<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Mark One)
{X} ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended AUGUST 31, 1993
OR
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 2-60372
Farmland Industries, Inc.
(Exact name of registrant as specified in its charter)
Kansas 44-0209330
(State or other jurisdiction of in(I.R.S.tEmployerrIdentification No.)
3315 N. Oak Trafficway, Kansas City, Missouri 64116-0005
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 816-459-6000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes {X} No { }
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K (~229.405 of this chapter) is not
contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. { }
Farmland Industries, Inc. is a cooperative. Its voting stock can
only be held by its members. No public market for voting stock of
Farmland Industries, Inc. is established and it is unlikely, in the
foreseeable future, that a public market for such voting stock will
develop.
Documents incorporated by reference: None
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
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, 1993 are derived from the consolidated financial
statements of the Company, which consolidated financial
statements have been audited by KPMG Peat Marwick, independent
certified public accountants. The consolidated financial
statements as of August 31, 1993 and 1992 and for each of the
years in the three-year period ended August 31, 1993, and the
report thereon, are included elsewhere in this Form 10-K. The
information set forth below should be read in conjunction with
information included elsewhere in this Form 10-K: Management's
Discussion and Analysis of Financial Condition and Results of
Operations, the consolidated financial statements and related
notes, and the independent auditors' report which contains an
explanatory paragraph concerning income tax adjustments proposed
by the Internal Revenue Service on the gain on sale of and
certain distributions by Terra Resources, Inc.
<CAPTION>
Year Ended August 31
1993 1992 1991 1990 1989
(Dollars in Thousands)
Summary of Operations: (3)(4)(5)
<S> <C> <C> <C> <C> <C>
Net Sales..........................................$4,722,940 $3,429,307 $3,638,072 $3,377,603 $2,975,240
Interest Expense (net of
interest capitalized).............................$ 36,764 $ 27,965 $ 36,951 $ 30,090 $ 27,364
Income (Loss) Before Income Taxes
and extraordinary item (1)(2).....................$ (36,833) $ 70,504 $ 50,166 $ 58,184 $ 110,472
Net income (Loss) (1)(2)...........................$ (30,400) $ 62,313 $ 42,693 $ 48,580 $ 99,164
Distribution of Net Income:
Patronage Refunds:
Equity Reinvestments..........................$ 1,155 $ 1,038 $ 17,837 $ 24,403 $ 40,764
Cash or Equivalent............................ 495 17,918 12,571 8,800 14,477
Allocation to Minority Owners.................... -0- -0- -0- -0- 1,711
Earned Surplus and Other Equities................ (32,050) 43,357 12,285 15,377 42,212
$ (30,400) $ 62,313 $ 42,693 $ 48,580 $ 99,164
Balance Sheets:
Working Capital....................................$ 260,519 $ 208,629 $ 122,124 $ 121,518 $ 96,628
Property, Plant and Equipment, Net.................$ 504,378 $ 446,002 $ 490,712 $ 469,710 $ 411,469
Total Assets.......................................$1,719,981 $1,526,392 $1,369,231 $1,352,889 $1,182,401
Long-Term Debt.....................................$ 485,861 $ 322,377 $ 291,192 $ 273,071 $ 221,261
Capital Shares and Equities........................$ 561,707 $ 588,129 $ 497,364 $ 476,011 $ 458,543
<PAGE>
</TABLE>
(1) On On July 28, 1983, Farmland sold the stock of Terra
Resources, Inc. ("Terra"), a wholly-owned subsidiary engaged
in oil and gas exploration and production operations, and
exited its oil and gas exploration and production activities.
The gain from the sale of Terra amounted to $237,200,000 for
tax reporting purposes. During 1983, and prior to the sale of
the Terra stock, Farmland received certain distributions from
Terra totaling $24,800,000. For tax purposes, Farmland
claimed intercorporate dividends-received deductions for the
entire amount of such distributions.
On March 24, 1993, the Internal Revenue Service ("IRS") issued
a statutory notice to Farmland asserting deficiencies in
federal income taxes (exclusive of statutory interest thereon)
in the aggregate amount of $70,775,000. The asserted
deficiencies relate primarily to the Company's tax treatment
of the sale of the Terra stock and the distributions received
from Terra prior to the sale. The IRS asserts that Farmland
incorrectly treated the Terra sale gain as income against
which certain patronage-sourced operating losses could be
offset, and that, as a nonexempt cooperative, Farmland was not
entitled to an intercorporate dividends-received deduction in
respect of the 1983 distribution by Terra. It further asserts
that Farmland incorrectly characterized gains for tax purposes
aggregating approximately $14,600,000, and a loss of
approximately $2,300,000, from the disposition of certain
other assets. On June 11, 1993, Farmland filed a petition in
the United States Tax Court contesting the asserted
deficiencies in their entirety. A trial date has not yet been
set.
If the IRS ultimately prevails on all of the adjustments
asserted in the statutory notice, Farmland would have
additional federal and state income tax liabilities
aggregating approximately $85,800,000 plus accumulating
statutory interest thereon (through October 31, 1993, of
approximately $133,500,000). In addition, such adjustments
would affect the computation of Farmland's taxable income for
its 1989 tax year and, as a result, could increase Farmland's
federal and state income taxes for that year by approximately
$5,000,000 plus applicable statutory interest thereon.
No provision has been made in the consolidated financial
statements for federal or state income taxes (or interest
thereon) in respect of the IRS claims described above.
Farmland believes that it has meritorious positions with
respect to all of these claims and will continue to vigorously
pursue their favorable resolution through the pending
litigation.
In the opinion of Bryan Cave, Farmland's special tax counsel,
it is more likely than not that the courts will ultimately
conclude that (i) Farmland's treatment of the Terra sale gain
was substantially, if not entirely, correct; and (ii) Farmland
<PAGE>
properly claimed a dividends-received deduction in respect of
the 1983 distributions which it received from Terra prior to
the sale of the Terra stock. Counsel has further advised,
however, that none of the issues involved in these disputes is
free from doubt, and that there can be no assurance that the
courts will ultimately rule in favor of Farmland on any of
these issues.
Should the IRS ultimately prevail on all of its asserted
claims, all claimed federal and state income taxes as well as
accrued interest would become immediately due and payable, and
would be charged to current operations. In such case, the
Company would be required to renegotiate agreements with its
banks to maintain compliance with various requirements of such
agreements, including working capital and funded indebtedness
provisions. However, no assurance can be given that such
renegotiation would be successful. Alternatives could include
other financing arrangements or the possible sale of assets.
(2) During the year ended August 31, 1991, the Company changed
its method for inventory pricing of certain petroleum
inventories from the first-in, first out (FIFO) method
previously used to the last-in, first out (LIFO) method
because the LIFO method better matches current costs with
current revenues. Pro forma effects of retroactive
application of the LIFO method are not determinable.
(3) Effective June 30, 1992, the Company acquired the grain
marketing assets of Union Equity. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" and note 2 of the notes to consolidated financial
statements.
(4) During 1993, Farmland obtained a 58% interest in NBPC, a
limited liability company. Effective April 15, 1993, NBPC
acquired Idle Wild Food's beef packing plant and feed lot
located in Liberal, Kansas. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and
note 2 of the notes to consolidated financial statements.
(5) At August 30, 1993, Farmland reduced its ownership interest
in CFA to 49%. In addition, CFA purchased the assets and
operations of FFSC. CFA has proposed a recapitalization plan
which limits the voting rights of any owner (including
Farmland) to 20% or less regardless of the number of voting
shares held. Accordingly, CFA is not a subsidiary of Farmland
at August 31, 1993 and Farmland is no longer engaged in
commercial lending operations.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Page
Financial Statements
Independent Auditors' Report.....................................31
Consolidated Balance Sheets, August 31, 1993 and 1992............32
Consolidated Statements of Operations for each of the years in
the three-year period ended August 31, 1993....................34
Consolidated Statements of Cash Flows for each of the years in
the three-year period ended August 31, 1993....................35
Consolidated Statements of Capital Shares and Equities for each
of the years in the three-year period ended August 31, 1993....37
Notes to Consolidated Financial Statements.......................38
Financial Statement Schedules
Farmland Industries, Inc. and Subsidiaries for
each of the years in the three-year period ended August 31,
1993:
V--Property, Plant and Equipment................................70
VI--Accumulated Depreciation and Amortization of.................73
Property, Plant and Equipment
IX--Short-term Borrowings........................................76
X--Supplementary Income Statement Information...................76
All other schedules are omitted as the required
information is inapplicable or the information is
presented in the consolidated financial statements or
related notes.
<PAGE>
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, 1993
and 1992, 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, 1993. In connection
with our audits of the consolidated financial statements, we also
have audited the financial statement schedules as listed in the
accompanying index. These consolidated financial statements and
financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial
statement schedules 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, 1993 and 1992, and the results of their operations and
their cash flows for each of the years in the three-year period
ended August 31, 1993, in conformity with generally accepted
accounting principles. Also, in our opinion, the related
financial statement schedules, when considered in relation to the
basic consolidated financial statements taken as a whole, present
fairly, in all material respects, the information set forth
therein.
As discussed in note 7 to the consolidated financial statements,
the Internal Revenue Service (IRS) has examined the Company's tax
returns for the years ended August 31, 1984 and 1983, and has
proposed certain adjustments. Should the IRS ultimately prevail,
the federal and state income taxes and statutory interest thereon
could be significant. Farmland believes it has meritorious
positions with respect to such claims and, based upon the opinion
of special tax counsel, management believes it is more likely
than not that the courts will ultimately conclude that Farmland's
treatment of such items was substantially, if not entirely,
correct. The ultimate outcome of this matter can not presently
be determined. Therefore, no provision for such income taxes and
interest has been made in the accompanying consolidated financial
statements.
<PAGE>
KPMG PEAT MARWICK
Kansas City, Missouri
October 29, 1993
<TABLE>
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<CAPTION>
August 31
1993 1992
(Amounts in Thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents.....................................$ 28,373 $ 34,739
Accounts receivable--trade.................................... 320,980 192,165
Finance companies' notes receivable (notes 2 and 4)........... -0- 127,843
Inventories (note 3).......................................... 496,690 408,599
Other current assets.......................................... 69,357 36,976
Total Current Assets..................................$ 915,400 $ 800,322
Investments and Long-Term Receivables (notes 4 and 6)...........$ 183,312 $ 140,301
Finance Companies' Notes Receivable (notes 2 and 4).............$ -0- $ 36,385
Property, Plant and Equipment (notes 5 and 6):
Property, plant and equipment, at cost........................$1,154,343 $1,036,439
Less accumulated depreciation and amortization................ 649,965 590,437
Net Property, Plant and Equipment.....................$ 504,378 $ 446,002
Other Assets....................................................$ 116,891 $ 103,382
Total Assets..........................................$1,719,981 $1,526,392
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND EQUITIES
<CAPTION>
August 31
1993 1992
(Amounts in Thousands)
<S> <C> <C>
Current Liabilities:
Demand loan certificates..............................................$ 29,860 $ 43,084
Short-term notes payable.............................................. 256,655 184,843
Current maturities of long-term debt (note 6)......................... 31,947 40,434
Accounts payable--trade............................................... 217,982 176,295
Other current liabilities............................................. 118,437 147,037
Total Current Liabilities.....................................$ 654,881 $ 591,693
Long-Term Debt (excluding current maturities) (note 6)..................$ 485,861 $ 322,377
Deferred Income Taxes...................................................$ 2,169 $ 5,632
Minority Owners' Equity in Subsidiaries (note 8)........................$ 15,363 $ 18,561
Capital Shares and Equities (note 9):
Preferred shares, $25 par value--Authorized 8,000,000 shares,
148,325 shares issued and outstanding (148,535 shares in 1992).......$ 3,708 $ 3,713
Common shares, $25 par value -- Authorized 50,000,000 shares,
15,199,833 shares issued and outstanding (15,055,334 shares in 1992). 379,996 376,383
Associate member common shares (nonvoting), $25 par value --
Authorized 2,000,000 shares, 327,828 shares issued and
outstanding (327,024 shares in 1992)................................. 8,196 8,176
Earned surplus and other equities..................................... 169,807 199,857
Total Capital Shares and Equities...............................$ 561,707 $ 588,129
Contingent Liabilities and Commitments (notes 4, 6, 7, 10 and 11)
Total Liabilities and Equities................................$1,719,981 $1,526,392
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Year Ended August 31
1993 1992 1991
(Amounts in Thousands)
<S> <C> <C> <C>
Sales....................................................................$ 4,722,940 $ 3,429,307 $ 3,638,072
Cost of Sales............................................................$ 4,470,290 $ 3,099,316 $ 3,346,722
Gross Income.............................................................$ 252,650 $ 329,991 $ 291,350
Selling, General and Administrative Expenses.............................$ 223,792 $ 236,065 $ 214,906
Other Income (Deductions):
Interest expense.......................................................$ (36,764) $ (27,965) $ (36,951)
Interest income........................................................ 4,189 2,667 2,694
Equity in losses of investees (note 4)................................. (12,394) (2,341) (856)
Provision for loss on disposition of assets (note 16).................. (29,430) -0- -0-
Other, net............................................................. 9,536 4,217 8,835
$ (64,863) $ (23,422) $ (26,278)
Income (loss) before income taxes, minority owners'
interest and extraordinary item........................................$ (36,005) $ 70,504 $ 50,166
Income tax benefit (expense) (note 7).................................... 6,433 (9,458) (7,473)
Minority owners' interest in income of subsidiaries...................... (828) -0- -0-
Income (loss) before extraordinary item..................................$ (30,400) $ 61,046 $ 42,693
Extraordinary item - Utilization of loss carryforward (note 7)........... -0- 1,267 -0-
Net income (loss)...................................................$ (30,400) $ 62,313 $ 42,693
Distribution of net income (note 9):
Patronage refunds:
Farm supply patrons....................................................$ -0- $ 16,229 $ 28,841
Pork marketing patrons................................................. -0- 1,245 -0-
The Cooperative Finance Association's patrons.......................... 1,650 1,482 1,567
$ 1,650 $ 18,956 $ 30,408
Earned surplus and other equities...................................... (32,050) 43,357 12,285
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPITON>
Year Ended August 31
1993 1992 1991
(Amounts in Thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).......................................................$ (30,400) $ 62,313 $ 42,693
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization......................................... 57,730 50,784 55,733
Provision for loss on disposition of assets........................... 29,430 -0- -0-
Provision for environmental matters................................... -0- 3,150 1,750
Loss (gain) on disposition of fixed assets............................ (385) (1,181) 2,484
Patronage refunds received in equities................................ (2,241) (2,320) (15,007)
Proceeds from redemption of patronage equities........................ 1,731 7,727 6,613
Equity in losses of investees......................................... 12,394 2,341 856
Unfunded pension expense.............................................. 3,367 1,287 4,923
Other................................................................. 774 1,456 (5,360)
Changes in assets and liabilities (exclusive of
assets and liabilities of businesses acquired):
Accounts receivable............................................... (92,024) 9,095 10,317
Inventories....................................................... (65,402) (27,483) 19,859
Other assets...................................................... (30,154) 11,490 24,304
Accounts payable.................................................. 19,630 (48,425) (3,221)
Other liabilities................................................. (17,981) 10,367 (10,974)
Net cash provided by (used in) operating activities.......................$(113,531) $ 80,601 $ 134,970
Cash flows from investing activities:
Advances to borrowers by finance companies..............................$(624,618) $(733,403) $(491,482)
Collections from borrowers by finance companies......................... 631,668 685,383 446,547
Acquisition of businesses............................................... (10,500) -0- (31,575)
Proceeds from disposal of investments and notes receivable.............. 12,115 71,582 13,515
Acquisition of investments and notes receivable......................... (50,378) (58,979) (2,493)
Capital expenditures.................................................... (98,238) (79,954) (69,964)
Proceeds from sale of assets to joint venture partner................... -0- 62,104 -0-
Distributions from joint venture, net................................... -0- 29,324 -0-
Proceeds from disposition of subsidiary (note 2)........................ 87,227 -0- -0-
Other................................................................... 8,760 8,191 6,170
Net cash used in investing activities.....................................$ (43,964) $ (15,752) $(129,282)
<PAGE>
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Year Ended August 31
1993 1992 1991
(Amounts in Thousands)
Cash flows from financing activities:
Net decrease of demand loan certificates................................$ (13,224) $ (13,712) $ 12,628
Proceeds from bank loans and notes payable.............................. 916,799 669,608 424,371
Payments of bank loans and notes payable................................ (777,268) (711,101) (434,889)
Proceeds from issuance of subordinated debt certificates................ 72,423 57,780 47,678
Payments for redemption of subordinated debt certificates............... (16,490) (22,557) (38,060)
Payments for redemption of equities..................................... (13,505) (8,046) (20,322)
Payments of patronage refunds and dividends............................. (17,946) (12,204) (9,507)
Other................................................................... 340 (3,853) 4
Net cash provided by (used in) financing activities.......................$ 151,129 $ (44,085) $ (18,097)
Net increase (decrease) in cash and cash equivalents......................$ (6,366) $ 20,764 $ (12,409)
Cash and cash equivalents at beginning of year............................ 34,739 13,975 26,384
Cash and cash equivalents at end of year..................................$ 28,373 $ 34,739 $ 13,975
CASH PAID FOR INTEREST AND INCOME TAXES:
Interest..................................................................$ 41,136 $ 35,626 $ 43,497
Income taxes (net of refunds).............................................$ 1,479 $ 12,181 $ 5,197
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Equities called for redemption............................................$ -0- $ 13,365 $ 7,671
Transfer of assets in exchange for
investment in joint venture (note 4)....................................$ -0- $ 63,911 $ -0-
Issuance of Farmland equities to minority owners of Foods.................$ -0- $ 16,680 $ -0-
Appropriation of current year's net income as patronage refunds...........$ -0- $ 18,956 $ 30,408
Acquisition of businesses:
Fair value of net assets acquired.......................................$ 1,414 $ 30,321 $ 27,661
Goodwill................................................................ 16,086 20,976 3,914
Minority owners' investment............................................. (7,000) -0- -0-
$ 10,500 $ 51,297 $ 31,575
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITAL SHARES AND EQUITIES
<CAPTION>
Years Ended August 31, 1993, 1992 and 1991
Earned Total
Associate Surplus Capital
Member And Shares
Preferred Common Common Other And
Shares Shares Shares Equities Equities
(Amounts in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at August 31, 1990.................................$ 3,737 $ 315,691 $ 7,218 $ 149,365 $ 476,011
Issue, redemption and cancellation of equities............. (4) 14 -0- -0- 10
Appropriation of current year's net income................. -0- -0- -0- 42,693 42,693
Transfers to current liabilities........................... -0- (7,665) (6) (12,571) (20,242)
Transfers to minority owners' equity....................... -0- -0- -0- (1,097) (1,097)
Dividends on preferred stock............................... -0- -0- -0- (7) (7)
Distribution to farm supply patrons in
common and associate member common shares................. -0- 22,293 992 (23,289) (4)
Exchange of common and associate member
common stock and other equities........................... -0- 313 (524) 211 -0-
Balance at August 31, 1991.................................$ 3,733 $ 330,646 $ 7,680 $ 155,305 $ 497,364
Issue, redemption and cancellation of equities............. (20) 44,297 (15) 13 44,275
Appropriation of current year's net income................. -0- -0- -0- 62,313 62,313
Transfers to current liabilities........................... -0- (12,045) (6) (19,329) (31,380)
Transfers from minority owners' equity..................... -0- 5,570 -0- 10,072 15,642
Dividends on preferred stock............................... -0- -0- -0- (5) (5)
Distribution to farm supply patrons in common stock,
associate member common stock and other equities.......... -0- 15,807 873 (16,760) (80)
Exchange of common stock, associate member
common stock and other equities........................... -0- (7,892) (356) 8,248 -0-
Balance at August 31, 1992.................................$ 3,713 $ 376,383 $ 8,176 $ 199,857 $ 588,129
Issue, redemption and cancellation of equities............. (5) 6,740 (49) (1,058) 5,628
Appropriation of current year's net loss................... -0- -0- -0- (30,400) (30,400)
Transfers to current liabilities........................... -0- -0- -0- (1,650) (1,650)
Exchange of common stock, associate member
common stock and other equities........................... -0- (3,127) 69 3,058 -0-
Balance at August 31, 1993.................................$ 3,708 $ 379,996 $ 8,196 $ 169,807 $ 561,707
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
Farmland is organized and operated as a cooperative and is
intended to be a producer-driven and profitable ag supply to
consumer foods cooperative system.
Principles of Consolidation --The consolidated financial
_____________________________
statements include the accounts of Farmland Industries, Inc.
("Farmland") and all its majority-owned subsidiaries (the
"Company"). All significant intercompany accounts and
transactions have been eliminated. Certain previously reported
amounts have been reclassified to conform to the 1993
presentation.
Investments --Investments in cooperatives are stated at cost
___________
plus the par value of equity certificates received as payment of
patronage refunds less such equity certificates redeemed.
Investments in companies owned 20% to 50% by Farmland are
accounted for by the equity method. All other investments are
stated at cost.
Accounts Receivable --The Company uses the allowance method
____________________
to account for uncollectible accounts and notes. Uncollectible
accounts and notes receivable from members are reduced by offsets
against the common stock of Farmland held by members prior to
charging uncollectible accounts 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
cost or market. Supplies are valued at cost. All other
inventories are valued at the lower of first-in, first-out cost
or market. To the extent practical, the Company hedges certain
inventories, advance sales and purchase contracts with fixed
prices and anticipated purchases of raw materials.
Property, Plant and Equipment --Assets are stated at cost
and depreciated principally on a straight-line basis over the
estimated useful life of the individual asset (3 to 40 years).
Leasehold improvements are amortized on a straight-line basis
over the terms of the individual leases (15 to 21 years). Upon
disposition of these assets any resulting gain or loss is
included in income. Major repairs and maintenance costs are
capitalized. Normal repairs and maintenance costs are charged to
operations.
Research and Development Costs --Total research and
development costs for the Company for the years ended August 31,
1993, 1992 and 1991 were $3,303,000, $3,338,000 and $3,269,000,
respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Goodwill --The excess of cost over net assets of businesses
purchased is being amortized on a straight-line basis over a
period of 25 to 40 years.
Federal Income Taxes --Farmland and its cooperative
subsidiaries are subject to income taxes on all income not
distributed to patrons as patronage refunds. Farmland and all
its subsidiaries, except Farmland Foods, Inc. ("Foods") and
National Beef Packing Company, L.P. ("NBPC") file consolidated
federal and state income tax returns.
Cash and Cash Equivalents --Investments with maturities of
less than three months are included in "Cash and cash
equivalents."
(2) Acquisitions and Dispositions
During 1993, Farmland and partners organized NBPC, a limited
partnership. Farmland retained a 58% ownership interest in NBPC
by investing $10,500,000 in cash. NBPC's purpose is to carry on
the business of Idle Wild Foods, Inc. ("Idle Wild"). On
April 15, 1993, NBPC acquired Idle Wild's beef packing plant and
feedlot located in Liberal, Kansas. NBPC acquired these assets
by assuming liabilities of Idle Wild with a fair market value of
approximately $130,605,000, including bank loans which are
nonrecourse to NBPC's partners. 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
liabilities assumed over the fair value of the net identifiable
assets acquired ($16,086,000) has been recorded as goodwill and
is being amortized on a straight-line basis over 25 years.
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 $51,297,000 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 acquired ($20,976,000) has
been recorded as goodwill and is being amortized on a
straight-line basis over 25 years.
To establish The Cooperative Finance Association ("CFA") as
an independent finance association for its members, CFA purchased
10,113,000 shares of its voting common stock held by Farmland for
a purchase price comprised of $1,541,000 in cash, equities of
Farmland (with a par value of $2,406,000) held by CFA and a
$6,166,000 subordinated promissory note payable to Farmland
bearing interest of 5.3%. In addition, CFA: 1) purchased the
lending operations and notes receivable of Farmland Financial
Services Company ("FFSC"), a wholly-owned subsidiary of Farmland.
The purchase price approximated the face amount of FFSC's notes
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
receivable and consisted of $60,505,000 in cash and a $2,128,000
6% subordinated promissory note payable; 2) repaid its operating
loan to Farmland ($25,181,000); and, 3) proposed a
recapitalization plan which limits the voting rights of any owner
(including Farmland) to 20% or less regardless of the number of
voting shares held. Farmland repaid $87,227,000 of its
borrowings from National Bank for Cooperatives ("CoBank") with
proceeds received from CFA. As a result of CFA's purchase of its
stock, Farmland's voting percentage in CFA was reduced to 49%.
Accordingly, CFA is not included in the consolidated balance
sheet of the Company as of August 31, 1993.
The following unaudited financial information, for the years
ended August 31, 1993 and 1992, presents 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 on
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 1993 and 1992.
August 31 (Unaudited)
1993 1992
(Amounts in Thousands)
Net sales........................................$5,357,867 $5,441,303
Income (loss) before extraordinary item..........$ (44,040) $ 47,225
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(3) Inventories
Major components of inventories are as follows:
August 31
1993 1992
(Amounts in Thousands)
Grain........................................$ 91,990 $ 67,459
Beef......................................... 27,754 -0-
Materials.................................... 43,857 42,702
Supplies..................................... 41,388 38,445
Finished and in-process products............. 285,947 258,358
$490,936 $406,964
LIFO adjustment.............................. 5,754 1,635
$496,690 $408,599
Earnings for the year ended August 31, 1993 have been
reduced by $8,346,000 to recognize the write-down of certain
crude oil and refined petroleum inventories to market.
Inventories, for these products, stated under the last-in,
first-out (LIFO) method at August 31, 1993 and 1992, were
$84,088,000 and $92,094,000, respectively. Had the lower of
first-in, first-out (FIFO) cost or market been used to value
these products, inventories at August 31, 1993 and 1992 would
have been lower by $5,754,000 and $1,635,000, respectively. The
LIFO valuation method had the effect of increasing income before
income taxes and patronage refunds by $4,119,000 in 1993,
reducing such income by $1,953,000 in 1992 and increasing such
income by $3,588,000 in 1991. Liquidation of prior year
inventory layers in 1992 and 1991 reduced income before income
taxes and patronage refunds in these years by $3,302,000 and
$4,177,000, respectively.
The carrying value of beef inventories stated under the LIFO
method was $27,754,000 at August 31, 1993. The LIFO method of
accounting for beef inventories had no effect on the carrying
value of inventories or on the loss reported in 1993, because
market value of these inventories was lower than LIFO or FIFO
cost.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(4) Investments and Long-Term Receivables
<TABLE>
The investments and long-term receivables are as follows:
<CAPTION>
August 31
1993 1992
(Amounts in Thousands)
<S> <C> <C>
Notes receivable from ventures, 20% to 50% owned.......$ 60,204 $ 33,801
Investments accounted for by the equity method......... 37,456 45,644
National Bank for Cooperatives (CoBank)................ 31,824 31,646
Investments in and advances to other cooperatives...... 37,690 10,776
Other investments and long-term receivables............ 16,138 18,434
$183,312 $140,301
</TABLE>
The Company's investments accounted for by the equity method
consist principally of 50% equity interests in Farmland Hydro
L.P., SF Phosphates Limited Company and Hyplains Beef L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
<TABLE>
Summarized financial information of investees accounted for
by the equity method is as follows:
<CAPTION>
August 31
1993 1992
(Amounts in Thousands)
<S> <C> <C>
Current Assets....................................$ 66,532 $ 64,899
Long-Term Assets.................................. 223,937 194,155
Total Assets $290,469 $259,054
Current liabilities...............................$ 79,224 $ 60,422
Long-Term Liabilities............................. 141,991 118,207
Total Liabilities $221,215 $178,629
Net Assets........................................$ 69,254 $ 80,425
</TABLE>
<TABLE>
<CAPTION>
Year Ended August 31
1993 1992 1991
(Amounts in Thousands)
<S> <C> <C> <C>
Net sales........................................$601,194 $218,913 $ 9,843
Net loss.........................................$(22,755) $ (5,046) $ (2,581)
Farmland's equity in loss........................$(12,394) $ (2,341) $ (856)
</TABLE>
On November 15, 1991, Farmland and Norsk Hydro a.s.
("Hydro") formed a joint venture company, Farmland Hydro, to
manufacture phosphate fertilizer products for distribution to
international markets. As part of the joint venture agreement,
Farmland sold a 50% interest in its Green Bay, Florida phosphate
fertilizer plant and certain phosphate rock reserves located in
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Hardee County, Florida to Hydro for an amount approximately equal
to Farmland's carrying value of the assets. Subsequently,
Farmland and Hydro contributed the assets to the joint venture.
Farmland operates the plant under a management agreement with the
joint venture and Hydro provides international marketing
services. See note 15 of the notes to consolidated financial
statements.
Farmland and J. R. Simplot formed a joint venture (SF
Phosphates, Limited Company) to operate a phosphate mine located
in Vernal, Utah, a fertilizer plant located in Rock Springs,
Wyoming, and a 96-mile pipeline that connects the mine with the
fertilizer plant. The purchase of the mine, plant and pipeline
from Chevron Corporation was completed in April 1992.
Prior to August 31, 1993, CFA was a 99%-owned finance
subsidiary of the Company. CFA provides specialized financial
services for Farmland's local cooperative members. CFA operates
on a fiscal year ending August 31. For the years ended August 31,
1993, 1992 and 1991, interest income of CFA amounting to
$7,614,000, $7,840,000 and $7,382,000, respectively, has been
included in sales and interest expense of $5,498,000, $6,248,000
and $5,202,000, respectively, has been included in cost of sales
in the accompanying consolidated statements of operations. A
condensed balance sheet of CFA as of August 31, 1992 and
condensed statements of operations for the period ended August
30, 1993 and the years ended August 31, 1992 and 1991 are shown
below. See note 2 of the notes to consolidated financial
statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
<TABLE>
THE COOPERATIVE FINANCE ASSOCIATION, INC.
CONDENSED BALANCE SHEET
<CAPTION>
ASSETS
August 31
1992
(Amounts in Thousands)
<S> <C>
Cash..........................................................................$ 389
Notes Receivable.............................................................. 102,602
Investment in National Bank for Cooperatives.................................. 3,471
Investment in Farmland........................................................ 1,689
Other......................................................................... 80
Total Assets........................................................$108,231
LIABILITIES AND EQUITIES
Notes and long-term debt payable to banks.....................................$ 3,131
Notes payable to Farmland..................................................... 69,167
Other......................................................................... 1,940
Total Liabilities...................................................$ 74,238
Capital Shares and Equities:
Farmland and subsidiaries...................................................$ 22,653
Other patrons............................................................... 11,340
Total Capital Shares and Equities........................................$ 33,993
Total Liabilities and Equities......................................$108,231
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
<TABLE>
THE COOPERATIVE FINANCE ASSOCIATION, INC.
CONDENSED STATEMENTS OF OPERATIONS
<CAPTION>
Year Ended August 31
1993 1992 1991
(Amounts in Thousands)
<S> <C> <C> <C>
Total income..........................................$ 7,742 $ 8,818 $ 8,275
Total expenses........................................ 5,077 6,423 5,829
Income before income taxes and patronage refunds......$ 2,665 $ 2,395 $ 2,446
Income taxes.......................................... 600 430 402
Net income before patronage refunds...................$ 2,065 $ 1,965 $ 2,044
Patronage refunds..................................... 1,732 1,645 1,746
Applied to earned surplus.............................$ 333 $ 320 $ 298
</TABLE>
Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities," was issued by the Financial Accounting Standards
Board ("FASB") in May 1993 and is effective for fiscal years
beginning after December 15, 1993 (the Company's 1995 fiscal
year). Statement 115 expands the use of fair value accounting
and the reporting for certain investments in debt and equity
securities. Management expects the adoption of Statement 115
will not have a significant impact on the Company's consolidated
financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(5) Property, Plant and Equipment
A summary of cost for property, plant and equipment is as
follows:
August 31
1993 1992
(Amounts in Thousands)
Land and improvements...........................$ 11,825 $ 11,437
Site improvements............................... 26,878 15,308
Buildings....................................... 215,420 193,215
Machinery and equipment......................... 655,117 593,014
Furniture and fixtures.......................... 45,405 37,850
Automotive equipment............................ 51,179 46,324
Mining properties............................... 26,786 26,569
Fertilizer properties........................... 48,695 48,695
Construction in progress........................ 57,242 53,812
Leasehold improvements.......................... 15,796 10,215
Total.................................$1,154,343 $1,036,439
Mining properties represent phosphate rock reserves and
construction and development costs of a mine in Hardee County,
Florida and the surrounding area. The Company has deferred the
development of this phosphate mine. See note 4 of the notes to
consolidated financial statements.
For the years ended August 31, 1993, 1992 and 1991, the
Company capitalized construction period interest of $1,611,000,
$330,000 and $328,000, respectively.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(6) Bank Loans, Subordinated Debt Certificates and Notes Payable
<TABLE>
Bank loans, subordinated debt certificates and notes payable
are as follows:
<CAPTION>
August 31
1993 1992
(Amounts in Thousands)
<S> <C> <C>
CoBank--4.08% to 9.2%, maturing 1994 through 2001..........................$ 66,098 $ 95,750
Other bank notes--3.7% to 6.25%, maturing 1996 through 2001................ 138,244 -0-
Subordinated certificates of investment and capital investment
certificates--7.25% to 10.5%, maturing 1994 through 2018................. 192,857 147,977
Subordinated monthly interest certificates
--7.25% to 12%, maturing 1994 through 2018............................... 62,913 51,829
Industrial revenue bonds--5.75% to 9.25%, maturing 1994 through 2007....... 27,880 28,770
Promissory notes--7% to 10%, maturing 1994 through 2001.................... 13,805 15,689
Other--5% to 13%........................................................... 16,011 22,796
$517,808 $362,811
Less current maturities.................................................. 31,947 40,434
$485,861 $322,377
</TABLE>
The Company maintains various credit agreements with CoBank
that allow the Company to borrow under terms as the Company and
CoBank mutually agree upon. These facilities provide for both
seasonal and term borrowings. At August 31, 1993, total credit
lines available were approximately $508,900,000. Seasonal and
term borrowings under these agreements at August 31, 1993 were
$156,650,000 and $66,098,000, respectively, and $86,819,000 was
used to support letters of credit issued on behalf of Farmland by
CoBank. The agreements with CoBank stipulate that by February
15, 1994 the maximum credit available from CoBank to the Company
shall be reduced to an amount not in excess of CoBank's then
applicable lending limit to a single borrower.
Under loan agreements with CoBank, the Company has pledged
its investment in CoBank stock carried at $31,824,000. Under
industrial revenue bonds and lease agreements, property, plant
and equipment with a carrying value of $31,394,000 has been
pledged. Under bank loan agreements of NBPC, all of its assets
(carried at $152,745,000) are pledged to support its borrowings.
Such borrowings of NBPC are nonrecourse to its partners.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Farmland's loan agreements with CoBank contain provisions
which require the Company to maintain consolidated working
capital of not less than $150,000,000 and to maintain
consolidated net worth of not less than $425,000,000. In
addition, the agreements require the Company to maintain funded
indebtedness and senior funded indebtedness of not more than 52%
and 43% of capitalization, respectively. All computations are
based on consolidated financial data adjusted to exclude
nonrecourse subsidiaries (any subsidiary for which Farmland is
not directly or indirectly liable for any of such subsidiary's
indebtedness). As computed under provisions of the agreement, at
August 31, 1993, working capital was $210,744,000, net worth was
$561,303,000, funded indebtedness was 45.14%, and senior funded
indebtedness was 21.10% of capitalization.
Borrowers from CoBank are required to maintain an investment
in CoBank stock based on the average amount borrowed from CoBank
during the previous five years. At August 31, 1993, the
Company's investment in CoBank approximated the requirement.
Farmland has credit facilities with various commercial
banks. At August 31, 1993, Farmland had $215,000,000 of
available credit from commercial banks under committed
arrangements and $30,000,000 of credit available under
uncommitted arrangements. Borrowings at August 31, 1993 under
these committed and uncommitted credit facilities were
$131,300,000 and $10,000,000, respectively. In addition,
$18,237,000 was used at August 31, 1993 to support letters of
credit issued by such banks on Farmland's behalf. Covenants of
these arrangements are not more restrictive than Farmland's
credit lines with CoBank.
Subordinated debt certificates have been issued under
several different indentures and therefore the terms of such
securities are not identical. Farmland may redeem subordinated
certificates of investments and capital investment certificates
in advance of scheduled maturities. Farmland will redeem
subordinated certificates of investments, capital investment
certificates and subordinated monthly interest certificates upon
death of the holder. Holders of certificates of investment and
capital investment certificates have the right to exchange such
securities after a minimum holding period for similar securities.
The outstanding subordinated debt certificates are subordinated
to senior indebtedness. At August 31, 1993, senior indebtedness
included $449,454,000 for money borrowed, and other instruments
(principally long-term operating leases) which provide for
aggregate payments over ten years of approximately $116,250,000.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Bank loans, subordinated debt certificates and notes payable
mature during the fiscal years ending August 31 in the following
amounts:
(Amounts in Thousands)
1994..........................................$ 31,947
1995.......................................... 33,794
1996.......................................... 94,075
1997.......................................... 51,997
1998.......................................... 73,643
1999 and after................................ 232,352
$517,808
(7) Income Taxes
On July 28, 1983, Farmland sold the stock of Terra
Resources, Inc. ("Terra"), a wholly-owned subsidiary engaged in
oil and gas exploration and production operations, and exited its
oil and gas exploration and production activities. The gain from
the sale of Terra amounted to $237,200,000 for tax reporting
purposes. During 1983, and prior to the sale of the Terra stock,
Farmland received certain distributions from Terra totaling
$24,800,000. For tax purposes, Farmland claimed intercorporate
dividends-received deductions for the entire amount of such
distributions.
On March 24, 1993, the Internal Revenue Service ("IRS")
issued a statutory notice to Farmland asserting deficiencies in
federal income taxes (exclusive of statutory interest thereon) in
the aggregate amount of $70,775,000. The asserted deficiencies
relate primarily to the Company's tax treatment of the sale of
the Terra stock and the distributions received from Terra prior
to the sale. The IRS asserts that Farmland incorrectly treated
the Terra sale gain as income against which certain
patronage-sourced operating losses could be offset, and that, as
a nonexempt cooperative, Farmland was not entitled to an
intercorporate dividends-received deduction in respect of the
1983 distribution by Terra. It further asserts that Farmland
incorrectly characterized gains for tax purposes aggregating
approximately $14,600,000, and a loss of approximately
$2,300,000, from the disposition of certain other assets. On
June 11, 1993, Farmland filed a petition in the United States Tax
Court contesting the asserted deficiencies in their entirety. A
trial date has not yet been set.
If the IRS ultimately prevails on all of the adjustments
asserted in the statutory notice, Farmland would have additional
federal and state income tax liabilities aggregating
approximately $85,800,000 plus accumulating statutory interest
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
thereon (through October 31, 1993, of approximately
$133,500,000). In addition, such adjustments would affect the
computation of Farmland's taxable income for its 1989 tax year
and, as a result, could increase Farmland's federal and state
income taxes for that year by approximately $5,000,000 plus
applicable statutory interest thereon.
No provision has been made in the consolidated financial
statements for federal or state income taxes (or interest
thereon) in respect of the IRS claims described above. Farmland
believes that it has meritorious positions with respect to all of
these claims and will continue to vigorously pursue their
favorable resolution through the pending litigation.
In the opinion of Bryan Cave, Farmland's special tax
counsel, it is more likely than not that the courts will
ultimately conclude that (i) Farmland's treatment of the Terra
sale gain was substantially, if not entirely, correct; and (ii)
Farmland properly claimed a dividends-received deduction in
respect of the 1983 distributions which it received from Terra
prior to the sale of the Terra stock. Counsel has further
advised, however, that none of the issues involved in these
disputes is free from doubt, and that there can be no assurance
that the courts will ultimately rule in favor of Farmland on any
of these issues.
Should the IRS ultimately prevail on all of its asserted
claims, all claimed federal and state income taxes as well as
accrued interest would become immediately due and payable, and
would be charged to current operations. In such case, the
Company would be required to renegotiate agreements with its
banks to maintain compliance with various requirements of such
agreements, including working capital and funded indebtedness
provisions. However, no assurance can be given that such
renegotiation would be successful. Alternatives could include
other financing arrangements or the possible sale of assets.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Income tax expense (benefit) is comprised of the following:
Year Ended August 31
1993 1992 1991
(Amounts in Thousands)
Federal:
Current.............................$ (2,502) $ 6,600 $ 6,644
Deferred............................ (2,944) 1,490 (205)
$ (5,446) $ 8,090 $ 6,439
State:
Current.............................$ (468) $ 1,106 $ 1,064
Deferred............................ (519) 262 (30)
$ (987) $ 1,368 $ 1,034
$ (6,433) $ 9,458 $ 7,473
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
<TABLE>
Income tax expense (benefit) differs from the "expected"
income tax expense (benefit) using statutory rate of 34%, as
follows:
<CAPTION>
Year Ended August 31
1993 1992 1991
<S> <C> <C> <C>
Computed "expected" income tax expense (benefit) on
income (loss) before income taxes................(34.0)% 34.0% 34.0%
Increase (reduction) in income tax expense (benefit)
attributable to:
Patronage refunds................................ (4.0) (9.2) (20.7)
Utilization of member-sourced losses............. -0- (11.4) (.1)
Patronage-sourced items for which no benefit (expense)
is available (provided)......................... 26.5 -0- -0-
State income tax expense (benefit) net of
federal income tax effect....................... (2.2) 1.2 1.4
Benefit associated with exempt income of
foreign sales corporation....................... (1.4) (1.5) -0-
Other, net....................................... (2.7) .3 .3
Income tax expense (benefit).......................(17.8)% 13.4% 14.9%
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
<TABLE>
Deferred income taxes result from timing differences in the
recognition of nonmember-sourced income and expenses for
financial reporting and income tax reporting purposes. The
sources of these timing differences and their tax effect are as
follows:
<CAPTION>
August 31
1993 1992 1991
(Amounts in Thousands)
<S> <C> <C> <C>
Depreciation...............................................$ 473 $ 1,562 $ 3,352
Safe harbor lease rentals.................................. (378) (478) (869)
Closed petroleum futures contracts......................... -0- 61 (2,394)
Provision for loss on proposed sale of assets.............. (3,454) -0- -0-
Unfunded pension expense................................... (355) (129) (892)
Reinstatement of deferred income taxes previously
offset by net operating loss carryforwards
for financial reporting purposes.......................... -0- 1,294 -0-
Other, net................................................. 251 (558) 568
$ (3,463) $ 1,752 $ (235)
</TABLE>
The current tax benefit for the year ended August 31, 1993
results from the carryback of nonpatronage-sourced losses to
reduce the amount of federal and state income taxes paid during
prior years.
During the year ended August 31, 1992, all of Foods'
nonmember-sourced loss carryforwards were utilized and deferred
income taxes amounting to $1,294,000 were reinstated. During the
year ended August 31, 1992, Farmland utilized nonmember-sourced
loss carryforwards amounting to $3,168,000 to reduce income tax
expense for financial reporting purposes by $1,267,000.
Utilization of these loss carryforwards has been presented as an
extraordinary item in the accompanying consolidated statement of
operations for the year ended August 31, 1992.
In connection with the acquisition of Union Equity, Farmland
acquired member-sourced and nonmember-sourced loss carryforwards
from Union Equity amounting to approximately $18,600,000 and
$10,600,000, respectively. For the year ended August 31, 1992,
Farmland was able to utilize member-sourced and nonmember-sourced
loss carryforwards amounting to $18,600,000 and $2,800,000,
respectively. The benefit of the utilization of the
nonmember-sourced loss carryforward amounting to $1,134,000 has
been recorded as a reduction of goodwill in the accompanying
consolidated balance sheet as of August 31, 1992. See note 2 of
the notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
At August 31, 1993, Farmland has nonmember-sourced loss
carryforwards amounting to approximately $7,597,000, which expire
in 2006 and 2007. At August 31, 1993, Farmland and its
consolidated subsidiaries have alternative minimum tax credit
carryforwards of approximately $2,502,000.
At August 31, 1993, Farmland has patronage-sourced loss
carryforwards available to offset future patronage-sourced income
of $8,155,000 which expire in 2008.
Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," was issued by the FASB in February
1992 and is effective for fiscal years beginning after December
15, 1992 (the Company's 1994 fiscal year). Statement 109
requires a change from the deferred method currently used by the
Company, to the asset and liability method of accounting for
income taxes. Under the asset and liability method, deferred
income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial
statement carrying amounts and the tax basis of existing assets
and liabilities. The Company has determined that implementation
of Statement 109 in the first fiscal quarter of 1994 will not
have a significant impact on its consolidated financial
statements.
(8) Minority Owners' Equity in Subsidiaries
<TABLE>
Minority owners' equity in subsidiaries represents other
owners' interest in common stock and patronage refund equities of
majority-owned subsidiaries of Farmland. A summary of minority
owners' equity in subsidiaries is as follows:
<CAPTION>
August 31
1993 1992
(Amounts in Thousands)
<S> <C> <C>
Farmland Foods, Inc. ..................................$ 6,401 $ 6,419
National Beef Packing Company, L.P..................... 7,865 -0-
The Cooperative Finance Association, Inc............... -0- 11,340
Others................................................. 1,097 802
$ 15,363 $ 18,561
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
During the year ended August 31, 1993, Farmland reduced its
voting interest in CFA to 49%. See note 2 of the notes to
consolidated financial statements.
(9) Preferred Stock, Earned Surplus and Other Equities
<TABLE>
(A) A summary of preferred stock is as follows:
<CAPTION>
August 31
1993 1992
(Amounts in Thousands)
<S> <C> <C>
Preferred shares, $25 par value-Authorized 8,000,000 shares:
6% - 624 shares issued and outstanding (652 shares in 1992)..........$ 15 $ 16
5-1/2% - 2,832 shares issued and outstanding (3,000 shares in 1992).. 71 75
Series F - 144,869 shares issued and outstanding
(144,883 shares in 1992)............................................ 3,622 3,622
$ 3,708 $ 3,713
</TABLE>
The 5-1/2% and 6% preferred stocks have preferential
liquidation rights over the Series F preferred stock. Dividends
on the 5-1/2% and 6% preferred stock are cumulative only to the
extent earned each year. Series F preferred stock is nondividend
bearing. 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.
(B) A summary of earned surplus and other equities is as
follows:
August 31
1993 1992
(Amounts in Thousands)
Earned surplus..................................$123,974 $136,175
Nonmember capital............................... 104 104
Capital credits................................. 38,105 35,765
Unallocated equity.............................. 6,021 25,877
Additional paid-in surplus...................... 1,603 1,936
$169,807 $199,857
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Nonmember capital represents patronage refunds distributed
in the form of book credits.
Capital credits are issued: 1) for payment of the portion
of patronage refunds distributed in equity to patrons who do not
satisfy requirements for membership or associate membership; and,
2) upon conversion of an equal par value amount of common stock
or associate member common stock held by persons who no longer
meet qualifications for membership or associate membership in
Farmland. During the year ended August 31, 1992, Farmland issued
$11,110,000 of capital credits to owners of Foods in exchange for
an equivalent par value of their ownership of Foods common stock
and capital equity fund certificates.
Unallocated equity represents the cumulative difference
between the amount of member-sourced income determined for
financial reporting purposes and the amount of member-sourced
income for income tax reporting purposes. The difference in the
two income amounts results principally from differences in timing
between book expense and tax deductions.
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.
The bylaws of Farmland provide that the patronage refund
payable for any year be reduced if immediately after the payment
of such patronage refund, the amount of retained earnings
(defined for this purpose as the sum of earned surplus and
unallocated equity) would be less than 30% of the previous
year-end balance of members' equity accounts (defined for this
purpose as the sum of common stock, associate member common
stock, capital credits, nonmember capital and patronage refunds
payable in equities). The reduction of patronage refunds would
be the lesser of 15% or the amount required to increase the
balance of the retained earnings account to the required 30%. As
of August 31, 1993, 1992 and 1991, retained earnings exceeded the
required amount by approximately $3,874,000, $49,451,000 and
$9,623,000, respectively.
Farmland established a base capital plan in 1991. The
plan's objective is to achieve proportionality between the dollar
amount of business a member or associate member of Farmland
("Participant") transacts with Farmland and the par value of
Farmland equity which the Participant should hold (hereinafter
referred to as the Participants' "Base Capital Requirement").
This plan: 1) provides that the relationship between the par
value of a Participant's actual investment in Farmland equity and
the Participant's Base Capital Requirement shall influence the
cash portion of any patronage refund paid to the Participant;
and, 2) provides a method for redemption by Farmland of its
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
equities held by a Participant when the par value of the
Participant's investment exceeds his Base Capital Requirement.
The Base Capital Requirement shall be determined annually by
the Farmland Board of Directors at its sole discretion. No
patronage refunds were paid by Farmland for 1993.
(10) Contingent Liabilities and Commitments
The Company leases various equipment and real properties
under long-term operating leases. For the years ended August 31,
1993, 1992 and 1991, rental expenses totaled $41,104,000,
$43,300,000 and $43,029,000, respectively. Rental expense is
reduced for mileage credits received on leased railroad cars
($1,939,000 in 1993, $663,000 in 1992 and $1,773,000 in 1991).
The leases have various remaining terms ranging from over
one year to 16 years. Some leases are renewable, at Farmland's
option, for additional periods. The minimum amount Farmland must
pay for these leases during the fiscal years ending August 31 are
as follows:
(Amounts in Thousands)
1994....................................$ 38,673
1995.................................... 29,370
1996.................................... 23,532
1997.................................... 21,603
1998.................................... 17,528
1999 and after.......................... 67,881
$198,587
Farmland and its subsidiaries are involved in various
lawsuits incidental to the businesses. 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.
The Company has certain throughput agreements, take-or-pay
agreements, minimum quantity agreements, and minimum charge
agreements for various raw material supplies and services through
1996. The Company's minimum obligations under such agreements
are: $2,548,000 in 1994; $1,248,000 in 1995; and $924,000 in
1996.
As a result of regulations by the Environmental Protection
Agency, sulfur levels must be reduced in diesel fuels sold after
September 30, 1993. To comply with these regulations, the
Company has committed to approximately $44,000,000 of
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
improvements to the Coffeyville refinery. As of August 31, 1993,
approximately $31,451,000 has been spent.
(11) Employee Benefit Plans
The Farmland Industries, Inc. Employee Retirement Plan ("the
Plan") is a defined benefit plan covering substantially all
employees of Farmland and its subsidiaries 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 Company's funding policy is to make the maximum annual
contribution that can be deducted for federal income tax
purposes. Contributions are intended to provide not only for
benefits attributed to service to date but also for those
expected to be earned in the future.
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. Plan assets at August 31, 1993 and
1992 included Farmland subordinated debt certificates and
Farmland demand loan certificates totalling $280,000 and
$5,832,000, respectively.
In connection with Farmland's acquisition of Union Equity,
Union Equity's defined benefit plan's assets and actuarial
liabilities were transferred to Farmland's retirement plan.
<TABLE>
Components of the Company's pension cost are as follows:
<CAPTION>
August 31
1993 1992 1991
(Amounts in Thousands)
<S> <C> <C> <C>
Service cost - benefits earned during the period...........$ 7,449 $ 6,519 $ 6,717
Interest cost on projected benefit obligation.............. 12,134 11,332 9,927
Actual return on Plan assets............................... (15,842) (20,591) (20,163)
Net amortization and deferral.............................. (374) 4,027 6,042
Change in plan benefits-from extending full retirement
benefits to employees obtaining age 58 by December 31, 1991
and accepting the program before September 30, 1991....... -0- -0- 2,400
Pension expense.........................................$ 3,367 $ 1,287 $ 4,923
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The discount rate and the rate of increase in future
compensation levels used in determining the actuarial present
value of the projected benefit obligations at August 31, 1993
were 8.5% and 5%, respectively (9% and 5% at August 31, 1992 and
1991, respectively). The expected long-term rates of return on
assets at August 31, 1993, 1992 and 1991 were 8.5%, 9% and 9.5%,
respectively.
<TABLE>
The following table sets forth the Plan's funded status and
amounts recognized in the Company's balance sheet at August 31,
1993 and 1992. Such prepaid pension cost is based on the Plan's
funded status as of May 31, 1993 and 1992.
<CAPTION>
August 31
1993 1992
(Amounts in Thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits................................................$123,061 $110,002
Nonvested benefits............................................. 7,102 4,440
Accumulated benefit obligation.................................$130,163 $114,442
Increase in benefits due to future compensation increases...... 51,633 41,313
Projected benefit obligation...................................$181,796 $155,755
Estimated fair value of Plan assets............................... 212,647 198,173
Plan assets in excess of projected benefit obligation.............$ 30,851 $ 42,418
Unrecognized net loss from past experience different
from that assumed and effects of changes in assumptions.......... 21,754 14,117
Unrecognized net transition asset being recognized over 10 years.. (1,866) (2,799)
Unrecognized prior service cost................................... 2,590 2,960
Prepaid pension cost at end of year...............................$ 53,329 $ 56,696
</TABLE>
The Company provides life insurance benefits for retired
employees through an insurance company. Any employee hired
before January 1, 1988 who reaches normal retirement age while
working for the Company is eligible for the benefit. Annual
premiums for providing this employee benefit and for providing
group life insurance for active employees are based on payments
made by the insurance company during the year. Costs of life
insurance provided for retired employees are not separable from
costs of providing group life insurance for active employees.
The Company recognizes costs for providing life insurance for
retired and active employees by charging operations for the
annual insurance premium paid. For the years ended August 31,
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
1993, 1992 and 1991, such insurance premiums were $1,178,000,
$783,000 and $462,000, respectively.
The Company will adopt FASB Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" during the first
quarter of its 1994 fiscal year. Upon adoption, the cost for
providing life insurance during an employee's retirement years
will be accrued during the active service period of the employee.
Previously unrecognized costs related to the service period
already rendered (the transition obligation) will be recognized
over 20 years. The annual cost of providing life insurance for
retired employees, determined following Statement 106, is
estimated to be $1,000,000.
Statement of Financial Accounting Standards No. 112,
"Employer's Accounting for Postemployment Benefits", was issued
by the FASB in November 1992 and is effective for fiscal years
beginning after December 15, 1993 (the Company's 1995 fiscal
year). Statement 112 establishes standards of accounting and
reporting for the estimated cost of benefits provided to former
or inactive employees. Management expects that the adoption of
Statement 112 will not have a significant impact on the Company's
consolidated financial statements.
An Annual Employee Variable Compensation Plan, a Long-Term
Management 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 Variable Compensation Plan, all regular
salaried employees are eligible to receive an annual cash bonus
that is based on the employee's position, income before
extraordinary items of the Company, and income or other
performance criteria of the individual's operating unit. Amounts
accrued under this plan for the years ended August 31, 1993, 1992
and 1991 amounted to $-0-, $10,033,000 and $-0-, respectively.
Distributions under this plan are made annually after the close
of each fiscal year.
Under the Long-Term Management Incentive Plan, the Company's
executive management employees are paid cash bonus amounts
determined by a formula which takes into account the level of
management and the average annual net income of the Company over
a three-year period. The current Long-Term Management Incentive
Plan ends August 31, 1996. The Company's performance did not
reach a level where incentive was earned under the Long-Term
Management Incentive Plan that covered the three-year period
ended August 31, 1993. As a result, operations in 1993 were
credited by $2,463,000 to reverse provisions for management
incentive awards previously charged against operations in 1992
and 1991 ($1,171,000 and $1,292,000, respectively).
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company's Executive Deferred Compensation Plan permits
certain 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. At August 31, 1993 and 1992, the Company's
obligations under this plan amounted to $8,240,000 and
$7,649,000, respectively.
(12) Industry Segment Information
The Company's business is conducted within three general
operating areas: cooperative farm supply operations, cooperative
marketing operations, and retail and service operations. As a
farm supply cooperative, the Company engages in manufacturing and
wholesale distribution of input products of agricultural
production. The Company's principal farm supply products are
petroleum, fertilizer and agricultural chemicals, and feed.
Petroleum products include gasoline, distillate, diesel
fuel, propane, lube oils, grease and automotive parts and
accessories. Products in the fertilizer and agricultural
chemicals area include nitrogen, phosphate and potash
fertilizers, herbicides, insecticides and other farm chemicals.
Feed products include a complete line of formulated feeds.
Supply products are sold primarily at wholesale to local farm
cooperatives.
Marketing operations include pork and beef processing,
marketing and the distribution of fresh meat products, ham,
bacon, sausage, deli meats, Italian specialty meats and boxed
beef, and the marketing and storage of grain. In 1993, export
sales of grain totaled $570,171,000.
The retail and service operations include convenience fuel
and food stores, farm supply stores, finance company operations
and services such as accounting, financial, management,
environmental and safety, and transportation. See note 2 of the
notes to consolidated financial statements.
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 have been added or deducted:
other income (deductions) or corporate expenses (included in the
accompanying statements of operations as selling, general and
administrative expenses), which cannot practicably be identified
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
or allocated by industry segment. Operating income (loss) of
industry segments for the years ended August 31, 1992 and 1991
have been restated for comparative purposes to include certain
costs which were not identified to business segments in 1992 and
1991 but which were identified to business segments in 1993.
Corporate assets include cash, investments in other cooperatives,
the corporate headquarters of Farmland and certain other assets.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
<TABLE>
Following is a summary of industry segment information as of
and for the years ended August 31, 1993, 1992 and 1991:
<CAPTION>
Cooperative Farm Supply Cooperative Unallocated
Marketing and Retail, Corporate
Fertilizer & Processing Services Items and
Agricultural and Inter-Segment
Petroleum Chemicals Feed Foods Grain Other Eliminations Consolidated
(Amounts in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1993
Sales to unaffiliated customers......$887,389 $884,811 $479,205 $1,412,634 $953,521 $105,380 $ -0- $ 4,722,940
Transfers between segments........... 5,591 7,970 2,330 3,496 -0- -0- (19,387) -0-
Total sales and transfers.........$892,980 $892,781 $481,535 $1,416,130 $953,521 $105,380 $(19,387) $ 4,722,940
Operating income (loss)
of industry segments................$ (7,429) $ 48,981 $ 19,376 $ 16,485 $ 105 $ (458) $ 77,060
Equity in loss of investees (note 4).$ 2 $ (8,223) $ (35) $ (3,306) $ (832) $ (12,394)
Provision for loss on disposition
of assets (note 16)................. (20,022) (6,155) (3,253) (29,430)
General corporate expenses........... (48,201)
Other corporate income............... 13,724
Interest expense..................... (36,764)
Minority interest.................... (828)
Income (loss) before income taxes
and extraordinary item.............. $ (36,833)
Identifiable assets at
August 31, 1993.....................$308,731 $324,956 $ 94,948 $ 391,152 $254,734 $ 35,986 $ 1,410,507
Investment in and
advances to investees...............$ 526 $ 72,166 $ 1,572 $ 18,686 - $ 3,553 $ 1,606 $ 98,109
Corporate assets..................... 211,365
Total assets...................... $ 1,719,981
Provision for depreciation
and amortization....................$ 13,546 $ 13,843 $ 4,487 $ 10,807 $ 2,637 $ 3,369 $ 9,041 $ 57,730
Capital expenditures (including
$48,362,000 of capital assets
of business acquired)...............$ 35,629 $ 17,972 $ 6,590 $ 73,561 $ 1,894 $ 3,613 $ 7,341 $ 146,600
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Cooperative Farm Supply Cooperative Unallocated
Marketing and Retail, Corporate
Fertilizer & Processing Services Items and
Agricultural and Inter-Segment
Petroleum Chemicals Feed Foods Grain Other Eliminations Consolidated
(Amounts in Thousands)
1992
Sales to unaffiliated customers......$979,542 $897,820 $445,338 $850,103 $155,169 $101,335 $ -0- $ 3,429,307
Transfers between segments........... 5,727 9,744 2,531 4,064 -0- -0- (22,066) -0-
Total sales and transfers.........$985,269 $907,564 $447,869 $854,167 $155,169 $101,335 $(22,066) $ 3,429,307
Operating income (loss)
of industry segments................$ 5,758 $101,408 $ 20,204 $ 25,162 $ (726) $ (3,348) $ 148,458
Equity in loss of investees (note 4).$ (31) $ (1,362) $ 15 $ (963) $ (2,341)
General corporate expenses........... (54,528)
Other corporate income............... 6,880
Interest expense..................... (27,965)
Income before income taxes
and extraordinary item.............. $ 70,504
Identifiable assets at
August 31, 1992.....................$289,021 $313,943 $ 76,300 $201,726 $173,376 $207,274 $ 1,261,640
Investment in and
advances to investees...............$ 139 $ 66,899 $ 1,143 $ 6,004 $ 1,197 $ 4,408 $ 79,790
Corporate assets..................... 184,962
Total assets...................... $ 1,526,392
Provision for depreciation
and amortization....................$ 12,269 $ 14,888 $ 3,013 $ 9,051 $ 613 $ 4,513 $ 6,437 $ 50,784
Capital expenditures (including
$47,977,000 of capital assets
of business acquired)...............$ 25,089 $ 17,119 $ 5,115 $ 14,862 $ 48,440 $ 11,141 $ 6,165 $ 127,931
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
<TABLE>
<CAPTION>
Cooperative Farm Supply Unallocated
Cooperative Retail, Corporate
Fertilizer & Food Services, Items and
Agricultural Marketing and and Inter-Segment
Petroleum Chemicals Feed Processing Other Eliminations Consolidated
(Amounts in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
1991
Sales to unaffiliated customers.$1,189,210 $1,035,532 $466,258 $828,964 $118,108 $ -0- $3,638,072
Transfers between segments...... 13,771 10,898 4,147 3,940 4,779 (37,535) -0-
Total sales and transfers....$1,202,981 $1,046,430 $470,405 $832,904 $122,887 (37,535) $3,638,072
Operating income (loss)
of industry segments...........$ (12,963) $ 117,490 $ 23,095 $ 11,380 $ (2,854) $ 136,148
Equity in loss of investees (note 4) $ (15) $ (841) (856)
General corporate expenses...... (59,704)
Other corporate income.......... 11,529
Interest expense (note 6)....... (36,951)
Income before income taxes
and extraordinary item......... $ 50,166
Identifiable assets at
August 31, 1991................$ 282,634 $ 442,271 $ 72,744 $192,582 $164,754 $1,154,985
Investment in and
advances to investees..........$ 68,083 $ 85 $ 1,220 69,388
Corporate assets................ 144,858
Total assets................. $1,369,231
Provision for depreciation
and amortization...............$ 11,401 $ 22,214 $ 3,005 $ 7,788 $ 4,079 $ 7,246 $ 55,733
Capital expenditures (including
$14,156,000 of capital
assets of businesses acquired).$ 17,302 $ 26,548 $ 3,639 $ 25,083 $ 3,827 $ 7,721 $ 84,120
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(13) Significant Group Concentration of Credit Risk
Farmland extends credit to its customers on terms no more
favorable than standard terms of the industries it serves. A
substantial portion of Farmland's receivables are concentrated in
the agricultural industry. Collections on these receivables may be
dependent upon economic returns from farm crop and livestock
production. The Company's credit risks are continually received
and management believes that adequate provisions have been made for
doubtful accounts.
Farmland 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 on the agribusiness
economic sector. See note 4 of the notes to consolidated financial
statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(14) Disclosures About Fair Value of Financial Instruments
<TABLE>
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 its carrying
value:
<CAPTION>
August 31, 1993
Carrying Fair
Amount Value
<S> <C> <C>
Financial Assets:
Investment and long-term receivables:
Notes receivable from investees, 20% to 50% owned..................$ 60,204 $ 58,111
National Bank for Cooperatives..................................... 31,824 ****
Other cooperatives:
Equities......................................................... 22,877 ****
Notes receivable................................................. 14,813 13,408
Financial Liabilities:
Long-term debt:
Subordinated certificates of investment, capital investment
certificates and subordinated monthly interest certificates.......$255,770 $287,168
</TABLE>
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 the discount rate for subordinated debt
certificates with similar maturities currently offered for sale.
**** Investments in CoBank and other cooperatives' equities
which have been purchased are carried at cost and securities
received as patronage refunds are carried at par value, less
provisions for permanent impairment. The Company believes it is
not practicable to estimate the fair value of these securities
because there is no established market for these securities and it
is inappropriate to estimate future cash flows which are largely
dependent on future patronage earnings of the cooperatives.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(15) Related Party Transactions
Farmland Hydro, L.P. and Hyplains Beef, L.C. (50% owned
investees) and National Beef Packing Company, L.P. (a 58% owned
consolidated limited partnership) have credit agreements with
various banks. Borrowings under these agreements are nonrecourse
to the Company. Cash distributions by these entities to their
owners are restricted by these credit agreements. In addition,
Farmland advances funds and provides management and administrative
services for these entities and, in certain instances, on terms
less advantageous to Farmland than transactions conducted in the
ordinary course of business. At August 31, 1993, Farmland's notes
receivable from these entities amounted to $38,368,000.
(16) Provision for Loss on Disposition of Assets
The Board of Directors authorized management to proceed with
negotiations to sell the Company's refinery at Coffeyville, Kansas.
Based on terms of the transaction contemplated, a $20,022,000
provision for loss on the sale of the refinery has been included in
the accompanying consolidated statement of operations for the year
ended August 31, 1993. Accordingly, at August 31, 1993, the net
carrying value of property, plant and equipment has been reduced by
$17,622,000, and a liability of $2,400,000 has been recorded for
completion of capital projects. The transaction is subject to
certain conditions including negotiation of final definitive
agreements.
The Company entered discussions with a potential purchaser of
a dragline. Based on these discussions, the Company estimates a
loss of $6,155,000 from the sale. Accordingly, at August 31, 1993,
the carrying value of the dragline has been written down by
$6,155,000 and a provision for this loss is included in the
Company's consolidated statement of operations for the year then
ended.
The carrying value of a pork processing plant at Iowa Falls,
Iowa was written down by $3,253,000 to an estimated disposal value.
