-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, VXSB1m9z9fECV462LQOUgv6oop4TPePk/dQuAhp79TXdOsvFEvgjJzOd9CE76vFk 8sdfUDt0u/eqaXXqH4e2rA== 0000034616-94-000011.txt : 19940415 0000034616-94-000011.hdr.sgml : 19940415 ACCESSION NUMBER: 0000034616-94-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19940228 FILED AS OF DATE: 19940414 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FARMLAND INDUSTRIES INC CENTRAL INDEX KEY: 0000034616 STANDARD INDUSTRIAL CLASSIFICATION: 2011 IRS NUMBER: 440209330 STATE OF INCORPORATION: KS FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 002-07250 FILM NUMBER: 94522796 BUSINESS ADDRESS: STREET 1: 3315 N OAK TRAFFICWAY CITY: KANSAS CITY STATE: MO ZIP: 64116 BUSINESS PHONE: 8164596000 FORMER COMPANY: FORMER CONFORMED NAME: CONSUMERS COOPERATIVE ASSOCIATION DATE OF NAME CHANGE: 19681201 10-Q 1 FORM 10-1 FILING FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended Commission File February 28, 1994 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.) 3315 North Oak Trafficway, Kansas City, Missouri (Address of principal executive offices) 64116 (Zip Code) 816-459-6000 (Registrant's telephone number, including area code) 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 { } FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS
February 28 August 31 1994 1993 (Amounts in Thousands) CURRENT ASSETS Accounts receivable . . . . . . . . . . . . . . . . . . $ 359,102 $ 320,980 Inventories (note 2). . . . . . . . . . . . . . . . . . 678,241 496,690 Prepaid expenses. . . . . . . . . . . . . . . . . . . . 20,688 4,610 Other current assets. . . . . . . . . . . . . . . . . . 119,652 93,120 TOTAL CURRENT ASSETS . . . . . . . . . . . . . . . . . . . . $ 1,177,683 $ 915,400 INVESTMENTS AND LONG-TERM RECEIVABLES (note 4). . . . . . . $ 185,029 $ 183,312 PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment, at cost. . . . . . . . . $ 1,182,839 $ 1,154,343 Less accumulated depreciation and amortization. . . . . 680,664 649,965 NET PROPERTY, PLANT AND EQUIPMENT. . . . . . . . . . . . . . $ 502,175 $ 504,378 OTHER ASSETS. $ 128,524 $ 116,891 TOTAL ASSETS. $ 1,993,411 $ 1,719,981
[FN] See Accompanying notes to condensed consolidated financial statements. FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS LIABILITIES AND EQUITIES
February 28 August 31 1994 1993 (Amounts in Thousands) CURRENT LIABILITIES Accounts and notes payable. . . . . . . . . . . . . . . $ 557,431 $ 504,497 Current maturities of long-term debt (note 3). . . . . . . . . . . . . . . . . . . . . 127,644 31,947 Customers' advances on product purchases. . . . . . . . 142,381 11,586 Other current liabilities . . . . . . . . . . . . . . . 149,162 106,851 TOTAL CURRENT LIABILITIES. . . . . . . . . . . . . . . . . . $ 976,618 $ 654,881 LONG-TERM DEBT (excluding current maturities). . . . . . . . $ 439,096 $ 485,861 DEFERRED INCOME TAXES (note 1) . . . . . . . . . . . . . . . $ 3,402 $ 2,169 MINORITY OWNERS' EQUITY IN SUBSIDIARIES. . . . . . . . . . . $ 15,017 $ 15,363 INCOME BEFORE INCOME TAXES, PATRONAGE REFUNDS AND APPROPRIATION FOR EARNED SURPLUS (note 1) . . . . . . . . . . . . . . . . . $ 6,193 $ -0- CAPITAL SHARES AND EQUITIES Common shares, $25 par value - Authorized 50,000,000 shares. . . . . . . . . . $ 378,727 $ 379,996 Other equities. . . . . . . . . . . . . . . . . . . . . 174,358 181,711 TOTAL CAPITAL SHARES AND EQUITIES. . . . . . . . . . . . . . $ 553,085 $ 561,707 TOTAL LIABILITIES AND EQUITIES . . . . . . . . . . . . . . . $ 1,993,411 $ 1,719,981
[FN] See Accompanying notes to condensed consolidated financial statements. FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended February 28 February 28 1994 1993 (Amounts in Thousands) Sales $ 3,000,903 $ 1,915,507 Cost of sales 2,841,579 1,797,542 Gross income. $ 159,324 $ 117,965 Selling, general & administrative expenses . . . . . . . . . $ 135,226 $ 122,527 Other income (deductions): Interest expense. . . . . . . . . . . . . . . . . . . . $ (27,111) $ (16,930) Operations of joint ventures. . . . . . . . . . . . . . (906) (6,583) Other, net. . . . . . . . . . . . . . . . . . . . . . . 6,660 3,821 Total other income (deductions). . . . . . . . . . . . . . . $ (21,357) $ (19,692) Income (loss) before income taxes, minority owners' interest and patronage refunds. . . . . . . . . $ 2,741 $ (24,254) Minority owners' interest in net loss of subsidiaries. . . . $ 3,452 $ -0- Income (loss) before income taxes and patronage refunds (note 1). . . . . . . . . . . . . . . $ 6,193 $ (24,254)
[FN] See Accompanying notes to condensed consolidated financial statements. FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended February 28 February 28 1994 1993 (Amounts in Thousands) Sales $ 1,526,911 $ 960,190 Cost of sales 1,457,815 904,985 Gross income. $ 69,096 $ 55,205 Selling, general & administrative expenses . . . . . . . . . $ 69,321 $ 61,676 Other income (deductions): Interest expense. . . . . . . . . . . . . . . . . . . . $ (13,978) $ (8,961) Operations of joint ventures. . . . . . . . . . . . . . 3,161 (4,166) Other, net. . . . . . . . . . . . . . . . . . . . . . . 3,730 2,612 Total other income (deductions). . . . . . . . . . . . . . . $ (7,087) $ (10,515) Loss before income taxes, minority owners' interest and patronage refunds. . . . . . . . . $ (7,312) $ (16,986) Minority owners' interest in net loss of subsidiaries. . . . $ 2,011 $ -0- Loss before income taxes and patronage refunds(note 1) . . . $ (5,301) $ (16,986)
[FN] See Accompanying notes to condensed consolidated financial statements. FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended February 28 February 28 1994 1993 (Amounts in Thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Income (loss) before income taxes and patronage refunds . . . . . . . . . . . . . . . . . $ 6,193 $ (24,254) Adjustments to reconcile income (loss) before income taxes and patronage refunds to net cash used in operating activities: Depreciation and amortization. . . . . . . . . . . 30,828 26,360 Other, net . . . . . . . . . . . . . . . . . . . . (2,999) 293 Changes in assets and liabilities: Accounts receivable. . . . . . . . . . . . . . . . 25,270 (44,745) Inventories. . . . . . . . . . . . . . . . . . . . (144,619) (188,589) Other assets . . . . . . . . . . . . . . . . . . . (55,843) (7,588) Accounts payable . . . . . . . . . . . . . . . . . (6,742) (6,574) Advances on product purchases. . . . . . . . . . . 130,795 102,707 Accrued interest and other liabilities . . . . . . 8,900 (2,801) Net cash used in operating activities. . . . . . . . . . . . $ (8,217) $ (145,191) CASH FLOWS FROM INVESTING ACTIVITIES: Advances to borrowers by finance companies. . . . . . . $ -0- $ (326,065) Collections from borrowers by finance companies. . . . . . . . . . . . . . . . . . . . . . -0- 316,170 Proceeds from disposal of investments and notes receivable . . . . . . . . . . . . . . . 8,789 2,176 Acquisition of investments and notes receivable . . . . . . . . . . . . . . . . . (17,936) (10,595) Acquisition of businesses (note 4). . . . . . . . . . . (33,251) -0- Capital expenditures. . . . . . . . . . . . . . . . . . (35,183) (57,277) Other 12,438 1,915 Net cash used in investing activities. . . . . . . . . . . . $ (65,143) $ (73,676) CASH FLOWS FROM FINANCING ACTIVITIES: Net decrease of demand loan certificates. . . . . . . . $ (8,378) $ (15,122) Proceeds from bank loans and notes payable. . . . . . . 620,407 596,043 Payments on bank loans and notes payable. . . . . . . . (596,852) (449,298) Proceeds from issuance of subordinated debt certificates. . . . . . . . . . 31,829 42,149 Payments for redemption of subordinated debt certificates . . . . . . . . . . (23,835) (10,533) Increase of checks and drafts outstanding . . . . . . . 20,585 51,943 Payments for redemption of equities . . . . . . . . . . (46) (13,444) Payments of patronage refunds and dividends . . . . . . -0- (17,938) Other 1,277 328 Net cash provided by financing activities. . . . . . . . . . $ 44,987 $ 184,128 Net decrease in cash and cash equivalents. . . . . . . . . . $ (28,373) $ (34,739) Cash and cash equivalents at beginning of period. . . . . . . . . . . . . . . . . . 28,373 34,739 Cash and cash equivalents at end of period . . . . . . . . . $ -0- $ -0- See accompanying notes to condensed consolidated financial statements
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (1) Interim Financial Statements The information included in these condensed consolidated financial statements 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. Certain reclassifications have been made to the condensed consolidated statements of operations of the prior year to conform with the current year presentation. In accordance with the bylaws of Farmland Industries, Inc. ("Farmland") and its cooperative subsidiaries, patronage refunds are apportioned and distributed or patronage losses are apportioned at the end of each fiscal year. As this apportionment is determined only at the end of each fiscal year and since the provision for income taxes, dividends, and the resultant amount of net income (loss) transferred to surplus are dependent upon the determination of the amount of the patronage refund or patronage loss, Farmland Industries, Inc. and subsidiaries ("the Company") has historically made no provisions for income taxes or patronage refunds in its interim financial statements. Therefore, the amount of interim income before income taxes and patronage refunds has been reflected as a separate item in the accompanying February 28, 1994 condensed consolidated balance sheet. (2) Inventories Major components of inventories at February 28, 1994, and August 31, 1993, are as follows:
February 28 August 31 1994 1993 (Amounts in Thousands) Finished and in-process products . . . . $ 381,930 $ 285,947 Grain. . . . . . . . . . . . . . . . . . . . . 166,793 91,990 Beef . . . . . . . . . . . . . . . . . . . . . . 23,191 27,754 Materials. . . . . . . . . . . . . . . . . . . . 47,027 43,857 Supplies . . . . . . . . . . . . . . . . . . . . 40,030 41,388 $ 658,971 $ 490,936 LIFO adjustment. . . . . . . . . . . . . . . . . 19,270 5,754 $ 678,241 $ 496,690
All inventories, other than grain, supplies and certain beef and petroleum inventories, are valued at the lower of first-in, first-out (FIFO) cost or market. The Company follows a policy of hedging its grain commodity transactions. Grain inventories are valued at market adjusted for net unrealized gains or losses on open commodity contracts. Supplies are valued at cost. Crude oil, refined petroleum products, beef and beef by-products are valued at the lower of last-in, first-out (LIFO) cost or market. In applying the lower of cost or market valuation method in the case of petroleum LIFO inventory, the general practice is modified to conform to the integral view of interim financial statements. Accordingly, a seasonal market value decline below cost of LIFO inventories, at an interim date, which is reasonably expected to be restored by year-end, is not recognized in interim results of operations since no loss is expected to be incurred in the annual period. At February 28, 1994, the carrying value of petroleum inventories stated under the LIFO method was $105,578,000. This exceeded the market value of such inventory by $10,165,000. However, based on historical prices of energy products and seasonal market price variations, the market value decline below cost is expected to be a temporary seasonal price fluctuation. Had the lower of first-in, first-out (FIFO) cost or market been used to value these petroleum products, inventories at February 28, 1994 would have been lower by $19,270,000. The LIFO valuation method had the effect of increasing income before income taxes and patronage refunds for the three and six months ended February 28, 1994 by $9,683,000 and $13,516,000, respectively, and increasing income before income taxes and patronage refunds for the three and six months ended February 28, 1993 by $5,615,000 and $8,314,000, respectively. The carrying value of beef inventories stated under the LIFO method was $20,712,000 at February 28, 1994. The LIFO method of accounting for beef inventories had no effect on the carrying value of inventories or on the income reported for the three and six months ended February 28, 1994, because market value of these inventories was lower than LIFO or FIFO cost. (3) Contingencies On July 28, 1983, Farmland sold the stock of Terra Resources, Inc. ("Terra"), a wholly-owned subsidiary engaged in oil and gas exploration and production operations, and exited its oil and gas exploration and production activities. The gain from the sale of Terra amounted to $237,200,000 for tax reporting purposes. During 1983, and prior to the sale of the Terra stock, Farmland received certain distributions from Terra totaling $24,800,000. For tax purposes, Farmland claimed intercorporate dividends-received deductions for the entire amount of such distributions. On March 24, 1993, the Internal Revenue Service ("IRS") issued a statutory notice to Farmland asserting deficiencies in federal income taxes (exclusive of statutory interest thereon) in the aggregate amount of $70,775,000. The asserted deficiencies relate primarily to the Company's tax treatment of the sale of the Terra stock and the distributions received from Terra prior to the sale. The IRS asserts that Farmland incorrectly treated the Terra sale gain as income against which certain patronage-sourced operating losses could be offset, and that, as a nonexempt cooperative, Farmland was not entitled to an intercorporate dividends-received deduction in respect of the 1983 distribution by Terra. It further asserts that Farmland incorrectly characterized gains for tax purposes aggregating approximately $14,600,000, and a loss of approximately $2,300,000, from the disposition of certain other assets. On June 11, 1993, Farmland filed a petition in the United States Tax Court contesting the asserted deficiencies in their entirety. A trial date has not yet been set. If the IRS ultimately prevails on all of the adjustments asserted in the statutory notice, Farmland would have additional federal and state income tax liabilities aggregating approximately $85,800,000 plus accumulating statutory interest thereon (through February 28, 1994, of approximately $140,000,000). In addition, such adjustments would affect the computation of Farmland's taxable income for its 1989 tax year and, as a result, could increase Farmland's federal and state income taxes for that year by approximately $5,000,000 plus applicable statutory interest thereon. No provision has been made in the consolidated financial statements for federal or state income taxes (or interest thereon) in respect of the IRS claims described above. Farmland believes that it has meritorious positions with respect to all of these claims and will continue to vigorously pursue their favorable resolution through the pending litigation. In the opinion of Bryan Cave, Farmland's special tax counsel, it is more likely than not that the courts will ultimately conclude that (i) Farmland's treatment of the Terra sale gain was substantially, if not entirely, correct; and (ii) Farmland properly claimed a dividends-received deduction in respect of the 1983 distributions which it received from Terra prior to the sale of the Terra stock. Counsel has further advised, however, that none of the issues involved in these disputes is free from doubt, and that there can be no assurance that the courts will ultimately rule in favor of Farmland on any of these issues. Should the IRS ultimately prevail on all of its asserted claims, all claimed federal and state income taxes as well as accrued interest would become immediately due and payable, and would be charged to current operations. In such case, the Company would be required to renegotiate agreements with its banks to maintain compliance with various requirements of such agreements, including working capital and funded indebtedness provisions. However, no assurance can be given that such renegotiation would be successful. Alternatives could include other financing arrangements or the possible sale of assets. National Beef Packing Company L.P. ("NBPC"), a 58%-owned subsidiary (engaged in beef processing operations) has lines of credit under an agreement in which two banks participate. Borrowings covered by this loan agreement are nonrecourse to the Company. As a result of losses in beef operations, NBPC is not in compliance with certain covenants of this agreement. At February 28, 1994, the Company's investments in and advances to NBPC were $23,374,000. (4) Acquisition of Businesses In December 1993, Farmland acquired 100% ownership of seven international grain trading companies (collectively referred to as "Tradigrain"), for approximately $31,028,000 in cash. In October 1993, Farmland acquired all of the assets and assumed certain liabilities of National Carriers, Inc. in Liberal, Kansas for approximately $2,223,000 in cash. The purchase method of accounting has been used to account for these acquisitions. The results of operations of the acquired enterprises have been included in the accompanying consolidated statements of operation from the dates of acquisition. The pro forma effects of these acquisitions on the accompanying consolidated financial statements are not significant. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General Farmland Industries, Inc. ("Farmland") is a regional farm supply and marketing cooperative. Farmland and subsidiaries (the"Company") conducts business primarily in two operating areas. On the input side of the agricultural industry, the Company operates as a farm supply cooperative. On the output side of the agricultural industry, the Company operates as a processing and marketing cooperative. Cooperative farm supply operations consists of three product divisions--petroleum, fertilizer and agricultural chemicals, and feed. Products of the petroleum division are principally refined fuels, propane, by-products of petroleum refining and a complete line of car, truck and tractor tires and accessories. Principal products of the fertilizer and agricultural chemicals division are nitrogen, phosphate and potash fertilizers and a complete line of insecticides, herbicides and mixed chemicals. Feed division products include swine, beef, poultry, mineral and specialty feeds, feed ingredients and animal health products. The Company distributes farm supply products at wholesale. Its customers are primarily local farm cooperative associations which are members and owners of Farmland. These local cooperatives distribute products primarily to farmers and ranchers who utilize the products in the production of farm crops and livestock. Cooperative marketing operations include the storage and marketing of grain, processing pork and beef, and marketing fresh pork, processed pork, fresh beef and boxed beef. Hogs and grain are supplied to the Company primarily by members. Cattle are purchased from producers in the proximity of beef plants at Liberal and Dodge City, Kansas. The Company has made arrangements to allow beef producers to become members and supply cattle to the Company on a patronage basis. Geographically, the Company's markets are mid-western states which comprise the corn belt and the wheat belt. A substantial portion of the Company's supply and marketing products are produced in facilities owned by the Company or operated by the Company under long-term lease arrangements. No material part of the business of any segment of the Company is dependent on a single customer or a few customers. The Company's revenues depend to a large extent on conditions in agriculture and may be volatile due to factors beyond the Company's control, such as weather, crop failures, federal agricultural programs, production efficiencies, and direct imports or exports. In addition, global variables which affect supply, demand and price of crude oil and refined fuels impact the Company's petroleum operations. Management cannot determine the extent to which future operations of the Company may be impacted by these factors. The Company's cash flow and net income may continue to be volatile as conditions affecting agriculture and markets for the Company's products change. Financial Condition, Liquidity and Capital Resources The Company maintains two primary sources for debt capital: a continuous public offering of its debt securities and bank lines of credit, primarily with the National Bank for Cooperatives ("CoBank"). The Company's debt securities are offered through a wholly-owned broker/dealer subsidiary on a best-efforts basis. The types of securities offered include certificates payable on demand and five-, ten- and twenty-year subordinated debt certificates. The total amount of such debt outstanding and the flow of funds to, or from, the Company as a result of this public offering are influenced by the rate of interest which Farmland establishes for each type of debt certificate offered and by options of Farmland to call for redemption certain of its outstanding debt certificates. During the six months ended February 28, 1994, the outstanding balance of demand loan and subordinated debt certificates decreased $400,000. The Company's credit lines with CoBank provide a source of long-term and short-term funds and provide support for letters of credit issued by the bank on behalf of Farmland. Under these lines, a commodity loan is available to finance grain inventories, seasonal loans are available for financing inventories and operations, and term loans are available for facility additions. At February 28, 1994, the maximum borrowings available to Farmland under existing lines of credit with CoBank totaled $510.7 million, of which $243.6 million was borrowed, and $55.1 million was being utilized for support of letters of credit issued on behalf of Farmland by CoBank. CoBank and Rabobank Nederland have been retained by Farmland as Co-agents to lead a syndication of a $650 million credit facility offered by the Company to a group of both domestic and foreign banks. The Co-agents have committed to provide up to $500 million of the syndication amount. To provide for the time necessary to complete this transaction, both CoBank and Rabobank have extended their existing credit agreements until May 16, 1994. The Company expects to have completed the syndication by that time, and the new credit agreement will replace the existing CoBank and Rabobank lines of credit and combine other existing credit facilities under a single credit agreement. Farmland's loan agreements with CoBank contain provisions which require the Company to maintain consolidated working capital of not less than $150 million and to maintain consolidated net worth of not less than $425 million. In addition, the agreements require the Company to maintain funded indebtedness and senior funded indebtedness of not more than 52% and 43% of capitalization, respectively. All computations are based on consolidated financial data adjusted to exclude nonrecourse subsidiaries (any subsidiary for which Farmland is not directly or indirectly liable for any of such subsidiary's indebtedness). It is expected that the terms of the new credit agreement will be substantially the same as those in the existing CoBank agreement. Computed in accordance with the loan agreements, at February 28, 1994, working capital was $216.5 million, net worth was $565.0 million and funded indebtedness and senior funded indebtedness were 46.7% and 23.4% of capitalization, respectively. Farmland also has credit facilities with various commercial banks. At February 28, 1994, Farmland's available credit from commercial banks under committed and uncommitted arrangements was $215.0 million and $40.0 million, respectively. At February 28, 1994, borrowings under the committed credit facilities were $125.0 million. At February 28, 1994, there were no borrowings under the uncommitted credit facilities. In addition, $16.9 million was used to support letters of credit issued by such banks on Farmland's behalf. Financial covenants of these arrangements are not more restrictive than Farmland's credit lines with CoBank. Management considers these arrangements for debt capital to be adequate for the Company's present operating and capital plans. However, alternative financing arrangements are continuously evaluated. In December 1993, Farmland acquired 100% ownership of seven international grain brokerage companies (collectively referred to as "Tradigrain"). Tradigrain has borrowing agreements with various international banks which provide financing and letters of credit to support current international grain trading transactions. Obligations of Tradigrain under these loan agreements are nonrecourse to the Company. Tradigrain's operations are expected not to increase or decrease the Company's liquidity in any material way. Negotiations to sell a refinery at Coffeyville, Kansas were terminated during the three months ended February 28, 1994. Future discussions regarding the disposition of this refinery are not contemplated at this time. National Beef Packing Company L.P. ("NBPC"), a 58%-owned subsidiary (engaged in beef processing operations) has lines of credit under an agreement in which two banks participate. This agreement is intended to provide credit for NBPC's operations and facilities. Borrowings covered by this loan agreement are nonrecourse to the Company. NBPC is not in compliance with certain covenants of this agreement. See note 3 of the notes to the condensed consolidated financial statements. Leveraged leasing has been utilized to finance railcars, and a substantial portion of nitrogen fertilizer production equipment. Under the most restrictive covenants of its leases, the Company has agreed to maintain working capital of at least $75 million, consolidated funded indebtedness not greater than 65% of consolidated capitalization, and consolidated senior funded indebtedness not greater than 50% of consolidated capitalization. Major uses of cash during the six months ended February 28, 1994 include $35.2 million for capital expenditures, $33.3 million for acquisition of businesses and $17.9 million for acquisition of investments. These funds were provided from a $23.6 million increase in net bank borrowings , a $20.6 million increase in checks and drafts outstanding and $28.4 million was provided from the 1993 year end cash balance. The Internal Revenue Service issued a statutory notice to Farmland asserting significant deficiencies in federal income taxes and statutory interest thereon. Farmland filed a petition in the United States Tax Court contesting the asserted deficiencies in their entirety. See note 3 of the notes to the condensed consolidated financial statements. Results of Operations Operating results for any quarter are not necessarily indicative of the results expected for the full year. The principal businesses of Farmland are highly seasonal. The majority of sales of farm supply products occurs in the spring months, revenues in grain marketing historically are concentrated in the summer months and summer is the lowest sales period for pork marketing. In view of the seasonality of the Company's businesses, it must be emphasized that the results for the three months and six months ended February 28, 1994 should not be annualized to project a full year's results. Six Months Ended February 28, 1994 Compared with Six Months Ended February 28, 1993 Sales Sales for the six months ended February 28, 1994, increased $1,085.4 million or 56.7% compared with the corresponding period of the prior year. The increase includes $944.7 million higher sales of agricultural output products (grain, pork and beef), $126.9 million higher sales of farm production input products (fertilizer and agricultural chemicals, petroleum and feed) and $13.8 million higher sales of other products and services. Sales of output products increased mostly because of business acquisitions. Food marketing sales increased $700.9 million principally because beef operations, acquired in April 1993, had sales of $572.1 million in the six months ended February 28, 1994 and sales of pork products increased $128.8 million, primarily due to the acquisition of a plant at Monmouth, Illinois in February, 1993. In addition, grain sales increased $243.8 million primarily due to higher unit sales and prices of corn and milo. The increase of input products sales was principally caused by higher fertilizer and feed unit sales and by higher feed ingredients prices. Fertilizer and feed sales increased $105.8 million and $36.7 million, respectively. Petroleum sales decreased $15.6 million. Sales of petroleum products decreased mostly because of $8.9 million lower sales of propane, $4.9 million lower sales of natural gas liquids ("NGL's") and $2.3 million lower sales of refined fuels. Propane sales decreased principally because grain drying activities were less extensive in the current year than in the prior year when weather conditions were extremely wet during the fall harvest. Sales of NGL's decreased because these products were consumed in processing activities at the refinery. During the prior year, production at the refinery was suspended approximately 40 days for scheduled maintenance and during the maintenance period the NGL's were sold. Refined fuel sales decreased because the average selling price was lower than in the prior year. Unit sales of refined fuels exceeded the prior year by 12%. Income Before Income Taxes and Patronage Refunds Income before income taxes and patronage refunds for the six months ended February 28,1994 increased $30.4 million compared with the corresponding period of the prior year. The improvement is attributable to the agricultural input side of the Company's business. Petroleum, fertilizer and agricultural chemicals, and other agricultural input businesses increased operating profits by $25.1 million, $13.5 million, and $2.3 million, respectively. In addition, the Company's share of fertilizer joint ventures' income increased $8.8 million. These increases were partly offset by decreased results in the grain and food marketing businesses of $7.8 million and $5.6 million, respectively, and by $10.2 million higher interest. Results from petroleum operations increased primarily because unit margins on diesel fuels with low levels of sulfur (required by the Environmental Protection Agency for diesel fuel sold after September 30, 1993) were higher than in the corresponding period of the prior year. These margins were significantly higher immediately after the crossover to low level sulfur fuels. In addition, unit margins on other refined fuels improved because crude oil costs decreased and because production at the Coffeyville, Kansas refinery was substantially higher than in the prior year when production was suspended 40 days for scheduled maintenance. Operating profit of the fertilizer and agricultural chemicals business increased principally because of increased fertilizer selling prices and 32% higher unit sales. The unit sales increase was primarily due to more favorable weather conditions. The grain marketing business had a loss of $7.0 million in the six months ended February 28, 1994 compared with an operating profit of $.9 million in the corresponding period of the prior year. The loss is attributable to low unit margins on grain sales, higher operating expenses and weather-related grain spoilage. The food marketing business had lower operating profit primarily because of a $5.2 million operating loss in its beef operations acquired in April, 1993. This loss was primarily due to the effect of intense competition on margins in beef and to unusually high cattle prices. The Company's share of joint ventures' income increased $5.7 million of which $8.8 million was increased income of fertilizer ventures and $3.2 million was decreased income of a beef venture. Interest expense increased primarily due to an increase of the level of borrowed funds. Three Months Ended February 28, 1994 Compared with the Three Months Ended February 28, 1993. The changes in sales and income before income taxes and patronage refunds for the three months ended February 28, 1994, compared to the corresponding period of the prior year, are primarily as discussed in the six months comparison. Recent Accounting Pronouncements In the first quarter of fiscal year 1994, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." Under SFAS 106, the expected costs of providing such benefits are accrued during the active service period of the employee rather than accounting for such costs on a pay-as-you-go (cash) basis. The effect of implementation of SFAS 106, including amortization (over 20 years) of previously unrecognized costs related to the service period already rendered (the transition obligation) was insignificant. In the first quarter of fiscal year 1994, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) 109, "Accounting for Income Taxes." Under SFAS 109, deferred tax assets and liabilities are determined based upon the tax effect of differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. SFAS 109 generally allows recognition of deferred tax assets if future realization of the tax benefit is more likely than not. The effect of implementation of SFAS 109 at September 1, 1993 was insignificant. Statement of Financial Accounting Standards No. 112, "Employer's Accounting for Postemployment Benefits", was issued by the FASB in November 1992 and is effective for fiscal years beginning after December 15, 1993 (the Company's 1995 fiscal year). Statement 112 establishes standards of accounting and reporting for the estimated cost of benefits provided to former or inactive employees. Management expects that the adoption of Statement 112 will not have a significant impact on the Company's consolidated financial statements. Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," was issued by the Financial Accounting Standards Board ("FASB") in May 1993 and is effective for fiscal years beginning after December 15, 1993 (the Company's 1995 fiscal year). Statement 115 expands the use of fair value accounting and the reporting for certain investments in debt and equity securities. Management expects the adoption of Statement 115 will not have a significant impact on the Company's consolidated financial statements. PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits The exhibits listed below are filed as part of Form 10-Q for quarter ended February 28, 1994. None (b) No reports on Form 8-K were filed during the quarter ended February 28, 1994. 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 hereunto duly authorized. FARMLAND INDUSTRIES, INC. (Registrant) By: /s/ JOHN F. BERARDI John F. Berardi Executive Vice President and Chief Financial Officer Date: April 14, 1994 -----END PRIVACY-ENHANCED MESSAGE-----