-----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, F2EELa8zUb0h7aCOlrlinAzJTiicIt1rKRb1sljirFQ5a+kyfh2aAM0fA7YOWMYD B7QrcQVcAHPadjQY9izlhw== 0000034616-96-000013.txt : 19961202 0000034616-96-000013.hdr.sgml : 19961202 ACCESSION NUMBER: 0000034616-96-000013 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 19961127 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FARMLAND INDUSTRIES INC CENTRAL INDEX KEY: 0000034616 STANDARD INDUSTRIAL CLASSIFICATION: MEAT PACKING PLANTS [2011] IRS NUMBER: 440209330 STATE OF INCORPORATION: KS FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-16945 FILM NUMBER: 96673412 BUSINESS ADDRESS: STREET 1: 3315 N FARMLAND TRAFFICWAY STREET 2: DEPT 140 CITY: KANSAS CITY STATE: MO ZIP: 64116-0005 BUSINESS PHONE: 816-459-6882 FORMER COMPANY: FORMER CONFORMED NAME: CONSUMERS COOPERATIVE ASSOCIATION DATE OF NAME CHANGE: 19681201 S-1 1 S-1 FOR FISCAL YEAR ENDING 8-31-96 Registration Statement No. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 FARMLAND INDUSTRIES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) KANSAS 44-0209330 (STATE OR OTHER JURISDICTION OF(I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION)IDENTIFICATION NO.) 2011 (PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE NUMBER) 3315 NORTH FARMLAND TRAFFICWAY, KANSAS CITY, MISSOURI 64116-0005 816-459-6000 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) TERRY M. CAMPBELL EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER FARMLAND INDUSTRIES, INC. 3315 NORTH FARMLAND TRAFFICWAY, KANSAS CITY, MISSOURI 64116-0005 816-459-6348 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to time after the effective date of this Registration Statement, as determined by market conditions. IF ANY OF THE SECURITIES BEING REGISTERED ON THIS FORM ARE TO BE OFFERED ON A DELAYED OR CONTINUOUS BASIS PURSUANT TO RULE 415 UNDER THE SECURITIES ACT OF 1933 CHECK THE FOLLOWING BOX. [ X ] IF THIS FORM IS FILED TO REGISTER ADDITIONAL SECURITIES FOR AN OFFERING PURSUANT TO RULE 462(B) UNDER THE SECURITIES ACT, PLEASE CHECK THE FOLLOWING BOX AND LIST THE SECURITIES ACT REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE REGISTRATION STATEMENT FOR THE SAME OFFERING. [ ] IF THIS FORM IS A POST-EFFECTIVE AMENDMENT FILED PURSUANT TO RULE 462(C) UNDER THE SECURITIES ACT, CHECK THE FOLLOWING BOX AND LIST THE SECURITIES ACT REGISTRATION STATEMENT NUMBER OF THE EARLIER EFFECTIVE REGISTRATION STATEMENT FOR THE SAME OFFERING. [ ] IF DELIVERY OF THE PROSPECTUS IS EXPECTED TO BE MADE PURSUANT TO RULE 434, PLEASE CHECK THE FOLLOWING BOX. [ ]
CALCULATION OF REGISTRATION FEE PROPOSED MAXIMUM AGGREGATE OFFERING AMOUNT OF TITLE OF EACH CLASS OF SECURITY BEING REGISTERED OR EXCHANGE PRICE REGISTRATION FEE DEMAND LOAN CERTIFICATES $ 100,000,000 $ 30,303 SUBORDINATED CAPITAL INVESTMENT CERTIFICATES --TEN YEAR $ 120,000,000 $ 36,364 --FIVE YEAR $ 80,000,000 $ 24,242 SUBORDINATED MONTHLY INCOME CAPITAL INVESTMENT CERTIFICATES --TEN YEAR $ 40,000,000 $ 12,121 --FIVE YEAR $ 25,000,000 $ 7,576 TOTAL $ 365,000,000 $ 110,606(1)
(1)PURSUANT TO RULE 429, THE COMBINED PROSPECTUS FILED AS A PART OF THIS REGISTRATION STATEMENT RELATES AS WELL TO REGISTRANT'S FORM S-1 REGISTRATION STATEMENTS NO. 33-56821 AND NO. 33-64741. THE AMOUNT OF SECURITIES REGISTERED AND FEES PAID IN CONNECTION WITH EARLIER REGISTRATION STATEMENTS ARE: REGISTRATION STATEMENT NO. 33-56821 - $42,144,989 AND $14,533, RESPECTIVELY; REGISTRATION STATEMENT NO. 33-64741 - $36,855,011 AND $12,709, RESPECTIVELY. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. PART I FARMLAND INDUSTRIES, INC. CROSS REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K
ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS 1. Forepart of Registration Statement and Outside Cover of Registration Statement Front Cover Page of Prospectus Cross Reference Sheet Front Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Inside Front and Outside Back Cover Pages of Prospectus Prospectus 3. Summary Information, Risk Factors and Ratio of Prospectus Summary Earnings to Fixed Charges Risk Factors 4. Use of Proceeds Use of Proceeds 5. Determination of Offering Price Not Applicable 6. Dilution Not Applicable 7. Selling Security Holders Not Applicable 8. Plan of Distribution Plan of Distribution 9. Description of Securities to be Registered Description of the Ten-Year Subordinated Capital Investment Certificates Description of the Five-Year Subordinated Capital Investment Certificates Description of the Ten-Year Subordinated Monthly Income Capital Investment Certificates Description of the Five-Year Subordinated Monthly Income Capital Investment Certificates Description of the Demand Loan Certificates 10.Interests of Named Experts and Counsel Legal Matters 11.Information with Respect to the Registrant a)Description of Business 1) Business Development The Company Business - General 2) Financial Information about Note 12 of Notes to Consolidated Financial Statements Industry Segments 3) Narrative Description of Business Business 4) Foreign and Domestic Operations Note 12 of Notes to Consolidated Financial Statements b)Description of Properties Business c)Legal Proceedings Legal Proceedings d)Market Price of and Dividends on Registrant's Not Applicable Common Equity and Related Stockholder Matters e)Financial Statement Schedules Index to Farmland Consolidated Financial Statements f)Selected Financial Data Selected Consolidated Financial Data g)Supplementary Financial Information Not Applicable h)Management's Discussion and Analysis of Management's Discussion and Analysis of Financial Financial Condition and Results of Operations Condition and Results of Operations i)Changes in and Disagreements with Accountants Changes in and Disagreements with Accountants on Accounting on Accounting and Financial Disclosure and Financial Disclosure j)Directors and Executive Officers Management k)Executive Compensation Executive Compensation l)Security Ownership of Certain Beneficial Security Ownership of Certain Beneficial Owners and Owners and Management Management m)Certain Relationships and Related Certain Transactions Transactions 12.Disclosure of Commission Position on Not Applicable Indemnification for Securities Act Liabilities
SUBJECT TO COMPLETION, DATED NOVEMBER 27, 1996 PROSPECTUS FARMLAND INDUSTRIES, INC.
AMOUNT OFFERED TO: EXISTING SECURITY THE GENERAL PUBLIC HOLDERS SUBORDINATED CAPITAL INVESTMENT CERTIFICATES TEN-YEAR $ 75,000,000 $ 45,000,000 FIVE-YEAR $ 50,000,000 $ 30,000,000 SUBORDINATED MONTHLY INCOME CAPITAL INVESTMENT CERTIFICATES TEN-YEAR $ 20,000,000 $ 20,000,000 FIVE-YEAR $ 15,000,000 $ 10,000,000 DEMAND LOAN CERTIFICATES $ 100,000,000 $ -0-
SEE "RISK FACTORS" ON PAGE 16 FOR A DESCRIPTION OF CERTAIN RISK FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THESE SECURITIES. IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE ENTITY CREATING THE SECURITIES AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Farmland Industries, Inc. ("Farmland" or the "Company") is offering: (1) to the owners of its Subordinated Capital Investment Certificates the right to exchange (see "Exchange Offer") such certificates for an equivalent principal amount of any Subordinated Monthly Income Capital Investment Certificate ($5,000 minimum) which, at the time of the exchange, is being offered by this Prospectus, and (2) to the owners of its Subordinated Capital Investment Certificates, which have been held until eligible for redemption prior to maturity at the option of the owner, the right to exchange such certificates for an equivalent principal amount of any Subordinated Capital Investment Certificate which, at the time of the exchange, is being offered by this Prospectus. This offer will expire at 12:00 P.M. Eastern Standard Time on December 31, 1997, unless terminated prior to such date. THE DATE OF THIS PROSPECTUS IS NOVEMBER 27, 1996 (Continued on following pages) (THE FOLLOWING TEXT IS PRINTED IN RED IN A VERTICLE POSITION AT THE LEFT HAND MARGIN ON THE PROSPECTUS COVER PAGE) Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus supplement and the accompanying prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. (END OF THE RED TEXT) (Continued from preceding page)
UNDERWRITING PRICE TO PUBLIC(1) DISCOUNTS PROCEEDS TO COMMISSIONS(2) FARMLAND(2) SUBORDINATED CAPITAL INVESTMENT CERTIFICATES* --$100 MINIMUM TEN-YEAR TOTAL $ 75,000,000 $ 75,000,000 FIVE-YEAR TOTAL $ 50,000,000 $ 50,000,000 SUBORDINATED MONTHLY INCOME CAPITAL INVESTMENT CERTIFICATES* --$5,000 MINIMUM (ADDITIONAL UNITS IN INCREMENTAL AMOUNTS OF $1,000 OR MORE) TEN-YEAR TOTAL $ 20,000,000 $ 20,000,000 FIVE-YEAR TOTAL $ 15,000,000 $ 15,000,000 DEMAND LOAN CERTIFICATES* $100 MINIMUM $ 100,000,000 $ 100,000,000 *See "Determination of the Certificate Interest Rate."
(1) Farmland's offering of Subordinated Capital Investment Certificates, Subordinated Monthly Income Capital Investment Certificates and Demand Loan Certificates (referred to herein as "Debt Certificates") is being made in compliance with the terms of a partial exemption from the requirements of Schedule E of the Bylaws of the National Association of Securities Dealers, Inc. ("NASD"). As a condition of this partial exemption, a minimum of 80 percent of the dollar amount of aggregate sales made in this offering must be to individuals or entities who are members of a defined group, the definition of which has been approved by the NASD. (2) The Debt Certificates offered hereby for cash and for exchange are offered on a "best efforts" basis by Farmland Securities Company ("FSC") and American Heartland Investments, Inc. ("AHI") and may be offered by other broker-dealers selected by Farmland. See "Plan of Distribution." The offering is for an indeterminate period of time, not expected to be in excess of two years with no minimum amount of securities which must be sold. The proceeds to Farmland are before deducting estimated commissions and expenses to be paid by Farmland of $7.8 million and $1.5 million, respectively, assuming that all securities offered hereby are sold. AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports and other information with the Securities and Exchange Commission (the "Commission"). Such reports and other information may be inspected and copied at the public reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the following Regional Offices of the Commission: Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, IL 60661 and 7 World Trade Center, 13th Floor, New York, NY 10048. Copies of such material can also be obtained from the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Such materials also may be accessed electronically by means at the Commission's home page on the Internet (http://www.sec.gov). REPORTS TO SECURITY HOLDERS Farmland intends to make available to holders of its Debt Certificates, upon written request from any such holder to the address stated on page 8, a copy of the latest annual report containing the audited Consolidated Financial Statements of Farmland and its subsidiaries. NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF SO GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS SHOULD NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY FARMLAND. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY ANY SUCH SECURITIES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY DISTRIBUTION OF THE SECURITIES UNDER THIS PROSPECTUS SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AT ANY TIME SUBSEQUENT TO THE RESPECTIVE DATES AT WHICH INFORMATION IS GIVEN HEREIN OR THE DATE OF THIS PROSPECTUS. TABLE OF CONTENTS Page PROSPECTUS SUMMARY .....................................................8 RISK FACTORS ..........................................................16 SELECTED CONSOLIDATED FINANCIAL DATA ..................................25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS .....................32 DETERMINATION OF THE CERTIFICATE INTEREST RATE ........................56 USE OF PROCEEDS .......................................................57 PLAN OF DISTRIBUTION ..................................................58 EXCHANGE OFFER ........................................................60 HOW TO ACCEPT EXCHANGE OFFER ..........................................63 HOW TO TRANSFER OWNERSHIP .............................................63 DESCRIPTION OF THE TEN-YEAR SUBORDINATED CAPITAL INVESTMENT CERTIFICATES ...................................64 DESCRIPTION OF THE FIVE-YEAR SUBORDINATED CAPITAL INVESTMENT CERTIFICATES ...................................73 DESCRIPTION OF THE TEN-YEAR SUBORDINATED MONTHLY INCOME CAPITAL INVESTMENT CERTIFICATES ...................................82 DESCRIPTION OF THE FIVE-YEAR SUBORDINATED MONTHLY INCOME CAPITAL INVESTMENT CERTIFICATES ...................................90 DESCRIPTION OF THE DEMAND LOAN CERTIFICATES ...........................97 LEGAL MATTERS ........................................................102 THE COMPANY ..........................................................103 BUSINESS .............................................................106 PATRONAGE REFUNDS AND DISTRIBUTION OF ANNUAL EARNINGS. EQUITY REDEMPTION PLANS ...............................................62 LEGAL PROCEEDINGS .....................................................58 EXPERTS ...............................................................64 QUALIFIED INDEPENDENT UNDERWRITER .....................................64 MANAGEMENT .................................. EXECUTIVE COMPENSATION ................................................64 CERTAIN TRANSACTIONS ..................................................68 INDEX TO FARMLAND CONSOLIDATED FINANCIAL STATEMENTS ...................69 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements appearing elsewhere in this Prospectus. Unless the context requires otherwise, (i) "Farmland" or the "Company" herein refers to Farmland Industries, Inc. and its consolidated subsidiaries, (ii) all references herein to "year" or "years" are to fiscal years ended August 31, (iii) all references herein to "tons" are to United States short tons, and (iv) all references herein to "member" are to any persons eligible to receive patronage refunds from Farmland including voting members, associate members and other persons with which Farmland is a party to a currently effective patronage refund agreement (a "patron"). FARMLAND INDUSTRIES, INC. P. O. Box 7305 Kansas City, Missouri 64116 Telephone (816) 459-6000 Business Farmland is an agricultural farm supply and processing and marketing cooperative headquartered in Kansas City, Missouri that is primarily owned by its members and operates on a cooperative basis. As of August 31, 1996, Farmland's membership consisted of 1,800 cooperative associations of farmers and ranchers and 11,800 pork or beef producers or associations of such producers. Founded originally in 1929, Farmland has grown from revenues of $310,000 during its first year of operation to over $9.7 billion during 1996. The Company is one of the largest cooperatives in the United States in terms of revenues. In 1996, Farmland had exports to approximately 70 countries, and derived approximately 42% of its grain revenues from export sales. Substantially all of the Company's foreign grain sales are paid in U.S. Dollars. The Company conducts business primarily in two operating areas: agricultural inputs and outputs. On the input side of the agricultural industry, the Company operates as a farm supply cooperative. On the output side of the agricultural industry, the Company operates as a processing and marketing cooperative. The Company's farm supply operations consist of three principal product divisions: petroleum, crop production and feed. Each division conducts manufacturing operations and distributes farm supply products principally at wholesale. Over 50% of the Company's farm supply products sold in 1996 was produced in plants owned by the Company or operated by the Company under long-term lease arrangements. Approximately 60% of the Company's farm supply products sold in 1996 were sold at wholesale 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 operations include the processing of pork and beef, the marketing of fresh pork, processed pork and fresh beef and the storage, marketing and processing of grain. In 1996, approximately 66% of the hogs processed, 14% of the beef cattle processed and 45% of the grain marketed by the Company were supplied to the Company by its members. Substantially all of the Company's pork and beef products sold in 1996 were processed in plants owned by the Company. No material part of the business of any segment of the Company is dependent on a single customer or a few customers. The Company competes for market share with numerous participants (including other cooperatives) with various levels of vertical integration, product and geographical diversification, sizes and types of operations. Financial information about the Company's industry segments is presented in Note 12 of the Notes to Consolidated Financial Statements included herein. THE OFFERING
OFFERED AT 100% OF AGGREGATE FACE AMOUNT FOR CASH FOR EXCHANGE Description of Securities* (see pages 64, 73, 82, 90 and 97): Subordinated Capital Investment Certificates--$100 Minimum Interest payable or compounded semiannually at the Certificate Interest Rate 10-year maturity $ 75,000,000 $ 45,000,000 5-year maturity $ 50,000,000 $ 30,000,000 Subordinated Monthly Income Capital Investment Certificates $5,000 Minimum (additional units may be purchased in increments of $1,000 or more) Interest payable monthly at the Certificate Interest Rate 10-year maturity $ 20,000,000 $ 20,000,000 5-year maturity $ 15,000,000 $ 10,000,000 Demand Loan Certificates - $100 minimum $ 100,000,000 $ -0-
*The Subordinated Capital Investment Certificates and Subordinated Monthly Income Capital Investment Certificates are referred to in this Prospectus as "Subordinated Debt Certificates." Plan of Distribution Offered on a best efforts basis by Farmland Securities Company ("FSC") and American Heartland Investments ("AHI") and may be offered by selected broker-dealers. See "Plan of Distribution" included herein. Underwriting Discounts and Commissions Farmland will pay commissions to FSC not to exceed 4% of the sale price of Demand Loan Certificates and Subordinated Debt Certificates being offered. Farmland will pay all expenses and liabilities incurred by FSC, limited to an amount not to exceed 3% of the aggregate sales price of Demand Loan and Subordinated Debt Certificates being offered. Farmland will pay to AHI and to other selected broker-dealers for their services a sales commission of not more than 4% of the face amount of the Subordinated Debt Certificates and not more than 1/2 of 1% of the face amount of the Demand Loan Certificates which the broker-dealers sell. See "Plan of Distribution" included herein. Purpose of the Exchange Offer The purpose of the exchange offer is to extend the period of time for which Farmland may utilize funds borrowed from an investor in its Subordinated Debt Certificates. Method of Transacting an Exchange The exchange offer may be accepted by delivering any of the Subordinated Debt Certificates which are eligible for exchange, to Farmland Securities Company, P.O. Box 7305, Kansas City, Missouri 64116, Dept. 79 or to American Heartland Investments, Inc., P. O. Box 1303, Salina, Kansas 67402. Such certificates should be assigned to Farmland in the transfer section (on the reverse side of the certificate) and endorsed by all persons whose names appear on the face of the certificate. For additional information regarding the exchange, see "How to Accept Exchange Offer" included herein, or call (816) 459-6360 or write to the above address for specific information. Use of Proceeds Any proceeds received will be used to fund portions of capital additions, improvements and investments in ventures which are estimated to be approximately $278.3 million during the two-year period ending August 31, 1998, or to redeem any of the $58.3 million of outstanding Subordinated Debt Certificates, which mature at various times prior to August 31, 1998, or to redeem any outstanding Subordinated Debt Certificates prior to maturity at the request of owners to the extent provided in each Subordinated Debt Certificate's trust indenture. See "Use of Proceeds," "Business - Capital Expenditures and Investments in Ventures," "Description of the Ten-Year Subordinated Capital Investment Certificates," "Description of the Five-Year Subordinated Capital Investment Certificates," "Description of the Ten-Year Subordinated Monthly Income Capital Investment Certificates," "Description of the Five-Year Subordinated Monthly Income Capital Investment Certificates" and "Description of the Demand Loan Certificates" included herein. Selling Price 100% of Face Amount. Provisions for Redemption or Prepayment Owners of the Subordinated Debt Certificates may not liquidate their investments except under restricted conditions summarized below and more fully stated in each of the Subordinated Debt Certificate's respective trust indenture. A. Farmland will not redeem any of the Ten-Year Subordinated Capital Investment Certificates prior to maturity except: (i)upon death of an owner; or, (ii)after the date any Ten-Year Subordinated Capital Investment Certificate becomes eligible for redemption prior to maturity at the option of the owner, in additional amounts limited in any month to the greater of $500,000 or 1/2 of 1% of the balance outstanding under the Ten-Year Subordinated Capital Investment Certificates' trust indenture at the end of the previous month, provided such balance outstanding is greater than $5,000,000. If such balance outstanding is less than $5,000,000 there will be no limitation on early redemption of eligible Ten-Year Subordinated Capital Investment Certificates outstanding under such trust indenture. B. Farmland will not redeem any of the Five-Year Subordinated Capital Investment Certificates prior to maturity except: (i)upon death of an owner; or, (ii)after the date any Five-Year Subordinated Capital Investment Certificate becomes eligible for redemption prior to maturity at the option of the owner, in additional amounts limited in any month to the greater of $500,000 or 1/2 of 1% of the balance outstanding under the Five-Year Subordinated Capital Investment Certificates' trust indenture at the end of the previous month, provided such balance outstanding is greater than $5,000,000. If such balance outstanding is less than $5,000,000 there will be no limitation on early redemption of eligible Five-Year Subordinated Capital Investment Certificates outstanding under such trust indenture. C. Farmland will not redeem the Subordinated Monthly Income Capital Investment Certificates prior to maturity except upon the death of an owner. Farmland has the right to call the Subordinated Capital Investment Certificates any time after two years from the date of issuance thereof. See the subcaption "Redemption" within the description of each type of certificate. RISK FACTORS Prospective investors should consider carefully, in addition to the other information contained in this Prospectus, the following risk factors before purchasing the Demand Loan Certificates and Subordinated Debt Certificates offered hereby. INCOME TAX MATTERS In July 1983, Farmland sold the stock of Terra Resources, Inc. ("Terra"), a wholly owned subsidiary engaged in oil and gas exploration and production operations, and exited its oil and gas exploration and production activities. The gain from the sale of Terra amounted to $237.2 million for tax reporting purposes. On March 24, 1993, the Internal Revenue Service ("IRS") issued a statutory notice to Farmland asserting deficiencies in federal income taxes (exclusive of statutory interest thereon) in the aggregate amount of $70.8 million. The asserted deficiencies relate primarily to the Company's tax treatment of the $237.2 million gain resulting from its sale, in July 1983, of the stock of Terra and the IRS's contention that Farmland incorrectly treated the Terra sale gain as income against which certain patronage-sourced operating losses could be offset. The statutory notice further asserts that Farmland incorrectly characterized for tax purposes gains aggregating approximately $14.6 million, and a loss of approximately $2.3 million, from dispositions of certain other assets. On June 11, 1993, Farmland filed a petition in the United States Tax Court contesting the asserted deficiencies in their entirety. The case was tried on June 13-15, 1995. The parties submitted post-trial briefs to the court in September 1995 and reply briefs were submitted to the court in November 1995. If the United States Tax Court decides in favor of the IRS on all unresolved issues raised in the statutory notice, Farmland would have additional federal and state income tax liabilities aggregating approximately $85.8 million plus accumulating statutory interest thereon (approximately $209.2 million, before tax benefits of the interest deduction, through August 31, 1996), or $295.0 million in the aggregate at August 31, 1996. In addition, such a decision would affect the computation of Farmland's taxable income for its 1989 tax year and, as a result, could increase Farmland's federal and state income taxes for that year by approximately $5.0 million plus accumulating statutory interest thereon (approximately $6.6 million), or $11.6 million in the aggregate at August 31, 1996. The asserted federal and state income tax liabilities and accumulated interest thereon would become immediately due and payable unless the Company appealed the decision and posted the requisite bond to stay assessment and collection. The liability resulting from an adverse decision by the United States Tax Court would be charged to current earnings and would have a material adverse effect on the Company. In the event of such an adverse determination of the Terra tax issue, certain financial covenants of the Company's Credit Agreement (the "Agreement"), dated May 15, 1996, become less restrictive. Had the United States Tax Court decided in favor of the IRS on all unresolved issues, and had all related additional federal and state income taxes and accumulated interest thereon been due and payable on August 31, 1996, Farmland's borrowing capacity under the Agreement was adequate at that time to finance the liability. However, Farmland's ability to finance such an adverse decision depends substantially on the financial effects of future operating events on its borrowing capacity under the Agreement. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Financial Condition, Liquidity and Capital Resources" included herein. SUBORDINATION AND ADDITIONAL DEBT The Subordinated Debt Certificates offered by this Prospectus for sale and for exchange are unsecured obligations of Farmland and are subordinated in right of payment to all existing and future Senior Indebtedness. Senior Indebtedness of Farmland includes the Demand Loan Certificates, money borrowed from time to time from certain financial institutions (including without limitation pursuant to the five year Credit Agreement; see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition, Liquidity and Capital Resources" included herein) and amounts due and payable under any instrument which provides that such amounts are to be Senior Indebtedness. The indentures under which the Subordinated Debt Certificates and Demand Loan Certificates are issued do not contain any provisions that would limit the ability of the Company or any of its affiliates to incur indebtedness (secured or unsecured; non-subordinated or subordinated) or that would afford holders of the Subordinated Debt Certificates and Demand Loan Certificates protection in the event of a highly leveraged transaction, restructuring, change in control, merger or similar transaction involving the Company that may adversely affect holders of the Subordinated Debt Certificates and Demand Loan Certificates. See "Description of the Ten-Year Subordinated Capital Investment Certificates," "Description of the Five-Year Subordinated Capital Investment Certificates," "Description of the Ten-Year Subordinated Monthly Income Capital Investment Certificates," "Description of the Five-Year Subordinated Monthly Income Capital Investment Certificates" and "Description of the Demand Loan Certificates" included herein. Certain of the Company's borrowing and lease agreements contain financial covenants regarding working capital, the ratio of certain debts to average cash flow and the ratio of equity to total capitalization. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition, Liquidity and Capital Resources" and the subcaption "Subordination" within the description of each type of Subordinated Debt Certificate. The Demand Loan Certificates are general unsecured and non-subordinated obligations of the Company and rank on parity in right of payment with all other unsecured and non-subordinated indebtedness of the Company. In addition, the Demand Loan Certificates and the Subordinated Debt Certificates will be effectively subordinated to all obligations of Farmland's subsidiaries. Any right of Farmland to receive assets of any of its subsidiaries upon the liquidation or recapitalization of any such subsidiary (and the consequent right of holders of the Demand Loan Certificates and the Subordinated Debt Certificates to participate in those assets) will be subject to the claims of such subsidiary's creditors, except to the extent that Farmland itself is recognized as a creditor of such subsidiary. Even if Farmland is recognized as a creditor of a subsidiary, Farmland's claims still would be subject to any security interests in the assets of such subsidiary and any indebtedness or other liability of such subsidiary that is senior to Farmland's claims. Accordingly, by operation of the foregoing principles, the Demand Loan Certificates and the Subordinated Debt Certificates will be effectively subordinated to all indebtedness and other liabilities, including trade accounts payable, of Farmland's subsidiaries. As of August 31, 1996, (i) the Company had outstanding $543.5 million of Senior Indebtedness, including the Demand Loan Certificates, (ii) the Company had outstanding $324.1 million aggregate principal amount of subordinated indebtedness, including the Subordinated Debt Certificates, (iii) certain of the Company's subsidiaries had outstanding $151.5 million aggregate principal amount of indebtedness, of which $128.0 million was nonrecourse to the Company, and (iv) the Company had outstanding other instruments (principally long-term leases) which provide for aggregate payments of approximately $308.8 million over 14 years. RESTRICTED REDEMPTION RIGHTS OF HOLDERS OF SUBORDINATED DEBT CERTIFICATES OWNERS OF THE SUBORDINATED DEBT CERTIFICATES MAY NOT LIQUIDATE THEIR INVESTMENTS EXCEPT UNDER RESTRICTED CONDITIONS SUMMARIZED BELOW AND MORE FULLY STATED IN EACH OF THE SUBORDINATED DEBT CERTIFICATE'S RESPECTIVE TRUST INDENTURE. THE RESTRICTED REDEMPTION RIGHTS OF HOLDERS OF THE SUBORDINATED DEBT CERTIFICATES MAY BE UNSUITABLE TO THE INVESTMENT OBJECTIVES OF CERTAIN PROSPECTIVE INVESTORS. Farmland will not redeem any of the Subordinated Capital Investment Certificates prior to maturity except: (i) upon death of an owner; or, (ii) after the date any Subordinated Capital Investment Certificate becomes eligible for redemption prior to maturity at the option of the owner, in additional amounts limited in any month to the greater of $500,000 or 1/2 of 1% of the balance outstanding under the Subordinated Capital Investment Certificates' respective trust indenture at the end of the previous month, provided such balance outstanding is greater than $5,000,000. If such balance outstanding is less than $5,000,000, there will be no limitation on early redemption of eligible Subordinated Capital Investment Certificates outstanding under such trust indenture. Farmland will not redeem the Subordinated Monthly Income Capital Investment Certificates prior to maturity except upon the death of an owner. Farmland has the right to call the Subordinated Capital Investment Certificates any time after two years from the date of issuance thereof. See the subcaption "Redemption" within the description, included herein, of each type of certificate. SOURCE OF FUNDS TO PAY INTEREST AND PRINCIPAL Farmland does not establish special cash reserves for payment of principal or interest on its Demand Loan and Subordinated Debt Certificates. In the past, Farmland has relied on general corporate funds provided by operations, sales of assets, and other borrowings (including the issuance of other Demand Loan and Subordinated Debt Certificates) to fund such payments. Farmland intends to make interest payments on and to redeem Demand Loan and Subordinated Debt Certificates in accordance with the respective trust indentures with cash from operations, borrowings, and from issuance of other Demand Loan or Subordinated Debt Certificates. GENERAL FACTORS AFFECTING THE BUSINESS 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 and other factors. In addition, various federal and state regulations to protect the environment encourage farmers to reduce the amount of fertilizer and other chemical applications that they use. 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. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations for Years Ended August 31, 1994, 1995, and 1996" and "Business - Raw Materials" included herein. LIMITED ACCESS TO EQUITY CAPITAL MARKETS As a cooperative, the Company cannot sell its common equity to traditional public or private markets. Instead, equity is raised largely from cooperative voting members, associate members and patrons. Farmland's equity results from payment of the noncash portion of patronage refunds with common stock, associate member common stock and capital credits and from net income on transactions with nonmembers (retained earnings). See ''Business - Patronage Refunds and Distribution of Annual Earnings'' and '' - Equity Redemption Plans" included herein. ENVIRONMENTAL MATTERS The Company is subject to various stringent federal, state and local environmental laws and regulations in the United States which regulate the Company's petroleum operations, farm supply manufacturing and distribution operations, its food processing and marketing operations and its grain marketing operations, or which may impose liability for the cleanup of environmental contamination. The Company has incurred and will continue to incur substantial capital expenditures and operating costs related to these laws and regulations. The Company cannot, however, predict the impact of new or amended laws or regulations, nor can it predict with certainty how existing laws and regulations will be enforced or interpreted. See ''Business - Matters Involving the Environment'' included herein. Many of the Company's current and former facilities have been in operation for many years and, over such time, the Company and other predecessor operators of such facilities have generated, used, stored, or disposed of substances or wastes that are or might be considered hazardous under applicable environmental laws. As a result of such operations, the soil and groundwater at or under certain of the Company's current and former facilities have been contaminated. Material expenditures may be required by the Company in the future to remediate contamination from past or future releases of hazardous substances or wastes. The Company wholly or jointly owns or operates 34 grain elevators and 58 manufacturing properties and has potential responsibility for environmental conditions at a number of former manufacturing facilities and at waste disposal facilities operated by third parties. The Company also has been identified as a potentially responsible party (a ''PRP'') under the federal Comprehensive Environmental Response, Compensation and Liability Act (''CERCLA'') at various National Priority List sites and has unresolved liability with respect to the past disposal of hazardous substances at five such sites. CERCLA may impose joint and several liability on certain statutory classes of persons for the costs of investigation and remediation of contaminated properties, regardless of fault or the legality of the original disposal. These persons include the present and former owner or operator of a contaminated property, and companies that generated, disposed of or arranged for the disposal of, hazardous substances found at the property. The Company is investigating or remediating contamination at 28 properties. During 1994, 1995 and 1996, the Company paid approximately $1.4 million, $3.2 million and $1.8 million, respectively, for environmental investigation and remediation. The Company currently is aware of probable obligations for environmental matters at 39 properties. As of August 31, 1996, the Company has an environmental accrual in its Consolidated Balance Sheet for probable and reasonably estimated costs for remediation of contaminated property of $18.9 million. The Company periodically reviews and, as appropriate, revises its environmental accruals. Based on current information and regulatory requirements, the Company believes that the accruals established for environmental expenditures are adequate. The Company's actual final costs of addressing certain environmental matters are not quantifiable, and therefore have not been accrued, because such matters are in preliminary stages and the timing, extent and costs of various actions which governmental authorities may require are currently unknown. Management is aware of other environmental matters for which there is a reasonable possibility that the Company will incur costs to resolve. It is possible that the costs of resolution of the matters described in this paragraph may exceed the liabilities which, in the opinion of management, are probable and which costs are reasonably estimable at August 31, 1996. In the opinion of management, it is reasonably possible for such costs to be approximately an additional $20.6 million. See "Business - Matters Involving the Environment" included herein. ABSENCE OF PUBLIC MARKET There is currently no trading market for Farmland's Subordinated Debt Certificates or Demand Loan Certificates. It is unlikely that a secondary market for these securities will develop. AFFILIATED UNDERWRITER Farmland Securities Company ("FSC") is a wholly-owned subsidiary of Farmland. FSC's business is limited to the offer and sale of securities issued by Farmland. This offering is being made in compliance with terms of a partial exemption from requirements of Schedule E of the NASD Bylaws; no persons, other than persons associated with Farmland or FSC, participated in determining the price and other terms of the securities offered hereby. See "Plan of Distribution" included herein. POTENTIAL TAXABLE GAINS OR LOSSES FROM THE EXCHANGE An exchange of Subordinated Debt Certificates in a transaction permitted by this Prospectus could result in a gain or a loss for purposes of determining taxable income of holders of Subordinated Debt Certificates. See "Exchange Offer" included herein. SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data as of the end of and for each of the years in the five-year period ended August 31, 1996 are derived from the Consolidated Financial Statements of the Company, which Consolidated Financial Statements have been audited by KPMG Peat Marwick LLP, independent certified public accountants. The Consolidated Financial Statements as of August 31, 1995 and 1996 and for each of the years in the three-year period ended August 31, 1996 (the "Consolidated Financial Statements"), and the independent auditors' report thereon, are included elsewhere herein. The information set forth below should be read in conjunction with information appearing elsewhere herein: "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and related notes.
Year Ended August 31 1992 1993 1994 1995 1996 (Amounts in Thousands except ratios) SUMMARY OF OPERATIONS:(1)(2) Net Sales........................... $ 3,429,307 $ 4,722,940 $ 6,677,933 $ 7,256,869 $ 9,788,587 Operating Income of Industry Segments.......................... 160,912 86,579 154,799 293,381 238,825 Interest Expense.................... 27,965 36,764 51,485 53,862 62,445 Income (Loss) From Continuing Operations ............ 61,046 (30,400) 73,876 162,799 126,418 Net Income (Loss)................... $ 62,313 $ (30,400) $ 73,876 $ 162,799 $ 126,418 DISTRIBUTION OF NET INCOME (LOSS): Patronage Refunds: Allocated Equity.................. $ 1,038 $ 1,155 $ 44,032 $ 61,356 $ 60,776 Cash and Cash Equivalents......... 17,918 495 26,580 33,061 32,719 Earned Surplus and Other Equities.......................... 43,357 (32,050) 3,264 68,382 32,923 $ 62,313 $ (30,400) 73,876 $ 162,799 $ 126,418 RATION OF EARNINGS TO FIXED CHARGES (3)....................... 2.5 Note 3 2.1 4.0 3.0 BALANCE SHEETS: Working Capital..................... $ 208,629 $ 260,519 $ 290,704 $ 319,513 $ 322,050 Property, Plant and Equipment, Net.................... 446,002 504,378 501,290 592,145 717,224 Total Assets........................ 1,526,392 1,719,981 1,926,631 2,185,943 2,568,446 Long-Term Borrowings (excluding current maturities)............... 296,297 482,112 506,531 469,718 616,258 Capital Shares and Equities......... 588,129 561,707 585,013 687,287 755,331
[FN] 1. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition, Liquidity and Capital Resources", included herein, for a discussion of the pending income tax litigation relating to Terra, a former subsidiary of the Company. 2. Acquisitions and Dispositions: a) In December 1993, the Company acquired all the common stock of seven (subsequently increased to eight) international grain trading companies (collectively referred to as "Tradigrain"). The purchase price for Tradigrain ($31.4 million) was paid in cash. See Note 2 of the Notes to Consolidated Financial Statements included herein. b) During 1993, the Company and partners NBPC. Farmland retained a 58% ownership interest in NBPC by investing $10.5 million in cash. The partnership interest was increased to 68% effective March 31, 1995 and to 75% effective September 1, 1996). On April 15, 1993, NBPC acquired the business of Idle Wild Foods, Inc. ("Idle Wild"), a beef packing plant and feedlot located in Liberal, Kansas. NBPC acquired the assets by assuming liabilities of Idle Wild with a fair value of approximately $130.6 million. The acquisition has been accounted for as a purchase and, accordingly, the results of operations of NBPC have been included in the Company's Consolidated Financial Statements from April 15, 1993. The excess of liabilities assumed over the fair value of the net identifiable assets acquired has been recorded as goodwill. c) On August 30, 1993, The Cooperative Finance Association ("CFA") purchased 10,113,000 shares of its voting common stock from Farmland as part of a recapitalization plan which established CFA as an independent finance association for its members. As a result of CFA's stock purchase and amendments to CFA's bylaws, Farmland did not have voting control of CFA at August 31, 1993 and, therefore, did not include CFA in its consolidated balance sheet at August 31, 1993. Farmland's remaining investment in CFA is being accounted for by the cost method. d) Effective June 30, 1992, Farmland acquired substantially all the business and assets of Union Equity Co-Operative Exchange ("Union Equity") in exchange for 2,051,880 shares of Farmland common stock with a par value of $51.3 million and Farmland's assumption of substantially all of Union Equity's liabilities. The acquisition has been accounted for as a purchase and, accordingly, the results of operations of Union Equity have been included in the Company's Consolidated Financial Statements from June 30, 1992. The excess of the purchase price over the fair value of the net identifiable assets ($21.0 million) acquired has been recorded as goodwill and is being amortized on a straight-line basis over 25 years. e) The following unaudited financial information for the years ended August 31, 1992 and 1993 present pro forma results of operations of the Company as if the disposition of CFA and the acquisitions of Union Equity and NBPC had occurred at the beginning of each period presented. The pro forma financial information includes adjustments for amortization of goodwill, additional depreciation expense, and increased interest expense both on recourse and nonrecourse debt assumed in the acquisitions. The pro forma financial information does not necessarily reflect the results of operations that would have occurred had the Company been a single entity which excluded CFA and included Union Equity and NBPC for the full years 1992 and 1993. August 31 (Unaudited) 1992 1993 (Amounts in Thousands) Net Sales............................ $ 5,441,303 $ 5,357,867 Income (Loss) Before Extraordinary Item................................. $ 47,225 $ (44,040) 3. The ratios of earnings to fixed charges have been computed by dividing fixed charges into the sum of (a) income (loss) before taxes for the enterprise as a whole, less capitalized interest and with adjustments to appropriately reflect the Company's majority-owned, 50%-owned, and less-than-50%-owned affiliates, and (b) fixed charges. Fixed charges consist of interest on all indebtedness (including amortization of debt issuance expenses) and the component of operating rents determined to be interest, with adjustments as appropriate to reflect the Company's 50%-owned and less-than-50%-owned affiliates. Income was inadequate to cover fixed charges for the year ended August 31, 1993. The dollar amount of the coverage deficiency was $36.6 million. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES The Company has historically maintained two primary sources for debt capital: a substantially continuous public offering of its subordinated debt and demand loan securities (the "continuous debt program") and bank lines of credit. The Company's debt securities issued under the continuous debt program generally are offered on a best-efforts basis through the Company's wholly owned broker-dealer subsidiary, Farmland Securities Company, and through American Heartland Investments, Inc. (which is not affiliated with Farmland), and also may be offered by selected unaffiliated broker-dealers. The types of securities offered in the continuous debt program include certificates payable on demand and 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 year ended August 31, 1996, the outstanding balance of demand certificates increased by $26.6 million and the outstanding balance of subordinated debt certificates increased by $24.1 million. In May 1996, Farmland entered into a five year Credit Agreement (the "Agreement") with various participating banks. The Agreement provides a $1.1 billion facility, subject to compliance with financial covenants as set forth in the Agreement, consisting of an annually renewable short-term credit of up to $650.0 million and a long-term credit of up to $450.0 million. Farmland pays commitment fees under the Agreement equal to 1/10 of 1% annually on the unused portion of the short-term credit and 1/4 of 1% annually on the unused portion of the long-term credit. In addition, Farmland must comply with the Agreement's financial covenants regarding working capital, the ratio of certain debts to average cash flow, and the ratio of equity to total capitalization, all as defined therein. The short-term credit provisions of the Agreement are subject to review and renewal annually by the lenders and the Company. The next renewal date is in May 1997. The Agreement matures in May 2001. At August 31, 1996, under the Agreement the Company had short-term borrowings of $236.6 million, long-term borrowings of $175.0 million and $69.5 million was being utilized to support letters of credit issued on behalf of Farmland by participating banks. As of August 31, 1996, under the short-term credit provisions, the Company had capacity to finance additional working capital of $386.7 million and, under the long-term credit provisions, the Company had capacity to borrow up to an additional $232.2 million. NBPC maintains borrowing agreements with a group of banks which provide financing support for its beef packing operations. Such borrowings are nonrecourse to Farmland or Farmland's other affiliates (except to the extent of $10.0 million). At August 31, 1996, $90.0 million was available under this facility of which $47.0 million was borrowed and $0.6 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 has borrowing agreements with various international banks which provide financing and letters of credit to support current international grain trading transactions. Obligations of Tradigrain under these loan agreements are nonrecourse to Farmland or Farmland's other affiliates. At August 31, 1996, such borrowings totaled $78.8 million. The Company maintains other borrowing arrangements with banks and financial institutions. Under such agreements, at August 31, 1996, $18.0 million was borrowed. 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. 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 shares, associate member common shares, capital credits or cash. For this purpose, net income or loss is 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 shares, associate member shares, capital credits 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 1994, 1995 and 1996, the earned surplus account exceeded the required amount by $2.3 million, $62.8 million and $45.5 million, respectively. Generally, a portion of the patronage refund is distributed in cash and the balance (the allocated equity portion) is distributed in common shares, associate member common shares or capital credits (depending on the membership status of the recipient), or the Board of Directors may determine to distribute the allocated equity portion in any other form or forms of equities. The allocated equity portion of the patronage refund is determined annually by the Board of Directors, but the allocated equity 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 allocated equity 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 shares and associate member common shares may be redeemed by cash payments from Farmland to holders thereof who participate in Farmland's base capital plan. Common stock, associate member common stock, capital credits and other equities of Farmland and Foods may be redeemed under other equity redemption plans. The base capital plan and other equity redemption plans are described under "Business - Equity Redemption Plans" included herein. Cash provided by operating activities totaled $182.1 million in 1996 compared with $47.5 million in 1995. This increase is primarily the result of the cash effect of changes in working capital as cash generated through a reduction in inventories and an increase in accounts payable were partially offset by increased levels of accounts receivable and other current assets. Other major sources of cash include $53.2 million from distributions from joint ventures, sale of investments and collection of long-term notes receivable, $50.7 million from investors in demand loan and subordinated debt certificates and $71.1 million from bank loans and other notes. Major uses of cash during 1996 include $192.0 million for capital additions and other long-term assets, $51.9 million for acquisition of investments and notes receivable, $39.5 million for acquisition of pork processing businesses and facilities, $32.8 million for patronage refunds and dividends distributed from 1995 earnings and $27.5 million for the redemption of allocated equities under the Farmland base capital plan and special allocated equity redemption plan. In July 1983, Farmland sold the stock of Terra, a wholly owned subsidiary engaged in oil and gas exploration and production operations, and exited its oil and gas exploration and production activities. The gain from the sale of Terra amounted to $237.2 million for tax reporting purposes. On March 24, 1993, the IRS issued a statutory notice to Farmland asserting deficiencies in federal income taxes (exclusive of statutory interest thereon) in the aggregate amount of $70.8 million. The asserted deficiencies relate primarily to the Company's tax treatment of the $237.2 million gain resulting from its sale, in July 1983, of the stock of Terra and the IRS's contention that Farmland incorrectly treated the Terra sale gain as income against which certain patronage-sourced operating losses could be offset. The statutory notice further asserts that Farmland incorrectly characterized for tax purposes gains aggregating approximately $14.6 million, and a loss of approximately $2.3 million, from dispositions of certain other assets. On June 11, 1993, Farmland filed a petition in the United States Tax Court contesting the asserted deficiencies in their entirety. The case was tried on June 13-15, 1995. The parties submitted post-trial briefs to the court in September 1995 and reply briefs were submitted to the court in November 1995. If the United States Tax Court decides in favor of the IRS on all unresolved issues raised in the statutory notice, Farmland would have additional federal and state income tax liabilities aggregating approximately $85.8 million plus accumulating statutory interest thereon (approximately $209.2 million, before tax benefits of the interest deduction, through August 31, 1996), or $295.0 million in the aggregate at August 31, 1996. In addition, such a decision would affect the computation of Farmland's taxable income for its 1989 tax year and, as a result, could increase Farmland's federal and state income taxes for that year by approximately $5.0 million plus accumulating statutory interest thereon (approximately $6.6 million), or $11.6 million in the aggregate at August 31, 1996. The asserted federal and state income tax liabilities and accumulated interest thereon would become immediately due and payable unless the Company appealed the decision and posted the requisite bond to stay assessment and collection. The liability resulting from an adverse decision by the United States Tax Court would be charged to current earnings and would have a material adverse effect on the Company. In the event of such an adverse determination of the Terra tax issue, certain financial covenants of the Company's Credit Agreement (the "Agreement") become less restrictive. Had the United States Tax Court decided in favor of the IRS on all unresolved issues, and had all related additional federal and state income taxes and accumulated interest thereon been due and payable on August 31, 1996, Farmland's borrowing capacity under the Agreement was adequate at that time to finance the liability. However, Farmland's ability to finance such an adverse decision depends substantially on the financial effects of future operating events on its borrowing capacity under the Agreement. No provision has been made in the Consolidated Financial Statements for federal or state income taxes (or interest thereon) in respect of the IRS claims described above. The Company believes that it has meritorious positions with respect to all of these claims. In the opinion of Bryan Cave LLP, the Company's special tax counsel, it is more likely than not that the courts will ultimately conclude that the Company's treatment of the Terra sale gain was substantially, if not entirely, correct. Such counsel has further advised, however, that none of the issues involved in this dispute is free from doubt, and there can be no assurance that the courts will ultimately rule in favor of the Company on any of these issues. RESULTS OF OPERATIONS FOR YEARS ENDED AUGUST 31, 1994, 1995 AND 1996 The Company's revenues, margins and net income depend, to a large extent, on conditions in agriculture and may be volatile due to factors beyond the Company's control, such as weather, crop failures, federal agricultural programs, production efficiencies and U.S. imports and exports. In addition, various federal and state regulations to protect the environment encourage farmers to reduce the use of fertilizers and other chemicals. Global variables which affect supply, demand and price of crude oil, refined fuels, natural gas and other commodities may impact the Company's operations. Historically, changes in the costs of raw materials used in the manufacture of the Company's finished products have not necessarily resulted in corresponding changes in the prices at which such products have been sold by the Company. Management cannot determine the extent to which these factors may impact future operations of the Company. The Company's cash flow and net income may continue to be volatile as conditions affecting agriculture and markets for the Company's products change. The increase (decrease) in sales and operating income by business segment in each of the years in the three-year period ended 1996, compared with the respective prior year, is presented in the below table. Management's discussion of industry segment sales, operating income or loss and other factors affecting the Company's net income during 1994, 1995 and 1996 follows the table.
Change in Sales Change in Net Income 1994 1995 1996 1994 1995 1996 Compared Compared Compared Compared Compared Compared with 1993 with 1994 with 1995 with 1993 with 1994 with 1995 (Amounts in Millions) INCREASE (DECREASE) OF INDUSTRY SEGMENT SALES AND OPERATING INCOME OR LOSS: Petroleum.................. $ (32) $ 21 $ 181 $ 32 $ (35) $ 13 Crop Production............ 278 8 165 74 73 (20) Feed....................... 49 (60) 102 (4) (7) 3 Food Processing and Marketing ............. 943 337 528 4 56 (11) Grain Marketing............ 674 279 1,566 (34) 52 (37) Other...................... 43 (6) (10) (4) -0- (3) $ 1,955 $ 579 $ 2,532 $ 68 $ 139 $ (55) CORPORATE EXPENSES AND OTHER: General corporate expenses (increase) decrease....................... $ (9) $ (14) $ (11) Interest expense (increase) decrease................................. (15) (2) (8) Other income and deductions increase (decrease)...................... 14 (6) 10 Equity in net income of investees increase (decrease)................ 23 11 18 Minority owners' interest in net income of subsidiaries (increase) decrease ............................................... 5 (14) 2 Provision for loss on disposition of assets (increase) decrease ............................................... 29 -0- -0- Income taxes (increase) decrease..................................... (11) (25) 8 Net income increase (decrease)....................................... $ 104 $ 89 $ (36)
In computing the operating income or loss of an industry segment, none of the following have been added or deducted: corporate expenses (included in the Consolidated Statements of Operations as selling, general and administrative expenses) which cannot be identified or allocated, practicably, to an industry segment, interest expense, interest income, equity in net income (loss) of investees, other income (deductions) and income taxes. PETROLEUM SALES Sales of the petroleum business increased $181.5 million in 1996 compared with 1995. This increase was primarily the result of increased fuel (gasoline, distillate, diesel and propane) prices and unit sales of approximately 11% and 9.5%, respectively. Sales of the petroleum business increased $21.3 million in 1995 compared with 1994, or 2.5%. Sales of gasoline increased $42.1 million due to 9.6% higher unit sales and 2.4% higher prices. Sales of distillates and propane decreased $14.3 million and $3.0 million, respectively, and sales of other petroleum products decreased $3.5 million. Unit sales of distillates and propane decreased as a result of the mild winter and a wet spring. Sales of petroleum products reflect a decrease of $31.9 million in 1994 compared with 1993 primarily due to lower prices of refined fuels and propane. The effect of lower prices was to reduce reported sales by approximately $62.4 million. Part of this decrease was offset by the effect of a 6% increase in refined fuels and propane unit sales. OPERATING INCOME The petroleum business had operating income of $5.0 million in 1996 compared to an operating loss of $8.0 million in 1995. This improvement was primarily attributable to higher unit margins resulting from seasonal demand pressure on product price movements. In addition, petroleum realized some margin improvement resulting from increased production capacity at the Company's refinery. The petroleum business incurred an operating loss of $8.0 million in 1995 compared with operating income of $27.2 million in 1994. This was attributable to increased crude oil costs (approximately 9%) without corresponding increases in finished product selling prices. Results from petroleum operations increased $31.7 million in 1994 compared with 1993 primarily because unit margins on diesel fuels with low levels of sulfur (required by the Environmental Protection Agency ("EPA") for diesel fuel sold after September 30, 1993) were higher than the prior year. These margins, which were significantly higher immediately after the crossover to the low sulfur level diesel fuels, decreased to normal levels later in 1994. In addition, margins on other refined fuels improved in 1994 compared with 1993 because the cost per barrel of crude oil decreased and because production at the Coffeyville, Kansas refinery was substantially higher than in the prior year. CROP PRODUCTION SALES Crop production sales, consisting primarily of plant nutrients, increased $164.9 million or 14.1% in 1996 compared with 1995. This increase was primarily a net result of increased unit sales of phosphate and nitrogen fertilizers and higher phosphate prices, partly offset by a slight decline of nitrogen prices. Sales of the crop production business increased $8.0 million in 1995 compared with 1994. Sales of plant nutrients increased $117.9 million due to higher selling prices. Unit sales of plant nutrients decreased slightly from the record level of 7.4 million tons set in 1994. Sales of crop protection products reflect a decrease of $109.9 million as a result of placing the Company's crop protection operations in a 50%-owned joint venture on January 1, 1995. Crop production sales in 1994 increased $278.5 million compared with 1993 due to higher plant nutrient prices and unit sales. The average price per ton of nutrient increased approximately 13.3% and unit sales increased approximately 1.1 million tons or 18%. OPERATING INCOME Operating income of the Company's crop production business reflects a decrease of $19.7 million in 1996 compared with 1995. However, the aggregate contribution to net income from all crop production operations (including joint ventures) was at about the same level in 1996 as in 1995. The Company's crop production operations reflect a decrease primarily because of lower fertilizer margins. The approximately $6.0 million, or 2.8%, decrease in nitrogen fertilizer margins was the result of lower average unit selling prices combined with higher raw material costs. Unit margins from the Company's phosphate fertilizer operations decreased approximately $17.0 million. The effect of these decreases were largely offset by an increase of approximately $17.1 million in the Company's share of net income from joint ventures engaged in phosphate fertilizer manufacturing operations and an increase of approximately $2.4 million in the Company's share of net income from WILFARM (a joint venture engaged in the distribution of crop protection products). Operating income of the crop production business increased $72.7 million in 1995 compared with 1994. In addition, the Company's share of the net income of joint ventures engaged in phosphate manufacturing increased $4.6 million and the Company's share of net income of WILFARM was $2.2 million. The increased operating results from crop production operations was principally attributable to the effect of higher selling price on unit margins and contributed significantly to the Company's increased net income in 1995. Operating income of the crop production business in 1994 increased $74.4 million compared with 1993. This increase resulted from higher unit sales and unit margins. Unit margins in 1994 were approximately twice the level of 1993 which increased operating income in this segment approximately $66.8 million. Unit sales increased over one million tons (18%) which increased operating income by approximately $10.8 million. In addition, included in the statement of operations in the caption "Equity in income (loss) of investees", is $15.3 million in 1994 representing the Company's share of net income from fertilizer joint ventures. This is an increase of $23.4 million compared with 1993. Demand for plant nutrients in 1994 was stronger than in 1993 due to an increase in the number of acres under cultivation, principally corn acreage (corn acreage harvested was relatively low in 1993 due to wet weather and the resulting floods in the Company's trade territory). In addition, demand for plant nutrients was stimulated by favorable weather conditions during the fall and spring application seasons. The increased demand for plant nutrients translated into higher unit sales and margins and contributed significantly to the Company's increased net income in 1994. FEED SALES Sales of feed products increased 21.9% to $569.9 million in 1996 compared with $467.7 million in 1995. The increase is primarily attributable to higher unit prices which reflects higher cost of raw materials. In addition, unit sales of formula feed and feed ingredients increased approximately 2% and 10%, respectively. Sales of the feed business decreased $60.1 million in 1995 compared with 1994. This decrease reflects lower unit sales in traditional markets for beef, dairy and swine feed partly offset by increased commercial (bulk) feed sales. Unit sales of dairy feed decreased because the number of dairy cattle on feed programs in the Company's trade territory decreased in 1995. Beef and swine feed unit sales decreased because the relatively low market prices available to livestock producers encouraged such producers to reduce input costs wherever possible and such efforts were aided by the mild winter during which pastures in most of the Company's trade area remained open and provided suitable grazing for beef cattle. Sales of feed products increased $48.7 million in 1994 compared with 1993. Unit sales of formula feed and feed ingredients each increased approximately 10% which generated a $39.6 million increase in sales. The balance of the sales increase resulted primarily from higher feed ingredient prices. OPERATING INCOME Operating income of the feed business increased $2.9 million in 1996 compared with 1995. This increase is attributable primarily to increased unit margins on feed grade phosphate and to increased sales of feed ingredients. Operating income of the feed business decreased $7.0 million in 1995 compared with 1994. This decease is attributable to decreased unit sales in traditional markets with cooperatives combined with a net loss on sales to commercial accounts. Operating income of the feed business segment decreased $3.7 million in 1994 compared with 1993. Gross margins decreased approximately $0.5 million reflecting lower margins on feed ingredients and pet food of $0.8 million and $0.4 million, respectively, partly offset by $0.7 million higher margins on animal health products. In addition, feed sales, marketing and administration expenses increased $3.2 million primarily due to higher commissions and other variable compensation plans. FOOD PROCESSING AND MARKETING SALES Sales of the food processing and marketing business increased $528.1 million in 1996 compared with 1995. Beef sales increased $308.7 million due primarily to the effect of including operations of the Hyplains Beef L.C. ("Hyplains") beef plant in the Company's financial statements for a full year in 1996. The Company acquired a majority ownership in this plant in March 1995. Pork sales increased $219.4 million primarily as a result of higher unit sales of branded products mostly as a result of acquisitions (OhSe and Farmstead brands). Sales of the food processing and marketing business increased $337.3 million in 1995 compared with 1994. Sales of beef increased $350.6 million. Approximately $235.0 million of this increase resulted from NBPC's purchase of assets from Hyplains (formerly 50%-owned by Farmland). The balance of the increased sales of beef resulted primarily from increased volume (approximately 16%) at NBPC's plant. Sales of pork decreased $13.3 million reflecting the net effect of lower wholesale pork prices, partly offset by higher unit sales. Sales of the food processing and marketing business increased $943.0 million in 1994 compared with 1993. Sales of beef increased $747.0 million principally because NBPC has been included in the Company's 1994 results for the full year. NBPC was acquired in April 1993. Pork sales increased $195.9 million, due mostly to including operations of the Monmouth, Illinois plant in the Company's results for a full year in 1994. This plant was acquired in February 1993. In addition, sales of specialty meats of the Company's Carando division increased $13.0 million. OPERATING INCOME Operating income of the food processing and marketing business of $66.0 million represents an $11.1 million decrease compared to 1995. This decrease primarily results from decreased margins on fresh pork and increased pork administrative expenses, partially offset by increased beef unit sales. Operating income of the food processing and marketing business increased $56.5 million in 1995 compared with 1994. This increase includes increased operating income of $43.5 million in beef operations and $13.0 million in pork operations. In addition, the Company's share of net income of Hyplains in 1995 (for the period prior to its acquisition by NBPC) increased $5.2 million compared with 1994. These increases reflect increased unit margins (mostly a result of lower cattle and hog market prices) and an increased number of cattle and hogs processed. Operating income in the food processing and marketing segment of $20.6 million in 1994 reflects an increase of $4.1 million compared with 1993. The increase includes $13.0 million higher operating income of the pork business partly offset by an $8.9 million decrease of operating income of the beef business. Operating income from pork processing and marketing operations increased primarily due to higher volume and higher margins on fresh pork, branded pork, hams and specialty meats of the Carando division. Operating income of the beef business decreased owing to weak consumer demands for beef and industry price competition. GRAIN MARKETING SALES AND OPERATING INCOME Grain sales increased $1.6 billion, or 82%, principally owing to a 40% increase in units sold combined with increased grain prices. Grain had a $19.0 million operating loss in 1996 compared with $17.9 million operating income in 1995. The operating loss was principally attributable to drought conditions in certain major wheat producing regions of the United States which resulted in both shortages of and significantly higher prices for wheat. Due to this shortage, the Company had to source wheat (in order to meet contractual obligations), from domestic geographic areas further from the Company's Gulf coast export elevator than expected, resulting in higher than anticipated purchase prices and transportation charges. The Company's policy is to hedge its exposure to price fluctuations. However, in order to avoid influencing price movement in certain commodity futures markets, significant contracts are hedged over a period of time, but as soon as practical, after such contracts are written. In 1996, the Company entered into a significant fixed price sales contract. During the time required to fully hedge this contract, the market for wheat was relatively volatile but generally trended upward. The joint effect of these factors contributed to the loss in the Company's grain operations. Sales of grain increased $279.0 million in 1995 compared with 1994. This increase resulted from higher grain prices and unit sales, primarily export sales. Operating income of the grain business totaled $17.9 million in 1995 compared with a loss of $33.5 million in 1994. The increase in operating results was attributable to approximately 59.0 million bushels higher export volume by the North American grain division, increased volume of international grain brokered by Tradigrain and as a result of more favorable unit margins which developed as market prices increased in response to decreased worldwide production in 1995. Grain sales increased $673.6 million in 1994 compared with 1993 primarily due to the acquisition of Wells-Bowman Trading Company and from operating elevators in Utah and Idaho which were leased to the Company in 1994. The grain marketing business had an operating loss of $33.5 million in 1994 compared with near break-even operations in 1993. The operating loss in 1994 resulted primarily from negative unit margins on international grain transactions and higher domestic operating expenses. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses ("SG&A") increased $24.6 million, or 7.1%, in 1996 compared with 1995. Approximately $13.5 million of the increase was directly connected to business segments (primarily the pork and grain businesses) and has been included in the determination of the operating income of business segments. The increase of general corporate expenses, not identified to business segments ($11.1 million), includes higher expenses from improving the management information systems and higher employee related costs. SG&A increased $39.1 million in 1995 compared with 1994. Approximately $25.3 million of the increase was directly connected to business segments (primarily the grain and pork businesses) and has been included in the determination of the operating income of business segments. The increase of general corporate expenses, not identified to business segments ($13.8 million), reflects higher variable compensation, pension and other employee costs and higher costs for legal services. SG&A increased $81.5 million in 1994 compared with 1993. However, as a percent of sales, these expenses were slightly lower in 1994 than in 1993. Approximately $17.6 million of the increase resulted from acquisitions of subsidiaries and from including NBPC in the Company's financial statements for the full year in 1994. Approximately $29.0 million of the increase was in pork marketing and processing and resulted primarily from including the Monmouth, Illinois pork plant in the Company's operations for a full year, and from higher sales of pork. Farm supply businesses and the grain marketing business had higher SG&A of $13.1 million and $3.4 million, respectively. The balance of the SG&A increase was primarily due to variable compensation plans. OTHER INCOME (DEDUCTIONS) INTEREST EXPENSE Interest expense increased $8.6 million in 1996 compared with 1995, reflecting higher average borrowings, partly offset by a slight decline in the average interest rate. Interest expense increased $2.4 million in 1995 compared with 1994, reflecting a higher average interest rate (approximately 1/2% higher), partly offset by a lower amount of average borrowings. Interest expense reflects an increase of $14.7 million in 1994 compared with 1993. The increase is primarily attributable to including the interest costs of NBPC's beef operations in the Company's financial statements for a full year in 1994, the acquisition of National Carriers, Inc. and Tradigrain in May 1994 and by higher interest rates. CAPITAL EXPENDITURES See "Business - Capital Expenditures and Investments in Ventures" included herein. OTHER, NET In May 1996, the Company sold its interest in a communications joint venture, Broadcast Partners. The sale resulted in a gain before income taxes of $10.9 million, which has been included in the caption "Other income (deductions): Other, net" in the Company's 1996 Consolidated Statement of Operations. See Note 16 of the Notes to Consolidated Financial Statements included herein. In June 1993, the Company filed a lawsuit against 43 insurance carriers and other parties (the "Defendants") seeking declaratory judgments regarding the Defendants' insurance coverage obligations for environmental remediation costs. In 1994, 1995 and 1996, the Company negotiated settlements with 20, 2 and 3 insurance companies, respectively, and, as part of the settlements, the Company provided the Defendants with releases of various possible environmental obligations. As a result of these settlements, the Company received cash payments of $13.6 million, $0.3 million and $0.5 million in 1994, 1995 and 1996, respectively, and has included such amounts in the caption "Other income (deductions): Other, net" in the Company's and Consolidated Statement of Operations for the year then ended. See Note 16 of the Notes to Consolidated Financial Statements included herein. MATTERS INVOLVING THE ENVIRONMENT See "Risk Factors - Environmental Matters" and "Business - Matters Involving the Environment" included herein. RECENT ACCOUNTING PRONOUNCEMENTS 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. 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. Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and For Long-Lived Assets to be Disposed of" ("Statement 121") was issued by FASB in March 1995 and is effective for fiscal years beginning after December 15, 1995 (the Company's 1997 fiscal year). Statement 121 establishes accounting standards for the impairment of long-lived assets, certain identifiable intangible, and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of. Management expects that the adoption of Statement 121 will not have a significant impact on the Company's Consolidated Financial Statements. CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The Company is including the following cautionary statement in this Form S-1 to make applicable and take advantage of the new "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statement made by, or on behalf of, the Company. The factors identified in this cautionary statement important factors (but not necessarily all important factors) that could cause actual results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, the Company. Where any such forward-looking statement includes a statement of the assumptions or basis underlying such forward-looking statement, the Company cautions that, while it believes such assumptions or basis to be reasonable and makes them in good faith, assumed facts or basis almost always vary from actual results, and the differences between assumed facts or basis and actual results can be material, depending upon the circumstances. Where, in any forward- looking statement, the Company, or its management, expresses an expectation or belief as to future results, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will result or be achieved or accomplished. The words "believe", "expect" and "anticipate" and similar expressions identify forward-looking 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, the Company: 1.Weather patterns (flood, drought, frost, etc.) or crop failure. 2.Federal or state regulations regarding agricultural programs and production efficiencies. 3.Federal or state regulations regarding the amounts of fertilizer and other chemical applications used by farmers. 4.Factors affecting the export of U.S. agricultural produce (including foreign trade and monetary policies, laws and regulations, political and governmental changes, inflation and exchange rates, taxes, operating conditions and world demand). 5.Factors affecting supply, demand and price of crude oil, refined fuels, natural gas and other commodities. 6.Regulatory delays and other unforeseeable obstacles beyond the Company's control that may affect growth strategies through acquisitions and investments in joint ventures. 7.Competitors in various segments which may be larger than the Company, offer more varied products or possess greater resources. 8.Unusual or unexpected events such as, among other things, litigation settlements, adverse rulings or judgments, and environmental remediation costs in excess of reserves. 9.The factors identified in "Risk Factors" included herein. DETERMINATION OF THE CERTIFICATE INTEREST RATE The Certificate Interest Rate ("CIR") is the interest rate per annum on the Subordinated Debt Certificates as determined by Farmland, from time to time, after giving consideration to the current rates of interest established by various money markets, and Farmland's need for funds. With respect to the Demand Loan Certificates, the CIR is the interest rate for Demand Loan Certificates as determined, from time to time, by Farmland. Any change in the CIR will not affect the CIR on any Subordinated Capital Investment Certificates, Subordinated Monthly Income Capital Investment Certificates, or Demand Loan Certificates for which the full purchase price was received prior to the change. Except as hereinafter provided, each Demand Loan Certificate shall earn interest at the CIR in effect on the date of issuance of such Demand Loan Certificate for a period of six (6) months only; provided, however, that if during such six (6) month period the CIR for Demand Loan Certificates is increased to a rate higher than that currently in effect for a Demand Loan Certificate, then each such Demand Loan Certificate shall earn interest at the increased rate from the effective date of the increase to the end of such Demand Loan Certificate's then current six (6) month period. Six (6) months from the date of issuance of each Demand Loan Certificate and each six (6) month anniversary date thereafter, such Demand Loan Certificate shall, if not redeemed, earn interest at the CIR for Demand Loan Certificates in effect on such anniversary date, but only for a six (6) month period from such anniversary date, subject to the escalation provisions previously set forth. A decrease in the CIR for Demand Loan Certificates will have no effect on the CIR of any Demand Loan Certificate issued prior to the decrease unless such decreased rate is in effect on the first day of the next subsequent six (6) month period of such outstanding Demand Loan Certificate. On the date of this Prospectus, the CIR was 7.5% on Five-Year and 8.0% on Ten-Year Subordinated Capital Investment Certificates; 7.5% on Five-Year and 8.0% on Ten-Year Subordinated Monthly Income Capital Investment Certificates; and 5.75% on Demand Loan Certificates. Whenever the CIR is changed, this Prospectus shall be amended to specify the interest rate in effect, after the effective date of the change as specified in the amendment, on the Certificates to be offered pursuant to such Prospectus. Whenever the CIR is changed, each respective Demand Loan Certificate and Subordinated Debt Certificate owner is notified in writing of the change as specified in the amendment. Information concerning the CIR can be obtained from the Prospectus or from Farmland Securities Company, Post Office Box 7305, Kansas City, Missouri 64116 (telephone 1-800-821-8000, extension 6360). See "Description of the Ten-Year Subordinated Capital Investment Certificates," "Description of the Five-Year Subordinated Capital Investment Certificates," "Description of the Ten-Year Subordinated Monthly Income Capital Investment Certificates," "Description of the Five-Year Subordinated Monthly Income Capital Investment Certificates" and "Description of the Demand Loan Certificates" included herein. USE OF PROCEEDS The offering is made on a best efforts basis with no established minimum amount of Subordinated Debt Certificates and Demand Loan Certificates that must be sold. No assurance can be provided as to the amount of net proceeds the Company may receive as a result of this offering. Assuming that all of the Subordinated Debt and Demand Loan Certificates offered hereby are sold, net proceeds to the Company will be approximately $250.7 million after deducting estimated commissions and expenses. Any proceeds to the Company from this offering may be used: 1) to fund portions of the Company's capital expenditures and investments in ventures which are estimated to be approximately $278.3 million through the two-year period ending August 31, 1998; 2) to refinance approximately $58.3 million of Subordinated Debt Certificates with interest rates of 7.25% to 10.5% which mature at various times prior to August 31, 1998; or 3) to redeem Subordinated Debt Certificates prior to maturity at owners' requests, restricted to the limited redemption rights of owners as described in each Subordinated Debt Certificate's respective trust indenture. To the extent that proceeds from sales of the securities offered hereby are less than amounts required for these purposes, such insufficient amounts may be obtained from operations, from bank or other borrowings or from other financing arrangements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition, Liquidity and Capital Resources", included herein, "- Capital Expenditures and Investments in Ventures", included herein, and the subcaption "Redemptions" within the description of each type of certificate included herein. PLAN OF DISTRIBUTION The securities offered by this Prospectus for cash and for exchange are offered by FSC and AHI, and may be offered by other broker-dealers selected by Farmland. The offering is on a best efforts basis. There is no requirement that any minimum amount of securities offered hereby must be sold. The offering shall be for an indeterminate period of time not expected to be in excess of two years. FSC, located at 3315 North Farmland Trafficway, Kansas City, Missouri, is a wholly-owned subsidiary of Farmland organized for the sole purpose of offering Farmland's Demand Loan and Subordinated Debt Certificates for sale to the general public and/or for exchange and to solicit offers therefor which are subject to acceptance by Farmland. FSC is a member of the NASD and the Securities Investor Protection Corporation (SIPC). FSC's involvement in this offering is in compliance with terms of a partial exemption from requirements of Schedule E of the NASD Bylaws; no persons, other than persons associated with Farmland or FSC, participated in determining the price and other terms of the securities offered hereby. FSC is under no firm commitment or obligation to solicit offers for any specified amount of such debt securities. FSC's commitment is to use its best efforts to solicit such orders. Farmland will pay commissions to FSC not to exceed 4% of the aggregate price of Demand Loan Certificates and Subordinated Debt Certificates being offered. Farmland will pay all expenses and liabilities incurred by FSC, limited to an amount not to exceed 3% of the aggregate sales price of Demand Loan and Subordinated Debt Certificates being offered. FSC is a registered broker-dealer under the Securities Exchange Act of 1934, as amended, but has only limited authority to engage in the offer and sale of securities issued by Farmland. Farmland will indemnify FSC for certain liabilities under the Securities Act of 1933, as amended (the "Securities Act"). The Company has engaged AHI, located at 110 E. Iron, P. O. Box 1303, Salina, Kansas 67402, to offer Farmland Demand Loan and Subordinated Debt Certificates to the general public and for exchange and to solicit offers therefore which are subject to acceptance by Farmland. Farmland may engage other broker-dealers that are qualified to offer and sell the Demand Loan Certificates and Subordinated Debt Certificates in a particular state and that are members of the National Association of Securities Dealers, Inc. AHI and each broker-dealer participating in this offering shall be held responsible for complying with all statutes, rules and regulations of all jurisdictions in which each participating broker-dealer offers the Demand Loan and Subordinated Debt Certificates for sale. Farmland will pay to AHI and may pay to other selected broker-dealers for their services a sales commission of not more than 4% of the face amount of Subordinated Debt Certificates and not more than 1/2 of 1% of the face amount of Demand Loan Certificates which AHI and other selected broker-dealers sell. In addition, Farmland will pay to AHI and may pay to other selected broker-dealers an unallocated due diligence and marketing fee of not more than 1/2 of 1% of the face amount of such certificates the broker-dealers sell. Farmland may indemnify AHI and other selected broker-dealers for certain liabilities arising out of violations by Farmland of blue sky laws, or the Securities Act. Interstate/Johnson Lane Corporation, a member of the NASD, participated as a qualified independent underwriter in the "due diligence" review with respect to the preparation of this Prospectus and received approximately $45,000 for such participation. As discussed above, Interstate/Johnson Lane Corporation will not be participating in the pricing of this issue. EXCHANGE OFFER Farmland is offering: (1) to the owners of its Subordinated Capital Investment Certificates the right to exchange such certificates for an equivalent principal amount of any Subordinated Monthly Income Capital Investment Certificate ($5,000 minimum) which, at the time of the exchange, is being offered by this Prospectus. The option to exchange a Subordinated Capital Investment Certificate into a Subordinated Monthly Income Capital Investment Certificate is not affected by the period of time the Subordinated Capital Investment Certificate has been held. Farmland will not redeem Subordinated Monthly Income Capital Investment Certificates prior to maturity except upon death of the owner. (2) Farmland is offering to the owners of its Subordinated Capital Investment Certificates, which have been held until eligible for redemption prior to maturity at the option of the owner, the right to exchange such certificates for an equivalent principal amount of any Subordinated Capital Investment Certificate which, at the time of the exchange, is being offered by this Prospectus. The option to exchange into Subordinated Capital Investment Certificates is affected by the period of time the outstanding certificate has been held. The required holding period is as follows: If, at the time of Then, to be eligible issuance the maturity for exchange, the period of the certificate must have certificate held was: been held for: (In Years) (In Years) 5 2 10 3 15 5 20 5 The exchange will be made effective on the day certificates eligible for exchange are received at Farmland's office in Kansas City, Missouri, provided, however, that any certificates received within a ten (10) day period preceding the record date of such certificates, the exchange shall be made effective as of the first day following such record date. The exchange is irrevocable after the effective date, but is revocable at any time prior to the effective date. Notice of an owner's revocation may be in writing, delivered to the address given below (see "How to Accept Exchange Offer" included herein) or by telephone to (816) 459-6360. This exchange offer will expire at 12:00 P.M. Eastern Standard Time on December 31, 1997, unless terminated prior to such date. Owners of certificates eligible for exchange shall be notified by letter from Farmland at least 30 days prior to the effective date of Farmland's termination of this exchange offer. Any interest accrued on a certificate being exchanged will be paid on the day the exchange is made effective. The following discussion is a brief summary of the principal United States Federal income tax consequences under current Federal income tax laws relating to exchanges of certificates. This summary is not intended to be exhaustive and, among other things, does not describe state, local or foreign income and other tax consequences. Generally, the exchange of certificates would be considered as taxable exchanges. The basis for determining a taxable gain or loss on a taxable exchange is for an owner to take into account as gain or loss the difference between the fair market value of the security being received and his basis (usually cost) in the security being exchanged. As a practical matter, most owners should have no gain or loss since the securities were sold at 100% of Face Amount and are being exchanged at 100% of Face Amount. However, since it is possible for a prior owner to have sold his certificate to another person at a cost which is more or less than he had paid for it, a subsequent owner could have a different cost than the original issued cost. Any gain or loss recognized on a taxable exchange would be taken into account for purpose of federal income taxes as a gain or loss from the sale or disposition of a capital asset and would be short-term gain or loss unless, at the time of exchange, it had been held for a period of more than twelve months. Owners of these certificates should seek advice from their tax advisor before accepting the exchange offer. HOW TO ACCEPT EXCHANGE OFFER The exchange offer may be accepted by delivering any of the Subordinated Capital Investment Certificates, which are eligible for exchange (see "Exchange Offer" immediately above), to Farmland Securities Company, P.O. Box 7305, Kansas City, Missouri 64116 or American Heartland Investments, Inc. P. O. Box 1303, Salina, Kansas, 67402. The certificates should be assigned to Farmland in the transfer section (on the reverse side of the certificate) and endorsed by all of the persons whose names appear on the face of the certificate. Should any registered owner be incapable of endorsing the certificate, additional documentation may be necessary. Call (816) 459-6360 or write to the above address for specific information. Should registered owners wish to have the new certificate issued to persons other than as shown on the certificate being surrendered in the exchange, the endorsement signatures must be guaranteed by a commercial bank or trust company officer or a NASD member firm representative. The exchange offer must be accompanied by a completed "Order and Receipt for Investment" form supplied by FSC or AHI. The U.S. Treasury Form W-9, Backup Withholding Certificate, included on the order form must be completed and signed by the principal owner of the new certificate. HOW TO TRANSFER OWNERSHIP To transfer ownership of certificates, the certificates should be assigned to the new owner(s) in the transfer section on the reverse side of the certificate and endorsed by all persons named on the face of the certificate. Should any registered owner be incapable of endorsing the certificate, additional documentation may be necessary. Call (816) 459-6360 or write Farmland Industries, Inc., P.O. Box 7305, Kansas City, Mo. 64116, Dept. 79 for specific information. All transfer requests require that endorsement signatures be guaranteed by a commercial bank or trust company officer or an NASD member firm representative. Requests for transfer should be accompanied by a completed transfer form supplied by Farmland. The U.S. Treasury Form W-9 Backup Withholding Certificate included with or on the transfer form must be completed and signed by the new principal owner. The transfer will be made effective on the day certificates to be transferred are received at Farmland's office in Kansas City, Missouri, provided, however, that for any certificates received within a ten (10) day period preceding the record date of such certificates, the transfer shall be made effective as of the first day following such record date. DESCRIPTION OF THE TEN-YEAR SUBORDINATED CAPITAL INVESTMENT CERTIFICATES The Ten-Year Subordinated Capital Investment Certificates, hereinafter within this section ("Description of the Ten-Year Subordinated Capital Investment Certificates") referred to as "Certificates," bearing an interest rate hereinafter described in this section and referred to in this section as the "CIR", are issued under an indenture (the "Indenture of November 8, 1984") dated November 8, 1984, as amended January 3, 1985 and December 3, 1991, between Farmland Industries, Inc. ("Farmland") and Commerce Bank of Kansas City, National Association, Kansas City, Missouri, as Trustee (the "Trustee.") The following descriptive paragraphs are brief summaries of certain terms and provisions contained in the Indenture of November 8, 1984, and do not purport to be complete. The section references therein refer to the sections of the Indenture of November 8, 1984. Where references are made to particular sections of said Indenture, such sections are incorporated by reference as a part of the statements made, and such statements are qualified in their entirety by such reference. GENERAL The Certificates are direct obligations of Farmland, but are not secured and are not negotiable. Interest on the principal sum at the CIR per annum is payable at the election of the owner, made at the time of purchase, (i) semiannually or (ii) at maturity or at the date of redemption if redeemed prior to maturity. See "Certificate Interest Rate" below. The Certificates are issued in amounts of $100 or more as of the first day on which payment of the full purchase price has been received by Farmland in Kansas City, Missouri. Any payments (other than wire transfers) received after noon shall be deemed received by Farmland on the next business day. Wire transfers are effective when funds are received. The Certificates mature ten years from date of issue. The payment of the principal at maturity may, at the request of the owner, be paid in a lump sum or in equal monthly, quarterly, semiannual or annual installments, including interest on the unpaid balance at the rate of six percent (6%) per annum, over a period of not more than thirty-six months. The issue of Certificates is limited to $500,000,000 outstanding at any one time under the Indenture of November 8, 1984, but such Indenture does not limit the amount of other securities, either secured or unsecured, which may be issued by Farmland. At August 31, 1996, a total of $158.3 million was outstanding. Farmland intends to mail to the Certificate owners a copy of the latest annual report containing Farmland's audited Consolidated Financial Statements upon written request of the owner to Farmland Industries, Inc., P. O. Box 7305, Kansas City, Missouri 64116. Attention: Executive Vice President and Chief Financial Officer, Telephone (816) 459-6348. CERTIFICATE INTEREST RATE The CIR is the rate per annum stated on the face of the Certificate. The CIR will be such rate as in effect on the date of issuance, as Farmland may from time to time determine, but any change of the CIR will not affect the CIR on any Certificate for which the full purchase price was received prior to the change. See "Determination of the Certificate Interest Rate" included herein. Interest at the CIR per annum is payable on the principal sum at the election of the purchaser, made at the time of purchase, in one of the following ways: (i) semiannually on January 1 and July 1 to owners of record on the last preceding December 31 and June 30, respectively; or (ii) at maturity, or at the date of redemption if redeemed prior to maturity, compounded semiannually on December 31 and June 30 at the CIR which is stated on the face of the Certificate. Any election to receive payment of the interest semiannually is irrevocable. The election to receive payment of the interest at maturity, or at the date of redemption if redeemed prior to maturity, will be terminated upon written request of the owner, such termination to be effective as of the last previous interest compounding date. Such termination is irrevocable and, at the same time, is an election to thereafter receive payment of the interest semiannually. Any interest attributable to periods starting with the date of purchase and ending with the effective date of the written request of the holder to terminate the election to receive payment of the interest at maturity or at the date of redemption if redeemed prior to maturity will be paid upon receipt of the written request to terminate the election. Farmland shall have the right at any time by notice to the owner to terminate any obligation to continue retaining the interest of any owner pursuant to an owner's election. Such termination shall be effective as of the opening of business on the day following the first interest compounding date after such notice is mailed to the owner and the owner will be paid all the interest in the owner's account on the effective date. REMEDIES IN EVENT OF DEFAULT The Indenture of November 8, 1984 contains provisions identifying events which are defined for all purposes of the Indenture as "defaults" (except when the terms are otherwise defined for specific purposes). The Indenture describes the duties and alternative courses of action which, upon the occurrence of a default, will be taken by the Trustee as directed by written notice of the holders of a majority of the principal amount of the Certificates then outstanding. The Indenture provides that action taken by the Trustee, as a result of default, will not impair and that no other provisions in the Indenture will impair the rights of any certificate owner to receive payment of the principal of and interest on such Certificates on or after the respective dates expressed on such Certificate nor will such act by the Trustee or other provisions in the Indenture impair the right of such certificate owner to institute suit for enforcement of such payment, except that 75 per centum in principal amount of the Certificates at the time outstanding may consent on behalf of the owners of all the outstanding Certificates to a postponement of an interest payment for a period not exceeding three years from its due date. SUBORDINATION The payment of the principal and interest on the Certificates is, to the extent set forth in the Indenture of November 8, 1984, subordinate in right of payment to the prior payment in full of all Senior Indebtedness, whether now outstanding or hereafter incurred. "Senior Indebtedness" is defined as (a) the principal of and interest on indebtedness of Farmland (other than the indebtedness of Farmland with respect to its Subordinated Certificates of Investment issued under indentures dated February 25, 1970 and under indentures dated November 29, 1971; and with respect to its Subordinated Capital Investment Certificates issued under indentures dated July 29, 1974, and under an indenture dated November 29, 1976, and under an indenture dated October 24, 1978, and under an indenture dated October 24, 1979, and under an indenture dated May 20, 1980, and under indentures dated November 5, 1980 and under indentures dated November 8, 1984; and with respect to its Subordinated Monthly Income Capital Investment Certificates issued under an indenture dated July 29, 1974, and under an indenture dated October 24, 1979, and under an indenture dated November 5, 1980, and under an indenture dated November 8, 1984, and under an indenture dated November 11, 1985; and with respect to its Subordinated Individual Retirement Account Certificates issued under an indenture dated November 20, 1981 and under an indenture dated November 8, 1984) for money borrowed from or guaranteed to banks, trust companies, insurance companies, or pension trusts or evidenced by securities issued under the provisions of an indenture or similar instrument between Farmland and a bank or trust company other than indebtedness evidenced by instruments which expressly provide that such indebtedness is not superior, or (b) indebtedness created after the date of the Indenture of November 8, 1984, as to which the instrument creating or evidencing the indebtedness provides that such indebtedness is superior in right of payment to the Certificates. In the event of any distribution of assets of Farmland under any dissolution, winding up, total or partial liquidation, reorganization or in bankruptcy, insolvency, receivership or other proceeding of Farmland, the holders of all Senior Indebtedness shall be entitled to receive payment in full before the owners of the Certificates are entitled to receive payment. After payment in full of the Senior Indebtedness, the owners of the Certificates will be entitled to participate in any distribution of assets, both as such owners and by virtue of subrogation to the rights of the holders of the Senior Indebtedness to the extent that the Senior Indebtedness was benefited by the receipt of distributions to which the owners of the Certificates would have been entitled if there had been no subordination. By reason of such subordination, in the event of Farmland's insolvency, holders of Senior Indebtedness may receive more, ratably, and owners of the Certificates may receive less, ratably, than other creditors of Farmland (Section 4.05(a)). As of August 31, 1996, (i) the Company had outstanding $543.5 million of Senior Indebtedness, including the Demand Loan Certificates, (ii) the Company had outstanding $324.1 million aggregate principal amount of subordinated indebtedness, including the Subordinated Debt Certificates, (iii) certain of the Company's subsidiaries had outstanding $151.5 million aggregate principal amount of indebtedness, of which $128.0 million was nonrecourse to the Company, and (iv) the Company had outstanding other instruments (principally long-term leases) which provide for aggregate payments of approximately $308.8 million over fourteen years. See "Risk Factors - Subordination and Additional Debt" included herein. REDEMPTION The Certificates may be redeemed, after two (2) years from date of issuance, at the option of Farmland at any time prior to maturity, on at least ten days written notice, at face value plus accrued interest to the date of redemption only. The Indenture of November 8, 1984 permits Farmland to select in any manner at its discretion the Certificates to be redeemed. Commencing three (3) years after date of issuance, a limited amount of Certificates can be redeemed prior to maturity during each month. The maximum amount that Farmland will redeem prior to maturity during any month is the greater of $500,000 or 1/2 of 1% of the balance outstanding provided the balance outstanding is greater than $5,000,000. If the balance outstanding is less than $5,000,000 there will be no limitation on early redemption of eligible Certificates. The 1/2 of 1% limitation is determined as follows: (1)Add the face amount of Certificates held by all investors at the end of the preceding month to establish the "combined amount" held by investors at the end of the preceding month. (2)Multiply the "combined amount" by 1/2 of 1%. If the amount made available for redemption prior to maturity (as determined in step one and two) exceeds the amount requested for redemption prior to maturity, such excess is carried over to the next month and added to the amount available for redemption prior to maturity, provided however that any excess will not be carried beyond Farmland's fiscal year end. Redemption prior to maturity will be made upon the surrender of such eligible Certificates properly endorsed accompanied by written request for early redemption to Farmland, in the order in which such written requests for redemption prior to maturity are received by Farmland. In addition to the amount available for redemption prior to maturity as determined above, redemptions will be made in the case of death of an owner of the Certificates upon written request of the legal owner accompanied by satisfactory proof of ownership. Redemptions prior to maturity will be made at the face value of the Certificates plus interest to the date of redemption only. Amounts available for redemption prior to maturity are not set aside in a separate fund (Sections 3.01 and 3.02). CONCERNING THE TRUSTEE The Commerce Bank of Kansas City, National Association, Kansas City, Missouri, is the Trustee under the Indenture of November 8, 1984, and is to perform only such duties as are specifically set forth in that Indenture. In the case of a default, the owners of a majority in aggregate principal amount of the Certificates outstanding at the time of the occurrence of a default have the right to require the Trustee to take action to remedy such default. Upon the occurrence of a default, the Trustee may, and upon the written request of a majority in aggregate principal amount of outstanding Certificates shall, declare the principal of all Certificates outstanding and interest accrued thereon immediately due and payable (Sections 6.03 and 7.02). MODIFICATION OF THE INDENTURE The Indenture of November 8, 1984 contains provisions permitting Farmland, with the consent of the Trustee, to execute supplemental indentures (a) to evidence any succession for another corporation to Farmland and the assumption by the successor corporation of covenants and obligations of Farmland, (b) to add further covenants or provisions which Farmland's Board of Directors and the Trustee consider to be for the protection of the holders of the Certificates, or (c) to cure any ambiguity in the Indenture (Section 10.01). The Indenture of November 8, 1984 contains provisions permitting Farmland and the Trustee, with the consent of the owners of not less than 66-2/3% in aggregate principal amount of the Certificates then outstanding, to execute supplemental indentures, provided that no such supplemental indenture shall (1) extend the fixed maturity of any Certificates, or reduce the principal amount thereof, or reduce the rate or extend the time of payment of interest, without the consent of the owner of each Certificate so affected, or (2) reduce the 66-2/3% requirement as to the consent of the owners of the Certificates for changes in any supplemental indenture, without the consent of the owners of all Certificates then outstanding (Section 10.02). DEFAULTS AND NOTICE THEREOF The Indenture of November 8, 1984 provides that any of the following shall constitute a default: (1) failure to pay principal when due; (2) failure to pay interest on Certificates when due, continued for 60 days; (3) certain events of bankruptcy or insolvency; and (4) failure to perform any other covenant or agreement contained in the Indenture, continued for 90 days. Failure to pay either principal or interest when due during the pendency of any dissolution or liquidation proceeding or action to enforce payment of indebtedness shall also constitute such a default (Section 6.01). The Indenture of November 8, 1984 provides that the Trustee shall within 90 days after the occurrence of a default, not including periods of grace, give to the Certificate owners notice of all such defaults unless such defaults have been cured; provided that, except in the case of default in the payment of principal of or interest on any of the Certificates, the Trustee shall be protected in withholding such notice if and so long as the Trustee determines that the withholding of such notice is in the interest of the Certificate owners (Section 6.02). The Indenture of November 8, 1984 requires Farmland to file with the Trustee and the Securities and Exchange Commission such additional information, documents and reports with respect to compliance by Farmland with the conditions and covenants provided for in said Indenture as may be required from time to time by the Securities and Exchange Commission. Summaries of any such reports filed with the Trustee or the Securities and Exchange Commission pursuant to rules and regulations as prescribed by the Securities and Exchange Commission shall be transmitted to the owners of Certificates in the manner and to the extent provided for in the Indenture (Section 5.03). The Indenture of November 8, 1984 does not require any periodic evidence to be furnished as to the absence of default or as to compliance with the terms of the Indenture. SATISFACTION AND DISCHARGE OF INDENTURE The Indenture of November 8, 1984 shall be discharged upon payment or redemption of all Certificates or upon deposit with the Trustee of funds sufficient therefor (Section 12.01). DESCRIPTION OF THE FIVE-YEAR SUBORDINATED CAPITAL INVESTMENT CERTIFICATES The Five-Year Subordinated Capital Investment Certificates, hereinafter within this section ("Description of the Five-Year Subordinated Capital Investment Certificates") referred to as "Certificates," bearing an interest rate hereinafter described in this section and referred to in this section as the "CIR", are issued under an indenture (the "Indenture of November 8, 1984") dated November 8, 1984, as amended January 3, 1985 and December 3, 1991, between Farmland Industries, Inc. ("Farmland") and Commerce Bank of Kansas City, National Association, Kansas City, Missouri, as Trustee (the "Trustee.") The following descriptive paragraphs are brief summaries of certain terms and provisions contained in the Indenture of November 8, 1984, and do not purport to be complete. The section references therein refer to the sections of the Indenture of November 8, 1984. Where references are made to particular sections of said Indenture, such sections are incorporated by reference as a part of the statements made, and such statements are qualified in their entirety by such reference. GENERAL The Certificates are direct obligations of Farmland, but are not secured and are not negotiable. Interest on the principal sum at the CIR per annum is payable at the election of the owner made at the time of purchase (i) semiannually or (ii) at maturity or at the date of redemption if redeemed prior to maturity. See "Certificate Interest Rate" below. The Certificates are issued in amounts of $100 or more as of the day on which payment of the full purchase price has been received by Farmland in Kansas City. Any payments (other than wire transfers) received after noon shall be deemed received by Farmland on the next business day. Wire transfers are effective when funds are received. The Certificates mature five years from date of issue. The payment of the principal at maturity may, at the request of the owner, be paid in a lump sum or in equal monthly, quarterly, semiannual or annual installments, including interest on the unpaid balance at the rate of six percent (6%) per annum, over a period of not more than thirty-six months. The issue of Certificates is limited to $500,000,000 outstanding at any one time under the Indenture of November 8, 1984, but such Indenture does not limit the amount of other securities, either secured or unsecured, which may be issued by Farmland. At August 31, 1996 a total of $73.5 million was outstanding. Farmland intends to mail to the Certificate owners a copy of the latest annual report containing Farmland's audited Consolidated Financial Statements upon written request of the owner to Farmland Industries, Inc., P.O. Box 7305, Kansas City, Missouri 64116. Attention: Executive Vice President and Chief Financial Officer, Telephone (816) 459-6348. CERTIFICATE INTEREST RATE The CIR is the rate per annum stated on the face of the Certificate. The CIR will be such rate as is in effect on the date of issuance, as Farmland may from time to time determine, but any change of the CIR will not affect the CIR on any Certificate for which the full purchase price was received prior to the change. See "Determination of the Certificate Interest Rate" included herein. Interest at the CIR per annum is payable on the principal sum at the election of the purchaser, made at the time of purchase, in one of the following ways: (i) semiannually on January 1 and July 1, to owners of record on the last preceding December 31 and June 30, respectively; or (ii) at maturity or at the date of redemption if redeemed prior to maturity, compounded semiannually, on December 31 and June 30 at the CIR which is stated on the face of the Certificate. Any election to receive payment of the interest semiannually is irrevocable. The election to receive payment of the interest at maturity, or at the date of redemption if redeemed prior to maturity, will be terminated upon written request of the owner, such termination to be effective as of the last previous interest compounding date. Such termination is irrevocable and, at the same time, is an election to thereafter receive payment of the interest semiannually. Any interest attributable to periods starting with the date of purchase and ending with the effective date of the written request of the holder to terminate the election to receive payment of the interest at maturity or at the date of redemption if redeemed prior to maturity will be paid upon receipt of the written request to terminate the election. Farmland shall have the right at any time by notice to the owner to terminate any obligation to continue retaining the interest of any owner pursuant to an owner's election. Such termination shall be effective as of the opening of business on the day following the first interest compounding date after such notice is mailed to the owner and the owner will be paid all the interest in the owner's account on the effective date. REMEDIES IN EVENT OF DEFAULT The Indenture of November 8, 1984 contains provisions identifying events which are defined for all purposes of the Indenture as "defaults" (except when the terms are otherwise defined for specific purposes). The Indenture describes the duties and alternative courses of action which, upon the occurrence of a default, will be taken by the Trustee as directed by written notice of the holders of a majority of the principal amount of the Certificates then outstanding. The Indenture provides that action taken by the Trustee, as a result of default, will not impair and that no other provisions in the Indenture will impair the rights of any certificate owner to receive payment of the principal of and interest on such Certificates on or after the respective dates expressed on such Certificate nor will such act by the Trustee or other provisions in the Indenture impair the right of such certificate owner to institute suit for enforcement of such payment, except that 75 per centum in principal amount of the Certificates at the time outstanding may consent on behalf of the owners of all the outstanding Certificates to a postponement of an interest payment for a period not exceeding three years from its due date. SUBORDINATION The payment of the principal and interest on the Certificates is, to the extent set forth in the Indenture of November 8, 1984, subordinate in right of payment to the prior payment in full of all Senior Indebtedness, whether now outstanding or hereafter incurred. "Senior Indebtedness" is defined as (a) the principal of and interest on indebtedness of Farmland (other than the indebtedness of Farmland with respect to its Subordinated Certificates of Investment issued under indentures dated February 25, 1970 and under indentures dated November 29, 1971; and with respect to its Subordinated Capital Investment Certificates issued under indentures dated July 29, 1974, and under an indenture dated November 29, 1976, and under an indenture dated October 24, 1978, and under an indenture dated October 24, 1979, and under an indenture dated May 20, 1980, and under indentures dated November 5, 1980 and under indentures dated November 8, 1984; and with respect to its Subordinated Monthly Income Capital Investment Certificates issued under an indenture dated July 29, 1974, and under an indenture dated October 24, 1979, and under an indenture dated November 5, 1980, and under an indenture dated November 8, 1984, and under an indenture dated November 11, 1985; and with respect to its Subordinated Individual Retirement Account Certificates issued under an indenture dated November 20, 1981 and under an indenture dated November 8, 1984) for money borrowed from or guaranteed to banks, trust companies, insurance companies, or pension trusts or evidenced by securities issued under the provisions of an indenture or similar instrument between Farmland and a bank or trust company other than indebtedness evidenced by instruments which expressly provide that such indebtedness is not superior, or (b) indebtedness created after the date of the Indenture of November 8, 1984, as to which the instrument creating or evidencing the indebtedness provides that such indebtedness is superior in right of payment to the Certificates. In the event of any distribution of assets of Farmland under any dissolution, winding up, total or partial liquidation, reorganization or in bankruptcy, insolvency, receivership or other proceeding of Farmland the holders of all Senior Indebtedness shall be entitled to receive payment in full before the owners of the Certificates are entitled to receive payment. After payment in full of the Senior Indebtedness, the owners of the Certificates will be entitled to participate in any distribution of assets, both as such owners and by virtue of subrogation to the rights of the holders of the Senior Indebtedness to the extent that the Senior Indebtedness was benefited by the receipt of distributions to which the owners of the Certificates would have been entitled if there had been no subordination. By reason of such subordination, in the event of Farmland's insolvency, holders of Senior Indebtedness may receive more, ratably, and owners of the Certificates may receive less, ratably, than other creditors of Farmland (Section 4.05(a)). As of August 31, 1996, (i) the Company had outstanding $543.5 million of Senior Indebtedness, including the Demand Loan Certificates, (ii) the Company had outstanding $324.1 million aggregate principal amount of subordinated indebtedness, including the Subordinated Debt Certificates, (iii) certain of the Company's subsidiaries had outstanding $151.5 million aggregate principal amount of indebtedness, of which $128.0 million was nonrecourse to the Company, and (iv) the Company had outstanding other instruments (principally long-term leases) which provide for aggregate payments of approximately $308.8 million over fourteen years. See "Risk Factors - Subordination and Additional Debt" included herein. REDEMPTION The Certificates may be redeemed, after two (2) years from date of issuance, at the option of Farmland at any time prior to maturity, on at least ten days' written notice, at face value plus accrued interest to the date of redemption only. The Indenture of November 8, 1984 permits Farmland to select in any manner at its discretion the Certificates to be redeemed. Commencing two (2) years after date of issuance, a limited amount of Certificates can be redeemed prior to maturity during each month. The maximum amount that Farmland will redeem prior to maturity during any month is the greater of $500,000 or 1/2 of 1% of the balance outstanding provided the balance outstanding is greater than $5,000,000. If the balance outstanding is less than $5,000,000 there will be no limitation on early redemption of eligible Certificates. The 1/2 of 1% limitation is determined as follows: (1)Add the face amount of Certificates held by each investor at the end of the preceding month to establish the "combined amount" held by investors at the end of the preceding month. (2)Multiply the "combined amount" by 1/2 of 1%. If the amount made available for redemption prior to maturity (as determined in step one and two) exceeds the amount requested for redemption prior to maturity, such excess is carried over to the next month and added to the amount available for redemption prior to maturity, provided however that any excess will not be carried beyond Farmland's fiscal year end. Redemption prior to maturity will be made upon the surrender of such eligible Certificates properly endorsed accompanied by written request for early redemption to Farmland, in the order in which such written requests for redemption prior to maturity are received by Farmland. In addition to the amount available for redemption prior to maturity as determined above, redemptions will be made in the case of death of an owner of the Certificates upon written request of the legal owner accompanied by satisfactory proof of ownership. Redemptions prior to maturity will be made at the face value of the Certificates plus interest to the date of redemption only. Amounts available for redemption prior to maturity are not set aside in a separate fund (Sections 3.01 and 3.02). CONCERNING THE TRUSTEE The Commerce Bank of Kansas City, National Association, Kansas City, Missouri, is the Trustee under the Indenture of November 8, 1984, and is to perform only such duties as are specifically set forth in that Indenture. In the case of a default, the owners of a majority in aggregate principal amount of the Certificates outstanding at the time of the occurrence of a default have the right to require the Trustee to take action to remedy such default. Upon the occurrence of a default, the Trustee may, and upon the written request of a majority in aggregate principal amount of the outstanding Certificates shall, declare the principal of all Certificates outstanding and interest accrued thereon immediately due and payable (Sections 6.03 and 7.02). MODIFICATION OF THE INDENTURE The Indenture of November 8, 1984 contains provisions permitting Farmland, with the consent of the Trustee, to execute supplemental indentures (a) to evidence any succession for another corporation to Farmland and the assumption by the successor corporation of covenants and obligations of Farmland, (b) to add further covenants or provisions which Farmland's Board of Directors and the Trustee consider to be for the protection of the holders of the Certificates, or (c) to cure any ambiguity in the Indenture (Section 10.01). The Indenture of November 8, 1984 contains provisions permitting Farmland and the Trustee, with the consent of the owners of not less than 66-2/3% in the aggregate principal amount of the Certificates then outstanding, to execute supplemental indentures, provided that no such supplemental indenture shall (1) extend the fixed maturity of any Certificates, or reduce the principal amount thereof, or reduce the rate or extend the time of payment of interest, without the consent of the owner of each Certificate so affected, or (2) reduce the 66-2/3% requirement as to the consent of the owners of the Certificates for changes in any supplemental indenture, without the consent of the owners of all Certificates then outstanding (Section 10.02). DEFAULTS AND NOTICE THEREOF The Indenture of November 8, 1984 provides that any of the following shall constitute a default: (1) failure to pay principal when due; (2) failure to pay interest on Certificates when due, continued for 60 days; (3) certain events of bankruptcy or insolvency; and (4) failure to perform any other covenant or agreement contained in the Indenture, continued for 90 days. Failure to pay either principal or interest when due during the pendency of any dissolution or liquidation proceeding or action to enforce payment of indebtedness shall also constitute such a default (Section 6.01). The Indenture of November 8, 1984 provides that the Trustee shall within 90 days after the occurrence of a default, not including periods of grace, give to the Certificate owners notice of all such defaults unless such defaults have been cured; provided that, except in the case of default in the payment of principal of or interest on any of the Certificates, the Trustee shall be protected in withholding such notice if and so long as the Trustee determines that the withholding of such notice is in the interest of the Certificate owners (Section 6.02). The Indenture of November 8, 1984 requires Farmland to file with the Trustee and the Securities and Exchange Commission such additional information, documents and reports with respect to compliance by Farmland with the conditions and covenants provided for in said Indenture as may be required from time to time by the Securities and Exchange Commission. Summaries of any such reports filed with the Trustee or the Securities and Exchange Commission pursuant to rules and regulations as prescribed by the Securities and Exchange Commission shall be transmitted to the owners of Certificates in the manner and to the extent provided for in said Indenture (Section 5.03). The Indenture of November 8, 1984 does not require any periodic evidence to be furnished as to the absence of default or as to compliance with the terms of the indenture. SATISFACTION AND DISCHARGE OF INDENTURE The Indenture of November 8, 1984 shall be discharged upon payment or redemption of all Certificates or upon deposit with the Trustee of funds sufficient therefor (Section 12.01). DESCRIPTION OF THE TEN-YEAR SUBORDINATED MONTHLY INCOME CAPITAL INVESTMENT CERTIFICATES The Ten-Year Subordinated Monthly Income Capital Investment Certificates, hereinafter within this section ("Description of the Ten-Year Subordinated Monthly Income Capital Investment Certificates") referred to as "Certificates," bearing an interest rate hereinafter described in this section and referred to in this section as the "CIR", are issued under an indenture (the "Indenture of November 8, 1984") dated November 8, 1984, as amended January 3, 1985 and November 20, 1985, between Farmland Industries, Inc. ("Farmland") and Commerce Bank of Kansas City, National Association, Kansas City, Missouri, as Trustee (the "Trustee.") The following descriptive paragraphs are brief summaries of certain terms and provisions contained in the Indenture of November 8, 1984, and do not purport to be complete. The section references therein refer to the sections of the Indenture of November 8, 1984. Where references are made to particular sections of said Indenture, such sections are incorporated by reference as a part of the statements made, and such statements are qualified in their entirety by such reference. GENERAL The Certificates are direct obligations of Farmland, but are not secured and are not negotiable. The Certificates are issued in amounts of $5,000 or more and in additional increments of $1,000 or more as of the day on which payment of the full purchase price has been received by Farmland in Kansas City, Missouri. Any payments (other than wire transfers) received after noon shall be deemed received by Farmland on the next business day. Wire transfers are effective when funds are received. The Certificates mature ten years from date of issue. Interest on the principal sum at the CIR per annum is payable monthly on the first day of each month following the month in which a Certificate is issued. The payment of the principal at maturity may, at the request of the owner, be paid in a lump sum or in equal monthly, quarterly, semiannual or annual installments, including interest on the unpaid balance at the rate of six percent (6%) per annum, over a period of not more than thirty-six months. The issue of Certificates is limited to $500,000,000 outstanding at any one time under the Indenture of November 8, 1984, but such Indenture does not limit the amount of other securities, either secured or unsecured, which may be issued by Farmland. At August 31, 1996, a total of $55.6 million was outstanding. Farmland intends to mail to the Certificate owners a copy of the latest annual report containing Farmland's audited Consolidated Financial Statements upon written request of the owner to Farmland Industries, Inc., P.O. Box 7305, Kansas City, Missouri 64116. Attention: Executive Vice President and Chief Financial Officer, Telephone (816) 459-6348. CERTIFICATE INTEREST RATE The CIR is the rate per annum stated on the face of the Certificate. The CIR will be such rate as is in effect on the date of issuance, as Farmland may from time to time determine, but any change of the CIR will not affect the CIR on any Certificate for which the full purchase price was received prior to the change. See "Determination of the Certificate Interest Rate" included herein. REMEDIES IN EVENT OF DEFAULT The Indenture of November 8, 1984 contains provisions identifying events which are defined for all purposes of the Indenture as "defaults" (except when the terms are otherwise defined for specific purposes). The Indenture describes the duties and alternative courses of action which, upon the occurrence of a default, will be taken by the Trustee as directed by written notice of the holders of a majority of the principal amount of the Certificates then outstanding. The Indenture provides that action taken by the Trustee, as a result of default, will not impair and that no other provisions in the Indenture will impair the rights of any certificate owner to receive payment of the principal of and interest on such Certificates on or after the respective dates expressed on such Certificate nor will such act by the Trustee or other provisions in the Indenture impair the right of such certificate owner to institute suit for enforcement of such payment, except that 75 per centum in principal amount of the Certificates at the time outstanding may consent on behalf of the owners of all the outstanding Certificates to a postponement of an interest payment for a period not exceeding three years from its due date. SUBORDINATION The payment of the principal and interest on the Certificates is, to the extent set forth in the Indenture of November 8, 1984, subordinate in right of payment to the prior payment in full of all Senior Indebtedness, whether now outstanding or hereafter incurred. "Senior Indebtedness" is defined as (a) the principal of and interest on indebtedness of Farmland (other than the indebtedness of Farmland with respect to its Subordinated Certificates of Investment issued under indentures dated February 25, 1970 and under indentures dated November 29, 1971; and with respect to its Subordinated Capital Investment Certificates issued under indentures dated July 29, 1974, and under an indenture dated November 29, 1976, and under an indenture dated October 24, 1978, and under an indenture dated October 24, 1979, and under an indenture dated May 20, 1980, and under indentures dated November 5, 1980, and under indentures dated November 8, 1984, and under an indenture dated November 11, 1985; and with respect to its Subordinated Monthly Income Capital Investment Certificates issued under an indenture dated July 29, 1974, and under an indenture dated October 24, 1979, and under an indenture dated November 5, 1980 and under an indenture dated November 8, 1984, and under an indenture dated November 11, 1985; and with respect to its Subordinated Individual Retirement Account Certificates issued under an indenture dated November 20, 1981 and under an indenture dated November 8, 1984) for money borrowed from or guaranteed to banks, trust companies, insurance companies, or pension trusts or evidenced by securities issued under the provisions of an indenture or similar instrument between Farmland and a bank or trust company other than indebtedness evidenced by instruments which expressly provide that such indebtedness is not superior, or (b) indebtedness created after the date of the Indenture of November 8, 1984, as to which the instrument creating or evidencing the indebtedness provides that such indebtedness is superior in right of payment to the Certificates. In the event of any distribution of assets of Farmland under any dissolution, winding up, total or partial liquidation, reorganization or bankruptcy, insolvency, receivership or other proceeding of Farmland, the holders of all Senior Indebtedness shall be entitled to receive payment in full before the owners of the Certificates are entitled to receive payment. After payment in full of the Senior Indebtedness, the owners of the Certificates will be entitled to participate in any distribution of assets, both as such owners and by virtue of subrogation to the rights of the holders of the Senior Indebtedness to the extent that the Senior Indebtedness was benefited by the receipt of distributions to which the owners of the Certificates would have been entitled if there had been no subordination. By reason of such subordination, in the event of Farmland's insolvency, holders of Senior Indebtedness may receive more, ratably, and owners of the Certificates may receive less, ratably, than other creditors of Farmland (Section 4.05(a)). As of August 31, 1996, (i) the Company had outstanding $543.5 million of Senior Indebtedness, including the Demand Loan Certificates, (ii) the Company had outstanding $324.1 million aggregate principal amount of subordinated indebtedness, including the Subordinated Debt Certificates, (iii) certain of the Company's subsidiaries had outstanding $151.5 million aggregate principal amount of indebtedness, of which $128.0 million was nonrecourse to the Company, and (iv) the Company had outstanding other instruments (principally long-term leases) which provide for aggregate payments of approximately $308.8 million over fourteen years. See "Risk Factors - Subordination and Additional Debt" included herein. REDEMPTION The Certificates can not be called for redemption by Farmland at any time prior to maturity (Section 3.01). In addition, Farmland will not redeem the Certificates prior to maturity upon request of the owner. Redemption will be made in the case of death of an owner of the Certificates upon written request of the legal owner accompanied by satisfactory proof of ownership. Redemptions prior to maturity will be made at the face value of the Certificates plus interest to the date of redemption only. Amounts available for redemption prior to maturity are not set aside in a separate fund (Section 3.02). CONCERNING THE TRUSTEE The Commerce Bank of Kansas City, National Association, Kansas City, Missouri, is the Trustee under the Indenture of November 8, 1984, and is to perform only such duties as are specifically set forth in that Indenture. In the case of a default, the owners of a majority in aggregate principal amount of the Certificates outstanding at the time of the occurrence of a default have the right to require the Trustee to take action to remedy such default. Upon the occurrence of a default, the Trustee may, and upon the written request of a majority in aggregate principal amount of the outstanding Certificates shall, declare the principal of all Certificates outstanding and interest accrued thereon immediately due and payable (Section 6.03 and 7.02). MODIFICATION OF THE INDENTURE The Indenture of November 8, 1984 contains provisions permitting Farmland, with the consent of the Trustee, to execute supplemental indentures (a) to evidence any succession for another corporation to Farmland and the assumption by the successor corporation of covenants and obligations of Farmland, (b) to add further covenants or provisions which Farmland's Board of Directors and the Trustee consider to be for the protection of the holders of the Certificates, or (c) to cure any ambiguity in the Indenture (Section 10.01). The Indenture of November 8, 1984 contains provisions permitting Farmland and the Trustee, with the consent of the owners of not less than 66-2/3% in aggregate principal amount of the Certificates then outstanding, to execute supplemental indentures, provided that no such supplemental indentures shall (1) extend the fixed maturity of any Certificates, or reduce the principal amount thereof, or reduce the rate or extend the time of payment of interest, without the consent of the owner of each Certificate so affected, or (2) reduce the 66-2/3% requirement as to the consent of the owners of the Certificates for changes in any supplemental indenture, without the consent of the owners of all Certificates then outstanding (Section 10.02). DEFAULTS AND NOTICE THEREOF The Indenture of November 8, 1984 provides that any of the following shall constitute a default: (1) failure to pay principal when due; (2) failure to pay interest on Certificates when due, continued for 60 days; (3) certain events of bankruptcy or insolvency; and (4) failure to perform any other covenant or agreement contained in the Indenture, continued for 90 days. Failure to pay either principal or interest when due during the pendency of any dissolution or liquidation proceeding or action to enforce payment of indebtedness shall also constitute such a default (Section 6.01). The Indenture of November 8, 1984 provides that the Trustee shall within 90 days after the occurrence of a default, not including periods of grace, give to the Certificate owners notice of all such defaults unless such defaults have been cured; provided that, except in the case of default in the payment of principal or interest on any of the Certificates, the Trustee shall be protected in withholding such notice if and so long as the Trustee determines that the withholding of such notice is in the interest of the Certificate owners (Section 6.02). The Indenture of November 8, 1984 requires Farmland to file with the Trustee and the Securities and Exchange Commission such additional information, documents and reports with respect to compliance by Farmland with the conditions and covenants provided for in said Indenture as may be required from time to time by the Securities and Exchange Commission. Summaries of any such reports filed with the Trustee or the Securities and Exchange Commission pursuant to rules and regulations as prescribed by the Securities and Exchange Commission shall be transmitted to the owners of Certificates in the manner and to the extent provided for in the Indenture (Section 5.03). The Indenture of November 8, 1984 does not require any periodic evidence to be furnished as to the absence of default or as to compliance with the terms of said Indenture. SATISFACTION AND DISCHARGE OF INDENTURE The Indenture of November 8, 1984 shall be discharged upon payment or redemption of all Certificates or upon deposit with the Trustee of funds sufficient therefor (Section 12.01). DESCRIPTION OF THE FIVE-YEAR SUBORDINATED MONTHLY INCOME CAPITAL INVESTMENT CERTIFICATES The Five-Year Subordinated Monthly Income Capital Investment Certificates, hereinafter within this section ("Description of the Five-Year Subordinated Monthly Income Capital Investment Certificates") referred to as "Certificates," bearing an interest rate hereinafter described in this section and referred to in this section as the "CIR", are issued under an indenture dated November 11, 1985 (the "Indenture of November 11, 1985") between Farmland Industries, Inc. ("Farmland") and Commerce Bank of Kansas City, National Association, Kansas City, Missouri, as Trustee (the "Trustee"). The following descriptive paragraphs are brief summaries of certain terms and provisions contained in the Indenture of November 11, 1985, and do not purport to be complete. The section references therein refer to the sections of the Indenture of November 11, 1985. Where references are made to particular sections of said Indenture, such sections are incorporated by reference as a part of the statements made, and such statements are qualified in their entirety by such reference. GENERAL The Certificates are direct obligations of Farmland, but are not secured and are not negotiable. The Certificates are issued in amounts of $5,000 or more and in additional increments of $1,000 or more as of the day on which payment of the full purchase price has been received by Farmland in Kansas City, Missouri. Any payments (other than wire transfers) received after noon shall be deemed received by Farmland on the next business day. Wire transfers are effective when funds are received. The Certificates mature five years from date of issue. Interest on the principal sum at the CIR per annum is payable monthly on the first day of each month to the owners of record on such payment date commencing with the first day of the month which follows the month in which the Certificate is issued. The payment of the principal at maturity may, at the request of the owner, be paid in a lump sum or in equal monthly, quarterly, semiannual or annual installments, including interest on the unpaid balance at the rate of six percent (6%) per annum, over a period of not more than thirty-six months. The issue of Certificates is limited to $500,000,000 outstanding at any one time under the Indenture of November 11, 1985, but such Indenture does not limit the amount of other securities, either secured or unsecured, which may be issued by Farmland. At August 31, 1996, a total of $22.7 million was outstanding. Farmland intends to mail to the Certificate owners a copy of the latest annual report containing Farmland's audited Consolidated Financial Statements upon written request of the owner to Farmland Industries, Inc., P. O. Box 7305, Kansas City, Missouri 64116. Attention: Executive Vice President and Chief Financial Officer, Telephone (816) 459-6348. CERTIFICATE INTEREST RATE The CIR is the rate per annum stated on the face of the Certificate. The CIR will be such rate as is in effect at the date of issuance, as Farmland may from time to time determine, but any change of the CIR will not affect the CIR on any Certificate for which the full purchase price was received prior to the change. See "Determination of the Certificate Interest Rate" included herein. REMEDIES IN EVENT OF DEFAULT The Indenture of November 11, 1985 contains provisions identifying events which are defined for all purposes of the Indenture as "defaults" (except when the terms are otherwise defined for specific purposes). The Indenture describes the duties and alternative courses of action which, upon the occurrence of a default, will be taken by the Trustee as directed by written notice of the holders of a majority of the principal amount of the Certificates then outstanding. The Indenture provides that action taken by the Trustee, as a result of default, will not impair and that no other provisions in the Indenture will impair the rights of any certificate owner to receive payment of the principal of and interest on such Certificates on or after the respective dates expressed on such Certificate nor will such act by the Trustee or other provisions in the Indenture impair the right of such Certificate owner to institute suit for enforcement of such payment, except that 75 per centum in principal amount of the Certificates at the time outstanding may consent on behalf of the owners of all the outstanding Certificates to a postponement of an interest payment for a period not exceeding three years from its due date. SUBORDINATION The payment of the principal and interest on the Certificates is, to the extent set forth in the Indenture of November 8, 1984, subordinate in right of payment to the prior payment in full of all Senior Indebtedness, whether now outstanding or hereafter incurred. "Senior Indebtedness" is defined as (a) the principal of and interest on indebtedness of Farmland (other than the indebtedness of Farmland with respect to its Subordinated Certificates of Investment issued under indentures dated February 25, 1970, and under indentures dated November 29, 1971; and with respect to its Subordinated Capital Investment Certificates issued under indentures dated July 29, 1974, and under an indenture dated November 29, 1976, and under an indenture dated October 24, 1978, and under an indenture dated October 24, 1979, and under an indenture dated May 20, 1980, and under indentures dated November 5, 1980, and under indentures dated November 8, 1984, and under an indenture dated November 11, 1985; and with respect to its Subordinated Monthly Income Capital Investment Certificates issued under an indenture dated July 29, 1974, and under an indenture dated October 24, 1979, and under an indenture dated November 5, 1980, and under an indenture dated November 8, 1984, and under an indenture dated November 11, 1985; and with respect to its Subordinated Individual Retirement Account Certificates issued under an indenture dated November 20, 1981, and under an indenture dated November 8, 1984) for money borrowed from or guaranteed to banks, trust companies, insurance companies, or pension trusts or evidenced by securities issued under the provisions of an indenture or similar instrument between Farmland and a bank or trust company other than indebtedness evidenced by instruments which expressly provide that such indebtedness is not superior, or (b) indebtedness created after the date of the Indenture of November 11, 1985, as to which the instrument creating or evidencing the indebtedness provides that such indebtedness is superior in right of payment to the Certificates. In the event of any distribution of assets of Farmland under any dissolution, winding up, total or partial liquidation, reorganization or bankruptcy, insolvency, receivership or other proceeding of Farmland, the holders of all Senior Indebtedness shall be entitled to receive payment in full before the owners of the Certificates are entitled to receive payment. After payment in full of the Senior Indebtedness, the owners of the Certificates will be entitled to participate in any distribution of assets, both as such owners and by virtue of subrogation to the rights of the holders of the Senior Indebtedness to the extent that the Senior Indebtedness was benefited by the receipt of distributions to which the owners of the Certificates would have been entitled if there had been no subordination. By reason of such subordination, in the event of Farmland's insolvency, holders of Senior Indebtedness may receive more, ratably, and owners of the Certificates may receive less, ratably, than other creditors of Farmland (Section 4.05(a)). As of August 31, 1996, (i) the Company had outstanding $543.5 million of Senior Indebtedness, including the Demand Loan Certificates, (ii) the Company had outstanding $324.1 million aggregate principal amount of subordinated indebtedness, including the Subordinated Debt Certificates, (iii) certain of the Company's subsidiaries had outstanding $151.5 million aggregate principal amount of indebtedness, of which $128.0 million was nonrecourse to the Company, and (iv) the Company had outstanding other instruments (principally long-term leases) which provide for aggregate payments of approximately $308.8 million over fourteen years. See "Risk Factors - Subordination and Additional Debt" included herein. REDEMPTION The Certificates can not be called for redemption by Farmland at any time prior to maturity (Section 3.01). In addition, Farmland will not redeem the Certificates prior to maturity upon request of the owner. Redemption will be made in the case of death of an owner of the Certificates upon written request of the legal owner accompanied by satisfactory proof of ownership. Redemptions prior to maturity will be made at the face value of the Certificates plus interest to the date of redemption only. Amounts available for redemption prior to maturity are not set aside in a separate fund (Section 3.02). CONCERNING THE TRUSTEE The Commerce Bank of Kansas City, National Association, Kansas City, Missouri, is the Trustee under the Indenture of November 11, 1985, and is to perform only such duties as are specifically set forth in that Indenture. In the case of a default, the owners of a majority in aggregate principal amount of the Certificates outstanding at the time of the occurrence of a default have the right to require the Trustee to take action to remedy such default. Upon the occurrence of a default, the Trustee may, and upon the written request of a majority in aggregate principal amount of the outstanding Certificates shall, declare the principal of all Certificates outstanding and interest accrued thereon immediately due and payable (Sections 6.03 and 7.02). MODIFICATION OF THE INDENTURE The Indenture of November 11, 1985 contains provisions permitting Farmland, with the consent of the Trustee, to execute supplemental indentures (a) to evidence any succession for another corporation to Farmland and the assumption by the successor corporation of covenants and obligations of Farmland, (b) to add further covenants or provisions which Farmland's Board of Directors and the Trustee consider to be for the protection of the holders of the Certificates, or (c) to cure any ambiguity in the Indenture (Section 10.01). The Indenture of November 11, 1985 contains provisions permitting Farmland and the Trustee, with the consent of the owners of not less than 66-2/3% in aggregate principal amount of the Certificates then outstanding, to execute supplemental indentures, provided that no such supplemental indentures shall (1) extend the fixed maturity of any Certificates, or reduce the principal amount thereof, or reduce the rate or extend the time of payment of interest, without the consent of the owner of each Certificate so affected, or (2) reduce the 66-2/3% requirement as to the consent of the owners of the Certificates for changes in any supplemental indenture, without the consent of the owners of all Certificates then outstanding (Section 10.02). DEFAULTS AND NOTICE THEREOF The Indenture of November 11, 1985 provides that any of the following shall constitute a default: (1) failure to pay principal when due; (2) failure to pay interest on Certificates when due, continued for 60 days; (3) certain events of bankruptcy or insolvency; and (4) failure to perform any other covenant or agreement contained in the Indenture, continued for 90 days. Failure to pay either principal or interest when due during the pendency of any dissolution or liquidation proceeding or action to enforce payment of indebtedness shall also constitute such a default (Section 6.01). The Indenture of November 11, 1985 provides that the Trustee shall within 90 days after the occurrence of a default, not including periods of grace, give to the Certificate owners notice of all such defaults unless such defaults have been cured; provided that, except in the case of default in the payment of principal or interest on any of the Certificates, the Trustee shall be protected in withholding such notice if and so long as the Trustee determines that the withholding of such notice is in the interest of the Certificate owners (Section 6.02). The Indenture of November 11, 1985 requires Farmland to file with the Trustee and the Securities and Exchange Commission such additional information, documents and reports with respect to compliance by Farmland with the conditions and covenants provided for in said Indenture as may be required from time to time by the Securities and Exchange Commission. Summaries of any such reports filed with the Trustee or the Securities and Exchange Commission pursuant to rules and regulations as prescribed by the Securities and Exchange Commission shall be transmitted to the owners of Certificates in the manner and to the extent provided for in said Indenture (Section 5.03). The Indenture of November 11, 1985 does not require any periodic evidence to be furnished as to the absence of default or as to compliance with the terms of the Indenture. SATISFACTION AND DISCHARGE OF INDENTURE The Indenture of November 11, 1985 shall be discharged upon payment or redemption of all Certificates or upon deposit with the Trustee of funds sufficient therefor (Section 12.01). DESCRIPTION OF THE DEMAND LOAN CERTIFICATES The Demand Loan Certificates are issued under an indenture (the "Indenture of November 20, 1981") dated November 20, 1981, as amended January 4, 1982, between Farmland Industries, Inc. ("Farmland") and Commerce Bank of Kansas City, National Association, Kansas City, Missouri as Trustee (the "Trustee.") Effective January 31, 1989, Commerce Bank resigned as Trustee and UMB Bank, National Association, Kansas City, Missouri has been appointed the Trustee. The following descriptive paragraphs are brief summaries of certain terms and provisions contained in the Indenture of November 20, 1981 and do not purport to be complete. The section references therein refer to the sections of the Indenture of November 20, 1981. Where references are made to particular sections of said Indenture, such sections are incorporated by reference as part of the statements made, and such statements are qualified in their entirety by such reference. GENERAL The Demand Loan Certificates are direct obligations of Farmland but are not secured and are not negotiable. The Demand Loan Certificates are issued in amounts of $100 or more, and dated on the day payment of the full purchase price is received by Farmland in Kansas City, Missouri. Any payments (other than wire transfers) received after noon shall be deemed received by Farmland on the next business day. Wire transfers are effective when funds are received. If purchased and held by a member of Farmland for a one (1) month period or by any other purchaser for a six (6) month period immediately following the date of issue the principal amount of the Demand Loan Certificates will bear interest at the Certificate Interest Rate (herein referred to as the "CIR"). The CIR is the interest rate for the Demand Loan Certificates as determined, from time to time, by Farmland. Except as hereinafter provided, each Demand Loan Certificate shall earn interest at the CIR in effect on the date of issuance of such Demand Loan Certificate for a period of six (6) months only; provided, however, that if during such six (6) month period the CIR is increased to a rate higher than that currently in effect for the Demand Loan Certificates, then each such Demand Loan Certificate shall earn interest at the increased rate from the effective date of the increase to the end of such Demand Loan Certificate's then current six (6) month period. Six (6) months from the date of issue of each Demand Loan Certificate and each six (6) month anniversary date thereafter, such Demand Loan Certificate shall, if not redeemed, earn interest at the CIR in effect on such anniversary date, but only for a six (6) month period from such anniversary date, subject to the escalation provisions previously set forth. A decrease in the CIR will have no effect on any Demand Loan Certificate issued prior to the decrease until the first day of the next subsequent six (6) month period of such outstanding Demand Loan Certificate. Holders of Demand Loan Certificates are notified of the effective date of any change of the CIR which affects the Demand Loan Certificates held. The Demand Loan Certificates may be redeemed at face value plus interest to date of redemption at the option of the owner, at any time. No partial redemptions will be permitted. If redeemed by a Farmland member cooperative during a one (1) month period or by any other purchaser during a six (6) month period immediately following the date of issuance, the Demand Loan Certificates shall bear interest from date of issuance to date of redemption at a demand rate of 2% below the CIR. Interest on the principal amount of any Demand Loan Certificate held longer than six (6) months will be computed at the effective CIR and is payable in one of the following ways at the option of the owner, made at the time of purchase and irrevocable as to the purchaser: (i) six (6) months after the date of issuance and at the end of each and every six (6) month period thereafter until the Demand Loan Certificate is surrendered for redemption, or (ii) only at the date of redemption compounded semi-annually at the effective CIR. The issuance of Demand Loan Certificates is limited to $500,000,000 outstanding at any one time under the Indenture of November 20, 1981 but such Indenture does not limit the amount of other securities either secured or unsecured, which may be issued by Farmland. At August 31, 1996, a total of $40.1 million was outstanding. Farmland intends to mail to the Certificate owners a copy of the latest annual report containing Farmland's audited Consolidated Financial Statements upon written request of the owner to Farmland Industries, Inc., P.O. Box 7305, Kansas City, Missouri 64116. Attention: Executive Vice President and Chief Financial Officer, Telephone (816) 459-6348. See "Risk Factors - Subordination and Additional Debt" included herein. REDEMPTION Farmland will redeem the Demand Loan Certificates at any time upon written request of the owner. If the certificate is surrendered for redemption by a Farmland member cooperative during a one (1) month period or by any other owner during a six (6) month period immediately following the date of issuance, interest computed at the applicable demand rate from date of issuance to date of redemption will be paid at the time of redemption of the Demand Loan Certificate. If the Demand Loan Certificate is held for a period longer than six (6) months from date of issuance, interest from the last previous date on which interest was paid or compounded to the date of redemption computed at the applicable CIR will be paid upon redemption. Any interest held for compounding by Farmland in accordance with an interest option made by the purchaser will be paid upon redemption of the Demand Loan Certificate (Section 3.01). CONCERNING THE TRUSTEE The Commerce Bank of Kansas City, National Association, Kansas City, Missouri, the corporation designated to act as Trustee under the Indenture, resigned effective January 31, 1989 and UMB Bank, National Association, Kansas City, Missouri, has been appointed the Trustee under the Indenture of November 20, 1981 and is to perform only such duties as are specifically set forth in that Indenture. In the case of a default, the owners of a majority in aggregate principal amount of the Demand Loan Certificates outstanding at the time of the occurrence of a default have the right to require the Trustee to take action to remedy such default. Upon the occurrence of a default, the Trustee may, and upon the written request of a majority in aggregate principal amount of the Demand Loan Certificates outstanding shall, declare the principal of all Demand Loan Certificates and interest accrued thereon immediately due and payable (Sections 6.03 and 7.02). MODIFICATION OF THE INDENTURE The Indenture of November 20, 1981 contains provisions permitting Farmland, with the consent of the Trustee, to execute supplemental indentures (a) to evidence any succession for another corporation to Farmland and the assumption by the successor corporation of covenants and obligations of Farmland, (b) to add further covenants or provisions which Farmland's Board of Directors and the Trustee consider to be for the protection of the holders of the Certificates, or (c) to cure any ambiguity in the Indenture (Section 10.01). The Indenture of November 20, 1981 contains provisions permitting Farmland and the Trustee, with the consent of the owners of not less than 66-2/3% in aggregate principal amount of the Demand Loan Certificates then outstanding, to execute supplemental indentures adding to or changing any provisions of the indenture of November 20, 1981, or supplemental indentures, provided that no such supplemental Indenture shall (1) extend the fixed maturity of any Demand Loan Certificates, or reduce the principal amount thereof, or reduce the rate or extend the time of payment of interest, without the consent of the owner of each Demand Loan Certificate so affected, or (2) reduce the 66-2/3% requirement as to the consent of the owners of the Demand Loan Certificates for changes in any supplemental indenture, without the consent of the owner of all Demand Loan Certificates then outstanding (Section 10.02). DEFAULTS AND NOTICE THEREOF The Indenture of November 20, 1981 provides that any of the following shall constitute a default: (1) failure to pay principal on Demand Loan Certificates when due; (2) failure to pay interest on Demand Loan Certificates when due, continued for 60 days; (3) certain events of bankruptcy or insolvency; and (4) failure to perform any other covenant or agreement contained in the Indenture, continued for 90 days. Failure to pay either principal or interest when due during the pendency of any dissolution or liquidation proceeding or action to enforce payment of indebtedness shall also constitute such a default (Section 6.01). The Indenture of November 20, 1981 provides that the Trustee shall within 90 days after the occurrence of a default, not including periods of grace, give to the Demand Loan Certificate owners notice of all such defaults unless such defaults have been cured; provided that, except in the case of default in the payment of principal of or interest on any of the Demand Loan Certificates, the Trustee shall be protected in withholding such notice if and so long as the Trustee determines that the withholding of such notice is in the interest of the Demand Loan Certificate owners (Section 6.02). The Indenture of November 20, 1981 requires Farmland to file with the Trustee and the Securities and Exchange Commission such additional information, documents and reports with respect to compliance by Farmland with the conditions and covenants provided for in said Indenture as may be required from time to time by the Securities and Exchange Commission. Summaries of any such reports filed with the Trustee or the Securities and Exchange Commission pursuant to rules and regulations as prescribed by the Securities and Exchange Commission shall be transmitted to the owners of Demand Loan Certificates in the manner and to the extent provided for in said Indenture (Section 5.03). The Indenture of November 20, 1981 does not require any periodic evidence to be furnished as to the absence of default or as to compliance with the terms of the Indenture. SATISFACTION AND DISCHARGE OF INDENTURE The Indenture of November 20, 1981 shall be discharged upon payment or redemption of all Demand Loan Certificates or upon deposit with the Trustee of funds sufficient therefor (Section 12.01). LEGAL MATTERS Robert B. Terry, Vice President and General Counsel of the Registrant, has given an opinion upon the legality of the securities being registered and upon certain other legal matters in connection with the registration of these securities. THE COMPANY Farmland is an agricultural farm supply and processing and marketing cooperative headquartered in Kansas City, Missouri that is primarily owned by its members and operates on a cooperative basis. Founded originally in 1929, Farmland has grown from revenues of $310,000 during its first year of operation to over $9.7 billion during 1996. Members are entitled to receive patronage refunds distributed by Farmland from its member-sourced annual net earnings. Unless the context otherwise requires, the term "member" herein means (i) any voting member, (ii) any associate member, or (iii) any other person with which Farmland is a party to a currently effective patronage refund agreement (a "patron"). See "Business - Patronage Refunds and Distribution of Annual Earnings" included herein. Farmland was formally incorporated in Kansas in 1931. Its principal executive offices are at 3315 North Farmland Trafficway, Kansas City, Missouri 64116 (telephone 816-459-6000). Unless the context requires otherwise, (i) "Farmland" or the "Company" herein refers to Farmland Industries, Inc. and its consolidated subsidiaries, (ii) all references herein to "year" or "years" are to fiscal years ended August 31, (iii) all references herein to "tons" are to United States short tons. MEMBERSHIP Membership requirements are determined by Farmland's Articles of Incorporation and the Board of Directors of Farmland (the ''Board of Directors''). VOTING MEMBERS As of August 31, 1996, Farmland's requirements for voting membership were as follows: the voting member must (1) own a minimum of $1,000 of Farmland's common stock; and (2) transact business with Farmland on a patronage basis; and (3) not be a significant direct competitor with Farmland in any of Farmland's major business lines; and (4) (a) be a natural person, a family farm corporation or a family farm partnership that (i) derives a majority of earned income from a farming operation (excluding any earned income of a spouse from other sources) and (ii) is a vendor of livestock to Farmland and/or a contract producer of livestock for Farmland; or (b) be an association of producers of agricultural products that (i) is organized and conducts business on a cooperative basis; (ii) distributes its earnings based on patronage; and (iii) is controlled directly by its voting producer members. ASSOCIATE MEMBERS To qualify for associate membership in Farmland, all of the following conditions must be met: the associate member must (1) own a minimum of $1,000 of Farmland's associate member common stock; and (2) not be a significant direct competitor of Farmland in any of the business line(s) in which the associate member expects to conduct patronage business with Farmland; and (3)(a) be a natural person, a family farm corporation, or a family farm partnership that (i) derives a majority of earned income from a farming operation (excluding any earned income of a spouse from other sources) and (ii) is a vendor of livestock to Farmland and/or a contract producer of livestock for Farmland; or (b) be an association conducting business on a cooperative basis; or (c) be a business entity owned 100%, directly or indirectly, by Farmland or its members or associate members; or (d) be a hog-and/or cattle-feeding business entity that agrees to provide Farmland with the information it needs to pass on patronage refunds from Farmland's hog- and/or cattle-marketing operations to those agricultural producer-members of Farmland who have conducted business with the entity. PATRONAGE AGREEMENTS WITH PATRONS All existing patronage agreements with patrons will remain in force until such time as either (a) the patron has been inactive with Farmland during any single fiscal year; or (b) the patronage agreement is canceled by mutual consent. No new patronage agreements will be authorized without prior approval by the Board of Directors. As of August 31, 1996, Farmland's membership, associate membership and patrons eligible for patronage refunds consisted of approximately 1,800 cooperative associations of farmers and ranchers and 11,800 pork or beef producers or associations of such producers. See ''Business - Patronage Refunds and Distribution of Annual Earnings'' included herein. In the event the Board of Directors of Farmland shall determine that any holder of the common stock or associate member common stock of Farmland does not meet the qualifications as may be established by the Board of Directors for holders thereof, such person shall have no rights or privileges on account of such common stock to vote for director(s) or to vote on the management or affairs of Farmland, and Farmland shall have the right, at its option, (a) to purchase such common stock at its book or par value, whichever is less, as determined by the Board of Directors, or (b) in exchange for such common stock or associate member common stock to issue or record on the books of Farmland capital credits in an equivalent amount. On the failure of any holder, following any demand by Farmland therefor, to deliver the certificate or certificates evidencing any common stock or associate member common stock, Farmland may cancel the same on its books and issue or record on the books of Farmland an equivalent amount of capital credits in lieu thereof. BUSINESS GENERAL The Company is one of the largest cooperatives in the United States in terms of revenues. In 1996, Farmland had exports to approximately 70 countries, and derived approximately 42% of its grain revenues from export sales. Substantially all of the Company's foreign grain sales are paid in U.S. Dollars. The Company conducts business primarily in two operating areas: agricultural inputs and outputs. On the input side of the agricultural industry, the Company operates as a farm supply cooperative. On the output side of the agricultural industry, the Company operates as a processing and marketing cooperative. The Company's farm supply operations consist of three principal product divisions: petroleum, crop production and feed. Principal products of the petroleum division are refined fuels, propane, by-products of petroleum refining and car, truck and tractor tires, batteries and accessories. Principal products of the crop production division are nitrogen-, phosphate- and potash-based fertilizers ("plant nutrients"), and, through the Company's ownership in WILFARM (a 50%-owned venture formed in 1995) ("WILFARM"), a complete line of insecticides, herbicides and mixed chemicals. Principal products of the feed division include swine, dairy, pet, beef, poultry, mineral and specialty feeds, feed ingredients and supplements, animal health products and livestock services. Over 50% of the Company's farm supply products sold in 1996 was produced in plants owned by the Company or operated by the Company under long-term lease arrangements. Approximately 60% of the Company's farm supply products sold in 1996 were sold at wholesale 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 operations include the processing of pork and beef, the marketing of fresh pork, processed pork and fresh beef and the storage, marketing and processing of grain. In 1996, approximately 66% of the hogs processed, 14% of the beef cattle processed and 45% of the grain marketed by the Company were supplied to the Company by its members. Substantially all of the Company's pork and beef products sold in 1996 were processed in plants owned by the Company. No material part of the business of any segment of the Company is dependent on a single customer or a few customers. Financial information about the Company's industry segments is presented in Note 12 of the Notes to Consolidated Financial Statements included herein. 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. The Company competes for market share with numerous participants with various levels of vertical integration, product and geographical diversification, sizes and types of operations. In the petroleum industry, competitors include major oil companies, independent refiners, other cooperatives and product brokers. Competitors in the crop production industry include global producers (some of which are cooperatives) of nitrogen and phosphate fertilizers and product importers and brokers. The feed, pork and beef industries are comprised of a large variety of competitive participants. PETROLEUM MARKETING The principal product of this business segment is refined fuels. Approximately 58% of refined fuels products sold in 1996 resulted from transactions with Farmland's members. The balance of the Company's refined fuels products sales were principally to retailing chains in urban areas. Other petroleum products include lube oil, grease, by-products of petroleum refining and car, truck and tractor tires, batteries and accessories. Sales of petroleum products as a percent of the Company's consolidated sales for 1994, 1995 and 1996 were 13%, 12% and 11%, respectively. Competitive methods in the petroleum industry include service, product quality and prices. However, in refined fuel markets, price competition is most dominant. Many participants in the industry engage in one or more of the industry's processes (oil production and transportation, refining, wholesale distribution and retailing). The Company participates in the industry primarily as a mid-continent refiner and as a wholesale distributor of petroleum products. PRODUCTION The Company owns a refinery at Coffeyville, Kansas. Production volume for 1994, 1995 and 1996 was as follows: Barrels of Crude Oil Processed Daily Average Based on 365 Days per year 1994 1995 1996 (barrels) Coffeyville, Kansas 63,872 66,367 64,276 The Coffeyville refinery produced approximately 25 million barrels of motor fuels, heating fuels and other petroleum products in 1994, 26 million barrels in 1995, and 25 million barrels in 1996. Production at the refinery reflects a decrease in 1996 compared with 1995 primarily because production was suspended for 35 days for scheduled maintenance during that year. Approximately 65% of petroleum product sales in 1996 represented products produced at this location. In July 1994, the Company acquired a mothballed refinery in Texas for reassembly at the Coffeyville refinery site. Reassembly was completed during the fourth quarter of 1996 which expanded crude oil processing capacity to 95,000 barrels per day. RAW MATERIALS Farmland's refinery at Coffeyville, Kansas presently is designed to process high quality crude oil with low sulfur content ("sweet crude"). Competition for sweet crude and declining production in proximity of the refinery has increased its cost of raw material relative to such cost for coastal refineries with the capacity for processing and access to lower quality crude grades. In 1996, the Company's pipeline/trucking gathering system collected approximately 25% of its crude oil supplies from producers near its refineries. Additional supplies are acquired from diversified sources. Modifications to the Coffeyville refinery to increase its capability to process efficiently crude oil streams containing greater amounts of lower quality crude are continuing. In October 1996, Farmland entered into various 20-year agreements with Tessenderlo KERLEY Inc. ("TKI") whereby TKI will build, own and operate a sulfur processing plant at the Coffeyville refinery (the Company anticipates the plant will be completed by the first quarter of 1998). Under the agreements, Farmland will provide high sulfur gas streams to TKI's plant. High sulfur gas streams, a by-product of Farmland's refinery, will be utilized by TKI's plant as a source of feedstock to manufacture sulfur. TKI's facility will have the capacity to process 100 tons sulfur per day. The refinery operations currently include a sour gas stripper and sulfur plant but additional sulfur handling capacity will be required to accommodate any additional expansion of refinery capacity. Crude oil is purchased approximately 45 to 60 days in advance of the time the related refined products are to be marketed. Certain of these advance crude oil purchase transactions, as well as fixed price refined products advance sales contracts, are hedged utilizing petroleum futures contracts. See "Risk Factors - - General Factors Affecting the Business" included herein. During periods of volatile crude oil price changes or in extremely short crude supply conditions, the Company's petroleum operations could be affected to a greater extent than petroleum operations of more vertically integrated competitors with crude oil supplies available from owned producing reserves. In past periods of relatively severe crude oil shortages, various governmental regulations such as price controls and mandatory crude oil allocating programs have been implemented. There can be no assurance as to what, if any, government action would be taken if a crude oil shortage were to develop. CROP PRODUCTION MARKETING The Company's crop production business plant nutrients and, through the Company's ownership in WILFARM, a complete line of crop protection products such as insecticides, herbicides and mixed chemicals. Sales of the crop production business segment as a percent of consolidated sales for 1994, 1995 and 1996 were 17%, 16% and 14%, respectively. Competition in the plant nutrient industry is dominated by price considerations. However, during the spring and fall plant nutrient application seasons, farming activities intensify and delivery service capacity is a significant competitive factor. The Company maintains a significant capital investment in distribution assets and a seasonal investment in inventory to enhance its manufacturing and distribution operations. The Company owns or leases plant nutrient custom dry blending, liquid mixing, storage and distribution facilities at 177 locations throughout its trade territory to conform delivery capacity more closely to customer demands for delivery services. The Company's sales of crop production products are primarily at wholesale to local cooperative associations who are members of Farmland. In view of this member/customer relationship, management believes that, with respect to such customers, the Company has a slight competitive advantage. Domestic competition, mainly from other regional cooperatives and integrated crop production companies, is intense due to customers' sophisticated buying tendencies and production strategies that focus on costs and service. Also, foreign competition exists from producers of crop production products manufactured in countries with lower cost natural gas supplies (the principal raw material in nitrogen-based fertilizer products). In certain cases, foreign producers of fertilizer for export to the United States may be subsidized by their respective governments. PRODUCTION The Company manufactures nitrogen-based crop production products. Based on total production capacity, the Company is one of the largest producers of anhydrous ammonia fertilizer in the United States. The Company owns and produces nitrogen-based products at four anhydrous ammonia plants and operates three anhydrous ammonia plants under long-term lease arrangements. The Company owns and produces phosphate-based products at one plant and has 50% ownership interests in two ventures which produce phosphate-based products. Nitrogen fertilizer production information for 1994, 1995 and 1996 is as follows: Actual Annual Production Anhydrous Ammonia Plant Location 1994 1995 1996 (tons) Lawrence, Kansas............ 443,000 430,000 431,000 Dodge City, Kansas.......... 257,000 276,000 285,000 Fort Dodge, Iowa............ 256,000 258,000 263,000 Beatrice, Nebraska.......... 277,000 281,000 276,000 Enid, Oklahoma (2 plants)(A) 985,000 998,000 1,005,000 Pollock, Louisiana(A)....... 526,000 497,000 508,000 (A) Leased plants Natural gas is the major raw material used in production of synthetic anhydrous ammonia. Synthetic anhydrous ammonia is the basic component of other commercially produced nitrogen-based crop production products including urea, urea ammonium nitrate ("UAN") solutions and other products. The Company produces such value-added nitrogen-based products at four plants. Production of such value-added products from anhydrous ammonia for 1994, 1995 and 1996 was as follows: Actual Annual Production Plant Location 1994 1995 1996 (tons) Lawrence, Kansas............ 654,000 719,000 710,000 Enid, Oklahoma (2 plants)(A) 433,000 473,000 475,000 Dodge City, Kansas.......... 163,000 202,000 187,000 Beatrice, Nebraska.......... 162,000 165,000 161,000 (A) Leased plants Ammonia also is used to react with phosphoric acid to produce phosphoric acid products such as liquid mixed fertilizer, diammonium phosphate and monoammonium phosphate. The Company owns land in Florida which contains an estimated 40 million tons of phosphate rock and a phosphate chemical plant located in Joplin, Missouri. The Joplin plant produces ammonium phosphate which is combined in varying ratios with muriate of potash to produce 12 different fertilizer grade products. In addition, feed grade phosphate (dicalcium phosphate) is produced at this facility. Production at the Joplin plant for 1994, 1995 and 1996 was as follows: Actual Annual Production 1994 1995 1996 (tons) Ammonium Phosphate........... 75,000 64,000 65,000 Feed Grade Phosphate......... 157,000 159,000 160,000 The Company and Norsk Hydro a.s. are each 50% owners of a joint venture, Farmland Hydro, L.P. ("Hydro"), which is a manufacturer of phosphate fertilizer products for distribution principally to international markets. Hydro operates a phosphate plant at Green Bay, Florida and owns phosphate rock reserves located in Hardee County, Florida which contain an estimated 40 million tons of phosphate rock. The Company provides management and administrative services and Norsk Hydro a.s. provides marketing services to Hydro. Hydro's plant produces phosphoric acid products such as super acid, diammonium phosphate and monoammonium phosphate. Annual production in tons of such products for 1994, 1995 and 1996 was 1,437,000, 1,471,000 and 1,494,000, respectively. The phosphate rock required to operate Hydro's plant is presently purchased from outside suppliers and adequate supplies of sulfur are available from several producers. Plans for development of the phosphate reserves owned by the Company and Hydro have not been established in view of the availability of adequate supplies of phosphate rock from alternative sources. The Company and J.R. Simplot Company are each 50% owners of a joint venture, SF Phosphates Limited Company ("SF Phosphates"), which operates a phosphate mine located in Vernal, Utah, a phosphate chemical plant located in Rock Springs, Wyoming and a 96-mile pipeline connecting the mine to the plant. The plant produces monoammonium phosphate and super acid with annual production in tons for 1994, 1995 and 1996 of 465,000, 451,000 and 506,000, respectively. Under the joint venture agreement, the Company and J.R. Simplot Company purchase the production of the joint venture in proportion to their ownership. Based on current recovery methods and the levels of plant production in recent years, the Company estimates that the phosphate rock reserves owned by SF Phosphates are adequate to provide the phosphate rock requirements of the plant for approximately 75 years. The Company and Mississippi Chemical Company are each 50% owners of a joint venture formed to develop, construct and operate a 1,850 metric ton per day ammonia production facility in The Republic of Trinidad and Tobago. The plant construction is funded by a combination of nonrecourse project financing and equity. The Company expects to fund its equity position in the project (estimated to amount to approximately $67.0 million) from currently available sources of capital. Construction is tentatively scheduled to be completed in 1998. See "Business - Capital Expenditures and Investments in Ventures" included herein. RAW MATERIALS Natural gas, the largest single component of nitrogen-based fertilizer production, is purchased directly from natural gas producers. Natural gas purchase contracts are generally market sensitive and contract prices change as the market price for natural gas changes. The Company's management believes that the flexible pricing attributes of its gas supply contracts, without relinquishing rights to long-term supplies, are essential to its competitive position. In addition, the Company has a hedging program which utilizes natural gas futures and options to reduce risks of market price volatility. See "Risk Factors - General Factors Affecting the Business" included herein. Natural gas is delivered to the Company's facilities under pipeline transportation service agreements which have been negotiated with each plant's delivering pipeline. Natural gas delivery to the plants could be curtailed under regulations of the Federal Energy Regulatory Commission if a delivering pipeline's capacity was required to serve priority users such as residences, hospitals and schools. In such case, production could be curtailed. No significant production has been lost because of curtailments in pipeline transportation, and no such curtailment is anticipated. FEED Products in the Company's feed line include swine, beef, poultry, dairy, pet, mineral and specialty feeds, feed ingredients and supplements and animal health products. The primary component of feed products is grain and grain by- products, which are generally available in the region in which the company operates. This business segment's sales were approximately 8%, 6% and 6% of consolidated sales for the years 1994, 1995 and 1996, respectively. Approximately 56% of the feed business segment's sales in 1996 was attributable to products manufactured in the Company's feed mills. The Company operates feed mixing plants at 22 locations throughout its territory, an animal protein and premix plant located in Eagle Grove, Iowa, a premix plant in Marion, Ohio and a pet food plant in Muncie, Kansas. Feed production for 1994, 1995 and 1996 was as follows: Actual Annual Production 1994 1995 1996 (tons) 25 feed mills (combined)..... 1,118,000 1,112,000 1,103,000 The Company conducts research in genetic selection, breeding, animal health and nutrition at its research facility in Bonner Springs, Kansas. Through local cooperative associations of farmers and ranchers, the Company participates in livestock and hog services designed to produce lean, feed- efficient animals and help livestock producers select feed formulations which maximize weight gain. FOOD PROCESSING AND MARKETING PORK PROCESSING The Company's pork processing and marketing operations are conducted through a 99%-owned subsidiary, Farmland Foods, Inc. ("Foods"), which operates 11 food processing facilities including facilities at Topeka, Kansas, Albert Lea, Minnesota and Dubuque, Iowa which were purchased during 1996. Meat processing facilities at Springfield, Massachusetts, Carey, Ohio, and New Riegel, Ohio produce Italian-style specialty meats and ham products. Plants in Wichita and Topeka, Kansas and Albert Lea, Minnesota process fresh pork into a variety of products including ham, bacon and sausage. Additionally, the Wichita, Kansas facility processes pork, beef and chicken into hot dogs, dry sausage and other luncheon meats. Facilities in Denison, Iowa, Monmouth, Illinois, Dubuque, Iowa and Crete, Nebraska function as pork abattoirs and have additional capabilities for processing pork into bacon, ham and smoked meats. These facilities also process fresh pork into primal cuts for additional processing into fabricated meats which are sold to commercial users and to retail grocery chains, as well as case-ready and label-branded cuts for retail distribution. The plant located in Carroll, Iowa is primarily a packaging facility for canned or cook-in-bag products. Production for 1994, 1995 and 1996 is as follows: Actual Weekly Production 1994 1995 1996 (pounds) Crete, Nebraska.............. 2,800,000 3,100,000 3,300,000 Denison, Iowa................ 2,700,000 2,800,000 2,700,000 Wichita, Kansas.............. 1,900,000 2,200,000 2,600,000 Monmouth, Illinois........... 1,400,000 1,900,000 1,900,000 Carroll, Iowa................ 1,100,000 1,400,000 1,200,000 Springfield, Massachusetts... 750,000 725,000 782,619 Carey/New Riegel, Ohio....... 275,000 425,000 434,996 Dubuque, Iowa(A)............. n/a n/a 1,200,000 Albert Lea, Minnesota (A).... n/a n/a 1,300,000 Topeka, Kansas (a) .......... n/a n/a 810,000 (A) Actual weekly averages since acquisition of the plant by the Company. Actual Weekly Head Slaughtered 1994 1995 1996 Crete, Nebraska.............. 46,000 46,000 43,000 Denison, Iowa................ 40,000 41,000 37,000 Monmouth, Illinois........... 27,000 33,000 31,000 MARKETING The Company's products include fresh pork, fabricated pork, smoked meats, ham, bacon, fresh sausage, dry sausage, hot dogs, and packing house by-products. These products are marketed under a variety of brand names including: Farmland, Farmstead, OhSe, Maple River, Carando, Roegelein, Regal and Marco Polo. Product distribution is through national and regional retail food chains, food service accounts, distributors and through international marketing brokers. Pork marketing is a highly competitive industry with many suppliers of fresh and processed pork products competing for shelf space in retail food stores. Other meat products such as beef, poultry and fish also compete directly with pork products. Competitive methods in this segment include price, product quality, product differentiation and customer service. BEEF PROCESSING The Company's beef processing and marketing operations are conducted through National Beef Packing Company, L.P. ("NBPC"), which was formed in April 1993, and at September 1, 1996, was 75%-owned by Farmland. The processing facilities for these beef operations are located in Liberal, Kansas and Dodge City, Kansas. These facilities function as beef abattoirs and process fresh beef into primal cuts for additional processing into fabricated or boxed beef. During 1994, 1995 and 1996, the two plants slaughtered an aggregate of 1.7 million, 1.9 million and 2.1 million cattle, respectively. MARKETING Products in the Company's beef processing and marketing operations include fresh beef, boxed beef and packing house by-products. Product distribution is through national and regional retail and food service customers as well as under the Farmland Black Angus Beef label. In addition, certain beef products are distributed in international markets. Beef marketing is a highly competitive industry with many suppliers of fresh and boxed beef. Other meat products such as pork, poultry and fish also compete directly with beef products. Competitive methods in this industry include price, product quality and customer service. GRAIN MARKETING The Company markets wheat, milo, corn, soybeans, barley and oats, with corn and wheat constituting the majority of the marketing business. The Company purchases grain from members and nonmembers located in the Midwestern part of the United States. Once the grain is purchased, the Company assumes all risks related to selling such grain. Since grain is a commodity, the pricing of grain in the United States is principally conducted through bids based on the commodity futures markets. The Company is exposed to risk of loss in the market value of its grain inventory and fixed price purchase contracts if grain market prices decrease, and is exposed to loss on its fixed price sales contracts if grain market prices increase. To reduce the price change risk associated with holding positions in grain, the Company takes opposite and offsetting positions by entering into grain commodity futures contracts. Such contracts have terms of up to one year. The Company's strategy is to maintain hedged positions on as close to 100% of its position in grain as is possible. During 1994, 1995 and 1996, the Company maintained hedges on approximately 95.3%, 97.9% and 94.8%, respectively, of its grain positions. Based on total assets at the beginning and end of 1996, the average market value of grain positions not hedged during the year amounted to less than 1% of the Company's average total assets. While hedging activities reduce the risk of loss from changing market values of grain, such activities also limit the gain potential which otherwise could result from changes in market prices of grain. In 1996, approximately 42% of grain revenues were from export sales or sales to domestic customers for export. In 1994 and 1995, export sales or sales to domestic customers for export accounted for approximately 37% and 47%, respectively, of consolidated grain revenues. Export-related sales are subject to international political upheavals and changes in other countries' trade policies which are not within the control of the United States or the Company. Foreign sales of grain generally are paid in U.S. Dollars. Heartland Wheat Growers, L.P. (79%-owned by Farmland and 21%-owned by five cooperative members of Farmland), which processes wheat into gluten for use primarily in commercial baking and pet food markets and starch for numerous industrial purposes, started commercial operations during May 1996. The plant has capacity to process 4.3 million bushels of wheat annually; actual production for 1996 was approximately 0.6 million bushels of wheat. PROPERTY The Company owns or leases 33 inland elevators and one export elevator in North America with a total capacity of approximately 179.2 million bushels of grain, six of which elevators (with an aggregate capacity of 55.5 million bushels of grain) are temporarily closed due to current demand for grain holding and storage facilities. TRADIGRAIN Eight international grain trading subsidiaries of Farmland (collectively referred to as "Tradigrain") import, export and ship all major grains from the major producing countries to final consumers which are either governmental entities, private companies or other major grain companies. Tradigrain's purchases of grain are made on a cash basis against presentation of documents. Its sales of grain are mostly done against confirmed letters of credit at sight or on 180/360 days deferred basis. For purposes of the Company's Consolidated Financial Statements, on Tradigrain transactions, the Company recognizes as revenues net margin on grain merchandised rather than the gross value of such products merchandised. RESEARCH The Company operates a research and development farm near Bonner Springs, Kansas where many aspects of animal nutrition are studied. The research is directed toward improving the nutrition, breeding and feeding practices of livestock and pets. Expenditures related to Company-sponsored product research and process improvements amounted to $2.7 million, $2.3 million and $2.4 million for 1994, 1995 and 1996, respectively. CAPITAL EXPENDITURES AND INVESTMENTS IN VENTURES In 1996, the Company made capital expenditures and investments in ventures totaling $233.5 million. See "Business - Petroleum", " - Crop Production", " - Feed"," - Food Processing and Marketing" and " - Grain" included herein. The Company plans expenditures for capital additions, improvements and investments in ventures of an aggregate of approximately $278.3 million during the years 1997 and 1998 (of which $61.0 million was committed as of August 31, 1996) as described in the following paragraphs. Of this amount, the Company plans expenditures of $248.6 million for capital additions and improvements and $29.7 million for investments in ventures. Capital expenditures and investments planned for the crop production business segment total approximately $127.7 million and include: an investment in a 50%-owned venture organized to construct and operate an anhydrous ammonia plant in The Republic of Trinidad and Tobago, construction of a 525,000 ton per year UAN facility in Ft. Dodge, Iowa and expenditures for operating efficiencies, environmental and safety issues and for operating necessities or betterments. Capital expenditures and investments planned for the feed business segment total approximately $11.5 million for feed mill efficiencies, operating necessities and replacements. Capital expenditures and investments planned for the petroleum business segment total approximately $39.4 million and are for operating necessities, increased operating efficiency and for environmental and safety issues. Capital expenditures and investments of approximately $72.8 million are planned for the food processing and marketing business segment. These expenditures are primarily for operating necessities and improvements. Capital expenditures and investments of approximately $6.3 million planned for the grain business segment are mainly for expansion and replacements. Capital expenditures and investments of approximately $20.6 million are planned for the other operations and corporate groups. These expenditures include upgrades of management information services. The remaining expenditures are planned for operating necessities and improvements. The Company intends to fund its capital program with cash from operations or through borrowings. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition, Liquidity and Capital Resources" included herein. MATTERS INVOLVING THE ENVIRONMENT The Company is subject to various stringent federal, state and local environmental laws and regulations, including those governing the use, storage, discharge and disposal of hazardous materials, as the Company uses hazardous substances and generates hazardous wastes in the ordinary course of its manufacturing processes. The Company recognizes liabilities related to remediation of contaminated properties when the related costs are probable and can be reasonably estimated. Estimates of these costs are based upon currently available facts, existing technology, undiscounted site specific costs and currently enacted laws and regulations. In reporting environmental liabilities, no offset is made for potential recoveries. Such liabilities include estimates of the Company's share of costs attributable to potentially responsible parties (''PRPs'') which are insolvent or otherwise unable to pay. All liabilities are monitored and adjusted regularly as new facts or changes in law or technology occur. The Company wholly or jointly owns or operates 34 grain elevators and 58 manufacturing properties and has potential responsibility for environmental conditions at a number of former manufacturing facilities and at waste disposal facilities operated by third parties. The Company also has been identified as a PRP under CERCLA at various National Priority List sites and has unresolved liability with respect to the past disposal of hazardous substances at five such sites. CERCLA may impose joint and several liability on certain statutory classes of persons for the costs of investigation and remediation of contaminated properties, regardless of fault or the legality of the original disposal. These persons include the present and former owners or operators of a contaminated property, and companies that generated, disposed of, or arranged for the disposal of hazardous substance found at the property. The Company is investigating or remediating contamination at 28 properties under CERCLA and/or the state and federal hazardous waste management laws. During 1994, 1995 and 1996, the Company paid approximately $1.4 million, $3.2 million and $1.8 million, respectively, for environmental investigation and remediation. The Company currently is aware of probable obligations for environmental matters at 39 properties. As of August 31, 1996, the Company has an environmental accrual in its Consolidated Balance Sheet for probable and reasonably estimated cost for remediation of contaminated property of $18.9 million. The Company periodically reviews and, as appropriate, revises its environmental accruals. Based on current information and regulatory requirements, the Company believes that the accruals established for environmental expenditures are adequate. The Company's actual final costs of addressing certain environmental matters are not quantifiable, and therefore have not been accrued, because such matters are in preliminary stages and the timing, extent and costs of various actions which governmental authorities may require are currently unknown. Management is aware of other environmental matters for which there is a reasonable possibility that the Company will incur costs to resolve. It is possible that the costs of resolution of the matters described in this paragraph may exceed the liabilities which, in the opinion of management, are probable and which costs are reasonably estimable at August 31, 1996. In the opinion of management, it is reasonably possible for such costs to be approximately an additional $20.6 million. Under the Resource Conservation Recovery Act of 1976 (''RCRA''), the Company has four closure and four post-closure plans in place for six locations. Closure and post-closure plans also are in place for three landfills and two injection wells as required by state regulations. Such closure and post-closure costs are estimated to be $5.2 million at August 31, 1996 (and is in addition to the $20.6 million discussed in the prior paragraph). Operations are being conducted at these locations and the Company does not plan to terminate such operations in the foreseeable future. Therefore, the Company has not accrued these environmental exit costs. The Company accrues these liabilities when plans for termination of plant operations have been made. The Company and the Environmental Protection Agency (''EPA'') reached an agreement to settle three proceedings brought by Region VII of the 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 major terms of the settlement are: (1) the Company does not acknowledge liability or fault; (2) the Company will spend approximately $4.3 million to implement Supplemental Environmental Projects; and (3) the Company will pay penalties of approximately $1.5 million. The penalties have been included in the Company's August 31, 1996 environmental accrual of $18.9 million. Protection of the environment requires the Company to incur expenditures for equipment or processes, which expenditures may impact the Company's future net income. However, the Company does not anticipate that its competitive position will be adversely affected by such expenditures or by laws and regulations enacted to protect the environment. Environmental expenditures are capitalized when such expenditures provide future economic benefits. In 1994, 1995 and 1996, the Company had capital expenditures of approximately $2.6 million, $4.7 million and $10.7 million, respectively, to prevent future discharges into the environment. The majority of such expenditures were for improvements at the Coffeyville refinery. Management believes the Company currently is in substantial compliance with existing environmental rules and regulations. GOVERNMENT REGULATION The Company's business is conducted within a legal environment created by numerous federal, state and local laws which have been enacted to protect the public's interest by promoting fair trade practices, safety, health and welfare. The Company's operating procedures conform to the intent of these laws and management believes that the Company currently is in compliance with all such laws, the violation of which could have a material adverse effect on the Company. Certain policies may be implemented from time to time by the United States Department of Agriculture, the Department of Energy or other governmental agencies which may impact the demands of farmers and ranchers for the Company's products or which may impact the methods by which certain of the Company's operations are conducted. Such policies may impact the Company's farm supply and food processing and marketing operations. The Federal Agriculture Improvement and Reform Act of 1996 ("FAIR") represents the most significant change in government farm programs in more than 60 years. FAIR greatly accelerates the trend toward greater market orientation and reduced Government influence on the agricultural sector. As a result, the Company expects the number of acres under cultivation to increase. This increase could favorably impact demand of producers for the Company's plant nutrients and crop protection products and fuels. Whether demand for the Company's products is favorably impacted depends in a large part on whether U.S. agriculture becomes more competitive in world markets as this industry moves toward greater market orientation, the extent which governmental actions expand international trade agreements and whether markets access opportunities for U.S. agriculture is increased. Management is not aware of any newly implemented or pending policies, other than as discussed above, having a significant impact or which may have a significant impact on operations of the Company. EMPLOYEE RELATIONS At August 31, 1996, the Company had approximately 14,700 employees. Approximately 50% of the Company's employees were represented by unions having national affiliations. The Company considers its relationship with employees to be generally satisfactory. No labor strikes or work stoppages within the last three fiscal years have had a materially adverse effect on the Company's operating results. Current labor contracts expire on various dates through February 1999. PATRONAGE REFUNDS AND DISTRIBUTION OF ANNUAL EARNINGS For purposes of this section, (1) annual earnings for 1994 and earlier years means earnings before income taxes determined in accordance with federal income tax law, and (2) annual earnings for 1995 and after means earnings before income taxes determined in accordance with generally accepted accounting principles. Farmland operates on a cooperative basis. In accordance with its bylaws, Farmland returns the member-sourced portion of its annual net earnings to its members as a patronage refund. Member-sourced earnings are the earnings attributed to transactions with members. Each member's portion of the annual patronage refund is determined by the earnings of Farmland attributed to the quantity or value of business transacted by the member with Farmland during the year for which the patronage is paid. Generally, the members receive a portion of the annual patronage refund in cash and, for the balance of the patronage refund (the "non-cash portion"), the members receive Farmland common shares, associate member common shares or capital credits (the equity type received is determined by the membership status). The non-cash portion of the patronage refund is determined annually by the Board of Directors. The annual patronage refund is returned to members as soon as practical after the end of each fiscal year. The Internal Revenue Code of 1986, as amended, allows a cooperative to deduct from its taxable income the total amount of the patronage refunds returned, provided that not less than 20% of the total patronage refund returned is cash. The bylaws of Farmland provide that the Board of Directors has complete discretion with respect to the handling and ultimate disposition of any member-sourced losses. For the years ended 1994, 1995 and 1996, Farmland returned the following patronage refunds: Cash or Cash Equivalent Non-Cash Total Portion of Portion of Patronage Patronage Patronage Refunds Refunds Refunds (Amounts in thousands) 1994......... $ 26,552 $ 44,032 $ 70,584 1995......... $ 33,038 $ 61,356 $ 94,394 1996......... $ 32,719 $ 60,776 $ 93,495 Nonmember-sourced income (earnings attributed to transactions with persons not eligible to receive patronage refunds, i.e. nonmembers) and nonpatronage income or loss (income or loss from activities not directly related to the cooperative marketing or purchasing activities of Farmland) is subject to income taxes computed on the same basis as such taxes are computed on the income or loss of other corporations. EQUITY REDEMPTION PLANS The Equity Redemption Plans described below, namely the Base Capital Plan (as defined below), the estate settlement plan and the special equity redemption plans (collectively, the "Plans") may be changed at any time or from time to time at the sole and absolute discretion of the Board of Directors. The Plans are also not binding upon the Board of Directors or the Company, and the Board of Directors reserves the right to redeem, or not redeem, any equities of the Company without regard to whether such action or inaction is in accordance with the Plans. The factors which may be considered by the Board of Directors in determining when, and under what circumstances, the Company may redeem equities include, but are not limited to, the terms of the Company's Base Capital Plan, the Company's results of operations, financial position, cash flow, capital requirements, long-term financial planning needs, income and other tax considerations and other relevant considerations. By retaining discretion to determine the amount, timing and ordering of any equity redemptions, the Board of Directors believes that it can continue to assure that the best interests of the Company and thus of its owners will be protected. BASE CAPITAL PLAN For the purposes of acquiring and maintaining adequate capital to finance the business of the Company, the Board of Directors has established a base capital plan ("Base Capital Plan"). The Base Capital Plan provides a mechanism for determining the Company's total capital requirements and each voting member's and associate member's share thereof (the base capital requirement). As part of the Base Capital Plan, the Board of Directors may, in its discretion, provide for redemption of Farmland common stock or associate member common stock held by voting members or associate members whose holdings of common shares or associate member shares exceed the voting members' or associate members' base capital requirement. The Base Capital Plan provides a mechanism under which the cash portion of the patronage refund payable to voting members or associate members will depend upon the degree to which such voting members or associate members meet their base capital requirements. ESTATE SETTLEMENT PLAN The estate settlement plan provides that equity holdings of deceased natural persons (except for equity purchased and held for less than five years) will be redeemed at par value. This provision is subject to a limitation of $1.0 million in any one fiscal year without further authorization by the Board of Directors for such year. SPECIAL EQUITY REDEMPTION PLANS From time to time, the Company has redeemed portions of its outstanding equity under various special equity redemption plans. The special equity redemption plans (collectively, the "Plans") may be changed at any time or from time to time at the sole and absolute discretion of the Board of Directors. The Plans are also not binding upon the Board of Directors or the Company, and the Board of Directors reserves the right to redeem, or not redeem, any equities of the Company without regard to whether such action or inaction is in accordance compliance with the Plans. The special equity redemption plans are designed to return cash to members or former members of Farmland or Foods by a systematic method for redemption of outstanding equity which is not subject to redemption through other Plans, such as the Base Capital Plan or the estate settlement plan. The order in which each type of equity is redeemed is determined by the Board of Directors. Presented below are the amounts of equity approved for redemption by the Board of Directors under the Base Capital Plan, the estate settlement plan, special equity redemption plans and redemptions of Foods equities for each of the years in the five-year period ended 1996. Substantially all amounts approved for redemptions are paid in cash in the year following approval.
Estate Base Capital Plan Settlement Plan Special Equity Total Plan Redemptions Redemptions Redemption(A) Redemptions (Amounts in Thousands) 1992........... $ 6,707 $ 234 $ 6,755 $ 13,696 1993........... $ -0- $ 127 $ 12 $ 139 1994........... $ 8,740 $ 126 $ 4,108 $ 12,974 1995........... $ 14,159 $ 128 $ 13,451 $ 27,738 1996........... $ 14,024 $ 138 $ 11,277 $ 25,439
(A) Included in 1995 and 1996 are redemptions of preferred stock. LEGAL PROCEEDINGS The Company believes there is no litigation existing or pending against Farmland or any of its subsidiaries that, based on the amounts involved or the defenses available to the Company, would have a material adverse effect on the financial position of the Company except for the pending tax litigation relating to Terra Resources, Inc. ("Terra"), a former subsidiary of the Company, as explained in Note 7 of the Notes to Consolidated Financial Statements. See "Risk Factors - Income Tax Matters" and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition, Liquidity and Capital Resources" included herein. In accordance with Securities and Exchange Commission regulations, the Company reports that, during the fourth quarter, it resolved (see "Business - Matters Involving the Environment" included herein) the following civil and administrative proceedings in which violations of environmental laws were alleged and civil penalties in excess of $100,000 were sought. 1. COFFEYVILLE CERCLA/EPCRA PENALTIES. Administrative complaint issued August 10, 1993, by Region VII of the EPA seeking $350,000 in civil penalties for alleged violations of notification requirements under the CERCLA and the Emergency Planning and Community Right to Know Act. 2. COFFEYVILLE RCRA DOCKET NO. VII-94-H-0018. Administrative compliant issued August 2, 1994, by Region VII of the EPA seeking $1.4 million in civil penalties for alleged violations of the RCRA and of regulations issued thereunder. 3. COFFEYVILLE CLEAN AIR ACT CIVIL PENALTY. Federal civil complaint filed August 15, 1996, by the U.S. Department of Justice for alleged violations of the Clean Air Act. EXPERTS The Consolidated Financial Statements of Farmland as of August 31, 1995 and 1996 and for each of the years in the three-year period ended August 31, 1996 included herein and elsewhere in the Registration Statement, have been included herein and in the Registration Statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein and upon the authority of such firm as experts in accounting and auditing. QUALIFIED INDEPENDENT UNDERWRITER Interstate/Johnson Lane Corporation, a member of the NASD, has participated as a qualified independent underwriter in the "due diligence" review with respect to the preparation of this Prospectus. See "Plan of Distribution", included herein, regarding the exception from pricing by the qualified independent underwriter. MANAGEMENT
The directors of Farmland are as follows: Total Years Expiration of Age as of Positions of Present Service August 31, Held With Term as as Board Name 1996 Farmland Director Member Business Experience During Last Five Years Albert J. Shivley 53 Chairman of 1998 12 General Manager--American Pride Co-op the Board Association, Brighton, Colorado, a local cooperative association of farmers and ranchers. H. D. Cleberg 57 President and 1997 6 Mr. Cleberg has been with Farmland since Chief 1968. He was named as president-elect in Executive February 1991 and became President in April Officer 1991. From September 1990 to January 1991 he served as Senior Vice President and Chief Operating Officer, Agricultural Group. From April 1989 to August 1990 he served as Executive Vice President, Operations. Otis H. Molz 65 Vice Chairman 1997 13 Producer--Deerfield, Kansas. Mr. Molz has and Vice served as Chairman of the Board of the President National Bank for Cooperatives since January 1993. He served as Chairman of the Board of Directors of Farmland Industries, Inc. from December 1991 to December 1992. He served as First Vice President of the National Bank for Cooperatives from January 1990 to January of 1993. He was Second Vice Chairman from January 1, 1989 to January 1, 1990. Lyman Adams, Jr. 45 1998 4 General Manager--Cooperative Grain and Supply, Hillsboro, Kansas, a local cooperative association of farmers and ranchers. Ronald J. Amundson 52 1997 8 General Manager--Central Iowa Cooperative, Jewell, Iowa, a local cooperative association of farmers and ranchers. Baxter Ankerstjerne 60 1996 6 Producer--Peterson, Iowa. Since December 1988 Mr. Ankerstjerne has served as Chairman of the Board of Directors of Farmers Cooperative, Association, Marathon, Iowa, a local cooperative association of farmers and ranchers. Jody Bezner 55 1997 5 Producer--Texline, Texas. Richard L. Detten 62 1996 9 Producer--Ponca City, Oklahoma. Steven Erdman 46 1998 4 Producer--Bayard, Nebraska. Warren Gerdes 48 1998 3 General Manager--Farmers Cooperative Elevator Company, Buffalo Lake, Minnesota, a local cooperative association of farmers and ranchers. Ben Griffith 47 1998 7 General Manager--Central Cooperatives, Inc., Pleasant Hill, Missouri, a local cooperative association of farmers and ranchers. Gail D. Hall 54 1997 8 General Manager--Lexington Cooperative Oil Company, Lexington, Nebraska, a local cooperative association of farmers and ranchers. Jerome Heuertz 55 1997 2 General Manager--Farm Service Cooperative, Council Bluffs, Iowa, a local cooperative association of farmers and ranchers. Barry Jensen 51 1996 6 Producer--White River, South Dakota. Mr. Jensen currently serves as a Director, and was President from May 1989 to May 1993, of Farmers Co-op Oil Association, Winner, South Dakota, a local cooperative association of farmers and ranchers. Ron Jurgens 58 1998 1 General Manager-Agri Co-op in Holdrege, Nebraska, a local cooperative association of farmers and ranchers. Greg Pfenning 47 1997 4 Producer--Hobart, Oklahoma. Director of Hobart & Roosevelt Cooperative, a local cooperative association of farmers and ranchers. Vonn Richardson 63 1996 9 Producer--Plains, Kansas. President of The Plains Equity Exchange and Cooperative Union, Plains, Kansas, a local cooperative association of farmers and ranchers. Monte Romohr 43 1996 6 Producer--Gresham, Nebraska. From March 1988 to March 1991, Mr. Romohr served as President of Farmers Co-op Business Association, Shelby, Nebraska, a local cooperative association of farmers and ranchers. Joe Royster 44 1996 3 General Manager--Dacoma Farmers Cooperative, Inc., Dacoma, Oklahoma, a local cooperative association of farmers and ranchers. Raymond J. Schmitz 65 1996 9 Producer--Baileyville, Kansas. Frank Wilson 50 1998 1 General Manager-Elkhart Farmers Co-op Association, Elkhart, Texas, a local cooperative association of farmers and ranchers. Robert Zinkula 66 1996 6 Producer--Mount Vernon, Iowa. Secretary and Treasurer of Linn Cooperative Oil Company, Marion, Iowa, a local cooperative association of farmers and ranchers.
Directors are elected for a term of three years by the shareholders of Farmland at its annual meeting. The expiration dates for such three-year terms are sequenced so that about one-third of the Board of Directors is elected each year. H. D. Cleberg is serving as director-at-large; the remaining 21 directors were elected from nine geographically defined districts. The executive committee consists of Ronald Amundson, Ben Griffith, Otis Molz, Monte Romohr, Albert Shivley and H. D. Cleberg. With the exception of H. D. Cleberg, President and Chief Executive Officer, members of the executive committee serve as chairman of standing committees of the Board of Directors as follows: Ronald Amundson, corporate responsibility committee; Ben Griffith, audit committee; Otis Molz, compensation committee; Monte Romohr, finance committee; and Albert Shivley, nominating committee. The executive officers of Farmland are:
Age as of August 31, Name 1996 Principal Occupation and Other Positions J. F. Berardi 53 Executive Vice President and Chief Operating Officer, Grain Businesses - Mr. Berardi joined Farmland March 1992, serving as Executive Vice President and Chief Financial Officer. He was appointed to his present position in July 1996. He served as Executive Vice President and Treasurer of Harcourt Brace Jovanovich, Inc., a diversified Fortune 200 company, and was a member of its Board of Directors from 1988 until 1990. T. M. Campbell 46 Executive Vice President and Chief Financial Officer - Mr. Campbell jointed Farmland August 1992, serving as Vice President and Treasurer. He was appointed to his present position in August 1996. He served as Vice President and Assistant Treasurer of Harcourt Brace Jovanovich, Inc., a diversified Fortune 200 company, from 1986 to 1992. H. D. Cleberg 57 President and Chief Executive Officer - Mr. Cleberg has been with Farmland since 1968. He was appointed to his present position effective April 1991. From September 1990 to March 1991 he served as Senior Vice President and Chief Operating Officer. From April 1989 to August 1990 he served as Executive Vice President, Operations. Prior to April 1989 he held several executive management positions with Farmland. S. P. Dees 53 Executive Vice President, Business Development and International Marketing - Mr. Dees joined Farmland in 1984, serving as Vice President and General Counsel, Law and Administration. He was appointed to his present position in September 1995. From September 1993 to September 1995 he served as Executive Vice President, Farmland and Director General of Farmland Industrias, S.A. de C.V. From October 1990 to September 1993 he served as Executive Vice President, Administrative Group and General Counsel. G. E. Evans 52 Executive Vice President and Chief Operating Officer, Livestock and Meat Businesses - Mr. Evans has been with Farmland since 1971. He was appointed to his present position in September 1995. From January 1992 to September 1995 he served as Senior Vice President, Agricultural Production Marketing/Processing. From April 1991 to January 1992 he served as Senior Vice President, Agricultural Inputs. He served as Executive Vice President, Agricultural Marketing from October 1990 to March 1991. R. W. Honse 53 Executive Vice President and Chief Operating Officer, Ag Input Businesses - Mr. Honse has been with Farmland since 1983. He was appointed to his present position in September 1995. From January 1992 to September 1995, he served as Executive Vice President, Agricultural Inputs Operations. From October 1990 to January 1992 he served as Executive Vice President, Agricultural Operations. B. L. Sanders 55 Senior Vice President and Corporate Secretary - Dr. Sanders has been with Farmland since 1968. He was appointed to his present position in September 1991. From April 1990 to September 1991 he served as Vice President, Strategic Planning and Development. From October 1987 to March 1990 he served as Vice President, Planning.
EXECUTIVE COMPENSATION The following table sets forth the annual compensation awarded to, earned by, or paid to the Chief Executive Officer and the Company's next four most highly compensated executive officers for services rendered to the Company in all capacities during 1994, 1995 and 1996.
Long-Term Annual Compensation Compensation Year Employee Other Annual LTIP Name and Principal Position Ending Salary Variable Compensation Payouts August 31 Compensation Plan H. D. Cleberg, 1994 $ 439,728 $ 338,481 $ -0- $ -0- President and 1995 $ 456,218 $ 346,944 $ -0- $ -0- Chief Executive Officer 1996 $ 497,713 $ 356,485 $ -0- $ 1,296,482 G. E. Evans, 1994 $ 278,304 $ 217,761 $ -0- $ -0- Executive Vice President and 1995 $ 283,988 $ 217,761 $ -0- $ -0- Chief Operating Officer 1996 $ 298,848 $ 216,121 $ -0- $ 648,241 Livestock and Meat Businesses R. W. Honse, 1994 $ 251,532 $ 205,206 $ -0- $ -0- Executive Vice President and 1995 $ 280,248 $ 210,337 $ -0- $ -0- Chief Operating Officer 1996 $ 303,364 $ 216,121 $ -0- $ 648,241 Ag Input Businesses J. F. Berardi, 1994 $ 216,252 $ 146,576 $ -0- $ -0- Executive Vice President and 1995 $ 226,914 $ 150,241 $ -0- $ -0- Chief Operating Officer, 1996 $ 244,770 $ 154,372 $ -0- $ 549,204 Grain Businesses S. P. Dees, 1994 $ 205,066 $ 119,093 $ 124,138(a) $ -0- Executive Vice President 1995 $ 211,000 $ 122,070 $ 127,878(a) $ -0- Business Development and 1996 $ 236,765 $ 125,427 $ 5,357(a) $ 459,171 International Marketing (a)Mr. Dees received a differential remuneration and reimbursements in 1994, 1995 and 1996 for taxes in connection with foreign assignments. Mr. Dees' foreign assignment ended in September 1995.
An Annual Employee Variable Compensation Plan, a Management Long-Term Incentive Plan and an Executive Deferred Compensation Plan have been established by the Company to meet the competitive salary programs of other companies, and to provide a method of compensation which is based on the Company's performance. Under the Company's Annual Employee Variable Compensation Plan, all regular salaried employees' total compensation is based on a combination of base and variable pay. The variable compensation payment is dependent upon the employee's position, the performance of the Company for the fiscal year or other performance criteria of the individual's operating unit. Variable compensation is awarded only in years that the Company achieves a threshold performance level as approved each year by the Board of Directors. The Company intends for its total cash compensation (base plus variable) to be competitive, recognizing that in the event the Company fails to achieve a predetermined threshold level of performance, the base pay alone will place the employees well under market rates. This system of variable compensation allows the Company to keep its fixed costs (base salaries) lower and only increase payroll costs consistent with the Company's ability to pay. Distributions under this plan are made annually after the close of each fiscal year. During 1996, under the Company's Management Long-Term Incentive Plan for 1996 through 1998, certain management employees became eligible for future payments (contingent on satisfying the terms and conditions of the Plan as set forth below herein) including those executives set forth below.
(A) (B) (C) Estimated Future Payouts Under Non-Stock Price Based Plans Number of Shares, Performance or Other (D) (E) (F) Name Units or Other Period Until Maturation Threshold Target (2) Maximum (2) Rights (1) or Payout (Amounts in Thousands) H. D. Cleberg 1996 - 1998 $ 392 G. E. Evans 1996 - 1998 $ 196 R. W. Honse 1996 - 1998 $ 196 J. F. Berardi 1996 - 1998 $ 153 S. P. Dees 1996 - 1998 $ 139 (1) Rights in the incentive pool are expressed as a minimum percentage of the total pool. See discussion contained below herein. (2) Not applicable as payouts are based on a percentage of aggregate income; the plan does not specify a target or maximum payment. See discussion contained below herein.
Under the Management Long-Term Incentive Plan, certain of the Company's management employees are paid cash incentive amounts determined by a formula which takes into account the level of management and the aggregate income of the Company over a three year period. The Management Long-Term Incentive Plan provides for three year performance and reward cycles and, in general, participants must be active employees of the Company at the end of the cycle in order to receive payment of the award with respect to such cycle. Periods currently covered by the Management Long-Term Incentive Plan are: 1995 through 1997 ("1997 Plan"); 1996 through 1998 ("1998 Plan") and 1997 through 1999 ("1999 Plan"). The income threshold ("Threshold") for the three year period of the 1997 Plan, the 1998 Plan and 1999 Plan is $235,043,000, $393,481,000 and $541,768,000, respectively. For each plan, if the aggregate income is less than the Threshold or if the sum of the cash returned to members during the 1997 Plan, the 1998 Plan and the 1999 Plan, as patronage refunds, redemptions under the base capital plan, estate settlement plans and special allocated equity redemption plans is less than $61,938,000, $90,000,000 and $147,285,000, respectively, subject to the following sentence, no payment will occur with respect to such plan. The Board of Directors may, in its sole discretion, amend or discontinue the Management Long-Term Incentive Plan, adjust or cancel any awards otherwise payable thereunder should the Company incur a loss in the final year of any performance cycle or impact the goals and rewards of the plan by approving for inclusion or exclusion in the calculation of performance results the financial results of extraordinary events occurring during the cycle. Subject to the preceding sentence, if aggregate income equals or exceeds the Threshold and the cash returned to members equals or exceeds the specified amounts, then .83% of aggregate income for the 1997 Plan, the 1998 Plan and the 1999 Plan is allocated to an incentive pool for each such plan from which awards to management will be paid. Absent a significant change in their status, in which event such percentages may be adjusted, of the amount, if any, allocated to the incentive pool Messrs. Cleberg, Evans, Honse, Berardi and Dees will receive at least : 12%, 6% 6%, 5.6% and 4.25%, respectively, for the 1997 Plan; 12%, 6%, 6%, 6% and 4.25%, respectively, for the 1998 Plan; and 11.2%, 5.6%, 5.6%, 5.6% and 4.0%, respectively, for the 1999 Plan. The Company's Executive Deferred Compensation Plan permits executive employees to defer part of their salary and/or part or all of their bonus compensation. The amount to be deferred and the period for deferral is specified by an election made semi-annually. Payments of deferred amounts shall begin at the earlier of the end of the specified deferral period, retirement, disability or death. The employee's deferred account balance is credited annually with interest at the highest rate of interest paid by the Company on any subordinated debt certificate sold during the year. Payment of an employee's account balance shall, at the employee's election, be a lump sum or in ten annual installments. Amounts deferred pursuant to the plan for the accounts of the named individuals during the years 1994, 1995 and 1996 are included in the cash compensation table. The Company established the Farmland Industries, Inc. Employee Retirement Plan (the "Plan") in 1986 for all employees whose customary employment is at the rate of at least 1,000 hours per year. Participation in the Plan is optional prior to age 34, but mandatory thereafter. Approximately 6,890 active and 7,640 inactive employees were participants in the Plan on August 31, 1996. The Plan is funded by employer and employee contributions to provide lifetime retirement income at normal retirement age 65, or a reduced income beginning as early as age 55. The Plan also contains provisions for death and disability benefits. The Plan has been determined qualified under the Internal Revenue Code. The Plan is administered by a committee appointed by the Board of Directors, and all funds of the Plan are held by a bank trustee in accordance with the terms of the trust agreement. It is the present intent to continue this plan indefinitely. The Company's funding policy is to make the maximum annual contributions to the Plan's trust fund that can be deducted for federal income tax purposes. Company contributions made to the Plan for the years ended August 31, 1994, 1995 and 1996 were $2.9 million, $5.3 million and $12.2 million, respectively. Payments to participants in the Plan are based upon length of participation and compensation reported to the Plan for the four highest of the last ten years of employment. Compensation for this purpose includes base salary and compensation earned under the Company's Annual Employee Variable Compensation Plan discussed above. However, at the present time, the maximum compensation (per participant) which may be covered by a qualified pension plan is limited to $150,000 ($160,000 for the plan year beginning in 1997) annually and the maximum retirement benefit which may be paid by such plan is limited to $120,000 ($125,000 for the limitation year beginning in 1997) annually by the Internal Revenue Code ("IRC"). The Company established the Farmland Industries, Inc. Supplemental Executive Retirement Plan ("SERP") effective January 1, 1994. The SERP is intended to supplement the retirement income of executive participants in the Farmland Industries, Inc. Employee Retirement Plan whose retirement benefit would otherwise be reduced because of the limitation of the IRC on the amount of annual salary which can be included in the computation of retirement income (currently $150,000) or the amount of annual retirement benefit which may be paid by a qualified retirement plan (currently $120,000). The Board of Directors has appointed an Administrative Committee to administer the SERP. The Company purchased cash value life insurance polices on the lives of certain plan participants to recover its cost of providing benefits under the SERP. The Company owns these insurance policies and has the sole right to name policy beneficiaries. The total SERP premiums charged to operations for the years ended August 31, 1994, 1995 and 1996 were $0.4 million, $0.6 million and $-0-, respectively. The Company's obligation to pay supplemental retirement benefits under the SERP is limited to the aggregate cash value of the life insurance policies designated by the Administrative Committee as policies of the SERP. If the benefit payments under this Plan for a year would, when added to all prior benefit payments made from this Plan, exceed (a) the total cash value, on August 31 of the preceding year, of the policies designated by the Administrative Committee, increased by (b) any previous reductions in cash value caused by withdrawals from the policies by the Corporation, each Participant's payment shall be reduced. The following table sets forth, for compensation levels up to $150,000, the estimated annual benefits payable at age 62 for members of the Retirement Plan, which benefits are not reduced by virtue of Social Security payments. The following table also sets forth, for compensation levels exceeding $150,000, the combined estimated annual benefits payable under the Retirement Plan and SERP for each of the first 10 years following retirement (no SERP payouts are to be made after 10 years) assuming: retirement occurs on or after age 62; the portion of the employee's benefit lost (due to the IRC limitations), which would have been provided by the employer's contribution to the Retirement Plan, is 85%; the employee lives for 10 years after retirement; and, the aggregate payments under the SERP are less than the cash value of life insurance policies designated (see above) as SERP policies.
Final Average Years of Service Wage 15 20 25 30 $ 100,000 $ 26,250 $ 35,000 $ 43,750 $ 52,500 125,000 32,812 43,750 54,687 65,625 150,000 39,375 52,500 65,625 78,750 200,000 46,813 62,417 78,021 93,625 250,000 54,250 72,333 90,417 108,500 300,000 61,688 82,250 102,813 123,375 350,000 69,125 92,167 115,209 138,250 400,000 76,563 102,083 127,604 153,125 450,000 84,000 112,000 140,000 168,000 500,000 91,437 121,917 152,396 182,875 600,000 106,313 141,750 177,188 212,626 700,000 121,188 161,584 201,980 242,376 800,000 136,063 181,417 226,771 272,126 900,000 150,938 201,251 251,564 301,876 1,000,000 165,813 221,083 276,355 331,626
The following table sets forth the credited years of service for certain executive officers of the Company at August 31, 1996. Name Years of Creditable Service H. D. Cleberg 31 G. E. Evans 22 R. W. Honse 22 J. F. Berardi 4 S. P. Dees 12 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The following persons, none of whom, except as indicated below, is either currently or formerly an officer or employee of the Company or any of its subsidiaries, served as members of the Company's compensation committee during 1996. Messrs. Lyman Adams, Jody Bezner, Warren Gerdes, Gail Hall and Otis Molz. Mr. Molz was Chairman of the Board of the Company from December 1991 to December 1992. No executive officer of the Company (i) served as a member of a compensation committee (or other board committee performing equivalent functions or, in the absence of such committee, the entire board of directors) of another entity, one of whose executive officers served on the compensation committee of the Company, (ii) served as a director of another entity, one of whose executive officers served on the compensation committee of the Company, or (iii) served as a member of a compensation committee (or other board committee performing equivalent functions or, in the absence of such committee, the entire board of directors) of another entity, one of whose executive officers served as a director of the Company. COMPENSATION OF DIRECTORS Directors' compensation consists of payment of three hundred dollars ($300.00) per day of attendance at the Board of Directors or committee meetings, plus reimbursement of necessary expenses incurred in connection with their official duties. CERTAIN TRANSACTIONS The Company transacts business in the ordinary course with its directors and with its local cooperative members with which the directors are associated on terms no more favorable than those available to its other local cooperative members. INDEX TO FARMLAND CONSOLIDATED FINANCIAL STATEMENTS Independent Auditors' Report ...... Consolidated Balance Sheets, August 31, 1995 and 1996 .............................. Consolidated Statements of Operations for each of the years in the three-year period ended August 31, 1996 .......................... Consolidated Statements of Cash Flows for each of the years in the three-year period ended August 31, 1996 Consolidated Statements of Capital Shares and Equities for each of the years in the three-year period ended August 31, 1996 ...... Notes to Consolidated Financial Statements INDEPENDENT AUDITORS' REPORT The Board of Directors Farmland Industries, Inc.: We have audited the accompanying consolidated balance sheets of Farmland Industries, Inc. and subsidiaries as of August 31, 1995 and 1996, and the related consolidated statements of operations, cash flows and capital shares and equities for each of the years in the three-year period ended August 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Farmland Industries, Inc. and subsidiaries as of August 31, 1995 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended August 31, 1996, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Kansas City, Missouri October 18, 1996 FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
August 31 1995 1996 (Amounts in Thousands) Current Assets: Accounts receivable - trade........................................ $ 446,232 $ 624,002 Inventories (Note 3)............................................... 772,528 736,620 Other current assets............................................... 60,883 101,748 Total Current Assets.......................................... $ 1,279,643 $ 1,462,370 Investments and Long-Term Receivables (Note 4)....................... $ 185,687 $ 241,124 Property, Plant and Equipment (Notes 5 and 6): Property, plant and equipment, at cost............................. $ 1,334,849 $ 1,506,460 Less accumulated depreciation and amortization..................... 742,704 789,236 Net Property, Plant and Equipment.................................. $ 592,145 $ 717,224 Other Assets......................................................... $ 128,468 $ 147,728 Total Assets......................................................... $ 2,185,943 $ 2,568,446 FN> See accompanying Notes to Consolidated Financial Statements.
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS LIABILITIES AND EQUITIES
August 31 1995 1996 (Amounts in Thousands) Current Liabilities: Demand loan certificates............................................... $ 13,524 $ 40,099 Short-term notes payable (Note 6)...................................... 346,133 315,428 Current maturities of long-term debt (Note 6).......................... 42,394 41,080 Accounts payable - trade............................................... 245,905 392,436 Accrued payroll........................................................ 50,337 48,893 Other current liabilities.............................................. 261,837 302,384 Total Current Liabilities......................................... $ 960,130 $ 1,140,320 Long-Term Liabilities (Note 6): Long-term borrowings (excluding current maturities).................... $ 469,718 $ 616,258 Other long-term liabilities............................................ 36,315 35,983 Total Long-Term Liabilities....................................... $ 506,033 $ 652,241 Deferred Income Taxes (Note 7)........................................... $ 12,501 $ 6,709 Minority Owners' Equity in Subsidiaries (Note 8)......................... $ 19,992 $ 13,845 Capital Shares and Equities (Note 9): Preferred shares, $25 par value--Authorized 8,000,000 shares, 50,565 shares issued and outstanding (98,113 shares in 1995).............................................. $ 2,453 $ 1,264 Common shares, $25 par value--Authorized 50,000,000 shares, 16,580,112 shares issued and outstanding (15,416,370 shares in 1995)......................................... 385,409 414,503 Associate member common shares (nonvoting), $25 par value --Authorized 2,000,000 shares, 623,058 shares issued and outstanding (445,323 shares in 1995)...................... 11,133 15,576 Earned surplus and other equities...................................... 288,292 323,988 Total Capital Shares and Equities............................ $ 687,287 $ 755,331 Contingent Liabilities and Commitments (Notes 6, 7 and 10) Total Liabilities and Equities............................................. $ 2,185,943 $ 2,568,446 See accompanying Notes to Consolidated Financial Statements.
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended August 31 1994 1995 1996 (Amounts in Thousands) Sales........................................................ $ 6,677,933 $ 7,256,869 $ 9,788,587 Cost of sales................................................ 6,284,084 6,699,178 9,272,002 Gross income................................................. $ 393,849 $ 557,691 $ 516,585 Selling, general and administrative expenses................. $ 305,279 $ 344,364 $ 368,954 Other income (deductions): Interest expense.......................................... $ (51,485) $ (53,862) $ (62,445) Interest income........................................... 6,170 8,334 5,021 Other, net (Note 16)...................................... 20,111 11,600 24,257 Total other income (deductions).............................. $ (25,204) $ (33,928) $ (33,167) Income before income taxes and equity in net income of investees and minority owners' interest in net (income) loss of subsidiaries............ $ 63,366 $ 179,399 $ 114,464 Income tax expense (Note 7)................................. 4,890 29,628 21,755 Income before equity in net income of investees and minority owners' interest in net (income) loss of subsidiaries............................ $ 58,476 $ 149,771 $ 92,709 Equity in net income of investees (Note 4).................................................. 10,878 22,785 41,092 Minority owners' interest in net (income) loss of subsidiaries...................................... 4,522 (9,757) (7,383) Net income .................................................. $ 73,876 $ 162,799 $ 126,418 Distribution of net income (Note 9): Patronage refunds: Farm supply patrons....................................... $ 59,685 $ 74,557 $ 83,739 Pork marketing patrons.................................... 10,927 16,087 6,998 Beef marketing patrons.................................... -0- 2,488 2,753 Grain marketing patrons................................... -0- 1,285 -0- Livestock production...................................... -0- -0- 5 $ 70,612 $ 94,417 $ 93,495 Earned surplus and other equities (Note 9)................ 3,264 68,382 32,923 $ 73,876 $ 162,799 $ 126,418 See accompanying Notes to Consolidated Financial Statements.
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended August 31 1994 1995 1996 (Amounts in Thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income..................................................... $ 73,876 $ 162,799 $ 126,418 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................................ 62,960 69,138 77,741 Gain on disposition of investments........................... -0- -0- (11,300) (Gain) loss on disposition of fixed assets................... (1,794) 1,882 (967) Patronage refunds received in equities....................... (2,171) (2,025) (2,244) Proceeds from redemption of patronage equities............... 573 3,776 5,112 Equity in net income of investees............................ (10,878) (22,785) (41,092) Deferred income tax (benefit) expense........................ (5,034) 6,161 11,034 Minority owners' equity in net income (loss) of subsidiaries.............................. (4,522) 9,757 7,383 Other........................................................ 5,292 412 (2,335) Changes in assets and liabilities (exclusive of assets and liabilities of businesses acquired): Accounts receivable........................................ (12,079) (70,413) (175,991) Inventories................................................ (4,692) (186,570) 47,220 Other assets............................................... (34,873) 38,889 (40,774) Accounts payable........................................... 17,884 782 140,721 Other liabilities.......................................... 32,617 35,684 41,194 Net cash provided by operating activities...................... $ 117,159 $ 47,487 $ 182,120 CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of businesses...................................... $ (35,790) $ -0- $ (39,536) Proceeds from sale of investments and collection of notes receivable........................... 34,577 39,780 31,003 Acquisition of investments and notes receivable................ (22,117) (26,789) (51,923) Capital expenditures........................................... (69,776) (124,722) (168,272) Acquisition of other long-term assets.......................... (11,117) (2,141) (23,768) Proceeds from sale of fixed assets............................. 14,785 3,828 5,996 Distribution from joint venture............................... -0- 513 22,239 Proceeds from sale of assets to joint venture partner....................................... 2,310 -0- -0- Other.......................................................... 5,547 -0- (6,803) Net cash used in investing activities.......................... $ (81,581) $ (109,531) $ (231,064) See accompanying Notes to Consolidated Financial Statements.
Year Ended August 31 1994 1995 1996 (Amounts in Thousands) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in demand loan $ (6,702) $ (9,634) $ 26,575 certificates................................ Proceeds from bank loans and notes payable.. 888,088 522,916 597,959 Payments of bank loans and notes payable....(924,731) (513,672) (526,814) Proceeds from issuance of subordinated debt 57,636 46,715 67,965 certificates................................ Payments for redemption of subordinated debt certificates......................... (33,034) (26,866) (43,803) Net increase (decrease) in checks and drafts outstanding.................... -0- 37,088 (6,144) Payments for redemption of equities......... (3,244) (12,431) (27,470) Payments of patronage refunds and dividends. -0- (26,648) (32,781) Other, increase (decrease).................. 2,120 492 (6,543) Net cash provided by (used in) financing $(19,867) $ 17,960 $ 48,944 activities.................................. Net increase (decrease) in cash and cash $ 15,711 $(44,084) $ -0- equivalents................................. Cash and cash equivalents at beginning of 28,373 44,084 -0- year........................................ Cash and cash equivalents at end of year....$ 44,084 $ -0- $ -0- SUPPLEMENTAL SCHEDULE OF CASH PAID FOR INTEREST AND INCOME TAXES: Interest....................................$ 43,419 $ 50,551 $ 58,125 Income taxes (net of refunds)...............$ 9,746 $ 30,422 $ 27,943 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Equities and minority owners' interest called for redemption............................$ 12,935 $ 27,738 $ 25,214 Transfer of assets in exchange for investment in joint ventures............................$ 309 $ 2,061 $ -0- Appropriation of current year's net income as patronage refunds......................$ 70,612 $ 94,417 $ 93,495 Acquisition of businesses: Fair value of net assets acquired.........$131,847 $ -0- $ 52,401 Goodwill.................................. 1,094 -0- 3,181 Minority owners' investment............... (843) -0- -0- Cash Paid................................. (35,790) -0- (39,536) Liabilities assumed.........................$ 96,308 $ -0- $ 16,046
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CAPITAL SHARES AND EQUITIES
Years Ended August 31, 1994, 1995 and 1996 Associate Earned Total Member Surplus and Capital Preferred Common Common Other Shares and Shares Shares Shares Equities Equities (Amounts in Thousands) BALANCE AT AUGUST 31, 1993......................... $ 3,708 $ 379,996 $ 8,196 $ 169,807 $ 561,707 Issue, redemption and cancellation of equities..... -0- (355) 17 (3,397) (3,735) Appropriation of current year's net income......... -0- -0- -0- 73,876 73,876 Patronage refund payable in cash transferred to current liabilities........................... -0- -0- -0- (26,552) (26,552) Base capital redemptions transferred to current liabilities........................... -0- (8,628) (112) -0- (8,740) Other equity redemptions transferred to current liabilities........................... (6) (9) -0- (3,440) (3,455) Transferred to liabilities......................... -0- -0- -0- (8,084) (8,084) Dividends on preferred stock....................... -0- -0- -0- (4) (4) Exchange of common stock, associate member common stock and other equities.................. -0- (7,442) 1,167 6,275 -0- BALANCE AT AUGUST 31, 1994......................... $ 3,702 $ 363,562 $ 9,268 $ 208,481 $ 585,013 Issue, redemption and cancellation of equities..... -0- (51) 332 (990) (709) Appropriation of current year's net income......... -0- -0- -0- 162,799 162,799 Patronage refund payable in cash transferred to current liabilities........................... -0- -0- -0- (33,061) (33,061) Base capital redemptions transferred to current liabilities........................... -0- (13,939) (220) -0- (14,159) Other equity redemptions transferred to current liabilities........................... (1,249) (30) -0- (11,477) (12,756) Prior year patronage refund allocation............. -0- 35,940 1,508 (37,284) 164 Dividends on preferred stock....................... -0- -0- -0- (4) (4) Exchange of common stock, associate member common stock and other equities.................. -0- (73) 245 (172) -0- BALANCE AT AUGUST 31, 1995......................... $ 2,453 $ 385,409 $11,133 $ 288,292 $ 687,287 Issue, redemption and cancellation of equities..... 1 (166) (6) 29 (142) Appropriation of current year's net income......... -0- -0- -0- 126,418 126,418 Patronage refund payable in cash transferred to current liabilities........................... -0- -0- -0- (32,719) (32,719) Base capital redemptions transferred to current liabilities........................... (1,190) (13,922) (103) -0- (14,025) Other equity redemptions transferred to current liabilities........................... -0- (6,578) (287) (3,272) (11,327) Prior year patronage refund allocation............. -0- 49,644 6,493 (56,294) (157) Dividends on preferred stock....................... -0- -0- -0- (4) (4) Exchange of common stock, associate member common stock and other equities.................. -0- 116 (1,654) 1,538 -0- BALANCE AT AUGUST 31, 1996 $ 1,264 $ 414,503 $15,576 $ 323,988 $ 755,331 See accompanying Notes to Consolidated Financial Statements.
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Farmland Industries, Inc., a Kansas corporation, is organized and operated as a cooperative and its mission is to be a producer-driven, customer-focused and profitable agricultural supply to consumer foods cooperative system. General -- The consolidated financial statements include the accounts of Farmland Industries, Inc. and all of its majority-owned subsidiaries ("Farmland" or the "Company", unless the context requires otherwise). All significant intercompany accounts and transactions have been eliminated. When necessary, the financial statements include amounts based on informed estimates and judgments of management. The Company's fiscal year ends August 31. Accordingly, all references to "year" or "years" are to fiscal years ended August 31. Cash and Cash Equivalents -- Investments with maturities of less than three months are included in "Cash and cash equivalents." Investments -- Investments in companies over which the Company exercises significant influence (20% to 50% voting control) are accounted for by the equity method. Other investments are stated at cost, less any provision for impairment (other than temporary impairment). Accounts Receivable -- The Company uses the allowance method to account for doubtful accounts and notes. Pursuant to the Company's right to offset, as contained in its bylaws, uncollectible accounts and notes receivable from members are written off against the common shares held by members before such uncollectible accounts are charged to operations. Inventories -- Grain inventories are valued at market adjusted for net unrealized gains or losses on open commodity contracts. Crude oil, refined petroleum products, cattle and beef inventories are valued at the lower of last-in, first-out ("LIFO") cost or market. Other inventories are valued at the lower of first-in, first-out ("FIFO") cost or market. Supplies are valued at cost. Property, Plant and Equipment -- Assets, including assets under capital leases, are stated at cost. Depreciation and amortization are computed principally using the straight-line method over the estimated useful lives of the assets and the remaining terms of the capital leases, respectively. Goodwill -- The excess of cost over the fair market value of assets of businesses purchased is amortized on a straight-line basis over a period of 15 to 25 years. The Company assesses the recoverability of goodwill by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows. Goodwill is reflected in the accompanying Consolidated Balance Sheets net of accumulated amortization of $6.9 million and $10.3 million, respectively at August 31, 1995 and 1996. Sales -- The Company's policy is to recognize sales at the time product is shipped. Net margins on international grain merchandised, rather than the gross value of such products merchandised, are included in net sales. The gross value of international grain merchandised in 1994, 1995 and 1996 was $590.2 million, $1.6 billion and $2.6 billion, respectively. Environmental Expenditures -- Liabilities related to remediation of contaminated properties are recognized when the related costs are considered probable and can be reasonably estimated. Estimates of these costs are based upon currently available facts, existing technology, undiscounted site specific costs, and currently enacted laws and regulations. In reporting environmental liabilities, no offset is made for potential recoveries. All liabilities are monitored and adjusted as new facts or changes in law or technology occur. Environmental expenditures are capitalized when such costs provide future economic benefits. Federal Income Taxes -- Farmland is subject to income taxes on all income not distributed to patrons as patronage refunds. Farmland files consolidated federal and state income tax returns. Reclassification -- Certain prior-year amounts have been reclassified to conform with the current year presentation. (2) ACQUISITIONS In December 1993, the Company acquired all the common stock of seven international grain trading companies (collectively referred to as "Tradigrain"). The purchase price for Tradigrain ($31.4 million) was paid in cash. The acquisition of Tradigrain has been accounted for by the purchase method of accounting and, accordingly, the operating results have been included in the Company's Consolidated Financial Statements from the date of acquisition. The excess of the cash paid over the fair value of the net assets acquired has been recorded as goodwill. The pro forma effect of the acquisition of Tradigrain on the Consolidated Financial Statements is not significant. (3) INVENTORIES Major components of inventories are as follows: August 31 1995 1996 (Amounts in Thousands) Finished and in-process products..... $ 682,801 $ 620,794 Materials............................ 39,399 58,526 Supplies............................. 50,328 57,300 $ 772,528 $ 736,620 The carrying values of crude oil and refined petroleum inventories stated under the lower of LIFO cost or market at August 31, 1995 and 1996 were $82.6 million and $111.8 million, respectively. Replacement cost approximated the LIFO carrying values of inventories at both August 31, 1995 and 1996. The carrying values of beef inventories stated under the lower of LIFO or market at August 31, 1995 and 1996 were $30.2 million and $32.3 million, respectively. At both August 31, 1995 and 1994, market value was lower than LIFO and, accordingly, such inventories were valued at market. (4) INVESTMENTS AND LONG-TERM RECEIVABLES Investments and long-term receivables are as follows: August 31 1995 1996 (Amounts in Thousands) Investments accounted for by the equity method $ 88,786 $ 147,028 Investments in and advances to other cooperatives 47,328 44,944 National Bank for Cooperatives ............ 27,000 24,913 Other investments and long-term receivables 18,355 22,796 Notes receivable from ventures, 20% to 50% owned 4,218 1,443 $185,687 $241,124 National Bank for Cooperatives ("CoBank") requires its borrowers to maintain an investment in stock of the bank. The amount of investment required is based on the average amount borrowed from CoBank during the previous five years. At August 31, 1995 and 1996, Farmland's investment in CoBank approximated its requirement. CoBank maintains a statutory lien on the investment held by the Company in CoBank. Summarized financial information of investees accounted for by the equity method is as follows: August 31 1995 1996 (Amounts in Thousands) Current Assets............................. $243,259 $228,883 Long-Term Assets........................... 238,297 319,166 Total Assets............................ $481,556 $548,049 Current Liabilities........................ $ 205,713 $191,632 Long-Term Liabilities...................... 94,029 57,208 Total Liabilities....................... $299,742 $248,840 Net Assets................................. $181,814 $299,209 Year Ended August 31 1994 1995 1996 (Amounts in Thousands) Net sales..................... $ 803,516 $1,212,592 $1,154,195 Net income.................... $ 24,285 $ 46,803 $ 83,075 Farmland's equity in net income.....................$ 10,878 $ 22,785 $ 41,092 The Company's investments accounted for by the equity method consist principally of 50% equity interests in three manufacturers of crop production products, Farmland Hydro, L.P., SF Phosphates Limited Company and Farmland MissChem, Limited (expected to commence production in 1998) and a 50% equity interest in a distributor of crop protection products, WILFARM, LLC. Effective September 1, 1994, the Company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The cumulative effect of this change in the use of fair value accounting and reporting for certain investments in debt and equity securities was immaterial. (5) PROPERTY, PLANT AND EQUIPMENT A summary of cost for property, plant and equipment is as follows: August 31 1995 1996 (Amounts in Thousands) Land and improvements...... $ 42,355 $ 50,800 Buildings.................. 245,460 278,097 Machinery and equipment.... 765,383 880,152 Automotive equipment....... 67,124 67,754 Furniture and fixtures..... 54,888 61,426 Capital leases............. 49,241 50,562 Leasehold improvements..... 21,763 24,539 Other...................... 7,124 8,837 Construction in progress... 81,511 84,293 $1,334,849 $1,506,460 During 1994, 1995 and 1996, the Company capitalized construction period interest of $0.4 million, $0.7 million and $1.6 million, respectively. (6) BANK LOANS, SUBORDINATED DEBT CERTIFICATES AND NOTES PAYABLE Bank loans, subordinated debt certificates and notes payable are as follows: August 31 1995 1996 (Amounts in Thousands) Subordinated capital investment certificates --6% to 9.5%, maturing 1997 through 2004 $ 225,132 $ 245,792 Subordinated monthly income certificates --6.25% to 10.5%, maturing 1997 through 2006 74,863 78,313 Syndicated Credit Facility --5.73% to 6.05%, maturing 2001....... 85,000 175,000 Other bank notes--7.2% to 10.75%, maturing 1997 through 2001............ 71,498 88,704 Industrial revenue bonds--6.75% to 9.25%, maturing 1997 through 2007............ 21,750 18,930 Promissory notes--7% to 8.5%, maturing 1997 through 2002............ 17,210 16,917 Other--5% to 14.92%..................... 16,659 33,682 512,112 657,338 Less current maturities................. 42,394 41,080 $ 469,718 $ 616,258 The Company has a $1.1 billion Credit Agreement ("the Agreement"). The Agreement provides short-term credit of up to $650.0 million to finance seasonal operations and inventory, and revolving term credit of up to $450 million. At August 31, 1996, the Company had $236.6 million of short-term borrowings under the Agreement, $175.0 million of revolving term borrowings and $69.5 million was being utilized to support letters of credit issued on behalf of the Company by participating banks. The Company pays commitment fees under the 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, the Company must comply with the Agreement's financial covenants regarding working capital, the ratio of certain debt to average cash flow and the ratio of equity to total capitalization, all as defined therein. The short-term provisions of the Credit Agreement are reviewed and/or renewed annually. The next review date is in May 1997. The revolving term provisions of this agreement expire in May 2001. The Company maintains other borrowing arrangements with banks and financial institutions. At August 31, 1996, $18.0 million was borrowed under such agreements. National Beef Packing Company, L.P. ("NBPC") maintains a $90.0 million borrowing agreement with a group of banks which provides financing support for its beef packing operations. Such borrowings are nonrecourse to Farmland or Farmland's other affiliates (except to the extent of $10 million). At August 31, 1996, $47.0 million was borrowed under this agreement and $0.6 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 has borrowing agreements with various international banks which provide financing and letters of credit to support current international grain trading transactions. At August 31, 1996, such short-term borrowings totaled $78.8 million. Obligations of Tradigrain under these loan agreements are nonrecourse to Farmland or Farmland's other affiliates. Subordinated debt certificates have been issued under several different indentures. Certain subordinated capital investment certificates may be redeemed prior to maturity at the option of the owner in accordance with the indenture. Subject to limitations in the Agreement, the Company has an option to redeem certain subordinated capital investment certificates in advance of scheduled maturities. Additionally, the Company may redeem subordinated capital investment certificates and subordinated monthly interest certificates upon death of the holder. Outstanding subordinated debt certificates are subordinated to senior indebtedness ($522.6 million at August 31, 1996) and additional financings (principally long-term operating leases). See Note 10. Under industrial revenue bonds and other agreements, property, plant and equipment with a carrying value of $20.5 million have been pledged. Borrowings from CoBank, totaling $94.3 million at August 31, 1996, are partially secured by liens on the equity investment held by the Company in CoBank. See Note 4. Bank loans, subordinated debt certificates and notes payable mature during the fiscal years ending August 31 in the following amounts: (Amounts in Thousands) 1997................. $ 41,080 1998................. 132,769 1999................. 22,016 2000................. 31,070 2001................. 226,551 2002 and after....... 203,852 $ 657,338 At August 31, 1995 and 1996, the Company had demand loan certificates and short-term bank debt outstanding of $365.3 million (weighted average interest rate of 6.4%) and $355.5 million (weighted average interest rate of 6.29%), respectively. (7) INCOME TAXES A. TERRA RESOURCES, INC. In July 1983, Farmland sold the stock of Terra Resources, Inc. ("Terra"), a wholly owned subsidiary engaged in oil and gas exploration and production operations, and exited its oil and gas exploration and production activities. The gain from the sale of Terra amounted to $237.2 million for tax reporting purposes. On March 24, 1993, the Internal Revenue Service ("IRS") issued a statutory notice to Farmland asserting deficiencies in federal income taxes (exclusive of statutory interest thereon) in the aggregate amount of $70.8 million. The asserted deficiencies relate primarily to the Company's tax treatment of the $237.2 million gain resulting from its sale, in July 1983, of the stock of Terra and the IRS's contention that Farmland incorrectly treated the Terra sale gain as income against which certain patronage-sourced operating losses could be offset. The statutory notice further asserts that Farmland incorrectly characterized for tax purposes gains aggregating approximately $14.6 million, and a loss of approximately $2.3 million, from dispositions of certain other assets. On June 11, 1993, Farmland filed a petition in the United States Tax Court contesting the asserted deficiencies in their entirety. The case was tried on June 13-15, 1995. The parties submitted post-trial briefs to the court in September 1995 and reply briefs were submitted to the court in November 1995. If the United States Tax Court decides in favor of the IRS on all unresolved issues raised in the statutory notice, Farmland would have additional federal and state income tax liabilities aggregating approximately $85.8 million plus accumulating statutory interest thereon (approximately $209.2 million, before tax benefits of the interest deduction, through August 31, 1996), or $295.0 million in the aggregate at August 31, 1996. In addition, such a decision would affect the computation of Farmland's taxable income for its 1989 tax year and, as a result, could increase Farmland's federal and state income taxes for that year by approximately $5.0 million plus accumulating statutory interest thereon (approximately $6.6 million), or $11.6 million in the aggregate at August 31, 1996. The asserted federal and state income tax liabilities and accumulated interest thereon would become immediately due and payable unless the Company appealed the decision and posted the requisite bond to stay assessment and collection. The liability resulting from an adverse decision by the United States Tax Court would be charged to current earnings and would have a material adverse effect on the Company. In the event of such an adverse determination of the Terra tax issue, certain financial covenants of the Company's Credit Agreement (the "Agreement"), dated May 15, 1996, become less restrictive. Had the United States Tax Court decided in favor of the IRS on all unresolved issues, and had all related additional federal and state income taxes and accumulated interest thereon been due and payable on August 31, 1996, Farmland's borrowing capacity under the Agreement was adequate at that time to finance the liability. However, Farmland's ability to finance such an adverse decision depends substantially on the financial effects of future operating events on its borrowing capacity under the Agreement. No provision has been made in the Consolidated Financial Statements for federal or state income taxes (or interest thereon) in respect of the IRS claims described above. The Company believes that it has meritorious positions with respect to all of these claims. In the opinion of Bryan Cave LLP, the Company's special tax counsel, it is more likely than not that the courts will ultimately conclude that the Company's treatment of the Terra sale gain was substantially, if not entirely, correct. Such counsel has further advised, however, that none of the issues involved in this dispute is free from doubt, and there can be no assurance that the courts will ultimately rule in favor of the Company on any of these issues. B. OTHER INCOME TAX MATTERS Income tax expense is comprised of the following: Year Ended August 31 1994 1995 1996 (Amounts in Thousands) Federal: Current............... $ 10,076 $ 18,533 $ 7,322 Deferred.............. (3,217) 4,255 9,430 $ 6,859 $ 22,788 $ 16,752 State: Current.............. $ 1,965 $ 3,356 $ 1,292 Deferred............. (755) 665 1,664 $ 1,210 $ 4,021 $ 2,956 Foreign: Current.............. $ (2,117) $ 1,578 $ 2,107 Deferred............. (1,062) 1,241 (60) $ (3,179) $ 2,819 $ 2,047 Total income tax expense $ 4,890 $ 29,628 $ 21,755 During the year ended August 31, 1994, a charge in lieu of taxes, resulting from initial recognition of acquired tax benefits that are allocated to reduce goodwill related to the acquired entity, decreased Farmland's deferred tax benefit by $3.0 million. Income (loss) before income tax expense from foreign sources amounted to ($14.3 million), $19.3 million and $13.5 million for 1994 , 1995 and 1996, respectively. Income tax expense attributable to income from continuing operations differs from the "expected" income tax expense using statutory rate of 35% as follows: Year Ended August 31 1994 1995 1996 (Amounts in Thousands) Computed "expected" income tax expense on income before income taxes ........ 35.0 % 35.0% 35.0 % Increase (reduction) in income tax expense attributable to: Patronage refunds............. (33.3) (18.3) (20.4) State income tax expense net of federal income tax effect .. 1.1 2.2 2.5 Other, net.................... 3.8 (2.4) 1.9 Income tax expense............ 6.6 % 16.5% 19.0 % The tax effect of temporary differences that give rise to significant portions of deferred tax liabilities and deferred tax assets at August 31, 1995 and 1996 are as follows: August 31 1995 1996 (Amounts in Thousands) Deferred tax liabilities: Property, plant and equipment, principally due to differences in depreciation............ $ 26,009 $40,182 Prepaid pension cost ....... 19,807 21,500 Other ...................... 15,065 2,080 Total deferred tax $ 60,881 $63,762 liabilities ................ Deferred tax assets: Safe harbor leases ......... $ 5,096 $ 4,699 Accrued expenses ........... 29,394 47,140 Accounts receivable, principally due to allowance for doubtful accounts.......... 2,300 1,971 Other ...................... 11,590 3,243 Total deferred tax assets .. $ 48,380 $57,053 Net deferred tax liability.... $ 12,501 $ 6,709 A valuation allowance for deferred tax assets was not necessary at August 31, 1995 or 1996. (8) MINORITY OWNERS' EQUITY IN SUBSIDIARIES A summary of the equity of subsidiaries owned by others is as follows: August 31 1995 1996 (Amounts in Thousands) National Beef Packing Company, L.P. and G.P. $12,473 $6,455 Farmland Foods, Inc. .................... 4,682 4,594 Other subsidiaries....................... 2,837 2,796 $19,992 $13,845 (9) PREFERRED STOCK, EARNED SURPLUS AND OTHER EQUITIES A summary of preferred stock is as follows: August 31 1995 1996 (Amounts in Thousands) Preferred shares, $25 par value - Authorized 8,000,000 shares: 6% - 608 shares issued and outstanding, 6% - 608 shares issued and outstanding, (608 shares in 1995)... $ 15 $ 15 5-1/2% - 2,412 shares issued and outstanding (2,436 shares in 1995).............. 61 60 Series F - 47,545 shares issued and outstanding (95,069 shares in 1995).............. 2,377 1,189 $ 2,453 $ 1,264 The 5-1/2% and 6% preferred stocks have preferential liquidation rights over the Series F nondividend bearing preferred stock. Dividends on the 5-1/2% and 6% preferred stock are cumulative if declared by the Farmland Board of Directors and only to the extent earned each year. Upon liquidation, holders of all preferred stock are entitled to the par value thereof and, with respect to the 5-1/2% and 6% preferred stock, any declared or unpaid earned dividends. A summary of earned surplus and other equities is as follows: August 31 1995 1996 (Amounts in Thousands) Earned surplus......................... $ 197,666 $ 230,340 Patronage refund payable in equities... 61,356 60,776 Capital credits........................ 27,645 31,237 Additional paid-in surplus............. 1,603 1,616 Currency translation adjustment........ 22 19 $ 288,292 $ 323,988 In accordance with the bylaws of Farmland, the member-sourced portion of its net income or loss and the resulting patronage refund payable to members and patrons are determined annually. Farmland maintains a base capital plan. The plan's objectives are as follows: 1) to achieve proportionality between the dollar amount of business a member or associate member of Farmland ("Participant") transacts with Farmland and the equity of Farmland which the Participant should hold (hereinafter referred to as the Participant's "Base Capital Requirement"); and, 2) provide a method for the Board of Directors, in its discretion, to redeem equities held by a Participant when the amount of such equity held by the Participant exceeds the Participant's Base Capital Requirement. This plan provides a mechanism under which the cash portion of the patronage refund payable to voting members or associate members will depend upon the degree to which such voting members or associate members meet their base capital requirements. The Base Capital Requirement is determined annually by the Farmland Board of Directors at its sole discretion. At August 31, 1995 and 1996, common stock and associate member common stock with an aggregate par value of $14.2 million and $14.0 million, respectively, were approved for redemption by the Board of Directors under the base capital plan and such amounts have been included in "Other current liabilities" in the Consolidated Balance Sheets at August 31, 1995 and 1996, respectively. Farmland maintains an estate settlement plan for redemption of equities held by estates of deceased individuals (except purchased equities held less than five years) and special equity redemption plans. Under these plans, the Board of Directors, in its discretion, may redeem equities based on certain factors, including the financial position and consolidated net income of the Company. At August 31, 1995 and 1996, certain equities of Farmland with a face amount of $12.8 million and $11.3 million, respectively, and capital equity fund certificates held by certain members of Farmland Foods, Inc. in the amount of $0.8 million and $0.1 million, respectively, have been approved by the Board of Directors for redemption under the estate settlement and special allocated equity redemption plan and such amounts have been included in "Other current liabilities" in the Consolidated Balance Sheets at August 31, 1995 and 1996, respectively. Capital credits are issued: 1) for payment of patronage refunds to patrons who do not satisfy requirements for membership or associate membership; and, 2) upon conversion of common stock or associate member common stock held by persons who do not meet qualifications for membership or associate membership in Farmland. Additional paid-in surplus results from members donating Farmland equity to Farmland. None of the aforementioned equities are held by or for the account of Farmland or in any sinking or other special fund of Farmland and none have been pledged by Farmland. (10) CONTINGENT LIABILITIES AND COMMITMENTS The Company leases various equipment and real properties under long-term operating leases. For 1994, 1995 and 1996, rental expenses totaled $41.8 million, $44.6 million and $43.6 million, respectively. Rental expense is reduced for mileage credits received on leased railroad cars ($1.9 million in 1994, $1.8 million in 1995 and $1.4 million in 1996). The leases have various remaining terms ranging from one year to fourteen years. Some leases are renewable, at the Company's option, for additional periods. The minimum required payments for these leases during the fiscal years ending August 31 are as follows: (Amounts in Thousands) 1997...........................$ 46,750 1998........................... 50,498 1999........................... 43,847 2000........................... 39,296 2001........................... 36,143 2002 and after................. 92,296 $ 308,830 Commitments for capital expenditures and investments in joint ventures aggregated $61.0 million at August 31, 1996. The Company has been designated by the Environmental Protection Agency as a potentially responsible party ("PRP") under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), at various National Priority List ("NPL") sites. In addition, the Company is aware of possible obligations associated with environmental matters at other sites, including sites where no claim or assessment has been made. The Company's accrued liability for probable and reasonably determinable obligations for resolution of environmental matters at NPL and other sites was $18.5 million and $18.9 million at August 31, 1995 and 1996, respectively. The ultimate costs of resolving certain environmental matters are not quantifiable because many such matters are in preliminary stages and the timing and extent of actions which governmental authorities may ultimately require are unknown. It is possible that the costs of such resolution may be greater than the liabilities which, in the opinion of management, are probable and reasonably determinable at August 31, 1996. In the opinion of management, it is reasonably possible for such costs to approximate an additional $20.6 million. In the ordinary course of conducting international grain trading, Tradigrain, as of August 31, 1996, was contingently liable in respect of $114.2 million of guarantees, performance and bid bonds, and letters of credit. The Company is involved in various lawsuits arising in the normal course of business. In the opinion of management, the ultimate resolution of these litigation issues will not have a material adverse effect on the Company's Consolidated Financial Statements. (11) EMPLOYEE BENEFIT PLANS The Farmland Industries, Inc. Employee Retirement Plan (the "Plan") is a defined benefit plan covering substantially all employees of the Company who meet minimum age and length-of-service requirements. Benefits payable under the Plan are based on years of service and the employee's average compensation during the highest four of the employee's last ten years of employment. The assets of the Plan are maintained in a trust fund. The majority of the Plan's assets are invested in common stocks, corporate bonds, United States Government securities and short-term investment funds. The Company's funding policy is to make the maximum annual contribution to the Plan's trust fund that can be deducted for federal income tax purposes. The Company charges pension cost as accrued based on actuarial valuation of the Plan. Components of the Company's pension cost are as follows:
August 31 1994 1995 1996 (Amounts in Thousands) Service cost - benefits earned during the period $ 8,663 $10,336 $10,886 Interest cost on projected benefit obligation. 15,292 16,707 18,843 Actual return on Plan assets.................. (10,949) (27,422) (46,630) Net amortization and deferral................. (7,860) 8,677 24,634 Pension expense............................... $ 5,146 $8,298 $ 7,733
The discount rate, the rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligations and the expected long-term rate of return on assets were 8.0%, 4.5% and 8.5%, respectively, at August 31, 1994, 1995 and 1996. The following table sets forth the Plan's funded status and amounts recognized in the Company's Consolidated Balance Sheets at August 31, 1995 and 1996. Such prepaid pension cost is based on the Plan's funded status as of May 31, 1995 and 1996. August 31 1995 1996 (Amounts in Thousands) Actuarial present value of benefit obligations: Vested benefits.............................. $ 170,105 $180,253 Nonvested benefits........................... 11,584 12,024 Accumulated benefit obligation............... $ 181,689 $192,277 Increase in benefits due to future compensation increases.........................56,353 56,030 Projected benefit obligation................. $ 238,042 $248,307 Estimated fair value of Plan assets.......... 259,262 301,504 Plan assets in excess of projected benefit obligation....................................$ 21,220 $ 53,197. Unrecognized net loss from past experience different from that assumed and effects of changes in assumptions....................... 27,750 450 Unrecognized prior service cost.............. 1,089 871 Prepaid pension cost at end of year............ $ 50,059 $ 54,518 (12) INDUSTRY SEGMENT INFORMATION The Company conducts business primarily in two operating areas: agricultural inputs and outputs. On the input side of the agricultural industry, the Company operates as a farm supply cooperative. On the output side of the agricultural industry, the Company operates as a processing and marketing cooperative. The Company's farm supply operations consist of three principal product divisions: petroleum, crop production and feed. Principal products of the petroleum division are refined fuels, propane, jet fuels, by-products of petroleum refining and car, truck and tractor tires, batteries and accessories. Principal products of the crop production division are nitrogen-, phosphate- and potash-based 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. On the output side, the Company's processing and marketing operations include the processing of pork and beef, the marketing of fresh pork, processed pork and fresh beef and the storage and marketing of grain. Other operations primarily includes livestock production and services such as computer services, accounting, financial, management, printing and transportation. The operating income (loss) of each industry segment includes the revenue generated on transactions involving products within that industry segment less identifiable and allocated expenses. In computing operating income (loss) of industry segments, none of the following items has been added or deducted: interest expense, interest income, other income (deductions) or corporate expenses (included in the statements of operations as selling, general and administrative expenses), which cannot practicably be identified or allocated by industry segment. Corporate assets include cash, investments in other cooperatives, the Company's corporate headquarters and certain other assets. Following is a summary of industry segment information as of and for the years ended August 31, 1994, 1995 and 1996 Export sales to unaffiliated customers from U.S. operations for the years ended August 31, 1994, 1995 and 1996 were $842.5 million, $1.3 billion and $2.0 billion, respectively.
Unallocated Corporate Items Cooperative Farm Supply Cooperative Marketing and Inter- Crop and Processing Other Segment Petroleum Production Feed Foods Grain Operations Eliminations Consolidated (Amounts in Thousands) 1994 Sales to unaffiliated customers........$855,479 $1,163,357 $527,864 $2,355,599 $1,627,156 $ 148,478 $ -0- $6,677,933 Transfers between segments......... 4,843 9,513 2,072 3,007 -0- 19,467 (38,902) -0- Total sales and transfers........$860,322 $1,172,870 $529,936 $2,358,606 $1,627,156 $ 167,945 $ (38,902) $6,677,933 Operating income (loss) of industry segments.........$ 27,172 $ 126,047 $ 17,019 $ 20,608 $ (33,637) $ (2,410) $ 154,799 Equity in net income (loss) of investees (Note 4).........$ (41) $ 15,466 $ 155 $ (4,404) $ -0- $ (298) $ 10,878 General corporate expenses.......... (66,229) Other corporate income............ 26,281 Interest expense... (51,485) Minority interest... 4,522 Income tax expense.. (4,890) Net income.......... $ 73,876 Identifiable assets at August 31, 1994..$306,366 $ 357,178 $ 92,767 $ 395,159 $ 341,367 $ 62,301 $1,555,138 Investment in and advances to investees........$ 746 $ 76,439 $ 1,761 $ 13,927 $ -0- $ 8,560 $ 101,433 Corporate assets.... 270,060 Total assets........ $1,926,631 Provision for depreciation and amortization.....$ 9,911 $ 14,700 $ 3,815 $ 16,776 $ 4,011 $ 7,982 $ 5,765 $ 62,960 Capital expenditures (including $16.9 million of capital assets of businesses acquired)........$ 14,399 $ 14,136 $ 4,508 $ 19,040 $ 6,256 $ 26,051 $ 2,274 $ 86,664 1995 Sales to unaffiliated customers........$876,776 $1,171,389 $467,695 $2,692,892 $1,906,191 $ 141,926 $ -0- $7,256,869 Transfers between segments......... 2,877 6,547 940 3,100 -0- 29,100 (42,564) -0- Total sales and transfers........$879,653 $1,177,936 $468,635 $2,695,992 $1,906,191 $ 171,026 $ (42,564) $7,256,869 Operating income (loss) of industry segments.........$ (8,029) $ 198,720 $ 10,061 $ 77,060 $ 17,942 $ (2,373) $ 293,381 Equity in net income (loss) of investees (Note 4).........$ 168 $ 22,096 $ 130 $ 823 $ 688 $ (1,120) $ 22,785 General corporate expenses.......... (80,054) Other corporate income............ 19,934 Interest expense... (53,862) Minority interest... (9,757) Income tax expense.. (29,628) Net income.......... $ 162,799 Identifiable assets at August 31, 1995..$313,478 $ 410,979 $ 93,438 $ 491,257 $ 525,032 $ 59,108 $1,893,292 Investment in and advances to investees........$ 953 $ 80,805 $ 1,497 $ 325 $ 120 $ 9,304 $ 93,004 Corporate assets.... 199,647 Total assets........ $2,185,943 Provision for depreciation and amortization.....$ 9,858 $ 15,530 $ 4,319 $ 21,891 $ 5,156 $ 5,308 $ 7,076 $ 69,138 Capital expenditures $ 27,638 $ 23,845 $ 5,766 $ 32,219 $ 905 $ 7,504 $ 28,986 $ 126,863 1996 Sales to affiliated customers......$1,058,258 $1,336,307 $569,869 $3,220,996 $3,472,009 $ 131,148 $ -0- $9,788,587 Transfers between segments......... 3,351 1,402 923 2,959 -0- 33,255 (41,890) -0- Total sales and transfers........$1,061,609 $1,337,709 $570,792 $3,223,955 $3,472,009 $ 164,403 $ (41,890) $9,788,587 Operating income (loss) of industry segments.........$ 4,990 $ 179,008 $ 12,952 $ 65,953 $ (18,993) $ (5,085) $ 238,825 Equity in net income (loss) of investees (Note 4).........$ (98) $ 41,899 $ 382 $ -0- $ (10) $ (1,081) $ 41,092 General corporate expenses......... (91,194) Other corporate income........... 29,278 Interest expense.. (62,445) Minority interest.. (7,383) Income tax expense. (21,755) Net income......... $ 126,418 Identifiable assets at August 31, 1996..$433,352 $ 438,559 $107,267 $ 618,122 $ 492,919 $ 64,403 $2,154,622 Investment in and advances to investees........$ 611 $ 136,959 $ 3,399 $ 18 $ 468 $ 7,016 $ 148,471 Corporate assets... 265,353 Total assets....... $2,568,446 Provision for depreciation and amortization.....$ 11,024 $ 16,797 $ 4,625 $ 26,438 $ 5,729 $ 6,171 $ 6,957 $ 77,741 Capital expenditures (Including $29.9 million of capital assets of businesses acquired)........$ 42,075 $ 37,296 $ 5,083 $ 84,493 $ 15,084 $ 10,603 $ 27,342 $ 221,976
(13) SIGNIFICANT GROUP CONCENTRATION OF CREDIT RISK The Company extends credit to its customers on terms generally no more favorable than standard terms of sale for the industries it serves. A substantial portion of the Company's receivables are concentrated in the agricultural industry. Collection of these receivables may be dependent upon economic returns from farm crop and livestock production. The Company's credit risks are continually reviewed and management believes that adequate provisions have been made for doubtful accounts. The Company maintains investments in and advances to cooperatives, cooperative banks and joint ventures from which it purchases products or services. A substantial portion of the business of these investees is dependent upon the agribusiness economic sector. See Note 4. (14) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS Estimates of fair values are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could affect the estimates. Except as follows, the fair market value of the Company's financial instruments approximates the carrying value:
August 31, 1995 August 31, 1996 Carrying Carrying Amount Fair Value Amount Fair Value (Amounts in Thousands) FINANCIAL ASSETS: Notes receivable from investees, 20% to 50% owned............................ $ 4,218 $ 3,747 $ 1,443 $ 1,454 National Bank for Cooperatives................ 27,000 **** 24,913 **** Other cooperatives: Equities.................................... 27,728 **** 27,187 **** Notes receivable............................ 19,600 17,327 17,757 17,073 FINANCIAL LIABILITIES: Subordinated capital investment certificates and subordinated monthly income certificates........................... $ (299,995) $ (304,450) $ (324,105) $ (317,476)
****Investments in National Bank for Cooperatives and other cooperatives' equities which have been purchased are carried at cost and equities received as patronage refunds are carried at par value, less provisions for other than temporary impairment. The Company believes it is not practicable to estimate the fair value of these equities because there is no established market for these equities and estimated future cash flows, which are largely dependent on the future equity redemptions policy of each cooperative, are not determinable. The estimated fair value of notes receivable has been determined by discounting future cash flows using a market interest rate. The estimated fair value of the subordinated debt certificates was calculated using a discount rate equal to the interest rate on subordinated debt certificates with similar maturities currently offered for sale by the Company. The carrying amounts of the Company's other debt borrowings approximate their fair market value. (15) RELATED PARTY TRANSACTIONS The Company has a 50% interest in two manufacturers of phosphate products, Farmland Hydro, L.P. and SF Phosphates Limited Company, and a 50% interest in a distributor of crop production products, WILFARM, LLC. During 1994, 1995 and 1996, the Company purchased $83.1 million, $106.2 million and $117.4 million, respectively, of product from these ventures. Accounts payable includes $4.8 million and $2.9 million due to these ventures at August 31, 1995 and 1996, respectively. The Company also has notes receivable from these ventures in the amount of $16.6 million and $12.9 million at August 31, 1995 and 1996, respectively. (16) OTHER INCOME In May 1996, the Company sold its interest in a communications joint venture, Broadcast Partners. The sale resulted in a gain before income taxes of $10.9 million, which has been included in the caption "Other income (deductions): Other, net" in the Company's 1996 Consolidated Statement of Operations. In June 1993, the Company filed a lawsuit against 43 insurance carriers and other parties (the "Defendants") seeking declaratory judgments regarding the Defendants' insurance coverage obligations for environmental remediation costs. The Company negotiated settlements with 20, 2 and 3 insurance companies in 1994, 1995 and 1996, respectively. As part of the settlements, the Company provided the Defendants with releases of various possible environmental obligations. As a result of these settlements, the Company received cash payments in 1994, 1995 and 1996 of $13.6 million, $0.3 million and $0.5 million, respectively, and included such amounts in the caption "Other income (deductions): Other, net" in the Consolidated Statement of Operations for the years ended. PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The expenses (excluding commissions) to be incurred in connection with the issuance and distribution of the securities to be offered are estimated as follows and will be borne by the Company: Estimated Item Expense Federal and state registration fees $ 142,000 State taxes and fees.............. 7,000 Printing and engraving............ 242,000 Accounting and legal.............. 60,000 Trustee fee....................... 13,000 Advertising and administration.... 988,000 $1,452,000 ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 6002(b) of Chapter 17 of the Kansas Statutes (1987), permits the following provision to be included in the articles of incorporation of the Company: a provision eliminating or limiting the personal liability of a director to the corporation or its stockholders, policyholders or members for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director (A) for any breach of the director's duty of loyalty to the corporation or its stockholders, policyholders or members, (B) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (C) under the provision of K.S.A. 17-6424 and amendments thereto or (D) for any transaction from which the director derived an improper personal benefit. No such provision shall eliminate or limit the liability of a director for any act or omission occurring prior to the date when such provision becomes effective. All references in this subsection to a director shall be deemed also to refer to a member of the governing body of a corporation which is not authorized to issue capital stock. Section 6002(c) provides that "It shall not be necessary to set forth in the articles of incorporation any of the powers conferred on corporations by this act." Article VII of the Articles of Incorporation of Farmland reads as follows: ARTICLE VII - INDEMNIFICATION Section 1. Indemnification. The Association may agree to the terms and conditions upon which any director, officer, employee or agent accepts his office or position and in its bylaws, by contract or in any other manner may agree to indemnify and protect any director, officer, employee or agent of the Association, or any person who serves at the request of the Association as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, to the fullest extent permitted by the laws of the State of Kansas. Section 2. Limitation of Liability. Without limiting the generality of the foregoing provisions of this ARTICLE VII, to the fullest extent permitted or authorized by the laws of the State of Kansas, including, without limitation, the provisions of subsection (b)(8) of Kan. Stat. Ann. Sec. 17-6002 (1981) as now in effect and as it may from time to time hereafter be amended, no person who is currently or shall hereinafter become a director of the Association shall have personal liability to the Association for monetary damages for breach of fiduciary duty as a director for any act or omission occurring subsequent to the date this provision becomes effective. If the Kansas General Corporation Code is amended after approval of this provision by the shareholders of the Association, to authorize corporate action further limiting or eliminating the personal liability of directors, then the liability of a director of the Association shall be limited or eliminated to the fullest extent permitted by the Kansas General Corporation Code, as so amended. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES The Company did not sell any unregistered securities during the three years ended August 31, 1996. ITEM 16. EXHIBITS; FINANCIAL STATEMENT SCHEDULES (A) EXHIBITS The following exhibits are filed as a part of this Registration Statement. Exhibit No. Description of Exhibits UNDERWRITING AGREEMENT: 1.A Underwriting Agreement between Farmland Industries, Inc. and Farmland Securities Company, dated December 6, 1989. (Incorporated by Reference - Form S-1 No. 33-56821 filed December 12, 1994) 1.A(1) Amendment, dated December 5, 1994, to the agreement, dated December 6, 1989 between Farmland Industries, Inc. and Farmland Securities Company. (Incorporated by Reference - Form S-1 No. 33-56821, filed December 12, 1994) 1.B Sales Agency Agreement between Farmland Industries, Inc. and American Heartland Investment, Inc., dated December 29, 1993. (Incorporated by Reference - Form S-1 No. 33-56821, filed December 12, 1994) ARTICLES OF INCORPORATION AND BYLAWS: 3.A Articles of Incorporation and Bylaws of Farmland Industries, Inc. effective December 1, 1994. (Incorporated by Reference - Form 10-K, filed November 28, 1995) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES: 4.(i)A Trust Indenture dated November 20, 1981, as amended January 4, 1982, including specimen of Demand Loan Certificates. (Incorporated by Reference - Form S-1, No. 2-75071, effective January 7, 1982) 4.(i)B Trust Indenture dated November 8, 1984, as amended January 3, 1985, including specimen of 10-year Subordinated Capital Investment Certificates. (Incorporated by Reference - Form S-1, No. 2-94400, effective December 31, 1984) 4.(i)B(1) Amendment Number 2, dated December 3, 1991, to Trust Indenture dated November 8, 1984 as amended January 3, 1985 covering Farmland Industries, Inc.'s 10-Year Subordinated Capital Investment Certificates. (Incorporated by Reference - Form SE, dated December 3, 1991) 4.(i)C Trust Indenture dated November 8, 1984, as amended January 3, 1985, including specimen of 5-year Subordinated Capital Investment Certificates. (Incorporated by Reference - Form S-1, No. 2-94400, effective December 31, 1984) 4.(i)C(1) Amendment Number 2, dated December 3, 1991, to Trust Indenture dated November 8, 1984 as amended January 3, 1985 covering Farmland Industries, Inc.'s 5-Year Subordinated Capital Investment Certificates. (Incorporated by Reference - Form SE, dated December 3, 1991) 4.(i)D Trust Indenture dated November 8, 1984, as amended January 3, 1985 and November 20, 1985, including specimen of 10-year Subordinated Monthly Income Capital Investment Certificates. (Incorporated by Reference - Form S-1, No. 2-94400, effective December 31, 1984) 4.(i)E Trust Indenture dated November 11, 1985 including specimen of the 5-year Subordinated Monthly Income Capital Investment Certificates. (Incorporated by Reference - Form S-1, No. 33-1970, effective December 31, 1985) 4.(ii)A Credit Agreement between Farmland Industries, Inc. and various banks dated May 15, 1996, (Incorporated by Reference - Form 10-Q filed July 15, 1996) 5 Opinion of Robert B. Terry, Vice President and General Counsel of Farmland Industries, Inc. re Legality MATERIAL CONTRACTS: LEASE CONTRACTS: 10.(i)A Leveraged lease dated September 6, 1991, among the First National Bank of Chicago, not individually but solely as Trustee for AT&T Commercial Finance Corporation, The Boatmen's National Bank of St. Louis, Firstier Bank, N.A. and Norwest Bank Minnesota, National Association and Farmland Industries, Inc. in the amount of $73,153,000. (Incorporated by Reference - Form SE, filed December 3, 1991) 10.(i)B Leveraged lease dated March 17, 1977, among the First National Bank of Commerce as Trustee for General Electric Credit Corporation as Beneficiary and Farmland Industries, Inc. in the amount of $51,909,257.90. (Incorporated by Reference - Form S-1, No. 2-60372, effective December 22, 1977) MANAGEMENT REMUNERATIVE PLANS: 10.(iii)AAnnual Employee Variable Compensation Plan (September 1, 1996 - August 31, 1997) (Incorporated by Reference - Form 10-K, filed November 27, 1996) 10.(iii)BFarmland Industries, Inc. Management Long-Term Incentive Plan (Effective September 1, 1995) (Incorporated by Reference - Form 10-K, filed November 28, 1995) 10.(iii)B(1) Exhibit E (Fiscal years 1997 through 1999) (Incorporated by Reference - Form 10-K, filed November 27, 1996) 10.(iii)CFarmland Industries, Inc. Supplemental Executive Retirement Plan (Effective January 1, 1994) (Incorporated by Reference - Form 10-K, filed November 28, 1995) 10.(iii)C(1) Resolution Approving the Revision of Appendix A and Appendix A (Incorporated by Reference - Form 10-K, filed November 27, 1996) 10.(iii)DFarmland Industries, Inc. Executive Deferred Compensation Plan (As Amended and Restated Effective November 1, 1996) (Incorporated by Reference - Form 10-K, filed November 27, 1996) 12 Computation of Ratios 21 Subsidiaries of the Registrant CONSENTS OF EXPERTS AND COUNSEL: 23.A Independent Auditors' Consent 23.B Consent of Special Tax Counsel 23.C Consent of Qualified Independent Underwriter 23.D Consent of Robert B. Terry, Vice President and General Counsel of Farmland Industries, Inc. (included in Exhibit 5) 24 Power of Attorney 25.A Statement of Eligibility of Trustee and Qualification of UMB Bank, National Association Trustee, Form T-1. 25.B Statement of Eligibility of Trustee and Qualification of Commerce Bank of Kansas City, National Association as Trustee, Form T-1. (B) FINANCIAL STATEMENT SCHEDULES All schedules are omitted as the required information is inapplicable or the information is presented in the Consolidated Financial Statements or related notes included herein. ITEM 17. UNDERTAKINGS The undersigned registrant hereby undertakes: (a) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) (Section 230.424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective Registration Statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; (b) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (c) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (d) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, FARMLAND INDUSTRIES, INC. HAS DULY CAUSED THIS REGISTRATION STATEMENT ON FORM S-1 TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF KANSAS CITY, STATE OF MISSOURI ON NOVEMBER 27, 1996. FARMLAND INDUSTRIES, INC. BY TERRY M. CAMPBELL Terry M. Campbell Executive Vice President and Chief Financial Officer BY ROBERT B. TERRY Robert B. Terry Vice President and General Counsel PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT ON FORM S-1 HAS BEEN SIGNED FOR THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED. Signature Title Date * Chairman of Board, November 27, 1996 Albert J. Shivley Director * President, November 27, 1996 H. D. Cleberg Chief Executive Officer and Director (Principal Executive Officer) * Vice Chairman of Board November 27, 1996 Otis H. Molz Vice President and Director * Director November 27, 1996 Lyman Adams, Jr. * Director November 27, 1996 Ronald J. Amundson * Director November 27, 1996 Baxter Ankerstjerne * Director November 27, 1996 Jody Bezner * Director November 27, 1996 Richard L. Detten * Director November 27, 1996 Steven Erdman * Director November 27, 1996 Warren Gerdes * Director November 27, 1996 Ben Griffith * Director November 27, 1996 Gail D. Hall * Director November 27, 1996 Jerome Heuertz * Director November 27, 1996 Barry Jensen * Director November 27, 1996 Ron Jurgens * Director November 27, 1996 Greg Pfenning * Director November 27, 1996 Vonn Richardson * Director November 27, 1996 Monte Romohr * Director November 27, 1996 Joe Royster * Director November 27, 1996 Paul Ruedinger * Director November 27, 1996 Raymond J. Schmitz * Director November 27, 1996 Theodore J. Wehrbein * Director November 27, 1996 Robert Zinkula /s/ TERRY M. CAMPBELL Executive Vice President November 27, 1996 Terry M. Campbell and Chief Financial Officer (Principal Financial Officer) /s/ MERL DANIEL Vice President and November 27, 1996 Merl Daniel Controller (Principal Accounting Officer) *BY /s/ TERRY M. CAMPBELL Terry M. Campbell Attorney-In-Fact EX-99 2 EXHIBIT INDEX Exhibit 99 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 EXHIBITS To Form S-1 Registration Statement Under The Securities Act of 1933 Farmland Industries, Inc. EXHIBIT INDEX The following exhibits are filed as a part of this Form S-1 Registration Statement. Certain of these exhibits are incorporated by reference as indicated. Items marked with an asterisk (*) are filed herein. Exhibit No. Description of Exhibits UNDERWRITING AGREEMENT: 1.A Underwriting Agreement between Farmland Industries, Inc. and Farmland Securities Company, dated December 6, 1989. (Incorporated by Reference - Form S-1 No. 33-56821 filed December 12, 1994) 1.A(1) Amendment, dated December 5, 1994, to the agreement, dated December 6, 1989 between Farmland Industries, Inc. and Farmland Securities Company. (Incorporated by Reference - Form S-1 No. 33-56821, filed December 12, 1994) 1.B Sales Agency Agreement between Farmland Industries, Inc. and American Heartland Investment, Inc., dated December 29, 1993. (Incorporated by Reference - Form S-1 No. 33-56821, filed December 12, 1994) ARTICLES OF INCORPORATION AND BYLAWS: 3.A Articles of Incorporation and Bylaws of Farmland Industries, Inc. effective December 1, 1994. (Incorporated by Reference - Form 10-K, filed November 28, 1995) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES: 4.(i)A Trust Indenture dated November 20, 1981, as amended January 4, 1982, including specimen of Demand Loan Certificates. (Incorporated by Reference - Form S-1, No. 2-75071, effective January 7, 1982) 4.(i)B Trust Indenture dated November 8, 1984, as amended January 3, 1985, including specimen of 10-year Subordinated Capital Investment Certificates. (Incorporated by Reference - Form S-1, No. 2-94400, effective December 31, 1984) 4.(i)B(1) Amendment Number 2, dated December 3, 1991, to Trust Indenture dated November 8, 1984 as amended January 3, 1985 covering Farmland Industries, Inc.'s 10-Year Subordinated Capital Investment Certificates. (Incorporated by Reference - Form SE, dated December 3, 1991) 4.(i)C Trust Indenture dated November 8, 1984, as amended January 3, 1985, including specimen of 5-year Subordinated Capital Investment Certificates. (Incorporated by Reference - Form S-1, No. 2-94400, effective December 31, 1984) 4.(i)C(1) Amendment Number 2, dated December 3, 1991, to Trust Indenture dated November 8, 1984 as amended January 3, 1985 covering Farmland Industries, Inc.'s 5-Year Subordinated Capital Investment Certificates. (Incorporated by Reference - Form SE, dated December 3, 1991) 4.(i)D Trust Indenture dated November 8, 1984, as amended January 3, 1985 and November 20, 1985, including specimen of 10-year Subordinated Monthly Income Capital Investment Certificates. (Incorporated by Reference - Form S-1, No. 2-94400, effective December 31, 1984) 4.(i)E Trust Indenture dated November 11, 1985 including specimen of the 5-year Subordinated Monthly Income Capital Investment Certificates. (Incorporated by Reference - Form S-1, No. 33-1970, effective December 31, 1985) 4.(ii)A Credit Agreement between Farmland Industries, Inc. and various banks dated May 15, 1996, (Incorporated by Reference - Form 10-Q filed July 15, 1996) * 5 Opinion of Robert B. Terry, Vice President and General Counsel of Farmland Industries, Inc. re Legality MATERIAL CONTRACTS: LEASE CONTRACTS: 10.(i)A Leveraged lease dated September 6, 1991, among the First National Bank of Chicago, not individually but solely as Trustee for AT&T Commercial Finance Corporation, The Boatmen's National Bank of St. Louis, Firstier Bank, N.A. and Norwest Bank Minnesota, National Association and Farmland Industries, Inc. in the amount of $73,153,000. (Incorporated by Reference - Form SE, filed December 3, 1991) 10.(i)B Leveraged lease dated March 17, 1977, among the First National Bank of Commerce as Trustee for General Electric Credit Corporation as Beneficiary and Farmland Industries, Inc. in the amount of $51,909,257.90. (Incorporated by Reference - Form S-1, No. 2-60372, effective December 22, 1977) MANAGEMENT REMUNERATIVE PLANS: 10.(iii)AAnnual Employee Variable Compensation Plan (September 1, 1996 - August 31, 1997) (Incorporated by Reference - Form 10-K, filed November 27, 1996) 10.(iii)BFarmland Industries, Inc. Management Long-Term Incentive Plan (Effective September 1, 1995) (Incorporated by Reference - Form 10-K, filed November 28, 1995) 10.(iii)B(1) Exhibit E (Fiscal years 1997 through 1999) (Incorporated by Reference - Form 10-K, filed November 27, 1996) 10.(iii)CFarmland Industries, Inc. Supplemental Executive Retirement Plan (Effective January 1, 1994) (Incorporated by Reference - Form 10-K, filed November 28, 1995) 10.(iii)C(1) Resolution Approving the Revision of Appendix A and Appendix A (Incorporated by Reference - Form 10-K, filed November 27, 1996) 10.(iii)DFarmland Industries, Inc. Executive Deferred Compensation Plan (As Amended and Restated Effective November 1, 1996) (Incorporated by Reference - Form 10-K, filed November 27, 1996) *12 Computation of Ratios *21 Subsidiaries of the Registrant CONSENTS OF EXPERTS AND COUNSEL: *23.A Independent Auditors' Consent *23.B Consent of Special Tax Counsel *23.C Consent of Qualified Independent Underwriter 23.D Consent of Robert B. Terry, Vice President and General Counsel of Farmland Industries, Inc. (included in Exhibit 5) *24 Power of Attorney *25.A Statement of Eligibility of Trustee and Qualification of UMB Bank, National Association Trustee, Form T-1. *25.B Statement of Eligibility of Trustee and Qualification of Commerce Bank of Kansas City, National Association as Trustee, Form T-1. EX-5 3 LEGAL OPINION EXHIBIT 5 Farmland Industries, Inc. 3315 North Farmland Trafficway Kansas City, Missouri 64116 Gentlemen: I am acting as the General Counsel for Farmland Industries, Inc., a Kansas corporation (the "Company"), in connection with the Registration Statement on Form S-1 (the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the contemplated issuance by the Company from time to time of Demand Loan Certificates, 10-year Subordinated Capital Investment Certificates, 5-year Subordinated Capital Investment Certificates, 10-year Subordinated Monthly Income Capital Investment Certificates, and 5-year Subordinated Monthly Income Capital Investment Certificates of the Company, which with respect to Demand Loan Certificates may be issued pursuant to an Indenture entered into between the Company and UMB Bank, National Association, as successor trustee to Commerce Bank of Kansas City, National Association and with respect to Subordinated Capital Investment Certificates and Subordinated Monthly Income Capital Investment Certificates may be issued under indentures entered into between the Company and Commerce Bank of Kansas City, National Association, as trustee. Said Demand Loan Certificates, Subordinated Capital Investment Certificates and Subordinated Monthly Income Capital Investment Certificates, when issued and sold in accordance with this Registration Statement presently to be filed with the Securities and Exchange Commission, Washington, D.C., and registered in accordance with the laws of the States in which the Certificates are and will be sold, will constitute valid and binding obligations according to their tenor and effect. Capitalized terms used herein have the meanings set forth in the Registration Statement, unless otherwise defined herein. I have examined the originals, or certified, conformed or reproduction copies of all records, agreements, instruments and documents as I have deemed relevant or necessary as the basis for the opinions hereinafter expressed. In all such examinations, I have assumed the genuineness of all signatures on original or certified copies and the conformity to original or certified copies of all copies submitted to me as conformed or reproduction copies. As to various questions of fact relevant to such opinions, I have relied upon, and assumed the accuracy of, certificates and statements and other information of public officials, officers or representatives of the Company and others. Based upon the foregoing, and subject to the limitations set forth herein, I hereby confirm the opinions attributed to me in the Registration Statement. I hereby consent to the filing of this opinion as an exhibit to the Registration Statement (including any Amendment thereto) and to the references to me under the captions "Legal Matters" in the Prospectus and "Legal Matters" in any Prospectus Supplement forming a part of the Registration Statement. In giving these consents, I do not hereby admit that I am in the category of persons whose consent is required under Section 7 of the Securities Act. The opinions expressed herein are solely for the benefit of the Company and Trustees (who may rely on this letter as though it were an addressee) and may not be relied upon in any manner or for any purpose by any other person and may not be quoted in whole or in part without my prior written consent. Very truly yours, Robert B. Terry November 27, 1996 3 EX-12 4 COMPUTATION OF RATIOS EXHIBIT 12 FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
Year Ended August 31 1992 1993 1994 1995 1996 (Amounts in Thousands) Earnings: Pretax Income (Loss).................. $ 70,504 $ (36,833) $ 78,766 $ 197,641 $ 155,754 Minority Interest in Income of Consolidated Subsidiary that has Fixed Charges................. -0- 865 333 9,793 7,604 Minority Interest in Loss of Consolidated Subsidiary .......... -0- (37) (4,855) -0- (221) Equity Interest in Loss (Income) (Earnings less distributions) of Less-than-Fifty Percent Owned Investees................... 2,341 1,007 603 (623) 574 Total Fixed Charges (excluding interest capitalized)............. 47,719 55,361 64,838 68,271 80,572 Total Earnings............................. $ 120,564 $ 20,363 $ 139,685 $ 275,082 $ 244,283 Fixed Charges: Interest (including amounts capitalized and amortization of debt issuance costs).............. $ 34,426 $ 43,966 $ 52,297 $ 55,497 $ 69,898 Estimated Interest Component of Rentals........................ 13,293 13,006 12,898 13,494 12,303 Total Fixed Charges........................ $ 47,719 $ 56,972 $ 65,195 $ 68,991 $ 82,201 Ratio of Earnings to Fixed Charges......... 2.5 0.4 2.1 4.0 3.0 Earnings Inadequate to Cover Fixed Charges......................... $ 36,609
3 EX-21 5 SUBSIDIARIES OF REGISTRANT EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Farmland Foods, Inc., a 99%-owned subsidiary, was incorporated under the laws of the State of Kansas. Farmland Foods, Inc. has been included in the Consolidated Financial Statements filed in this registration. FDL Foods, Inc., a wholly-owned subsidiary was incorporated under the laws of the State of Iowa. FDL Foods, Inc. has been included in the Consolidated Financial Statements filed in this registration. Farmland Insurance Agency, a wholly-owned subsidiary, was incorporated under the laws of the State of Missouri. Farmland Insurance Agency has been included in the Consolidated Financial Statements filed in this registration. Farmers Chemical Company, a wholly-owned subsidiary, was incorporated under the laws of the State of Kansas. Farmers Chemical Company has been included in the Consolidated Financial Statements filed in this registration. Farmland Securities Company, a wholly-owned subsidiary, was incorporated under the laws of the State of Delaware. Farmland Securities Company has been included in the Consolidated Financial Statements filed in this registration. Cooperative Service Company, a wholly-owned subsidiary, was incorporated under the laws of the State of Nebraska. Cooperative Service Company has been included in the Consolidated Financial Statements filed in this registration. Double Circle Farm Supply Company, a wholly-owned subsidiary, was incorporated under the laws of the State of Nevada. Double Circle Farm Supply Company has been included in the Consolidated Financial Statements filed in this registration. National Beef Packing Company, L.P., a 76%-owned subsidiary was formed under the laws of the State of Delaware. National Beef Packing Company has been included in the Consolidated Financial Statements filed in this registration. NBPCo, L.L.C., a wholly-owned subsidiary, was formed under the laws of the State of Kansas. NBPCo, L.L.C. has been included in the Consolidated Financial Statements filed in this registration. Farmland Financial Services Company, a wholly-owned subsidiary, was incorporated under the laws of the State of Kansas. Farmland Financial Services Company has been included in the Consolidated Financial Statements filed in this registration. Farmland Transportation, Inc., a wholly-owned subsidiary, was incorporated under the laws of the State of Missouri. Farmland Transportation, Inc. has been included in the Consolidated Financial Statements filed in this registration. Environmental and Safety Services, Inc., a wholly-owned subsidiary, was incorporated under the laws of the State of Missouri. Environmental and Safety Services, Inc. has been included in the Consolidated Financial Statements filed in this registration. Farmland Industries, Ltd., a wholly-owned subsidiary, was incorporated under the laws of the United States Virgin Islands. Farmland Industries, Ltd. has been included in the Consolidated Financial Statements filed in this registration. FI Mankato Energy, Inc., a wholly-owned subsidiary, was incorporated under the laws of the State of Minnesota. Mankato Energy, Inc. has been included in the Consolidated Financial Statements filed in this registration. FII Communications, L.L.C., a wholly-owned subsidiary, was incorporated under the laws of the State of Missouri. FII Communications, L.L.C. has been included in the Consolidated Financial Statements filed in this registration. Heartland Data Services, Inc., a wholly-owned subsidiary, was incorporated under the laws of the State of Kansas. Heartland Data Services, Inc. has been included in the Consolidated Financial Statements filed in this registration. Equity Country, Inc., a wholly-owned subsidiary, was incorporated under the laws of the State of Delaware. Equity Country, Inc. has been included in the Consolidated Financial Statements filed in this registration. Ceres Realty Corporation, a wholly-owned subsidiary, was incorporated under the laws of the State of Missouri. Ceres Realty Corporation has been included in the Consolidated Financial Statements filed in this registration. Heartland Wheat Growers, L.P., a 79%-owned subsidiary, was formed under the laws of the State of Kansas. Heartland Wheat Growers, L.P. has been included in the Consolidated Financial Statements filed in this registration. Heartland Wheat Growers, Inc., a 79%-owned subsidiary, was incorporated under the laws of the State of Kansas. Heartland Wheat Growers has been included in the Consolidated Financial Statements filed in this registration. Farmland Industrias S.A. de C.V., a wholly-owned subsidiary, was formed under the laws of Mexico. Farmland Industrias S.A. de C.V. has been included in the Consolidated Financial Statements filed in this registration. National Carriers, Inc., a 79%-owned subsidiary, was incorporated under the laws of the State of Kansas. National Carriers, Inc. has been included in the Consolidated Financial Statements filed in this registration. Supreme Land, Inc., a wholly-owned subsidiary, was incorporated under the laws of the State of Kansas. Supreme Land, Inc. has been included in the Consolidated Financial Statements filed in this registration. Tradigrain, Inc., a wholly-owned subsidiary, was incorporated under the laws of the State of Tennessee. Tradigrain, Inc. has been included in the Consolidated Financial Statements filed in this registration. Tradigrain S.A., a wholly-owned subsidiary, was formed under the laws of Switzerland. Tradigrain S.A. of Switzerland has been included in the Consolidated Financial Statements filed in this registration. Tradigrain S.A., a wholly-owned subsidiary, was formed under the laws of Argentina. Tradigrain S.A. of Argentina has been included in the Consolidated Financial Statements filed in this registration. Tradigrain S.A., a wholly-owned subsidiary, was formed under the laws of France. Tradigrain S.A. of France has been included in the Consolidated Financial Statements filed in this registration. Tradigrain GmbH, a wholly-owned subsidiary, was formed under the laws of Germany. Tradigrain GmbH has been included in the Consolidated Financial Statements filed in this registration. Tradigrain Shipping S.A., a wholly-owned subsidiary, was formed under the laws of Switzerland. Tradigrain Shipping S.A. has been included in the Consolidated Financial Statements filed in this registration. Tradigrain LTD., a wholly-owned subsidiary, was formed under the laws of Great Britain. Tradigrain LTD. has been included in the Consolidated Financial Statements filed in this registration. 5 EX-23.A 6 INDEPENDENT AUDITORS' CONSENT EXHIBIT 23.A INDEPENDENT AUDITORS' CONSENT The Board of Directors Farmland Industries, Inc.: We consent to the use of our report included herein and to the references to our firm under the headings "Selected Consolidated Financial Data", and "Experts" in the Prospectus. KPMG PEAT MARWICK LLP Kansas City, Missouri November 27, 1996 1 EX-23.B 7 CONSENT OF SPECIAL TAX COUNSEL EXHIBIT 23.B CONSENT OF SPECIAL TAX COUNSEL Farmland Industries, Inc.: We consent to the references to our firm in the Prospectus filed as part of this Registration Statement. BRYAN CAVE LLP November 27, 1996 1 2 EX-23.C 8 CONSENT OF QUALIFIED INDEPENDENT UNDERWRITER EXHIBIT 23.C CONSENT OF QUALIFIED INDEPENDENT UNDERWRITER Farmland Industries, Inc.: We consent to the references to our firm under the caption "Qualified Independent Underwriter" in the Prospectus. JAMES H. GLEN, JR. James H. Glen, Jr. INTERSTATE/JOHNSON LANE CORPORATION November 27, 1996 EX-24 9 POWER OF ATTORNEY Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose name appears below constitutes and appoints Robert B. Terry and Terry M. Campbell, and each of them, his true and lawful attorney-in-fact and agent with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, as well as any related registration statement (or amendments thereto) filed pursuant to Rule 462(b) promulgated under the Securities Act of 1933, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. This Power of Attorney may be executed in multiple counterparts, each of which shall be deemed an original, but which taken together shall constitute one instrument. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICTED.
Signature Title Date ALBERT J. SHIVLEY Chairman of Board October 23, 1996 Albert J. Shivley and Director H. D. CLEBERG President, October 23, 1996 H. D. Cleberg Chief Executive Officer and Director (Principal Executive Officer) OTIS H. MOLZ Vice Chairman of Board October 23, 1996 Otis H. Molz and Director LYMAN ADAMS, JR. Director October 23, 1996 Lyman Adams, Jr. RONALD J. AMUNDSON Director October 23, 1996 Ronald J. Amundson BAXTER ANKERSTJERNE Director October 23, 1996 Baxter Ankerstjerne JODY BEZNER Director October 23, 1996 Jody Bezner RICHARD L. DETTEN Director October 23, 1996 Richard L. Detten STEVEN ERDMAN Director October 23, 1996 Steven Erdman WARREN GERDES Director October 23, 1996 Warren Gerdes BEN GRIFFITH Director October 23, 1996 Ben Griffith GAIL D. HALL Director October 23, 1996 Gail D. Hall JEROME HEUERTZ Director October 23, 1996 Jerome Heuertz BARRY JENSEN Director October 23, 1996 Barry Jensen RON JURGENS Director October 23, 1996 Ron Jurgens GREG PFENNING Director October 23, 1996 Greg Pfenning VONN RICHARDSON Director October 23, 1996 Vonn Richardson MONTE ROMOHR Director October 23, 1996 Monte Romohr JOE ROYSTER Director October 23, 1996 Joe Royster RAYMOND J. SCHMITZ Director October 23, 1996 Raymond J. Schmitz FRANK WILSON Director October 23, 1996 Frank Wilson ROBERT ZINKULA Director October 23, 1996 Robert Zinkula
EX-25.A 10 T-1 STATEMENT OF ELIGIBILITY OF TRUSTEE, UMB BANK Exhibit 25.A SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM T-1 STATEMENT OF ELIGIBILITY AND QUALIFICATION UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE UMB BANK, NATIONAL ASSOCIATION (Exact name of trustee as specified in its charter) 44-0201230 (I.R.S. Employer Identification No.) 928 Grand Avenue, Kansas City, Missouri.....................64106 (Address of principal executive offices) (Zip Code) FARMLAND INDUSTRIES, INC. (Exact name of obligor as specified in its charter) KANSAS 42-0209330 (State or other jurisdiction (I.R.S. employer of incorporation or organization) identification No.) 3315 North Oak Trafficway Post Office Box 7305 Kansas City, Missouri 64116 (Address of principal executive offices) (Zip Code) DEMAND LOAN CERTIFICATES Dated: November 20, 1981 (Title of the indenture securities) Item 1.General Information (a) Name and address of each examining or supervising authority to which the Trustee is subject is as follows: The Comptroller of the Currency Mid-Western District 2345 Grand Avenue, Suite 700 Kansas City, Missouri 64108 Federal Reserve Bank of Kansas City Federal Reserve P.O. Station Kansas City, Missouri 64198 Supervising Examiner Federal Deposit Insurance Corporation 720 Olive Street, Suite 2909 St. Louis, Missouri 63101 (b) The Trustee is authorized to exercise corporate trust powers. Item 2. Affiliations with obligor and underwriters. The Obligor is not affiliated with the Trustee. No person, who is not an affiliate of the Obligor, has served as an underwriter for the Obligor. Item 3. Voting securities of the Trustee. The following information as to each class of voting securities of the Trustee is furnished as of November 21, 1996: Column A Column B Title of Amount Class Outstanding Common 660,000 Item 4. Trusteeships under other indentures. The Trustee is not a trustee under another indenture under which any other securities, or certificates of interest or participation in other securities, of the Obligor are outstanding. Item 5. Interlocking directorates and similar relationships with the obligor or underwriters. Neither the Trustee nor any of its directors or officers is a director, officer, partner, employee, appointee, or representative of the Obligor. No person, who is not an affiliate of the Obligor, has served as an underwriter for the Obligor. Item 6. Voting securities of the trustee owned by the obligor or its officials. No voting securities of the Trustee are owned beneficially by the Obligor or its directors and executive officers as of November 21, 1996. Item 7. Voting securities of the trustee owned by underwriters or their officials. Not applicable Item 8. Securities of the obligor owned or held by the trustee. No securities of Obligor are owned beneficially or held as collateral security for obligations in default by the Trustee as of November 21, 1996. Item 9. Securities of the underwriters owned or held by the trustee. Not applicable Item 10. Ownership or holdings by the trustee of voting securities of certain affiliates or security holders of the obligor. The Trustee neither owns beneficially nor holds as collateral security for obligations in default any voting securities of a person who, to the knowledge of the Trustee, (1) owns 10 percent or more of the voting securities of the Obligor, or (2) is an affiliate, other than a subsidiary of Obligor, as of November 21, 1996. Item 11. Ownership or holdings by the trustee of any securities of a person owning 50 percent or more of the voting securities of the obligor. The Trustee neither owns beneficially nor holds as collateral security for obligations in default any securities of a person who, to the knowledge of the Trustee, owns 50 percent or more of the voting shares of the Obligor as of November 21, 1996. Item 12. Indebtedness of the Obligor to the Trustee. None Item 13. Defaults of the Obligor. There has been no default with respect to the securities under this Indenture. Item 14. Affilitiations with the Underwriters. Not Applicable Item 15. Foreign Trustee. Not Applicable Item 16. List of exhibits. Listed below are all exhibits filed as a part of this statement of eligibility and qualification. Exhibit No. Exhibit 1. Articles of Association of the Trustee, as now in effect. 2. Certificate of Authority from the Comptroller of the Currency evidencing a change of the corporate title of the Association. Incorporated by Reference - In the Statement of Eligibility and Qualification of United Missouri Bank, National Association, as Trustee, Form T-1 #22-21530, Filed on FORM SE dated December 19, 1991. 3. Certificate from the Comptroller of the Currency evidencing authority to exercise corporate trust powers and a letter evidencing a change of the corporate title of the Association. Incorporated by Reference - In the Statement of Eligibility and Qualification of United Missouri Bank, National Association, as Trustee, Form T-1 #22-21530, Filed on FORM SE dated December 19, 1991. 4. Bylaws, as amended, of the Trustee. 5. N/A 6. Consent of the Trustee required by Section 321 (b) of the Act. 7. Report of Condition of the Trustee as of September 30, 1996. SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939, the Trustee, UMB Bank, National Association, a national bank organized and existing under the laws of the United States of America, has duly caused this statement of eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in the city of Kansas City, and State of Missouri, on the 22nd day of November 1996. UMB BANK, NATIONAL ASSOCIATION BY: Frank C. Bramwell, Vice President Frank C. Bramwell, Vice President T-1 Exhibit 6 Consent of Trustee Pursuant to Section 321(B) of the Trust Indenture Act of 1939, UMB Bank, National Association, a national bank organized under the laws of the United States, hereby consents that reports of examinations by the Comptroller of the Currency, of the Federal Deposit Insurance Corporation, and any other federal, state, territorial or district authorities may be furnished by such authorities to the Securities and Exchange Commission upon request therefor. UMB BANK, NATIONAL ASSOCIATION By: Frank C. Bramwell, Vice President Frank C. Bramwell, Vice President Date: November 22, 1996 UMB BANK, NATIONAL ASSOCIATION RESTATED ARTICLES OF ASSOCIATION FIRST: The title of this Association shall be "UMB Bank, National Association" (amended as of October 1, 1994). SECOND: The main office shall be in the City of Kansas City, County of Jackson, State of Missouri. The general business of this Association, and its operations of discount and deposit, shall be conducted at its main office. THIRD: The Board of Directors of this Association shall consist of not less than five nor more than twenty-five shareholders, the exact number of Directors within such minimum and maximum limits to be fixed and determined from time to time by resolution of a majority of the full Board of Directors or by resolution of the shareholders at any annual or special meeting thereof. Unless otherwise provided by the laws of the United States, any vacancy in the Board of Directors for any reason, including an increase in the number thereof, may be filled by action of the Board of Directors. FOURTH: The regular annual meeting of the shareholders for the election of directors and the transaction of whatever other business which may be brought before said meeting shall be held at the main office, or at such other place as the Board of Directors may designate, on the day of each year specified therefor in the By-Laws of the Association, but if no election be held on that day it may be held on any subsequent day according to the provisions of law. FIFTH: The amount of authorized capital stock of this Association shall be Thirteen Million Two Hundred Fifty Thousand Dollars ($16,500,000), divided into 660,000 shares of common stock of the par value of Twenty-Five Dollars ($25) each; but said capital stock may be increased or decreased from time to time in accordance with the provisions of the laws of the United States. If the capital stock is increased by the sale of additional shares thereof, each shareholder shall be entitled to subscribe for such additional shares in proportion to the number of shares of said capital stock owned by him at the time the increase is authorized by the shareholders, unless another time subsequent to the date of the shareholders' meeting is specified in a resolution adopted by the shareholders at the time the increase is authorized. The Board of Directors shall have the power to prescribe a reasonable period of time within which the pre-emptive rights to subscribe to the new shares of capital stock must be exercised. If the capital stock is increased by a stock dividend, each shareholder shall be entitled to his proportion of the amount of such increase in accordance with the number of shares of capital stock owned by him at the time the increase is authorized by the shareholders, unless another time subsequent to the date of the shareholders' meeting is specified in a resolution adopted by the shareholders at the time the increase is authorized. SIXTH: The Board of Directors shall appoint one of its members to be President of this Association. The Board of Directors may appoint one of its members to be Chairman of the Board, who shall perform such duties as the Board of Directors may designate. The Board of Directors shall have the power to appoint one or more Vice Presidents and to appoint a Cashier and such other officers and employees as may be required to transact the business of the Association. The Board of Directors shall have the power to define the duties of the officers and employees of the Association; to fix the salaries to be paid to them; to dismiss them; to require bonds from them and to fix the penalty thereof; to regulate the manner in which any increase in the capital of the Association shall be made; to manage and administer the business and affairs of the Association; to make all By-Laws that it may be lawful for them to make; and generally to do and perform all acts that it may be legal for the Board of Directors to do and perform. The Board of Directors, without the approval of the shareholders, but subject to the approval of the Comptroller of the Currency, shall have the power to change the location of the main office of the Association to any other place within the limits of Kansas City, Missouri and to establish or change the location of any branch or branches to any other location permitted under applicable law. SEVENTH: The corporate existence of this Association shall continue until terminated in accordance with the laws of the United States. EIGHTH: The Board of Directors of this Association, or any three or more shareholders owning, in the aggregate, not less than ten percentum (10%) of the stock of this Association, may call a special meeting of the shareholders at any time; provided, however, that unless otherwise provided by law, not less than ten (10) days prior to the date fixed for any such meeting, a notice of the time, place and purpose of the meeting shall be given by first class mail, postage prepaid, to all shareholders of record at their respective addresses as shown upon the books of the Association. Subject to the provisions of the laws of the United States, these Articles of Association may be amended at any meeting of the shareholders, for which adequate notice has been given, by the affirmative vote of the owners of two-thirds of the stock of this Association, voting in person or by proxy. NINTH: Any person, his heirs, executors, or administrators, may be indemnified or reimbursed by the Association for reasonable expenses actually incurred in connection with any action, suit, or proceeding, civil or criminal, to which he or they shall be made a party by reason of his being or having been a director, officer, or employee of the Association or any firm, corporation, or organization which he served in any capacity at the request of the Association; provided, however, that no person shall be so indemnified or reimbursed in relation to any matter in such action, suit, or proceeding as to which he shall finally be adjudged to have been guilty of or liable for gross negligence or willful misconduct or criminal acts in the performance of his duties to the Association; and, provided further, that no person shall be so indemnified or reimbursed in relation to any matter in such action, suit, or proceeding which has been made the subject of a compromise settlement except with the approval of a court of competent jurisdiction, or the holders of record of a majority of the outstanding shares of the Association, or the Board of Directors, acting by vote of directors not parties to the same or substantially the same action, suit, or proceeding, constituting a majority of the whole number of the directors. The foregoing right of indemnification or reimbursement shall not be exclusive of other rights to which such person, his heirs, executors, or administrators, may be entitled as a matter of law. T-1 Exhibit 2 Certificate, dated January 10th, 1934, of the Office of Comptroller of the Currency authorizing the City National Bank and Trust Company of Kansas City to Commence the business of Banking. C E R T I F I C A T E For and on behalf of UMB Bank, National Association, a national banking association organized under the laws of the United States of America (formerly named The City National Bank and Trust Company of Kansas City and the United Missouri Bank of Kansas City, National Association and United Missouri Bank, National Association), the undersigned, R. William Bloemker, Assistant Secretary of said Association, hereby certifies that attached hereto are the following: 1) A true and correct copy of the certificate of the Comptroller of the Currency, dated December 19, 1972, evidencing a change in corporate title from The City National Bank and Trust Company of Kansas City to United Missouri Bank of Kansas City, National Association; 2) A true and correct copy of the letter of authorization from the Comptroller of the Currency, dated April 9, 1991, authorizing the Association to adopt the name United Missouri Bank, National Association; and 3) Certified Resolution evidencing recordation of change of the name of the Association to UMB Bank, National Association. Certified under the corporate seal of said Association this 22nd day of November, 1996. /s/ R. William Bloemker Assistant Secretary Certificate, dated December 19, 1972, of the Comptroller of the Currency evidencing change in corporate title from the City National Bank and Trust Company of Kansas City to United Missouri Bank of Kansas City, National Association. Letter, dated April 9, 1991, from the Comptroller of the currency, authorizing the Association to adopt the name United Missouri Bank, National Association. CERTIFIED RESOLUTION I hereby certify that the following is an excerpt from a letter dated October 3, 1994 from the Office of the Comptroller of the Currency (OCC) confirming the Bank's change of name: The OCC has recorded that as of October 1, 1994, the title of United Missouri Bank, National Association, Charter No. 13936, was changed to "UMB Bank, National Association." /s/ R. William Bloemker Assistant Secretary [SEAL] T-l Exhibit 3 C E R T I F I C A T E For and on behalf of UMB Bank, National Association, a national banking association under the laws of the United States of America, the undersigned, R. William Bloemker, Assistant Secretary of said Association, hereby certifies that the attached document is a true and correct copy of the certificate issued by the Comptroller of the Currency of the United States evidencing its authority to exercise fiduciary powers under the statutes of the United States. Certified under the corporate seal of said Association this 22nd day of November, 1996. /s/ R. William Bleomker Assistant Secretary Certificate, dated December 31, 1972, of the Comptroller of the Currency evidencing the authority of the Association to exercise fiduciary powers under the statutes of the United States. T-l Exhibit No. 4 TO WHOM IT MAY CONCERN The attached ByLaws are the ByLaws for the UMB Bank, National Association and are current as of this date. /s/ R. William Bloemker Assistant Secretary November 22, 1996 [SEAL] UMB BANK, NATIONAL ASSOCIATION BY-LAWS ARTICLE I Meetings of Shareholders Section 1.1 - Where Held. All meetings of shareholders of this Association shall be held at its main banking house in Kansas City, Jackson County, Missouri, or at such other place as the Board of Directors may from time to time designate. Section 1.2 - Annual Meeting. The annual meeting of shareholders shall be held at 11 o'clock in the forenoon, or at such other time as shall be stated in the notice thereof, on the third Wednesday of January in each year or, if that day be a legal holiday, on the next succeeding banking day, for the purpose of electing a Board of Directors and transacting such other business as may properly come before the meeting. Section 1.3 - Special Meetings. Except as otherwise provided by law, special meetings of shareholders may be called for any purpose, at any time, by the Board of Directors or by any three or more shareholders owning, in the aggregate, not less than ten percent (10%) of the outstanding stock in the Association. Section 1.4 - Notice of Meetings. Written notice of the time, place, and purpose of any meeting of shareholders shall be given to each shareholder (a) by delivering a copy thereof in person to the shareholder, or (b) by depositing a copy thereof in the U.S. mails, postage prepaid, addressed to the shareholder at his address appearing on the books of the Association, in either case at least ten (10) days prior to the date fixed for the meeting. Section 1.5 - Quorum. A majority of the outstanding capital stock, represented in person or by proxy, shall constitute a quorum for the transaction of business at any meeting or shareholders, unless otherwise provided by law. A majority of the votes cast shall decide every question or matter submitted to the shareholders at any meeting, unless otherwise provided by law or by the Articles of Association. Section 1.6 - Adjournment. Any meeting of shareholders may, by majority vote of the shares represented at such meeting, in person or by proxy, though less than a quorum, be adjourned from day to day or from time to time, not exceeding, in the case of elections of directors, sixty (60) days from such adjournment, without further notice, until a quorum shall attend or the business thereof shall be completed. At any such adjourned meeting, any business may be transacted which might have been transacted at the meeting as originally called. Section 1.7 - Voting. Each shareholder shall be entitled to one (1) vote on each share of stock held, except that in the election of directors each shareholder shall have the right to cast as many votes, in the aggregate, as shall equal the number of shares owned by him, multiplied by the number of directors to be elected, and said votes may be cast for one director or distributed among two (2) or more candidates. Voting may be in person or by proxy, but no officer or employee of this Association shall act as proxy. Authority to vote by proxy shall be by written instrument, dated and filed with the records of the meeting, and shall be valid only for one meeting, to be specified therein, and any adjournments of such meeting. ARTICLE II Directors Section 2.1 - Number and Qualifications. The Board of Directors (hereinafter sometimes referred to as the "Board") shall consist of not less than five (5) nor more than twenty-five (25) shareholders, the exact number, within such limits, to be fixed and determined from time to time by resolution of a majority of the full Board of Directors or by resolution of the shareholders at any meeting thereof; provided, however, that a majority of the full Board of Directors shall not increase the number of directors to a number which: (a) exceeds by more than two (2) the number of directors last elected by shareholders where such number was fifteen (15) or less; or (b) exceeds by more than four (4) the number of directors last elected by shareholders where such number was sixteen (16) or more. No person who has attained the age of seventy (70) shall be eligible for election to the Board of Directors unless such person is actively engaged in business at the time of his election, but any person not so disqualified at the time of his election as a director shall be entitled to serve until the end of his term. All directors shall hold office for one (1) year and until their successors are elected and qualified. Section 2.2 - Advisory Directors. The Board of Directors may appoint Advisory Directors, chosen from former directors of the Association or such other persons as the Board shall select. The Advisory Directors shall meet with the Board at all regular and special meetings of the Board and may participate in such meetings but shall have no vote. They shall perform such other advisory functions and shall render such services as may from time to time be directed by the Board. Section 2.3 - Powers. The Board shall manage and administer the business and affairs of the Association. Except as expressly limited by law, all corporate powers of the Association shall be vested in and may be exercised by said Board. It may not delegate responsibility for its duties to others, but may assign the authority and responsibility for various functions to such directors, committees and officers or other employees as it shall see fit. Section 2.4 - Vacancies. In case of vacancy occurring on the Board through death, resignation, disqualification, disability or any other cause, such vacancy may be filled at any regular or special meeting of the Board by vote of a majority of the surviving or remaining directors then in office. Any director elected to fill a vacancy shall hold office for the unexpired term of the director whose place was vacated and until the election and qualification of his successor. Section 2.5 - Organization Meeting. Following the annual meeting of shareholders, the Corporate Secretary shall notify the directors elect of their election and of the time and place of the next regular meeting of the Board, at which the new Board will be organized and the members of the Board will take the oath required by law, after which the Board will appoint committees and the executive officers of the Association, and transact such other business as may properly come before the meeting; provided, however, that if the organization meeting of the Board shall be held immediately following the annual meeting of shareholders, no notice thereof shall be required except an announcement thereof at the meeting of directors. Section 2.6 - Regular Meetings. The regular meetings of the Board of Directors shall be held, without notice except as provided for the organization meeting, on the third Wednesday of each month at the main banking house in Kansas City, Jackson County, Missouri. When any regular meeting of the Board falls upon a holiday, the meeting shall be held on the next banking day, unless the Board shall designate some other day. A regular monthly meeting of the Board may, by action of the Board at its preceding meeting, be postponed to a later day in the same month. Section 2.7 - Special Meetings. Special meetings of the Board may be called by the Corporate Secretary on direction of the President or of the Chairman of the Board, or at the request of three (3) or more directors. Each member of the Board shall be given notice, by telegram, letter, or in person, stating the time, place and purpose of such meeting. Section 2.8 - Quorum. Except when otherwise provided by law, a majority of the directors shall constitute a quorum for the transaction of business at any meeting, but a lesser number may adjourn any meeting, from time to time, and the meeting may be held, as adjourned, without further notice. Section 2.9 - Voting. A majority of the directors present and voting at any meeting of the Board shall decide each matter considered. A director may not vote by proxy. Section 2.10 - Compensation of Directors. The compensation to be paid the directors of the Association for their services shall be determined from time to time by the Board. ARTICLE III Committees Appointed by the Board Section 3.1 - Standing Committees. The standing committees of this Association shall be the Management Committee, Executive Committee, the Officers' Salary Committee, the Discount Committee, the Bond Investment Committee, the Trust Policy Committee, the Bank Examining Committee and the Trust Auditing Committee. The members of the standing committees shall be appointed annually by the Board of Directors at its organization meeting, or, on notice, at any subsequent meeting of the Board, to serve until their respective successors shall have been appointed. The President and the Chairman of the Board shall be, ex officio, members of all standing committees except the Bank Examining Committee and the Trust Auditing Committee. Each standing committee shall keep minutes of its meetings, showing the action taken on all matters considered. A report of all action so taken shall be made to the Board, and a copy of such minutes shall be available for examination by members of the Board. Section 3.2 - Management Committee. The Management Committee shall consist of such executive officers of the Association as shall be designated by the Board. One of the members of the Committee shall be designated by the Board as Chairman. The Committee may adopt policies (not inconsistent with policies and delegations of authority prescribed by these By-Laws or by the Board) with respect to the executive and administrative functions of the Association, and in general, it shall coordinate the performance of such functions in and among the various departments of the Association, assisting and advising the executive officers or department heads upon matters referred to it by such officers or department heads. The Committee shall make reports and recommendations to the Board upon such policies or other matters as it deems advisable or as may be referred to it by the Board, and shall have such other powers and duties as may be delegated or assigned to it by the Board from time to time. The secretary of the Committee may be designated by the Board, or, in default thereof, by the Committee, and may but need not be a member thereof. Section 3.3 - Executive Committee. The Executive Committee shall consist of such executive officers of the Association as shall be designated by the Board. One of the members of the Committee shall be designated by the Board as Chairman. The Committee shall carry out such responsibilities and duties as the Management Committee shall delegate to it, from time to time. Section 3.4 - Officers' Salary Committee. The Officers' Salary Committee shall consist of such directors and officers of the Association as may be designated by the Board. It shall study and consider the compensation to be paid to officers of the Association and shall make recommendations to the Board with respect thereto and with respect to such other matters as may be referred to it by the Board. Section 3.5 - Discount Committee. The Discount Committee shall consist of such directors and officers as shall be designated by the Board of Directors. It shall have the power to discount and purchase bills, notes and other evidences of debt; to buy and sell bills of exchange; to examine and approve loans and discounts; and to exercise authority regarding loans and discounts held by the Association. At each regular meeting of the Board, the Board shall approve or disapprove the report filed with it by the Discount Committee and record its actions in the minutes of its meeting. The powers and authority conferred upon the Discount Committee by this Section may, with the approval of the Board of Directors, be assigned or delegated by it, to officers of the Association, subject to such limits and controls as the Committee may deem advisable. Section 3.6 - Bond Investment Committee. The Bond Investment Committee shall consist of such directors and officers as shall be designated by the Board of Directors. It shall have power to buy and sell bonds, to examine and approve the purchase and sale of bonds, and to exercise authority regarding bonds held by the Association. At each regular meeting of the Board, the Board shall approve or disapprove the report filed with it by the Bond Investment Committee and record its action in the minutes of its meeting. Section 3.7 - Trust Policy Committee. The Trust Policy Committee shall consist of such directors and officers of the Association as shall be designated by the Board of Directors. Such committee shall have and exercise such of the Bank's fiduciary powers as may be assigned to it by the Board, with power to further assign, subject to its control, the exercise of such powers to other committees, officers and employees. The action of the Trust Policy Committee shall, at all times, be subject to control by the Board. Section 3.8 - Bank Examining Committee. The Bank Examining Committee shall consist of such directors of the Association as shall be designated by the Board, none of whom shall be an active officer of the Association. It shall make suitable examinations at least once during each period of twelve (12) months of the affairs of the Association or cause a suitable audit to be made by auditors responsible only to the Board of Directors. The result of such examinations shall be reported in writing, to the Board at the next regular meeting thereafter and shall state whether the Association is in a sound and solvent condition, whether adequate internal controls and procedures are being maintained, and shall recommend to the Board such changes as the Committee shall deem advisable. The Bank Examining Committee, with the approval of the Board of Directors, may employ a qualified firm of certified public accountants to make an examination and audit of the Association. If such a procedure is followed, the annual examination of directors, will be deemed sufficient to comply with the requirements of this section of the By-Laws. Section 3.9 - Trust Auditing Committee. The Trust Auditing Committee shall consist of such directors of the Association as shall be designated by the Board, none of whom shall be an active officer of the Association. At least once during each calendar year, and within fifteen (15) months of the last such audit, the Trust Auditing Committee shall make suitable audits of the Trust Departments or cause suitable audit to be made by auditors responsible only to the Board of Directors, and t such time shall ascertain whether the Departments have been administered in accordance with law, the Regulations of the Comptroller and sound fiduciary practices. As an alternative, in lieu of such periodic audits, the Board may elect to adopt an adequate continuous audit system. Section 3.10 - Other Committees. The Board may appoint, from time to time, from its own members or from officers of the Association, or both, other committees of one or more persons for such purposes and with such powers as the Board may determine. Section 3.11 - Compensation of Committee Members. The Board shall determine the compensation to be paid to each member of any committee appointed by it for services on such committee, but no such compensation shall be paid to any committee member who shall at the time be receiving a salary from the Association as an officer thereof. ARTICLE IV Officers and Employees Section 4.1 - Chairman of the Board. The Board of Directors shall appoint one of its members (who may, but need not, be President of the Association) as Chairman of the Board. He shall preside at all meeting of the Board of Directors and shall have general executive powers and such further powers and duties as from time to time may be conferred upon, or assigned to, him by the Board of Directors. He shall be, ex officio, a member of all standing committees except the Bank Examining Committee and the Trust Auditing Committee. Section 4.2 - President. The Board of Directors shall appoint one of its members to be the President of this Association. The President shall be the chief executive officer of the Association, except as the Board of Directors may otherwise provide, and shall have and may exercise any and all other powers and duties pertaining to such office. He shall also have and may exercise such further powers and duties as from time to time may be conferred upon, or assigned to, him by the Board of Directors. He shall be, ex officio, a member of all standing committees except the Bank Examining Committee and the Trust Auditing Committee. Section 4.3 - Chairman of the Executive Committee. The Board of Directors may appoint a Chairman of the Executive Committee, who shall have general executive powers and shall have and may exercise such further powers and duties as from time to time may be conferred upon, or assigned to, him by the Board of Directors. Section 4.4 - Vice Presidents. The Board of Directors shall appoint one or more Vice Presidents. Each Vice President shall have such powers and duties as may be assigned to him by the Board and may be given such descriptive or functional titles as the Board may designate. Section 4.5 - Trust Officers. The Board of Directors shall appoint one or more Trust Officers. Each Trust Officer shall have such powers and duties as may be assigned to him by the Board of Directors in accordance with the provisions of Article V. The Trust Officers may be given such descriptive or functional titles as the Board may designate. Section 4.6 - Corporate Secretary. The Board of Directors shall appoint a Corporate Secretary. The Corporate Secretary shall be responsible for the minutes book of the Association, in which he shall maintain and preserve the organization papers of the Association, the Articles of Association, the By-Laws, minutes of regular and special meetings of the shareholders and of the Board of Directors, and reports by officers and committees of the Association to the shareholders and to the Board of Directors. He shall attend all meetings of the shareholders and of the Board of Directors and shall act as the clerk of such meetings and shall prepare and sign the minutes of such meetings. He shall have custody of the corporate seal of the Association and of the stock transfer books, except as given to the Comptroller's Department or the Corporate Trust Department to act as transfer agent and registrar of the Association's capital stock, and of such other documents and records as the Board of Directors shall entrust to him. The Secretary shall give such notice of meetings of the shareholders and of the Board of Directors as is required by law, the Articles of the Association and the By-Laws. In addition, he shall perform such other duties as may be assigned to him from time to time by the Board of Directors. The Assistant Secretaries shall render the Corporate Secretary such assistance as he shall require in the performance of his office. During his absence or inability to act, the Assistant Secretaries shall be vested with the powers and perform the duties of the Corporate Secretary. Section 4.7 - Cashier. The Board of Directors may appoint a Cashier. He shall have such powers and shall perform such duties as may be assigned to him by resolution of the Board of Directors. Section 4.8 - Comptroller. The Board of Directors shall appoint a Comptroller. The Comptroller shall institute and maintain the accounting policies and practices established by the Board of Directors. He shall maintain, or cause to be maintained, adequate records of all transactions of the Association. He shall be responsible for the preparation of reports and returns to taxing and regulatory authorities, and at meetings of the Board of Directors shall furnish true and correct statements of condition and statements of operations of the Association and such further information and data, and analyses thereof, as the Board of Directors may require. He shall have custody of the Association's insurance policies. In addition, the Comptroller shall perform such other duties as may be assigned to him, from time to time by the Board of Directors. The Assistant Comptroller(s) shall render the Comptroller such assistance as he shall require in the performance of the duties of his office and, during his absence or inability to act, the Assistant Comptroller(s), in the order designated by the Board of Directors, shall be vested with the powers and perform the duties of the Comptroller. Section 4.9 - Auditor. The Board of Directors shall appoint an Auditor of the Association. He shall see that adequate audits of the Association are currently and regularly made and that adequate audit systems and controls are established and maintained. He shall examine each department and activity of the Association and may inquire into transactions affecting the Association involving any officer or employee thereof. The Board, however, may, in lieu of appointing an Auditor, assign the duties thereof to the Auditor of the parent company of the Association. Section 4.10 - Other Officers. The Board of Directors may appoint one or more Assistant Vice Presidents, one or more Assistan Trust Officers, one or more Assistant Secretaries, one or more Assistant Cashiers, and such other officers and Attorneys-In-Fact as from time to time may appear to the Board of Directors to be required or desirable to transact the business of the Association. The power to appoint such assistant or the additional officers may be delegated to the Chairman of the Board or the President, or to such other executive officer or officers as the Board may designate, but the power to appoint any officer of the Audit Department or any Assistant Secretary may not be so delegated. Any officer and Attorney-In-Fact appointed as herein provided shall exercise such powers and perform such duties as pertain to his office or as may be conferred upon or assigned to him by the Board of Directors of by the officer authorized to make such appointment. Section 4.11 - Tenure of Office. The Chairman of the Board and the President shall hold office for the current year for which Board of Directors of which they are members was elected, unless either of them shall resign, become disqualified or be removed, and any vacancy occurring in either of such offices shall be filled promptly by the Board of Directors. All other officers of the Association shall serve at the pleasure of the Board of Directors. Section 4.12 - Compensation of Officers. The compensation of the officers of the Association shall be fixed and may be altered, from time to time, by the Board of Directors or, in the case of officers appointed by another officer, as authorized by Section 4.10 of this Article, by the officer or officers making such appointment, subject to the supervisory control of, and in accordance with the policies established by, the Board. Section 4.13 - Combining Offices. The Board of Directors, in its discretion, may combine two or more offices and direct that they be filled by the same individual, except that (a) the office of Corporate Secretary shall not be combined with that of the Chairman of the Board or of the President and (b) the office of Auditor shall not be combined with any other office. Section 4.14 - Succession. During the absence of the Chairman of the Board, or such other officer designated as Chief Executive Officer, all of the duties pertaining to his office under these By-Laws and the resolutions of the Board of Directors shall, subject to the supervisory control of the Board, devolve upon, and be performed by, the officers, successively, who are next in the order of authority as established by the Board of Directors from time to time, or, in the absence of an order of authority so established, in the order of Chairman of the Board, President and Chairman of the Executive Committee as may be applicable in the particular case. Section 4.15 - Clerks and Agents. Any one of the Chairman of the Board, President or Chairman of the Executive Committee, or any officer of the Association authorized by them, may appoint and dismiss all or any clerks, agents and employees and prescribe their duties and the conditions of their employment, and from time to time fix their compensation. Section 4.16 - Requiring Bond. The Board of Directors shall require such officers and employees of the Association as it shall designate to give bond, of suitable amount, with security to be approved by the Board, conditioned for the honest and faithful discharge by each such officer or employee of his respective duties. In the discretion of the Board, such bonds may be in blanket form and the premiums may be paid by the Association. The amount of such bonds, form of coverage, and the company acting as surety therefor, shall be reviewed by the Board of Directors each year. ARTICLE V Administration of Trust Powers Section 5.1 - Trust Department. Organization. There shall be one or more departments of the Association which shall perform the fiduciary responsibilities of the Association. Section 5.2 - Management of Department. The Board of Directors shall be responsible for the management and administration of the Trust Department or Departments, but is may assign or delegate such of its powers and authority to the Trust Policy Committee and to such other committees and officers of the Association as it may deem advisable. Section 5.3 - Department Heads. The Board of Directors shall designate one of the Trust Officers as the chief executive of each Trust Department. His duties shall be to manage, supervise and direct all activities of such Department, subject to such supervision as may be vested in the Trust Policy and other committees. He shall do, or cause to be done, all things necessary or proper in carrying on the business of such Department in accordance with provisions of law, applicable regulations and policies established by authority of the Board. He shall act pursuant to opinions of counsel where such opinion is deemed necessary. He shall be responsible for all assets and documents held by the Association in connection with fiduciary matters, in such Department, except as otherwise provided in this Article V. Section 5.4 - Custody of Securities. The Board of Directors shall designate two or more officers or employees of the Association to have joint custody of the investments of each trust account administered by the Trust Department or Departments. Section 5.5 - Trust Department Files. There shall be maintained in each Trust Department files containing all fiduciary records necessary to assure that it fiduciary responsibilities have been properly undertaken and discharged. Section 5.6 - Trust Investments. Funds held in a fiduciary capacity shall be invested in accordance with the instrument establishing the fiduciary relationship and governing law. Where such instrument does not specify the character and class of investments to be made and does not vest in the Association a discretion in the matter, funds held pursuant to such instrument shall be invested in investments in which corporate fiduciaries may invest under the laws of the State of Missouri and the decisions of its courts. ARTICLE VI Stock and Stock Certificates Section 6.1 - Transfers. Shares of the capital stock of the Association shall be transferable only on the books of the Association, and a transfer book shall be kept in which all transfers of stock shall be recorded. Section 6.2 - Stock Certificates. Certificates of stock shall bear the signatures of (i) the Chairman of the Board, the President or any Vice President, and (ii) the Secretary, Cashier, any Assistant Secretary, or any other officer appointed by the Board of Directors for that purpose; and the seal of the Association shall be impressed, engraved, or printed thereon. Such signatures may be manual or engraved, printed or otherwise impressed by facsimile process; but if both of the required signatures are by facsimile then such certificates shall be manually countersigned by the person or persons thereunto authorized by the Board of Directors. Certificates bearing the facsimile signature of an authorized officer may be validly issued even though the person so named shall have ceased to hold such office at the time of issuance. Each certificate shall recite on its face that the stock represented thereby is transferable only upon the books of the Association upon the surrender of such certificate properly endorsed. Section 6.3 - Closing Transfer Books or Fixing Record Date. The Board of Directors shall have power to close the transfer books of the Association for a period not exceeding thirty (30) days preceding the date of any meeting of shareholders, or the date of payment of any dividend, or the date of allotment of rights, or the date when any change or conversion of exchange of shares shall go into effect; provided, however, that in lieu of closing the said transfer books, the Board of Directors may fix, in advance, a date, not exceeding thirty (30) days preceding the date of any such event, as record date for the determination of the shareholders entitled to notice of, and to vote at, any such meeting (and any adjournment thereof), or entitled to receive payment of any such dividend or allotment of such rights, or to exercise rights in respect of any such change, conversion or exchange of shares, and in such case, only such shareholders as shall be shareholders of record at the close of business on the date of closing the transfer books or on the record date so fixed shall be entitled to notice of, and to vote at, such meeting (and any adjournment thereof), or to receive payment of such dividend or allotment of such rights, or to exercise such rights, as the case may be. ARTICLE VII Corporate Seal Section 7.1 - Authority to Affix. The President, the Corporate Secretary, the Cashier, and any Assistant Secretary or other officer designated by the Board of Directors, shall have authority to affix the corporate seal on any document requiring such seal, and to attest the same. The seal shall be substantially in the following form: ARTICLE VIII Miscellaneous Provisions Section 8.1 - Fiscal Year. The fiscal year of the Association shall be the calendar year. Section 8.2 - Execution of Instruments. All agreements, indentures, mortgages, deeds, conveyances, transfers, certificates, declarations, receipts, discharges, releases, satisfactions, settlements, petitions, schedules, accounts, affidavits, bonds, undertakings, proxies and other instruments or documents may be signed, executed, acknowledged, verified, delivered or accepted on behalf of the Association by the Chairman of the Board, the President, any Vice President, or the Cashier; and, if in connection with the exercise of fiduciary owers of the Association, by any of said officers or by any authorized officer of the Trust Department or Departments. Any such instruments may also be executed, acknowledged, verified, delivered, or accepted on behalf of the Association in such other manner and by such other officers as the Board of Directors may from time to time direct. The provisions of this Section are supplementary to any other provisions of these By-Laws. Section 8.3 - Banking Hours. The Association shall be open for business on such days and during such hours as may be prescribed by resolution of the Board of Directors. Unless and until the Directors shall prescribe other and different banking hours, this Association's main office shall be open for business from 9:30 o'clock a.m. to 2:00 o'clock p.m. of each day, except Fridays when the hours shall be from 9:30 o'clock a.m. to 6:00 o'clock p.m., and except that the Association shall be closed on Saturdays and Sundays, and, with the approval of the Board on days recognized by the laws of the State of Missouri as public holiday. ARTICLE IX By-Laws Section 9.1. - Inspection. A copy of the By-Laws, with all amendments thereto, shall at all times be kept in a convenient place at the main office of the Association and shall be open for inspection to all shareholders during banking hours. Section 9.2 - Amendments. The By-Laws may be amended, altered or repealed by vote of a majority of the entire Board of Directors at any meeting of the Board, provided that ten (10) days' written notice of the proposed change has been given to each Director. No amendment may be made unless the By-Laws, as amended, is consistent with the requirements of the laws of the United States and with the provisions of the Articles of the Association. A certified copy of all amendments to the By-Laws shall be forwarded to the Comptroller of the Currency immediately after adoption. 10-1-94 T-l Exhibit 6 Consent of Trustee Pursuant to Section 32l(b) of the Trust Indenture Act of l939, UMB Bank, National Association, a national bank organized under the laws of the United States, hereby consents that reports of examinations by the Comptroller of the Currency, of the Federal Deposit Insurance Corporation, and any other federal, state, territorial or district authorities may be furnished by such authorities to the Securities and Exchange Commission upon request therefor. UMB BANK, NATIONAL ASSOCIATION BY:Frank C. Bramwell, Vice President Frank C. Bramwell, Vice President Date: November 22, 1996 T-1 Exhibit 7 Legal Title of Bank: UMB BANK, N.A. Call Date: 9/30/96 ST-BK: 29-2668 Address: P. O. Box 419226 FFIEC 032 City, State Zip: KANSAS CITY, MO 64141-6226 Page RC-1 FDIC Certificate No.: /1/3/6/0/1 Consolidated Report of Condition for Insured Commercial and State-Chartered Savings Bank for September 30, 1996 All schedules are to be reported in thousands of dollars. Unless otherwise indicated, report the amount outstanding as of the last business day of the quarter. Schedule RC--Balance Sheet
Dollar Amounts in Thousand RCON Bil Mil Thou ASSETS 1. Cash and balances due from depository institutions: a. Noninterest-beering balances and currency and coin. . . . . . . . . . . . . . . . . . . 0081 458,874 b. Interest-bearing balances (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0071 3,187 2. Securities ///////////////////// a. Held-to-maturity securities (from Schedule RC-B, column A). . . . . . . . . . . . . . . 1754 53,136 b. Available-for-sale securities (from Schedule RC-B, column D). . . . . . . . . . . . . . 1773 875,013 3. Federal funds sold and securities purchased under agreements to resell: ///////////////////// a. Federal funds sold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0276 217,015 b. Securities purchased under agreements to resell . . . . . . . . . . . . . . . . . . . . 0277 0 4. Loans and lease financing receivables: ///////////////////// a. Loans and leases, net of unearned income (from Schedule RC-C) RCON 2122 1,242,270 ///////////////////// b. LESS: Allowance for loan and lease losses ....................RCON 3123 10,819 ///////////////////// c. LESS: Allocated transfer risk reserve.........................RCON 3128 0 ///////////////////// d. Loans and leases, net of unearned income, ///////////////////// allowance, and reserve (item 4.a minus 4.b and 4.c) . . . . . . . . . . . . . . . . . . 2125 1,231,451 5. Trading assets (from Schedule RC-D). . . . . . . . . . . . . . . . . . . . . . . . . . . . 3545 78,893 6. Premises and fixed assets (including capitalized leases) . . . . . . . . . . . . . . . . . 2145 84,248 7. Other real estate owned (from Schedule RC-M) . . . . . . . . . . . . . . . . . . . . . . . 2150 30 8. Investments in unconsolidated subsidiaries and associated companies (from Schedule RC-M) . 2130 0 9. Customers' liability to this bank on acceptances outstanding . . . . . . . . . . . . . . . 2155 4,344 10. Intangible assets (from Schedule RC-M) . . . . . . . . . . . . . . . . . . . . . . . . . . 2143 1,616 11. Other assets (from Schedule RC-F . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2160 68,712 12. Total assets (sum of items 1 through 11) . . . . . . . . . . . . . . . . . . . . . . . . . 2170 3,076,519 (1) Includes cash items in process of collection and unposted debits. (2) Includes time certificates of deposit not held for trading. CONTINUED ON NEXT PAGE Legal Title of Bank: UMB BANK, N.A. Call Date: 9/30/96 ST-BK: 29-2668 FFIEC 032 Address: P. O. Box 419226 Page RC-2 City, State Zip: KANSAS CITY, MO 64141-6226 FDIC Certificate No.: /1/3/6/0/1 Schedule RC--Continued Dollar Amounts in Thousands RCON Bil Mil Thou LIABILITIES //////////////////// 13. Deposits: //////////////////// a. In domesteic offices (sum of totals of columns A and C from Schedule RC-E) . . . . . . . . .2200 2,240,497 (1) Noninterest-bearing(1).................................. RCON 6631 868.041 //////////////////// (2) Interest-bearing........................................ RCON 6636 1,154,927 //////////////////// b. In foreign offices, Edge and Agreement subsidiaries, and IBFs. . . . . . . . . . . . . . . .//////////////////// (1) Noninterest-bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .//////////////////// (2) Interest-bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .//////////////////// 14. Federal funds purchased and securities sold under agreements to repurchase: . . . . . . . . . ./////////////////// a. Federal funds purchased. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .0278 559,114 b. Securities sold under agreements to repurchase . . . . . . . . . . . . . . . . . . . . . .0279 4,918 15. a. Demand notes issued to the U. S. Treasury . . . . . . . . . . . . . . . . . . . . . . . . .2840 0 b. Trading liabilities (from Schedule RC-D) . . . . . . . . . . . . . . . . . . . . . . . . . .3548 0 16. Other borrowed money: //////////////////// a. With original maturity of one year or less.. . . . . . . . . . . . . . . . . . . . . . . . .2332 0 b. With original maturity of more than one year . . . . . . . . . . . . . . . . . . . . . . . .2333 0 17. Mortgage indebtness and obligations under capitalized leases. . . . . . . . . . . . . . . . . .2910 0 18. Bank's liability on acceptances executed and outstanding. . . . . . . . . . . . . . . . . . . .2920 4,344 19. Subordinated notes and debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3200 0 20. Other liabilities (from Schedule RC-G). . . . . . . . . . . . . . . . . . . . . . . . . . . . .2930 31,012 21. Total liabilities (sum of items 13 through 20). . . . . . . . . . . . . . . . . . . . . . . . .2948 2,839,885 //////////////////// 22. Limited-life preferred stock and related surplus. . . . . . . . . . . . . . . . . . . . . . . .3282 0 EQUITY CAPITAL //////////////////// 23. Perpetual preferred stock and related surplus . . . . . . . . . . . . . . . . . . . . . . . . .3838 0 24. Common stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3230 16,500 25. Surplus (exclude all surplus related to preferred stock). . . . . . . . . . . . . . . . . . . .3839 22,742 26. a. Undivided profits and capital reserves. . . . . . . . . . . . . . . . . . . . . . . . . . .3632 202,739 b. Net unrealized holding gains (losses) on available-for-sale securities. . . . . . . . . . .8434 (5,347) 27. Cumulative foreign currency translation adjustments . . . . . . . . . . . . . . . . . . . . . .//////////////////// 28. Total equity capital (sum of items 23 through 27) . . . . . . . . . . . . . . . . . . . . . . .3210 236,634 29. Total liabilities, limited-life preferred stock, and equity capital //////////////////// (sum of items 21, 22, and 28) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3300 3,076,519
EX-25 11 T-1 STMT OF ELIGIBILITY OF TRUSTEE, COMMERCE BANK Exhibit 25.B FORM T - 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO SECTION 305(b)(2) COMMERCE BANK, NATIONAL ASSOCIATION (exact name of trustee as specified in its charter) NATIONAL BANKING ASSOCIATION (State of incorporation if not a national bank) 44-0206815 (I.R.S. employer identification No.) 1000 WALNUT STREET, KANSAS CITY, MISSOURI (Address of principal executive offices) 64106 (Zip Code) William E. Ekey 922 Walnut Street, Kansas City, MO 64106 (816) 234-2101 (Name, Address and telephone number of agent for service) Farmland Industries, Inc. (Exact name of obligator as specified in its charter) Kansas (State or other jurisdiction of incorporation or organization) 44-0209330 (I.R.S. Employer Identification No.) 3315 North Oak Trafficway, Kansas City, Missouri (Address of principal executive offices) 64116 (Zip Code) 10-Year Subordinated Capital Investment Certificates 5-Year Subordinated Capital Investment Certificates 10-Year Subordinated Monthly Income Capital Investment Certificates 5-Year Subordinated Monthly Income Capital Investment Certificates Demand Loan Certificates (Title of the indenture securities) ITEM 1. General Information. Furnish the following information as to the trustee: (a) Name and address of each examining or supervising authority to which it is subject. Comptroller of the Currency, Washington, D.C. Federal Reserve Bank of Kansas City, Kansas City, Missouri Federal Deposit Insurance Corporation Washington, D.C. Kansas City Clearing House Association, Kansas City, Missouri. (b) Whether it is authorized to exercise corporation trust powers. Yes. As authorized by the Comptroller of the Currency, effective June 30, 1972. Previously organized as a trust company under the Laws of the State of Missouri. ITEM 2. Affiliations with obligor and underwriters. If the obligor or any underwriter for the obligor is an affiliate of the trustee, describe each such affiliation. NONE ITEM 3. Voting securities of the trustee. Furnish the following information as to each class of voting securities of the trustee: As of October 31, 1996 COL. A. COL. B. Title of class Amount Outstanding Capital Stock - par $20 900,000 Shares ITEM 4. Trusteeships under other indentures. If the trustee is a trustee under another indenture under which any other securities, or certificates of interest or participation in any other securities, of the obligor are outstanding, furnish the following information: (a) Title of the securities outstanding under each such other indenture. FARMLAND INDUSTRIES, INC. (F.K.A. Consumers Cooperative Association) Subordinated Certificates of Investment (under Indenture dated February 25, 1970, as amended by Supplemental Indenture dated April 1, 1970) 8-1/2%, due 10 years from date of issue and Subordinated Monthly Interest Certificate (under Indenture dated November 29, 1971, amended by Supplemental Indenture dated December 22, 1971, as amended by Amended Indenture dated January 6, 1972), 7-1/2%, due 10 years from date of issue and Subordinated Capital Investment Certificates (under Indenture dated July 29, 1974) 8-1/2%, due 10 years from date of issue and Subordinated Capital Investment Certificates (under Indenture dated July 29, 1974) 9%, due 15 years from date of issue and Subordinated Capital Investment Certificates (under Indenture dated July 29, 1974) 9-1/2% due 20 years from date of issue and Subordinated Capital Investment Certificates (under Indenture dated November 29, 1976) 9-1/2%, due 20 years from date of issue and Subordinated Capital Investment Certificates (under Indenture dated October 24, 1979) 10-1/2%, due 25 years from date of issue and Subordinated Capital Investment Certificates (under Indenture dated October 24, 1978, as amended by Supplemental Indenture dated December 21, 1978) 9- 1/2%, due 20 years from date of issue and Subordinated Capital Investment Certificates (under Indenture dated May 20, 1980) due 10 years from date of issue and Subordinated Capital Investment Certificates (under Indenture dated November 5, 1980) due 5 years from date of issue and Subordinated Capital Investment Certificates (under Indenture dated November 5, 1980) due 20 years from date of issue and Subordinated Monthly Income Capital Investment Certificates (under Indenture dated November 5, 1980) due 10 years from date of issue and Subordinated Individual Retirement Account Certificates (under Indenture dated November 20, 1981) due 10 years from date of issue and Subordinated Monthly Income Capital Investment Certificates (under Indenture dated November 11, 1985) due 5 years from date of issue (b) A brief statement of the facts relied upon as a basis for the claim that no conflicting interest within the meaning of Section 310 (b) (1) of the Act arises as a result of the trusteeship under any such other indenture, including a statement as to how the securities will rank with the securities issued under such other indenture. The securities issued, or to be issued, under the indentures named herein are wholly unsecured and rank equally with each other without priority. ITEM 5. Interlocking directorates and similar relationships with obligor or underwriters. If the trustee or any of the directors or executive officers of the trustee is a director, officer, partner, employee, appointee, or representative of the obligor or of any underwriter for the obligor, identify each such person having any such connection and state the nature of each such connection. H. D. Cleberg, President and CEO of Farmland Industries, Inc. is a director of Commerce Bank of Kansas City, N.A. ITEM 6. Voting securities of the trustee owned by the obligor or its officials. Furnish the following information as to the voting securities of the trustee owned beneficially by the obligor and each director, partner and executive officer of the obligor. As of October 31, 1996 COL. A. COL. B. COL. C. COL. D. Amount Percentage of voting Name of Title of owned securities represented by owner class beneficially amount given in Col. C. NONE [The remainder of this page was intentionally left blank] ITEM 7. Voting securities owned by underwriters or their officials. Furnish the following information as to the voting securities of the trustee owned beneficially by each underwriter for the obligor and each director, partner, and executive officer or each underwriter. As of October 31, 1996 COL. A. COL. B. COL. C. COL. D. Amount Percentage of voting Name of Title of owned securities represented by owner class beneficially amount given in Col. C. NONE ITEM 8. Securities of the obligor owned or held by the trustee. Furnish the following information as to the securities of the obligor owned beneficially or held as collateral security for obligations in default by the trustee. As of October 31, 1996 COL. A. COL. B. COL. C. COL. D. Whether the Amount owned Percent of securities are beneficially or held as class represented Title of voting or non- collateral security for by amount given class voting securities obligations in default in Col. C. NONE ITEM 9. Securities of underwriters owned or held by the trustee. If the trustee owns beneficially or holds collateral security for obligations in default any securities of an underwriter for the obligor, furnish the following information as to each class of securities of such underwriter any of which are so owned or held by the trustee. As of October 31, 1996 COL. A. COL. B. COL. C. COL. D. Amount owned beneficially Percent of Name of issuer or held as collateral class represented and Title Amount security for obligations by amount given of class outstanding in default by trustee in Col. C. NONE ITEM 10. Ownership or holdings by the trustee of voting securities of certain affiliates or security holders of the obligor. If the trustee owns beneficially or holds as collateral security for obligations in default voting securities of a person who, to the knowledge of the trustee (1) owns 10 percent or more of the voting securities or the obligor or (2) is an affiliate, other than a subsidiary or the obligor, furnish the following information as to the voting securities of such person. As of October 31, 1996 COL. A. COL. B. COL. C. COL. D. Amount owned beneficially Percent of Name of issuer or held as collateral class represented and Title of Amount security for obligations by amount given class outstanding in default by trustee in Col. C. NONE ITEM 11. Ownership or holdings by the trustee of any securities of a person owning 50 percent or more of the voting securities of the obligor. If the trustee owns beneficially or holds as collateral security for obligations in default any securities of a person who, to the knowledge of the trustee, owns 50 percent or more of the voting securities of the obligor, furnish the following information as to each class of securities of such person any of which are so owned or held by the trustee. As of October 31, 1996 COL. A. COL. B. COL. C. COL. D. Amount owned beneficially Percent of Name of issuer or held as collateral class represented and Title of Amount security for obligations by amount given class outstanding in default by trustee in Col. C. NONE ITEM 12. Indebtedness of the Obligor to the Trustee Except as noted in the instructions, if the obligor is indebted to the trustee, furnish the following information: COL. A. COL. B. COL. C Nature of Indebtedness Amount Outstanding Date Due Unsecured Line of Credit $9,000,000 5/15/97 Unsecured Line of Credit $3,070,900 5/15/01 ITEM 13. Defaults by the Obligor (a) State whether there is or has been a default with respect to the securities under this indenture. Explain the nature of any such default There is not currently, nor has there been a default with respect to the securities under the indentures. (b) If the trustee is a trustee under another indenture under which any other securities, or certificates of interest or participation in any other securities, of the obligor are outstanding, or is trustee for more than one outstanding series of securities under the indenture, state whether there has been a default under any such indenture or series, identify the indenture or series affected, and explain the nature of any such default. There has been no default under any of the securities for which the Trustee is a Trustee under any other indenture. ITEM 14. Affiliations with the Underwriters If any underwriter is an affiliate of the trustee, describe each such affiliation. No underwriter is an affiliate of the trustee. ITEM 15. Foreign Trustee Identify the order or rule pursuant to which the foreign trustee is authorized to act as sole trustee under indentures qualified or to be qualified under the Act. Not applicable. ITEM 16. List of Exhibits: 1. A copy of the articles of association of the trustee as now in effect. 2. A copy of the certificate of authority of the trustee to commence business, if not contained in the articles of association. 3. A copy of the authorization of the trustee to exercise corporate trust powers. 4. A copy of the existing By-Laws of the trustee or instruments corresponding thereto. 5. A copy of each indenture referred to in Item 4 hereof. 6. The consents of the trustee required by Section 321(b) of the Act. 7. A copy of the latest report of condition of the trustee published pursuant to law or the requirements of the supervising examining authority. SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939, the trustee, Commerce Bank, National Association, a banking association organized and existing under the laws of the United States, has duly caused this statement of eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of Kansas City, and State of Missouri, on the 31st day of October, 1996. COMMERCE BANK, NATIONAL ASSOCIATION By /s/ William E. Ekey William E. Ekey Vice-President EXHIBIT 1 COPY OF THE ARTICLES OF ASSOCIATION OF THE TRUSTEE AS NOW IN EFFECT ARTICLES OF ASSOCIATION Commerce Bank, National Association (Charter #18112) For the purpose of organizing an Association to carry on the business of banking under the laws of the United States, the undersigned do enter into the following Articles of Association: FIRST. The title of this Association shall be Commerce Bank, National Association. SECOND. The main office of the Association shall be in the City of Kansas City, County of Jackson, State of Missouri. The general business of the Association shall be conducted at its main office and its branches. THIRD. The Board of Directors of this Association shall consist of not less than five nor more than twenty-five shareholders, the exact number of Directors within such minimum and maximum limits to be fixed and determined from time to time by resolution of a majority of the full Board of Directors or by resolution of the shareholders at any annual or special meeting thereof. Unless otherwise provided by the laws of the United States, any vacancy in the Board of Directors for any reason, including an increase in the number thereof, may be filled by action of the Board of Directors. FOURTH. The annual meeting of the shareholders for the election of Directors and the transaction of whatever other business may be brought before said meeting shall be held at the main office or such other place as the Board of Directors may designate, on the day of each year specified therefor in the By-Laws, but if no election is held on that day, it may be held on any subsequent day according to the provisions of law; and all elections shall be held according to such lawful regulations as may be prescribed by the Board of Directors. Nominations for election to the Board of Directors may be made by the Board of Directors or by any shareholder of any outstanding class of capital stock of the bank entitled to vote for election of directors. FIFTH. The authorized amount of capital stock of this Association shall be 100,000 shares of common stock of the par value of one hundred dollars ($100.00) each; but said capital stock may be increased or decreased from time to time, in accordance with the provisions of the laws of the United States. No holder of shares of the capital stock of any class of the corporation shall have any preemptive or preferential right of subscription to any shares of any class of stock of the corporation, whether now or hereafter authorized, or to any obligations convertible into stock of the corporation, issued or sold, nor any right of subscription to any thereof other than such, if any, as the Board of Directors, in its discretion, may from time to time determine and at such price as the Board of Directors may from time to time fix. The Association, at any time and from time to time, may authorize and issue debt obligations, whether or not subordinated, without the approval of the shareholders. SIXTH. The Board of Directors shall appoint one of its members President of this Association, who shall be Chairman of the Board, unless the Board appoints another director to be the Chairman. The Board of Directors shall have the power to appoint one or more Vice Presidents; and to appoint a Cashier and such other officers and employees as may be required to transact the business of this Association. The Board of Directors shall have the power to define the duties of the officers and employees of the Association; to fix the salaries to be paid to them; to dismiss them; to require bonds from them and to fix the penalty thereof; to regulate the manner in which any increase of the capital of the Association shall be made; to manage and administer the business and affairs of the Association; to make all By-Laws that it may be lawful for them to make; and generally to do and perform all acts that it may be legal for a Board of Directors to do and perform. SEVENTH. The Board of Directors shall have the power to change the location of the main office to any other place within the limits of Kansas City, Missouri, without the approval of the shareholders, and shall have the power to establish or change the location of any branch or branches of the Association to any other location without the approval of the shareholders but subject to the approval of the Comptroller of the Currency. EIGHTH. The corporate existence of this Association shall continue until terminated in accordance with the laws of the United States. NINTH. The Board of Directors of this Association, or any shareholder owning, in the aggregate, not less than 25 per cent of the stock of this Association, may call a special meeting of shareholders at any time. Unless otherwise provided by the laws of the United States, a notice of the time, place, and purpose of every annual and special meeting of the shareholders shall be given by first-class mail, postage prepaid, mailed at least ten days prior to the date of such meeting to each shareholder of record at his address as shown upon the books of this Association. TENTH. This Association shall, to the fullest extent permissible under The General and Business Corporation Law of Missouri, (a) indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, other than an action by or in the right of the corporation, by reason of the fact that such person is or was a director, officer or employee of this Association, or is or was serving at the request of this Association as a director, officer or employee of another corporation, partnership, joint venture, trust or other enterprise, against expenses, including attorneys' fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Association, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful, and (b) indemnify any person who was or is a party or is threatened to be made a party to any threatened pending or completed action or suit by or in the right of the Association to procure a judgment in its favor by reason of the fact that such person is or was a director, officer or employee of the Association or is or was serving at the request of the Association as a director, officer or employee of another corporation against expenses and amounts paid in settlement actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Association, and indemnification shall be made in the event of negligence or misconduct in the performance of duties to the corporation only to the extent that the court in which the action or suit was brought determines upon application that the person is fairly and reasonably entitled to indemnity for such expenses; provided, however, that no such indemnification shall be available to any person against expenses or civil money penalties arising from final orders in an administrative proceeding or action instituted by an appropriate bank regulatory agency assessing such civil money penalties or requiring affirmative action by an individual or individuals in the form of payments to this Association; and, provided further, that all advances to an officer, director or employee to indemnify such party against expenses incurred in an action instituted by the Comptroller of the Currency shall be made subject to reimbursement if a final order is entered assessing civil money penalties or requiring payments to be made to this Association and before any advances are made the Board of Directors of this Association in good faith has determined in writing that all the following conditions are met: 1. The officer, director or employee has a substantial likelihood of prevailing on the merits; 2. In the event the officer, director or employee does not prevail, he or she will have the financial capability to reimburse this Association; and 3. Payment of expenses by this Association will not adversely affect the Association's safety and soundness; and provided further, the Association may purchase insurance covering the liability of its directors, officers, or employees, and pay the premiums therefor, to the extent authorized under The General and Business Corporation Law of Missouri, except that any such insurance shall exclude insurance coverage for a formal order assessing civil money penalties against a bank director or employee. ELEVENTH. These Articles of Association may be amended at any regular or special meeting of the shareholders by the affirmative vote of the holders of a majority of the stock of this Association, unless the vote of the holders of a greater amount of stock is required by law, and in that case by the vote of the holders of such greater amount. EXHIBIT 2 COPY OF THE CHARTER EXHIBIT 3 COPY OF THE AUTHORIZATION OF THE TRUSTEE TO EXERCISE CORPORATE TRUST POWERS EXHIBIT 4 COPY OF THE EXISTING BY-LAWS OF THE TRUSTEE OR INSTRUMENTS CORRESPONDING THERETO COMMERCE BANK, N.A., Kansas City, Missouri By-Laws as amended thru October 31, 1996 BY-LAWS OF COMMERCE BANK, NATIONAL ASSOCIATION KANSAS CITY, MISSOURI BY-LAWS OF COMMERCE BANK, NATIONAL ASSOCIATION KANSAS CITY, MISSOURI ARTICLE I STOCKHOLDERS' MEETING Section 1.1 Stockholders' Annual Meeting. The annual meeting of the stockholders of this Association for the election of directors and the transaction of other business shall be held at the offices of the Association in Kansas City, Missouri, on the third Tuesday of February in each year, and shall be convened by the Chairman of the Board or the President at the hour of ten o'clock A.M. Section 1.2 Special Meetings of Stockholders. Special meetings of the stockholders may be called by the Chairman of the Board or the President at any time, and shall be called whenever so directed by resolution of the Board of Directors, or whenever stockholders holding a majority of the capital stock issued and outstanding, request either of them in writing so to do. Section 1.3 Notice. Notice of each annual and each special meeting of stockholders shall be given by the Secretary as required by law; provided, that notice of any meeting of stockholders may be waived by any stockholder executing a written waiver of notice either before, during or after such meeting. Section 1.4 Votes. Each share of stock shall entitle its owner to one vote, and in case of election for Directors, each stockholder shall have the right to cast as many votes in the aggregate as shall equal the number of shares held by such stockholder, multiplied by the number of directors to be elected, and may cast the whole number of votes, in person or by proxy, for one candidate or distribute them among two or more. Section 1.5 Proxies. Stockholders may vote at any meeting of the stockholders by proxies duly authorized in writing; provided, however, that each proxy shall be valid only for the specific meeting of stockholders specified therein and at any adjournments of such meeting, and, provided further, that no officer or employee of this Association shall act as proxy. Proxies shall be dated and shall be filed with the records of the meeting. ARTICLE II DIRECTORS Section 2.1 Board of Directors. The affairs of this Association shall be controlled and managed by a Board of Directors (hereinafter referred to as the "Board") consisting of not less than five nor more than twenty-five shareholders, the exact number within such minimum and maximum limits to be fixed and determined from time to time by resolution of a majority of the full Board or by resolution of the shareholders at any meeting thereof; provided, however, that a majority of the full Board may not increase the number of directors to a number which: (i) exceeds by more than two the number of directors last elected by shareholders where such number was fifteen or less; and (ii) exceeds by more than four the number of directors last elected by shareholders where such number was sixteen or more, but in no event shall the number of directors exceed twenty-five. In addition the Board may appoint, from time to time, one or more advisory directors to serve in advisory capacities only without the power of final decision in matters concerning the business of the bank. Advisory directors shall be entitled to the same compensation as other directors and shall be subject to the same requirements relating to retirement. Advisory directors may also serve in an advisory capacity on any committee; provided, that an advisory director may not fill any committee position which, according to these By-Laws, must be filled by a regular member of the Board. Section 2.2 Retirement of Directors. No person shall be elected a director of this Association who shall have attained the age of 70 years, and each person serving as a director of this Association upon attaining the age of 70 years shall be deemed to have submitted his resignation as a director of this Association with such resignation to become effective on the day such director attains the age of 70 years. Notwithstanding the foregoing, a director who is also an officer of this Association shall retire from the Board on the date he shall resign, retire or otherwise terminate his services as an officer of this Association; provided, however, that for the purposes of this Section only, a director serving as Chairman of the Board or as Chairman of any Committee of the directors shall not be deemed to be an officer of this Association, and provided further that without establishing any precedent and because of the unique position of James M. Kemper, Jr., he may continue to serve as a director of this Association after attaining the age of 70 years and may thereafter be elected to serve as a director of this Association. The election or re-election by mistake or otherwise of a director in violation of the aforesaid policy shall not, ipso facto, void such election or re-election or nullify any actions such person might take as a director. Section 2.3 Board Meetings. Regular meetings of the Board shall be held at the office of the Association in Kansas City, Missouri, at the hour of 1:00 o'clock in the afternoon, on the third Tuesday of every January, March, May, July, September and November, if not a legal holiday, and if the same be a legal holiday, then on the first day following which is not a legal holiday. No notice shall be required for any such regular monthly meetings of the Board, and any and all business may be transacted thereat. At the first regular meeting of the Board following a stockholders meeting at which directors are elected, the Board shall first proceed with the organization of the new Board and shall elect and appoint such officers as these By-Laws or the Board may prescribe. Section 2.4 Special Board Meetings. Special meetings of the Board may be held at any time on the call of the Chairman of the Board, the Chairman of the Executive Committee, if one be elected, or the President, or any three (3) directors. Section 2.5 Notice of Board Meetings. While no notice shall be required for any regular meeting of the Board, nevertheless, the Secretary, for the information of the directors, shall mail to each director a written or printed notice specifying the time and place of such meeting, addressed to him at his last known business address (postage prepaid), not less than twenty-four (24) hours before the hour fixed for the meeting. Except in the case of special meetings called by reason of emergency, as hereinafter provided, notice of the time and place of special meetings shall be given by the Secretary, in writing, delivered to, or by telephone message communicated to, or by prepaid telegram deposited in the telegraph office at Kansas City, Missouri, addressed to each director not less than twenty-four (24) hours before the hour fixed for the meeting. Such notices and communications may be addressed to or communicated to such director at his last known place of business or residence, and shall be sufficient if delivered to, addressed to, or communicated to, such place of business or residence. If in the opinion of the Chairman of the Board, or the President, and of three directors, the matters to be presented at such special meeting are so urgent in their character as to constitute an emergency requiring a shorter notice, and they shall so certify in writing, notice of such meeting may be given in the same manner as hereinbefore provided, but shall be sufficient if given at least one (l) hour before the hour fixed for the meeting. Unless otherwise indicated in the notice thereof, any and all business may be transacted at a special meeting. Section 2.6 Quorum. A majority of the directors shall constitute a quorum at any meeting, except when otherwise provided by law, but a lesser number may adjourn any meeting from time to time and the meeting may be held, as adjourned, without further notice. Section 2.7 Vacancies. When any vacancy occurs among the directors the remaining members of the Board, in accordance with the laws of the United States, may appoint a director to fill such vacancy at any regular meeting of the Board or at a special meeting called for that purpose. Section 2.8 Compensation of Directors. The compensation of directors of this Association for services shall be $650.00 for each regular or special meeting of the Board attended; provided that no such compensation shall be paid to any director who shall at the time be receiving a salary from the Association, the parent of the Association or any other subsidiary of the parent, as an officer thereof, without express order from the Board. Each director shall be entitled to two paid absences per year. ARTICLE III COMMITTEES Section 3.1 Executive Committee. The Executive Committee shall consist of seven directors, of whom the Chairman of the Board, the Chairman of the Executive Committee, if one be so elected, and the President shall be members and such other members of the Board as may be appointed, from time to time, by the Chairman of the Board with the approval of the Board. The Executive Committee shall have, and exercise, all the powers of the Board during the intervals between meetings of the Board, including the power to control the conduct of the Association's business, and full power to appoint committees and prescribe their duties, and to direct the actions of all officers, agents and employees of the Association. The Executive Committee shall meet at the office of the Association on such days and at such hour as meetings of such Committee may be called, from time to time, by any three members thereof, or by the Chairman of the Executive Committee, the Chairman of the Board, or the President. Notices of meetings shall be given in the same manner as is provided for in the case of special emergency meetings of the Board. Four (4) members of the Executive Committee shall constitute a quorum for the transaction of business. Unless otherwise indicated in the notice thereof, any and all business may be transacted at any meeting of the Committee. Minutes of the meetings of the Executive Committee shall be recorded in chronological order in the same Minute Book of the Association in which the minutes of the meetings of the stockholders and of the Board are recorded, and shall be approved at the next succeeding meeting of the Board as the report of that committee to the Board, together with any special report that said Committee may wish to make to the Board not contained in said minutes. Section 3.2 Trust Committee. There shall be a committee to be known as the Trust Committee, consisting of nine regular members selected from the members of the Board. At least one of the members shall be an ex-officio member selected from the Chairman of the Board, any Vice Chairman or the President, and at least three other members of the Committee shall be selected from Board members who are not officers of the Association. The regular members shall be appointed by the Chairman of the Board with the approval of the Board, such appointment to be made annually at the regular meeting of the Board in December of each year, and shall hold their offices as such until their successors are duly appointed. Vacancies occurring in the Trust Committee shall be filled by the Chairman of the Board, subject to the approval of the Board at a regular meeting after such vacancy occurs. The powers of appointment hereby given to the Chairman of the Board may be exercised by the President in the absence of the Chairman. Said Committee shall have general supervision and control of the sale and disposition of all property and assets, as well as of the investments and reinvestments of all funds and other property, which have, or may at any time, come into the custody, possession, control of, or have been, or may be acquired by the Association through its Trust Division, in its fiduciary capacity (including, but not by way of limitation, in the capacity of executor, administrator, guardian, curator, trustee and/or agent), and with reference to the same, and each of the same, said Committee shall possess the same authority and power as the Board. Three members shall constitute a quorum. Regular meetings of the Committee shall be held at the offices of the Association on such days and at such hour as may be fixed by the Committee; and special meetings may be held at any time upon call of the Chairman of the Board, the President of the Association or the Chairman of the Committee. A Vice President assigned to the Trust Division or a Trust Officer shall attend all meetings of the Committee. Section 3.3 Examining Committee. At the December meeting of the Board held in each year, the Chairman, with the approval of the Board, shall appoint not less than three directors to serve for the ensuing year as members of the Examining Committee. Such members shall not consist of any director who may at the same time be serving as an officer or employee of the Association. Vacancies occurring from time to time in the Committee may be filled by the Chairman with the approval of the Board. The Committee shall meet at such time or times as it shall deem appropriate and shall have the duty of meeting with and receiving the reports of the Auditor of the Association and such independent accountants as may, from time to time, conduct audits of the Association. The Committee shall determine whether adequate internal audit controls and procedures are being maintained, shall supervise the continuous audit system of the Association and shall recommend to the Board such changes in the manner of doing business or conducting the affairs of the Association as it shall deem advisable. The Examining Committee shall also make, or cause to be made by auditors responsible only to the Board, suitable audits of the Trust Division at least once during each calendar year and within fifteen months of the last audit. Section 3.4 Other Committees. From time to time the Board may create such other committees, consisting of such persons, as the Board may determine to be necessary or desirable and may fix the powers and duties of any such committee. Section 3.5 Compensation of Committee Members. The compensation of committee members for service shall be $150.00 (or such lesser amount as shall be specified in the resolution establishing any other committee) for each meeting attended; provided, that no such compensation shall be paid to any committee member who shall at the time be receiving a salary from the Association, the parent of the Association or any other subsidiary of the parent, as an officer thereof, without express order from the Board. ARTICLE IV OFFICERS Section 4.1 Executive Officers. The executive officers of this Association shall be the Chairman of the Board, the Vice Chairman of the Board, if one or more is so elected, the Chairman of the Executive Committee, if one be so elected, the President, the Senior Executive Vice Presidents, the Executive Vice Presidents and the Secretary. Any person may hold two or more offices except the offices of President and Secretary. Section 4.2 Chairman of the Board. The Board shall elect one of its members to be Chairman of the Board. He shall preside at all meetings of the Board and shall supervise the establishment of policies adopted or approved by the Board. He shall have general executive powers, including, by way of illustration, the power to fix remuneration of officers, agents and employees; to employ and dismiss any officer, agent or employee; and to assign officers, agents and employees to duties in the various areas of the Association, as well as the specific powers conferred by these By-Laws and shall also have and may exercise such further powers and duties as may from time to time be conferred upon, or assigned to him by the Board. Section 4.3 Vice Chairman of the Board. The Board may elect one or more of its members to the office of Vice Chairman of the Board. In the absence of the Chairman, any Vice Chairman may preside at any meeting of the Board. The Vice Chairman of the Board shall assist the Chairman of the Board in establishing policies adopted or approved by the Board. A Vice Chairman of the Board shall have such general executive powers as may be assigned by the Chairman as well as specific powers conferred by these By-Laws, and shall also have and may exercise such further powers and duties as may from time to time be conferred upon or assigned to him by the Board. Section 4.4 Chairman of the Executive Committee. The Board may elect one of its members to the office of Chairman of the Executive Committee, and such officer shall preside over all meetings of the Executive Committee. In the absence of the Chairman or any Vice Chairman of the Board, the Chairman of the Executive Committee shall preside at any meeting of the Board. The Chairman of the Executive Committee shall have such general executive powers as may be assigned by the Chairman as well as specific powers conferred upon or assigned to him by the Board. Section 4.5 President. The Board shall elect one of its members to be President of the Association. In the absence of the Chairman, any Vice Chairman, or Chairman of the Executive Committee, the President shall preside at any meeting of the Board. The President shall have such general executive powers as may be assigned by the Chairman, and shall have and may exercise any and all other powers and duties pertaining by law, regulation, or practice, to the office of President, or imposed by these By-Laws, and shall also have and may exercise such further powers and duties as may from time to time be conferred upon or assigned to him by the Board. Section 4.6 Vice President. The Board shall elect one or more Vice Presidents and may classify one or more of such Vice Presidents so elected as Senior Executive Vice President, Executive Vice President, Senior Vice President or otherwise as the Board may deem appropriate. The offices of Senior Executive Vice President, Executive Vice President, and Senior Vice President shall be deemed executive offices of the Association and the persons holding such office shall be authorized to participate in the major policy making functions of the Association and shall additionally have such powers and duties as imposed by the By-Laws or assigned or conferred from time to time by the Board, the Chairman of the Board, a Vice Chairman or the President. Each Vice President shall have and may exercise any and all powers and duties pertaining to the office of Vice President as imposed by these By-Laws and shall also have and may exercise such further powers and duties as may from time to time be conferred upon or assigned to him by the Board, the Chairman of the Board, a Vice Chairman or the President. Section 4.7 Secretary. The Board shall elect a Secretary (who may also be designated as Cashier) who shall be the Secretary of the Board and of the Association. He shall attend the meetings of stockholders, the Board, and the Executive Committee and keep minutes of said meetings and shall have custody of the corporate records of the Association. He shall have custody of the seal of the Association and shall have authority to affix the same to any instrument executed on behalf of the Association and also to attest the same. He shall also attend to the giving of all notices required by these By-Laws to be given and shall have and may exercise any and all other powers and duties pertaining by law, regulation or practice or imposed by these By-Laws or as may be assigned to him, from time to time, by the Board. Section 4.8 General Counsel. The Board shall elect a General Counsel who shall have charge of the legal business of the Association and shall appear or provide for proper appearances for the Association in suits and proceedings to which it is a party. He shall advise the Board, Executive Committee, Chairman of the Board, President and other officers of the Association concerning the affairs of the Association when by them requested. He shall also have such other powers and duties as may be imposed by these By-Laws. Section 4.9 Controller. The Board shall elect a Controller who shall receive and take care of all monies, securities and evidences of indebtedness belonging to the Association, keep full and complete accounts of receipts and disbursements, and make reports thereof to the Executive Committee and the Board as often as may be requested. He shall, under the direction of the Chairman of the Board, a Vice Chairman, or the President, perform such other duties pertinent to his office as they may require. Section 4.10 Other Officers. The Board may elect one or more Trust Officers, one or more Assistant Vice Presidents, and one or more Assistant Secretaries together with such other junior officers, to be designated by such titles as the Board may determine, from time to time, as may appear to the Board to be required or desirable to transact the business of the Association. Such officers shall respectively exercise such powers and perform such duties as pertain to their several offices, or as may be conferred upon them or assigned to them by the Board, the Chairman of the Board, a Vice Chairman of the Board or the President. As used in these By-Laws a Trust Officer shall include Trust Investment Officer, Corporate Trust Officer, Trust Operations Officer, and a Trust Officer with such other descriptive term as may be applied by the Board. A person elected a junior officer under this Section shall use such title, approved by the Board, as the Chairman, from time to time, may designate. Section 4.11 Bonds. All officers shall be bonded with such security and approved in such manner as the Board or the Executive Committee may from time to time direct. Section 4.12 Tenure of Office. The officers of this Association shall be elected by the Board annually at the annual meeting of the Board and such officers as shall be elected to such offices shall continue in office for one year and until their successors shall be elected, unless such officer shall resign, become disqualified, or be removed. Persons may be elected officers or be promoted to a different office at any meeting of the Board; provided, that such person so elected shall continue in office only until the next annual meeting of the Board at which all officers are to be elected or re-elected, unless any such person shall resign, become disqualified, or be removed. The Board shall have the power to remove any officer at any time and, in addition, may designate by resolution, officers who shall have the authority to dismiss any officer, agent or employee. ARTICLE V POWERS AND DUTIES OF OFFICERS Section 5.1 Representation. The Chairman of the Board, any Vice Chairman, the President, the General Counsel, and such other officer or officers of the Association as may be empowered so to do by the Board, or any one of them, shall have power to act for, appear in behalf of, and represent this Association before all Departments and Courts of the United States of America, and any State, Territory or Possession thereof, and to execute general or special powers of attorney for litigation in favor of lawyers, solicitors, agents, or any other legal representatives, granting to them such powers and authorization, whether ordinary or extraordinary, and with or without limitation, which any such officer may deem advisable, including the power to settle in or out of court, or to submit to arbitrators or other adjustment, any question in which this Association may be interested; and to employ counsel and direct the taking of any legal action in reference to any of the foregoing, or any other matter or thing touching the interest of the Association. Section 5.2 Real Estate Conveyances. All transfers and conveyances of real estate, including releases of mortgages, deeds of trust and other real estate interests held, or purportedly held, by the Association, may be executed by the Chairman of the Board, any Vice Chairman, the President, or any Vice President and sealed with the corporate seal of the Association and, if required, attested by the Secretary or one of the Assistant Secretaries of the Association; and such instruments may be executed and delivered by the Chairman of the Board, the President, or any Vice President without any order of the Board of Directors. Section 5.3 Voting of Securities. Unless otherwise ordered by the Board or the Executive Committee, the Chairman of the Board, any Vice Chairman, the President, and any Vice President, (and, with respect to stock held in a fiduciary capacity, any Trust Officer) shall each have full power and authority in behalf of the Association to attend, and to act and to vote at any meeting of the stockholders of any corporation in which the Association may hold stock, in its own capacity or in any fiduciary capacity, and in connection with such meeting each of said officers shall possess and may exercise in behalf of the Association any and all rights and powers incident to the ownership of such stock, including the power to sign proxies therefor; provided, that any proxy granted with respect to stock held in a fiduciary capacity shall be limited to a single meeting and shall either be limited to voting for trustees or directors or shall direct how such proxy holder shall vote. Section 5.4 Foreclosure of Collateral. The Chairman of the Board, any Vice Chairman, the President, and any Vice President, shall each have power and authority for and on behalf of this Association to request, order or direct the foreclosure of any mortgage, deed of trust or other security agreement in favor of the Association held or owned by the Association (or held by this Association in trust) securing a loan or loans or other obligations and to exercise any or all of the options and powers inuring to this Association under the provisions of such mortgages, deeds of trust or security agreements or under the terms of the note or notes thereby secured, including the power and authority to appoint and designate a successor trustee or trustees as substitutes for the trustee or trustees named in any such mortgage or deed of trust. Section 5.5 Refusal to Serve as Trustee. The Chairman of the Board, any Vice Chairman, the President, and any Vice President, shall each have power and authority to act for the Association in refusing or declining to act as trustee under any mortgage or deed of trust securing a loan on real or personal property in which this Association is named or designated as trustee, and/or to resign as such trustee, and to make, execute and deliver in the name of, and for and in behalf of the Association, appropriate instruments, in writing, evidencing such refusal or declination to so act or such resignation. Section 5.6 Authentication of Securities. The Chairman of the Board, any Vice Chairman, the President, any Vice President, any Trust Officer, and any Assistant Trust Officer, shall each have authority to countersign or authenticate bonds or certificates on behalf of this Association as Trustee, and to sign, in behalf of this Association as Trustee, authentications or certifications of this Association as Trustee under any mortgage, deed of trust or other agreement securing an issue of bonds, debentures, notes or other obligations of any corporation, association or individual, or as registrar or transfer agent, and also certificates of deposit for stock, bonds, debentures, notes or other obligations, interim certificates and trust certificates. The Chairman of the Board, any Vice Chairman, the President, any Vice President, or the Secretary and any Assistant Secretary shall each have authority to countersign or authenticate bonds or certificates on behalf of this Association where this Association is the direct purchaser of the issue and to execute any closing documents required for the purchase of such bonds. Section 5.7 Trust Division. The Chairman of the Board shall assign a Vice President who shall have and may exercise, subject to the control of the Chairman, a Vice Chairman or the President, general supervision over the Trust Division. Such Vice President together with other Vice Presidents assigned to the Trust Division and the Trust Officers, and each of them, may represent the Association in any of the business of said division. All securities and funds held by the Association in a fiduciary capacity and the accounts of each trust or other fiduciary relationship shall be held separate and apart from those of every other and entirely separate and apart from the assets of the Association, and such securities shall be subject to the joint control of any two Trust Officers or, if designated by the Vice President having general supervision of the Trust Division, employees of the Trust Division. Each Vice President assigned to the Trust Division shall have and may exercise, so long as he remains assigned to said division, all of the powers granted by these By-Laws or by the Board to a Trust Officer. Section 5.8 Trusts. The Chairman of the Board, any Vice Chairman, the President, any Vice President assigned to the Trust Division, and the Trust Counsel, shall each have authority, for and on behalf of this Association, to accept or reject any and all trusts or other fiduciary duties or responsibilities which may be offered to this Association, and in connection therewith to execute, on behalf of this Association, all trust agreements or other appropriate instruments and the Secretary, or any Assistant Secretary of this Association, is authorized to affix the seal of this Association to any such trust agreement or other instrument which has been duly signed by any such officer. Section 5.9 Substitution of Attorney-in-Fact. Whenever this Association has been, or may be appointed Attorney-in-Fact, with power of substitution in and about the transfer of shares of capital stock, bonds or other instruments commonly referred to as securities of any corporation or other entity, the Chairman of the Board, any Vice Chairman, the President, or any Vice President of this Association may substitute, by a proper written instrument, an attorney- in-fact to act in the place and stead of this Association in and about such transfer. Section 5.10 Purchase or Transfer of Securities. The Chairman of the Board, any Vice Chairman, the President, and any Vice President of this Association, shall each have authority for and in behalf of the Association, and in its name, to sell, assign and transfer, or to purchase or otherwise acquire, directly or through a cash account of this Association established or maintained with a brokerage firm selected by such person, any and all shares of the capital stock, bonds, or other instruments commonly referred to as securities, and notes, mortgages and deeds of trust issued by any corporation or other entity and held or to be held by this Association in its own capacity or in any fiduciary capacity; and the Chairman of the Board, any Vice Chairman or the President may designate, in writing, from time to time, such other officers or employees as shall be authorized to exercise the powers granted by this Section. Section 5.11 Banking Relationships. The Chairman of the Board, any Vice Chairman and the President shall each have authority for and in behalf of the Association to designate from time to time institutions with which this Association may maintain checking or other depository accounts, safekeeping accounts, clearing accounts or such other form of account as may be deemed necessary or appropriate for the conduct of the Association's business, whether any such account shall be in the name of this Association or in the name of this Association in any custodial or fiduciary capacity, and to designate from time to time such individuals, who may be officers or employees of this Association, as shall be authorized to effect transactions with respect thereto, and with respect to any and all accounts or transactions with the Federal Reserve Bank of Kansas City, including, without limitation, the signing of checks, drafts or other orders with respect to any depository account to effect the deposit or withdrawal of funds, securities, instruments or other documents held in or subject to any such account, including delivery instructions with respect to any safekeeping, clearing or other form of account, and any such transactions as may be effected by a designated individual shall include authority to effect transfers of funds, securities, instruments or other documents subject to any such account by wire or telephone instruction. ARTICLE VI STOCK Section 6.1 Stock Certificates--Transferred. The capital stock of this Association shall be represented by certificates signed by the Chairman of the Board, any Vice Chairman, the President, or any Vice President, and attested by the Secretary or an Assistant Secretary, with the corporate seal affixed, and shall be transferable only on the books of the Association, in person or by attorney duly authorized according to law; and when stock is transferred, the certificate therefor shall be returned to the Association and canceled, and new certificate issued. Section 6.2 Stockholders Recognized. Until stock shall be transferred, as provided in Section 6.l, no person shall be recognized by this Association as the owner of said stock, except the person to whom the same was issued, and in whose name the same stands on the books of the Association, except as provided by law in case of executor, administrator, guardian or trustee. Section 6.3 Record Date. With respect to each meeting of stockholders, each declaration and payment of a dividend or distribution, or each declaration and grant of allotment of rights, the Board may fix a date preceding the date on which such event affecting the rights of any stockholder shall occur as a record date for the determination of the stockholders entitled to notice of and to vote at any such meeting or entitled to receive payment of any such dividend or to any such allotment of rights or to exercise the rights in respect of any change, conversion or exchange of capital stock, and in such case such stockholders and only such stockholders as shall be stockholders of record on the date so fixed shall be entitled to notice of and to vote at such meeting or to receive payment of such dividend or to receive such allotment of rights or to exercise such rights, as the case may be, notwithstanding any transfer of any stock on the books of the Association after any such record date fixed as aforesaid. Any such date as may be fixed by the Board as the record date shall not precede the date of any meeting of stockholders, the date for the payment of any dividend or the date for allotment of rights or the date when any change, conversion or exchange of capital stock shall go into effect by more than fifty days. If the Board shall not have set a record date for the determination of its stockholders entitled to participate in the event for which a record date be established, the date on which notice of the meeting is mailed or the date such dividend is declared or other right announced shall be the record date for such determination of stockholders so entitled to participate. ARTICLE VII MISCELLANEOUS Section 7.1 Fiscal Year. The fiscal year of this Association shall end on the 31st day of December in each year, and at the close of each fiscal year it shall be the duty of the Board to cause a complete and accurate statement of the financial condition of the Association to be made forthwith from the books thereof, a copy of which shall be submitted to the stockholders at the annual meeting. Section 7.2 Seal. The Association shall have a corporate seal which shall have inscribed around the upper circumference thereof "Commerce Bank" and around the lower circumference thereof "National Association" and elsewhere thereon shall bear the word "Seal". Section 7.3 Business Hours. The main office and all other facilities of the Association shall be open for the transaction of business on such days and during such hours as the Board or the Executive Committee may in its discretion determine. The Board of Directors, or the Executive Committee, however, may in its discretion change said hours and days, or close the office entirely, whenever the interests of the Association will be best served thereby, or circumstances shall render the same proper. Section 7.4 Amendments. The Board shall have the power to make, alter, amend, or repeal the By-Laws of this Association from time to time. Exhibit 5 COPIES OF INDENTURE Exhibit 5 COPIES OF INDENTURE Copies of the Indentures referred to in Item 4 hereof have heretofore been filed with the Securities and Exchange Commission under the Securities Act of 1933 and the Securities Exchange Act of 1934 as Exhibits to the Registration Settlements of the Farmland Industries, Inc. (formerly Consumers Cooperative Association). The copies of Indentures listed in this Exhibit 5 hereof are hereby incorporated by reference to the Exhibits to the Registration Statements which are listed as items (a) through (n) as follows: (a) Trust Indenture dated February 25, 1970, as amended by Supplemental Indenture dated April 1, 1970, and amended January 29, 1982. (Form S-1, No. 2-36418, effective April 6, 1970). 8-1/2%, 10-Year Subordinated Certificates of Investment (b) Trust Indenture dated November 29, 1971, as amended by Supplemental Indenture dated December 22, 1971, as amended by Amended Indenture dated January 6, 1972, and amended January 29, 1982. (Form S-1, No. 2-42493, effective January 14, 1972). 7-1/2%, 10-Year Subordinated Certificates of Investment (c) Trust Indenture dated July 29, 1974, as amended January 29, 1982. (Form S- 1, No. 2-51757 effective October 22, 1974). 8-1/2%, 10-Year Subordinated Capital Investment Certificates (d) Trust Indenture dated July 29, 1974, as amended January 29, 1982. (Form S- 1, No. 2-51757 effective October 22, 1974). 9%, 15-Year Subordinated Capital Investment Certificates (e) Trust Indenture dated July 29, 1974, as amended January 29, 1982. (Form S- 1, No. 2-51757 effective October 22, 1974). 9-1/2%, 20-Year Subordinated Capital Investment Certificates (f) Trust Indenture dated November 29, 1976, as amended January 29, 1982. (Form S-1, No. 2-55767 effective January 10, 1977). 9-1/2%, 20-Year Subordinated Capital Investment Certificates (g) Trust Indenture dated October 24, 1978, as amended December 21, 1978. (Form S-1, No. 2-63106) 9-1/2% 20-Year Subordinated Capital Investment Certificates (h) Trust Indenture dated October 24, 1978, as amended January 29, 1982. (Form S-1, No. 2-66090 effective January 3, 1980). 10-1/2%, 25-Year Subordinated Capital Investment Certificates (i) Trust Indenture dated November 8, 1984. (Form S-1, No. 2-94400 effective December 31, 1984). 10-Year Subordinated Capital Investment Certificates (j) Trust Indenture dated November 8, 1984. (Form S-1, No. 2-94400 effective December 31, 1984). 5-Year Subordinated Capital Investment Certificates (k) Trust Indenture dated November 8, 1984. (Form S-1, No. 2-94400 effective December 31, 1984). 20-Year Subordinated Capital Investment Certificates (l) Trust Indenture dated November 5, 1980. (Form S-1, No. 2-26998 effective December 31, 1980). 10-Year Subordinated Monthly Income Capital Investment Certificates (m) Trust Indenture dated November 20, 1981, as amended January 4, 1982, and as amended January 3, 1983. (Form S-1, No. 2-75071, effective January 7, 1982). 10-Year Subordinated Individual Retirement Account Certificates (n) Trust Indenture dated November 11, 1985 (Form S-1, No. 33-1970, effective December 3, 1985) 5-Year Subordinated Monthly Income Capital Investment Certificates Exhibit 6 CONSENTS OF THE TRUSTEE REQUIRED BY SECTION 321(B) OF THE ACT Exhibit 6 CONSENT OF THE TRUSTEE Pursuant to Section 321(b) of the Trust Indenture Act, Commerce Bank, National Association, hereby consents to the release of reports of examinations by Federal, State, Territorial or District authorities to the Securities and Exchange Commission upon request therefor. Dated this 31st day of October, 1996. COMMERCE BANK, NATIONAL ASSOCIATION, Trustee By: /s/ William E. Ekey William E. Ekey, Vice-President EXHIBIT 7 COPY OF THE LATEST REPORT OF CONDITION OF THE TRUSTEE PUBLISHED PURSUANT TO LAW OR THE REQUIREMENTS OF THE SUPERVISING EXAMINING AUTHORITY
STATEMENT OF CONDITION JUNE 30, 1996 ASSETS Loans, less allowance for loan losses of $ 43,785,000 $2,497,689,000 Investment securities: United States Government and Federal Agency Obligations $ 778,206,000 Obligations of states and political subdivision $ 16,824,000 Other securities $ 279,501,000 $1,074,531,000 Federal Funds sold and securities purchases under agreements to resell $ 353,745,000 Trading account securities $ 17,296,000 Net earning assets $3,943,261,000 Cash and due from banks $ 351,429,000 Land, buildings and equipment $ 98,807,000 Customers' acceptance liability $ 1,281,000 Other assets $ 82,169,000 Total Assets $4,476,947,000 LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Demand $ 860,895,000 Savings and interest bearing checking $1,685,235,000 Time $1,141,196,000 $3,687,326,000 Federal funds purchased and securities sold under agreements to repurchase $ 425,673,000 Accrued expenses and other liabilities $ 35,285,000 Acceptances outstandings $ 1,281,000 Other Borrowings $ 2,221,000 Total Liabilities $4,151,786,000 Total Stockholders' Equity $ 325,161,000 Total Liabilities and Stockholders' Equity $4,476,947,000
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