-----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, EOIm48A1BGMB2In0Ws3w81pVFOkpRe5eMsbn9d5ibR4BrBIW9ZolUM5MH+ARIBz4 LTHHhnqG9M8jhpT7fTFqYA== 0000034616-01-000003.txt : 20010417 0000034616-01-000003.hdr.sgml : 20010417 ACCESSION NUMBER: 0000034616-01-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20010228 FILED AS OF DATE: 20010416 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FARMLAND INDUSTRIES INC CENTRAL INDEX KEY: 0000034616 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-FARM PRODUCT RAW MATERIALS [5150] IRS NUMBER: 440209330 STATE OF INCORPORATION: KS FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11629 FILM NUMBER: 1603237 BUSINESS ADDRESS: STREET 1: 3315 N FARMLAND TRAFFICWAY STREET 2: DEPT 140 CITY: KANSAS CITY STATE: MO ZIP: 64116-0005 BUSINESS PHONE: 8164596000 FORMER COMPANY: FORMER CONFORMED NAME: CONSUMERS COOPERATIVE ASSOCIATION DATE OF NAME CHANGE: 19681201 10-Q 1 0001.htm QUARTERLY REPORT FOR FARMLAND INDUSTRIES Form 10-Q for Second Quarter

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[x ]                                      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
                                               OF THE SECURITIES EXCHANGE ACT OF 1934


                                 For the quarterly period ended February 28, 2001

                                                        or

[  ]                                      TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
                                               OF THE SECURITIES EXCHANGE ACT OF 1934


                          For the transition period from _____________ to _____________.

                                          Commission File Number: 2-67985


                                               FARMLAND INDUSTRIES, INC.
                              (Exact name of registrant as specified in its charter)



                        Kansas                                                                   44-0209330
               (State of incorporation)                                             (I.R.S. Employer Identification No.)

             12200 North Ambassador Drive
                Kansas City, Missouri                                                               64163
       (Address of principal executive offices)                                                  (Zip Code)

                         Registrant's telephone number, including area code: 816-459-6000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

PART I - FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

                                       CONDENSED CONSOLIDATED BALANCE SHEETS
                                                    (UNAUDITED)
                                                      ASSETS


                                                        August 31               February 28
                                                          2000                     2001
                                                     ----------------         ----------------
                                                                (Amounts in Thousands)
  Accounts receivable - trade........................ $      740,026          $        689,403
  Inventories (Note 2)...............................        832,687                 1,058,343
  Other current assets...............................        252,716                   342,016
                                                      -----------------       ------------------

        Total Current Assets......................... $    1,825,429          $      2,089,762
                                                      -----------------       ------------------


Investments and Long-Term Receivables (Note 3)....... $      399,889          $        357,386
                                                      -----------------       ------------------


Property, Plant and Equipment:
  Property, plant and equipment, at cost............. $    1,787,614          $      1,704,327
     Less accumulated depreciation and
     amortization....................................        960,652                   920,396
                                                        ---------------         ----------------

  Net Property, Plant and Equipment.................. $      826,962          $        783,931
                                                      -----------------       ------------------


Other Assets                                          $      229,907          $        248,460
                                                      -----------------       ------------------

Total Assets                                          $    3,282,187          $      3,479,539
                                                      =================       ==================






    See accompanying Notes to Consolidated Financial Statements





                                     FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES

                                       CONDENSED CONSOLIDATED BALANCE SHEETS
                                                    (UNAUDITED)
                                             LIABILITIES AND EQUITIES

                                                                             August 31          February 28
                                                                                2000                2001
                                                                       --------------------- -------------------
                                                                                (Amounts in Thousands)
Current Liabilities:
    Short-term notes payable ........................................  $        689,477       $         752,035
    Current maturities of long-term debt ............................            32,222                  31,148
    Accounts payable - trade.........................................           345,286                 389,531
    Customer advances on product purchases...........................           120,731                 167,898
    Other current liabilities........................................           422,811                 413,658
                                                                       ------------------     ------------------

         Total Current Liabilities...................................  $      1,610,527       $       1,754,270
                                                                       ------------------     ------------------

Long-Term Liabilities:
    Long-term borrowings (excluding current maturities)..............  $        646,160       $         662,447
    Other long-term liabilities......................................            40,134                  38,165
                                                                       ------------------     ------------------

         Total Long-Term Liabilities.................................  $        686,294       $         700,612
                                                                       ------------------     ------------------

Deferred Income Taxes................................................  $         54,676       $          48,048
                                                                       ------------------     ------------------

Minority Owners' Equity in Subsidiaries..............................  $         49,459       $          54,416
                                                                       ------------------     ------------------

Net Income (Note 1)..................................................  $             -0-      $           5,369
                                                                       ------------------     ------------------

Capital Shares and Equities:
    Preferred Shares, Authorized 8,000,000 Shares, 8% Series A
     cumulative redeemable preferred shares, stated
     at redemption value, $50 per share..............................  $        100,000       $         100,000
    Common shares, $25 par value--Authorized
      50,000,000 shares..............................................           522,876                 527,155
    Accumulated Other Comprehensive Income (net of
    deferred taxes of $5,450 at February 28, 2001) (Notes 4
 .........and 5)                                                                     111                  30,789
    Earned surplus and other equities................................           258,244                 258,880
                                                                       ------------------     ------------------

         Total Capital Shares and Equities...........................  $        881,231       $         916,824
                                                                       ------------------     ------------------


Contingent Liabilities and Commitments (Note 6)



Total Liabilities and Equities.......................................  $      3,282,187       $       3,479,539
                                                                       ==================     ==================

    See accompanying Notes to Consolidated Financial Statements





                                    FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES

                                  CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


                                                                         Six Months Ended
                                                              ---------------------------------------
                                                                 February 29         February 28
                                                                     2000                2001
                                                              ------------------- -------------------
                          (Amounts in Thousands)

 Sales.........................................................$    5,848,663     $       5,952,724
 Cost of sales.................................................     5,613,211             5,730,092
                                                               -----------------  --------------------

 Gross income..................................................$      235,452     $         222,632
                                                               -----------------  --------------------

 Selling, general and administrative expenses..................$      237,512     $         193,500
                                                               -----------------  --------------------

 Other income (deductions):
     Interest expense, net.....................................$      (48,806)    $         (60,865)
     Other, net (Note 5).......................................        (4,959)               23,209
                                                               -----------------  --------------------
 Total other income (deductions)..............................$       (53,765)    $         (37,656)
                                                              ------------------  --------------------

  Loss before equity in net income of investees, minority
       owners' interest in net (income) of subsidiaries, income
       tax benefit, and cumulative effect of changes
       in accounting principles, net of income tax expense.....$      (55,825)    $          (8,524)

    Equity in net income of investees (Note 3) ................         5,059                 1,144

    Minority owners' interest in net (income)
         of subsidiaries........................................       (9,385)               (9,090)
                                                                  -----------------  --------------------

    Loss before income tax benefit and cumulative
        effect of changes in accounting principles,
        net of income tax expense..............................$      (60,151)      $       (16,470)

    Income tax benefit.........................................        11,513                 2,063
                                                                  -----------------  --------------------

    Loss before cumulative effect of changes in
        accounting principles..................................$      (48,638)       $      (14,407)

    Cumulative effect of changes in accounting for
        derivative financial instruments and planned major
        maintenance costs, net of $3,313 income
        tax expense (Notes 5 and 7)............................            -0-               19,776
                                                                  -----------------  --------------------

    Net income (loss)..........................................$      (48,638)    $  $        5,369
                                                                  =================  ====================


    Pro forma net loss assuming use of the direct expense
        method of accounting for planned major
        maintenance costs (Note 7).............................       (44,809)    $            (901)                                                                             $
                                                                  =================  ====================


    See accompanying Notes to Consolidated Financial Statements





                                    FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES

                                  CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


                                                                        Three Months Ended
                                                             -----------------------------------------
                                                                  February 29          February 28
                                                                     2000                 2001
                                                             ---------------------- ------------------
                         (Amounts in Thousands)

  Sales........................................................$     2,864,198      $       3,011,397
  Cost of sales.................................................     2,752,563              2,904,514
                                                               -----------------    -------------------

  Gross income.................................................$       111,635      $         106,883
                                                               -----------------    -------------------

  Selling, general and administrative expenses.................$       114,341      $          91,615
                                                               -----------------    -------------------

  Other income (deductions):
      Interest expense, net....................................$       (25,074)     $         (30,472)
      Other, net (Note 5).......................................           465                 20,568
                                                               -----------------    -------------------
  Total other income (deductions).............................$.       (24,609)    $   $       (9,904)
                                                              ------------------   --------------------

   Income (loss) before equity in net income (loss) of
        investees, minority owners' interest in net (income) of
        subsidiaries and income tax                            $       (27,315)     $           5,364
        benefit......................

     Equity in net income (loss) of investees (Note 3) .........         3,982                 (4,149)

     Minority owners' interest in net (income)
         of subsidiaries........................................        (3,254)                (2,876)
                                                                  ------------------   --------------------

     Loss before income tax benefit............................$       (26,587)     $  $       (1,661)

     Income tax benefit.........................................         4,491                    317
                                                                  -----------------    -------------------

     Net loss                                                  $       (22,096)     $  $       (1,344)
                                                                  ==================   ====================


     Pro forma net loss assuming use of the direct expense
     method of accounting for planned major maintenance costs
     (note 7)                                                  $       (21,787)     $          (1,344)
                                                                  ==================   ====================











    See accompanying Notes to Consolidated Financial Statements





                                    FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES

                                   CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                    (UNAUDITED)


                                                                                            Six Months Ended
                                                                              ---------------------------------------------
                                                                                 February 29                February 28
                                                                                    2000                       2001
                                                                              ------------------         ------------------
                                                                                         (Amounts in Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................................   $      (48,638)            $         5,369
Adjustments to reconcile net income (loss) to net cash provided by
  (used in) operating activities:
      Depreciation and amortization..........................................           55,193                      53,296
      Equity in net (income) of investees....................................           (5,059)                     (1,144)
      Other..................................................................            9,370                       8,878
    Changes in assets and liabilities:
       Accounts receivable...................................................           52,300                      48,261
       Inventories...........................................................          (35,592)                   (171,257)
       Other assets..........................................................            1,809                     (60,809)
       Accounts payable......................................................         (106,120)                     44,246
       Other liabilities.....................................................           80,908                      63,535
                                                                              ------------------         ------------------
Net cash provided by (used in) operating activities..........................   $        4,171             $        (9,625)
                                                                              ------------------         ------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.........................................................   $      (48,381)            $       (49,767)
Distributions from joint ventures............................................           11,910                      17,241
Additions to investments and notes receivable................................          (17,846)                    (11,066)
Acquisition of other long-term assets........................................          (10,343)                    (10,200)
Proceeds from disposal of investments and notes receivable...................           12,842                      15,016
Proceeds from sale of fixed assets...........................................            4,395                       6,233
                                                                              ------------------         ------------------
Net cash used in investing activities....................................     $        (47,423)          $         (32,543)
                                                                              ------------------         ------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of patronage refunds................................................ $         (6,054)          $              -0-
Payments of dividends........................................................           (4,004)                     (4,000)
Proceeds from bank loans and notes payable...................................          984,297                   2,865,524
Payments on bank loans and notes payable.....................................         (945,920)                 (2,769,103)
Proceeds from issuance of subordinated debt certificates.....................           16,734                      15,328
Payments for redemption of subordinated debt certificates....................          (13,820)                    (26,965)
Increase (decrease) of checks and drafts outstanding.........................           16,916                     (28,790)
Net decrease in demand loan certificates.....................................           (4,210)                     (5,710)
Other                                                                                     (687)                     (4,116)
                                                                              ------------------         ------------------
Net cash provided by financing activities.................................... $         43,252           $          42,168
                                                                              ------------------         ------------------

Net decrease in cash and cash equivalents.................................... $             -0-          $              -0-
Cash and cash equivalents at beginning of period.............................               -0-                         -0-
                                                                              ------------------         ------------------
Cash and cash equivalents at end of period................................... $             -0-          $              -0-
                                                                              ==================         ==================

    On October 1, 2000, we contributed property, plant and equipment and investments with a carrying value of
    approximately $43.8 million in return for an equity interest in Land O'Lakes Farmland Feed, LLC.

    On December 31, 2000, Cooperative Refining LLC was dissolved.   We received inventory with a value of $54.4
    million in exchange for our equity interest in Cooperative Refining.


    See accompanying Notes to Consolidated Financial Statements

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(1) Interim Financial Statements

Unless the context requires otherwise, (i) "Farmland", "we", "us" and "our" refer to Farmland Industries, Inc. and its consolidated subsidiaries, (ii) all references to "year" or "years" are to fiscal years ended August 31 and (iii) all references to "members" are to persons eligible to receive patronage refunds from Farmland including voting members, associate members and other patrons with which Farmland has a currently effective patronage refund agreement.

In view of the seasonality of Farmland's businesses, it must be emphasized that the results of operations for the periods presented are not necessarily indicative of the results for a full fiscal year.

The information included in these unaudited Condensed Consolidated Financial Statements of Farmland reflects all adjustments (consisting only of normal recurring accruals) which, in the opinion of management, are necessary for a fair statement of the results for the interim periods presented.

Our sales, margins and net income or loss depend, to a large extent, on conditions in agriculture and may be volatile due to factors beyond our control, such as weather, crop failures, federal agricultural programs, production efficiencies and U.S. imports and exports. In addition, various federal and state regulations intended 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, livestock, grain and other commodities may impact Farmland's operations. Historically, changes in the costs of raw materials used in the manufacture of our finished products have not necessarily resulted in corresponding changes in the prices at which we have sold such products. We cannot determine the extent to which these factors may impact our future operations. Our cash flow and net income or loss may be volatile as conditions affecting agriculture and markets for our products change.

In accordance with the bylaws of Farmland, we determine annually the members' portion of income or loss before income taxes. From this amount, patronage refunds are distributed or losses are allocated to our members.

Farmland does not provide for patronage refunds in our interim financial statements as:

we determine the amount of members' income and the amount of members' loss only after the end of the fiscal year;
the Board of Directors, in its sole discretion, then determines the amount of patronage refund, after consideration of member losses (if any), to be paid in cash and the portion to be paid in Farmland equity (common shares, associate member common shares and capital credits); and
the amount of income appropriated to earned surplus is dependent on the amount of patronage refunds and the handling of members' losses (if any).

Therefore, the amount of net income for the interim period presented is reflected as a separate item in the accompanying unaudited Condensed Consolidated Balance Sheet as of February 28, 2001.

(2) Inventories

                                                   August 31               February 28

                                                      2000                    2001
                                               -------------------     --------------------
                                                         (Amounts in Thousands)
Finished and in-process products..............  $        750,057       $           917,625
Materials.....................................            16,939                    88,296
Supplies......................................            65,691                    52,422
                                                ------------------     --------------------
                                                $        832,687       $         1,058,343
                                                ==================     ====================

On December 31, 2000, Cooperative Refining, LLC was dissolved and our equity investment of $54.4 million was returned to us in the form of crude oil and in-process petroleum inventories.

At February 28, 2001, the carrying value of our petroleum inventories stated under the LIFO method (gasoline and distillates) was $161.5 million which was approximately $19.6 million less than the market value of these inventories.

(3) Summarized Financial Information of Investees Accounted for by the Equity Method

Summarized financial information of investees accounted for by the equity method is as follows:

                                                 Six Months Ended                       Three Months Ended
                                        ------------------------------------   --------------------------------------
                                          February 29         February 28         February 29         February 28
                                              2000               2001                 2000                2001
                                        -----------------   ----------------    -----------------   -----------------
                                                                   (Amounts in Thousands)
Net sales...............................  $  1,625,852      $    3,166,910     $      885,012       $    1,472,653
                                        =================  =================   =================    =================
Net income (loss).......................  $      7,553      $      (30,188)    $        5,107       $      (29,672)
                                        =================  =================   =================    =================
Farmland's equity in net income.........  $      5,059      $        1,144     $        3,982       $       (4,149)
                                        =================  =================   =================    =================

Our investments accounted for by the equity method consist principally of :

50% equity interests in three manufacturers of crop nutrient products, Farmland Hydro, L.P., SF Phosphates Limited Company and Farmland MissChem, Limited;
beginning January 1, 2000, an approximate 50% equity interest in UCB LLC, which in turn holds a 50% equity interest in Agriliance LLC, an agronomy distribution and marketing venture;
through December 31, 2000, an approximate 42% equity interest in Cooperative Refining, LLC, which operated two refineries; and
beginning October 1, 2000, an approximate 31% equity interest (adjusted to an approximate 29% equity interest as of January 1, 2001) in Land O'Lakes Farmland Feed, LLC, a manufacturer of feed products.

At February 28, 2001, our share of the undistributed earnings of all ventures accounted for by the equity method totaled $43.9 million. (4) Comprehensive Income Changes in accumulated other comprehensive income (AOCI) during the six months ended February 28, 2001 were as follows:

                                                        Cash Flow           Foreign Currency              Total
                                                         Hedges               Translation                  AOCI
                                                     ----------------     ---------------------      -----------------
Balance at August 31, 2000......................     $          -0-          $            111        $           111
Foreign currency translation adjustment.........                 -                        (20)                   (20)
Transition adjustment...........................            25,653                         -                  25,653
Net gain on cash flow hedges....................            35,242                         -                  35,242
Less reclassification adjustments...............           (30,197)                        -                 (30,197)
                                                     -- -------------        --- --------------      ---- ------------
Balance at February 28, 2001....................     $      30,698           $             91        $        30,789
                                                     == =============        === ==============      ==== ============

Comprehensive income for the six and three months ended February 28, 2001 is as follows:

                                                                     February 28, 2001            February 28, 2001
                                                                  ------------------------    --------------------------
Net income (loss)................................................      $           5,369      $                  (1,344)
                                                                      --- ----------------    --- ----------------------
Net gains (losses) arising during the period
    Cash flow hedges:
         Net derivative transition gain..........................      $          30,208      $                       -
         Net derivative gains during period......................                 41,500                         18,498
         Reclassification adjustment.............................                (35,560)                       (33,908)
    Foreign currency translation adjustment......................                    (20)                            (9)
                                                                      --- ----------------    --- ----------------------
Other comprehensive income before tax............................      $          36,128      $                 (15,419)
Income tax (expense) benefit related to items of
    other comprehensive income...................................      $          (5,450)     $                   2,311
                                                                      --- ----------------    --- ----------------------
Other comprehensive income (loss)................................      $          30,678      $                 (13,108)
                                                                      --- ----------------    --- ----------------------
Comprehensive income (loss)......................................      $          36,047      $                 (14,452)
                                                                      === ================    === ======================

(5) Derivative Financial Instruments

Effective September 1, 2000, we adopted Statement of Financial Accounting Standard No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. This standard imposes extensive recordkeeping requirements in order to designate a derivative financial instrument as a hedge. As a result, certain of our segments hold derivative instruments, such as exchange traded grain futures and options, exchange traded crude oil futures and foreign currency forward positions that we believe provide an economic hedge of future transactions, but have not been designated as a hedge. Gains or losses related to these derivative instruments are classified as a component of other income. All derivative instruments are recorded in our balance sheet at fair value. The cumulative effect of this change in accounting principle at September 1, 2000 was to increase income by $13.5 million.

Farmland also uses derivative financial instruments to manage our commodity price risk in the procurement of natural gas, the primary input necessary for the production of the various nitrogen-based crop production products we manufacture. Our objective is to fix the price of a portion of our forecasted purchases of natural gas used to manufacture crop production products.

To meet this objective, we enter into various types of derivative instruments to manage fluctuations in cash flows resulting from commodity price risk. These instruments may include exchange traded futures contracts, over the counter (OTC) swap contracts and OTC option or exchange traded option contracts. The changes in the market value of such contracts has historically been, and is expected to continue to be, highly effective at offsetting changes in price movements of the hedged item. The amount of hedge ineffectiveness was immaterial for the three and six months ended February 28, 2001.

As of February 28, 2001, the maximum length of time over which we are hedging our exposure to the variability in future cash flows associated with natural gas forecasted transactions is approximately one year. Gains and losses recorded in accumulated other comprehensive income (“AOCI”) are reclassified, on a first-in, first-out basis, as a component of cost of sales when the related crop production product is sold. As a result, we anticipate that substantially all gains and losses in AOCI as of February 28, 2001 will be reclassified into earnings within the next twelve months. Gains and losses in AOCI may fluctuate until the related contract is closed. During the six months ended February 28, 2001, net gains of approximately $35.5 million related to derivative instruments included in AOCI as a result of the September 1, 2000 transition adjustment were reclassified into net income. During the three and six months ended February 28, 2001, approximately $14.4 million and $18.7 million, respectively, were reclassified into earnings as a result of the discontinuance of cash flow hedges because it became probable that the original forecasted purchases of natural gas would not occur.

(6) Contingencies

Farmland is aware of probable obligations under state and federal environmental laws at a number of properties. At February 28, 2001 and at August 31, 2000, we had an environmental accrual in our Condensed Consolidated Balance Sheet for probable and reasonably estimated costs for remediation of contaminated properties of $13.8 million and $12.9 million, respectively. We periodically review and, as appropriate, revise our environmental accruals. Based on current information and regulatory requirements, we believe that the accruals established for environmental expenditures are adequate.

Some environmental matters are in preliminary stages and the timing, extent and costs of actions which governmental authorities may require are currently unknown. As a result, certain costs of addressing these environmental matters are either not probable or not reasonably estimable and, therefore, have not been accrued. In management’s opinion, it is reasonably possible that, in addition to the $13.8 million which has been accrued at February 28, 2001, Farmland may incur $13.7 million of costs for these matters.

Under the Resource Conservation Recovery Act of 1976 (‘‘RCRA”), Farmland has three closure and four post-closure plans in place for five 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 February 28, 2001 (and are in addition to the $13.8 million accrual and the $13.7 million discussed in the prior paragraphs). These liabilities are accrued when plans for termination of plant operations have been made. Operations are being conducted at these locations, and we do not plan to terminate these operations in the foreseeable future. Therefore, these environmental exit costs have not been accrued.

The Environmental Protection Agency has issued new rules limiting sulfur in gasoline to 30 parts per million and has published a proposed rule limiting sulfur in diesel fuel to 15 parts per million. The rules affecting gasoline were effective December 1, 1999 with a January 1, 2004 compliance date. The proposed rules for diesel fuel have a June 1, 2006 compliance date. Based on information currently available, we anticipate that material expenditures, possibly in excess of $100 million, will be required to achieve compliance with these new and pending rules. Farmland has applied for, but has not received, regulatory extension of the deadlines until 2008.

(7) Planned Major Maintenance Costs

Effective September 1, 2000, based on a proposed Statement of Position issued by the Accounting Standards Executive Committee of the AICPA during September, 2000, Farmland changed its method of accounting for certain costs expected to be incurred in the next planned major maintenance of its manufacturing and processing facilities from the accrue-in-advance method to the direct expense method. Under the new accounting method, maintenance costs are recognized as expense as maintenance services are performed. We believe the new method is preferable in the circumstances because, prior to the performance of the maintenance services, we do not have a present unavoidable duty or responsibility to perform such services. The effect of this change at September 1, 2000 was a $6.3 million benefit (net of income taxes of $1.1 million) and has been presented as a cumulative effect of an accounting change in the accompanying Condensed Consolidated Statements of Operations for the three and six months ended February 28, 2001.

(8) Industry Segment Information

Beginning September 1, 2000, Farmland began allocating certain interest expense based on net assets employed by each segment and allocating certain corporate service expenses based on estimated use of the service by each segment. Segment results for the six months and three months ended February 29, 2000 were restated to conform to our current operational structure and our current method of allocation.

Six months ended
February 29, 2000 (Page 1 of 3)

(Amounts in Thousands)


                                                             CONSOLIDATED SEGMENTS
                                   --------------------------------------------------------------------------
                                                                  Unallocated
                                          Combined             Corporate Expenses
                                          Segments                                           Consolidated
                                     ------------------     ----------------------      ---------------------
Sales & transfers                    $      7,373,670        $                 -         $         7,373,670
Transfers between segments                 (1,525,007)                         -                  (1,525,007)
                                     ------------------     ----------------------      ---------------------
Net sales                            $      5,848,663        $                 -         $         5,848,663
                                     ==================     ======================      =====================

Net income (loss)                    $        (23,568)       $           (25,070)        $           (48,638)
                                     ==================     ======================      =====================


Total assets                         $      2,952,050        $           308,441         $         3,260,491
                                     ==================     ======================      =====================

Six months ended
February 28, 2001 (Page 1 of 3)

(Amounts in Thousands)

                                                          CONSOLIDATED SEGMENTS
                                   ------------------------------------------------------------------------
                                                                 Unallocated
                                         Combined                 Corporate
                                         Segments                 Expenses                  Consolidated
                                     ---------------       ---------------------       --------------------
Sales & transfers                    $   7,653,115          $                -          $       7,653,115
Transfers between segments              (1,700,391)                          -                 (1,700,391)
                                     ---------------       ---------------------       --------------------
Net sales                            $   5,952,724          $                -          $       5,952,724
                                     ===============       =====================       ====================

Net income (loss)                    $      25,435          $          (20,066)         $           5,369
                                     ===============       =====================       ====================


Total assets                         $   3,168,342          $          311,197          $       3,479,539
                                     ===============       =====================       ====================

Six months ended
February 29, 2000 (Page 2 of 3)(
Amounts in Thousands)

                                                                       INPUT AND OTHER SEGMENTS
                                    ------------------------------------------------------------------------------------------------
                                                                                                      Other            Total Input
                                           Crop                                                     Operating           and Other
                                        Production           Petroleum              Feed              Units              Segments
                                    -- -------------    -- --------------     --- ----------    -- ------------     -- -------------
Sales & transfers                   $      435,874      $        686,416      $    340,096       $  1,038,725        $  2,501,111
Transfers between segments                  (1,769)               (9,646)          (27,513)          (889,188)           (928,116)
                                    -- -------------       --------------         ---------        ------------        -------------
Net sales                           $      434,105      $        676,770      $    312,583       $    149,537        $  1,572,995
                                    == =============    == ==============     === =========     == ============      == =============

Net income (loss)                   $      (44,459)     $        (10,378)     $      5,929      $        (204)       $    (49,112)
                                    == =============    == ==============     === =========     == ============      == =============


Total assets                        $      719,552      $        379,842      $    125,374      $     120,176        $  1,344,944
                                    == =============    == ==============     === =========     == ============      == =============

Six months ended
February 28, 2001 (Page 2 of 3)
(Amounts in Thousands)


                                                                    INPUT AND OTHER SEGMENTS
                                  ----------------------------------------------------------------------------------------------
                                                                                                                   Other            Total Input
                                                         Crop                                                    Operating           and Other
                                                      Production           Petroleum           Feed                Units              Segments
                                                  -- -------------    --- ------------    -- ----------      -- -------------    -- -------------
                 Sales & transfers                $      316,532      $     863,746       $    50,262        $    1,165,359      $     2,395,899
                 Transfers between segments               (1,390)           (10,458)           (5,191)           (1,042,963)          (1,060,002)
                                                  --                  ---                 --                 --                  --
                                                     -------------        ------------       ----------         -------------       -------------
                 Net sales                        $      315,142      $     853,288       $    45,071        $      122,396      $     1,335,897
                                                  == =============    === ============    == ==========      == =============    -- =============

                 Net income (loss)                $          140      $      15,133       $    (2,406)       $       (4,731)     $         8,136
                                                  == =============    === ============    == ==========      == =============    == =============


                 Total assets                     $      808,231      $     431,195       $    54,785        $      113,763      $     1,407,974
                                                  == =============    === ============    == ==========      == =============    == =============

Six months ended
February 29, 2000 (Page 3 of 3)
(Amounts in Thousands)


                                                       OUTPUT SEGMENTS
                                  ----------------------------------------------------------
                                                                                Total
                                  Refrigerated           World                 Output
                                      Foods              Grain                Segments
                                  --------------     --------------       ------------------
Sales&transfers                 $  2,560,615        $  2,311,944        $      4,872,559
Transfers between segments            (439,254)           (157,637)               (596,891)
                                  --------------     --------------       ------------------
Net sales                         $  2,121,361        $  2,154,307        $      4,275,668
                                  ==============     ==============       ==================

Net income (loss)                 $     21,460       $       4,084        $         25,544
                                  ==============     ==============       ==================


Total assets                      $    710,064       $     897,042        $      1,607,106
                                  ==============     ==============       ==================

Six months ended
February 28, 2001 (Page 3 of 3)
(Amounts in Thousands)


                                                       OUTPUT SEGMENTS
                                    -------------------------------------------------------
                                                                                Total
                                     Refrigerated            World             Output
                                        Foods                Grain            Segments
                                    ---------------     ----------------   ----------------
Sales & transfers                   $   2,683,095        $   2,574,121      $    5,257,216
Transfers between segments               (422,105)            (218,284)           (640,389)
                                    ---------------     ----------------   ----------------
Net sales                           $   2,260,990        $   2,355,837      $    4,616,827
                                    ===============     ================   ================

Net income (loss)                   $      14,028        $       3,271      $       17,299
                                    ===============     ================   ================


Total assets                        $     790,094        $     970,274      $    1,760,368
                                    ===============     ================   ================

Three months ended
February 29, 2000 (Page 1 of 3)
(Amounts in Thousands)


                                                             CONSOLIDATED SEGMENTS
                                   ---------------------------------------------------------------------------
                                                                  Unallocated
                                          Combined             Corporate Expenses
                                          Segments                                            Consolidated
                                     ------------------     ----------------------      -----------------------
Sales & transfers                    $      3,588,902        $                 -         $          3,588,902
Transfers between segments                   (724,704)                         -                     (724,704)
                                     ------------------     ----------------------      -----------------------
Net sales                            $      2,864,198        $                 -         $          2,864,198
                                     ==================     ======================      =======================

Net income (loss)                    $        (15,897)       $            (6,199)        $            (22,096)
                                     ==================     ======================      =======================


Total assets                         $      2,952,050        $           308,441         $          3,260,491
                                     ==================     ======================      =======================

Three months ended
February 28, 2001 (Page 1 of 3)
(Amounts in Thousands)


                                                            CONSOLIDATED SEGMENTS
                                   -------------------------------------------------------------------------
                                                                 Unallocated
                                         Combined                 Corporate
                                         Segments                 Expenses                  Consolidated
                                     ---------------       ---------------------       ---------------------
Sales & transfers                    $   3,900,907          $                -          $        3,900,907
Transfers between segments                (889,510)                          -                    (889,510)
                                     ---------------       ---------------------       ---------------------
Net sales                            $   3,011,397          $                -          $        3,011,397
                                     ===============       =====================       =====================

Net income (loss)                    $       1,397          $           (2,741)         $           (1,344)
                                     ===============       =====================       =====================


Total assets                         $   3,168,342          $          311,197          $        3,479,539
                                     ===============       =====================       =====================

Three months ended
February 29, 2000 (Page 2 of 3)
(Amounts in Thousands)


                                                                       INPUT AND OTHER SEGMENTS
                                    -----------------------------------------------------------------------------------------------
                                                                                                      Other               Total
                                           Crop                                                     Operating           Input and
                                        Production           Petroleum              Feed              Units               Other
                                                                                                                        Segments
                                    -- -------------    -- ---------------    --- ----------    -- ------------     -- ------------
Sales & transfers                   $      201,251      $        314,946     $    163,502      $    498,881        $   1,178,580
Transfers between segments                    (839)               (9,646)          (9,961)         (423,997)            (444,443)
                                    -- -------------    -- ---------------    --- ---------     -- ------------     -- ------------
Net sales                           $      200,412      $        305,300     $    153,541      $     74,884        $     734,137
                                    == =============    == ===============    === =========     == ============     == ============

Net income (loss)                   $      (11,321)     $         (7,372)    $      1,292      $     (2,071)       $     (19,472)
                                    == =============    == ===============    === =========     == ============     == ============


Total assets                        $      719,552      $        379,842     $    125,374      $    120,176        $   1,344,944
                                    == =============    == ===============    === =========     == ============     == ============

Three months ended
February 28, 2001 (Page 2 of 3)
(Amounts in Thousands)


                                                                    INPUT AND OTHER SEGMENTS
                                  ----------------------------------------------------------------------------------------------
                                                                                                                   Other            Total Input
                                                         Crop                                                    Operating           and Other
                                                      Production           Petroleum            Feed               Units              Segments
                                                  -- -------------     -- ------------    -- -----------     -- -------------    -- -------------
                 Sales & transfers                $      170,867       $      441,624     $        (2)       $      619,374      $    1,231,863
                 Transfers between segments                 (461)              (5,390)             -0-             (560,696)           (566,547)

                                                     -------------        ------------       -----------        -------------       -------------
                 Net sales                        $      170,406       $      436,234     $        (2)       $       58,678      $      665,316
                                                  == =============     == ============    == ===========     == =============    == =============

                 Net income (loss)                $       (1,968)      $       11,482     $    (3,851)       $       (3,256)     $        2,407
                                                  == =============     == ============    == ===========     == =============    == =============


                 Total assets                     $      808,231       $      431,195     $    54,785        $      113,763      $    1,407,974
                                                  == =============     == ============    == ===========     == =============    == =============

Three months ended
February 29, 2000 (Page 3 of 3)
(Amounts in Thousands)


                                                       OUTPUT SEGMENTS
                                  -----------------------------------------------------------
                                                                                Total
                                  Refrigerated           World                  Output
                                      Foods              Grain                 Segments
                                  --------------     --------------       -------------------
Sales & transfers                 $  1,289,249       $   1,121,073        $      2,410,322
Transfers between segments            (221,542)            (58,719)               (280,261)
                                  --------------     --------------       -------------------
Net sales                         $  1,067,707       $   1,062,354        $      2,130,061
                                  ==============     ==============       ===================

Net income (loss)                 $      2,352       $       1,223        $          3,575
                                  ==============     ==============       ===================


Total assets                      $    710,064       $     897,042        $      1,607,106
                                  ==============     ==============       ===================

Three months ended
February 28, 2001 (Page 3 of 3)
(Amounts in Thousands)


                                                       OUTPUT SEGMENTS
                                    -------------------------------------------------------
                                                                                Total
                                     Refrigerated           World              Output
                                        Foods               Grain             Segments
                                    ---------------     ---------------    ----------------
Sales & transfers                   $   1,359,414        $   1,309,630      $    2,669,044
Transfers between segments               (204,969)            (117,994)           (322,963)
                                    ---------------     ---------------    ----------------
Net sales                           $   1,154,445        $   1,191,636      $    2,346,081
                                    ===============     ===============    ================

Net income (loss)                   $        (708)       $        (302)     $       (1,010)
                                    ===============     ===============    ================


Total assets                        $     790,094        $     970,274      $    1,760,368
                                    ===============     ===============    ================

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

The information contained in this discussion and in the unaudited Condensed Consolidated Financial Statements and Accompanying Notes presented in this Form 10-Q should be read in conjunction with information set forth in Part II, Items 7 and 8, in Farmland’s Annual Report on Form 10-K for the year ended August 31, 2000.

Financial Condition, Liquidity and Capital Resources

Farmland 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.

Farmland’s debt securities issued under the continuous debt program generally are offered on a best-efforts basis through our wholly owned broker-dealer subsidiary, Farmland Securities Company, and also may be offered by selected unaffiliated broker-dealers. The types of debt securities offered in the continuous debt program include certificates payable on demand and subordinated debenture bonds. The total amount of debt securities outstanding and the flow of funds to, or from, Farmland as a result of the continuous debt program are influenced by the rate of interest which we establish for each type or series of debt security offered, by the option of Farmland to call for redemption certain of its outstanding debt securities, and by the option of holders, under certain circumstances, to request the early redemption of outstanding debt securities. On October 31, 2000, we suspended sales under our debt program. To sell debt under our program, we will need to register additional securities with the Securities and Exchange Commission. Although as of April 16, 2001 we have not filed to register additional securities, management plans to file a registration statement in the near future. This report on Form 10-Q does not constitute an offer of securities; such an offering will only be made through a prospectus. During the six months ended February 28, 2001, the outstanding balance of demand certificates decreased by $5.7 million, and the outstanding balance of subordinated debenture bonds decreased by $11.6 million.

In May 2000, Farmland established a 364 day, $750 million, revolving credit facility (the “Credit Facility”) with a syndicate of banks. At February 28, 2001, Farmland had $545.0 million of short-term borrowings under the Credit Facility. Additionally, $50.4 million of the Credit Facility was utilized to support letters of credit. Farmland pays commitment fees under the Credit Facility, currently equal to 50 basis points annually on the unused portion of the credit. Borrowings under the Credit Facility are secured by a substantial portion of our accounts receivable, inventories and fixed assets. Interest rates under the Credit Facility are based on a spread over the base rate (as defined in the related agreement) or a spread over LIBOR (the London Interbank Offering Rate). The Credit Facility contains covenants related to Farmland’s ratio of earnings before interest, taxes, depreciation and amortization to net interest expense, our ratio of total debt to total capitalization, and our ratio of senior debt to total capitalization, all as defined in the related agreement. In addition to these financial covenants, our ability to borrow under the Credit Facility may be restricted based on our level of receivables and inventories. As calculated at February 28, 2001, availability under the Credit Facility was approximately $86 million.

During April 2001, Farmland and a syndicate of banks reached agreement to amend our Credit Facility agreement. The Credit Facility’s term was extended to November 9, 2001. Subject to debt covenant restrictions, the amended Credit Facility provides a $650 million credit, reduced to a $500 million credit effective August 9, 2001. As specified in the agreement, the available credit will be reduced by proceeds from sales of assets and working capital (other than in the ordinary course of business). Regardless of asset and working capital sales, we will retain a minimum available credit of $400 million. Farmland and the syndicate of banks are working to replace, prior to November 9, 2001, the current credit facility with a long-term $400 million credit facility.

Farmland National Beef Packing Company, L.P. (“FNBPC”) has a $130.0 million credit facility which expires March 31, 2003. This facility is provided by various participating banks and these borrowings are nonrecourse to Farmland or Farmland’s other affiliates. At February 28, 2001, FNBPC had borrowings under this facility of $43.0 million, and $17.9 million of the facility was utilized to support letters of credit. Assets with a carrying value of $270.6 million at February 28, 2001 have been pledged by FNBPC to support its borrowings under the facility.

At February 28, 2001, Tradigrain had $377 million in credit facilities with various international banks. Tradigrain primarily uses these facilities to provide financing and letters of credit to support international grain trading transactions. Obligations of Tradigrain under these facilities are nonrecourse to Farmland and Farmland’s other affiliates. At February 28, 2001, the related borrowings and other commitments totaled $317.9 million.

Farmland maintains other borrowing arrangements with banks and financial institutions. Under such arrangements, at February 28, 2001, $7.3 million was borrowed, of which $6.0 million is nonrecourse to Farmland or Farmland’s other affiliates.

Leveraged leasing has been utilized to finance railcars, a significant portion of our crop production equipment, and certain crop production manufacturing facilities.

Farmland has issued and outstanding 2 million shares of 8% Series A Cumulative Redeemable Preferred Shares (the “Preferred Shares”) with an aggregate liquidation preference of $100 million ($50 liquidation preference per share). The Preferred Shares are not redeemable prior to December 15, 2022. On and after December 15, 2022, the Preferred Shares may be redeemed for cash at our option, in whole or in part, at specified redemption prices declining to $50 per share on and after December 15, 2027, plus accumulated and unpaid dividends. The Preferred Shares do not have any stated maturity, are not subject to any sinking fund or mandatory redemption provisions and are not convertible into any other security.

Net cash used in operating activities totaled $9.6 million during the six months ended February 28, 2001, reflecting increases in inventories, primarily due to the purchase of approximately $59.7 million of crude oil and in-process product concurrent with the dissolution of Cooperative Refining combined with a significant increase in the cost of natural gas (the primary raw material for nitrogen-based crop nutrient inventories), and other assets, partially offset by a decrease in accounts receivable and increases in accounts payable and other liabilities. Major uses of cash during the six months ended February 28, 2001 include $49.8 million for capital expenditures, a $28.8 million decrease in checks and drafts, and $27.0 million to redeem subordinated debt certificates. The major sources of cash were $96.4 million provided by a net increase in net bank loans and notes payable, $17.2 million of cash distributions from ventures, and $15.3 million from the issuance of subordinated debt securities.

Results of Operations

General

In view of the seasonality of Farmland’s businesses, it must be emphasized that the results of operations for the periods presented are not necessarily indicative of the results for a full fiscal year.

Farmland’s sales, gross margins and net income depend, to a large extent, on conditions in agriculture and may be volatile due to factors beyond our 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 our operations. Historically, changes in the costs of raw materials used in the manufacture of Farmland’s finished products have not necessarily resulted in corresponding changes in the prices at which such products have been sold. Management cannot determine the extent to which these factors may impact our future operations. Farmland’s cash flow and net income or loss may be volatile as conditions affecting agriculture and markets for our products change.

The level of operating income in the crop production, petroleum, and refrigerated foods businesses is, to a significant degree, attributable to the spread between selling prices and raw material costs (natural gas in the case of nitrogen-based crop nutrients, crude oil in the case of petroleum products, and live hogs and cattle in the case of refrigerated foods). We cannot determine the direction or magnitude to which these factors will affect our cash flow and net income or loss.

Results of Operations for Six Months Ended February 28, 2001 compared to Six Months Ended February 29, 2000.

Effective January 1, 2000 and October 1, 2000 we formed a crop production marketing venture (Agriliance) and a feed venture (Land O’Lakes Farmland Feed). We record income (loss) from ventures as equity in net income (loss) of investees in our Condensed Consolidated Statements of Operations. As a result, effective from the date of formation, sales, costs of sales, selling, general and administrative (SG&A) expenses and other income generated by these ventures are not recorded in our Condensed Consolidated Statements of Operations. Therefore, sales, expenses and other income items related to feed and crop production marketing decreased for the six months ended February 28, 2001 compared with the prior year.

Sales for the six months ended February 28, 2001 increased approximately $104 million, or 2%, compared with for the same period last year. This increase is primarily the result of increased sales in our petroleum and world grain businesses, partially offset by a decrease in sales recorded in Farmland’s financial statements due to the formation of our Land O’Lakes Farmland Feed and Agriliance ventures.

For the six months ended February 28, 2001, we had net income of $5.4 million compared with a net loss of $48.6 million for the same period last year. This improvement is primarily due to the combined result of improved margins for our refined fuel, propane, and nitrogen-based plant foods products, our successful effort to reduce selling, general and administrative expense, and our management of natural gas positions, partly offset by an increase in interest expense due to increased interest rates.

Crop Production

In order to enhance the efficiency in marketing crop production products to our members, on January 1, 2000, Farmland, Land O’Lakes, and Cenex Harvest States combined their crop production marketing functions into a new venture, Agriliance. Farmland now sells 100% of our manufactured product to Agriliance, and we no longer need to purchase additional product for resale to meet our members’ demand for fertilizer. For the six months ended February 28, 2001, our unit sales volume was reduced by 48% compared to the same period last year. Unit selling prices for the six months ended February 28, 2001 increased by 51% compared to the same period last year. The net impact was a reduction in crop production sales to $315 million for the six months ended February 28, 2001 compared with crop production sales of $434 million for the same period last year. Both the average unit selling prices of nitrogen-based plant foods and the average unit cost to produce nitrogen-based plant foods have increased from last year. Average unit selling price increased as a result of the temporary closing by various manufacturers of certain nitrogen production facilities, presumably in response to increased natural gas prices. Average unit production cost increased as the price of natural gas, which represents a major cost in the production of nitrogen based fertilizer, has risen substantially since this same period last year. The average price of natural gas for the first six months of fiscal year 2001 was $4.86 per mmbtu compared to $2.43 per mmbtu for the same period last year, which translates to an increased cost of producing anhydrous ammonia of approximately $82 per ton. To better manage our inventory costs, we temporarily stopped production at two locations. To meet spring demand, we resumed production at these two locations during our second quarter of 2001.

Income of the crop production segment increased $44.6 million for the six months ended February 28, 2001 compared with the prior year, primarily as a result of improved margins for nitrogen-based plant foods, reduced administrative expenses, and gains related to discontinued cash flow hedges. With the formation, effective January 1, 2000, of the Agriliance venture, a portion of our nitrogen-based plant food income is now recognized as equity in income of investees, rather than as gross income. Also, certain of crop production’s selling, general and administrative expenses were transferred to Agriliance. Income from crop production’s ventures, including Agriliance, decreased $15.1 million, which was partially offset by a decrease of $7.9 million in crop production’s direct selling, general and administrative expenses.

Petroleum

Sales of the petroleum segment during the six months ended February 28, 2001 increased $177 million, or approximately 26%, compared with the same period last year. This increase was primarily due to an approximate 31% increase in unit prices for refined fuels and an approximate 72% increase in unit prices for propane, partially offset by an approximate 2% decline in unit sales of refined fuels. The increase in price results from a combination of factors, including an effort by OPEC to maintain a relatively high price for crude oil, the diversion of product to other geographic areas with more severe product shortages than the Midwest, and a colder than normal winter throughout much of the United States.

Income for the petroleum segment increased $25.5 million for the six months ended February 28, 2001 compared with the prior period. This increase is primarily due to an increase in the spread between crude oil costs and refined fuel selling prices and to higher propane product prices.

Cooperative Refining, which was 42% owned by Farmland, was dissolved effective December 31, 2000. As a result, during our second quarter income previously recognized as equity in income of investees is now recognized as gross income.

Feed

In order to enhance the size, scale and market position of our feed operations, effective October 1, 2000, Farmland and Land O’Lakes combined feed businesses to form a new venture, Land O’Lakes Farmland Feed. Starting October 1, 2000, we no longer record our feed business’s sales, cost of sales, SG&A expenses and other income in our Condensed Consolidated Statements. Instead, we record only our share of net income (loss) of the venture as equity in net income of investees in our Condensed Consolidated Statements. As a result of forming the venture, the sales of the feed segment as recorded in Farmland’s financial statements decreased $268 million, or approximately 86%, in the six months ended February 28, 2001 compared with the prior year. Income for the feed segment decreased $8.3 million for the six months ended February 28, 2001 compared with the same period last year due primarily to our share of non-recurring costs associated with Land O’Lakes Farmland Feed’s rationalization of its manufacturing facilities.

Refrigerated Foods

Sales in the refrigerated foods segment increased $140 million, or approximately 7%, for the six months ended February 28, 2001 compared with the same period last year. This increase is primarily attributable to a 9% increase in unit selling price and a 2% decrease in unit volume.

Income in the refrigerated foods segment for the six months ended February 28, 2001 decreased $7.4 million compared to the prior period. This decrease is primarily attributable to decreased herd supplies available for processing, which resulted in higher livestock prices, higher natural gas prices due to decreased supply and increased demand during the winter months, and higher labor costs. Also, promotional and advertising expense to enhance brand recognition were approximately $4.2 million higher during the period.

World Grain

Sales of the world grain segment increased $202 million, or approximately 9%, for the period ended February 28, 2001 compared with the same period last year primarily as a result of an increase in average unit selling price. Compared to the same period last year, international sales volume increased approximately 3% offset by a domestic sales volume decrease of 4%. Lower near term wheat prices, inclement weather and governmental producer loan deficiency payments (which require the producer to withhold grain from the market) were the primary causes of the reduced domestic sales volume.

Operating margins for our world grain business increased 23% for the six months ended February 28, 2001 compared to the same period in the prior year. However, reduced third party storage income and increased interest costs resulted in a $0.8 million reduction in world grain segment income for the six months ended February 28, 2001 compared to the same period last year.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses decreased $44.0 million, or approximately 19%, from the same period last year. SG&A expenses directly connected to segments decreased approximately $33.9 million (primarily related to the formation of Agriliance and Land O’Lakes Farmland Feed joint ventures and the sale of our Dubuque, Iowa pork processing plant) and are included in the determination of business segment income. During the six months ended February 28, 2001 compared with the same period last year, Farmland successfully reduced SG&A expenses not identified to business segments decreased by $10.1 million, primarily as a result of increased efficiencies and a reduction in bad debt expense.

Other Income

Other income increased $28.2 million for the six months ended February 28, 2001 compared with the same period last year. Other income directly connected to the segments increased $22.2 million, primarily due to the reclassification into earnings of cash flow hedges because it became probable that the original forecasted transactions would not occur. Other income not directly connected to segments increased $6.0 million for the six months ended February 28, 2001 compared with the same period last year, primarily due to the $4.5 million gain on sale of our 50% ownership interest in One System Group, LLC.

Interest Expense

Net interest expense for six months ended increased $12.1 million compared with the same period last year due primarily to an increase in our effective interest rate.

Results of Operations for Three Months Ended February 28, 2001 compared to Three Months Ended February 29, 2000.

On October 1, 2000, Farmland and Land O’Lakes engaged in a venture (Land O’Lakes Farmland Feed) that combines all aspects of each investor’s feed business. We record income (loss) from ventures as equity in net income of investees in our Condensed Consolidated Statements of Operations. As a result, sales, costs of sales, SG&A expenses and other income generated by ventures are not recorded in our Condensed Consolidated Statements of Operations. Therefore, sales, expenses and other income related to the feed segment decreased for the three months ended February 28, 2001 compared with the prior year.

Consolidated sales for the three months ended February 28, 2001 increased $147 million, or 5%, compared to the same period in the prior year. This increase is primarily the result of increased sales in our petroleum and world grain businesses, partially offset by a decrease in sales recorded in Farmland’s financial statements due to the formation of our Land O’Lakes Farmland Feed and Agriliance ventures.

Our net income improved $20.8 million, from a net loss of $22.1 million for the three months ended February 29, 2000 to a net loss of $1.3 million for the three months ended February 28, 2001. This improvement is primarily due to increased margins for refined fuels, propane, and nitrogen-based plant foods combined with our successful effort to reduce selling, general and administrative expense, partly offset by an increase in interest expense due to increased interest rates.

Crop Production

As a result of forming Agriliance, our unit sales volume for the period was reduced compared to the same period last year. This unit volume decrease was partially offset by a 70% increase in unit selling prices for the three months ended February 28, 2001 compared to the same period last year. The net impact was a reduction in crop production sales to $171 million for the three months ended February 28, 2001 compared with crop production sales of $201 million for the same period last year. Both the average unit selling prices of nitrogen-based plant foods and the average unit cost to produce nitrogen-based plant foods have increased from last year. Average unit selling price increased as a result of the temporary closing by various manufacturers of certain nitrogen production facilities in response to increased natural gas prices. Average unit production cost increased as the price of natural gas, which represents a major cost in the production of nitrogen based fertilizer, has risen substantially since this same period last year. The average price of natural gas for the second three months of fiscal year 2001 was $5.59 compared to $2.38 for the same period last year. This translates to an increased cost of producing anhydrous ammonia of approximately $109 per ton. To better manage our inventory costs, we temporarily stopped production at two locations. To meet spring demand, we resumed production at these two locations during our second quarter of 2001.

The net loss of the crop production segment decreased $9.4 million for the three months ended February 28, 2001 compared with the prior year, primarily as a result of improved margins for nitrogen-based plant foods and gains related to discontinued cash flow hedges. With the formation, effective January 1, 2000, of the Agriliance venture, a portion of our nitrogen-based plant food income is now recognized as equity in income of investees rather than as gross income. Also, certain of crop production’s selling, general and administrative expenses were transferred to Agriliance. Income from crop production’s ventures, including Agriliance, decreased $13.5 million, which was partially offset by a decrease of $3.5 million in crop production’s direct selling, general and administrative expenses.

Petroleum

Sales of the petroleum segment in the three months ended February 28, 2001 increased $131 million, or approximately 43%, compared with the same period last year. This increase was primarily due to an approximate 17% increase in unit prices for refined fuels, an approximate 77% increase in unit prices for propane, and increased unit sales for refined fuels and propane of approximately 5% and 60%, respectively.

The increase in petroleum unit prices results from a combination of factors, including efforts by OPEC to maintain a relatively high price for crude oil, the diversion of product to other geographic areas with more severe product shortages than the Midwest, and a colder than normal winter throughout much of the United States. The substantial increase in unit sales of propane primarily is the result of much colder weather in our geographic sales region than was experienced in the previous year.

Income for the petroleum segment increased $18.9 million for the three months ended February 28, 2001 compared with the prior period. This increase is primarily due to an increase in the spread between crude oil costs and refined fuel and higher propane product prices.

Cooperative Refining, which was 42% owned by Farmland, was dissolved effective December 31, 2000. As a result, income previously recognized as equity in income of investees is now recognized as gross income.

Feed

As a result of forming Land O’Lakes Farmland Feed, we did not record any sales for our feed business during the three months ended February 28, 2001. Income for the feed segment decreased $5.1 million for the three months ended February 28, 2001 compared with the same period last year due primarily to non-recurring costs associated with Land O’Lakes Farmland Feed’s rationalization of its manufacturing facilities. With the formation of Land O’Lakes Farmland Feed, our feed income (loss) is now recognized as equity in income of investees, rather than gross income. Also, feed’s selling, general and administrative expenses have been transferred to our venture.

Refrigerated Foods

Sales in the refrigerated foods segment increased $86.7 million, or approximately 8%, for the three months ended February 28, 2001 compared with the same period last year. This increase is primarily attributable to an 11% increase in unit price offset by a 2% decrease in unit volume.

Despite the increase in unit selling price, our income from the refrigerated foods segment for the three months ended February 28, 2001 decreased $3.1 million compared to the prior period. This decrease is primarily attributable to increased raw material costs combined with increased utility costs, increased labor costs and increased promotional and advertising expense to expand brand recognition.

World Grain

Sales of the world grain segment increased $129 million, or approximately 12%, for the three month period ended February 28, 2001 compared with the same period last year primarily as a result of an increase in average unit selling price. The increase in average selling price was partly offset by a decline in domestic sales volume caused by lower near term wheat prices when compared to deferred wheat selling prices, inclement weather and governmental producer loan deficiency payments.

Although world grain operating margins increased 3%, this increase was offset by a reduction in third party storage income and increased interest costs, resulting in a $1.5 million decrease in world grain segment income for the three months ended February 28, 2001 compared to the same period last year.

Selling, General and Administrative Expenses

For the three months ended February 28, 2001, SG&A expenses decreased $22.7 million, or approximately 20%, from the same period last year. SG&A expenses directly connected to segments decreased approximately $20.8 million (primarily related to the formation of Land O’Lakes Farmland Feed joint venture and the sale of our Dubuque, Iowa pork processing plant) and are included in the determination of business segment income.

Other Income

Other income increased $20.1 million for the three months ended February 28, 2001 compared with the same period last year. Other income directly connected to segments increased $15.9 million, primarily due to the reclassification into earnings of cash flow hedges because it became probable that the original forecasted transactions would not occur. Other income not directly connected to segments increased $4.2 million for the three months ended February 28, 2001 compared with the same period last year. This increase is primarily due to the $4.5 million gain on the sale of our 50% ownership interest in One System Group, LLC.

Interest Expense

Net interest expense for the three months increased $5.4 million compared with the same period last year due primarily to an increase in our effective interest rate.

Recent Accounting Pronouncements

Statement of Financial Accounting Standards (“SFAS”) No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities ” was issued by the FASB and is effective for transfers occurring after March 31, 2001 and for disclosures relating to securitization transactions and collateral and for recognition and reclassification of collateral for fiscal years ending after December 15, 2000 (our fiscal year 2001). We are currently evaluating the impact, if any, that adoption of these provisions would have on our financial statements.

Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” was issued in December 1999 by the staff of the SEC and is effective no later than the fourth fiscal quarter of fiscal years beginning after December 15, 1999. We anticipate that the adoption of SAB 101 will not have a significant effect on our financial statements.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Farmland’s market exposure to derivative transactions, entered into for the purpose of managing commodity price risk, foreign currency risk and interest rate risk, has not materially changed since August 31, 2000. Quantitative and qualitative disclosures about market risk are contained in Item 7A of our Annual Report on Form 10-K for the year ended August 31, 2000.

Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995

We are including the following cautionary statement in this Form 10-Q 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, Farmland. The factors identified in this cautionary statement include 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, Farmland.

Where any such forward-looking statement includes a statement of the assumptions or basis underlying such forward-looking statement, we caution that, while we believe such assumptions or basis to be reasonable and made in good faith, the assumed facts or basis almost always vary from actual results, and the differences between the assumed facts or basis and actual results can be material, depending upon the circumstances. Where, in any forward-looking statement, Farmland, 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 our business, the anticipated expenditures for environmental remediation, our ability to complete, in the near term, a filing to register additional subordinated debt securities, our ability to negotiate a new Credit Facility, the impact of pending EPA regulations related to sulfur content in refined fuels and the sufficiency of our arrangements for capital. Discussion containing such forward-looking statements is found in the material set forth herein under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Notes to Condensed Consolidated Financial Statements”.

Taking into account the foregoing, the following are identified as important factors that could cause actual results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, Farmland:

                    1.   Weather patterns 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 production and demand).

                    5.   Factors  affecting  supply,  demand  and price of crude
                         oil, refined fuels,  natural gas, livestock,  grain and
                         other commodities.

                    6.   Regulatory  delays  and other  unforeseeable  obstacles
                         beyond our control  that may affect  growth  strategies
                         through unification, acquisitions, investments in joint
                         ventures and operational alliances.

                    7.   Competitors  in various  segments  may be  larger,  may
                         offer  more  varied  products  or may  possess  greater
                         financial and other resources than Farmland.

                    8.   Unusual  or  unexpected  events  such as,  among  other
                         things, adverse rulings or judgments in litigation, and
                         environmental  remediation  costs in excess of  amounts
                         accrued.

                    9.   The factors identified in “Business and Properties
                         - Business - Business  Risk  Factors”  included in
                         our  Annual  Report  on Form  10-K for the  year  ended
                         August 31, 2000.

PART II - OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K.

(a) Exhibits

             Exhibit No.                              Description of Exhibits
           --------------           -------------------------------------------------------------

                4.(ii)B             Second Amendment to Credit Agreement dated April 12, 2001
               10.(iii)I            Long Term Incentive Plan dated February 22, 2001.
               10.(iii)J            Employment  agreement  between  Farmland  and Mr.  Robert  Terry,
                                    dated December 1, 2000.
               10.(iii)K            Employment  agreement  between  Farmland  and Mr.  John  Berardi,
                                    dated April 6, 2001.

(b) Reports on Form 8-K

On December 6, 2000 Farmland filed a report on Form 8-K, Item 5, “Other Events”. The report described the anticipated earnings for the first quarter of 2001, before the effect of income taxes.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

                                                        FARMLAND INDUSTRIES, INC.
                                                              (Registrant)


                                By:                        /s/  JOHN BERARDI
                                   --------------------------------------------------
                                                             John Berardi
                                                       Executive Vice President
                                                      and Chief Financial Officer

Date: April 16, 2001 EX-4 2 0002.htm EX-4(II)B BANK AGREEMENT Bank Credit Agreement




                                       Second Amendment To Credit Agreement

         This Second Amendment to Credit Agreement is entered into as of April 12, 2001 ("Effective Date"), by
and between COBANK, ACB ("CoBank") for its own benefit as a Syndication Party, as Co-Syndication Agent, as
Collateral Agent, and as the Administrative Agent for the benefit of the present and future Syndication Parties
(in that capacity "Administrative Agent"), COOPERATIEVE CENTRALE RAIFFEISEN-BOERENLEENBANK B.A., "RABOBANK
INTERNATIONAL", NEW YORK BRANCH, as Co-Syndication Agent and as a Syndication Party, SUNTRUST BANK, as
Documentation Agent and as a Syndication Party, the other Syndication Parties signatory hereto, and FARMLAND
INDUSTRIES, INC., a cooperative corporation formed under the laws of the State of Kansas, whose address is 12200
North Ambassador Drive, Kansas City, MO 64163 ("Borrower").

Recitals:

A.       CoBank, as Co-Syndication Agent, Administrative Agent, and as a Syndication Party, SunTrust Bank, as
Documentation Agent and as a Syndication Party, Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A., "Rabobank
International," New York Branch, as Co-Syndication Agent and as a Syndication Party, certain other Syndication
Parties, and Borrower, have entered into that certain Credit Agreement (Revolving Loan) dated as of May 10, 2000
(as amended, restated or replaced from time to time, the "Original Credit Agreement"), pursuant to which the
Syndication Parties agreed to make certain loans to Borrower and to issue Letters of Credit for the account of
Borrower (collectively "Facilities") in an aggregate amount not exceeding $800,000,000 under the terms and
conditions set forth in the Credit Agreement.

B.       The Original Credit Agreement was amended by the First Amendment to Credit Agreement dated as of July
14, 2000 wherein, among other things the aggregate amount of credit was reduced to $750,000,000 (the Original
Credit Agreement, as amended by the First Amendment, and as amended from time to time hereafter, the "Credit
Agreement").

C.       The Administrative Agent, the Syndication Parties, and Borrower now wish to amend the Credit Agreement
in order to further reduce the aggregate amount of credit available, to extend the 364-Day Maturity Date, and to
make other changes.

Agreement:

                  Now, therefore, for good and valuable consideration, the receipt of which is hereby
acknowledged, including the mutual covenants contained herein, the parties hereto hereby agree as follows:



 1.      Amendments to Credit Agreement.  The Credit Agreement is amended as of the Effective Date as follows:

 1.1     The following definitions are added to Article 1 of the Credit Agreement:

                  1.191    Asset Sale:  means either a Fixed Asset Sale or a Working Capital Asset Sale, or both,
as the context requires.


                  1.192    Cash Proceeds: means the portion of the gross proceeds received by Borrower and/or FLF
in connection with an Asset Sale which are in the form of cash, check, wire transfer or other cash equivelant
transfer such as a transfer through an automated clearing house or internet funds transfer, less (a) Necessary
Sales Expenses actually incurred by Borrower and/or FLF in connection with such Asset Sale; and (b) without
duplication of clause (a), any account payables, liabilities or other obligations relating to such Asset Sale and
paid or, at the time of such Asset Sale payable, by Borrower and/or FLF.

                  1.193    Coffeyville Refinery Operations: means Borrower's crude oil refining operations,
including without limitation, the crude oil refinery located in Coffeyville, Kansas.

                  1.194    Consultant:  shall have the meaning given such term in Section 11.17 hereof.

                  1.195    Extension Closing Date:  means April 12, 2001.

                  1.196    Fixed Assets:  means assets (including equity investments (or evidences thereof) in
Persons), other than Working Capital Assets.

                  1.197    Fixed Asset Sale:  means a transaction whereby Fixed Assets are sold or otherwise
disposed of by Borrower and/or FLF, but excluding individual transactions where the gross proceeds are
$1,000,000.00 or less, so long as the aggregate amount of gross proceeds of all such transactions does not exceed
$10,000,000.00.

                  1.198    FLF:  means Farmland Foods, Inc.

                  1.199    Individual Funded Facility Pro-Rata Share: means with respect to any Syndication Party
a fraction, expressed as a percentage (rounded to 8 decimal points), where the numerator is such Syndication
Party's Individual Funded Facility Commitment, and the denominator is the Funded Facility Commitment, determined
at 12:00 noon (Central time) on any Banking Day.

                  1.200    Lenders' Share of Remitted Proceeds: means that amount of Remitted Proceeds which the
Administrative Agent receives from the Collateral Agent for application to the Bank Debt pursuant to the
provisions of the Proceeds Sharing Agreement.

                  1.201    Necessary Sales Expenses:  means reasonable and necessary expenses incurred and
actually paid by Borrower and/or FLF in connection with any Asset Sale, including without limitation any
severance or other payments related to the termination of employees which payments are required to be made by
written contract or written policy of Borrower and/or FLF, which, in either case, were in effect prior to April
1, 2001, or required to be made by law.

                  1.202    Non-Cash Proceeds:  means any portion of the gross proceeds received by Borrower
and/or FLF in connection with an Asset Sale which are in a form other than cash, check, wire transfer or other
cash equivelant transfer such as a transfer through an automated clearing house or internet funds transfer (for
example, Non-Cash Proceeds includes gross proceeds received in the form of promissory notes or other deferred
payment obligations, in the form of an equity interest in another Person, or in the form of other non-cash
personal property or real property), in any case less, to the extent not deducted from gross proceeds in
determining the Cash Proceeds in connection with such Asset Sale (a) Necessary Sales Expenses actually incurred
by Borrower and/or FLF in connection with such Asset Sale; and (b) without duplication of clause (a), any account
payables, liabilities or other obligations relating to such Asset Sale and paid or, at the time of such Asset
Sale payable, by Borrower and/or FLF.

                  1.203    Proceeds Sharing Agreement:  means the agreement entitled "Proceeds Sharing Agreement"
substantially in the form of Exhibit 1.203 hereto by and between CoBank, ACB, in its role as Administrative Agent
                             -------------
and as Collateral Agent, and The Chase Manhattan Bank, in its role as Chase Group Agent.

                  1.204    Reduction Amount:  means, (a) with respect to any Fixed Asset Sale, the Lenders' Share
of Remitted Proceeds therefrom; and (b) with respect to any Working Capital Asset Sale the amount, as determined
by the Administrative Agent on or before consummation of the Working Capital Asset Sale, of the Aggregate
Commitment allocable to fund working capital requirements relating to the business operations associated with the
assets disposed of in such Working Capital Asset Sale.

                  1.205    Remitted Proceeds:  shall have the meaning given such term in Section 11.15 hereof.

                  1.206    Sales Report:  shall have the meaning given such term in Section 11.15 hereof.

                  1.207    Working Capital Assets:  means assets that consist of inventory, receivables, and
other non tangible assets (but excluding equity investments (or evidences thereof) in Persons).

                  1.208    Working Capital Asset Sale:  means a transaction whereby Working Capital Assets are
sold or otherwise disposed of by Borrower and/or FLF out of the ordinary course of such Person's business, but
excluding individual transactions where the gross proceeds are $1,000,000.00 or less, so long as the aggregate
amount of gross proceeds of all such transactions does not exceed $10,000,000.00.

 1.2     The following definitions are amended in their entirety to read as follows:

                  1.11     Aggregate LC Commitment:  shall be $100,000,000.00, subject to automatic reduction as
provided in Section 2.9 hereof.

                  1.12     Aggregate 364-Day Commitment:  shall be $345,000,000.00, subject to reduction as
provided in Sections 2.8 and 2.10 hereof, and subject to automatic reduction as provided in Section 2.9 hereof.

                  1.23     Base Rate Margin:  shall be  175 basis points through August 8, 2001

and shall increase to 200 basis points on August 9, 2001.


                  1.118    LIBOR Margin:  shall be  375 basis points through August 8, 2001 and

shall increase to 400 basis points on August 9, 2001.


                  1.135    Overnight Funding Commitment: means $45,000,000.00, subject to automatic reduction as
provided in Section 2.9 hereof.

                  1.172    364-Day Commitment Fee Factor:  shall be  75 basis points.


                  1.176    364-Day Maturity Date:  means November 9, 2001.

                  1.185    Aggregate Commitment: shall be $650,000,000.00, subject to reduction in the event the
Aggregate 364-Day Commitment and/or the Funded Facility Commitment is reduced as provided in Sections 2.8, 2.10,
2A.7, and 2A.9 hereof, and subject to automatic reduction as provided in Sections 2.9 and 2A.8 hereof.

                  1.188    Funded Facility Commitment:  shall be $260,000,000.00, subject to reduction as
provided in Sections 2A.7 and 2A.9 hereof, and subject to automatic reduction as provided in Section 2A.8 hereof.

 1.3     The following Sections and Subsections are amended in their entirety to read as follows:

                  1.48     Credit Rating.  This Section intentionally omitted.

                  1.156    Selected Credit Rating.  This Section intentionally omitted.

         2.8      Voluntary Reduction of Aggregate Commitment.  Borrower may, by written facsimile notice to the
Administrative Agent on or before 10:00 A.M. (Central time) on any Banking Day, irrevocably reduce the Aggregate
Commitment; provided that (a) a simultaneous irrevocable reduction must be made in the Overnight Funding
Commitment equal to the product of (i) a fraction, the numerator of which is the Overnight Funding Commitment
then in effect and the denominator of which is the Aggregate Commitment then in effect, multiplied by (ii) the
amount of such reduction in the Aggregate Commitment; (b) a simultaneous irrevocable reduction must be made in
the Aggregate 364-Day Commitment equal to the product of (i) a fraction, the numerator of which is the Aggregate
364-Day Commitment then in effect and the denominator of which is the Aggregate Commitment then in effect,
multiplied by (ii) the amount of such reduction in the Aggregate Commitment; (c) a simultaneous irrevocable
reduction must be made in the Funded Facility Commitment equal to the product of (i) a fraction, the numerator of
which is the Funded Facility Commitment then in effect and the denominator of which is the Aggregate Commitment
then in effect, and (ii) the amount of such reduction in the Aggregate Commitment; (d) such reduction to the
Aggregate Commitment, the Aggregate 364-Day Commitment, the Funded Facility Commitment, and the Overnight Funding
Commitment must each be rounded to the nearest multiple of one-million dollars ($1,000,000.00) as appropriate;
and (e) Borrower must simultaneously make any principal payment necessary (along with any applicable Funding
Losses on account of such principal payment) so that (i) the principal amount outstanding for 364-Day Pro Rata
Advances plus the undrawn face amount of all outstanding Letters of Credit does not exceed the reduced Aggregate
364-Day Commitment on the date of such reduction, (ii) the Individual Outstanding 364-Day Obligations owing to
any Syndication Party do not exceed the Individual 364-Day Commitment of that Syndication Party, (iii) the
principal amount outstanding under the Funded Facility for Funded Facility Advances does not exceed the reduced
Funded Facility Commitment on the date of such reduction, and (iv) the outstanding Overnight Advances do not
exceed the reduced Overnight Funding Commitment.  Any such reduction to the Aggregate 364-Day Commitment will
reduce the Individual 364-Day Commitment of each Syndication Party on the basis of their Individual 364-Day Pro
Rata Share immediately prior to such reduction, and any such reduction to the Funded Facility Commitment will
reduce the Individual Funded Facility Commitment of each Syndication Party on the basis of their Individual
Funded Facility Pro Rata Share immediately prior to such reduction.

         11.8.15  This Subsection intentionally omitted.

         12.10    Capital Expenditures.  Borrower shall not (nor shall it permit any of its Restricted
Subsidiaries to) incur Capital Expenditures during the period from May 1, 2001 to November 9, 2001, in excess of
$37,500,000.00; provided Borrower may incur up to an additional $12,500,000.00 in Capital Expenditures during
                --------
such period to the extent (on a dollar for dollar basis) that the amount of Borrower's Subordinated Debt has
increased in a like amount after April 30, 2001.

 1.4     The following language is added to the end of Section 6.6:

                  In addition, Borrower shall make to the Collateral Agent all payments required pursuant to
Section 11.15 hereof on account of Asset Sales, and such payments shall be deemed to be Mandatory Prepayments
hereunder.

 1.5     The following new Sections and Subsections are added to read as follows:

         2.9      Automatic Reduction of Aggregate Commitment, Aggregate 364-Day Commitment, Overnight Funding
Commitment, Funded Facility Commitment, and Aggregate LC Commitment.  As of August 9, 2001, the Aggregate
Commitment shall be automatically reduced to $500,000,000.00, the Aggregate 364-Day Commitment shall be
automatically reduced to $265,000,000.00, the Overnight Funding Commitment shall be automatically reduced to
$35,000,000.00, the Funded Facility Commitment shall be automatically reduced to $200,000,000.00, and the
Aggregate LC Commitment shall be automatically reduced to $80,000,000.00.  Borrower must simultaneously make any
principal payment necessary (along with any applicable Funding Losses on account of such principal payment) so
that (i) the principal amount outstanding under the 364-Day Facility for 364-Day Pro Rata Advances plus the
undrawn face amount of all outstanding Letters of Credit does not exceed the reduced Aggregate 364-Day Commitment
on the date of such reduction, (ii) the Individual Outstanding 364-Day Obligations owing to any Syndication Party
do not exceed the Individual 364-Day Commitment of that Syndication Party, (iii) the outstanding Overnight
Advances do not exceed the reduced Overnight Funding Commitment, and (iv) the principal amount outstanding under
the Funded Facility for Funded Facility Advances does not exceed the reduced Funded Facility Commitment.  Any
such reduction to the Aggregate 364-Day Commitment will reduce the Individual 364-Day Commitment of each
Syndication Party on the basis of their Individual 364-Day Pro Rata Share immediately prior to such reduction,
and any such reduction to the Funded Facility Commitment will reduce the Individual Funded Facility Commitment of
each Syndication Party on the basis of their Individual Funded Facility Pro Rata Share immediately prior to such
reduction.

         2.10     Reduction of Aggregate Commitment, Overnight Funding Commitment, Funded Facility Commitment,
and Aggregate 364-Day Commitment On Account of Asset Sales.  Upon the consummation of an Asset Sale, (a) the
Aggregate Commitment shall be automatically reduced by the Reduction Amount; (b) the Aggregate 364-Day Commitment
shall be automatically reduced by an amount equal to the product of (i) the Reduction Amount multiplied by (ii) a
fraction, the numerator of which is the Aggregate 364-Day Commitment then in effect (but without giving affect to
such Asset Sale) and the denominator of which is the Aggregate Commitment then in effect (but without giving
affect to such Asset Sale); (c) the Overnight Funding Commitment shall be automatically reduced by an amount
equal to the product of (i) the Reduction Amount multiplied by (ii) a fraction, the numerator of which is the
Overnight Funding Commitment then in effect (but without giving affect to such Asset Sale) and the denominator of
which is the Aggregate Commitment then in effect (but without giving affect to such Asset Sale); and (d) the
Funded Facility Commitment shall be automatically reduced by an amount equal to the product of (i) the Reduction
Amount multiplied by (ii) a fraction, the numerator of which is the Funded Facility Commitment then in effect
(but without giving affect to such Asset Sale) and the denominator of which is the Aggregate Commitment then in
effect (but without giving affect to such Asset Sale).  Any such reduction to the Aggregate 364-Day Commitment
will reduce the Individual 364-Day Commitment of each Syndication Party on the basis of their Individual 364-Day
Pro Rata Share immediately prior to such reduction, and any such reduction to the Funded Facility Commitment will
reduce the Individual Funded Facility Commitment of each Syndication Party on the basis of their Individual
Funded Facility Pro-Rata Share immediately prior to such reduction.  Notwithstanding any reduction in the
Aggregate Commitment required pursuant to the foregoing provisions of this Section 2.10, (x) at no time shall the
Aggregate Commitment be required to be reduced to less than $400,000,000.00; and (y) effective as of August 9,
2001, the Aggregate Commitment, the Aggregate 364-Day Commitment, the Overnight Funding Commitment, and the
Funded Facility Commitment shall be re-set to the amounts set forth in Section 2.9 hereof.

         2A.7     Reduction of Aggregate Commitment.  In the event Borrower elects to reduce the Aggregate
Commitment, the Funded Facility Commitment shall simultaneously be irrevocably reduced as provided in Section 2.8
hereof.

         2A.8     Automatic Reduction of Aggregate Commitment and Funded Facility Commitment.  As of August 9,
2001, the Aggregate Commitment and the Funded Facility Commitment shall be automatically reduced as provided in
Section 2.9 hereof.

         2A.9     Reduction of Aggregate Commitment and Funded Facility Commitment On Account of Asset Sales.
Upon the consummation of an Asset Sale the Aggregate Commitment and the Funded Facility Commitment shall be
automatically reduced as provided in Section 2.10 hereof.

         11.15    Payment of Cash Proceeds; Sales Report.  Borrower shall promptly, and in no event later than
five (5) Business Days after consummation of a Working Capital Asset Sale and/or a Fixed Asset Sale, (a) provide
the Administrative Agent with notice of such Asset Sale; and (b) pay over to the Collateral Agent the Cash
Proceeds received on account of such Asset Sale.  To the extent that after the consummation of an Asset Sale,
Borrower and/or FLF receive any cash payments on account of any Non-Cash Proceeds, Borrower shall promptly remit
such payments to the Collateral Agent, and such payments shall thereupon be considered to be a portion of the
Cash Proceeds from such Asset Sale.  Each such payment of Cash Proceeds to the Collateral Agent (other than cash
payments periodically received by Borrower and/or FLF on account of any Non-Cash Proceeds) shall be accompanied
by a report to the Collateral Agent certified to by Borrower's Chief Financial Officer or duly elected Treasurer
("Sales Report") providing the information required by Exhibit 11.15 hereto.  In addition, to the extent that any
                                                       -------------
portion of the Non-Cash Proceeds consist of promissory notes, chattel paper, and/or an equity interest in another
Person, Borrower shall deliver the original of any such promissory notes and/or chattel paper and any securities
or other evidence of such equity interest to the Collateral Agent upon the Collateral Agent's request therefore,
and, whether or not delivery thereof is requested, Borrower agrees to, does hereby, and agrees to cause FLF to,
grant to the Collateral Agent, on behalf of the Syndication Parties and the Synthetic Lenders, a security
interest in such promissory notes, chattel paper, and equity interests to secure all of the Bank Debt and all of
the Coffeyville Synthetic Lease Obligation.  The amount actually remitted at any time by Borrower to the
Collateral Agent with respect to any Asset Sale shall be deemed the "Remitted Proceeds" with respect to such
Asset Sale.  The Collateral Agent shall distribute the Remitted Proceeds to the Syndication Parties and to the
Chase Group Agent as required under the Proceeds Sharing Agreement.  Nothing in this Section shall be construed
as a waiver of any of the prohibitions, restrictions, or other provisions of Section 12.4 hereof.

         11.16    Update of Borrowing Base Certificate.  Promptly upon the consummation of each Asset Sale,
Borrower shall provide to the Administrative Agent an update to the most recently delivered Borrowing Base
Certificate making, based on Borrower's good faith estimates, adjustments thereto as required to reflect assets
sold or otherwise disposed of in connection with such Asset Sale.

         11.17    Engagement of Consultant.  If Borrower does not receive evidence of a financing commitment from
a buyer of Borrower's Coffeyville Refinery Operations on or before May 1, 2001, Borrower shall, no later than May
4, 2001, engage a recognized investment banking firm ("Consultant") acceptable, in its reasonable judgment, to
the Administrative Agent, and such Consultant shall been charged with the responsibility of representing and
coordinating the efforts of Borrower in effecting the sale of Borrower's Coffeyville Refinery Operations.

         11.18    Alternative Cash Source Information.  In the event that the Aggregate Commitment has not been
reduced, solely on account of Asset Sales as provided in Section 2.10 hereof, by no less than $100,000,000.00 by
July 1, 2001, then Borrower shall, no later than July 8, 2001 provide to the Administrative Agent a report,
certified to by Borrower's Chief Financial Officer or duly elected Treasurer, detailing Borrower's strategic plan
to raise capital and reduce Indebtedness so that (a) on August 9, 2001 the Aggregate Commitment will not exceed
$500,000,000.00; and (b) on October 25, 2001, the sum of (i) the total principal amount outstanding for Funded
Facility Advances and 364-Day Advances plus the undrawn face amount of all outstanding Letters of Credit, plus
(ii) the outstanding Coffeyville Synthetic Lease Obligations, will not exceed an aggregate of $360,000,000.00.

 1.6     Schedule A to the Credit Agreement is replaced in its entirety by Schedule A hereto.
- -------------------                                                        ----------

 1.7     Schedule B to the Credit Agreement is deleted.
- -------------------

 2.      Conditions to Effectiveness of this Second Amendment.  The effectiveness of this Second Amendment is
subject to satisfaction, in the Administrative Agent's sole discretion, of each of the following conditions
precedent:

 2.1     Extension Fee; Fees and Expenses.  In addition to any fees required to be paid by Borrower pursuant to
that certain Fee Letter dated March 30, 2001 by and between Borrower, CoBank, and Rabobank ("Extension Fee
Letter"), Borrower shall (a) reimburse the Administrative Agent for all of its costs and expenses incurred in
connection with the negotiation, preparation, and execution of this Second Amendment and all related documents
(including, without limitation, the Extension Fee Letter and the Proceeds Sharing Agreement), and (b) pay to the
Administrative Agent, for distribution on a pro-rata basis to the Syndication Parties, based on their Individual
364-Day Commitments and their Individual Funded Facility Commitments, a non-refundable fee ("Extension Fee") in
the amount of $6,500,000.00, which shall be payable and fully earned on the Extension Closing Date.


 2.2     Documents.  Borrower shall have provided and/or executed and delivered to the Administrative Agent, or
shall have caused to be provided and/or executed and delivered to the Administrative Agent, the following
documents and such further assignments, documents or financing statements as the Administrative Agent may
reasonably request, all in form and substance satisfactory to the Administrative Agent:

                  (a)      This Second Amendment to Credit Agreement

                  (b)      An opinion of Borrower's counsel with respect to this Second Amendment covering such
matters as the Administrative Agent shall reasonably require including corporate power, due authorization,
validity, enforceability, and choice of law (in form and substance substantially similar to the opinions provided
in connection with the Original Credit Agreement).

                  (c)      A copy of a resolution (or multiple resolutions) of Borrower's board of directors,
         certified to by Borrower's corporate secretary, which (i) authorizes execution of this Second Amendment
         at the reduced Aggregate Commitment of $650,000,000.00 and with a further reduction to $500,000,000.00
         as of August 9, 2001, (ii) authorizes Borrower to enter into a commitment for new financing as of
         November 9, 2001 with a total commitment of not in excess of $400,000,000.00, and (iii) specifically
         identifies the titles of the persons authorized to execute all necessary documents in connection with
         the transactions described in clauses (i) and (ii).

                  (d)      Upon written request by the Administrative Agent, a copy of previously adopted
         resolutions of Borrower's board of directors, certified to by Borrower's corporate secretary,
         authorizing Asset Sales.

 2.3     Consent and Agreement of Chase Group Agent; Proceeds Sharing Agreement.  Borrower shall have provided
the Administrative Agent with (a) the written consent of the Chase Group Agent, acting on behalf of the holders
of the Coffeyville Synthetic Lease Obligations: to the revised LIBOR Margin, Base Rate Margin and 364-Day
Commitment Fee Factor as set forth herein; and (b) the Proceeds Sharing Agreement fully executed by the Chase
Group Agent, acting on behalf of the holders of the Coffeyville Synthetic Lease Obligations.

 2.4     Representations and Warranties.  The representations and warranties of Borrower contained in each of the
Loan Documents to which it is a party, shall be true and correct in all material respects on and as of the
Effective Date as though made on and as of such date.

 2.5     No Event of Default.  No Event of Default or Potential Default shall have occurred and be continuing
under the Credit Agreement.

 2.6     Closing Deadline.  Each of the foregoing conditions shall have been met no later than May 9, 2001.

 3.      General Provisions.

 3.1     The Credit Agreement, except as expressly modified herein, shall continue in full force and effect and
be binding upon the parties thereto.

 3.2     Use in the Credit Agreement or other Loan Documents of the phrase "364-Day" in certain defined terms
shall not in any way be construed as any commitment or representation by the Administrative Agent or the
Syndication Parties that credit will be provided under the Credit Agreement beyond the 364-Day Maturity Date.

 3.3     The Syndication Parties by executing this Second Amendment and the Voting Participants, by signing the
document entitled "Voting Participant Consent", consent to an increase in certain rates and/or yields charged
under the Coffeyville Synthetic Lease to a level which does not exceed the increase in rates and/or yields
effected by the amendments to Sections 1.23, 1.118, and 1.172 made in this Second Amendment, effective as of the
Effective Date.

 3.4              This Second Amendment shall be binding upon and inure to the benefit of each of the parties
hereto and their respective successors and assigns, except that Borrower may not assign or transfer its rights or
obligations hereunder.

 3.5     Capitalized terms used, but not defined, in this Second Amendment shall have the meaning set forth in
the Credit Agreement if defined therein.

 3.6              The invalidity or unenforceability of any provision of this Second Amendment shall not affect
the remaining portions of this Second Amendment; in case of such invalidity or unenforceability, this Second
Amendment shall be construed as if such invalid or unenforceable provisions had not been included therein.

 3.7              To the extent not governed by federal law, this Second Amendment and the rights and obligations
of the parties hereto shall be governed by and interpreted in accordance with the internal laws of the State of
Colorado, without giving effect to any otherwise applicable rules concerning conflicts of law.

 3.8              The captions or headings in this Second Amendment are for convenience only and in no way
define, limit or describe the scope or intent of any provision of this Second Amendment.

 3.9     Borrower, for itself, its successors and assigns, agents, personal representatives and legal
representatives, does hereby release and forever discharge the Administrative Agent, the Collateral Agent, and
each Syndication Party and their predecessors, successors, assigns, agents, and legal representatives for any and
all claims, demands, debt, obligations, liabilities, costs, attorney's fees, expenses, rights of action, causes
of action of any kind or character whatsoever which either of them may have, whether known, unknown, suspected,
unsuspected, arising on account of any action or inaction occurring prior to the date of this Second Amendment or
during any meetings or negotiations conducted in connection with this Second Amendment.

 3.10    This Second Amendment may be executed in several counterparts, each of which shall be an original and
all of which shall constitute but one and the same agreement.  Telefax copies of documents or signature pages
bearing original signatures, and executed documents or signature pages delivered by telefax, shall, in each such
instance, be deemed to be, and shall constitute and be treated as, an original signed document or counterpart, as
applicable.
                  [SIGNATURES COMMENCE ON THE NEXT PAGE]



                  IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to be executed as of
the Effective Date set forth above.

                                                     BORROWER:

                                                     FARMLAND INDUSTRIES, INC.


                                                     By: _________________________________
                                                     Name:
                                                     Title:

                                                     ADMINISTRATIVE AGENT, CO-SYNDICATION AGENT AND SYNDICATION
                                                     PARTY:

                                                     COBANK, ACB


                                                     By:
                                                         ----------------------------------------------------------
                                                     Name: Greg E. Somerhalder
                                                     Title: Vice President

                                                     CO-SYNDICATION AGENT AND SYNDICATION PARTY:

                                                     COOPERATIEVE CENTRALE RAIFFEISEN-BOERENLEENBANK B.A.,
                                                     "RABOBANK INTERNATIONAL", NEW YORK BRANCH


                                                     By:
                                                         ----------------------------------------------------------
                                                     Name:
                                                     Title:

                                                     DOCUMENTATION AGENT AND SYNDICATION PARTY:

                                                     SUNTRUST BANK


                                                     By:
                                                         ----------------------------------------------------------
                                                     Name:
                                                     Title:

                                                     SYNDICATION PARTY:

                                                     CREDIT AGRICOLE INDOSUEZ


                                                     By:
                                                         ----------------------------------------------------------
                                                     Name:
                                                     Title:


                                                     By:
                                                         ----------------------------------------------------------
                                                     Name:
                                                     Title:

                                                     SYNDICATION PARTY:

                                                     NATEXIS BANQUE


                                                     By:
                                                         ----------------------------------------------------------
                                                     Name:
                                                     Title:

                                                     SYNDICATION PARTY:

                                                     U.S. BANCORP AG CREDIT, INC.


                                                     By:
                                                         ----------------------------------------------------------
                                                     Name:
                                                     Title:

                                                     SYNDICATION PARTY:

                                                     TEXTRON FINANCIAL CORPORATION


                                                     By:
                                                         ----------------------------------------------------------
                                                     Name:
                                                     Title:


                                                     SYNDICATION PARTY:

                                                     ARAB BANKING CORPORATION (B.S.C.)


                                                     By:
                                                         ----------------------------------------------------------
                                                     Name:
                                                     Title:

                                                     SYNDICATION PARTY:

                                                     FIRSTAR BANK, N.A.


                                                     By:
                                                         ----------------------------------------------------------
                                                     Name:
                                                     Title:

                                                     SYNDICATION PARTY:

                                                     FORTIS BANK


                                                     By:
                                                         ----------------------------------------------------------
                                                     Name:
                                                     Title:

                                                     SYNDICATION PARTY:

                                                     DG BANK DEUTSCHE GENOSSENSCHAFTSBANK AG


                                                     By:
                                                         ----------------------------------------------------------
                                                     Name:
                                                     Title:


                                                     SYNDICATION PARTY:

                                                     FIRST NATIONAL BANK OF KANSAS


                                                     By:
                                                         ----------------------------------------------------------
                                                     Name:
                                                     Title:

                                                     SYNDICATION PARTY:

                                                     UMB BANK, N.A.


                                                     By:
                                                         ----------------------------------------------------------
                                                     Name:
                                                     Title:

                                                     SYNDICATION PARTY:

                                                     HARRIS TRUST AND SAVINGS BANK


                                                     By:
                                                         ----------------------------------------------------------
                                                     Name:
                                                     Title:

                                                     SYNDICATION PARTY:

                                                     PROMETHEUS INVESTMENT FUNDING NO. 1 LTD.
                                                     By:  CPF Asset Advisory, L.P., as Investment Manager


                                                     By:
                                                         ----------------------------------------------------------
                                                     Name:
                                                     Title:


                                                     SYNDICATION PARTY:

                                                     FARM CREDIT BANK OF WICHITA


                                                     By:
                                                         ----------------------------------------------------------
                                                     Name:
                                                     Title:

                                                     SYNDICATION PARTY:

                                                     COMMERCE BANK N.A.


                                                     By:
                                                         ----------------------------------------------------------
                                                     Name:
                                                     Title:

                                                     SYNDICATION PARTY:

                                                     DLJ ASSET MANAGEMENT


                                                     By:
                                                         ----------------------------------------------------------
                                                     Name:
                                                     Title:

                                                     SYNDICATION PARTY:

                                                     MAPLEWOOD (CAYMAN) LIMITED


                                                     By:
                                                         ----------------------------------------------------------
                                                     Name:
                                                     Title:


                                                     SYNDICATION PARTY:

                                                     FOOTHILL INCOME TRUST, L.P.


                                                     By:
                                                         ----------------------------------------------------------
                                                     Name:
                                                     Title:

                                                     SYNDICATION PARTY:

                                                     MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY


                                                     By:
                                                         ----------------------------------------------------------
                                                     Name:
                                                     Title:

                                                     SYNDICATION PARTY:

                                                     SUFFIELD CLO, LIMITED


                                                     By:
                                                         ----------------------------------------------------------
                                                     Name:
                                                     Title:

                                                     SYNDICATION PARTY:

                                                     CSAM FUNDING I


                                                     By:
                                                         ----------------------------------------------------------
                                                     Name:
                                                     Title:


                                                     SYNDICATION PARTY:

                                                     DEN DANSKE BANK AKTIESELSKAB


                                                     By:
                                                         ----------------------------------------------------------
                                                     Name:
                                                     Title:

                                                     SYNDICATION PARTY:

                                                     BANK OF AMERICA, N.A.


                                                     By:
                                                         ----------------------------------------------------------
                                                     Name:
                                                     Title:

EX-10 3 0003.htm MANAGEMENT LONG TERM INCENTIVE PLAN Management Long Term Incentive Plan

Secretary’s Document #436
Farmland Industries, Inc.
Management Long Term Incentive Plan

A. EFFECTIVE DATE AND PLAN PURPOSE
1. The Management Long Term Incentive Plan (the Plan) is effective September
2000.

a. The Plan provides incentive compensation opportunities for designated
management employees of Farmland Industries, Inc. (the Company) based on
the attainment of multi-year performance goals. (See Exhibit B and
subsequent Exhibits for performance criteria and goals.)

b. The Plan’s initial performance and reward cycles cover fiscal years 2001
through 2002, the period from September 1, 2000 through August
31, 2002; and fiscal years 2001 through 2003, the period from September 1,
2000 through August 31, 2003.

c. The Plan’s subsequent performance and reward cycles will begin each
subsequent year thereafter for a three–year time span. The Plan’s second
full performance and reward cycle covers fiscal years 2002 through 2004, the
Plan’s third performance and reward cycle covers fiscal years 2003 through
2005, etc.

d. It is the company’s intent to continue this Plan indefinitely, but the Company
reserves the right to amend or discontinue the Plan at any time if such action
is deemed in the best interests of the Company and the Membership.

2. The key purposes of the Plan are set forth below.

a. To attract and retain high quality management personnel who can produce
sustained company results for the immediate and ongoing benefit of its
Membership. (See Exhibit A for a list of participants.)

b. To provide a long-term incentive element which encourages key
management employees to act like owner management.

c. To provide a competitive program of total cash compensation in appropriate
marketplaces with an emphasis on variable, pay-for-performance
opportunities linked to the accomplishment of demonstrated results.

d. To focus key employees on key strategic results and motivate those actions
which reinforce the attainment of the Company’s business plan over a
sustained period of time.

B. DESCRIPTION OF PLAN IN OPERATION.

1. The Plan shall establish multi-year performance and award cycles (Plan cycle).

a. The initial cycles are from 9/1/2000 through 8/31/2002, and 9/1/2000 through
8/31/2003.

b. Subsequent plan cycles shall commence each year thereafter and contain a three
year performance cycle., e.g.:

9/1/2002 through 8/31/2004
9/1/2003 through 8/31/2005
To continue as Board and management determines valid.

2. Participation shall be as designated by the CEO for each cycle (except that the
CEO’s participation shall be approved by the Board of Directors), and shall be
limited to management positions which have a significant impact on long term,
strategic results. Positions and/or individuals participate at the discretion of the
CEO.

3. Multi-year performance goals shall be established each cycle which shall focus on
one, or a very few, key, measurable results of strategic financial importance to the
Company.

4. An incentive pool from which participant awards can be paid shall be created each
cycle based on results achieved against goals. The pool shall be equal to a fixed
percentage share of Company income. The minimum amount at which the pool is
funded is defined in accompanying Exhibits for each cycle. The total size of the
pool increases as Company results improve, and the incentive pool shall be an
open-ended, uncapped amount to provide participants with an “ownership interest”
in maximizing results.

5. Performance goals and the share of results used to produce the incentive pool can
vary from cycle to cycle, but generally be established under the following criteria:
- ------------------- -------------------- -------------------------------------- ------------------------
Level Achieved Share of Results Awards Payable - Resulting Approximate
to Pool Compensation Level in Marketplace Probability of
Attainment
- ------------------- -------------------- -------------------------------------- ------------------------
‹Threshold None None - Un-competitive
- ------------------- -------------------- -------------------------------------- ------------------------
- ------------------- -------------------- -------------------------------------- ------------------------
Threshold/ Expected Significant – Desired (Average) 90%
Target
- ------------------- -------------------- -------------------------------------- ------------------------
- ------------------- -------------------- -------------------------------------- ------------------------
Above Target Above Expectations Large (Very Competitive) to 40 - 50 %
open–ended “ownership”
share of outstanding results
- ------------------- -------------------- -------------------------------------- ------------------------

6. Each cycle the Company shall establish a Basic Award Percentage (pool portion)
for each participant in the Plan. Such Basic award Percentages shall:

a. Be communicated to participants by the Company;

b. Remain unchanged during a cycle unless a participant’s status shall significantly
change; and

c. In total, be approximately 10% less than the total incentive pool. The remaining
portion of the incentive pool for each Part of the Plan shall be a Reserve
Incentive Pool available for discretionary use by the CEO and/or for
allocation for new participants as selected by the CEO.

7. Each cycle, the CEO may distribute all or some portion of the Plan’s Reserve
Incentive Pool to participants for any of these reasons:

a. To recognize outstanding individual performance or contributions to overall
Company results.

b. To recognize changes in status during a cycle where a participant’s
accountability significantly increased.

c. To permit participation by a person hired or promoted into an eligible
position during a cycle.

Such distribution can consist of an additional dollar award at cycle end, or a new or
increased Base Share Award determined during the cycle.

8. Total awards can not exceed the size of the incentive pool generated each cycle. If
additional participants caused the incentive pool to be more than 100% allocated,
the CEO would determine the amount of reduction to each participant’s pool
portion. No awards are payable if no money has been generated based on plan
formulas.

9. Participant’s total award shall be the sum of his (or her) Basic Award Percentage
plus any additional amount awarded by the CEO from the Reserve Incentive Pool.
Total awards shall be payable as soon as practical at the end of the cycle subject to
(10) and (11) below.

a. About mid-December, 2002 for the initial cycle.

b. About mid-December, following the end of each successive cycle.

10. Awards shall be payable in cash and subject to all applicable withholding.

11. Participants may voluntarily elect to irrevocably defer receipt of awards otherwise
payable in accordance with rules and procedures established by the Company in the
Farmland Industries, Inc. Executive Deferred Compensation Plan.

12. Exhibit A lists participants. Exhibit B and succeeding exhibits list the Performance
criteria and goals, and the amount by which the pool is to be funded for each level
of performance.

C. VESTING AND FORFEITURE OF AWARDS

1. A participant must be an active employee of the Company at the end of each cycle
in order to receive an award for such cycle unless active employment ceases for
reasons of death, total disability, or retirement.

2. In the event of a participant’s death, total disability, or retirement during a cycle,
awards otherwise payable shall be prorated on the basis of full months of active
participation in relation to the length of the cycle.

3. In the event of a participant’s change of status to a non-participating position
during a cycle, awards otherwise payable shall be prorated and/or adjusted
depending upon the reason for the change, but generally on the basis of full months
participation in relation to the length of the cycle.

4. If a participant’s employment is terminated with the Company for reasons other
than death, total disability or retirement during a cycle, such participant shall forfeit
all rights to any award otherwise payable.

5. Decisions regarding pro-ration and award adjustment shall be made by the CEO
and, barring highly unusual circumstances, on the basis of full months of active
participation in relation to the thirty-six months within each cycle. The Board and
CEO authorities and guidelines for specific situations are set forth in Section D.

D. APPROVAL AUTHORITY FOR KEY ACTIONS

1. The Board approved this plan in February, 2001. The Board, in its sole judgment,
has the authority for all the following actions.

a. Amendment or discontinuance of the Plan.

b. Adjustment or cancellation of any awards otherwise payable should the
Company suffer an operating loss in the final fiscal year of any performance
cycle.

c. Approval for any cycle for all the following:

(i) performance goals

(ii) award payout procedures which are not specifically delegated to the
Compensation Committee of the Board (the Committee), the CEO or the
Company.

d. Approval of all of the following with respect to the CEO for any given Plan
cycle:

(i) The CEO’s portion of any incentive award pool generated by the Plan;

(ii) An appropriate prorata portion of any award otherwise payable in the event
of termination of employment by the CEO during a cycle due to death, total
disability, or retirement;

(iii) An appropriate prorata award for a CEO hired or promoted into such
position during a cycle; and

(iv) A determination of the CEO’s personal performance during a cycle, with
authority to deny, or adjust, any award otherwise payable should such
performance be deemed, in the Board’s majority judgment, wholly
unsatisfactory.

e. Approval for the inclusion or exclusion of major, extraordinary financial results
or transactions occurring during the cycle in the calculation of performance
results impacting Plan goals and awards. Such decisions will be made on a
case-by-case basis with the basic standard of judgment being the best interests
of the Company and its Membership and the purposes of the Plan.

f. Delegation to the Committee of the power to review or decide any issue relative
to the Plan.

2. The Committee shall be responsible for monitoring the Plan, reviewing all major
aspects in detail, analyzing Company requests for Plan actions or approvals,
recommending Plan amendments or actions to the Board, and reporting to the
Board such information as it may reasonably request.

3. The Company shall be responsible for administering the Plan, establishing
appropriate accounting reserves to recognize award liabilities, communicating all
appropriate details to participants in a timely manner, recommending necessary
plan amendments or actions to the Committee, and reporting such information to
the Committee and the Board as they may request.

4. The CEO is specifically authorized to take the following actions with respect to all
other participants.

a. Approval for any cycle for the following:

(i) participants

(ii) levels of opportunity and incentive pool calculations

b. Distribution on a subjective, discretionary basis of the Plan’s Reserve Incentive
Pool, if any:

(i) Distribution can be made in any amount the CEO shall determine, and need
not be consistent with the distribution of Basic Award Percentages.

(ii) The total distribution cannot exceed the funds in the Reserve Incentive Pools
but the total Reserve need not be spent and any unused funds shall not be
carried over to subsequent cycles but shall revert to the Company.

c. Approval of appropriate prorata awards and/or Basic Award Percentages from
the Incentive Pool to a participant in the event of any of the following
circumstances.

(i) A participant’s death, total disability, or retirement at any time during a Plan
Cycle.

(ii) A participant’s change of status during a Plan cycle which is sufficiently
significant to either (a) render further participation inappropriate or (b)
render the originally designated Basic Award Percentage inappropriate
relative to those applicable to other participants in positions of similar
responsibility and impact.

(iii) The hiring, or promotion, of an employee during a cycle into a position for
which Plan participation is appropriate.

Such decisions shall be subjective, discretionary judgments made on a case-
by-case basis, but the CEO shall generally follow these guidelines:

(a) Prorata awards and prorata assignment of Basic Award Percentages
shall generally be mathematically determined on the basis of full
months of active participation in the applicable position divided by the
number of months within the Plan cycle.

(b) If a participant’s status is reduced to a position where Plan
participation is no longer appropriate, a prorata award will generally
be determined in accordance with (ii) above if the change was due to
reorganization or similar Company instigated action. The CEO will
determine appropriate action if a participant leaves the plan due to
individual performance or personal choice.

E. ADMINISTRATIVE ISSUES

1. Participation in the Plan is not a guarantee of employment, nor does participation in one cycle
guarantee participation in subsequent cycles.

Plan awards shall not be considered as compensation for any Company benefit
plan whatsoever. For purposes of the Plan, the following definitions shall apply:

a. “Retirement” shall mean the cessation of Company employment at or after age
55 and immediate retirement under the Company’s primary qualified
retirement plan applicable to the participant whether or not retirement benefits
are then commenced. The CEO in his sole discretion may make an exception
for an individual over 55 who has not vested in the retirement plan.

b. “Total Disability” shall mean the cessation of Company employment for
reasons of physical or mental impairment which on the basis of evidence
provided to the CEO or Board (as appropriate) is, in the CEO’s or Board’s (as
appropriate) sole judgment, expected to last at least 12 months.

4. In the event of a substantial change of ownership in which the Company, as
constituted on the Effective Date, is not a surviving entity, the Plan shall continue
in effect and insure to the benefit of the new entity.

5. The Basic Award Percentages originally assigned to any participant but
subsequently forfeited or otherwise reduced for such participant during a Plan cycle
may be reassigned to any other participant. The Board may make such assignment
with respect to the CEO, and the CEO may make such assignment with respect to
any other participant.

6. The total awards payable under the Plan for any cycle can not exceed the total
incentive pools generated by the Plan for such cycle, and any unused incentive
pool funds shall revert to the Company at cycle end.

7. All participants shall designate a beneficiary under the Plan in accordance with
policies and procedures established by the Company from time to time, and it is a
participant’s responsibility to keep such designation up to date. In the event of a
participant’s death, the Company shall pay any award payable on behalf of such
participant to such designated beneficiary or, if such beneficiary is no longer living
or can not be located, to the participant’s estate.

Exhibit A

Title of Participant

President and CEO
Executive Vice President/Chief Financial Officer
Executive Vice President/President, Grain/Grain Processing Group
Executive Vice President, Administrative Group/General Counsel
Senior Vice President, Corporate Secretary
Regional Vice Presidents (2 incumbents)
Vice President/President and CEO, One System Group LLC
Vice President, Administration
Vice President/Controller
Vice President, E-Commerce Development
Vice President, Human Resources
Vice President, Livestock Production
Vice President/President, Pork Division
Vice President/Treasurer
General Manager, Nitrogen MFG– Crop Production
Director, Commodity Management– Grain
Director, Business Services – Grain
Director, Grain Processing– Grain
President/General Manager, Farmland – Atwood – Grain
Director, Marketing – Grain
Vice President, Sales and Marketing – Pork Division
Vice President, Operations – Pork Division
Vice President/Controller – Pork Division
Plant Manager – Pork Division (One incumbent in developmental assignment)
Vice President, Human Resources– Pork Division
President, SFFA LLC
Director, Taxation– Corporate Finance
Director, Employee Trust Administration – Corporate Finance
Director, SEC Accounting – Corporate Finance
Assistant Treasurer – Corporate Finance
Director, Risk Management – Corporate Finance
Director, General Accounting – Corporate Finance
Director, Strategic Sourcing
Associate General Counsel – Admin Group (3 incumbents)
Director, Environmental Affairs–Admin Group

Exhibit B

Performance criteria for FY 2001 - FY 2002 cycle include the following:
Aggregate Income, defined as the targeted income, before taxes and extraordinary items1, for the entire two-year
period, as shown in the table below.

Performance goals and amounts funding the payout pool include the following:
- ------------------------------------- ----------------------------------- -----------------------------------
Performance Level Aggregate Income % of Net Earnings to Pool
- ------------------------------------- ----------------------------------- -----------------------------------
Below Target Below $78,200,000 0% of Earnings
- ------------------------------------- ----------------------------------- -----------------------------------
- ------------------------------------- ----------------------------------- -----------------------------------
Target $78,200,000 .83% of Earnings
- ------------------------------------- ----------------------------------- -----------------------------------
- ------------------------------------- ----------------------------------- -----------------------------------
Above Target Above $78,200,000 .83% of Earnings
- ------------------------------------- ----------------------------------- -----------------------------------

In order to ensure the integrity of Farmland’s financial strength, a limit on funded indebtedness as a percent of
capitalization is incorporated into this plan. In the event that the indebtedness ratio is above the level which
is established by bank covenants at the end of the cycle, no payout will occur under this plan.

1Guidelines for “Extraordinary” Designation were issued on September 1, 1990,
and updated on September 1, 1992. These guidelines state that the Chief Financial Officer and the Chief
Executive Officer must approve the classification of any item as “extraordinary”. Transactions deemed
as “extraordinary” and therefore excluded in the determination of income for variable compensation
include:

Income or losses that pertain to discontinued operations or activities which have been non–operational through a fiscal year-end.
The punitive portion of litigation results in favor of or against Farmland, excluding redemptive payments on normal business matter where the intent is to substantially restore net income to where it would have been had the incident not occurred.
Non–recurring (one-time) adjustment to income or expense such as the gain from settlement of the retirement plan or a write-down of a major fixed asset.
The gain or loss on the disposal of a major asset or a group of assets.
Other items as approved.

Specific requests by an operating unit for treatment of an item as“extraordinary” must be approved by the Senior Management representative before review by the Chief Financial Officer and the Chief Executive Officer.



                                                     Exhibit C

Performance criteria for FY 2001 - FY 2003 cycle include the following:
Aggregate Income, defined as the targeted income, before taxes and extraordinary items1, for the entire
three-year period, as shown in the table below.

Performance goals and amounts funding the payout pool include the following:

- ------------------------------------- ----------------------------------- -----------------------------------
         Performance Level                     Aggregate Income               % of Net Earnings to Pool
- ------------------------------------- ----------------------------------- -----------------------------------
            Below Target                      Below $194,200,000                    0% of earnings
- ------------------------------------- ----------------------------------- -----------------------------------
- ------------------------------------- ----------------------------------- -----------------------------------
               Target                            $194,200,000                      .83% of earnings
- ------------------------------------- ----------------------------------- -----------------------------------
- ------------------------------------- ----------------------------------- -----------------------------------
            Above Target                      Above $194,200,000                   .83% of earnings
- ------------------------------------- ----------------------------------- -----------------------------------

In order to ensure the integrity of Farmland’s financial strength, a limit on funded indebtedness as a percent of
capitalization is incorporated into this plan.  In the event that the indebtedness ratio is above the level which
is established by bank covenants at the end of the cycle, no payout will occur under this plan.

         1 The Chief Financial Officer and the Chief Executive Officer must approve the classification of any
         item as “extraordinary”.  Transactions deemed as “extraordinary” and therefore excluded in the
         determination of income for variable compensation include:

The punitive portion of litigation results in favor of or against Farmland, excluding redemptive payments on normal business matter where the intent is to substantially restore net income to where it would have been had the incident not occurred.
Non–recurring (one-time) adjustment to income or expense such as the gain from settlement of the retirement plan or a write-down of a major fixed asset.
The gain or loss on the disposal of a major asset or a group of assets.
The impact of adjustments resulting from LIFO inventory computations or reserves.
Other items as approved.

Specific requests by an operating unit for treatment of an item as “extraordinary” must be approved by
         the Senior Management representative before review by the Chief Financial Officer and the Chief
         Executive Officer.

EX-10 4 0004.htm EMPLOYMENT AGREEMENT FOR ROBERT B. TERRY Employment Agreement for Robert B. Terry

EXHIBIT 10.(iii)J
EMPLOYMENT AGREEMENT

THIS AGREEMENT is made between Farmland Industries, Inc. ("Farmland"), with its principal place of
business at 3315 North Oak Trafficway, Kansas City, Missouri 64116, and Robert B. Terry, ("Executive").

WHEREAS, Executive and Farmland desire and agree to govern their employment relationship by means of
this Employment Agreement.

NOW, THEREFORE, in consideration of the promises and mutual covenants herein contained, and for good and
valuable consideration, the receipt and sufficiency of which is hereby acknowledged, it is mutually covenanted
and agreed by and between the parties as follows:

1. Position and Term. Farmland hereby employs Executive to serve as Executive Vice President, Law
-----------------
and Administration and in such other senior management positions as may be assigned from time to time. The
period of employment under this Agreement shall commence on September 1, 2000 and continue for a rolling two (2)
year period and shall be referred to as the "Employment Period." In no event, will such Employment Period be
automatically extended beyond Executive's 62nd birthday. Executive's employment may be earlier terminated by
either party subject to the rights and obligations of the parties set forth herein. While employed hereunder,
Executive will devote his best efforts to Farmland and shall perform the duties of the position outlined herein
and such other duties as may be reasonably assigned by Farmland. While it is understood and agreed that
Executive's job capacities may change at Farmland's discretion, Executive's level of responsibility shall not be
substantially reduced at any time. Executive shall not, without the prior written consent of Farmland, render
services of a business, professional, or commercial nature to any other person or firm, whether for compensation
or otherwise during the Employment Period.

2. Employment at Will. The parties acknowledge this Employment Agreement does not create any
-------------------
obligation on Executive's part to work for Farmland nor on Farmland's part to employ Executive for any fixed
period of time and that this Employment Agreement may be terminated at any time with or without cause, subject
only to the rights and obligations set forth herein.

3. Termination of Employment.
-------------------------

(a) Death. Executive's employment shall terminate upon his death.
------

(b) Termination by the Company
---------------------------

(i) Without Cause. Farmland may terminate Executive's
---------------
employment, at any time and for any reason
whatsoever, without cause, effective upon delivery of written notice of termination
to Executive.

(ii) For Cause. Farmland may terminate Executive's employment at any time for Cause, effective upon delivery
---------
of written notice of termination to Executive. If such termination by Farmland is asserted to
be for Cause, such termination notice shall state the grounds constituting Cause. As used
herein, "Cause" shall mean: (a) willful misconduct by Executive which is damaging or
detrimental to the business and affairs of Farmland, monetarily or otherwise, as determined by
the Chief Executive Officer in the exercise of good faith business judgment; (b) a material
breach of this Employment Agreement by Executive which is not "cured" by Executive following at
least thirty (30) days' written notice of such breach; (c)gross negligence in the execution of
his material assigned duties; (d) the commission by Executive of any act involving fraud,
dishonesty or moral turpitude; (e) the indictment for, being bound over for trial following
preliminary hearing, or the conviction of Executive of any felony in either a state or federal
court proceeding; or (f) failure to reasonably perform his duties and obligations or to
implement policies and directions promulgated by Farmland following at least thirty (30) days'
written notice of such failure.

(iii) Disability. Farmland may terminate Executive's employment if Executive sustains a disability which is
----------
serious enough that Executive is not able to perform the essential functions of his position,
with or without reasonable accommodations, as defined and if required by applicable state and
federal disability laws. Executive shall be presumed to have such a disability if he qualifies
to begin receiving disability income insurance payments under any applicable Long Term
Disability Income plan. Further, Executive shall be presumed to have such a disability if he
is substantially incapable of performing his duties for a period of more than twelve (12) weeks.

(i) Voluntary Resignation. Executive may terminate his employment at any time and for any reason
----------------------
whatsoever, effective upon delivery of written notice of termination to Farmland.

(ii) "Good Reason" Resignation. Executive may terminate this contract and his employment for "Good Reason"
--------------------------
following at least thirty (30) days' written notice of the asserted "Good Reason" to Farmland,
if such "Good Reason" is not then "cured" by Farmland. If such termination by Executive is
asserted to be for "Good Reason", such termination shall state the grounds that Executive
claims constitutes Good Reason. As used herein, "Good Reason" shall mean a material breach of
this Employment Agreement by Farmland, or a demotion such that Executive does not serve in
substantially the capacity described herein or a position of comparable responsibility.

4. Compensation.
------------

(a) Base Salary. During his employment, Farmland shall pay Executive an initial "Base Salary" at the rate
-----------
of Two Hundred Seventeen Thousand Eight Hundred and Sixty-Two Dollars ($217,862) per year, commencing on
the effective date of this Employment Agreement, payable in accordance with Farmland's regular payroll
practices and policies. Farmland shall annually review the amount of Base Salary with the first such
review to occur in April, 2001. Any upward adjustment shall not require a written amendment to this
Employment Agreement.

(b) Other Compensation and Employee Benefits. During the Employment Period, Executive shall be eligible to
-----------------------------------------
participate in the Company's variable pay and long-term incentive compensation programs. Executive
shall be entitled to participate in any additional executive compensation programs and employee benefit
plans generally applicable to senior management employees of the Company pursuant to the terms and
conditions of such programs and plans. Nothing contained herein shall preclude Farmland from
terminating or amending any such plan or program in its sole discretion.

5. Post-Termination Payments by Farmland.
---------------------------------------

(a) Terminations without Cause or Resignation for Good Reason. In the event that Executive's employment is
----------------------------------------------------------
terminated by Farmland without Cause or by Executive for Good Reason, and Executive signs (and does not
rescind, as allowed by law) a Release of Claims in a form satisfactory to Farmland which assures, among
other things, that Executive will not commence any litigation or other claims as a result of his
employment or termination, and agrees to honor all of Executive's other obligations as required by this
Agreement, Farmland will provide Executive a severance payment equal to two years Base Salary and
Executive will be entitled to a pro-rata payment under any then existing annual or long-term variable
pay or incentive plans or other bonus arrangements then in effect, if applicable objectives are achieved.

(b) Termination for Cause, or Voluntary Resignation. If Executive's employment is terminated by Farmland
--------------------------------------------------
for Cause or by Executive as a Voluntary Resignation, Executive shall be entitled only to his rights (a)
to receive the unpaid portion of his Base Salary, prorated to the date of termination, (b) to receive
reimbursement for any ordinary and reasonable business expenses for which he had not yet been
reimbursed, (c) to receive payment for accrued and unused vacation days, (d) to receive payments under
Farmland's pension, deferred compensation or other benefit plans in accordance with the terms of such
plans, and (e) to continue certain health insurance at his expense pursuant to COBRA.

6. Other Executive Obligations. Executive agrees that the following provisions will apply
-----------------------------
throughout Executive's Employment Period and for the specified post-employment period, regardless of the
reason for termination or resignation;

(a) Nondisclosure of Confidential Information. Except to the extent required in
-----------------------------------------------
furtherance of Farmland's business in connection with matters as to which Executive is involved as an
employee, Executive will not, during the term of his employment and for an unlimited period thereafter,
directly or indirectly: (1) disclose or furnish to, or discuss with, any other person or entity any
confidential information concerning Farmland or its business or employees, acquired during the period of
his employment by Farmland; (2) individually or in conjunction with any other person or entity, employ
or cause to be employed, any such confidential information in any way whatsoever or (3) without the
written consent of Farmland, publish or deliver any copies, abstracts or summaries of any papers,
documents, lists, plans, specifications or drawings containing any such confidential information.

(b) Non-Interference. Executive will not, during the Employment Period and for an
----------------
unlimited period thereafter, directly or indirectly attempt to encourage, induce or otherwise solicit
any employee or other person or entity to breach any agreement with the Company or otherwise interfere
with the advantageous business relationship of the Company with any person or entity. Executive
specifically agrees not to solicit, on Executive's own behalf or on behalf of another, any of the
Company's employees to resign from their employment with the Company in order to go to work elsewhere.
Executive further specifically agrees not to make any disparaging remarks of any sort or otherwise
communicate any disparaging remarks about the Company or any of its members, equity holders, directors,
officers or employees, directly or indirectly, to any of the Company's employees, members, equity
holders, directors, customers, vendors, competitors, or other people or entities with whom the Company
has a business or employment relationship.

(c) Non-Competition. Executive agrees that during the term of his employment and
---------------
thereafter for a period of one (1) year, Executive will not directly or indirectly engage in or carry on
a business that is in direct competition with any significant business unit of Farmland as conclusively
determined by the President and Chief Executive Officer. Further, Executive agrees that during this
same period of time he will not act as an agent, representative, consultant, officer, director,
independent contractor or employee of any entity or enterprise that is in direct competition with any
significant business unit of Farmland as conclusively determined by the President and Chief Executive
Officer.

(d) Cooperation in Claims. For an unlimited period following his period of employment, at
---------------------
the request of Farmland, Executive will cooperate with Farmland with respect to any claims or lawsuits
by or against Farmland where Executive has knowledge of the facts involved in such claims or lawsuits.
Executive shall be entitled to reasonable compensation for Executive's time and expense in rendering
such cooperation. Further, Executive will decline to voluntarily aid, assist or cooperate with any
party who has claims or lawsuits against Farmland, or with their attorneys or agents. Farmland and
Executive both acknowledge, however, that nothing in this paragraph shall prevent Executive from
honestly testifying at an administrative hearing, arbitration, deposition or in court, in response to a
lawful and properly served subpoena in a proceeding involving Farmland.

(e) Remedies. The parties recognize and agree that, because any breach by Executive of
--------
the provisions of this Paragraph 6 would result in damages difficult to ascertain, Farmland shall be
entitled to injunctive and other equitable relief to prevent a breach or threatened breach of the
provisions of this Paragraph 6. Accordingly, the parties specifically agree that Farmland shall be
entitled to temporary and permanent injunctive relief to enforce the provisions of this Paragraph 6 and
that such relief may be granted without the necessity of proving actual damages or irreparable harm.

(f) Enforceability. Executive agrees that considering Executive's relationship with
--------------
Farmland, and given the terms of this Agreement, the restrictions and remedies set forth in Paragraph 6
are reasonable. Notwithstanding the foregoing, if any of the covenants set forth above shall be held to
be invalid or unenforceable, the remaining parts thereof shall nevertheless continue to be valid and
enforceable as though the invalid or unenforceable parts have not been included therein. In the event
the provisions relating to time periods and/or areas of restriction shall be declared by a court of
competent jurisdiction to exceed the maximum time periods or areas of restriction permitted by law, then
such time periods and areas of restriction shall be amended to become and shall thereafter be the
maximum periods and/or areas of restriction which said court deems reasonable and enforceable.
Executive also agrees that Farmland's action in not enforcing a particular breach of any part of
Paragraph 6 will not prevent Farmland from enforcing any other breaches that Farmland discovers, and
shall not operate as a waiver by Farmland against any future enforcement of a breach.

7. Notices. Notices hereunder shall be in writing and shall be delivered personally or sent
-------
return receipt requested and postage prepaid, addressed as follows:

If to Executive: Robert B. Terry
c/o Farmland Industries, Inc.
3315 North Oak Trafficway
Kansas City, MO 64116

If to Farmland: Robert W. Honse
President and Chief Executive Officer
Farmland Industries, Inc.
3315 North Oak Trafficway
Kansas City, MO 64116

with a copy to: Vice President and General Counsel
Farmland Industries, Inc.
3315 North Oak Trafficway
Kansas City, MO 64116

8. Binding Agreement. The provisions of this Agreement shall be binding upon, and shall inure to
------------------
the benefit of, the respective heirs, legal representatives and successors of the parties hereto.

9. Missouri Law. This Agreement shall be governed by and construed in accordance with the laws of
------------
the State of Missouri, unless otherwise pre-empted by federal law.

10. Captions and Section Headings. Captions and paragraph headings used herein are for convenience
------------------------------
only and are not a part of this Agreement and shall not be used in construing it.

11. Invalid Provisions. If any provision of this Agreement shall be unlawful, void, or for any
-------------------
reason unenforceable, it shall be deemed severable from, and shall in no way affect the validity or
enforceability of, the remaining provisions of this Agreement.

12. Waiver of Breach. The failure to enforce at any time any of the provisions of this Agreement,
----------------
or to require at any time performance by the other party of any of the provisions hereof, shall in no way be
construed to be a waiver of such provisions or to affect either the validity of this Agreement or any part hereof
or the right of either party thereafter to enforce each and every provision in accordance with the terms of this
Agreement.

13. Entire Agreement. This Agreement contains the entire agreement between the parties with
-----------------
respect to the subject matter hereof and supersedes all prior and contemporaneous agreements, representations and
understandings of the parties with respect thereto. No modification or amendment of any of the provisions of
this Agreement shall be effective unless in writing specifically referring hereto and signed by Executive and the
Chief Executive Officer.

IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the date set forth above.

EXECUTIVE FARMLAND INDUSTRIES, INC.

By: /s/ ROBERT B. TERRY By: /s/ ROBERT W. HONSE
____________________________ ________________________________
Robert B. Terry Robert W. Honse
Executive Vice President, President and Chief Executive Officer
Law and Administration

EX-10 5 0005.htm EX-10(III)K EMPLOYMENT AGREEMENT WITH JOHN BERARDI Employmentagreement between Farmland and John Berardi

EMPLOYMENT AGREEMENT

THIS AGREEMENT is made between Farmland Industries, Inc. (“Farmland”), with its principal place of
business at 3315 North Oak Trafficway, Kansas City, Missouri 64116, and John F. Berardi, (“Executive”).

WHEREAS, Executive and Farmland desire and agree to govern their employment relationship by means of
this Employment Agreement.

1. Position and Term. Farmland hereby employs Executive to serve as Executive Vice President and
Chief Financial Officer and in such other senior management positions as may be assigned from time to time. The
period of employment under this Agreement shall commence on September 1, 2000 and continue for a rolling two (2)
year period and shall be referred to as the “Employment Period.” In no event, will such Employment Period be
automatically extended beyond Executive’s 65th birthday. Executive’s employment may be earlier terminated by
either party subject to the rights and obligations of the parties set forth herein. While employed hereunder,
Executive will devote his best efforts to Farmland and shall perform the duties of the position outlined herein
and such other duties as may be reasonably assigned by Farmland. While it is understood and agreed that
Executive’s job capacities may change at Farmland’s discretion, Executive’s level of responsibility shall not be
substantially reduced at any time. Executive shall not, without the prior written consent of Farmland, render
services of a business, professional, or commercial nature to any other person or firm, whether for compensation
or otherwise during the Employment Period.

2. Employment at Will. The parties acknowledge this Employment Agreement does not create any
obligation on Executive’s part to work for Farmland nor on Farmland’s part to employ Executive for any fixed
period of time and that this Employment Agreement may be terminated at any time with or without cause, subject
only to the rights and obligations set forth herein.

3. Termination of Employment.

(a) Death. Executive’s employment shall terminate upon his death.

(b) Termination by the Company

(i) Without Cause. Farmland may terminate Executive’s employment, at any time and for any reason
whatsoever, without cause, effective upon delivery of written notice of termination to
Executive.

(ii) For Cause. Farmland may terminate Executive’s employment at any time for Cause, effective upon delivery
of written notice of termination to Executive. If such termination by Farmland is asserted to
be for Cause, such termination notice shall state the grounds constituting Cause. As used
herein, “Cause” shall mean: (a) willful misconduct by Executive which is damaging or
detrimental to the business and affairs of Farmland, monetarily or otherwise, as determined by
the Chief Executive Officer in the exercise of good faith business judgment; (b) a material
breach of this Employment Agreement by Executive which is not “cured” by Executive following at
least thirty (30) days’ written notice of such breach; (c)gross negligence in the execution of
his material assigned duties; (d) the commission by Executive of any act involving fraud,
dishonesty or moral turpitude; (e) the indictment for, being bound over for trial following
preliminary hearing, or the conviction of Executive of any felony in either a state or federal
court proceeding; or (f) failure to reasonably perform his duties and obligations or to
implement policies and directions promulgated by Farmland following at least thirty (30) days’
written notice of such failure.

(iii) Disability. Farmland may terminate Executive’s employment if Executive sustains a disability which is
serious enough that Executive is not able to perform the essential functions of his position,
with or without reasonable accommodations, as defined and if required by applicable state and
federal disability laws. Executive shall be presumed to have such a disability if he qualifies
to begin receiving disability income insurance payments under any applicable Long Term
Disability Income plan. Further, Executive shall be presumed to have such a disability if he
is substantially incapable of performing his duties for a period of more than twelve (12) weeks.

(i) Voluntary Resignation. Executive may terminate his employment at any time and for any reason
whatsoever, effective upon delivery of written notice of termination to Farmland.

(ii) “Good Reason” Resignation. Executive may terminate this contract and his employment for “Good Reason”
following at least thirty (30) days’ written notice of the asserted “Good Reason” to Farmland,
if such “Good Reason” is not then “cured” by Farmland. If such termination by Executive is
asserted to be for “Good Reason”, such termination shall state the grounds that Executive
claims constitutes Good Reason. As used herein, “Good Reason” shall mean a material breach of
this Employment Agreement by Farmland, or a demotion such that Executive does not serve in
substantially the capacity described herein or a position of comparable responsibility.

4. Compensation.

(a) Base Salary. During his employment, Farmland shall pay Executive an initial“Base Salary” at the rate
of Four Hundred Twelve Thousand Eighty Dollars ($412,080) per year, commencing on the effective date of this Employment Agreement,
payable in accordance with Farmland’s regular payroll practices and policies. Farmland shall annually
review the amount of Base Salary. Any upward adjustment shall not require a written amendment to this
Employment Agreement.

(b) Other Compensation and Employee Benefits. During the Employment Period, Executive shall be eligible to
participate in the Company’s variable pay and long-term incentive compensation programs. Executive
shall be entitled to participate in any additional executive compensation programs and employee benefit
plans generally applicable to senior management employees of the Company pursuant to the terms and
conditions of such programs and plans. Nothing contained herein shall preclude Farmland from
terminating or amending any such plan or program in its sole discretion.

5. Post-Termination Payments by Farmland.

(a) Terminations without Cause or Resignation for Good Reason. In the event that Executive’s employment is
terminated by Farmland without Cause or by Executive for Good Reason, and Executive signs (and does not
rescind, as allowed by law) a Release of Claims in a form satisfactory to Farmland which assures, among
other things, that Executive will not commence any litigation or other claims as a result of his
employment or termination, and agrees to honor all of Executive’s other obligations as required by this
Agreement, Farmland will provide Executive a severance payment equal to two years Base Salary and
Executive will be entitled to a pro-rata payment under any then existing annual or long-term variable
pay or incentive plans or other bonus arrangements then in effect, if applicable objectives are achieved.

(b) Termination for Cause, or Voluntary Resignation. If Executive’s employment is terminated by Farmland
for Cause or by Executive as a Voluntary Resignation, Executive shall be entitled only to his rights (a)
to receive the unpaid portion of his Base Salary, prorated to the date of termination, (b) to receive
reimbursement for any ordinary and reasonable business expenses for which he had not yet been
reimbursed, (c) to receive payment for accrued and unused vacation days, (d) to receive payments under
Farmland’s pension, deferred compensation or other benefit plans in accordance with the terms of such
plans, and (e) to continue certain health insurance at his expense pursuant to COBRA.

6. Other Executive Obligations. Executive agrees that the following provisions will apply throughout
Executive’s Employment Period and for the specified post-employment period, regardless of the reason for
termination or resignation;

(a) Nondisclosure of Confidential Information. Except to the extent required in
furtherance of Farmland’s business in connection with matters as to which Executive is involved as an
employee, Executive will not, during the term of his employment and for an unlimited period thereafter,
directly or indirectly: (1) disclose or furnish to, or discuss with, any other person or entity any
confidential information concerning Farmland or its business or employees, acquired during the period of
his employment by Farmland; (2) individually or in conjunction with any other person or entity, employ
or cause to be employed, any such confidential information in any way whatsoever or (3) without the
written consent of Farmland, publish or deliver any copies, abstracts or summaries of any papers,
documents, lists, plans, specifications or drawings containing any such confidential information.

(b) Non-Interference. Executive will not, during the Employment Period and for an
unlimited period thereafter, directly or indirectly attempt to encourage, induce or otherwise solicit
any employee or other person or entity to breach any agreement with the Company or otherwise interfere
with the advantageous business relationship of the Company with any person or entity. Executive
specifically agrees not to solicit, on Executive’s own behalf or on behalf of another, any of the
Company’s employees to resign from their employment with the Company in order to go to work elsewhere.
Executive further specifically agrees not to make any disparaging remarks of any sort or otherwise
communicate any disparaging remarks about the Company or any of its members, equity holders, directors,
officers or employees, directly or indirectly, to any of the Company’s employees, members, equity
holders, directors, customers, vendors, competitors, or other people or entities with whom the Company
has a business or employment relationship.

(c) Non-Competition. Executive agrees that during the term of his employment and
thereafter for a period of one (1) year, Executive will not directly or indirectly engage in or carry on
a business that is in direct competition with any significant business unit of Farmland as conclusively
determined by the President and Chief Executive Officer. Further, Executive agrees that during this
same period of time he will not act as an agent, representative, consultant, officer, director,
independent contractor or employee of any entity or enterprise that is in direct competition with any
significant business unit of Farmland as conclusively determined by the President and Chief Executive
Officer.

(d) Cooperation in Claims. For an unlimited period following his period of employment, at
the request of Farmland, Executive will cooperate with Farmland with respect to any claims or lawsuits
by or against Farmland where Executive has knowledge of the facts involved in such claims or lawsuits.
Executive shall be entitled to reasonable compensation for Executive’s time and expense in rendering
such cooperation. Further, Executive will decline to voluntarily aid, assist or cooperate with any
party who has claims or lawsuits against Farmland, or with their attorneys or agents. Farmland and
Executive both acknowledge, however, that nothing in this paragraph shall prevent Executive from
honestly testifying at an administrative hearing, arbitration, deposition or in court, in response to a
lawful and properly served subpoena in a proceeding involving Farmland.

(e) Remedies. The parties recognize and agree that, because any breach by Executive of
the provisions of this Paragraph 6 would result in damages difficult to ascertain, Farmland shall be
entitled to injunctive and other equitable relief to prevent a breach or threatened breach of the
provisions of this Paragraph 6. Accordingly, the parties specifically agree that Farmland shall be
entitled to temporary and permanent injunctive relief to enforce the provisions of this Paragraph 6 and
that such relief may be granted without the necessity of proving actual damages or irreparable harm.

(f) Enforceability. Executive agrees that considering Executive’s relationship with
Farmland, and given the terms of this Agreement, the restrictions and remedies set forth in Paragraph 6
are reasonable. Notwithstanding the foregoing, if any of the covenants set forth above shall be held to
be invalid or unenforceable, the remaining parts thereof shall nevertheless continue to be valid and
enforceable as though the invalid or unenforceable parts have not been included therein. In the event
the provisions relating to time periods and/or areas of restriction shall be declared by a court of
competent jurisdiction to exceed the maximum time periods or areas of restriction permitted by law, then
such time periods and areas of restriction shall be amended to become and shall thereafter be the
maximum periods and/or areas of restriction which said court deems reasonable and enforceable.
Executive also agrees that Farmland’s action in not enforcing a particular breach of any part of
Paragraph 6 will not prevent Farmland from enforcing any other breaches that Farmland discovers, and
shall not operate as a waiver by Farmland against any future enforcement of a breach.

7. Notices. Notices hereunder shall be in writing and shall be delivered personally or sent
return receipt requested and postage prepaid, addressed as follows:

If to Executive: John F. Berardi
c/o Farmland Industries, Inc.
3315 North Oak Trafficway
Kansas City, MO 64116

If to Farmland: Robert W. Honse
President and Chief Executive Officer
Farmland Industries, Inc.
3315 North Oak Trafficway
Kansas City, MO 64116

with a copy to: Executive Vice President
Administrative Group and General Counsel
Farmland Industries, Inc.
3315 North Oak Trafficway
Kansas City, MO 64116

8. Binding Agreement. The provisions of this Agreement shall be binding upon, and shall inure to
the benefit of, the respective heirs, legal representatives and successors of the parties hereto.

9. Missouri Law. This Agreement shall be governed by and construed in accordance with the laws of
the State of Missouri, unless otherwise pre-empted by federal law.

10. Captions and Section Headings. Captions and paragraph headings used herein are for convenience
only and are not a part of this Agreement and shall not be used in construing it.

11. Invalid Provisions. If any provision of this Agreement shall be unlawful, void, or for any
reason unenforceable, it shall be deemed severable from, and shall in no way affect the validity or
enforceability of, the remaining provisions of this Agreement.

12. Waiver of Breach. The failure to enforce at any time any of the provisions of this Agreement,
or to require at any time performance by the other party of any of the provisions hereof, shall in no way be
construed to be a waiver of such provisions or to affect either the validity of this Agreement or any part hereof
or the right of either party thereafter to enforce each and every provision in accordance with the terms of this
Agreement.

13. Entire Agreement. This Agreement contains the entire agreement between the parties with
respect to the subject matter hereof and supersedes all prior and contemporaneous agreements, representations and
understandings of the parties with respect thereto. No modification or amendment of any of the provisions of
this Agreement shall be effective unless in writing specifically referring hereto and signed by Executive and the
Chief Executive Officer.

IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the date set forth above.

EXECUTIVE FARMLAND INDUSTRIES, INC.

By: JOHN F. BERARDI By: ROBERT W. HONSE
- --------------------------------- -------------------------------------------
John F. Berardi Robert W. Honse
Executive Vice President and President and Chief Executive Officer
Chief Financial Officer

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