on ___________, 1997. (Corporate Seal) FARMLAND INDUSTRIES, INC. ____________________ By Secretary Name: Title: (Corporate Seal) COMMERCE BANK, NATIONAL ASSOCIATION By Name: Title: Assistant Secretary STATE OF MISSOURI ) ) ss. COUNTY OF ___________ ) On this 4th day of December, 1997, before me personally appeared __________________, to be personally known, who, being by me duly sworn, did say that he is the _____________________of FARMLAND INDUSTRIES, INC., Kansas City, Missouri, that the seal affixed to this instrument is the corporate seal of said corporation and that the said instrument was signed and sealed in behalf of said corporation by authority of its Board of Directors, and said ________________________ acknowledged said instrument to be the free act and deed of said corporation. IN TESTIMONY WHEREOF, I have hereunto set my hand and affixed my official seal at my office in Kansas City, Missouri, the day and year last above written. (Notarial Seal) /s/ Notary Public My commission expires: STATE OF MISSOURI ) ) ss. COUNTY OF ___________ ) On this 4th day of December, 1997, before me personally appeared ____________________, to me personally known, who, being by me duly sworn, did say that he is a Vice President assigned to the Trust Division of COMMERCE BANK, NATIONAL ASSOCIATION, Kansas City, Missouri, that the seal affixed to this instrument is the corporate seal of said corporation, and that the said instrument was signed and sealed in behalf of said corporation by authority of its board of directors and said ____________________ acknowledged said instrument to be the free act and deed of said corporation. IN TESTIMONY WHEREOF, I have hereunto set my hand and affixed my official seal at my office in Kansas City, Missouri, the day and year last above written. (Notarial Seal) /s/ Notary Public My commission expires: PRINCIPAL AMOUNT: BOND NUMBER: FARMLAND INDUSTRIES, INC. Kansas City, Missouri 64116 SUBORDINATED DEBENTURE BONDS, TEN-YEAR, SERIES A ___________________________ _______________________ Name Date of Original Issuance ___________________________ _______________________ Street Maturity Date ___________________________ _______________________ City State Interest Rate Farmland Industries, Inc., a Kansas corporation ("Farmland", which term includes any successor corporation under the Indenture referred to herein), for value received, hereby promises to pay to the owner named above or registered assigns (the "Holder"), the principal amount shown above on the Maturity Date specified above (except to the extent redeemed or repaid prior to the Maturity Date), and to pay interest thereon from the most recent date to which interest has been paid or, if no interest has been paid, from the date of original issuance of this Bond (the "Date of Original Issuance") at the interest rate per annum specified above (the "Interest Rate"), computed on the basis of a 365-day year, until the principal hereof is paid or duly made available for payment, and to pay interest on overdue principal and, to the extent permitted by law, overdue interest at the Interest Rate. Payment of principal and interest shall be in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts. Interest is payable at the option of the purchaser, made at the time of original issuance in one of the following ways: (i) semiannually on January 1 and July 1, to Holders of record on the last preceding December 15 and June 15, respectively (or, in the case of the first interest payment date, if originally issued between the record date and the payment date, to the Holder on the Date of Original Issuance); or (ii) at maturity or at the date of redemption if redeemed prior to maturity, compounded semiannually, on December 31 and June 30 at the Interest Rate. Any election to receive payment of interest semiannually is irrevocable. The election to receive payment of interest at maturity, or at the date of redemption if redeemed prior to maturity, will be terminated upon written request of the Holder, such termination to be effective as of the last previous interest compounding date. Such termination is irrevocable and, at the same time, is an election to receive payment of interest semiannually thereafter. Any interest attributable to periods starting with the Date of Original Issuance and ending with the effective date of the written request of the Holder to terminate the election to receive payment of interest at maturity or at the date of redemption if redeemed prior to maturity will be paid upon receipt of the written request to terminate the election. Farmland shall have the right at any time by notice to the Holder to terminate any obligation to continue retaining the interest of any Holder. Such termination shall be effective as of the opening of business on the day following the first interest compounding date after such notice is mailed to the Holder and the Holder will be paid all interest then accrued and unpaid to the Holder on the effective date. If the Maturity Date (or date of redemption or repayment) or an interest payment date falls on a day which is not a business day, principal or interest payable with respect to such Maturity Date (or date of redemption or repayment) or interest payment date will be paid on the next succeeding business day with the same force and effect as if made on such Maturity Date (or date of redemption or repayment) or interest payment date, as the case may be, and no interest shall accrue on the amount so payable for the period from and after such Maturity Date (or any date of redemption or repayment) or interest payment date. This Bond shall not be valid or become obligatory for any purpose until the Certificate of Authentication hereon shall have been signed by the Trustee under the Indenture mentioned on the reverse side hereof. ISSUED THIS DAY OF , 19 Attest: FARMLAND INDUSTRIES, INC. SECRETARY ________________________ BY PRESIDENT ____________________ Trustee's Certificate of Authentication This is one of the Bonds described in the Indenture mentioned on the back hereof. COMMERCE BANK, NATIONAL ASSOCIATION As Trustee By ____________________________________________ Authorized Signature REVERSE SIDE OF TEN-YEAR SERIES A This Bond is one of a duly authorized issue of securities (hereinafter called the "Securities") of Farmland issued and to be issued under an Indenture dated as of ____________________ (herein called the "Indenture") between Farmland and Commerce Bank, National Association, as Trustee (herein called the "Trustee", which term includes any successor trustee under the Indenture), to which the Indenture and all indentures supplemental thereto and the Officers' Certificate (as defined in the Indenture) setting forth the terms of this series of Securities reference is hereby made for a statement of the respective rights, limitation of rights, duties and immunities thereunder of Farmland, the Trustee and the Holders and the terms upon which the Bonds are, and are to be, authenticated and delivered. The Bonds of this series may bear different dates, mature at different times, bear interest at different rates, be subject to different redemption or repayment provisions and may otherwise vary and are entitled to the benefits of the Indenture. Any interest which is payable, but is not punctually paid or duly provided for, on any interest payment date and, to the extent permitted by law, interest on such defaulted interest at the Interest Rate (such defaulted interest and interest thereon herein collectively called "Defaulted Interest") will not be payable to the Holder on the applicable record date; and such Defaulted Interest may be paid by Farmland, at its election in each case, in the time and manner as provided for in the Indenture. Payment of the principal of, premium, if any, and interest on this Bond will be made at the office or agency of Farmland in Kansas City, Missouri; provided, however, that at the option of Farmland payment of interest other than interest paid at maturity, redemption or repayment may be made by check mailed to the address of the person entitled thereto as such address will appear in the Register or by electronic funds transfer or similar means to an account maintained by the person entitled thereto as specified in the Register. If an Event of Default (as defined in the Indenture) with respect to the Bonds shall occur and be continuing, the Trustee or the Holders of not less than a majority in principal amount of the outstanding Bonds may declare the principal of and accrued interest on all the Bonds due and payable in the manner and with the effect and subject to the conditions provided in the Indenture. Upon certain events of bankruptcy, insolvency or reorganization of Farmland, the principal of and accrued interest on all of the Bonds shall become due and payable without any declaration by the Trustee or the Holders. The Indenture contains provisions permitting Farmland and the Trustee to enter into one or more supplemental indentures under certain situations without the consent of the Holders of any of the Bonds. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of Farmland and the rights of the Holders of the Securities of each series under the Indenture to be affected at any time by Farmland and the Trustee with the consent of the Holders of a majority in aggregate principal amount of the Outstanding Securities (as defined in the Indenture) of each series affected thereby. The Indenture also contains provisions permitting the Holders of specified percentages in aggregate principal amount of the Outstanding Securities of each series under the Indenture, on behalf of the Holders of all Securities of such series, to waive compliance by Farmland with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Bond shall be conclusive and binding upon such Holder and upon all future Holders of this Bond and of any Bond issued upon the registration of transfer hereof or in exchange hereof or in lieu hereof, whether or not notation of such consent or waiver is made upon this Bond. No reference herein to the Indenture and no provision of this Bond or of the Indenture shall alter or impair the obligation of Farmland, which is absolute and unconditional, to pay the principal of and interest on this Bond at the times, places, and rate, and in the coin or currency, herein prescribed. This Bond may be redeemed, after two (2) years from Date of Original Issuance, at the option of Farmland at any time prior to maturity, on at least fifteen (15) days written notice, at face value plus accrued interest to the date of redemption only. The Indenture permits Farmland to select in any manner at its discretion the Bonds to be redeemed. Subject to the conditions hereinafter set forth, this Bond may be redeemed at the option of the Holder. (1)At any time three (3) years after the Date of Original Issuance, the Holder may request redemption of this Bond from Farmland. Farmland will redeem prior to maturity each month, on a first come, first serve basis (as evidenced by the time stamped or otherwise recorded as the time of receipt by Farmland) a limited amount of Redemption Eligible Bonds. Subject to the carryover discussed below, the aggregate maximum amount of Redemption Eligible Bonds, as a group, that Farmland will redeem each month will be the greater of: (a) $1,500,000 or (b) 1/2 of 1% of the combined total principal balance outstanding of all Redemption Eligible Bonds outstanding at the end of the prior month. For purposes of the foregoing, "Redemption Eligible Bonds" mean Ten-Year, Series A Bonds, Ten-Year, Series B Bonds, Five-Year, Series C Bonds, and Five-Year, Series D Bonds issued under the Indenture and any other subordinated debt that Farmland elects to designate as a "Redemption Eligible Bond". If the amount determined pursuant to the foregoing formula in any month (including any carryover from the prior month) exceeds the total amount requested for redemption prior to maturity in that month, such excess is carried over to the next month and added to the amount available for redemption prior to maturity in that month; provided, however, that any excess will not be carried beyond the end of Farmland's fiscal year. If the total balance of outstanding Bonds of this series is less than $5,000,000 at the end of any month, then in the following month any Bonds of this series which have been held at least three (3) years from the Date of Original Issuance will be redeemed at the request of the Holder without regard to the above dollar limitation. (2) In addition to the amounts made available for redemption prior to maturity at the option of the Holder as described in (1) above, redemption will be made in the case of death of Holder upon written request and delivery of satisfactory proof of death and other documentation and in accordance with applicable laws. (3) In addition to the amounts made available for redemption prior to maturity at the option of the Holder as described in (1) and (2) above, if this Bond is held in an Individual Retirement Account (an "IRA") established under Section 408 of the Internal Revenue Code of 1986, as amended (the "IRC"), Farmland will redeem this Bond, upon written request, to the extent necessary to satisfy mandatory withdrawals from the IRA which are required by the IRC. Such redemption will be made only upon sufficient proof to Farmland that a mandatory withdrawal from the IRA is required. (4) The foregoing redemption privileges described in (1), (2) and (3) above are subject to the condition as provided under the subordination provisions applicable to the Subordinated Debenture Bonds, that Farmland cannot redeem any of the Subordinated Debenture Bonds if, at the time of or immediately after giving effect to such redemption, there shall exist under any Senior Indebtedness or any indenture or agreement pursuant to which any Senior Indebtedness is issued any default or any condition, event or act, which, with notice or lapse of time, or both, would constitute a default. Redemption prior to maturity will be made, subject to the aforementioned conditions, upon the surrender of this Bond, properly endorsed and accompanied by written requests for early redemption to Farmland. Redemption prior to maturity will be made at the face value of this Bond plus accrued interest to the date of redemption. Amounts available for redemption prior to maturity are not set aside in a separate fund. This Bond shall be subordinate, to the extent and in the manner provided in the Indenture, in right of payment to the prior payment in full of all Senior Indebtedness (as defined in the Indenture) and this Bond is issued subject to the provisions of the Indenture with respect thereto. Each Holder of this Bond, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee on his or her or its behalf to take such action as may be necessary or appropriate to acknowledge or effectuate the subordination so provided and (c) appoints the Trustee his or her or its attorney-in-fact for any and all such purposes. As provided in the Indenture, and subject to certain limitations therein set forth, the transfer of this Bond may be registered on the Register upon surrender of this Bond for registration of transfer at the office or agency of Farmland, in Kansas City, Missouri, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to Farmland duly executed by the Holder or by his attorney duly authorized in writing, and thereupon one or more new Bonds of this series having the same terms as this Bond, of authorized denominations, having the same terms and conditions and for the same aggregate principal amount, will be issued to the designated transferee or transferees. The Bonds are issuable only in registered form, without coupons. As provided in the Indenture, and subject to certain limitations therein set forth, this Bond is exchangeable for a like aggregate principal amount of Bonds having the same terms as this Bond of different authorized denominations, as requested by the Holder surrendering the same. No service charge will be made for any such registration of transfer or exchange of Bonds, but Farmland may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith. Prior to due presentment of this Bond for registration of transfer, Farmland, the Trustee and any agent of Farmland or the Trustee may treat the person in whose name this Bond is registered as the owner hereof for all purposes, whether or not this Bond be overdue, and neither Farmland, the Trustee nor any such agent shall be affected by notice to the contrary. All terms used in this Bond which are defined in the Indenture shall have the meanings designated to them in the Indenture and all references in the Indenture to "Security" or "Securities" shall be deemed to include the Bonds. For value received, I, we and each of us hereby sell, assign and transfer the within Bond and the indebtedness evidenced thereby to ___________________________________________________________ of _________________________________________________________ (ADDRESS) (CITY OR TOWN) STATE THIS ASSIGNMENT WILL BECOME EFFECTIVE ONLY WHEN MADE AND ENTERED ON THE BOOKS OF FARMLAND INDUSTRIES, INC. { __________ {___________________________________ DATE { (SIGNED) ENDORSEMENT { ___________________________________ (SIGNED) PRINCIPAL AMOUNT: BOND NUMBER: FARMLAND INDUSTRIES, INC. Kansas City, Missouri 64116 SUBORDINATED DEBENTURE BONDS, TEN-YEAR, SERIES B ___________________________ _______________________ Name Date of Original Issuance ___________________________ _______________________ Street Maturity Date ___________________________ _______________________ City State Interest Rate Farmland Industries, Inc., a Kansas corporation ("Farmland", which term includes any successor corporation under the Indenture referred to herein), for value received, hereby promises to pay to the owner named above or registered assigns (the "Holder"), the principal amount shown above on the Maturity Date specified above (except to the extent redeemed or repaid prior to the Maturity Date), and to pay interest thereon from the most recent date to which interest has been paid or, if no interest has been paid, from the date of original issuance of this Bond (the "Date of Original Issuance") at the interest rate per annum specified above (the "Interest Rate"), computed on the basis of a 365-day year, until the principal hereof is paid or duly made available for payment, and to pay interest on overdue principal and, to the extent permitted by law, overdue interest at the Interest Rate. Payment of principal and interest shall be in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts. Interest is payable at the option of the purchaser, made at the time of original issuance in one of the following ways: (i) semiannually on January 1 and July 1, to Holders of record on the last preceding December 15 and June 15, respectively (or, in the case of the first interest payment date, if originally issued between the record date and the payment date, to the Holder on the Date of Original Issuance); or (ii) at maturity or at the date of redemption if redeemed prior to maturity, compounded semiannually, on December 31 and June 30 at the Interest Rate. Any election to receive payment of interest semiannually is irrevocable. The election to receive payment of interest at maturity, or at the date of redemption if redeemed prior to maturity, will be terminated upon written request of the Holder, such termination to be effective as of the last previous interest compounding date. Such termination is irrevocable and, at the same time, is an election to receive payment of interest semiannually thereafter. Any interest attributable to periods starting with the Date of Original Issuance and ending with the effective date of the written request of the Holder to terminate the election to receive payment of interest at maturity or at the date of redemption if redeemed prior to maturity will be paid upon receipt of the written request to terminate the election. Farmland shall have the right at any time by notice to the Holder to terminate any obligation to continue retaining the interest of any Holder. Such termination shall be effective as of the opening of business on the day following the first interest compounding date after such notice is mailed to the Holder and the Holder will be paid all interest then accrued and unpaid to the Holder on the effective date. If the Maturity Date (or date of redemption or repayment) or an interest payment date falls on a day which is not a business day, principal or interest payable with respect to such Maturity Date (or date of redemption or repayment) or interest payment date will be paid on the next succeeding business day with the same force and effect as if made on such Maturity Date (or date of redemption or repayment) or interest payment date, as the case may be, and no interest shall accrue on the amount so payable for the period from and after such Maturity Date (or any date of redemption or repayment) or interest payment date. This Bond shall not be valid or become obligatory for any purpose until the Certificate of Authentication hereon shall have been signed by the Trustee under the Indenture mentioned on the reverse side hereof. ISSUED THIS DAY OF , 19 Attest: FARMLAND INDUSTRIES, INC. SECRETARY ________________________ BY PRESIDENT ____________________ Trustee's Certificate of Authentication This is one of the Bonds described in the Indenture mentioned on the back hereof. COMMERCE BANK, NATIONAL ASSOCIATION As Trustee By ____________________________________________ Authorized Signature REVERSE SIDE OF TEN-YEAR SERIES B This Bond is one of a duly authorized issue of securities (hereinafter called the "Securities") of Farmland issued and to be issued under an Indenture dated as of ____________________ (herein called the "Indenture") between Farmland and Commerce Bank, National Association, as Trustee (herein called the "Trustee", which term includes any successor trustee under the Indenture), to which the Indenture and all indentures supplemental thereto and the Officers' Certificate (as defined in the Indenture) setting forth the terms of this series of Securities reference is hereby made for a statement of the respective rights, limitation of rights, duties and immunities thereunder of Farmland, the Trustee and the Holders and the terms upon which the Bonds are, and are to be, authenticated and delivered. The Bonds of this series may bear different dates, mature at different times, bear interest at different rates, be subject to different redemption or repayment provisions and may otherwise vary and are entitled to the benefits of the Indenture. Any interest which is payable, but is not punctually paid or duly provided for, on any interest payment date and, to the extent permitted by law, interest on such defaulted interest at the Interest Rate (such defaulted interest and interest thereon herein collectively called "Defaulted Interest") will not be payable to the Holder on the applicable record date; and such Defaulted Interest may be paid by Farmland, at its election in each case, in the time and manner as provided for in the Indenture. Payment of the principal of, premium, if any, and interest on this Bond will be made at the office or agency of Farmland in Kansas City, Missouri; provided, however, that at the option of Farmland payment of interest other than interest paid at maturity, redemption or repayment may be made by check mailed to the address of the person entitled thereto as such address will appear in the Register or by electronic funds transfer or similar means to an account maintained by the person entitled thereto as specified in the Register. If an Event of Default (as defined in the Indenture) with respect to the Bonds shall occur and be continuing, the Trustee or the Holders of not less than a majority in principal amount of the outstanding Bonds may declare the principal of and accrued interest on all the Bonds due and payable in the manner and with the effect and subject to the conditions provided in the Indenture. Upon certain events of bankruptcy, insolvency or reorganization of Farmland, the principal of and accrued interest on all of the Bonds shall become due and payable without any declaration by the Trustee or the Holders. The Indenture contains provisions permitting Farmland and the Trustee to enter into one or more supplemental indentures under certain situations without the consent of the Holders of any of the Bonds. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of Farmland and the rights of the Holders of the Securities of each series under the Indenture to be affected at any time by Farmland and the Trustee with the consent of the Holders of a majority in aggregate principal amount of the Outstanding Securities (as defined in the Indenture) of each series affected thereby. The Indenture also contains provisions permitting the Holders of specified percentages in aggregate principal amount of the Outstanding Securities of each series under the Indenture, on behalf of the Holders of all Securities of such series, to waive compliance by Farmland with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Bond shall be conclusive and binding upon such Holder and upon all future Holders of this Bond and of any Bond issued upon the registration of transfer hereof or in exchange hereof or in lieu hereof, whether or not notation of such consent or waiver is made upon this Bond. No reference herein to the Indenture and no provision of this Bond or of the Indenture shall alter or impair the obligation of Farmland, which is absolute and unconditional, to pay the principal of and interest on this Bond at the times, places, and rate, and in the coin or currency, herein prescribed. This Bond may be redeemed, after two (2) years from Date of Original Issuance, at the option of Farmland at any time prior to maturity, on at least fifteen (15) days written notice, at face value plus accrued interest to the date of redemption only. The Indenture permits Farmland to select in any manner at its discretion the Bonds to be redeemed. Subject to the conditions hereinafter set forth, this Bond may be redeemed at the option of the Holder. (1)At any time three (3) years after the Date of Original Issuance, the Holder may request redemption of this Bond from Farmland. Farmland will redeem prior to maturity each month, on a first come, first serve basis (as evidenced by the time stamped or otherwise recorded as the time of receipt by Farmland) a limited amount of Redemption Eligible Bonds. Subject to the carryover discussed below, the aggregate maximum amount of Redemption Eligible Bonds, as a group, that Farmland will redeem each month will be the greater of: (a) $1,500,000 or (b) 1/2 of 1% of the combined total principal balance outstanding of all Redemption Eligible Bonds outstanding at the end of the prior month. For purposes of the foregoing, "Redemption Eligible Bonds" mean Ten-Year, Series A Bonds, Ten-Year, Series B Bonds, Five-Year, Series C Bonds, and Five-Year, Series D Bonds issued under the Indenture and any other subordinated debt that Farmland elects to designate as a "Redemption Eligible Bond". If the amount determined pursuant to the foregoing formula in any month (including any carryover from the prior month) exceeds the total amount requested for redemption prior to maturity in that month, such excess is carried over to the next month and added to the amount available for redemption prior to maturity in that month; provided, however, that any excess will not be carried beyond the end of Farmland's fiscal year. If the total balance of outstanding Bonds of this series is less than $5,000,000 at the end of any month, then in the following month any Bonds of this series which have been held at least three (3) years from the Date of Original Issuance will be redeemed at the request of the Holder without regard to the above dollar limitation. (2) In addition to the amounts made available for redemption prior to maturity at the option of the Holder as described in (1) above, redemption will be made in the case of death of Holder upon written request and delivery of satisfactory proof of death and other documentation and in accordance with applicable laws. (3) In addition to the amounts made available for redemption prior to maturity at the option of the Holder as described in (1) and (2) above, if this Bond is held in an Individual Retirement Account (an "IRA") established under Section 408 of the Internal Revenue Code of 1986, as amended (the "IRC"), Farmland will redeem this Bond, upon written request, to the extent necessary to satisfy mandatory withdrawals from the IRA which are required by the IRC. Such redemption will be made only upon sufficient proof to Farmland that a mandatory withdrawal from the IRA is required. (4) The foregoing redemption privileges described in (1), (2) and (3) above are subject to the condition as provided under the subordination provisions applicable to the Subordinated Debenture Bonds, that Farmland cannot redeem any of the Subordinated Debenture Bonds if, at the time of or immediately after giving effect to such redemption, there shall exist under any Senior Indebtedness or any indenture or agreement pursuant to which any Senior Indebtedness is issued any default or any condition, event or act, which, with notice or lapse of time, or both, would constitute a default. Redemption prior to maturity will be made, subject to the aforementioned conditions, upon the surrender of this Bond, properly endorsed and accompanied by written requests for early redemption to Farmland. Redemption prior to maturity will be made at the face value of this Bond plus accrued interest to the date of redemption. Amounts available for redemption prior to maturity are not set aside in a separate fund. This Bond shall be subordinate, to the extent and in the manner provided in the Indenture, in right of payment to the prior payment in full of all Senior Indebtedness (as defined in the Indenture) and this Bond is issued subject to the provisions of the Indenture with respect thereto. Each Holder of this Bond, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee on his or her or its behalf to take such action as may be necessary or appropriate to acknowledge or effectuate the subordination so provided and (c) appoints the Trustee his or her or its attorney-in-fact for any and all such purposes. As provided in the Indenture, and subject to certain limitations therein set forth, the transfer of this Bond may be registered on the Register upon surrender of this Bond for registration of transfer at the office or agency of Farmland, in Kansas City, Missouri, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to Farmland duly executed by the Holder or by his attorney duly authorized in writing, and thereupon one or more new Bonds of this series having the same terms as this Bond, of authorized denominations, having the same terms and conditions and for the same aggregate principal amount, will be issued to the designated transferee or transferees. The Bonds are issuable only in registered form, without coupons. As provided in the Indenture, and subject to certain limitations therein set forth, this Bond is exchangeable for a like aggregate principal amount of Bonds having the same terms as this Bond of different authorized denominations, as requested by the Holder surrendering the same. No service charge will be made for any such registration of transfer or exchange of Bonds, but Farmland may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith. Prior to due presentment of this Bond for registration of transfer, Farmland, the Trustee and any agent of Farmland or the Trustee may treat the person in whose name this Bond is registered as the owner hereof for all purposes, whether or not this Bond be overdue, and neither Farmland, the Trustee nor any such agent shall be affected by notice to the contrary. All terms used in this Bond which are defined in the Indenture shall have the meanings designated to them in the Indenture and all references in the Indenture to "Security" or "Securities" shall be deemed to include the Bonds. For value received, I, we and each of us hereby sell, assign and transfer the within Bond and the indebtedness evidenced thereby to ___________________________________________________________ of _________________________________________________________ (ADDRESS) (CITY OR TOWN) STATE THIS ASSIGNMENT WILL BECOME EFFECTIVE ONLY WHEN MADE AND ENTERED ON THE BOOKS OF FARMLAND INDUSTRIES, INC. { __________ {___________________________________ DATE { (SIGNED) ENDORSEMENT { ___________________________________ (SIGNED) PRINCIPAL AMOUNT: BOND NUMBER: FARMLAND INDUSTRIES, INC. Kansas City, Missouri 64116 SUBORDINATED DEBENTURE BONDS, FIVE-YEAR, SERIES C ___________________________ _______________________ Name Date of Original Issuance ___________________________ _______________________ Street Maturity Date ___________________________ _______________________ City State Interest Rate Farmland Industries, Inc., a Kansas corporation ("Farmland", which term includes any successor corporation under the Indenture referred to herein), for value received, hereby promises to pay to the owner named above or registered assigns (the "Holder"), the principal amount shown above on the Maturity Date specified above (except to the extent redeemed or repaid prior to the Maturity Date), and to pay interest thereon from the most recent date to which interest has been paid or, if no interest has been paid, from the date of original issuance of this Bond (the "Date of Original Issuance") at the interest rate per annum specified above (the "Interest Rate"), computed on the basis of a 365-day year, until the principal hereof is paid or duly made available for payment, and to pay interest on overdue principal and, to the extent permitted by law, overdue interest at the Interest Rate. Payment of principal and interest shall be in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts. Interest is payable at the option of the purchaser, made at the time of original issuance in one of the following ways: (i) semiannually on January 1 and July 1, to Holders of record on the last preceding December 15 and June 15, respectively (or, in the case of the first interest payment date, if originally issued between the record date and the payment date, to the Holder on the Date of Original Issuance); or (ii) at maturity or at the date of redemption if redeemed prior to maturity, compounded semiannually, on December 31 and June 30 at the Interest Rate. Any election to receive payment of interest semiannually is irrevocable. The election to receive payment of interest at maturity, or at the date of redemption if redeemed prior to maturity, will be terminated upon written request of the Holder, such termination to be effective as of the last previous interest compounding date. Such termination is irrevocable and, at the same time, is an election to receive payment of interest semiannually thereafter. Any interest attributable to periods starting with the Date of Original Issuance and ending with the effective date of the written request of the Holder to terminate the election to receive payment of interest at maturity or at the date of redemption if redeemed prior to maturity will be paid upon receipt of the written request to terminate the election. Farmland shall have the right at any time by notice to the Holder to terminate any obligation to continue retaining the interest of any Holder. Such termination shall be effective as of the opening of business on the day following the first interest compounding date after such notice is mailed to the Holder and the Holder will be paid all interest then accrued and unpaid to the Holder on the effective date. If the Maturity Date (or date of redemption or repayment) or an interest payment date falls on a day which is not a business day, principal or interest payable with respect to such Maturity Date (or date of redemption or repayment) or interest payment date will be paid on the next succeeding business day with the same force and effect as if made on such Maturity Date (or date of redemption or repayment) or interest payment date, as the case may be, and no interest shall accrue on the amount so payable for the period from and after such Maturity Date (or any date of redemption or repayment) or interest payment date. This Bond shall not be valid or become obligatory for any purpose until the Certificate of Authentication hereon shall have been signed by the Trustee under the Indenture mentioned on the reverse side hereof. ISSUED THIS DAY OF , 19 Attest: FARMLAND INDUSTRIES, INC. SECRETARY ________________________ BY PRESIDENT ____________________ Trustee's Certificate of Authentication This is one of the Bonds described in the Indenture mentioned on the back hereof. COMMERCE BANK, NATIONAL ASSOCIATION As Trustee By ____________________________________________ Authorized Signature REVERSE SIDE OF FIVE-YEAR SERIES C This Bond is one of a duly authorized issue of securities (hereinafter called the "Securities") of Farmland issued and to be issued under an Indenture dated as of ____________________ (herein called the "Indenture") between Farmland and Commerce Bank, National Association, as Trustee (herein called the "Trustee", which term includes any successor trustee under the Indenture), to which the Indenture and all indentures supplemental thereto and the Officers' Certificate (as defined in the Indenture) setting forth the terms of this series of Securities reference is hereby made for a statement of the respective rights, limitation of rights, duties and immunities thereunder of Farmland, the Trustee and the Holders and the terms upon which the Bonds are, and are to be, authenticated and delivered. The Bonds of this series may bear different dates, mature at different times, bear interest at different rates, be subject to different redemption or repayment provisions and may otherwise vary and are entitled to the benefits of the Indenture. Any interest which is payable, but is not punctually paid or duly provided for, on any interest payment date and, to the extent permitted by law, interest on such defaulted interest at the Interest Rate (such defaulted interest and interest thereon herein collectively called "Defaulted Interest") will not be payable to the Holder on the applicable record date; and such Defaulted Interest may be paid by Farmland, at its election in each case, in the time and manner as provided for in the Indenture. Payment of the principal of, premium, if any, and interest on this Bond will be made at the office or agency of Farmland in Kansas City, Missouri; provided, however, that at the option of Farmland payment of interest other than interest paid at maturity, redemption or repayment may be made by check mailed to the address of the person entitled thereto as such address shall appear in the Register or by electronic funds transfer or similar means to an account maintained by the person entitled thereto as specified in the Register. If an Event of Default (as defined in the Indenture) with respect to the Bonds shall occur and be continuing, the Trustee or the Holders of not less than a majority in principal amount of the outstanding Bonds may declare the principal of and accrued interest on all the Bonds due and payable in the manner and with the effect and subject to the conditions provided in the Indenture. Upon certain events of bankruptcy, insolvency or reorganization of Farmland, the principal of and accrued interest on all of the Bonds shall become due and payable without any declaration by the Trustee or the Holders. The Indenture contains provisions permitting Farmland and the Trustee to enter into one or more supplemental indentures under certain situations without the consent of the Holders of any of the Bonds. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of Farmland and the rights of the Holders of the Securities of each series under the Indenture to be affected at any time by Farmland and the Trustee with the consent of the Holders of a majority in aggregate principal amount of the Outstanding Securities (as defined in the Indenture) of each series affected thereby. The Indenture also contains provisions permitting the Holders of specified percentages in aggregate principal amount of the Outstanding Securities of each series under the Indenture, on behalf of the Holders of all Securities of such series, to waive compliance by Farmland with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Bond shall be conclusive and binding upon such Holder and upon all future Holders of this Bond and of any Bond issued upon the registration of transfer hereof or in exchange hereof or in lieu hereof, whether or not notation of such consent or waiver is made upon this Bond. No reference herein to the Indenture and no provision of this Bond or of the Indenture shall alter or impair the obligation of Farmland, which is absolute and unconditional, to pay the principal of and interest on this Bond at the times, places, and rate, and in the coin or currency, herein prescribed. This Bond may be redeemed, after two (2) years from Date of Original Issuance, at the option of Farmland at any time prior to maturity, on at least fifteen (15) days written notice, at face value plus accrued interest to the date of redemption only. The Indenture permits Farmland to select in any manner at its discretion the Bonds to be redeemed. Subject to the conditions hereinafter set forth, this Bond may be redeemed at the option of the Holder. (1)At any time two (2) years after the Date of Original Issuance, the Holder may request redemption of this Bond from Farmland. Farmland will redeem prior to maturity each month, on a first come, first serve basis (as evidenced by the time stamped or otherwise recorded as the time of receipt by Farmland) a limited amount of Redemption Eligible Bonds. Subject to the carryover discussed below, the aggregate maximum amount of Redemption Eligible Bonds, as a group, that Farmland will redeem each month will be the greater of: (a) $1,500,000 or (b) 1/2 of 1% of the combined total principal balance outstanding of all Redemption Eligible Bonds outstanding at the end of the prior month. For purposes of the foregoing, "Redemption Eligible Bonds" mean Ten- Year, Series A Bonds, Ten-Year, Series B Bonds, Five-Year, Series C Bonds, and Five-Year, Series D Bonds issued under the Indenture and any other subordinated debt that Farmland elects to designate as a "Redemption Eligible Bond". If the amount determined pursuant to the foregoing formula in any month (including any carryover from the prior month) exceeds the total amount requested for redemption prior to maturity in that month, such excess is carried over to the next month and added to the amount available for redemption prior to maturity in that month; provided, however, that any excess will not be carried beyond the end of Farmland's fiscal year. If the total balance of outstanding Bonds of this series is less than $5,000,000 at the end of any month, then in the following month any Bonds of this series which have been held at least two (2) years from the Date of Original Issuance will be redeemed at the request of the Holder without regard to the above dollar limitation. (2) In addition to the amounts made available for redemption prior to maturity at the option of the Holder as described in (1) above, redemption will be made in the case of death of Holder upon written request and delivery of satisfactory proof of death and other documentation and in accordance with applicable laws. (3) In addition to the amounts made available for redemption prior to maturity at the option of the Holder as described in (1) and (2) above, if this Bond is held in an Individual Retirement Account (an "IRA") established under Section 408 of the Internal Revenue Code of 1986, as amended (the "IRC"), Farmland will redeem this Bond, upon written request, to the extent necessary to satisfy mandatory withdrawals from the IRA which are required by the IRC. Such redemption will be made only upon sufficient proof to Farmland that a mandatory withdrawal from the IRA is required. (4) The foregoing redemption privileges described in (1), (2) and (3) above are subject to the condition as provided under the subordination provisions applicable to the Subordinated Debenture Bonds, that Farmland cannot redeem any of the Subordinated Debenture Bonds if, at the time of or immediately after giving effect to such redemption, there shall exist under any Senior Indebtedness or any indenture or agreement pursuant to which any Senior Indebtedness is issued any default or any condition, event or act, which, with notice or lapse of time, or both, would constitute a default. Redemption prior to maturity will be made, subject to the aforementioned conditions, upon the surrender of this Bond, properly endorsed and accompanied by written requests for early redemption to Farmland. Redemption prior to maturity will be made at the face value of this Bond plus accrued interest to the date of redemption. Amounts available for redemption prior to maturity are not set aside in a separate fund. This Bond shall be subordinate, to the extent and in the manner provided in the Indenture, in right of payment to the prior payment in full of all Senior Indebtedness (as defined in the Indenture) and this Bond is issued subject to the provisions of the Indenture with respect thereto. Each Holder of this Bond, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee on his or her or its behalf to take such action as may be necessary or appropriate to acknowledge or effectuate the subordination so provided and (c) appoints the Trustee his or her or its attorney-in-fact for any and all such purposes. As provided in the Indenture, and subject to certain limitations therein set forth, the transfer of this Bond may be registered on the Register upon surrender of this Bond for registration of transfer at the office or agency of Farmland, in Kansas City, Missouri, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to Farmland duly executed by the Holder or by his attorney duly authorized in writing, and thereupon one or more new Bonds of this series having the same terms as this Bond, of authorized denominations, having the same terms and conditions and for the same aggregate principal amount, will be issued to the designated transferee or transferees. The Bonds are issuable only in registered form, without coupons. As provided in the Indenture, and subject to certain limitations therein set forth, this Bond is exchangeable for a like aggregate principal amount of Bonds having the same terms as this Bond of different authorized denominations, as requested by the Holder surrendering the same. No service charge will be made for any such registration of transfer or exchange of Bonds, but Farmland may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith. Prior to due presentment of this Bond for registration of transfer, Farmland, the Trustee and any agent of Farmland or the Trustee may treat the person in whose name this Bond is registered as the owner hereof for all purposes, whether or not this Bond be overdue, and neither Farmland, the Trustee nor any such agent shall be affected by notice to the contrary. All terms used in this Bond which are defined in the Indenture shall have the meanings designated to them in the Indenture and all references in the Indenture to "Security" or "Securities" shall be deemed to include the Bonds. For value received, I, we and each of us hereby sell, assign and transfer the within Bond and the indebtedness evidenced thereby to ____________________________________________________________ of _________________________________________________________ (ADDRESS) (CITY OR TOWN) STATE THIS ASSIGNMENT WILL BECOME EFFECTIVE ONLY WHEN MADE AND ENTERED ON THE BOOKS OF FARMLAND INDUSTRIES, INC. { __________ {___________________________________ DATE { (SIGNED) ENDORSEMENT { ___________________________________ (SIGNED) PRINCIPAL AMOUNT: BOND NUMBER: FARMLAND INDUSTRIES, INC. Kansas City, Missouri 64116 SUBORDINATED DEBENTURE BONDS, FIVE-YEAR, SERIES D ___________________________ _______________________ Name Date of Original Issuance ___________________________ _______________________ Street Maturity Date ___________________________ _______________________ City State Interest Rate Farmland Industries, Inc., a Kansas corporation ("Farmland", which term includes any successor corporation under the Indenture referred to herein), for value received, hereby promises to pay to the owner named above or registered assigns (the "Holder"), the principal amount shown above on the Maturity Date specified above (except to the extent redeemed or repaid prior to the Maturity Date), and to pay interest thereon from the most recent date to which interest has been paid or, if no interest has been paid, from the date of original issuance of this Bond (the "Date of Original Issuance") at the interest rate per annum specified above (the "Interest Rate"), computed on the basis of a 365-day year, until the principal hereof is paid or duly made available for payment, and to pay interest on overdue principal and, to the extent permitted by law, overdue interest at the Interest Rate. Payment of principal and interest shall be in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts. Interest is payable at the option of the purchaser, made at the time of original issuance in one of the following ways: (i) semiannually on January 1 and July 1, to Holders of record on the last preceding December 15 and June 15, respectively (or, in the case of the first interest payment date, if originally issued between the record date and the payment date, to the Holder on the Date of Original Issuance); or (ii) at maturity or at the date of redemption if redeemed prior to maturity, compounded semiannually, on December 31 and June 30 at the Interest Rate. Any election to receive payment of interest semiannually is irrevocable. The election to receive payment of interest at maturity, or at the date of redemption if redeemed prior to maturity, will be terminated upon written request of the Holder, such termination to be effective as of the last previous interest compounding date. Such termination is irrevocable and, at the same time, is an election to receive payment of interest semiannually thereafter. Any interest attributable to periods starting with the Date of Original Issuance and ending with the effective date of the written request of the Holder to terminate the election to receive payment of interest at maturity or at the date of redemption if redeemed prior to maturity will be paid upon receipt of the written request to terminate the election. Farmland shall have the right at any time by notice to the Holder to terminate any obligation to continue retaining the interest of any Holder. Such termination shall be effective as of the opening of business on the day following the first interest compounding date after such notice is mailed to the Holder and the Holder will be paid all interest then accrued and unpaid to the Holder on the effective date. If the Maturity Date (or date of redemption or repayment) or an interest payment date falls on a day which is not a business day, principal or interest payable with respect to such Maturity Date (or date of redemption or repayment) or interest payment date will be paid on the next succeeding business day with the same force and effect as if made on such Maturity Date (or date of redemption or repayment) or interest payment date, as the case may be, and no interest shall accrue on the amount so payable for the period from and after such Maturity Date (or any date of redemption or repayment) or interest payment date. This Bond shall not be valid or become obligatory for any purpose until the Certificate of Authentication hereon shall have been signed by the Trustee under the Indenture mentioned on the reverse side hereof. ISSUED THIS DAY OF , 19 Attest: FARMLAND INDUSTRIES, INC. SECRETARY ________________________ BY PRESIDENT ____________________ Trustee's Certificate of Authentication This is one of the Bonds described in the Indenture mentioned on the back hereof. COMMERCE BANK, NATIONAL ASSOCIATION As Trustee By ____________________________________________ Authorized Signature REVERSE SIDE OF FIVE-YEAR SERIES D This Bond is one of a duly authorized issue of securities (hereinafter called the "Securities") of Farmland issued and to be issued under an Indenture dated as of ____________________ (herein called the "Indenture") between Farmland and Commerce Bank, National Association, as Trustee (herein called the "Trustee", which term includes any successor trustee under the Indenture), to which the Indenture and all indentures supplemental thereto and the Officers' Certificate (as defined in the Indenture) setting forth the terms of this series of Securities reference is hereby made for a statement of the respective rights, limitation of rights, duties and immunities thereunder of Farmland, the Trustee and the Holders and the terms upon which the Bonds are, and are to be, authenticated and delivered. The Bonds of this series may bear different dates, mature at different times, bear interest at different rates, be subject to different redemption or repayment provisions and may otherwise vary and are entitled to the benefits of the Indenture. Any interest which is payable, but is not punctually paid or duly provided for, on any interest payment date and, to the extent permitted by law, interest on such defaulted interest at the Interest Rate (such defaulted interest and interest thereon herein collectively called "Defaulted Interest") will not be payable to the Holder on the applicable record date; and such Defaulted Interest may be paid by Farmland, at its election in each case, in the time and manner as provided for in the Indenture. Payment of the principal of, premium, if any, and interest on this Bond will be made at the office or agency of Farmland in Kansas City, Missouri; provided, however, that at the option of Farmland payment of interest other than interest paid at maturity, redemption or repayment may be made by check mailed to the address of the person entitled thereto as such address shall appear in the Register or by electronic funds transfer or similar means to an account maintained by the person entitled thereto as specified in the Register. If an Event of Default (as defined in the Indenture) with respect to the Bonds shall occur and be continuing, the Trustee or the Holders of not less than a majority in principal amount of the outstanding Bonds may declare the principal of and accrued interest on all the Bonds due and payable in the manner and with the effect and subject to the conditions provided in the Indenture. Upon certain events of bankruptcy, insolvency or reorganization of Farmland, the principal of and accrued interest on all of the Bonds shall become due and payable without any declaration by the Trustee or the Holders. The Indenture contains provisions permitting Farmland and the Trustee to enter into one or more supplemental indentures under certain situations without the consent of the Holders of any of the Bonds. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of Farmland and the rights of the Holders of the Securities of each series under the Indenture to be affected at any time by Farmland and the Trustee with the consent of the Holders of a majority in aggregate principal amount of the Outstanding Securities (as defined in the Indenture) of each series affected thereby. The Indenture also contains provisions permitting the Holders of specified percentages in aggregate principal amount of the Outstanding Securities of each series under the Indenture, on behalf of the Holders of all Securities of such series, to waive compliance by Farmland with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Bond shall be conclusive and binding upon such Holder and upon all future Holders of this Bond and of any Bond issued upon the registration of transfer hereof or in exchange hereof or in lieu hereof, whether or not notation of such consent or waiver is made upon this Bond. No reference herein to the Indenture and no provision of this Bond or of the Indenture shall alter or impair the obligation of Farmland, which is absolute and unconditional, to pay the principal of and interest on this Bond at the times, places, and rate, and in the coin or currency, herein prescribed. This Bond may be redeemed, after two (2) years from Date of Original Issuance, at the option of Farmland at any time prior to maturity, on at least fifteen (15) days written notice, at face value plus accrued interest to the date of redemption only. The Indenture permits Farmland to select in any manner at its discretion the Bonds to be redeemed. Subject to the conditions hereinafter set forth, this Bond may be redeemed at the option of the Holder. (1)At any time two (2) years after the Date of Original Issuance, the Holder may request redemption of this Bond from Farmland. Farmland will redeem prior to maturity each month, on a first come, first serve basis (as evidenced by the time stamped or otherwise recorded as the time of receipt by Farmland) a limited amount of Redemption Eligible Bonds. Subject to the carryover discussed below, the aggregate maximum amount of Redemption Eligible Bonds, as a group, that Farmland will redeem each month will be the greater of: (a) $1,500,000 or (b) 1/2 of 1% of the combined total principal balance outstanding of all Redemption Eligible Bonds outstanding at the end of the prior month. For purposes of the foregoing, "Redemption Eligible Bonds" mean Ten- Year, Series A Bonds, Ten-Year, Series B Bonds, Five-Year, Series C Bonds, and Five-Year, Series D Bonds issued under the Indenture and any other subordinated debt that Farmland elects to designate as a "Redemption Eligible Bond". If the amount determined pursuant to the foregoing formula in any month (including any carryover from the prior month) exceeds the total amount requested for redemption prior to maturity in that month, such excess is carried over to the next month and added to the amount available for redemption prior to maturity in that month; provided, however, that any excess will not be carried beyond the end of Farmland's fiscal year. If the total balance of outstanding Bonds of this series is less than $5,000,000 at the end of any month, then in the following month any Bonds of this series which have been held at least two (2) years from the Date of Original Issuance will be redeemed at the request of the Holder without regard to the above dollar limitation. (2) In addition to the amounts made available for redemption prior to maturity at the option of the Holder as described in (1) above, redemption will be made in the case of death of Holder upon written request and delivery of satisfactory proof of death and other documentation and in accordance with applicable laws. (3) In addition to the amounts made available for redemption prior to maturity at the option of the Holder as described in (1) and (2) above, if this Bond is held in an Individual Retirement Account (an "IRA") established under Section 408 of the Internal Revenue Code of 1986, as amended (the "IRC"), Farmland will redeem this Bond, upon written request, to the extent necessary to satisfy mandatory withdrawals from the IRA which are required by the IRC. Such redemption will be made only upon sufficient proof to Farmland that a mandatory withdrawal from the IRA is required. (4) The foregoing redemption privileges described in (1), (2) and (3) above are subject to the condition as provided under the subordination provisions applicable to the Subordinated Debenture Bonds, that Farmland cannot redeem any of the Subordinated Debenture Bonds if, at the time of or immediately after giving effect to such redemption, there shall exist under any Senior Indebtedness or any indenture or agreement pursuant to which any Senior Indebtedness is issued any default or any condition, event or act, which, with notice or lapse of time, or both, would constitute a default. Redemption prior to maturity will be made, subject to the aforementioned conditions, upon the surrender of this Bond, properly endorsed and accompanied by written requests for early redemption to Farmland. Redemption prior to maturity will be made at the face value of this Bond plus accrued interest to the date of redemption. Amounts available for redemption prior to maturity are not set aside in a separate fund. This Bond shall be subordinate, to the extent and in the manner provided in the Indenture, in right of payment to the prior payment in full of all Senior Indebtedness (as defined in the Indenture) and this Bond is issued subject to the provisions of the Indenture with respect thereto. Each Holder of this Bond, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee on his or her or its behalf to take such action as may be necessary or appropriate to acknowledge or effectuate the subordination so provided and (c) appoints the Trustee his or her or its attorney-in-fact for any and all such purposes. As provided in the Indenture, and subject to certain limitations therein set forth, the transfer of this Bond may be registered on the Register upon surrender of this Bond for registration of transfer at the office or agency of Farmland, in Kansas City, Missouri, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to Farmland duly executed by the Holder or by his attorney duly authorized in writing, and thereupon one or more new Bonds of this series having the same terms as this Bond, of authorized denominations, having the same terms and conditions and for the same aggregate principal amount, will be issued to the designated transferee or transferees. The Bonds are issuable only in registered form, without coupons. As provided in the Indenture, and subject to certain limitations therein set forth, this Bond is exchangeable for a like aggregate principal amount of Bonds having the same terms as this Bond of different authorized denominations, as requested by the Holder surrendering the same. No service charge will be made for any such registration of transfer or exchange of Bonds, but Farmland may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith. Prior to due presentment of this Bond for registration of transfer, Farmland, the Trustee and any agent of Farmland or the Trustee may treat the person in whose name this Bond is registered as the owner hereof for all purposes, whether or not this Bond be overdue, and neither Farmland, the Trustee nor any such agent shall be affected by notice to the contrary. All terms used in this Bond which are defined in the Indenture shall have the meanings designated to them in the Indenture and all references in the Indenture to "Security" or "Securities" shall be deemed to include the Bonds. For value received, I, we and each of us hereby sell, assign and transfer the within Bond and the indebtedness evidenced thereby to ____________________________________________________________ of _________________________________________________________ (ADDRESS) (CITY OR TOWN) STATE THIS ASSIGNMENT WILL BECOME EFFECTIVE ONLY WHEN MADE AND ENTERED ON THE BOOKS OF FARMLAND INDUSTRIES, INC. { __________ {___________________________________ DATE { (SIGNED) ENDORSEMENT { ___________________________________ (SIGNED) PRINCIPAL AMOUNT: BOND NUMBER: FARMLAND INDUSTRIES, INC. Kansas City, Missouri 64116 SUBORDINATED DEBENTURE BONDS, TEN-YEAR MONTHLY INCOME, SERIES E ___________________________ _______________________ Name Date of Original Issuance ___________________________ _______________________ Street Maturity Date ___________________________ _______________________ City State Interest Rate Farmland Industries, Inc., a Kansas corporation ("Farmland", which term includes any successor corporation under the Indenture referred to herein), for value received, hereby promises to pay to the owner named above or registered assigns (the "Holder"), the principal amount shown above on the Maturity Date specified above (except to the extent redeemed or repaid prior to the Maturity Date), and to pay interest thereon from the most recent date to which interest has been paid or, if no interest has been paid, from the date of original issuance of this Bond (the "Date of Original Issuance") at the interest rate per annum specified above (the "Interest Rate"), computed on the basis of a 365-day year, until the principal hereof is paid or duly made available for payment, and to pay interest on overdue principal and, to the extent permitted by law, overdue interest at the Interest Rate. Payment of principal and interest shall be in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts. Interest on the principal sum is payable monthly on the first day of each month following the month in which this Bond is issued to Holders of record on the last day of the preceding month. If the Maturity Date (or any date of redemption or repayment) or an interest payment date falls on a day which is not a business day, principal or interest payable with respect to such Maturity Date (or date of redemption or repayment) or interest payment date will be paid on the next succeeding business day with the same force and effect as if made on such Maturity Date (or date of redemption or repayment) or interest payment date, as the case may be, and no interest shall accrue on the amount so payable for the period from and after such Maturity Date (or date of redemption or repayment) or interest payment date. This Bond shall not be valid or become obligatory for any purpose until the Certificate of Authentication hereon shall have been signed by the Trustee under the Indenture mentioned on the reverse side hereof. ISSUED THIS DAY OF , 19 Attest: FARMLAND INDUSTRIES, INC. SECRETARY ________________________ BY PRESIDENT ____________________ Trustee's Certificate of Authentication This is one of the Bonds described in the Indenture mentioned on the back hereof. COMMERCE BANK, NATIONAL ASSOCIATION As Trustee By ____________________________________________ Authorized Signature REVERSE SIDE OF MONTHLY INCOME BONDS This Bond is one of a duly authorized issue of securities (hereinafter called the "Securities") of Farmland issued and to be issued under an Indenture dated as of ____________________ (herein called the "Indenture") between Farmland and Commerce Bank, National Association, as Trustee (herein called the "Trustee", which term includes any successor trustee under the Indenture), to which the Indenture and all indentures supplemental thereto and the Officers' Certificate (as defined in the Indenture) setting forth the terms of this series of Securities reference is hereby made for a statement of the respective rights, limitation of rights, duties and immunities thereunder of Farmland, the Trustee and the Holders and the terms upon which the Bonds are, and are to be, authenticated and delivered. The Bonds of this series may bear different dates, mature at different times, bear interest at different rates, be subject to different redemption or repayment provisions and may otherwise vary and are entitled to the benefits of the Indenture. Any interest which is payable, but is not punctually paid or duly provided for, on any interest payment date and, to the extent permitted by law, interest on such defaulted interest at the Interest Rate (such defaulted interest and interest thereon herein collectively called "Defaulted Interest") shall not be payable to the Holder on the record date; and such Defaulted Interest may be paid by Farmland, at its election in each case, in the time and manner as provided for in the Indenture. Payment of the principal of, premium, if any, and interest on this Bond will be made at the office or agency of Farmland in Kansas City, Missouri; provided, however, that at the option of Farmland payment of interest other than interest paid at maturity, redemption or repayment may be made by check mailed to the address of the person entitled thereto as such address shall appear in the Register or by electronic funds transfer or similar means to an account maintained by the person entitled thereto as specified in the Register. If an Event of Default (as defined in the Indenture) with respect to the Bonds shall occur and be continuing, the Trustee or the Holders of not less than a majority in principal amount of the outstanding Bonds may declare the principal of and accrued interest on all of the Bonds due and payable in the manner and with the effect and subject to the conditions provided in the Indenture. Upon certain events of bankruptcy, insolvency or reorganization of Farmland, the principal and accrued interest of all of the Bonds shall become due and payable without any declaration by the Trustee or the Holders. The Indenture contains provisions permitting Farmland and the Trustee to enter into one or more supplemental indentures under certain situations without the consent of the Holders of any of the Bonds. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of Farmland and the rights of the Holders of the Securities of each series under the Indenture to be affected at any time by Farmland and the Trustee with the consent of the Holders of a majority in aggregate principal amount of the Outstanding Securities (as defined in the Indenture) of each series affected thereby. The Indenture also contains provisions permitting the Holders of specified percentages in aggregate principal amount of the Outstanding Securities of each series under the Indenture, on behalf of the Holders of all Securities of such series, to waive compliance by Farmland with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Bond shall be conclusive and binding upon such Holder and upon all future Holders of this Bond and of any Bond issued upon the registration of transfer hereof or in exchange hereof or in lieu hereof, whether or not notation of such consent or waiver is made upon this Bond. No reference herein to the Indenture and no provision of this Bond or of the Indenture shall alter or impair the obligation of Farmland, which is absolute and unconditional, to pay the principal of and interest on this Bond at the times, places, and rate, and in the coin or currency, herein prescribed. This Bond cannot be called for redemption by Farmland any time prior to maturity. Except as hereinafter provided, this Bond cannot be redeemed at the option of the Holder prior to maturity. In the case of death of the Holder, Farmland will redeem this Bond upon written request to Farmland and delivery of satisfactory proof of death and other documentation and in accordance with applicable law. Redemptions will be made at the face value of the bonds plus accrued interest to the date of redemption only. This Bond shall be subordinate in right of payment to all money borrowed from banks, trust companies, insurance companies or pension trusts or evidenced by securities issued under the provisions of an indenture or loan or other agreement pursuant to which Senior Indebtedness is issued, whether secured or unsecured, and whether or not now owed or hereafter incurred. As provided in the Indenture, and subject to certain limitations therein set forth, the transfer of this Bond may be registered on the Register upon surrender of this Bond for registration of transfer at the office or agency of Farmland, in Kansas City, Missouri, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to Farmland duly executed by the Holder or by his attorney duly authorized in writing, and thereupon one or more new Bonds of this series having the same terms as this Bond, of authorized denominations, having the same terms and conditions and for the same aggregate principal amount, will be issued to the designated transferee or transferees. The Bonds are issuable only in registered form, without coupons. As provided in the Indenture, and subject to certain limitations therein set forth, this Bond is exchangeable for a like aggregate principal amount of Bonds having the same terms as this Bond of different authorized denominations, as requested by the Holder surrendering the same. No service charge will be made for any such registration of transfer or exchange of Bonds, but Farmland may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith. Prior to due presentment of this Bond for registration of transfer, Farmland, the Trustee and any agent of Farmland or the Trustee may treat the person in whose name this Bond is registered as the owner hereof for all purposes, whether or not this Bond is overdue, and neither Farmland, the Trustee nor any such agent shall be affected by notice to the contrary. All terms used in this Bond which are defined in the Indenture shall have the meanings designated to them in the Indenture and all references in the Indenture to "Security" or "Securities" shall be deemed to include the Bonds. For value received, I, we and each of us hereby sell, assign and transfer the within Bond and the indebtedness evidenced thereby to ___________________________________________________ of _________________________________________________ (ADDRESS) (CITY OR TOWN) STATE THIS ASSIGNMENT WILL BECOME EFFECTIVE ONLY WHEN MADE AND ENTERED ON THE BOOKS OF FARMLAND, INDUSTRIES INC. { __________ {___________________________________ DATE { (SIGNED) ENDORSEMENT { ___________________________________ (SIGNED) _ PRINCIPAL AMOUNT: BOND NUMBER: FARMLAND INDUSTRIES, INC. Kansas City, Missouri 64116 SUBORDINATED DEBENTURE BONDS, TEN-YEAR MONTHLY INCOME, SERIES F ___________________________ _______________________ Name Date of Original Issuance ___________________________ _______________________ Street Maturity Date ___________________________ _______________________ City State Interest Rate Farmland Industries, Inc., a Kansas corporation ("Farmland", which term includes any successor corporation under the Indenture referred to herein), for value received, hereby promises to pay to the owner named above or registered assigns (the "Holder"), the principal amount shown above on the Maturity Date specified above (except to the extent redeemed or repaid prior to the Maturity Date), and to pay interest thereon from the most recent date to which interest has been paid or, if no interest has been paid, from the date of original issuance of this Bond (the "Date of Original Issuance") at the interest rate per annum specified above (the "Interest Rate"), computed on the basis of a 365-day year, until the principal hereof is paid or duly made available for payment, and to pay interest on overdue principal and, to the extent permitted by law, overdue interest at the Interest Rate. Payment of principal and interest shall be in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts. Interest on the principal sum is payable monthly on the first day of each month following the month in which this Bond is issued to Holders of record on the last day of the preceding month. If the Maturity Date (or any date of redemption or repayment) or an interest payment date falls on a day which is not a business day, principal or interest payable with respect to such Maturity Date (or date of redemption or repayment) or interest payment date will be paid on the next succeeding business day with the same force and effect as if made on such Maturity Date (or date of redemption or repayment) or interest payment date, as the case may be, and no interest shall accrue on the amount so payable for the period from and after such Maturity Date (or date of redemption or repayment) or interest payment date. This Bond shall not be valid or become obligatory for any purpose until the Certificate of Authentication hereon shall have been signed by the Trustee under the Indenture mentioned on the reverse side hereof. ISSUED THIS DAY OF , 19 Attest: FARMLAND INDUSTRIES, INC. SECRETARY ________________________ BY PRESIDENT ____________________ Trustee's Certificate of Authentication This is one of the Bonds described in the Indenture mentioned on the back hereof. COMMERCE BANK, NATIONAL ASSOCIATION As Trustee By ____________________________________________ Authorized Signature REVERSE SIDE OF MONTHLY INCOME BONDS This Bond is one of a duly authorized issue of securities (hereinafter called the "Securities") of Farmland issued and to be issued under an Indenture dated as of ____________________ (herein called the "Indenture") between Farmland and Commerce Bank, National Association, as Trustee (herein called the "Trustee", which term includes any successor trustee under the Indenture), to which the Indenture and all indentures supplemental thereto and the Officers' Certificate (as defined in the Indenture) setting forth the terms of this series of Securities reference is hereby made for a statement of the respective rights, limitation of rights, duties and immunities thereunder of Farmland, the Trustee and the Holders and the terms upon which the Bonds are, and are to be, authenticated and delivered. The Bonds of this series may bear different dates, mature at different times, bear interest at different rates, be subject to different redemption or repayment provisions and may otherwise vary and are entitled to the benefits of the Indenture. Any interest which is payable, but is not punctually paid or duly provided for, on any interest payment date and, to the extent permitted by law, interest on such defaulted interest at the Interest Rate (such defaulted interest and interest thereon herein collectively called "Defaulted Interest") shall not be payable to the Holder on the record date; and such Defaulted Interest may be paid by Farmland, at its election in each case, in the time and manner as provided for in the Indenture. Payment of the principal of, premium, if any, and interest on this Bond will be made at the office or agency of Farmland in Kansas City, Missouri; provided, however, that at the option of Farmland payment of interest other than interest paid at maturity, redemption or repayment may be made by check mailed to the address of the person entitled thereto as such address shall appear in the Register or by electronic funds transfer or similar means to an account maintained by the person entitled thereto as specified in the Register. If an Event of Default (as defined in the Indenture) with respect to the Bonds shall occur and be continuing, the Trustee or the Holders of not less than a majority in principal amount of the outstanding Bonds may declare the principal of and accrued interest on all of the Bonds due and payable in the manner and with the effect and subject to the conditions provided in the Indenture. Upon certain events of bankruptcy, insolvency or reorganization of Farmland, the principal and accrued interest of all of the Bonds shall become due and payable without any declaration by the Trustee or the Holders. The Indenture contains provisions permitting Farmland and the Trustee to enter into one or more supplemental indentures under certain situations without the consent of the Holders of any of the Bonds. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of Farmland and the rights of the Holders of the Securities of each series under the Indenture to be affected at any time by Farmland and the Trustee with the consent of the Holders of a majority in aggregate principal amount of the Outstanding Securities (as defined in the Indenture) of each series affected thereby. The Indenture also contains provisions permitting the Holders of specified percentages in aggregate principal amount of the Outstanding Securities of each series under the Indenture, on behalf of the Holders of all Securities of such series, to waive compliance by Farmland with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Bond shall be conclusive and binding upon such Holder and upon all future Holders of this Bond and of any Bond issued upon the registration of transfer hereof or in exchange hereof or in lieu hereof, whether or not notation of such consent or waiver is made upon this Bond. No reference herein to the Indenture and no provision of this Bond or of the Indenture shall alter or impair the obligation of Farmland, which is absolute and unconditional, to pay the principal of and interest on this Bond at the times, places, and rate, and in the coin or currency, herein prescribed. This Bond cannot be called for redemption by Farmland any time prior to maturity. Except as hereinafter provided, this Bond cannot be redeemed at the option of the Holder prior to maturity. In the case of death of the Holder, Farmland will redeem this Bond upon written request to Farmland and delivery of satisfactory proof of death and other documentation and in accordance with applicable law. Redemptions will be made at the face value of the bonds plus accrued interest to the date of redemption only. This Bond shall be subordinate in right of payment to all money borrowed from banks, trust companies, insurance companies or pension trusts or evidenced by securities issued under the provisions of an indenture or loan or other agreement pursuant to which Senior Indebtedness is issued, whether secured or unsecured, and whether or not now owed or hereafter incurred. As provided in the Indenture, and subject to certain limitations therein set forth, the transfer of this Bond may be registered on the Register upon surrender of this Bond for registration of transfer at the office or agency of Farmland, in Kansas City, Missouri, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to Farmland duly executed by the Holder or by his attorney duly authorized in writing, and thereupon one or more new Bonds of this series having the same terms as this Bond, of authorized denominations, having the same terms and conditions and for the same aggregate principal amount, will be issued to the designated transferee or transferees. The Bonds are issuable only in registered form, without coupons. As provided in the Indenture, and subject to certain limitations therein set forth, this Bond is exchangeable for a like aggregate principal amount of Bonds having the same terms as this Bond of different authorized denominations, as requested by the Holder surrendering the same. No service charge will be made for any such registration of transfer or exchange of Bonds, but Farmland may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith. Prior to due presentment of this Bond for registration of transfer, Farmland, the Trustee and any agent of Farmland or the Trustee may treat the person in whose name this Bond is registered as the owner hereof for all purposes, whether or not this Bond is overdue, and neither Farmland, the Trustee nor any such agent shall be affected by notice to the contrary. All terms used in this Bond which are defined in the Indenture shall have the meanings designated to them in the Indenture and all references in the Indenture to "Security" or "Securities" shall be deemed to include the Bonds. For value received, I, we and each of us hereby sell, assign and transfer the within Bond and the indebtedness evidenced thereby to ___________________________________________________ of _________________________________________________ (ADDRESS) (CITY OR TOWN) STATE THIS ASSIGNMENT WILL BECOME EFFECTIVE ONLY WHEN MADE AND ENTERED ON THE BOOKS OF FARMLAND, INDUSTRIES INC. { __________ {___________________________________ DATE { (SIGNED) ENDORSEMENT { ___________________________________ (SIGNED) ______________________ PRINCIPAL AMOUNT: BOND NUMBER: FARMLAND INDUSTRIES, INC. Kansas City, Missouri 64116 SUBORDINATED DEBENTURE BONDS, FIVE-YEAR MONTHLY INCOME, SERIES G ___________________________ _______________________ Name Date of Original Issuance ___________________________ _______________________ Street Maturity Date ___________________________ _______________________ City State Interest Rate Farmland Industries, Inc., a Kansas corporation ("Farmland", which term includes any successor corporation under the Indenture referred to herein), for value received, hereby promises to pay to the owner named above or registered assigns (the "Holder"), the principal amount shown above on the Maturity Date specified above (except to the extent redeemed or repaid prior to the Maturity Date), and to pay interest thereon from the most recent date to which interest has been paid or, if no interest has been paid, from the date of original issuance of this Bond (the "Date of Original Issuance") at the interest rate per annum specified above (the "Interest Rate"), computed on the basis of a 365-day year, until the principal hereof is paid or duly made available for payment, and to pay interest on overdue principal and, to the extent permitted by law, overdue interest at the Interest Rate. Payment of principal and interest shall be in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts. Interest on the principal sum is payable monthly on the first day of each month following the month in which this Bond is issued to Holders of record on the last day of the preceding month. If the Maturity Date (or any date of redemption or repayment) or an interest payment date falls on a day which is not a business day, principal or interest payable with respect to such Maturity Date (or date of redemption or repayment) or interest payment date will be paid on the next succeeding business day with the same force and effect as if made on such Maturity Date (or date of redemption or repayment) or interest payment date, as the case may be, and no interest shall accrue on the amount so payable for the period from and after such Maturity Date (or date of redemption or repayment) or interest payment date. This Bond shall not be valid or become obligatory for any purpose until the Certificate of Authentication hereon shall have been signed by the Trustee under the Indenture mentioned on the reverse side hereof. ISSUED THIS DAY OF , 19 Attest: FARMLAND INDUSTRIES, INC. SECRETARY ________________________ BY PRESIDENT ____________________ Trustee's Certificate of Authentication This is one of the Bonds described in the Indenture mentioned on the back hereof. COMMERCE BANK, NATIONAL ASSOCIATION As Trustee By ____________________________________________ Authorized Signature REVERSE SIDE OF MONTHLY INCOME BONDS This Bond is one of a duly authorized issue of securities (hereinafter called the "Securities") of Farmland issued and to be issued under an Indenture dated as of ____________________ (herein called the "Indenture") between Farmland and Commerce Bank, National Association, as Trustee (herein called the "Trustee", which term includes any successor trustee under the Indenture), to which the Indenture and all indentures supplemental thereto and the Officers' Certificate (as defined in the Indenture) setting forth the terms of this series of Securities reference is hereby made for a statement of the respective rights, limitation of rights, duties and immunities thereunder of Farmland, the Trustee and the Holders and the terms upon which the Bonds are, and are to be, authenticated and delivered. The Bonds of this series may bear different dates, mature at different times, bear interest at different rates, be subject to different redemption or repayment provisions and may otherwise vary and are entitled to the benefits of the Indenture. Any interest which is payable, but is not punctually paid or duly provided for, on any interest payment date and, to the extent permitted by law, interest on such defaulted interest at the Interest Rate (such defaulted interest and interest thereon herein collectively called "Defaulted Interest") shall not be payable to the Holder on the record date; and such Defaulted Interest may be paid by Farmland, at its election in each case, in the time and manner as provided for in the Indenture. Payment of the principal of, premium, if any, and interest on this Bond will be made at the office or agency of Farmland in Kansas City, Missouri; provided, however, that at the option of Farmland payment of interest other than interest paid at maturity, redemption or repayment may be made by check mailed to the address of the person entitled thereto as such address shall appear in the Register or by electronic funds transfer or similar means to an account maintained by the person entitled thereto as specified in the Register. If an Event of Default (as defined in the Indenture) with respect to the Bonds shall occur and be continuing, the Trustee or the Holders of not less than a majority in principal amount of the outstanding Bonds may declare the principal of and accrued interest on all of the Bonds due and payable in the manner and with the effect and subject to the conditions provided in the Indenture. Upon certain events of bankruptcy, insolvency or reorganization of Farmland, the principal and accrued interest of all of the Bonds shall become due and payable without any declaration by the Trustee or the Holders. The Indenture contains provisions permitting Farmland and the Trustee to enter into one or more supplemental indentures under certain situations without the consent of the Holders of any of the Bonds. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of Farmland and the rights of the Holders of the Securities of each series under the Indenture to be affected at any time by Farmland and the Trustee with the consent of the Holders of a majority in aggregate principal amount of the Outstanding Securities (as defined in the Indenture) of each series affected thereby. The Indenture also contains provisions permitting the Holders of specified percentages in aggregate principal amount of the Outstanding Securities of each series under the Indenture, on behalf of the Holders of all Securities of such series, to waive compliance by Farmland with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Bond shall be conclusive and binding upon such Holder and upon all future Holders of this Bond and of any Bond issued upon the registration of transfer hereof or in exchange hereof or in lieu hereof, whether or not notation of such consent or waiver is made upon this Bond. No reference herein to the Indenture and no provision of this Bond or of the Indenture shall alter or impair the obligation of Farmland, which is absolute and unconditional, to pay the principal of and interest on this Bond at the times, places, and rate, and in the coin or currency, herein prescribed. This Bond cannot be called for redemption by Farmland any time prior to maturity. Except as hereinafter provided, this Bond cannot be redeemed at the option of the Holder prior to maturity. In the case of death of the Holder, Farmland will redeem this Bond upon written request to Farmland and delivery of satisfactory proof of death and other documentation and in accordance with applicable law. Redemptions will be made at the face value of the bonds plus accrued interest to the date of redemption only. This Bond shall be subordinate in right of payment to all money borrowed from banks, trust companies, insurance companies or pension trusts or evidenced by securities issued under the provisions of an indenture or loan or other agreement pursuant to which Senior Indebtedness is issued, whether secured or unsecured, and whether or not now owed or hereafter incurred. As provided in the Indenture, and subject to certain limitations therein set forth, the transfer of this Bond may be registered on the Register upon surrender of this Bond for registration of transfer at the office or agency of Farmland, in Kansas City, Missouri, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to Farmland duly executed by the Holder or by his attorney duly authorized in writing, and thereupon one or more new Bonds of this series having the same terms as this Bond, of authorized denominations, having the same terms and conditions and for the same aggregate principal amount, will be issued to the designated transferee or transferees. The Bonds are issuable only in registered form, without coupons. As provided in the Indenture, and subject to certain limitations therein set forth, this Bond is exchangeable for a like aggregate principal amount of Bonds having the same terms as this Bond of different authorized denominations, as requested by the Holder surrendering the same. No service charge will be made for any such registration of transfer or exchange of Bonds, but Farmland may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith. Prior to due presentment of this Bond for registration of transfer, Farmland, the Trustee and any agent of Farmland or the Trustee may treat the person in whose name this Bond is registered as the owner hereof for all purposes, whether or not this Bond is overdue, and neither Farmland, the Trustee nor any such agent shall be affected by notice to the contrary. All terms used in this Bond which are defined in the Indenture shall have the meanings designated to them in the Indenture and all references in the Indenture to "Security" or "Securities" shall be deemed to include the Bonds. For value received, I, we and each of us hereby sell, assign and transfer the within Bond and the indebtedness evidenced thereby to ___________________________________________________ of _________________________________________________ (ADDRESS) (CITY OR TOWN) STATE THIS ASSIGNMENT WILL BECOME EFFECTIVE ONLY WHEN MADE AND ENTERED ON THE BOOKS OF FARMLAND, INDUSTRIES INC. { __________ {___________________________________ DATE { (SIGNED) ENDORSEMENT { ___________________________________ (SIGNED) ______________________ PRINCIPAL AMOUNT: BOND NUMBER: FARMLAND INDUSTRIES, INC. Kansas City, Missouri 64116 SUBORDINATED DEBENTURE BONDS, FIVE-YEAR MONTHLY INCOME, SERIES H ___________________________ _______________________ Name Date of Original Issuance ___________________________ _______________________ Street Maturity Date ___________________________ _______________________ City State Interest Rate Farmland Industries, Inc., a Kansas corporation ("Farmland", which term includes any successor corporation under the Indenture referred to herein), for value received, hereby promises to pay to the owner named above or registered assigns (the "Holder"), the principal amount shown above on the Maturity Date specified above (except to the extent redeemed or repaid prior to the Maturity Date), and to pay interest thereon from the most recent date to which interest has been paid or, if no interest has been paid, from the date of original issuance of this Bond (the "Date of Original Issuance") at the interest rate per annum specified above (the "Interest Rate"), computed on the basis of a 365-day year, until the principal hereof is paid or duly made available for payment, and to pay interest on overdue principal and, to the extent permitted by law, overdue interest at the Interest Rate. Payment of principal and interest shall be in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts. Interest on the principal sum is payable monthly on the first day of each month following the month in which this Bond is issued to Holders of record on the last day of the preceding month. If the Maturity Date (or any date of redemption or repayment) or an interest payment date falls on a day which is not a business day, principal or interest payable with respect to such Maturity Date (or date of redemption or repayment) or interest payment date will be paid on the next succeeding business day with the same force and effect as if made on such Maturity Date (or date of redemption or repayment) or interest payment date, as the case may be, and no interest shall accrue on the amount so payable for the period from and after such Maturity Date (or date of redemption or repayment) or interest payment date. This Bond shall not be valid or become obligatory for any purpose until the Certificate of Authentication hereon shall have been signed by the Trustee under the Indenture mentioned on the reverse side hereof. ISSUED THIS DAY OF , 19 Attest: FARMLAND INDUSTRIES, INC. SECRETARY ________________________ BY PRESIDENT ____________________ Trustee's Certificate of Authentication This is one of the Bonds described in the Indenture mentioned on the back hereof. COMMERCE BANK, NATIONAL ASSOCIATION As Trustee By ____________________________________________ Authorized Signature REVERSE SIDE OF MONTHLY INCOME BONDS This Bond is one of a duly authorized issue of securities (hereinafter called the "Securities") of Farmland issued and to be issued under an Indenture dated as of ____________________ (herein called the "Indenture") between Farmland and Commerce Bank, National Association, as Trustee (herein called the "Trustee", which term includes any successor trustee under the Indenture), to which the Indenture and all indentures supplemental thereto and the Officers' Certificate (as defined in the Indenture) setting forth the terms of this series of Securities reference is hereby made for a statement of the respective rights, limitation of rights, duties and immunities thereunder of Farmland, the Trustee and the Holders and the terms upon which the Bonds are, and are to be, authenticated and delivered. The Bonds of this series may bear different dates, mature at different times, bear interest at different rates, be subject to different redemption or repayment provisions and may otherwise vary and are entitled to the benefits of the Indenture. Any interest which is payable, but is not punctually paid or duly provided for, on any interest payment date and, to the extent permitted by law, interest on such defaulted interest at the Interest Rate (such defaulted interest and interest thereon herein collectively called "Defaulted Interest") shall not be payable to the Holder on the record date; and such Defaulted Interest may be paid by Farmland, at its election in each case, in the time and manner as provided for in the Indenture. Payment of the principal of, premium, if any, and interest on this Bond will be made at the office or agency of Farmland in Kansas City, Missouri; provided, however, that at the option of Farmland payment of interest other than interest paid at maturity, redemption or repayment may be made by check mailed to the address of the person entitled thereto as such address shall appear in the Register or by electronic funds transfer or similar means to an account maintained by the person entitled thereto as specified in the Register. If an Event of Default (as defined in the Indenture) with respect to the Bonds shall occur and be continuing, the Trustee or the Holders of not less than a majority in principal amount of the outstanding Bonds may declare the principal of and accrued interest on all of the Bonds due and payable in the manner and with the effect and subject to the conditions provided in the Indenture. Upon certain events of bankruptcy, insolvency or reorganization of Farmland, the principal and accrued interest of all of the Bonds shall become due and payable without any declaration by the Trustee or the Holders. The Indenture contains provisions permitting Farmland and the Trustee to enter into one or more supplemental indentures under certain situations without the consent of the Holders of any of the Bonds. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of Farmland and the rights of the Holders of the Securities of each series under the Indenture to be affected at any time by Farmland and the Trustee with the consent of the Holders of a majority in aggregate principal amount of the Outstanding Securities (as defined in the Indenture) of each series affected thereby. The Indenture also contains provisions permitting the Holders of specified percentages in aggregate principal amount of the Outstanding Securities of each series under the Indenture, on behalf of the Holders of all Securities of such series, to waive compliance by Farmland with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Bond shall be conclusive and binding upon such Holder and upon all future Holders of this Bond and of any Bond issued upon the registration of transfer hereof or in exchange hereof or in lieu hereof, whether or not notation of such consent or waiver is made upon this Bond. No reference herein to the Indenture and no provision of this Bond or of the Indenture shall alter or impair the obligation of Farmland, which is absolute and unconditional, to pay the principal of and interest on this Bond at the times, places, and rate, and in the coin or currency, herein prescribed. This Bond cannot be called for redemption by Farmland any time prior to maturity. Except as hereinafter provided, this Bond cannot be redeemed at the option of the Holder prior to maturity. In the case of death of the Holder, Farmland will redeem this Bond upon written request to Farmland and delivery of satisfactory proof of death and other documentation and in accordance with applicable law. Redemptions will be made at the face value of the bonds plus accrued interest to the date of redemption only. This Bond shall be subordinate in right of payment to all money borrowed from banks, trust companies, insurance companies or pension trusts or evidenced by securities issued under the provisions of an indenture or loan or other agreement pursuant to which Senior Indebtedness is issued, whether secured or unsecured, and whether or not now owed or hereafter incurred. As provided in the Indenture, and subject to certain limitations therein set forth, the transfer of this Bond may be registered on the Register upon surrender of this Bond for registration of transfer at the office or agency of Farmland, in Kansas City, Missouri, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to Farmland duly executed by the Holder or by his attorney duly authorized in writing, and thereupon one or more new Bonds of this series having the same terms as this Bond, of authorized denominations, having the same terms and conditions and for the same aggregate principal amount, will be issued to the designated transferee or transferees. The Bonds are issuable only in registered form, without coupons. As provided in the Indenture, and subject to certain limitations therein set forth, this Bond is exchangeable for a like aggregate principal amount of Bonds having the same terms as this Bond of different authorized denominations, as requested by the Holder surrendering the same. No service charge will be made for any such registration of transfer or exchange of Bonds, but Farmland may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith. Prior to due presentment of this Bond for registration of transfer, Farmland, the Trustee and any agent of Farmland or the Trustee may treat the person in whose name this Bond is registered as the owner hereof for all purposes, whether or not this Bond is overdue, and neither Farmland, the Trustee nor any such agent shall be affected by notice to the contrary. All terms used in this Bond which are defined in the Indenture shall have the meanings designated to them in the Indenture and all references in the Indenture to "Security" or "Securities" shall be deemed to include the Bonds. For value received, I, we and each of us hereby sell, assign and transfer the within Bond and the indebtedness evidenced thereby to ___________________________________________________ of _________________________________________________ (ADDRESS) (CITY OR TOWN) STATE THIS ASSIGNMENT WILL BECOME EFFECTIVE ONLY WHEN MADE AND ENTERED ON THE BOOKS OF FARMLAND, INDUSTRIES INC. { __________ {___________________________________ DATE { (SIGNED) ENDORSEMENT { ___________________________________ (SIGNED) ______________________ EX-5 5 OPINION RE: LEGALITY EXHIBIT 5 Farmland Industries, Inc. 3315 North Oak Trafficway Kansas City, Missouri 64116 Gentlemen: I am acting as the General Counsel for Farmland Industries, Inc., a Kansas corporation (the "Company"), in connection with the Registration Statement on Form S-1 (the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the contemplated issuance by the Company from time to time of Demand Loan Certificates and Subordinated Debenture Bonds of the Company, which with respect to Demand Loan Certificates may be issued pursuant to an Indenture entered into between the Company and UMB Bank, National Association, and with respect to Subordinated Debenture Bonds may be issued under an indenture entered into between the Company and Commerce Bank, National Association, as trustee. Said Demand Loan Certificates and Subordinated Debenture Bonds, when issued and sold in accordance with this Registration Statement presently to be filed with the Securities and Exchange Commission, Washington, D.C., and registered in accordance with the laws of the States in which the Demand Loan Certificates and Subordinated Debenture Bonds are and will be sold, will constitute valid and binding obligations according to their tenor and effect. Capitalized terms used herein have the meanings set forth in the Registration Statement, unless otherwise defined herein. I have examined the originals, or certified, conformed or reproduction copies of all records, agreements, instruments and documents as I have deemed relevant or necessary as the basis for the opinions hereinafter expressed. In all such examinations, I have assumed the genuineness of all signatures on original or certified copies and the conformity to original or certified copies of all copies submitted to me as conformed or reproduction copies. As to various questions of fact relevant to such opinions, I have relied upon, and assumed the accuracy of, certificates and statements and other information of public officials, officers or representatives of the Company and others. Based upon the foregoing, and subject to the limitations set forth herein, I hereby confirm the opinions attributed to me in the Registration Statement. I hereby consent to the filing of this opinion as an exhibit to the Registration Statement (including any Amendment thereto) and to the references to me under the captions "Legal Matters" in the Prospectus and "Legal Matters" in any Prospectus Supplement forming a part of the Registration Statement. In giving these consents, I do not hereby admit that I am in the category of persons whose consent is required under Section 7 of the Securities Act. Very truly yours, Robert B. Terry December 9, 1997 EX-23.A 6 INDEPENDENT AUDITOR'S CONSENT EXHIBIT 23.A INDEPENDENT AUDITORS' CONSENT The Board of Directors Farmland Industries, Inc.: We consent to the use of our report included herein and to the references to our firm under the headings "Selected Consolidated Financial Data", and "Experts" in the Prospectus. KPMG PEAT MARWICK LLP Kansas City, Missouri December 9, 1997 EX-23.B 7 CONSENT OF SPECIAL TAX COUNSEL EXHIBIT 23.B CONSENT OF SPECIAL TAX COUNSEL Farmland Industries, Inc.: We consent to the references to our firm in the Prospectus filed as part of this Registration Statement. BRYAN CAVE LLP December 9, 1997 EX-23.C 8 CONSENT OF QUALIFIED INDEPENDENT UNDERWRITER EXHIBIT 23.C CONSENT OF QUALIFIED INDEPENDENT UNDERWRITER Farmland Industries, Inc.: We consent to the references to our firm under the caption "Qualified Independent Underwriter" in the Prospectus. James H. Glen, Jr. INTERSTATE/JOHNSON LANE December 9, 1997 -----END PRIVACY-ENHANCED MESSAGE-----