0000034616-95-000027.txt : 19950920 0000034616-95-000027.hdr.sgml : 19950920 ACCESSION NUMBER: 0000034616-95-000027 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19950531 FILED AS OF DATE: 19950919 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FARMLAND INDUSTRIES INC CENTRAL INDEX KEY: 0000034616 STANDARD INDUSTRIAL CLASSIFICATION: MEAT PACKING PLANTS [2011] IRS NUMBER: 440209330 STATE OF INCORPORATION: KS FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 002-07250 FILM NUMBER: 95574614 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/A 1 AMENDMENT TO 10-Q FOR PERIOD ENDING 5/31/95 FORM 10-Q/A Amendment No. 1 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 May 31, 1995 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
May 31 August 31 1995 1994 ------------ ------------ (Amounts in Thousands) .................................. Current Assets: Cash and cash equivalents ................$ 0 $ 44,084 Accounts receivable ...................... 428,516 394,906 Inventories (Note 2) ..................... 673,052 538,314 Prepaid expenses ......................... 17,234 15,159 Other current assets ..................... 70,397 103,980 ------------ ----------- Total Current Assets.........................$ 1,189,199 $ 1,096,443 ------------ ----------- Investments and Long-Term Receivables.......$ 178,145 $ 189,601 ------------ ----------- Property, Plant and Equipment: Property, plant and equipment, at cost ...$ 1,312,640 $ 1,202,159 Less accumulated depreciation and amortization ....................... 737,049 700,869 ------------ ----------- Net Property, Plant and Equipment............$ 575,591 $ 501,290 ------------- ----------- Other Assets.................................$ 135,569 $ 139,297 ------------ ----------- Total Assets.................................$ 2,078,504 $ 1,926,631 ============ =========== See accompanying Notes to Condensed Consolidated Financial Statements
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS LIABILITIES AND EQUITIES
May 31 August 31 1995 1994 ---------------- ---------------- (Amounts in Thousands) Current Liabilities: Accounts and notes payable .......................$ 516,964 $ 548,476 Current maturities of long-term debt ............. 41,719 27,840 Customers' advances on product purchases ......... 61,597 24,438 Other current liabilities ........................ 236,372 204,985 -------------- -------------- Total Current Liabilities.............................$ 856,652 $ 805,739 -------------- -------------- Long-Term Debt (excluding current maturities)........................................$ 481,547 $ 517,806 -------------- -------------- Deferred Income Taxes (Note 1)........................$ 12,487 $ 6,340 -------------- -------------- Minority Owners' Equity in Subsidiaries...............$ 14,048 $ 11,733 -------------- -------------- Net Income (Note 1)...................................$ 129,043 $ -0- -------------- --------------- Capital Shares and Equities: Common shares, $25 par value - Authorized 50,000,000 shares ............................$ 398,619 $ 363,562 Other equities ................................... 186,108 221,451 -------------- -------------- Total Capital Shares and Equities.....................$ 584,727 $ 585,013 -------------- -------------- Total Liabilities and Equities........................$ 2,078,504 $ 1,926,631 =============== ==============
[FN] See accompanying Notes to Condensed Consolidated Financial Statements FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended ----------------------------------- May 31 May 31 1994 1995 Restated ------------ ------------ (Amounts in Thousands) Sales.. .. ..................................$ 5,325,044 $ 4 ,981,747 Cost of sales................................ 4,930,754 4,700,939 --------------- -------- Gross income.................................$ 394,290 $ 80,808 ------------- ------------ Selling, general & administrative expenses...$ 238,539 $ 218,372 ------------- ------------- Other income (deductions): Interest expense .........................$ (39,431) $ (38,310) Other, net ............................... 14,249 10,037 ------------ ------------ Total other income (deductions)..............$ (25,182) $ (8,273) ------------- ------------- Income before income taxes and equity in net income of investees and minority owners' interest in net (income) loss of subsidiaries ........$ 130,569 $ 34,163 Income tax (expense) (Note 1)................ (21,439) (2,255) -------------- ------------- Income before equity in net income of investees and minority owners' interest in net (income) loss of subsidiaries ........$ 109,130 $ 31,908 Equity in net income of investees (Note 4)... 22,410 6,242 Minority owners' interest in net (income) loss of subsidiaries ..................... (2,497) 5,158 ------------- ------------ Net income (Note 1)..........................$ 129,043 $ 43,308 ============= ============ See Accompanying Notes to Condensed Consolidated Financial Statements.
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended ----------------------------------- May 31 May 31 1994 1995 Restated ------------ ------------ (Amounts in Thousands) Sales.. .. ..................................$ 2,017,385 $ 1,980,844 Cost of sales................................ 1,861,428 1,859,360 --------------- --------------- Gross income.................................$ 155,957 $ 121,484 ------------- ------------- Selling, general & administrative expenses...$ 86,512 $ 83,146 ------------ ------------ Other income (deductions): Interest expense .........................$ (12,298) $ (11,199) Other, net ............................... 4,172 3,377 ------------ ------------ Total other income (deductions)..............$ (8,126) $ (7,822) ------------- ------------- Income before income taxes and equity in net income of investees and minority owners' interest in net (income) loss of subsidiaries ........$ 61,319 $ 30,516 Income tax (expense) (Note 1)............... (10,733) (2,014) -------------- ------------- Income before equity in net income of investees and minority owners' interest in net (income) loss of subsidiaries ........$ 50,586 $ 28,502 Equity in net income of investees (note 4)... 13,335 5,941 Minority owners' interest in net (income) loss of subsidiaries ..................... (3,039) 1,932 ------------- ------------ Net income (note 1)..........................$ 60,882 $ 36,375 ============ ============ See accompanying Notes to Condensed Consolidated Financial Statements
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended ---------------------------- May 31 May 31 1994 1995 Restated ---------- ---------- (Amounts in Thousands) Cash flows from operating activities: Net income .....................................$ 129,043 $ 43,308 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ............... 49,437 49,591 Equity in net income of investees ........... (22,410) (6,242) Other, net .................................. 7,346 (3,734) Changes in assets and liabilities: Accounts receivable ...................... (15,031) (54,617) Inventories .............................. (121,440) 23,380 Other current assets ..................... 12,046 (39,007) Accounts payable ......................... (29,039) 54,916 Advances on product purchases ............ 37,159 5,448 Other current liabilities ................ 39,890 48,420 ----------- ----------- Net cash provided by operating activities...........$ 87,001 $ 121,463 ----------- ------------ Cash flows from investing activities: Capital expenditures ............................$ (86,527) $ (47,782) Proceeds from disposal of investments and notes receivable ........................ 37,626 27,056 Acquisition of investments and notes receivable . (18,968) (14,935) Acquisition of businesses ...................... (2,200) (33,251) Proceeds from sale of fixed assets .............. 2,321 14,399 Other ......................................... 295 -0- --------- ---------- Net cash used in investing activities...............$ (67,453) $ (54,513) ------------- ------------- Cash flows from financing activities: Net decrease of demand loan certificates ........$ (7,137) $ (1,484) Proceeds from bank loans and notes payable ...... 370,686 1,183,819 Payments on bank loans and notes payable ........ (460,762) (1,287,651) Proceeds from issuance of subordinated debt certificates ............................. 34,461 43,868 Payments for redemption of subordinated debt certificates ............................. (18,632) (29,026) Increase of checks and drafts outstanding ....... 56,306 -0- Payments for redemption of equities ............. (12,335) (158) Payments of patronage refunds and dividends ..... (26,308) -0- Other ......................................... 89 2.309 --------- ------------- Net cash used in financing activities...............$ (63,632) $ (88,323) ------------- ------------- Net decrease in cash and cash equivalents...........$ (44,084) $ (21,373) Cash and cash equivalents at beginning of period.... 44,084 28,373 ----------- ----------- Cash and cash equivalents at end of period..........$ -0- $ 7,000 ========== ========== See accompanying Notes to Condensed Consolidated Financial Statements
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (1) INTERIM FINANCIAL STATEMENTS Unless the context requires otherwise, (i) "Farmland" or the "Company" herein refers to Farmland Industries, Inc. and its consolidated subsidiaries, and (ii) all references herein to "year" or "years" are to fiscal years ended August 31. The information included in these 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. In accordance with the bylaws of Farmland and its cooperative subsidiaries, the member-sourced portion of income is determined annually and distributed to members of Farmland as patronage refunds. The member-sourced portion of such income is determined on the basis of the quantity or value of business done by Farmland during the year with or for patrons entitled to receive patronage refunds. As this determination is made only after the end of the fiscal year, and since the appropriation of earned surplus is dependent on the determination of the amount of patronage refunds, and in view of the fact that the portion of the annual patronage refund to be paid in cash and Farmland equity (common stock, associate member common stock or capital credits) is determined (by the Farmland Board of Directors at its discretion) after the amount of the annual patronage refund has been determined, Farmland makes no provision for patronage refunds in its interim financial statements. Therefore, the amount of net income has been reflected as a separate item in the accompanying May 31, 1995 condensed consolidated balance sheet. As patronage refunds are an integral part of the computation of income taxes, the Company historically has not provided for income taxes in its interim period financial statements. However, in accordance with generally accepted accounting principles, the Company commenced (effective with the 1995 fiscal year) including a provision for estimated income taxes in its interim financial statements. For the nine months and three months ended May 31, 1995, the Company estimated an effective tax rate based on historic effective rates. The actual effective rate for 1995 may be subject to revision. Based on the effective tax rate for the 1994 fiscal year, the Condensed Consolidated Financial Statements for the nine months and three months ended May 31, 1994 have been restated to include an interim income tax expense of $379,000 and $1,119,000, respectively. (2) INVENTORIES Major components of inventories at May 31, 1995, and August 31, 1994, are as follows:
May 31 August 31 1995 1994 -------- -------- (Amounts in Thousands) Finished and in-process products ........$ 362,923 $ 286,381 Materials ............................... 62,498 51,428 Supplies ................................ 44,988 39,885 Beef .................................... 36,194 24,267 Grain ................................... 166,449 136,353 ----------- ----------- $ 673,052 $ 538,314 =========== ===========
Grain inventories are valued at market adjusted for the net unrealized gains or losses on open grain contracts. Crude oil, refined petroleum products, cattle and beef by-products are valued at the lower of last-in, first-out (LIFO) cost or market. Other inventories are valued at the lower of first-in, first-out (FIFO) cost or market. Supplies are valued at cost. 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 May 31, 1995, the carrying value of petroleum inventories stated under the LIFO method was $113,345,000. This exceeded the market value of such inventory by $1,936,000. 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 May 31, 1995 would have been lower by $3,276,000. The carrying value of beef inventories stated under the LIFO method was $28,612,000 at May 31, 1995. The LIFO method of accounting for beef inventories had no effect on the carrying value of inventories or on the income reported for the nine months and three months ended May 31, 1995 because market value of these inventories was lower than LIFO or FIFO cost. (3) CONTINGENCIES In July 1983, Farmland sold the stock of Terra Resources, Inc.("Terra"), a wholly owned subsidiary engaged in oil and gas exploration and production operations, and exited its oil and gas exploration and production activities. The gain from the sale of Terra amounted to $237,200,000 for tax reporting purposes. On March 24, 1993, the Internal Revenue Service ("IRS") issued a statutory notice to Farmland asserting deficiencies in federal income taxes (exclusive of statutory interest thereon) in the aggregate amount of $70,800,000. The asserted deficiencies relate primarily to the Company's tax treatment of the $237,200,000 gain resulting from its sale of the stock of Terra and the IRS's contention that Farmland incorrectly treated the Terra sale gain as income against which certain patronage-sourced operating losses could be offset. The statutory notice further asserts that Farmland incorrectly characterized for tax purposes gains aggregating approximately $14,600,000, and a loss of approximately $2,300,000, from dispositions of certain other assets and that Farmland was not entitled to a claimed intercorporate dividends-received deduction with respect to a $24,800,000 distribution received in 1983 from Terra. On June 11, 1993, Farmland filed a petition in the United States Tax Court contesting the asserted deficiencies in their entirety. The case was tried on June 13-15, 1995. Prior to trial, the IRS withdrew its challenge to Farmland's claimed intercorporate dividends-received deduction and several other minor issues were resolved. The parties will submit post-trial briefs to the court in September and November 1995. If the United States Tax Court decides in favor of the IRS on all unresolved issues raised in the statutory notice, Farmland would have additional federal and state income tax liabilities aggregating approximately $85,800,000 plus accumulating statutory interest thereon (approximately $173, 400,000, before tax benefits of the interest deduction, through June 30, 1995), or $259,200,000 in the aggregate at June 30, 1995. In addition, such a decision would affect the computation of Farmland's taxable income for its 1989 tax year and, as a result, could increase Farmland's federal and state income taxes for that year by approximately $5,000,000 plus applicable statutory interest thereon. Finally, the additional federal and state income taxes and accrued interest thereon, which would be owed based on an adverse decision, would become immediately due and payable unless the Company appealed the decision and posted the requisite bond to stay assessment and collection. The liability resulting from an adverse decision would be charged to current operations and would have a material adverse effect on the Company and may affect its ability to pay, when due, principal and interest on the Company's indebtedness. In order to pay any such tax claim, the Company would have to consider new financing arrangements, including the incurrence of indebtedness and the sale of assets. Moreover, the Company would be required to renegotiate the Credit Agreement with its bank lenders, as well as other existing financing agreements with certain other parties, not only to permit such new financing arrangements, but also to cure events of default under the Credit Agreement and certain of such other existing agreements and to maintain compliance with various requirements of the Credit Agreement and such other existing financing agreements, including working capital and funded indebtedness provisions, in order to avoid default thereunder. No assurance can be given that such financing arrangements or such renegotiation would be successfully concluded. 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. In the opinion of Bryan Cave, Farmland's special tax counsel, it is more likely than not that the courts will ultimately conclude that Farmland's treatment of the Terra sale gain was substantially, if not entirely, correct. Such counsel has further advised, however, none of the issues involved in this dispute is free from doubt, and there can be no assurance that the courts will ultimately rule in favor of Farmland on any of these issues. The Company has been designated by the Environmental Protection Agency as a potentially responsible party ("PRP") under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), at various sites. The Company currently is aware of probable obligations for environmental matters at 20 properties. As of May 31, 1995, the Company has made an environmental accrual of $8,439,000. The Company periodically reviews and, as appropriate, revises its environmental accruals. Based on current information and regulatory requirements, the Company believes that the accruals established for environmental expenditures are adequate. The Company's actual final costs of addressing certain environmental matters are not quantifiable, and therefore have not been accrued, because such matters are in preliminary stages and the timing, extent and costs of various actions which governmental authorities may require are currently unknown. Management also is aware of other environmental matters for which there is a reasonable possibility that the Company will incur costs to resolve. It is possible that the costs of resolution of the matters described in this paragraph may exceed the liabilities which, in the opinion of management, are probable and which costs are reasonably estimable at May 31, 1995. In the opinion of management, it is reasonably possible for such costs to be approximately an additional $24,000,000. The Company is currently involved in three administrative proceedings brought by Region VII of the Environmental Protection Agency ("EPA") with respect to alleged violations under the Clean Air Act, the Emergency Planning and Community Right-to-Know Act and RCRA at the Coffeyville refinery. The Company is currently negotiating with the EPA concerning these matters and believes that such negotiations may result in compromise settlements, including the possible implementation of a Supplemental Environmental Project in connection with the Clean Air Act proceeding. Absent such settlements, the Company may contest the EPA's allegations. Accordingly, no provision has been made in the Company's financial statements for these proposed penalties. Specifically, the three administrative proceedings are described as follows: (1) The Company is a party to an administrative enforcement action brought by Region VII of the EPA which alleges violations of the Emergency Planning and Community Right-to-Know Act and the release reporting requirements of CERCLA at its Coffeyville, Kansas refinery. This proceeding involves alleged violations of release reporting requirements and seeks a civil penalty in the amount of $350,000. (2) The Company is a party to an administrative enforcement action brought by Region VII of the EPA which alleges violations of RCRA at its Coffeyville, Kansas refinery. In this proceeding, the EPA has proposed a civil penalty in the amount of approximately $1.4 million. (3) The Company has been informed by the U.S. Department of Justice of its intent to bring an enforcement action alleging certain violations of the Clean Air Act at its Coffeyville, Kansas refinery. The U.S. Department of Justice has informed the Company that it will seek a civil penalty of at least $1.6 million. See "Business Matters Invovling the Environment" contained in the Company's Annual Report on Form 10-K, as amended by form 10-K/A (Amendment No. 1), for the year ended August 31, 1994. (4) SUMMARIZED FINANCIAL INFORMATION OF INVESTEES ACCOUNTED FOR BY THE EQUITY METHOD Summarized financial information of investees accounted for by the equity method for nine months ended May 31, 1995 and 1994 is as follows:
May 31 May 31 1995 1994 ----------- ----------- (Amounts in Thousands) Net sales ...............................$ 888,028 $ 585,263 ============ ============ Net Income .............................$ 44,512 $ 14,053 =========== =========== Farmland's equity in net income ........$ 22,410 $ 6,242 =========== ===========
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES The Company has historically maintained two primary sources for debt capital: a substantially continuous public offering of its debt securities (the ''continuous debt program'') and bank lines of credit. The Company's debt securities issued under the continuous debt program generally are offered on a best-efforts basis through the Company's wholly owned broker-dealer subsidiary, Farmland Securities Company, and through American Heartland Investments, Inc. (which is not affiliated with Farmland), and also may be offered by selected unaffiliated broker-dealers. The types of securities offered in the continuous debt program include certificates payable on demand and five- and ten-year subordinated debt certificates. The total amount of such debt outstanding and the flow of funds to, or from, the Company as a result of the continuous debt program are influenced by the rate of interest which Farmland establishes for each type of debt certificate offered and by options of Farmland to call for redemption certain of its outstanding debt certificates. During the nine months ended May 31, 1995, the outstanding balance of demand loan and subordinated debt certificates increased $8.7 million. Farmland has a $650.0 million Credit Agreement. The Credit Agreement provides short-term credit of up to $450.0 million to finance seasonal operations and inventory, and revolving term credit of up to $200.0 million. At May 31, 1995, short-term borrowings under the Credit Agreement were $183.4 million, revolving term borrowings were $50.0 million and $37.9 million was being utilized to support letters of credit issued on behalf of Farmland by participating banks. Farmland pays commitment fees under the Credit Agreement of 1/10 of 1% annually on the unused portion of the short-term commitment and 1/4 of 1% annually on the unused portion of the revolving term commitment. In addition, Farmland must maintain consolidated working capital of not less than $150.0 million, consolidated net worth of not less than $475.0 million and funded indebtedness and senior funded indebtedness of not more than 52% and 43% of Combined Total Capitalization (as defined in the Credit Agreement), respectively. All computations are based on consolidated financial data adjusted to exclude nonrecourse subsidiaries (as defined in the Credit Agreement). At May 31, 1995, Farmland was in compliance with all covenants under the Credit Agreement. The Credit Agreement expires in May 1997. The Company maintains other borrowing arrangements with banks and financial institutions. Under such agreements, at May 31, 1995, $47.2 million was borrowed and letters of credit issued by banks amounted to $37.9 million. Financial covenants of these arrangements generally are not more restrictive than under the Credit Agreement. In the opinion of management, these arrangements for debt capital are adequate for the Company's present operating and capital plans. However, alternative financing arrangements are continuously evaluated. NBPC, 68%-owned by Farmland, maintains borrowing agreements with a group of banks which provide financing support for its beef packing operations. Such borrowings under this facility are nonrecourse to Farmland or Farmland's other affiliates. At May 31, 1995, $90.0 million was available under this facility of which $65.7 million was borrowed and $1.3 million was utilized to support letters of credit. In addition, NBPC has incurred certain long-term borrowings from Farmland. NBPC has pledged certain assets to Farmland and such group of banks to support its borrowings. Tradigrain, which is comprised of seven international grain trading subsidiaries of Farmland, has borrowing agreements with various international banks which provide financing and letters of credit to support current international grain trading transactions. Obligations of Tradigrain under these loan agreements are nonrecourse to Farmland or Farmland's other affiliates Leveraged leasing has been utilized to finance railcars and a substantial portion of the Company's fertilizer production equipment. Under the most restrictive covenants of its leases, the Company has agreed to maintain working capital of at least $75.0 million, Consolidated Funded Debt of not greater than 65% of Consolidated Capitalization and Senior Funded Debt of not greater than 50% of Consolidated Capitalization (all as defined in the most restrictive lease). As a cooperative, Farmland's member-sourced net earnings (i.e., income from business done with or for members) are distributed to its voting members, associate members and patrons in the form of common equity, capital credits or cash. For this purpose, net income or loss was determined in accordance with the requirements of federal income tax law up to 1994 and is determined in accordance with generally accepted accounting principles in 1995 and after. Other income is treated as "nonmember-sourced income". Nonmember-sourced income is subject to income tax and after-tax earnings are transferred to earned surplus. Under Farmland's bylaws, the member-sourced income is distributed to members as patronage refunds unless the earned surplus account, at the end of that year, is lower than 30% of the sum of the prior year-end balance of outstanding common stock, associate member stock, capital credits, nonmember capital and patronage refunds for reinvestment. In such cases, member-sourced income is reduced by the lesser of 15% or an amount required to increase the earned surplus account to the required 30%. The amount by which the member-sourced income is so reduced is treated as nonmember-sourced income. The member-sourced income remaining is distributed to members as patronage refunds. For the years 1992, 1993 and 1994, the earned surplus account exceeded the required amount by $49.5 million, $3.8 million and $2.3 million, respectively. Generally, a portion of the patronage refund is distributed in cash and the balance (the "invested portion") is distributed in common stock, associate member common stock or capital credits (depending on the membership status of the recipient), or the Board of Directors may determine to distribute the invested portion in any other form or forms of equities. The invested portion of the patronage refund is determined annually by the Board of Directors, but the invested portion of the patronage refund is not deductible for federal income tax purposes when it is issued unless at least 20% of the amount of the patronage refund is paid in cash. The invested portion of the patronage refund is a source of funds from operations which is retained for use in the business and increases Farmland's equity base. Common stock and associate member common stock representing the invested portion of patronage refunds may be redeemed by cash payments from Farmland to holders thereof who participate in Farmland's base capital plan. Capital credits and other equities of Farmland and Farmland Foods, Inc., a 99% owned subsidiary ("Foods"), may be redeemed under other equity redemption plans. The base capital plan and other equity redemption plans are described in the Form 10-K under "Business Equity Redemption Plans" . Major uses of cash during the nine months ended May 31, 1995 include net payments of $90.1 million to decrease the balance of bank loans and other notes outstanding, $26.3 million for patronage refunds and dividends distributed from earnings of the 1994 fiscal year, $86.5 million for capital expenditures, $12.3 million for the redemption of equities under the Farmland base capital plan and special redemption plan and $19.0 million for acquisition of investments and notes receivable. Major sources of cash in the same period included $87.0 million from operations, $56.3 million from an increase in the balance of checks and drafts outstanding and $37.6 million from the disposition of investments and notes receivable. The IRS 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 GENERAL The Company conducts business primarily in two operating areas: inputs and outputs. On the input side of the agricultural industry, the Company operates as a farm supply cooperative. On the output side of the agricultural industry, the Company operates as a processing and marketing cooperative. The Company's farm supply operations consist of three principal product divisionsCpetroleum, crop production and feed. Principal products of the petroleum division are refined fuels, propane, by-products of petroleum refining and a complete line of car, truck and tractor tires, batteries and accessories. Principal products of the crop production division are nitrogen, phosphate and potash fertilizers, and, through the Company's ownership in the Wilfarm joint venture, a complete line of insecticides, herbicides and mixed chemicals. Principal products of the feed division include swine, dairy, pet, beef, poultry, mineral and specialty feeds, feed ingredients and supplements, animal health products and livestock services. The Company's three farm supply divisions produce and distribute products principally at wholesale. Over 50% of the Company's farm supply products sold in 1994 were produced in plants owned by the Company or operated by the Company under long-term lease arrangements. Approximately 65% of the Company's sales of farm supply products sold in 1994 were to farm cooperative associations which are members of Farmland. These farm cooperatives distribute products primarily to farmers and ranchers in states which comprise the corn belt and the wheat belt and who utilize the products in the production of farm crops and livestock. On the output side, the Company's processing and marketing operations include the storage and marketing of grain, the processing of pork and beef, and the marketing of fresh pork, processed pork and fresh beef. In 1994, approximately 61% of the hogs processed and 46% of the grain marketed were supplied to the Company by its members. Substantially all of the Company's pork and beef products sold in 1994 were processed in plants owned by the Company. A substantial portion of the Company's farm supply, pork and beef 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, margins and net income depend, to a large extent, on conditions in agriculture and may be volatile due to factors beyond the Company's control, such as weather, crop failures, federal agricultural programs, production efficiencies and U.S. imports and exports. In addition, various federal and state regulations to protect the environment encourage farmers to reduce the amount of fertilizer and other chemical applications. Global variables which affect supply, demand and price of crude oil, refined fuels, natural gas and other commodities may impact the Company's operations. Historically, changes in the costs of raw materials used in the manufacture of the Company's finished products have not necessarily resulted in corresponding changes in the prices at which such products have been sold by the Company. Management cannot determine the extent to which these factors may impact future operations of the Company. The Company's cash flow and net income may continue to be volatile as conditions affecting agriculture and markets for the Company's products change. Operating results for any quarter are not necessarily indicative of the results expected for the full year. The principal businesses of the Company are highly seasonal. Historically, the majority of sales of farm supply products occur in the spring. Revenues in the beef business and in grain marketing historically have been concentrated in the summer and summer is the lowest sales period for pork products. In view of the seasonality of the Company's businesses, it must be emphasized that the results for the nine months and three months ended May 31, 1995 should not be annualized to project a full year's results. NINE MONTHS ENDED MAY 31, 1995 COMPARED WITH NINE MONTHS ENDED MAY 31, 1994 SALES Sales for the nine months ended May 31, 1995 increased 6.9% compared with the corresponding period of the prior year. The increase includes $373.4 million higher sales of agricultural output products (grain and food), offset by $23.0 million lower sales of farm production input products (crop production products, petroleum and feed) and $7.1 million lower sales of other products and services. Sales of agricultural output products increased due to higher grain prices and volume, higher beef volume and as a result of an acquisition on March 31, 1995 by NBPC (68%-owned by Farmland) of the assets of Hyplains Beef, LLC. Sales of agricultural input products decreased due to lower sales in the feed and crop production business segments, partly offset by increased sales in the petroleum business segment. Sales of the feed business segment decreased because volume and prices of formula feed and feed ingredients decreased. Sales of the crop production business segment reflect a net decrease due to placing the Company's crop protection operations in a 50%- owned joint venture on January 1, 1995. Subsequent to the formation of this joint venture, sales of these products have not been included in the Company's financial statements. The effect of decreased sales of crop protection products was mostly offset by an $85.6 million increase in sales of crop nutrients. This increase resulted from higher prices, partly offset by a slight decrease in volume which reflected the wet spring season and delayed planting activities. Sales of petroleum products increased primarily because of higher gasoline volume and prices. This effect was partly offset by lower distillate and propane unit sales and by lower prices of all other refined products and propane. NET INCOME Net income for the nine months ended May 31, 1995 increased $85.7 million compared with the corresponding period of the prior year. The increase included increases in operating profits in crop production, food processing and marketing and grain marketing of $70.6 million, $45.0 million and $31.5 million, respectively. In addition, the net results of joint ventures engaged in crop production and beef operations increased $11.5 million and $4.2 million, respectively. The effect of these increases on net income was reduced by an operating loss in the petroleum business segment of $9.7 million in the nine months ended May 31, 1995 compared with an operating profit of $24.4 million in the corresponding period of the prior year and a $5.9 million decrease in operating profit in the feed business. In addition, general corporate expenses increased $9.2 million, income taxes increased $19.2 million and the deduction for minority owners interest increased $7.7 million which was principally a result of increased income of the beef business. Operating profit of the Company's crop production business increased pimarily as a result of increased prices, partly offset by a slight decrease in unit sales. In addition, net income from joint ventures engaged in fertilizer operations increased because of higher volume and prices. Operating profit of the food processing and marketing business increased because live hog and cattle costs decreased without a corresponding decline in wholesale prices. In addition, the number of hogs and cattle processed increased. Operating results in the grain marketing business increased due to higher volume and more favorable unit margins on all types of grains handled. The petroleum business segment had an operating loss for the nine months ended May 31, 1995, as the revenues received from selling refined products were below the costs of purchasing and refining crude oil. SG&A increased $20.2 in the nine months ended May 31, 1995 compared with the corresponding period of the prior year. Approximately $11.0 million of the increase was directly connected to business segments (primarily the grain and pork businesses) and has been included in the determination of the operating profit of business segments. General corporate expenses, not identified to business segments, increased reflecting higher cost of variable compensation plans and employee pension expenses. The estimated effective tax rate for the nine months ended May 31, 1995 was based on historical effective rates. The actual effective tax rate may be subject to subsequent revision. The effective tax rate for fiscal year 1994 has been used to provide income taxes for the nine months ended May 31, 1994. THREE MONTHS ENDED MAY 31, 1995 COMPARED WITH THREE MONTHS ENDED MAY 31, 1994 The changes in sales and net income for the three months ended May 31, 1995, compared to the corresponding period of the prior year are primarily as discussed in the nine months comparison. RECENT ACCOUNTING PRONOUNCEMENTS In the first quarter of 1995, the Company adopted the provisions of Statement of Financial Accounting Standards No. 112, ''Employer's Accounting for Postemployment Benefits'' (''Statement 112''), which was issued by FASB in November 1992. Statement 112 establishes standards of accounting and reporting for the estimated cost of benefits provided to former or inactive employees. The effect of the Company's implementation of Statement 112 at September 1, 1994 was insignificant. In the first quarter of 1995, the Company adopted the provisions of Statement of Financial Accounting Standards No. 115, ''Accounting for Certain Investments in Debt and Equity Securities'' (''Statement 115''), which was issued by the Financial Accounting Standards Board (''FASB'') in May 1993. Statement 115 expands the use of fair value accounting and the reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. The effect of the Company's implementation of Statement 115 at September 1, 1994 was insignificant. PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits The exhibit listed below is filed as part of Form 10-Q/A or the quarter ended May 31, 1995. None (b) No reports on Form 8-K were filed during the quarter ended May 31, 1995. . 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: September 18, 1995