<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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED FEBRUARY 23, 1996
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED , 1996
$100,000,000
FARMLAND INDUSTRIES, INC.
% SENIOR NOTES DUE 2003
-----------
Interest on the Senior Notes is payable and of each
year, commencing , 1996. The Senior Notes are not redeemable prior to
maturity and do not provide for any sinking fund. The Senior Notes will be
represented by a Global Security registered in the name of the nominee of The
Depository Trust Company. Beneficial interests in the Global Security will be
shown on, and transfers thereof will be effected only through, records
maintained by DTC and its participants. Except as described herein, Senior
Notes in definitive form will not be issued. The Senior Notes will be issued
only in denominations of $1,000 and integral multiples thereof. See
"Description of the Senior Notes".
The Senior Notes are general unsecured and non-subordinated obligations of
the Company and rank on a parity in right of payment with all other unsecured
and non-subordinated indebtedness of the Company.
The Senior Notes have been approved for listing on the New York Stock
Exchange under the symbol "FMLD 03", subject to official notice of issuance.
SEE "RISK FACTORS" ON PAGE S-6 FOR A DESCRIPTION OF CERTAIN RISK FACTORS THAT
SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE SENIOR NOTES.
-----------
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 SUPPLEMENT OR THE PROSPECTUS TO
WHICH IT RELATES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
-----------
<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE (1) DISCOUNT (2) COMPANY(1)(3)
------------------ ------------ -------------
<S> <C> <C> <C>
Per Senior Note................... % % %
Total............................. $ $ $
</TABLE>
- -----
(1) Plus accrued interest, if any, from , 1996.
(2) The Company has agreed to indemnify Goldman, Sachs & Co. against certain
liabilities, including liabilities under the Securities Act of 1933.
(3) Before deducting estimated expenses of $700,000 payable by the Company.
-----------
The Senior Notes offered hereby are being offered by Goldman, Sachs & Co., as
specified herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that the
Senior Notes will be ready for delivery in book-entry form only through the
facilities of DTC in New York, New York on or about , 1996, against payment
therefor in immediately available funds.
GOLDMAN, SACHS & CO.
-----------
The date of this Prospectus Supplement is , 1996.
<PAGE>
IN CONNECTION WITH THE OFFERING OF THE SENIOR NOTES, THE UNDERWRITERS MAY
OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE
OF THE SENIOR NOTES OFFERED HEREBY AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK
STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
S-2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere or incorporated by
reference in this Prospectus Supplement and the accompanying Prospectus. Unless
the context requires otherwise, (i) all references herein to "Farmland" or the
"Company" are 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 "membership" or "members" are to
persons eligible to receive patronage refunds from Farmland, i.e., Farmland's
voting members, associate members, and other persons ("patrons") with which
Farmland has a currently effective patronage refund agreement.
THE COMPANY
Farmland is an agricultural farm supply and processing and marketing company
headquartered in Kansas City, Missouri that is owned primarily by its members
and operates on a cooperative basis. As of August 31, 1995, Farmland's
membership consisted of approximately 1,800 cooperative associations of farmers
and ranchers and 11,500 pork or beef producers or associations of such
producers. Founded originally in 1929, Farmland has grown from sales of
$310,000 during its first year of operation to over $7.2 billion during 1995.
The Company is one of the largest cooperatives in the United States in terms
of revenues. The Company has endeavored to develop a significant presence in
international markets. In 1995, the Company had exports to approximately 70
countries, and derived 47% of its grain revenues from export sales or sales to
domestic customers for export. In 1995, the Company sold more than 2.5 million
tons of wheat to China, which management believes constituted the largest wheat
sale ever by a private U.S. enterprise to a foreign country. Substantially all
of the Company's foreign grain sales are denominated 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 and, through the Company's ownership in WILFARM (a 50%-owned
venture formed in 1995) ("WILFARM"), insecticides, herbicides and other plant
protection products. 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 1995 was produced in plants owned by the
Company or operated by the Company under long-term lease arrangements.
Approximately 64% of the Company's farm supply products sold in 1995 was sold
at wholesale to farm cooperative associations which are members of Farmland.
These farm cooperatives distribute products primarily to farmers and ranchers
in states in the corn belt and the wheat belt who utilize the products in the
production of farm crops and livestock.
On the output side, the Company's processing and marketing operations include
the processing of pork and beef, the marketing of fresh pork, processed pork,
fresh beef and processed beef, and the storage and marketing of grain. In
December 1995, the Company, through a 79%-owned subsidiary, commenced
processing wheat into wheat gluten for use primarily in the commercial baking
and pet
S-3
<PAGE>
food industries and starch for numerous industrial purposes. The Company
anticipates that such wheat processing operations will be fully operational
during 1996. In 1995, approximately 68% of the hogs processed and 49% of the
grain marketed were supplied to the Company by its members. Substantially all
of the Company's pork and beef products sold in 1995 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 in the Company's Annual Report on
Form 10-K for the year ended August 31, 1995 (the "1995 Form 10-K"), which is
incorporated by reference in the accompanying Prospectus.
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. 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 of nitrogen and phosphate fertilizers (some of which
are cooperatives) and product importers and brokers. The feed, grain, pork and
beef industries are comprised of a large variety of competitive participants.
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).
THE OFFERING
<TABLE>
<S> <C>
Securities Offered........ $100,000,000 aggregate principal amount of % Senior Notes Due
2003 (the "Senior Notes").
Maturity Date............. , 2003. The Senior Notes are not redeemable prior to
maturity and do not provide for any sinking fund.
Interest Payment Dates.... and , commencing , 1996.
Ranking................... The Senior Notes 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. As of November 30, 1995, after
giving effect to this offering, (i) the Company had
outstanding $568.0 million aggregate principal amount of non-
subordinated indebtedness, including the Senior Notes, (ii)
the Company had outstanding $300.0 million aggregate principal
amount of subordinated indebtedness, and (iii) certain of the
Company's subsidiaries had outstanding $130.5 million
aggregate principal amount of indebtedness that was
nonrecourse to the Company.
Certain Covenants......... The Indenture (as defined below) under which the Senior Notes
are to be issued restricts, among other things, the ability of
the Company in certain circumstances (i) to incur liens on its
assets, (ii) to repay or purchase indebtedness of the Company
which is by its terms made subordinate or junior in the right
of payment to the Senior Notes or other indebtedness of the
Company, and (iii) to pay patronage refunds or to pay
dividends on its stock or to purchase or redeem any of its
stock or capital credits.
</TABLE>
S-4
<PAGE>
<TABLE>
<S> <C>
Use of Proceeds........... The net proceeds to the Company from the sale of the Senior
Notes offered hereby are estimated to be $ million. The
Company intends to use such net proceeds for general corporate
purposes. Pending such use, such net proceeds may be used
temporarily to repay short-term indebtedness.
Listing................... The Senior Notes have been approved for listing on the New
York Stock Exchange under the symbol "FMLD 03", subject to
official notice of issuance.
Book-Entry System......... The Senior Notes will be issued in the form of one or more
fully registered global securities (collectively, the "Global
Security") registered in the name of the nominee of The
Depository Trust Company ("DTC"). Except as described in this
Prospectus Supplement or the accompanying Prospectus,
beneficial interests in the Global Security will be shown on,
and transfers thereof will be effected only through, records
maintained by DTC and its participants. Except in limited
circumstances described in this Prospectus Supplement, owners
of beneficial interests in the Global Security will not be
entitled to have Senior Notes registered in their names, will
not receive or be entitled to receive Senior Notes in
definitive form and will not be considered holders thereof
under the Indenture. Senior Notes will be issued only in
denominations of $1,000 and integral multiples thereof.
</TABLE>
S-5
<PAGE>
RISK FACTORS
Prospective investors should consider carefully, in addition to the other
information contained in this Prospectus Supplement and the accompanying
Prospectus, the following risk factors before purchasing the Senior Notes
offered hereby.
INCOME TAX MATTERS
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 Resources, Inc. ("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, among other things, 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 on
September 14, 1995; reply briefs were submitted to the court on November 28,
1995, and Farmland is awaiting the court's decision.
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 $191.4 million, before
tax benefits of the interest deduction, through January 31, 1996), or $277.2
million in the aggregate at January 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 applicable statutory
interest thereon. Finally, the additional federal and state income taxes and
accrued interest thereon, which would be owed based on an adverse decision,
would become immediately due and payable unless the Company appealed the
decision and posted the requisite bond to stay assessment and collection.
The liability resulting from an adverse decision would be charged to current
operations and would have a material adverse effect on the Company and may
adversely affect its ability to pay, when due, principal and interest on the
Senior Notes and the Company's other indebtedness. In order to pay any such
tax claim, the Company would have to consider new financing arrangements,
including the incurrence of additional indebtedness and the sale of assets.
Moreover, the Company would be required to renegotiate the Company's $650.0
million credit facility provided by ten domestic and international banking
institutions (the "Credit Agreement"), as well as other existing financing
agreements with certain other parties, not only to permit such new financing
arrangements, but also to cure events of default under the Credit Agreement
and certain of such other existing financing agreements and to maintain
compliance with various requirements of the Credit Agreement and such other
existing financing agreements, including working capital and funded
indebtedness provisions, in order to avoid default thereunder. No assurance
can be given that such financing arrangements or such renegotiation would be
successfully concluded. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Financial Condition, Liquidity and
Capital Resources".
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. In
S-6
<PAGE>
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" herein and "Business" in the accompanying Prospectus.
LIMITED ACCESS TO EQUITY CAPITAL MARKETS
As a cooperative, the Company cannot sell its equity to traditional public
or private markets. Instead, equity is raised largely from cooperative voting
members, associate members and patrons. Increases in the balance of Farmland's
capital shares and equities result from its payment of the noncash portion of
patronage refunds (the allocated equity portion) to its members in the form of
common shares, associate member common shares and capital credits and from net
income on transactions with nonmembers (retained earnings). See "Business--
Patronage Refunds and Distribution of Net Earnings" and "Business--Allocated
Equity Redemption Plans" in the accompanying Prospectus.
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 "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Matters Involving the Environment" herein and "Business--Matters Involving the
Environment" in the accompanying Prospectus.
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 56 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 is investigating or remediating contamination at 28
properties. The Company has also 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. Such laws 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
S-7
<PAGE>
and former owners or operators of a contaminated property, and companies that
generated, disposed of, or arranged for the disposal of, hazardous substances
found at the property. During 1994, 1995 and through the three months ended
November 30, 1995, the Company paid approximately $1.4 million, $3.2 million
and $.6 million, respectively, for environmental investigation and
remediation.
The Company currently is aware of probable obligations for environmental
matters at 35 properties. As of November 30, 1995, the Company has made an
environmental accrual of $18.5 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 also is aware of other environmental matters for which there is a
reasonable possibility that the Company will incur costs to resolve. It is
possible that the costs of resolution of the matters described in this
paragraph may exceed the liabilities which, in the opinion of management, are
probable and which costs are reasonably estimable at November 30, 1995. In the
opinion of management, it is reasonably possible for such costs to be
approximately an additional $22.2 million. See "Business--Matters Involving
the Environment" in the accompanying Prospectus.
ABSENCE OF CERTAIN RESTRICTIONS IN THE INDENTURE
The Indenture under which the Senior Notes are to be issued does not contain
any provisions that would limit the ability of the Company or any of its
affiliates to incur indebtedness (secured or unsecured) or that would afford
holders of the Senior Notes 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 Senior Notes.
See "Description of Debt Securities--General" in the accompanying Prospectus.
ABSENCE OF PUBLIC MARKET FOR THE SENIOR NOTES
There is currently no trading market for the Senior Notes, and no assurance
can be given that any market for the Senior Notes will develop or, if any such
market develops, as to the liquidity of such market. The Senior Notes have
been approved for listing on the New York Stock Exchange under the symbol
"FMLD 03", subject to official notice of issuance. No assurance can be given
that a holder of the Senior Notes will be able to sell them in the future or
that such sale will be at a price equal to or higher than the initial public
offering price. Furthermore, the Senior Notes may trade at a discount from
their initial public offering price depending upon prevailing interest rates
and other factors.
AGRICULTURAL LEGISLATION
The U.S. Senate has passed a bill primarily intended to phase out, over a
seven-year period, subsidies and price controls for grain and certain other
crops. A similar bill is pending before the U.S. House of Representatives. It
is not possible for the Company to predict whether and in what form such
legislation may be enacted, and, if enacted, what effect, if any, such
legislation may have on the Company.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Senior Notes offered
hereby are estimated to be $ million. The Company intends to use such net
proceeds for general corporate purposes. Pending such use, such net proceeds
may be used temporarily to repay short-term indebtedness.
S-8
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization (including short-term
debt) of the Company as of November 30, 1995, on an actual basis and as
adjusted to give effect to the issuance of the Senior Notes offered hereby:
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED
---------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
SHORT-TERM DEBT (INCLUDING NONRECOURSE DEBT OF $77,269
AND CURRENT MATURITIES OF LONG-TERM DEBT)(1)........... $ 392,201 $ 392,201
LONG-TERM DEBT (EXCLUDING CURRENT MATURITIES):
Senior Notes.......................................... 0 100,000
Other non-subordinated debt........................... 180,004 180,004
Subordinated debt..................................... 273,019 273,019
Nonrecourse debt(1)................................... 53,260 53,260
---------- ----------
Total long-term debt................................ $ 506,283 $ 606,283
INTERIM NET INCOME(2)................................... $ 52,284 $ 52,284
CAPITAL SHARES AND EQUITIES(2):
Preferred shares--Authorized 8,000,000 shares of $25
par value; issued and outstanding, 98,157 shares..... $ 2,454 $ 2,454
Common shares--Authorized 50,000,000 shares of $25 par
value; issued and outstanding, 17,393,619 shares..... 434,840 434,840
Associate member common shares--Authorized 2,000,000
shares of $25 par value; issued and outstanding,
707,103 shares....................................... 17,678 17,678
Capital credits....................................... 32,974 32,974
Earned surplus and other equities..................... 199,309 199,309
---------- ----------
Total capital shares and equities................... $ 687,255 $ 687,255
---------- ----------
Total capitalization.............................. $1,638,023 $1,738,023
========== ==========
</TABLE>
- --------
(1) Nonrecourse debt refers to debt of subsidiaries of the Company for which
only the applicable subsidiary is responsible.
(2) In accordance with the bylaws of Farmland, the member-sourced portion of
consolidated earnings (before income taxes) is determined annually and
distributed to members of Farmland as patronage refunds. The member-
sourced portion of such earnings is determined on the basis of the
quantity or value of business done by Farmland during the year with or for
members entitled to receive patronage refunds. As this determination is
made only after the end of the year, and because the appropriation of
earned surplus is dependent on the determination of the amount of
patronage refunds, and in view of the fact that the portion of the annual
patronage refund to be paid in cash or Farmland equity (common shares,
associate member common shares or capital credits) is determined (by the
Board of Directors of Farmland (the "Board of Directors") at its
discretion) after the amount of the annual patronage refund has been
determined, Farmland makes no provision for patronage refunds in its
interim financial statements. Therefore, the amount of interim net income
has been reflected as a separate item in Farmland's November 30, 1995
Condensed Consolidated Balance Sheet in the 1995 Form 10-K and is not
included in capital shares and equities at November 30, 1995.
S-9
<PAGE>
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, 1995 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, 1994 and 1995 and for each of the years in the three-year period
ended August 31, 1995 (the "Consolidated Financial Statements"), and the
independent auditors' report thereon, are included in the 1995 Form 10-K,
which is incorporated by reference in the accompanying Prospectus. The
following selected consolidated financial data as of the end of and for the
three-month periods ended November 30, 1994 and November 30, 1995 are derived
from unaudited Condensed Consolidated Financial Statements of the Company (the
"November 30, 1995 Financial Statements") included in the Company's Quarterly
Report on Form 10-Q for the quarterly period ended November 30, 1995, which is
incorporated by reference in the accompanying Prospectus. The November 30,
1995 Financial Statements include all adjustments, consisting of normal
recurring accruals, which the Company considers necessary for a fair
presentation of the results of operations for the periods covered thereby. The
information set forth below should be read in conjunction with information
appearing elsewhere or incorporated by reference in this Prospectus Supplement
and the accompanying Prospectus: "Management's Discussion and Analysis of
Financial Condition and Results of Operations", the Consolidated Financial
Statements including related notes, and the independent auditors' report which
contains an explanatory paragraph concerning income tax adjustments proposed
by the IRS relating to Terra, and the November 30, 1995 Financial Statements
including related notes.
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
YEAR ENDED AUGUST 31 NOVEMBER 30 NOVEMBER 30
------------------------------------------------------- ------------ ------------
1991 1992 1993 1994 1995 1994 1995
---------- ---------- ---------- ---------- ---------- ------------ ------------
(AMOUNTS IN THOUSANDS EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF
OPERATIONS:(1)(2)
Net Sales............... $3,638,072 $3,429,307 $4,722,940 $6,677,933 $7,256,869 $1,616,167 $2,156,949
Operating Income of
Industry Segments...... 156,765 160,912 86,579 154,799 293,381 77,020 85,801
Interest Expense........ 36,951 27,965 36,764 51,485 53,862 13,443 14,289
Income (Loss) From
Continuing Operations.. 42,693 61,046 (30,400) 73,876 162,799 47,945 52,284
Net Income (Loss)....... $ 42,693 $ 62,313 $ (30,400) $ 73,876 $ 162,799 $ 47,945 $ 52,284
========== ========== ========== ========== ========== ========== ==========
DISTRIBUTION OF NET
INCOME (LOSS):
Patronage Refunds:
Allocated Equity....... $ 17,837 $ 1,038 $ 1,155 $ 44,032 $ 61,356 Note 3 Note 3
Cash and Cash
Equivalents........... 12,571 17,918 495 26,580 33,061 Note 3 Note 3
Earned Surplus and Other
Equities............... 12,285 43,357 (32,050) 3,264 68,382 Note 3 Note 3
---------- ---------- ---------- ---------- ----------
$ 42,693 $ 62,313 $ (30,400) $ 73,876 $ 162,799 Note 3 Note 3
========== ========== ========== ========== ==========
RATIO OF EARNINGS TO
FIXED CHARGES(4)....... 1.9 2.5 Note 4 2.2 4.0 4.3 4.7
BALANCE SHEETS:
Working Capital......... $ 122,124 $ 208,629 $ 260,519 $ 290,704 $ 319,513 $ 300,890 $ 318,566
Property, Plant and
Equipment, Net......... 490,712 446,002 504,378 501,290 592,145 506,992 617,549
Total Assets............ 1,369,231 1,526,392 1,719,981 1,926,631 2,185,943 1,920,378 2,374,273
Long-Term Debt
(excluding current
maturities)............ 291,192 322,377 485,861 517,806 506,033 493,161 506,283
Capital Shares and
Equities............... 497,364 588,129 561,707 585,013 687,287 584,860 687,255
</TABLE>
S-10
<PAGE>
- --------
(1) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Financial Condition, Liquidity and Capital
Resources" for a discussion of the pending income tax litigation relating
to Terra, a former subsidiary of the Company.
(2) Acquisitions and Dispositions:
(a) During 1994, the Company acquired approximately 79% of the common stock
of National Carriers, Inc. ("NCI") for a cash purchase price of $4.4
million. NCI is a trucking company located in Liberal, Kansas. NCI
provides substantially all the trucking service needs of National Beef
Packing Company, L.P. ("NBPC"), a limited partnership. See Note 2 of
the Notes to Consolidated Financial Statements included in the 1995
Form 10-K.
(b) 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. See Note 2 of the Notes to Consolidated Financial
Statements included in the 1995 Form 10-K.
(c) During 1993, Farmland acquired a 58% interest in NBPC (which interest
was increased to 68% on March 31, 1995 and, subsequent to August 31,
1995, to approximately 76%). Effective April 15, 1993, NBPC acquired
Idle Wild Foods, Inc.'s beef packing plant and feedlot located in
Liberal, Kansas. See Note 2 of the Notes to Consolidated Financial
Statements included in the 1995 Form 10-K.
(d) In August 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. See Note 2
of the Notes to Consolidated Financial Statements included in the 1995
Form 10-K.
(e) The following unaudited financial information for the year ended August
31, 1993 presents pro forma results of operations of the Company as if
the disposition of CFA and the acquisition of NBPC had occurred at the
beginning of the 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 NBPC for the full 1993. See Note
2 of the Notes to Consolidated Financial Statements included in the
1995 Form 10-K.
<TABLE>
<CAPTION>
AUGUST 31
(UNAUDITED)
----------------
1993
-----------
(AMOUNTS IN
THOUSANDS)
<S> <C>
Net Sales................................................. $5,357,867
==========
Income (Loss) Before Extraordinary Item................... $ (44,040)
==========
</TABLE>
(3) In accordance with the bylaws of Farmland, the member-sourced portion of
consolidated earnings (before income taxes) is determined annually and
distributed to members of Farmland as patronage refunds. The member-
sourced portion of such earnings is determined on the basis of the
quantity or value of business done by Farmland during the year with or for
members entitled to receive patronage refunds. As this determination is
made only after the end of the year, and because the appropriation of
earned surplus is dependent on the determination of the amount of
patronage refunds, and in view of the fact that the portion of the annual
patronage refund to be
S-11
<PAGE>
paid in cash or Farmland equity (common shares, associate member common
shares or capital credits) is determined (by the Board of Directors at its
discretion) after the amount of the annual patronage refund has been
determined, Farmland makes no provision for patronage refunds in its
interim financial statements. Therefore, the amount of interim net income
has been reflected as a separate item in Farmland's November 30, 1995
Condensed Consolidated Balance Sheet and is not included in capital shares
and equities at November 30, 1995.
(4) In computing the ratio of earnings to fixed charges, earnings represent
pretax income (loss) for the enterprise as a whole including 100% of such
income (loss) of minority-owned subsidiaries which have fixed charges, the
Company's share of 50%-owned entities and any distributed earnings (but
not losses or undistributed earnings) of less-than-50% owned entities plus
fixed charges. Fixed charges consist of interest and finance charges on
all indebtedness plus that portion of rentals considered to be the
interest factor. 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 debt securities
(the "continuous debt program") and bank lines of credit.
The Company's debt securities issued under the continuous debt program
generally are offered on a best-efforts basis through the Company's wholly
owned broker-dealer subsidiary, Farmland Securities Company, and through
American Heartland Investments, Inc. (which is not affiliated with Farmland),
and also may be offered by selected unaffiliated broker-dealers. The types of
securities offered in the continuous debt program include certificates payable
on demand and five- and ten-year subordinated debt certificates. The total
amount of such debt outstanding and the flow of funds to, or from, the Company
as a result of the continuous debt program are influenced by the rate of
interest which Farmland establishes for each type of debt certificate offered
and by options of Farmland to call for redemption certain of its outstanding
debt certificates. During the year ended August 31, 1995, and the three months
ended November 30, 1995, the outstanding aggregate balance of demand loan and
subordinated debt certificates increased (decreased) by $10.3 million and
$(.6) million, respectively.
Farmland has a $650.0 million Credit Agreement. The Credit Agreement
provides short-term credit of up to $450.0 million to finance seasonal
operations and inventory, and revolving term credit of up to $200.0 million.
At November 30, 1995, short-term borrowings under the Credit Agreement were
$232.7 million, revolving term borrowings were $85.0 million and $35.0 million
were being utilized to support letters of credit issued on behalf of Farmland
by participating banks.
At November 30, 1995, Farmland was in compliance with all covenants under
the Credit Agreement. The Company and the bank participants annually renew the
short-term commitments of the Credit Agreement. The next renewal date is in
May 1996. Management expects that the short-term commitment will be renewed;
however, at such annual renewal date, any bank participant may choose not to
renew its portion of the short-term commitment. The revolving term loan
facility will expire in May 1997.
The Company maintains other borrowing arrangements with banks and financial
institutions. Under such agreements, at November 30, 1995, $44.2 million was
borrowed. Financial covenants of these arrangements generally are not more
restrictive than under the Credit Agreement.
S-12
<PAGE>
NBPC maintains a $90.0 million borrowing agreement 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 November 30, 1995, $41.3 million was
borrowed and $1.0 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 to such group of banks to support
its borrowings.
Tradigrain, which is comprised of seven international grain trading
subsidiaries of Farmland, has borrowing agreements with various international
banks which provide financing and letters of credit to support current
international grain trading transactions. At November 30, 1995, such
borrowings totaled $72.9 million. Obligations of Tradigrain under these loan
agreements are nonrecourse to Farmland or Farmland's other affiliates.
Leveraged leasing has been used 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).
In the opinion of management, these arrangements for debt capital are
adequate for the Company's present operating and capital plans. However,
additional financing arrangements are continuously evaluated. This offering of
Senior Notes is an example of such an additional financing arrangement.
As a cooperative, Farmland's member-sourced net earnings (i.e., income from
business done with or for members) are distributed to its voting members,
associate members and patrons in the form of common equity, capital credits or
cash. For this purpose, net income or loss was determined in accordance with
the requirements of federal income tax law up to 1994 and is determined in
accordance with generally accepted accounting principles in 1995 and after.
Income other than member-sourced 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 common shares, capital credits, nonmember capital and patronage refunds
payable in equities. 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 1993, 1994 and
1995, the earned surplus account exceeded the required amount by $3.8 million,
$2.3 million and $62.8 million, respectively.
Generally, a portion of the patronage refund is distributed in cash and the
balance is allocated to equity (the "allocated equity portion") and
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, representing the invested portion of patronage
refunds may be redeemed by cash payments from Farmland to holders thereof who
participate in Farmland's base capital plan. Capital credits and other
equities of Farmland and Farmland Foods, Inc., a 99%-owned subsidiary,
S-13
<PAGE>
may be redeemed under other equity redemption plans. The base capital plan and
other equity redemption plans are described under "Business--Allocated Equity
Redemption Plans" in the accompanying Prospectus.
Cash provided by operating activities totaled $44.7 million in 1995 compared
with $106.0 million in 1994. This decrease reflects the cash effect of
increased inventories and accounts receivable (principally in the output
business, and mostly in the grain business).
Other major sources of cash in 1995 included $42.5 million from disposition
of investments and collections on long-term notes receivable, $37.1 million
from an increase in checks and drafts outstanding which is attributable to the
Company's cash management systems, $10.3 million from the sale to investors of
demand loan and subordinated debt certificates and $9.2 million from bank
loans and other notes.
Major uses of cash during 1995 included $124.7 million for capital additions
or improvements, $26.8 million for acquisition of investments and notes
receivable, $26.6 million for patronage refunds and dividends distributed from
1994 earnings and $12.4 million for the redemption of allocated equities under
the Farmland base capital plan and other equity redemption plans.
Major uses of cash during the three months ended November 30, 1995 include
$45.0 million for capital expenditures, $32.6 million for patronage refunds
and dividends distributed from income of the 1995 fiscal year, $23.4 million
for the redemption of equities under the Farmland base capital plan and other
equity redemption plans, $15.9 million in net payments to reduce the balance
of bank loans and other notes outstanding and $11.9 million for additional
investment and long-term notes receivable. Major sources of cash include $73.9
million from operations and $58.9 million from an increase in the balance of
checks and drafts outstanding.
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 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, among other things, 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 on
September 14, 1995; reply briefs were submitted to the court on November 28,
1995, and Farmland is awaiting the court's decision.
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 $191.4 million, before
tax benefits of the interest deduction, through January 31, 1996), or $277.2
million in the aggregate at January 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 applicable statutory
interest thereon. Finally, the additional federal and state income taxes and
accrued interest thereon, which would be owed based on an adverse decision,
would become immediately due and payable unless the Company appealed the
decision and posted the requisite bond to stay assessment and collection.
S-14
<PAGE>
The liability resulting from an adverse decision would be charged to current
operations and would have a material adverse effect on the Company and may
adversely affect its ability to pay, when due, principal and interest on the
Senior Notes and the Company's other indebtedness. In order to pay any such
tax claim, the Company would have to consider new financing arrangements,
including the incurrence of additional indebtedness and the sale of assets.
Moreover, the Company would be required to renegotiate the Credit Agreement
with its bank lenders, as well as other existing financing agreements with
certain other parties, not only to permit such new financing arrangements, but
also to cure events of default under the Credit Agreement and certain of such
other existing financing agreements and to maintain compliance with various
requirements of the Credit Agreement and such other existing financing
agreements, including working capital and funded indebtedness provisions, in
order to avoid default thereunder. No assurance can be given that such
financing arrangements or such renegotiation would be successfully concluded.
No provision has been made in the Consolidated Financial Statements for
federal or state income taxes (or interest thereon) in respect of the IRS
claims described above. Farmland believes that it has meritorious positions
with respect to all of these claims.
In the opinion of Bryan Cave LLP, Farmland's special tax counsel, it is more
likely than not that the courts will ultimately conclude that Farmland's
treatment of the Terra sale gain was substantially, if not entirely, correct.
Such counsel has further advised, however, 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 Farmland on any of these issues.
RESULTS OF OPERATIONS FOR YEARS ENDED AUGUST 31, 1993, 1994 AND 1995
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 fertilizer and other plant nutrient and
protection products. 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 profit by business segment in
each of the years in the three-year period ended 1995, compared with the
respective prior year, is presented in the following table.
S-15
<PAGE>
Management's discussion of business segment sales, operating income or loss
and other factors affecting the Company's net income during 1993, 1994 and
1995 follows the table.
<TABLE>
<CAPTION>
CHANGE IN SALES CHANGE IN NET INCOME
----------------------------- -----------------------------
1993 1994 1995 1993 1994 1995
COMPARED COMPARED COMPARED COMPARED COMPARED COMPARED
WITH 1992 WITH 1993 WITH 1994 WITH 1992 WITH 1993 WITH 1994
--------- --------- --------- --------- --------- ---------
(AMOUNTS IN MILLIONS) (AMOUNTS IN MILLIONS)
INCREASE (DECREASE) OF
<S> <C> <C> <C> <C> <C> <C>
INDUSTRY SEGMENT--SALES
AND
OPERATING INCOME OR
LOSS:
Petroleum............. $ (92) $ (32) $ 21 $(13) $ 32 $(35)
Crop Production....... (13) 278 8 (60) 74 73
Feed.................. 34 49 (60) (1) (4) (7)
Food Processing and
Marketing............ 563 943 337 (8) 4 56
Grain Marketing....... 798 674 279 1 (34) 52
Other................. 4 43 (6) 7 (4) -0-
------ ------ ----- ---- ---- ----
$1,294 $1,955 $ 579 $(74) $ 68 $139
====== ====== =====
CORPORATE EXPENSES AND OTHER:
General corporate expenses (increase) decrease........ $ 9 $ (9) $(14)
Interest expense (increase) decrease.................. (9) (15) (2)
Provision for loss on disposition of assets (increase)
decrease............................................. (29) 29 -0-
Other income and deductions (net) increase (decrease). 7 14 (6)
Equity in income of investees increase (decrease)..... (10) 23 11
Minority owners' interest in net income of
subsidiaries (increase) decrease..................... (1) 5 (14)
Income taxes (increase) decrease...................... 15 (11) (25)
---- ---- ----
Net income increase (decrease)........................ $(92) $104 $ 89
==== ==== ====
</TABLE>
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
statements of operations as selling, general and administrative expenses)
which cannot practicably be identified or allocated to an industry segment,
interest expense, interest income, equity in net income (loss) of investees,
other income (deductions) or income taxes.
PETROLEUM
SALES
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 a 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.
Sales of the petroleum segment decreased $92.2 million in 1993 compared with
1992, primarily a result of a 12% decrease in unit sales of refined fuels
(gasoline, diesel and distillates) and a 2% decline of the average selling
price thereof. Unit sales decreased principally because the Company sold its
investment in National Cooperative Refinery Association ("NCRA") in June 1992.
The refined fuels unit
S-16
<PAGE>
sales decrease in 1993 reduced sales by approximately $92.2 million compared
with 1992 and lower prices of refined fuels reduced sales by $17.7 million.
Sales of other products (principally asphalt and coke) decreased $12.4
million. Propane sales increased approximately $30.1 million in 1993 due to a
27% increase in unit sales and 18% higher prices.
OPERATING INCOME
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 an approximately 9% increase in crude oil costs 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.
Operating income of the petroleum segment decreased $12.8 million in 1993
compared with 1992. The favorable effects of improved margins in propane and
lower marketing and administrative expenses were more than offset by the
unfavorable effects of lower income from distributing fuels produced by NCRA
and the write-down to market value of certain petroleum inventories.
CROP PRODUCTION
SALES
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 Company's 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%.
Sales of the crop production segment decreased $13.0 million in 1993
compared with 1992. Nitrogen fertilizer sales increased $54.1 million due to
8% higher unit sales and because the average selling price increased 3%.
Phosphate fertilizer sales decreased $64.7 million. This decrease is primarily
a result of the sale of the Green Bay, Florida phosphate plant to a 50%-owned
joint venture. Subsequent to this sale (on November 15, 1991) export sales
from the Green Bay plant have not been reported in the Company's operations.
In 1992, the Company's sales included export sales from the Green Bay plant of
$60.9 million.
OPERATING INCOME
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 were 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
S-17
<PAGE>
approximately twice the level of 1993 which increased operating income in this
segment approximately $66.8 million. Unit sales increased 18% (over one
million tons) which increased operating income by approximately $10.8 million.
In addition, the Company's share of net income from fertilizer ventures
(included in the Company's Consolidated Statement of Operations in the caption
"Equity in Net Income (Loss) of Investees" in the 1995 Form 10-K) was $15.3
million in 1994. 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.
Operating income of the crop production segment decreased $60.3 million in
1993 compared with 1992, primarily because of a 29% higher natural gas cost
(the principal raw material consumed in producing nitrogen fertilizer) which
was not recovered through selling prices. Fertilizer margins decreased
approximately $43.2 million because of higher natural gas cost. In addition,
phosphate fertilizer margins decreased approximately $7.1 million because
decreased phosphate fertilizer selling prices more than offset decreased cost.
In addition, the Company's share of the net loss of fertilizer ventures
(included in the Company's Consolidated Statement of Operations in the caption
"Equity in Net Income (Loss) of Investees" in the 1995 Form 10-K) was $8.1
million in 1993 compared with a loss of $1.3 million in 1992.
FEED
SALES
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 ingredients prices.
Sales of the feed segment increased $33.9 million in 1993 compared with
1992, primarily because of higher unit sales. Formula feed unit sales
increased approximately 9% which increased sales $20.3 million. Feed
ingredients unit sales increased approximately 12% which increased sales by
$18.1 million. In addition, sales of animal health products increased $2.0
million. Lower formula feed selling prices partly offset the effect of higher
unit sales.
OPERATING INCOME
Operating income of the feed business decreased $7.0 million in 1995
compared with 1994. This decrease was attributable to an overall decrease in
unit sales of beef, dairy and swine feed 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 $.5 million
reflecting lower margins on feed ingredients and pet food of $.8 million and
$.4 million, respectively, partly offset by $.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.
S-18
<PAGE>
Operating income of the feed segment of $20.7 million in 1993 was slightly
lower than in 1992. The decrease was due to the impact of lower selling
prices.
FOOD PROCESSING AND MARKETING
SALES
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 Beef L.C. ("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 formed 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.
Food processing and marketing sales increased $562.5 million in 1993
compared with 1992, primarily due to business acquisitions. In April 1993, the
Company and partners organized NBPC. Farmland acquired a 58% ownership
interest in NBPC (which interest was increased to 68% effective March 31, 1995
and, subsequent to August 31, 1995, to approximately 76%) which acquired a
beef packing plant and feedlot located in Liberal, Kansas. As a result of this
acquisition, the Company's sales included beef sales of $442.1 million in
1993. In February 1993, the Company purchased a pork processing plant located
at Monmouth, Illinois. As a result of this acquisition, sales of pork products
increased approximately $90.0 million. Sales of fabricated pork products at
the Company's other plants increased $17.0 million and sales of specialty
meats of the Carando division increased $8.3 million.
OPERATING INCOME
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 reflected an increase of $4.1 million compared with 1993. The
increase included $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 due to weak consumer demand for beef and
industry price competition.
Operating income of the food processing and marketing segment decreased $8.7
million in 1993 compared with 1992. The decrease is primarily due to a 4.6%
increase in live hog costs. Margins on fabricated products and hams increased
$3.6 million and $4.4 million, respectively, and margins on beef products (not
included in the Company's operations in 1992) were $4.2 million. These
increases
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resulted from acquisitions which increased sales as discussed above. However,
these increases were more than offset by the effects of the 4.6% increase in
live hog costs which could not be fully recovered through increased wholesale
prices of fresh and processed pork products and by higher selling and
administrative expenses.
GRAIN MARKETING
SALES AND OPERATING INCOME
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 and an increase in the volume of
international grain brokered by Tradigrain, as well as 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
includes an operating loss of $14.4 million in the international operations of
Tradigrain and an operating loss of $19.1 million in the Company's grain
division. The loss in 1994 resulted primarily from negative unit margins on
international grain transactions and higher domestic operating expenses.
Grain operations which were acquired in July 1992 reported sales for the
full year in 1993 of $953.5 million. Sales for the two months ended August 31,
1992 were $155.2 million.
In 1993, operating income of the grain business was $.1 million compared
with a loss of $.7 million for the two months ended August 31, 1992. In 1993,
grain marketing operations were relocated to Kansas City from Enid, Oklahoma,
an export elevator at Houston, Texas was sold and certain duplicative
administrative costs were eliminated. As a result, cost reductions were
realized in 1993.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") increased $39.1
million in 1995 compared with 1994. Approximately $25.3 million of the
increase were directly connected to business segments (primarily the grain and
pork businesses) and have been included in the operating expenses of these
business segments. The increase of SG&A 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 acquisition of
Tradigrain and NCI 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.
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SG&A decreased $12.3 million in 1993 compared with 1992. SG&A directly
connected to business segments decreased $3.0 million and SG&A not identified
to business segments decreased $9.3 million.
OTHER INCOME (DEDUCTIONS)
INTEREST EXPENSE
Interest expense increased $2.4 million in 1995 compared with 1994,
reflecting a higher average interest rate (approximately 0.5% higher), partly
offset by a lower amount of average borrowings.
Interest expense increased $14.7 million in 1994 compared with 1993. The
increase was 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 NCI and Tradigrain in 1994 and by higher interest rates.
Interest expense increased $8.8 million in 1993 compared with 1992 due to an
increase of the average level of borrowings, partly offset by lower interest
rates.
PROVISION FOR LOSS ON DISPOSITION OF ASSETS
At August 31, 1993, management was negotiating to sell the Company's
refinery at Coffeyville, Kansas. Based on the progress of negotiation and the
transactions contemplated, operations for 1993 included a $20.0 million
provision for loss on the sale of the refinery. Accordingly, the net carrying
value of property, plant and equipment was reduced by $20.0 million at August
31, 1993. The transactions contemplated were subject to certain conditions,
including negotiation of final agreements. During 1994, management determined
that final sale terms anticipated by the potential purchaser were not in the
Company's best interest. Accordingly, negotiations were terminated, and the
sale was not consummated.
In 1993, the Company entered discussions with a potential purchaser of a
dragline. Based on these discussions, the Company estimated a loss of $6.2
million from the sale. Accordingly, at August 31, 1993, the carrying value of
the dragline was written down by $6.2 million, and a provision for this loss
was included in the Company's Consolidated Statement of Operations for the
year then ended. In 1994, this sale was consummated on terms substantially as
expected.
At August 31, 1993, the carrying value of a pork processing plant at Iowa
Falls, Iowa was written down by $3.3 million to an estimated disposal value.
OTHER, NET
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 and 1995, the Company negotiated settlements with 20 and two
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 and $.3 million in 1994 and 1995,
respectively, and has included such amounts in the caption "Other income
(deductions): Other, net" in the Company's Consolidated Statements of
Operations for 1994 and 1995. See Note 16 of the Notes to Consolidated
Financial Statements included in the 1995 Form 10-K.
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RESULTS OF OPERATIONS FOR THREE MONTHS ENDED NOVEMBER 30, 1994 AND THREE
MONTHS ENDED NOVEMBER 30, 1995
SALES
Sales for the three months ended November 30, 1995 increased $540.8 million,
or 33.5%, compared with the corresponding period of the prior year. The
increase includes $435.9 million higher sales of agricultural output products,
$100.9 million higher sales of farm production input products and $4.0 million
higher sales of other products and services.
Sales of the food processing and marketing business increased $148.2 million
in the three months ended November 30, 1995 compared to the corresponding
period of the prior year. Pork sales increased $28.7 million as a result of
higher unit prices partially offset by lower volume. Beef sales increased
$119.5 million primarily due to the March 31, 1995 acquisition by NBPC of the
plant at Dodge City, Kansas formerly owned by Hyplains.
Grain sales increased $287.7 million due to a 58% increase in volume sold
(principally export sales) combined with a significant increase in grain
commodity prices during the three months ended November 30, 1995 compared to
the corresponding period of the prior year.
Sales of crop production products, petroleum products and feed increased
$89.5 million, or 32.6%, $4.5 million, or 2.0%, and $7.0 million, or 5.5%,
respectively. Sales of crop production products increased because unit sales
and prices of plant nutrients increased approximately 26.6% and 6.8%,
respectively. Sales of petroleum products increased only slightly as improved
propane prices and increased unit sales of distillates and diesel were largely
offset by a decrease in gasoline unit sales. Feed sales increased because of
higher formula feed unit sales and because of higher unit prices received on
sales of feed ingredients.
NET INCOME
Net income of $52.3 million for the three months ended November 30, 1995
increased $4.3 million or 9.1% compared with the corresponding period of the
prior year. The increase is primarily a result of $17.2 million higher
operating profit in the Company's crop production business. In addition, the
Company's share of net income from joint ventures engaged in crop production
increased $4.4 million. These increases were partially offset by decreased
operating profits of the Company's food processing and marketing, petroleum
and feed businesses of $4.8 million, $4.3 million and $1.2 million,
respectively. In addition, general corporate expenses increased $1.6 million,
minority interest in the net income of subsidiaries increased $1.6 million and
the provision for income taxes increased $3.4 million.
Operating profit of the crop production business increased in the three
months ended November 30, 1995 compared with the corresponding period of the
prior year as a result of both increased volume and higher prices of nitrogen-
based products. Income of crop production joint ventures increased primarily
because of higher market prices for phosphate fertilizers.
Operating profit of the food marketing business decreased $4.8 million in
the three months ended November 30, 1995 compared with the corresponding
period of the prior year. Pork processing and marketing operating profit
decreased $11.2 million primarily due to increased hog prices which resulted
in decreased margins on fresh pork products. Operating profits in the beef
business increased $6.4 million in the three months ended November 30, 1995
compared with the corresponding period of the prior year. This increase is
primarily attributable to improvements in operating efficiencies as well as
the availability of cattle at a favorable cost level.
The petroleum business incurred a $1.8 million loss in the three months
ended November 30, 1995 compared with operating income of $2.5 million in the
same period of the prior year primarily due to an extended turnaround period,
which was necessary to complete the expansion of refining capacity from 62,000
barrels per day to 75,000 barrels per day.
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Operating income in the feed business decreased $1.2 million in the three
months ended November 30, 1995 compared with the corresponding period of the
prior year. This decrease primarily resulted from lower unit margins.
SG&A increased $5.9 million in the three months ended November 30, 1995
compared with the corresponding period the prior year. Approximately $4.3
million of the increase was directly connected to business segments, primarily
the output businesses (grain, beef and pork) and the inclusion of SG&A of the
Dodge City beef processing facility (formerly Hyplains) in the Company's
Condensed Consolidated Statement of Operations for the three months ended
November 30, 1995. SG&A not identified to business segments increased $1.6
million primarily due to increased compensation and legal services.
The estimated effective tax rate, based on the Company's best estimate of
the full year's tax rate, increased to 21.6% for the three months ended
November 30, 1995 from 15.5% for the corresponding period of the prior year.
The increase results from the utilization in prior periods of alternative
minimum tax carryforward credits, which have now been fully utilized. The
actual effective tax rate may be subject to subsequent refinement or revision.
The level of operating profits in the crop production and food marketing
businesses is, to a significant degree, attributable to favorable spreads
between selling prices and raw material costs (natural gas in the case of
nitrogen-based fertilizers and live hogs and cattle in the food marketing
business). These price and cost factors are beyond the control of the
Company's management and have been volatile in the past. Accordingly,
management cannot determine how the direction or magnitude of these factors
will affect the Company's business. The Company's cash flow and income may be
volatile as conditions affecting agriculture, costs and markets for the
Company's products change.
CAPITAL EXPENDITURES AND INVESTMENTS IN VENTURES
The Company plans expenditures for capital additions, improvements and
investments in ventures of approximately $379.4 million during 1996 and 1997
of which $47.0 million have been made through November 30, 1995. The Company
intends to fund its capital program with cash from operations or from debt
financing. See "Business--Capital Expenditures and Investments in Ventures" in
the accompanying Prospectus.
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 process. 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 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 56 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 is investigating or remediating contamination at 28
properties. The Company has also 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. Such laws 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
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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 substances
found at the property. During 1994, 1995, and through the three months ended
November 30, 1995, the Company paid approximately $1.4 million, $3.2 million
and $.6 million, respectively, for environmental investigation and
remediation.
The Company currently is aware of probable obligations for environmental
matters at 35 properties. As of November 30, 1995, the Company has made an
environmental accrual of $18.5 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 also is aware of other environmental matters for which there is a
reasonable possibility that the Company will incur costs to resolve. It is
possible that the costs of resolution of the matters described in this
paragraph may exceed the liabilities which, in the opinion of management, are
probable and which costs are reasonably estimable at November 30, 1995. In the
opinion of management, it is reasonably possible for such costs to be
approximately an additional $22.2 million.
Under the Resource Conservation Recovery Act of 1976 ("RCRA"), the Company
has five closure and five 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. 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. Such closure and
post-closure costs are estimated to be $5.1 million at November 30, 1995 (and
are in addition to the $22.2 million discussed in the preceding paragraph).
The Company is currently involved in three administrative proceedings
brought by Region VII of the Environmental Protection Agency ("EPA") with
respect to alleged violations under the Clean Air Act, the Emergency Planning
and Community Right-to-Know Act and RCRA at the Coffeyville refinery. The
Company is currently negotiating with the EPA concerning these matters and
believes that such negotiations may result in compromise settlements,
including the possible implementation of a Supplemental Environmental Project
in connection with the Clean Air Act proceeding. Absent such settlements, the
Company may contest the EPA's allegations. Management's estimate of probable
civil fines and penalties for these three proceedings has been included in the
environmental accrual discussed above.
Specifically, the three administrative proceedings are described as follows:
(1) The Company is a party to an administrative enforcement action brought
by Region VII of the EPA which alleges violations of the Emergency
Planning and Community Right-to-Know Act and the release reporting
requirements of CERCLA at its Coffeyville, Kansas refinery. This
proceeding involves alleged violations of release reporting
requirements and seeks a civil penalty in the amount of $350,000.
(2) The Company is a party to an administrative enforcement action brought
by Region VII of the EPA which alleges violations of RCRA at its
Coffeyville, Kansas refinery. In this proceeding, the EPA has proposed
a civil penalty in the amount of approximately $1.4 million.
(3) The Company has been informed by the U.S. Department of Justice of its
intent to bring an enforcement action alleging certain violations of
the Clean Air Act at its Coffeyville, Kansas refinery. The U.S.
Department of Justice has informed the Company that it will seek a
civil penalty of at least $1.6 million.
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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
through the three months ended November 30, 1995, the Company had capital
expenditures of approximately $2.6 million, $4.7 million and $1.2 million,
respectively, to prevent future discharges into the environment. The majority
of such expenditures was for improvements at the Coffeyville refinery.
Management believes the Company currently is in substantial compliance with
existing environmental rules and regulations.
RECENT ACCOUNTING PRONOUNCEMENTS
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 the Financial Accounting Standards Board 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
intangibles, 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.
DESCRIPTION OF THE SENIOR NOTES
The following description of the particular terms of the Senior Notes
offered hereby supplements, and to the extent inconsistent therewith replaces,
the description in the accompanying Prospectus of the general terms and
provisions of the Debt Securities (as defined in the accompanying Prospectus),
to which description reference is hereby made.
GENERAL
The Company's % Senior Notes Due 2003 offered hereby constitute a single
series of Debt Securities to be issued under an Indenture dated as of ,
1996, as amended, supplemented or modified from time to time (the "Indenture")
between the Company and The Chase Manhattan Bank (National Association), as
trustee (the "Trustee"), and will be limited to $100,000,000 aggregate
principal amount. The Trustee initially will be the Registrar and Paying
Agent. The Indenture is described more fully under "Description of Debt
Securities" in the accompanying Prospectus. The statements herein concerning
the Senior Notes and the Indenture do not purport to be complete and are
qualified in their entirety by reference to the provisions of the Indenture,
including the definitions of certain terms used herein without definition.
The Senior Notes will mature on , 2003. The Senior Notes are not
redeemable or repayable prior to maturity and do not provide for any sinking
fund. The Company may purchase Senior Notes in the open market, by tender or
by contract. Senior Notes so purchased may be held, resold or surrendered to
the Trustee for cancellation. If applicable, the Company will comply with the
requirements of Rule 14e-1 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and other securities laws and regulations in
connection with any such purchase. The Senior Notes may be defeased in the
manner provided in the Indenture.
Interest on the Senior Notes will be payable semi-annually on each and
(each an "Interest Payment Date"), commencing , 1996. Interest
payable on each Interest Payment Date will include interest accrued from ,
1996 or from the most recent Interest
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Payment Date to which interest has been paid or duly provided for. Interest
payable on any Interest Payment Date will be payable to the person in whose
name a Senior Note (or any predecessor Senior Note) is registered at the close
of business on the or , as the case may be, next preceding such
Interest Payment Date. Principal of and interest on the Notes will be payable
at the office or agency of the Company maintained for such purpose in The City
of New York, which initially will be the office of the Paying Agent, provided
that payment of interest may be made, at the option of the Company, by check
mailed to the person entitled thereto. Interest shall be computed on the basis
of a 360-day year comprised of twelve 30-day months.
BOOK-ENTRY SYSTEM
The Senior Notes will be represented by the fully registered Global Security
deposited with, or on behalf of, DTC or other successor depositary (DTC or
such other depositary appointed by the Company is herein referred to as the
"Depositary") and registered in the name of the Depositary or its nominee. The
Senior Notes will not be issuable in definitive form, except under the limited
circumstances described herein.
DTC has advised the Company and Goldman, Sachs & Co. that it intends to
follow the procedures described below:
The Depositary will act as securities depositary for the Global Security.
The Global Security will be issued as a fully registered security
registered in the name of Cede & Co. (the Depositary's partnership
nominee).
The Depositary is a limited-purpose trust company organized under the New
York Banking Law, a "banking organization" within the meaning of the New
York Banking Law, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code,
and a "clearing agency" registered pursuant to the provisions of Section
17A of the Exchange Act. The Depositary holds securities that its
participants ("Participants") deposit with the Depositary. The Depositary
also facilitates the settlement among Participants of securities
transactions, such as transfers and pledges, in deposited securities
through electronic computerized book-entry changes in Participants'
accounts, thereby eliminating the need for physical movement of securities
certificates. Direct Participants include securities brokers and dealers,
banks, trust companies, clearing corporations and certain other
organizations ("Direct Participants"). The Depositary is owned by a number
of its Direct Participants and by the New York Stock Exchange, Inc., the
American Stock Exchange, Inc., and the National Association of Securities
Dealers, Inc. Access to the Depositary's system is also available to others
such as securities brokers and dealers, banks and trust companies that
clear through or maintain a custodial relationship with a Direct
Participant, either directly or indirectly ("Indirect Participants"). The
Rules applicable to the Depositary and its Participants are on file with
the Securities and Exchange Commission.
Purchases of Senior Notes must be made by or through Direct Participants,
which will receive a credit for the Senior Notes on the Depositary's
records. The ownership interest of each actual purchaser of each Senior
Note ("Beneficial Owner") is in turn recorded on the Direct and Indirect
Participant's records. Transfers of ownership interests in the Senior Notes
are to be accomplished by entries made on the books of Participants acting
on behalf of Beneficial Owners. Beneficial Owners will not receive
certificates representing their ownership interests in the Senior Notes,
except in the event that use of the book-entry system for the Senior Notes
is discontinued.
To facilitate subsequent transfers, all Senior Notes deposited by
Participants with the Depositary are registered in the name of the
Depositary's partnership nominee, Cede & Co. The deposit of Senior Notes
with the Depositary and their registration in the name of Cede & Co. effect
no change in beneficial ownership. The Depositary has no knowledge of the
actual Beneficial
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Owners of the Senior Notes; the Depositary's records reflect only the
identity of the Direct Participants to whose accounts such Senior Notes are
credited, which may or may not be the Beneficial Owners. The Participants
will remain responsible for keeping account of their holdings on behalf of
their customers.
Conveyance of Senior Notes and other communications by the Depositary to
Direct Participants, by Direct Participants to Indirect Participants, and
by Direct Participants and Indirect Participants to Beneficial Owners are
governed by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time.
Neither the Depositary nor Cede & Co. will consent or vote with respect
to the Senior Notes. Under its usual procedures, the Depositary mails an
Omnibus Proxy to the issuer as soon as possible after the record date. The
Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those
Direct Participants to whose accounts the Senior Notes are credited on the
record date (identified in a listing attached to the Omnibus Proxy).
Principal and interest payments on the Senior Notes will be made to the
Depositary. The Depositary's practice is to credit Direct Participants'
accounts on the payable date in accordance with their respective holdings
shown on the Depositary's records unless the Depositary has reason to
believe that it will not receive payment on the payable date. Payments by
Participants to Beneficial Owners will be governed by standing instructions
and customary practices, as is the case with securities held for the
accounts of customers in bearer form or registered in "street name", and
will be the responsibility of such Participant and not of the Depositary,
the Paying Agent or the Company, subject to any statutory or regulatory
requirements as may be in effect from time to time. Payment of principal
and interest to the Depositary is the responsibility of the Company or the
Paying Agent, disbursement of such payments to Direct Participants shall be
the responsibility of the Depositary, and disbursement of such payments to
the Beneficial Owners shall be the responsibility of Direct and Indirect
Participants.
Settlement for the Senior Notes will be made by Goldman, Sachs & Co. in
immediately available funds and all applicable payments of principal and
interest on the Senior Notes will be made by the Company in immediately
available funds.
The information in this section concerning the Depositary and the
Depositary's book-entry system has been obtained from sources which the
Company believes to be reliable, but the Company takes no responsibility for
the accuracy thereof.
So long as the Depositary for the Global Security, or its nominee, is the
registered owner of the Global Security, the Depositary or its nominee, as the
case may be, will be considered the sole owner or Holder of the Senior Notes
represented by the Global Security for all purposes under the Indenture.
Except as set forth below, owners of beneficial interests in the Global
Security will not be entitled to have Senior Notes represented by the Global
Security registered in their names, will not receive or be entitled to receive
physical delivery of Senior Notes in definitive form and will not be
considered the owners or Holders thereof under the Indenture. Accordingly,
each person owning a beneficial interest in the Global Security must rely on
the procedures of the Depositary and, if such person is not a Participant,
those of the Participants through which such person owns its interest, in
order to exercise any rights of a Holder under the Indenture.
The laws of some jurisdictions require that certain purchasers of securities
take physical delivery of such securities in definitive form. Such limits and
laws may impair the ability to transfer beneficial interests in the Global
Security.
Principal and interest payments on Senior Notes registered in the name of or
held by the Depositary or its nominee will be made to the Depositary or its
nominee, as the case may be, as the
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registered owner or the Holder of the Global Security representing such Senior
Notes. Neither the Company, the Paying Agent nor the Trustee will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Global
Security or for maintaining, supervising or reviewing any records relating to
such beneficial ownership interests.
If at any time the Depositary notifies the Company that it is unwilling or
unable to continue as Depositary or if at any time the Depositary shall no
longer be eligible under the Indenture, the Company shall appoint a successor
Depositary with respect to the Senior Notes. If a successor Depositary is not
appointed by the Company within 90 days after it receives such notice or
becomes aware of such ineligibility, the Company will issue certificated
Senior Notes of like tenor, in authorized denominations and in an aggregate
principal amount equal to the principal amount of the Global Security in
exchange for the Global Security.
The Company may at any time in its sole discretion determine that the Senior
Notes issued in global form shall no longer be represented by the Global
Security. In such event the Company will issue certificated Senior Notes of
like tenor, in authorized denominations and in an aggregate principal amount
equal to the principal amount of the Global Security in exchange for the
Global Security.
For other terms of the Senior Notes, see "Description of Debt Securities" in
the accompanying Prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
and the related Pricing Agreement in respect of the Senior Notes, the Company
has agreed to sell to Goldman, Sachs & Co. ("Goldman Sachs"), and Goldman
Sachs has agreed to purchase, the entire principal amount of Senior Notes
offered hereby.
Under the terms and conditions of the Underwriting Agreement, Goldman Sachs
is committed to take and pay for all of the Senior Notes offered hereby, if
any are taken.
Goldman Sachs proposes to offer the Senior Notes in part directly to the
public at the initial public offering price set forth on the cover page of
this Prospectus Supplement, and in part to certain securities dealers at such
price less a concession of % of the principal amount of the Senior Notes.
Goldman Sachs may allow, and such dealers may reallow, a concession not in
excess of % of the principal amount of the Senior Notes to certain brokers
and dealers. After the Senior Notes are released for sale to the public, the
offering price and other selling terms may from time to time be varied by
Goldman Sachs. Goldman Sachs will pay Cooperative Funding Corporation an
advisory fee upon completion of this offering of the Senior Notes.
The Senior Notes have been approved for listing on the New York Stock
Exchange under the symbol "FMLD 03", subject to official notice of issuance.
No assurance can be given as to the liquidity of any trading market for the
Senior Notes.
The Company has agreed to indemnify Goldman Sachs against certain
liabilities including liabilities under the Securities Act of 1933, as
amended.
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LEGAL MATTERS
The validity of the Senior Notes will be passed upon for the Company by
Fried, Frank, Harris, Shriver & Jacobson (a partnership including professional
corporations), New York, New York. Certain legal matters in connection with
the Senior Notes will be passed upon for Goldman Sachs by McDermott, Will &
Emery, Chicago, Illinois. McDermott, Will & Emery in the past has represented
and in the future may represent the Company on other matters. McDermott, Will
& Emery currently is acting as special counsel to assist the Company and its
trial counsel in connection with the pending income tax litigation relating to
Terra (see "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Financial Condition, Liquidity and Capital Resources").
Fried, Frank, Harris, Shriver & Jacobson and McDermott, Will & Emery each will
rely upon the opinion of Robert B. Terry, Esq., Vice President and General
Counsel of the Company, with respect to all matters of Kansas law.
S-29
<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 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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED FEBRUARY 23, 1996
$200,000,000
FARMLAND INDUSTRIES, INC.
DEBT SECURITIES
-----------
Farmland Industries, Inc. ("Farmland" or the "Company") may issue and sell
from time to time, in one or more series, up to an aggregate of $200,000,000 of
its debt securities (the "Debt Securities"). When a particular series of Debt
Securities is offered, all specific terms of the offering will be set forth in a
supplement to this Prospectus (the "Prospectus Supplement"), which will be
delivered with the Prospectus. The Prospectus Supplement will set forth with
respect to each series of Debt Securities: the designation and principal amount
offered; the rate (or method of calculation) and time of payment of interest, if
any; the authorized denominations; the maturity or maturities; the terms for a
sinking, purchase or analogous fund; the terms for redemption or early
repayment, if any; the purchase price and other terms of the offering; and any
listing on a securities exchange.
This Prospectus may not be used to consummate sales of Debt Securities unless
accompanied by a Prospectus Supplement.
-----------
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.
-----------
The Debt Securities may be sold (i) through underwriting syndicates
represented by managing underwriters, or by underwriters without a syndicate,
which may include Goldman, Sachs & Co.; (ii) through agents designated from
time to time; or (iii) directly. The names of any underwriters or agents of the
Company involved in the sale of the Debt Securities in respect of which this
Prospectus is being delivered, any applicable commissions or discounts, and the
net proceeds to the Company from such sale are set forth in the Prospectus
Supplement.
-----------
The date of this Prospectus is , 1996.
<PAGE>
IN CONNECTION WITH THE OFFERING OF THE DEBT SECURITIES, THE UNDERWRITERS MAY
OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE
OF THE DEBT SECURITIES OFFERED HEREBY AT LEVELS ABOVE THOSE WHICH MIGHT
OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE
NEW YORK STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
----------------
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 can be
inspected and copied at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the following Regional Offices of the Commission: 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. If any of the Debt
Securities are listed on the New York Stock Exchange, such material will be
available for inspection at the offices of the New York Stock Exchange, Inc.
at 20 Broad Street, New York, NY 10005.
This Prospectus constitutes a part of the Registration Statement on Form S-3
(together with all amendments, schedules and exhibits thereto, the
"Registration Statement") filed by the Company with the Commission under the
Securities Act of 1933, as amended (the "Securities Act"). This Prospectus and
the accompanying Prospectus Supplement omit certain of the information
contained in the Registration Statement in accordance with the rules and
regulations of the Commission. For further information with respect to the
Company and the Debt Securities, reference is made to the Registration
Statement, including the schedules and exhibits filed therewith. Statements
contained in this Prospectus and the accompanying Prospectus Supplement as to
the contents of certain documents are not necessarily complete, and, with
respect to each such document filed as an exhibit to the Registration
Statement or otherwise filed with the Commission, reference is made to the
copy of the document so filed. Each such statement is qualified in its
entirety by such reference.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents heretofore filed by the Company with the Commission
are incorporated herein by reference:
1. The Company's Annual Report on Form 10-K for the year ended August 31,
1995 (the "1995 Form 10-K"); and
2. The Company's Quarterly Report on Form 10-Q for the quarterly period
ended November 30, 1995 (the "November 1995 Form 10-Q").
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus or any
Prospectus Supplement and prior to the termination of the offering of the Debt
Securities shall be deemed to be incorporated by reference in this Prospectus
and to be a part hereof from the date of filing of such documents. Any
statement contained in this Prospectus, in any Prospectus Supplement or in a
document incorporated or deemed
2
<PAGE>
to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus or any Prospectus Supplement to the
extent that a statement contained herein or therein or in any subsequently
filed document that also is or is deemed to be incorporated by reference
herein modifies or supersedes such statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus or any Prospectus Supplement.
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, upon the written or oral request of such person,
a copy of any or all of the documents referred to above which have been or may
be incorporated by reference herein (other than exhibits to such documents
unless such exhibits are specifically incorporated by reference in such
documents). Requests for such copies should be directed to: Farmland
Industries, Inc., 3315 North Farmland Trafficway, Kansas City, Missouri 64116-
0005, telephone (816) 459-6000, Attention: John F. Berardi.
THE COMPANY
Farmland is an agricultural farm supply and processing and marketing company
headquartered in Kansas City, Missouri that is primarily owned by its members
and operates on a cooperative basis. As of August 31, 1995, Farmland's
membership consisted of approximately 1,800 cooperative associations of
farmers and ranchers and 11,500 pork or beef producers or associations of such
producers. Founded originally in 1929, Farmland has grown from sales of
$310,000 during its first year of operation to over $7.2 billion during 1995.
Members are entitled to receive patronage refunds distributed by Farmland from
its member-sourced annual net earnings. See "Business--Patronage Refunds and
Distribution of Net Earnings".
Farmland was formally incorporated in Kansas in 1931. Its principal
executive offices are at 3315 North Farmland Trafficway, Kansas City, Missouri
64116-0005 (telephone 816-459-6000).
Unless the context requires otherwise, (i) all references herein to
"Farmland" or the "Company" are 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 "membership" or
"members" are to persons eligible to receive patronage refunds from Farmland,
i.e., Farmland's voting members, associate members, and other persons
("patrons") with which Farmland has a currently effective patronage refund
agreement.
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 November 30, 1995, Farmland's requirements for voting membership were
as follows: (1) Voting membership is limited to (a) farmers' and ranchers'
cooperative associations which have purchased farm supplies from or provided
grain to Farmland during Farmland's two most recently completed years, and (b)
producers of hogs and cattle or associations of such producers which have
provided hogs or cattle to Farmland during Farmland's two most recent years.
(2) Voting members must maintain a minimum investment of $1,000 in par value
of Farmland common shares. (3) A cooperative must have open membership (an
open membership cooperative is open to anyone; i.e., non-discriminatory),
limit voting to agricultural producers and conduct a majority of its business
with voting producers.
3
<PAGE>
ASSOCIATE MEMBERS
Farmland's associate members have all the rights of membership except that
they do not have voting rights.
As of November 30, 1995, Farmland's requirements for associate membership
were: (1) Associate members must maintain a minimum investment of $1,000 in
par value of Farmland associate member common shares and (2) meet any one of
the following four criteria: (a) be a person meeting the requirements for
voting membership; (b) be a non-cooperative business entity owned 100%,
directly or indirectly, by Farmland or Farmland's members or associate
members; (c) be an association, other than one owned 100% by Farmland or
Farmland's voting members or associate members, which conducts business on a
cooperative basis and has a minimum of 25 active members; and (d) be a hog
and/or cattle feeding business which derives a majority of earned income from
such feeding business and agrees to provide Farmland with the information it
needs to pay patronage refunds from its hog and/or cattle marketing operations
to members or other associate members that are eligible to receive such
refunds.
BUSINESS
GENERAL
The Company is one of the largest cooperatives in the United States in terms
of revenues. The Company has endeavored to develop a significant presence in
international markets. In 1995, the Company had exports to approximately 70
countries, and derived 47% of its grain revenues from export sales or sales to
domestic customers for export. In 1995, the Company sold more than 2.5 million
tons of wheat to China, which management believes constituted the largest
wheat sale ever by a private U.S. enterprise to a foreign country.
Substantially all of the Company's foreign grain sales are denominated 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, and, through the Company's ownership in WILFARM
(a 50%-owned venture formed in 1995) ("WILFARM"), insecticides, herbicides and
other plant protection products. 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 1995 were produced in
plants owned by the Company or operated by the Company under long-term lease
arrangements. Approximately 64% of the Company's farm supply products sold in
1995 was sold at wholesale to farm cooperative associations which are members
of Farmland. These farm cooperatives distribute products primarily to farmers
and ranchers in states in the corn belt and the wheat belt who utilize the
products in the production of farm crops and livestock.
On the output side, the Company's processing and marketing operations
include the processing of pork and beef, the marketing of fresh pork,
processed pork, fresh beef and processed beef, and the storage and marketing
of grain. In December 1995, the Company, through a 79%-owned subsidiary,
commenced processing wheat into wheat gluten for use primarily in the
commercial baking and pet food industries and starch for numerous industrial
purposes. The Company anticipates that
4
<PAGE>
such wheat processing operations will be fully operational during 1996. In
1995, approximately 68% of the hogs processed and 49% of the grain marketed
were supplied to the Company by its members. Substantially all of the
Company's pork and beef products sold in 1995 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 in the 1995 Form 10-K.
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. 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 of nitrogen and phosphate fertilizers (some of which
are cooperatives) and product importers and brokers. The feed, grain, 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 66% of refined fuels product sales in 1995 resulted from
transactions with Farmland's members. The balance of the Company's refined
fuels product sales was principally through 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 1993,
1994 and 1995 were 19%, 13% and 12%, respectively.
Competitive methods in the petroleum industry include service, product
quality and pricing. 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 midcontinent refiner and as a wholesale distributor of
petroleum products.
PRODUCTION
The Company owns refineries at Coffeyville, Kansas and at Phillipsburg,
Kansas. The refinery at Phillipsburg, Kansas is closed. A loading terminal
located at the Phillipsburg refinery remains in operation. The carrying value
of this refinery at November 30, 1995 was approximately $1.5 million. The
Company is evaluating alternative uses for this facility and cannot at this
time determine the extent of any losses, if any, related to the closure of the
refinery, but such losses are expected not to be significant in relation to
Farmland's financial position.
Production volume for 1993, 1994 and 1995 was as follows:
<TABLE>
<CAPTION>
BARRELS OF CRUDE OIL PROCESSED
DAILY AVERAGE
BASED ON 365 DAYS PER YEAR
--------------------------------
LOCATION 1993 1994 1995
-------- ---------- ---------- ----------
(BARRELS)
<S> <C> <C> <C>
Coffeyville, Kansas......................... 53,000 64,211 66,965
</TABLE>
The Coffeyville refinery produced 20 million barrels of motor fuels and
heating fuels in 1993, 25 million barrels in 1994, and 26 million barrels in
1995. Approximately 67% of petroleum product sales in 1995 represented
products produced at this location.
5
<PAGE>
Management terminated negotiations with a potential purchaser of the
Coffeyville refinery in 1994 when final sale terms were determined not to be
in the Company's best interest. See Note 17 of the Notes to Consolidated
Financial Statements included in the 1995 Form 10-K. In July 1994, the Company
acquired a mothballed refinery in Texas which is being reassembled at the
Coffeyville refinery site. When reassembly is complete in 1996, crude oil
processing capacity is expected to increase.
RAW MATERIALS
Farmland's refinery at Coffeyville, Kansas 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. The Company's pipeline/trucking gathering system collects
approximately 27% 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.
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.
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 to spread the adversity among all industry participants.
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 segment includes nitrogen-,
phosphate-, and potash-based fertilizer products ("plant nutrients") and,
through the Company's ownership in the WILFARM joint venture, crop protection
products such as insecticides, herbicides and mixed chemicals. Sales of the
crop production business segment as a percent of consolidated sales for 1993,
1994 and 1995 were 19%, 17% and 16%, 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. Therefore, the Company maintains a significant
capital investment in distribution assets and a seasonal investment in
inventory to support its manufacturing operations. The Company owns, leases or
has the right to use various plant nutrient custom dry blending, liquid
mixing, storage and distribution facilities throughout its trade territory.
The Company's sales of crop production products are primarily at wholesale
to local cooperative associations (members and customers of the Company). 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 cooperative and integrated
crop production companies, is intense due to customers' sophisticated buying
tendencies and production strategies that
6
<PAGE>
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 interest in two ventures which produce phosphate-based products.
Nitrogen fertilizer production information for 1993, 1994 and 1995 was as
follows:
<TABLE>
<CAPTION>
ACTUAL ANNUAL PRODUCTION
ANHYDROUS AMMONIA
--------------------------
PLANT LOCATION 1993 1994 1995
-------------- -------- -------- --------
(TONS)
<S> <C> <C> <C>
Lawrence, Kansas.................................. 375,000 443,000 430,000
Dodge City, Kansas................................ 241,000 257,000 276,000
Fort Dodge, Iowa.................................. 232,000 256,000 258,000
Beatrice, Nebraska................................ 243,000 277,000 281,000
Enid, Oklahoma (2 plants)*........................ 969,000 985,000 998,000
Pollock, Louisiana*............................... 490,000 526,000 497,000
</TABLE>
- --------
* 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,
ammonium nitrate, 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 1993, 1994
and 1995 was as follows:
<TABLE>
<CAPTION>
ACTUAL ANNUAL PRODUCTION
--------------------------
PLANT LOCATION 1993 1994 1995
-------------- -------- -------- --------
(TONS)
<S> <C> <C> <C>
Lawrence, Kansas.................................. 661,000 654,000 719,000
Enid, Oklahoma.................................... 473,000 433,000 473,000
Dodge City, Kansas................................ 205,000 163,000 202,000
Beatrice, Nebraska................................ 166,000 162,000 165,000
</TABLE>
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 a phosphate chemical plant located in Joplin, Missouri and
land in Florida which contains an estimated 40 million tons of phosphate rock.
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.
7
<PAGE>
Production at the Joplin plant for 1993, 1994 and 1995 was as follows:
<TABLE>
<CAPTION>
ACTUAL ANNUAL PRODUCTION
--------------------------
PRODUCT 1993 1994 1995
------- -------- -------- --------
(TONS)
<S> <C> <C> <C>
Ammonium Phosphate................................ 72,000 75,000 64,000
Feed Grade Phosphate.............................. 141,000 157,000 159,000
</TABLE>
The Company and Norsk Hydro a.s. own a joint venture, Farmland Hydro, L.P.
("Hydro"), which is a manufacturer of phosphate fertilizer products for
distribution 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. The joint venture's plant produces
phosphoric acid products such as super acid, diammonium phosphate and
monoammonium phosphate. Annual production in tons of such products for 1993,
1994 and 1995 was 1,216,000, 1,437,000 and 1,471,000, respectively. The
phosphate rock required to operate the joint venture'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 own a joint venture, SF Phosphates
Limited Company, 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 1993, 1994 and
1995 of 440,000, 465,000 and 451,000, 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.
The Company and Mississippi Chemical Corporation have entered into a letter
of intent to form a joint venture to develop, construct and operate a 1,850
metric ton per day ammonia production facility at LaBrea in The Republic of
Trinidad and Tobago. The partners expect the plant to be 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.The
joint venture has given the general contractor permission to begin engineering
and construction of the LaBrea plant. Although production start up is expected
early in calendar year 1998, there can be no assurance that production will
commence at such time. See "--Capital Expenditures and Investments in
Ventures".
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.
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 the
pipeline's capacity were required to serve priority users such as residences,
hospitals and schools. In
8
<PAGE>
such case, production could be curtailed. No significant production has been
lost because of curtailments in 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, animal
health products and livestock services.
This business segment's sales were approximately 10%, 8% and 6% of
consolidated sales for the years 1993,1994 and 1995, respectively.
Approximately 51% of the feed business segment's sales in 1995 was
attributable to products manufactured in the Company's feed mills. The Company
operates feed mixing plants at 19 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. A new dairy feed mill
is under construction in Artesia, New Mexico.
Feed production was as follows:
<TABLE>
<CAPTION>
ACTUAL ANNUAL PRODUCTION
-----------------------------
1993 1994 1995
--------- --------- ---------
(TONS)
<S> <C> <C> <C>
22 feed mills (combined)....................... 1,030,000 1,118,000 1,112,000
</TABLE>
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
Farmland Foods, Inc. ("Foods"), a 99%-owned subsidiary, which operates eight
food processing facilities. Meat processing facilities at Springfield,
Massachusetts, Carey, Ohio, and New Riegel, Ohio produce Italian-style
specialty meats and ham products. A facility at Wichita, Kansas processes pork
into fresh sausage, and pork, beef and chicken into hot dogs, dry sausage and
other luncheon meats. A facility in Denison, Iowa and one in Crete, Nebraska
function as pork abattoirs and have additional capabilities for processing
pork into bacon, ham and smoked meats. An additional facility at Monmouth,
Illinois was purchased in February 1993. 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 eighth plant located
in Carroll, Iowa is primarily a packaging facility for canned or cook-in-bag
products. A facility at San Leandro, California was closed on September 1,
1993.
9
<PAGE>
Production for 1993, 1994 and 1995 was as follows:
<TABLE>
<CAPTION>
ACTUAL WEEKLY PRODUCTION
--------------------------------
LOCATION 1993 1994 1995
-------- ---------- ---------- ----------
(POUNDS)
<S> <C> <C> <C>
Crete, Nebraska............................. 2,800,000 2,800,000 3,100,000
Denison, Iowa............................... 2,600,000 2,700,000 2,800,000
Wichita, Kansas............................. 1,500,000 1,900,000 2,200,000
Monmouth, Illinois(a)....................... 1,400,000 1,400,000 1,900,000
Carroll, Iowa............................... 1,200,000 1,100,000 1,400,000
Springfield, Massachusetts.................. 650,000 750,000 725,000
Carey/Riegel, Ohio.......................... 225,000 275,000 425,000
San Leandro, California(b).................. 250,000 -0- -0-
- --------
(a) Acquired February 1993
(b) Closed September 1, 1993
<CAPTION>
ACTUAL WEEKLY HEAD SLAUGHTERED
--------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Crete, Nebraska............................. 45,000 46,000 46,000
Denison, Iowa............................... 37,000 40,000 41,000
Monmouth, Illinois.......................... 25,000 27,000 33,000
</TABLE>
MARKETING
Products marketed 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 the Farmland, Maple River, Marco Polo,
Carando, Regal and other brand names. Product distribution is through national
and regional retail food chains, food service accounts, distributors and
international marketing activities.
Pork marketing is a highly competitive industry with many suppliers of live
hogs, fresh pork and processed pork products. 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 August 31, 1995, was 68%-owned by Farmland (which ownership was
increased thereafter to approximately 76%). The processing facilities for
these beef operations are located in Liberal, Kansas and Dodge City, Kansas.
These facilities function as beef abattoirs and have capabilities for
processing fresh beef into primal cuts for additional processing into
fabricated or boxed beef. During 1994 and 1995, the two plants slaughtered an
aggregate of 1.7 million and 1.9 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
through Farmland's Black Angus Beef and other brand names. There is also a
limited amount of international product distribution.
10
<PAGE>
Beef marketing is a highly competitive industry with many suppliers of live
cattle, fresh beef and processed 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 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, 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. Fixed price purchase and
sales contracts, and offsetting positions in the futures market, 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, and 1995,
the Company maintained hedges on approximately 95.3% and 97.9%, respectively,
of its grain positions. Based on total assets at the beginning and end of
1995, 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 1995, approximately 47% of grain revenues were from export sales or sales
to domestic customers for export. The five largest purchasers during 1995 in
terms of total revenues from grain operations were China (15%), Mexico (7%),
Israel (6%), Egypt (6%), and Jordan (2%). In 1993 and 1994, export sales or
sales to domestic customers for export accounted for approximately 60% and
37%, respectively, of consolidated grain revenues. A majority of the grain
export sales are under price subsidies or credit arrangements guaranteed by
the United States government, primarily through programs administered by the
United States Department of Agriculture ("USDA"). 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. The Company's foreign sales of grain generally are denominated in
U.S. Dollars.
In December 1995, the Company, through a 79%-owned subsidiary, commenced
processing wheat into wheat gluten for use primarily in the commercial baking
and pet food industries and starch for numerous industrial purposes. The
Company anticipates that such wheat processing operations will be fully
operational during 1996.
TRADIGRAIN
In December 1993, the Company acquired all the common stock of seven
international grain trading companies (collectively referred to as
"Tradigrain"). Tradigrain imports, exports and ships 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 traded
rather than the value of the commodities involved in the trades.
11
<PAGE>
PROPERTY
The Company owns or leases 30 inland elevators and one export elevator with
a total capacity of approximately 177,045,000 bushels of grain. The location,
type, number and aggregate capacity in bushels of the elevators at November
30, 1995 were as follows:
<TABLE>
<CAPTION>
AGGREGATE
LOCATION TYPE NUMBER CAPACITY
-------- ------ ------ ----------
<S> <C> <C> <C>
Amarillo, Texas..................................... Inland 1 3,226,000
Black, Texas........................................ Inland 1 1,418,000
Commerce City, Colorado............................. Inland 1 3,234,000
Darrouzett, Texas................................... Inland 1 1,277,000
Enid, Oklahoma...................................... Inland 4 50,300,000
Fairfax, Kansas..................................... Inland 1 10,047,000
Galveston, Texas.................................... Export 1 3,253,000
Hutchinson, Kansas.................................. Inland 3 25,268,000
Idaho and Utah...................................... Inland 11 9,825,000
Lincoln, Nebraska................................... Inland 1 5,099,000
Omaha, Nebraska..................................... Inland 2 4,266,000
Saginaw, Texas...................................... Inland 2 37,274,000
Topeka, Kansas...................................... Inland 1 12,055,000
Wichita, Kansas..................................... Inland 1 10,503,000
</TABLE>
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 and feeding practices of livestock and
pets.
Expenditures related to Company-sponsored product and process improvements
amounted to $3.3 million, $2.7 million and $2.3 million for the years ended
1993, 1994 and 1995, respectively.
CAPITAL EXPENDITURES AND INVESTMENTS IN VENTURES
In 1995, the Company made capital expenditures of $124.7 million. These
expenditures related principally to the ongoing expansion of the Coffeyville,
Kansas refinery to a production level of 90,000 barrels per day. In addition,
NBPC's facility in Liberal, Kansas was undergoing major expansion as was
Foods' pork processing facility in Crete, Nebraska. Expenditures of the crop
production division included upgrading several existing facilities to improve
gas efficiencies and expanding urea ammonium nutrient facilities in Lawrence,
Kansas and at several storage terminals. In 1995, the Company, through a 79%-
owned subsidiary, was also constructing a wheat gluten plant, which commenced
operations in December 1995.
The Company plans expenditures for capital additions, improvements and
investments in ventures of approximately $379.4 million during the years 1996
and 1997 as described in the following paragraphs. Of this amount, the Company
plans expenditures of $315.1 million for capital additions and improvements
and $64.3 million for investments in ventures.
Capital expenditures and investments planned for the crop production
business segment total $150.3 million and include: an investment in a venture
organized to construct and operate an
12
<PAGE>
anhydrous ammonia plant in The Republic of Trinidad and Tobago, expansion of
an anhydrous ammonia plant and construction of a UAN plant (both in Fort
Dodge, Iowa) and expenditures for operating efficiencies, environmental and
safety issues and for operating necessities or betterments. See "--Crop
Production".
Capital expenditures and investments planned for the feed business segment
total $11.9 million and include an additional investment in a venture with
Alliance Farms Cooperative Association and expenditures for feed mill and
livestock production efficiencies, operating necessities and replacements.
Capital expenditures and investments planned for the petroleum business
segment total $94.9 million and are to complete the expansion of daily crude
oil processing capacity at the Coffeyville, Kansas refinery to 90,000 barrels
per day and for operating necessities, increased operating efficiency and for
environmental and safety issues.
Capital expenditures and investments of approximately $85.3 million are
planned for the food processing and marketing business segment. These
expenditures include an expansion of NBPC's facility at Liberal, Kansas, the
Crete, Nebraska and Wichita, Kansas plants and operational improvement and
replacements.
Capital expenditures and investments of approximately $6.7 million planned
for the grain business segment are mainly for expansion and replacements.
Capital expenditures and investments of $30.3 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" in the accompanying Prospectus Supplement. Of the foregoing
planned capital expenditures and investments in ventures, $47.0 million were
made in 1996 (through November 30, 1995).
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 process. 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 56 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 is investigating or remediating contamination at 28
properties. The Company has also been identified as 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. Such laws 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 substances found at the property.
During 1994, 1995 and through the three months ended November 30, 1995, the
Company paid approximately $1.4 million, $3.2 million and $.6 million,
respectively, for environmental investigation and remediation.
13
<PAGE>
The Company currently is aware of probable obligations for environmental
matters at 35 properties. As of November 30, 1995, the Company has made an
environmental accrual of $18.5 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 also is aware of other environmental matters for which there is a
reasonable possibility that the Company will incur costs to resolve. It is
possible that the costs of resolution of the matters described in this
paragraph may exceed the liabilities which, in the opinion of management, are
probable and which costs are reasonably estimable at November 30, 1995. In the
opinion of management, it is reasonably possible for such costs to be
approximately an additional $22.2 million.
Under the Resource Conservation Recovery Act of 1976 ("RCRA"), the Company
has five closure and five 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. 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. Such closure and
post-closure costs are estimated to be $5.1 million at November 30, 1995 (and
are in addition to the $22.2 million discussed in the preceding paragraph).
The Company is currently involved in three administrative proceedings
brought by Region VII of the Environmental Protection Agency ("EPA") with
respect to alleged violations under the Clean Air Act, the Emergency Planning
and Community Right-to-Know Act and RCRA at the Coffeyville refinery. The
Company is currently negotiating with the EPA concerning these matters and
believes that such negotiations may result in compromise settlements,
including the possible implementation of a Supplemental Environmental Project
in connection with the Clean Air Act proceeding. Absent such settlements, the
Company may contest the EPA's allegations. Management's estimate of probable
civil fines and penalties for these three proceedings has been included in the
environmental accrual discussed above.
Specifically, the three administrative proceedings are described as follows:
(1) The Company is a party to an administrative enforcement action brought
by Region VII of the EPA which alleges violations of the Emergency
Planning and Community Right-to-Know Act and the release reporting
requirements of CERCLA at its Coffeyville, Kansas refinery. This
proceeding involves alleged violations of release reporting
requirements and seeks a civil penalty in the amount of $350,000.
(2) The Company is a party to an administrative enforcement action brought
by Region VII of the EPA which alleges violations of RCRA at its
Coffeyville, Kansas refinery. In this proceeding, the EPA has proposed
a civil penalty in the amount of approximately $1.4 million.
(3) The Company has been informed by the U.S. Department of Justice of its
intent to bring an enforcement action alleging certain violations of
the Clean Air Act at its Coffeyville, Kansas refinery. The U.S.
Department of Justice has informed the Company that it will seek a
civil penalty of at least $1.6 million.
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
through the three months ended November 30, 1995, the Company had capital
expenditures of approximately $2.6
14
<PAGE>
million, $4.7 million and $1.2 million, respectively, to prevent future
discharges into the environment. The majority of such expenditures was 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 USDA, 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 marketing operations.
Management is not aware of any newly implemented or pending policies having
a significant impact or which may have a significant impact on operations of
the Company.
EMPLOYEE RELATIONS
At August 31, 1995, the Company had approximately 12,700 employees.
Approximately 43% of the Company's employees were represented by unions having
national affiliations. The Company's relationship with employees is considered
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 May
1998. There are no wage re-openers in any of the collective bargaining
agreements.
PATRONAGE REFUNDS AND DISTRIBUTION OF NET 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. Each member's portion of the annual patronage
refund is determined by the quantity or value of business transacted by the
member with Farmland during the year for which the patronage is paid in
comparison with Farmland's total member-sourced earnings for such year in the
patronage allocation unit for which the patronage is paid.
Generally, a portion of the annual patronage refund is returned 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, also referred to herein as
"allocated equity", 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.
15
<PAGE>
For the years ended 1993, 1994 and 1995, Farmland returned the following
patronage refunds:
<TABLE>
<CAPTION>
CASH OR CASH
EQUIVALENT PORTION NON-CASH PORTION TOTAL PATRONAGE
OF PATRONAGE REFUNDS OF PATRONAGE REFUNDS REFUNDS
-------------------- -------------------- ---------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
1993.............. $ -0- $ -0- -0-
1994.............. $26,552 $44,032 $70,584
1995.............. $33,038 $61,356 $94,394
</TABLE>
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.
ALLOCATED EQUITY REDEMPTION PLANS
The Allocated Equity Redemption Plans described below, namely the Base
Capital Plan (as defined below), the estate settlement plan and the special
allocated 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 compliance 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, income and other tax
considerations, the Company's results of operations, financial position, cash
flow, capital requirements, long-term financial planning needs 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 members 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 shares or associate member common shares 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 in the event of the death of an
individual (a natural person) allocated equity holder, the allocated equity
holdings of the deceased will be redeemed at par value with the exception of
allocated equity which was purchased and held by the deceased for less than
five years. The estate settlement plan is subject to a limitation of $1.0
million of redemptions in the aggregate in any one fiscal year without further
authorization by the Board of Directors.
SPECIAL ALLOCATED EQUITY REDEMPTION PLANS
From time to time, the Company has redeemed portions of its outstanding
allocated equity under various special allocated equity redemption plans.
16
<PAGE>
Each such plan has been designed to return cash to members or former members
of Farmland or Foods by redeeming certain types of outstanding allocated
equity. The order in which each type of allocated equity is redeemed is
determined by the Board of Directors. Except for preferred stock sold through
a public offering in 1984, substantially all the redemptions under these plans
were for allocated equity originally issued as the non-cash portion of the
Company's patronage refunds. See "--Patronage Refunds and Distribution of Net
Earnings".
Special allocated equity redemption plans are designed to provide a
systematic method for redemption of outstanding allocated equity which is not
subject to redemption through other Plans, such as the Base Capital Plan or
the estate settlement plan.
As of August 31, 1995, provisions of the current special allocated equity
redemption plan include:
1. No special redemption will be made if the redemption may result in a
violation of covenants in loan agreements and similar instruments; and
2. The targeted amount for special redemptions is a percentage of
consolidated net income (member and nonmember). The percentage is
determined based on the ratio of Funded Indebtedness to Capitalization
(as defined in the special allocated equity redemption plan) before the
special redemption but after giving effect to the distribution of cash
and the redemptions under the Base Capital Plan. Calculation for special
redemptions is as follows:
<TABLE>
<CAPTION>
TOTAL SPECIAL ALLOCATED
FUNDED INDEBTEDNESS EQUITY REDEMPTION
AS A PERCENT OF AS A PERCENT OF
CAPITALIZATION CONSOLIDATED NET INCOME
------------------- -----------------------
<S> <C>
>50 % None
48-50 % 2.5%
45-47 % 5.0%
40-44 % 7.5%
<40 % 10.0%
</TABLE>
3. The priority for redeeming equities under the special allocated equity
redemption plan is at the sole discretion of the Board of Directors.
Presented below are the amounts of allocated equity approved for redemption
by the Board of Directors under the Base Capital Plan, the estate settlement
plan and the special allocated equity redemption plans for each of the years
in the five-year period ended 1995. The amounts approved for redemptions were
paid in cash in the fiscal year following approval.
<TABLE>
<CAPTION>
BASE ESTATE
CAPITAL SETTLEMENT SPECIAL ALLOCATED
PLAN PLAN EQUITY REDEMPTION TOTAL PLAN
REDEMPTIONS REDEMPTIONS PLANS REDEMPTIONS REDEMPTIONS
----------- ----------- ----------------- -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
1991 $ 2,300 $ 4 $ 5,351 $ 7,655
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
</TABLE>
17
<PAGE>
EQUITY OWNERSHIP
Farmland's equity consists of preferred shares, common shares, associate
common shares and capital credits. Only the common shares have voting rights.
At January 31, 1996, no person was known by Farmland to be the beneficial
owner of more than 5% of Farmland's common shares.
At January 31, 1996, none of (i) the directors of Farmland and (ii) the
executive officers of Farmland named in the 1995 Form 10-K, beneficially owned
in excess of 1% of any class of Farmland's equity. At January 31, 1996, such
directors and executive officers as a group owned none of Farmland's preferred
shares, less than 1% of Farmland's common shares, none of Farmland's associate
common shares and less than 1% of Farmland's capital credits.
LEGAL PROCEEDINGS
In the opinion of Robert B. Terry, Vice President and General Counsel of
Farmland, 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 3 of the Notes to Condensed Consolidated
Financial Statements included in the November 1995 Form 10-Q. 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" in the accompanying Prospectus Supplement.
The Company is currently involved in three administrative proceedings
brought by Region VII of the EPA. See "--Matters Involving the Environment".
USE OF PROCEEDS
Except as otherwise may be stated in any Prospectus Supplement, the Company
intends to use the net proceeds from the sale of Debt Securities for general
corporate purposes, which may include the refinancing of existing
indebtedness.
DESCRIPTION OF DEBT SECURITIES
The following description sets forth certain general terms and provisions of
the indenture under which the Debt Securities are to be issued. The particular
terms of each issue of Debt Securities, as well as any modifications or
additions to such general terms that may apply in the case of such issue of
Debt Securities, will be described in the Prospectus Supplement relating to
such issue of Debt Securities. Accordingly, for a description of the terms of
a particular issue of Debt Securities, reference must be made to both the
Prospectus Supplement relating thereto and to the following description. As
used in this section, the "Company" refers only to Farmland Industries, Inc.
exclusive of any subsidiaries.
The Debt Securities are to be issued under an Indenture dated as of ,
1996, as amended, supplemented or modified from time to time (the
"Indenture"), between the Company and The Chase Manhattan Bank (National
Association), as trustee (in such capacity, the "Trustee"), the form of which
is filed as an exhibit to the Registration Statement of which this Prospectus
forms a part. Each series of Debt Securities issued pursuant to the Indenture
will be issued pursuant to an amendment or supplement thereto in the form of a
supplemental indenture or pursuant to an Officers' Certificate, in each case
delivered pursuant to a resolution of the Board of Directors and in accordance
18
<PAGE>
with the provisions of Section 3.1 or Article 8 of the Indenture, as the case
may be. The terms of the Debt Securities include those stated in the Indenture
and those made a part of the Indenture by reference to the Trust Indenture Act
of 1939, as amended (the "TIA"). The Debt Securities are subject to all such
terms and the Holders of Debt Securities are referred to the Indenture and the
TIA for a statement of such terms.
The following summaries of certain provisions of the Indenture and the Debt
Securities are not complete and are qualified in their entirety by reference
to the provisions of the Indenture, including the definitions of capitalized
terms used herein without definition. Numerical references in parentheses are
to sections in the Indenture and unless otherwise indicated capitalized terms
have the meanings given them in the Indenture.
GENERAL
The Indenture provides that Debt Securities issued thereunder may be issued
without limit as to aggregate principal amount, in one or more series, in each
case as established from time to time in or pursuant to authority granted by a
resolution of the Board of Directors or as established in one or more
supplemental indentures to such Indenture. (Section 3.1). The Debt Securities
will constitute general unsecured and non-subordinated obligations of the
Company and will rank on parity in right of payment with all other unsecured
and non-subordinated indebtedness of the Company.
The Indenture provides that there may be more than one Trustee under such
Indenture, each with respect to one or more series of Debt Securities.
(Section 1.1). Any Trustee under the Indenture may resign or be removed with
respect to one or more series of Debt Securities issued under the Indenture,
and a successor Trustee may be appointed to act with respect to such series.
(Sections 6.10 and 6.11). If two or more persons are acting as Trustee with
respect to different series of Debt Securities issued under the Indenture,
each such Trustee shall be a Trustee of a trust under the Indenture separate
and apart from any trust or trusts administered by any other Trustee (Section
6.11), and any action described therein to be taken by the "Trustee" may then
be taken by each such Trustee with respect to, and only with respect to, the
one or more series of Debt Securities for which it is Trustee under the
Indenture.
Reference is made to the Prospectus Supplement relating to the particular
series of Debt Securities offered thereby for the following terms and other
information to the extent applicable with respect to such Debt Securities: (1)
the title of such Debt Securities; (2) any limit on the aggregate principal
amount of such Debt Securities; (3) the date or dates on which the principal
of such Debt Securities is payable or the method of determination thereof; (4)
the rate or rates at which such Debt Securities shall bear interest, if any,
or the method of calculating such rate or rates of interest, the date or dates
from which such interest shall accrue or the method by which such date or
dates shall be determined, and the date or dates on which any such interest
shall be payable; (5) the place or places where the principal of and premium,
if any, and interest, if any, on such Debt Securities shall be payable; (6)
the period or periods within which, the price or prices at which, and the
other terms and conditions upon which, such Debt Securities may be redeemed,
in whole or in part, at the option of the Company and the other detailed terms
and provisions of such optional redemption; (7) the obligation, if any, of the
Company to redeem or purchase such Debt Securities pursuant to any sinking
fund or analogous provisions or upon the happening of a specified event or at
the option of a Holder thereof, and the period or periods within which, the
price or prices at which, and the other terms and conditions upon which, such
Debt Securities shall be redeemed or purchased, in whole or in part, pursuant
to such obligation; (8) if other than denominations of $1,000 and any integral
multiple thereof, the denominations in which such Debt Securities shall be
issuable; (9) if other than the principal amount thereof, the portion of the
principal amount of such Debt Securities which shall be payable upon
declaration of acceleration thereof or the method by which such portion shall
be determined; (10) if other than as provided in the Indenture, the Person to
whom any interest on any Debt Security
19
<PAGE>
shall be payable, and the extent to which, or the manner in which, any
interest payable on one or more temporary or permanent fully registered global
securities (each a "Global Security") on an Interest Payment Date will be
paid; (11) provisions, if any, granting special rights to the Holders of such
Debt Securities upon the occurrence of such events as may be specified; (12)
any deletions from, modifications of or additions to the Events of Default or
covenants of the Company set forth in the Indenture pertaining to such Debt
Securities; (13) if other than as provided in the Indenture, the means of
defeasance or covenant defeasance as may be specified for such Debt
Securities; (14) if other than the Trustee, the identity of the Registrar and
any Paying Agent; (15) whether such Debt Securities shall be issued in whole
or in part in temporary or permanent global form and, if so, (i) the initial
Depository for such Global Securities, and (ii) if other than as provided in
the Indenture, whether and the circumstance under which beneficial owners of
interests in any Debt Securities in temporary or permanent global form may
exchange such interests for Debt Securities and of like tenor of any
authorized form and denomination; and (16) any other terms (which terms shall
not be inconsistent with the provisions of the Indenture), including, without
limitation, any terms which may be required by or advisable under United
States laws or regulations or advisable in connection with the marketing of
such Debt Securities. (Section 3.1).
Debt Securities will be issued only in fully registered form without
coupons. Debt Securities of a series may be issued in whole or in part in the
form of one or more Global Securities that will be deposited with, or on
behalf of, a Depository identified in the applicable Prospectus Supplement.
The specific depository arrangement with respect to a series of Debt
Securities or any part thereof will be described in the applicable Prospectus
Supplement. Unless otherwise specified in the Prospectus Supplement, Debt
Securities will be issued in denominations of $1,000 and any integral multiple
thereof. (Section 3.2).
The Indenture does not contain any provisions that would limit the ability
of the Company or any of its Affiliates to incur indebtedness (secured or
unsecured) or that would afford Holders of Debt Securities 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 Debt Securities.
One or more series of Debt Securities may be sold at a substantial discount
below their stated principal amount, bearing no interest or interest at a rate
which at the time of issuance is below market rates ("Original Issue Discount
Securities"). Special federal income tax, accounting and other considerations
applicable thereto will be described in the Prospectus Supplement relating to
any such Debt Securities.
CERTAIN DEFINITIONS
The following terms are defined in the Indenture (Sections 1.1, 9.9 and
9.12).
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
when used with respect to any specified Person means the power to direct the
management and policies of such Person, directly or indirectly, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Consolidated Net Worth" means, at any date of determination, the difference
between the Company's consolidated total assets and consolidated total
liabilities as shown on the Company's most recent audited consolidated
financial statements prepared in accordance with generally accepted accounting
principles.
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"corporation" includes corporations, associations, partnerships, limited
liability companies, joint stock companies and business trusts.
"Default" means any event which is, or after notice or passage of time, or
both, would be, an Event of Default.
"Event of Default" is defined below under "--Events of Default, Notice and
Waiver".
"Material Subsidiary" means, at any particular time, any Subsidiary that,
together with any Subsidiaries of such Subsidiary (i) accounted for more than
5% of the consolidated sales of the Company for its most recently completed
fiscal year, or (ii) owned more than 5% of the consolidated assets of the
Company as at the end of such fiscal year, all as calculated in accordance
with generally accepted accounting principles.
"Maturity", where used with respect to any Debt Security, means the date on
which the principal of such Debt Security or an installment of principal
thereof becomes due and payable as therein or in the Indenture provided,
whether at the Stated Maturity or by declaration of acceleration, call for
redemption or otherwise.
"Officers' Certificate" means a certificate signed by the Chairman of the
Board, the President, any Executive Vice President or any Senior Vice
President, signing alone, or by any Vice President signing together with the
Corporate Secretary, any Assistant Secretary, the Treasurer or any Assistant
Treasurer of the Company.
"Opinion of Counsel" means a written opinion of legal counsel, who may be
(a) counsel for the Company or (b) other counsel designated by the Company.
Any counsel for the Company may be an employee of the Company.
"Stated Maturity", when used with respect to any Debt Security or any
installment of principal thereof or interest thereon, means the date specified
in such Debt Security as the fixed date on which the principal of such Debt
Security or such installment of principal or interest is due and payable.
"Subordinated Debt" means indebtedness of the Company which is by its terms
made subordinate or junior in right of payment to the Debt Securities or other
indebtedness of the Company.
"Subsidiary" means any corporation of which the Company at the time owns or
controls, directly or indirectly, more than 50% of the shares of outstanding
stock having general voting power under ordinary circumstances to elect a
majority of the Board of Directors of such corporation (irrespective of
whether or not at the time stock of any other class or classes of such
corporation shall have or might have voting power by reason of the happening
of any contingency).
"Trinidad Venture" means the joint venture to be organized by the Company
and the Mississippi Chemical Corporation to acquire, own, develop, construct
and/or operate a plant to produce anhydrous ammonia and related products
(including urea) in The Republic of Trinidad and Tobago.
CERTAIN COVENANTS
LIMITATION ON LIENS
The Company, with the exceptions listed below, will not issue, assume or
guarantee any indebtedness for borrowed money (referred to in this subsection
as "indebtedness") secured by a mortgage, security interest, pledge or lien
("mortgage") of or upon any of its property, owned at the date of the
Indenture or thereafter acquired, unless the Debt Securities then outstanding
(together with, if the Company shall so determine, any other indebtedness
issued, assumed or guaranteed by the
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Company and then existing or thereafter created) are secured by such mortgage
equally and ratably with (or, at the option of the Company, prior to) all
other indebtedness secured thereby for so long as such other indebtedness
shall be so secured. The term "indebtedness" as used in this subsection does
not include any guarantee, cash deposit or other recourse obligation in
connection with the sale, securitization or discount by the Company of finance
or accounts receivable, trade acceptances or other paper arising in the
ordinary course of its business.
The foregoing covenant does not apply to (1) mortgages of or upon any
property (including, without limitation, inventory) acquired, constructed or
improved by, or of or upon any shares of capital stock or indebtedness
acquired by, the Company after the date of the Indenture (A) to secure the
payment of all or any part of the purchase price of such property, shares of
capital stock or indebtedness upon the acquisition thereof by the Company or
(B) to secure any indebtedness issued, assumed or guaranteed by the Company
prior to, at the time of, or within 360 days after (i) in the case of
property, the latest of the acquisition, completion of construction (including
any improvements on existing property) and commencement of commercial
operation of such property, or (ii) in the case of shares of capital stock or
indebtedness, the acquisition of such shares of capital stock or indebtedness,
which indebtedness is issued, assumed or guaranteed for the purpose of
financing or refinancing all or any part of the purchase price of such
property, shares of capital stock or indebtedness and, in the case of
property, the cost of construction thereof or improvements thereon, provided,
however, that, in the case of any such acquisition, construction or
improvement of property, the mortgage shall not apply to any property, shares
of capital stock or indebtedness theretofore owned by the Company other than
(x) any real property on which the property so acquired or constructed or the
improvement is located, or (y) any real property to which the property so
acquired or constructed or the improvement attaches or is affixed; (2)
mortgages of or upon any property, shares of capital stock or indebtedness,
which mortgages exist at the time of acquisition of such property, shares or
indebtedness by the Company; (3) mortgages of or upon any property of a
corporation, which mortgages exist at the time such corporation is merged with
or into or consolidated with the Company or which mortgages exist at the time
of a sale or transfer of the properties of a corporation as an entirety or
substantially as an entirety to the Company; (4) mortgages to secure
indebtedness of the Company to any Subsidiary, provided, however, that the
money borrowed by the Company from such Subsidiary that constitutes such
indebtedness arose from the internal operations of such Subsidiary; (5)
mortgages in favor of the United States of America or any state thereof, or
any department, agency or instrumentality or political subdivision of the
United States of America or any State thereof, or in favor of any other
country or political subdivision to secure partial, progress, advance or other
payments pursuant to any contract or statute or to secure any indebtedness
incurred, assumed or guaranteed for the purpose of financing or refinancing
all or any part of the purchase price of the property, shares of capital stock
or indebtedness subject to such mortgages, or the cost of constructing or
improving the property subject to such mortgages (including, without
limitation, mortgages incurred in connection with pollution control,
industrial revenue or similar financings); (6) mortgages on properties
financed through tax-exempt municipal obligations, provided that such
mortgages are limited to the property so financed; (7) mortgages existing on
the date of execution of the Indenture; (8) mortgages of or upon any grain
inventory to secure any indebtedness incurred, assumed or guaranteed by the
Company; (9) mortgages of or upon any equity or other interest in the Trinidad
Venture to facilitate the availability of political risk insurance and/or to
secure any indebtedness in connection with or relating to the Trinidad
Venture; and (10) any extension, renewal, substitution, refinancing, refunding
or replacement (or successive extensions, renewals, substitutions,
refinancings, refundings or replacements) (each a "refinancing") in whole or
in part of any mortgage existing at the date of the Indenture or any mortgage
referred to in the foregoing clauses (1) through (9), inclusive, provided,
however, that the principal amount of indebtedness secured thereby shall not
exceed the principal amount of indebtedness so secured at the time of such
refinancing plus the aggregate amount of premiums, other payments, costs and
expenses required to be paid or incurred in connection with such refinancing,
and that such refinancing shall be limited to all or a part of the property
(plus improvements and construction on such
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property), shares of capital stock or indebtedness which was subject to the
mortgage so extended, renewed, substituted, refinanced, refunded or replaced.
Notwithstanding the foregoing, the Company may, without equally and ratably
securing the Debt Securities, issue, assume or guarantee indebtedness secured
by a mortgage not excepted by clauses (1) through (10) above, if the aggregate
amount of such indebtedness, together with all other indebtedness of, or
indebtedness guaranteed by, the Company existing at such time and secured by
mortgages not so excepted, does not at the time exceed 10% of the Company's
Consolidated Net Worth. (Section 9.9).
OWNERSHIP OF MATERIAL SUBSIDIARY STOCK
The Company will not take any action which would result in a decrease in the
percentage of the outstanding shares of stock of any Material Subsidiary owned
directly or indirectly by the Company, except as the result of (a) the
issuance of directors' qualifying shares, (b) the declaration and payment of
patronage refunds, (c) the issuance of capital stock to members, (d) the
purchase or retirement of shares with the proceeds of newly issued shares, or
(e) the sale of capital stock at a price determined by the Company (which
determination may be evidenced by a resolution of the Board of Directors) to
be the fair value thereof. (Section 9.10).
TRANSACTIONS WITH AFFILIATES
The Company will not enter into any transaction (including the purchase,
sale or exchange of property or the rendering of any service) with any
Affiliate of the Company or any Subsidiary, other than in the ordinary course
of business and upon fair and reasonable terms taking into account the nature
of the Company's or the Subsidiary's business. (Section 9.11).
PREPAYMENT OF SUBORDINATED DEBT
The Company will not pay, prepay or purchase, redeem or otherwise acquire
any or all of the Subordinated Debt, provided, however, that the Company may
make (a) a regularly scheduled payment on Subordinated Debt; (b) any mandatory
prepayment required under the terms of the subordination agreement related to
such Subordinated Debt; and (c) any other payment or prepayment or any
purchase, redemption or acquisition of such Subordinated Debt, if, after
giving effect to such other payment or prepayment or such purchase, redemption
or acquisition, (i) the principal amount of all outstanding Subordinated Debt
is equal to or greater than $200 million and (ii) there are no Defaults or
Events of Default under the Indenture. (Section 9.12).
RESTRICTION ON CERTAIN PAYMENTS
The Company may not pay any patronage refunds or pay any dividends on its
stock or purchase or redeem any of its stock or capital credits at any time
(except refunds, dividends, purchases or redemptions payable in common stock
of the Company or capital credits or other equity credits) (any of the
foregoing being referred to herein as a "Distribution") if, after giving
effect to such Distribution (a) its Consolidated Net Worth would be less than
$475 million, or (b) the aggregate amount of all Distributions in respect of a
given fiscal year (the "Applicable Year") (whether such Distribution actually
is paid or made in the Applicable Year or subsequent thereto) would exceed the
greater of (i) the Company's net income for the Applicable Year or (ii) the
Company's patronage earnings (i.e., member-sourced income) for the Applicable
Year; provided, however, that the foregoing limitation in clause (b) above
shall not apply if, after giving effect to such Distribution, the Company's
Consolidated Net Worth would be $600 million or more; provided, further,
however, that notwithstanding any of the foregoing limitations: (A) the
Company may pay or make Distributions in respect of any Applicable Year in an
aggregate amount not exceeding the greater of (1) 50% of the Company's net
income for the
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Applicable Year or (2) 50% of the Company's patronage earnings for the
Applicable Year (provided that, in any event, the Company may pay cash
patronage refunds in respect of any Applicable Year to the extent necessary
for the patronage distribution to satisfy the requirement, presently set forth
in the last sentence of Section 1388(c)(1) of the Internal Revenue Code of
1986, as amended (or any successor provision), that a specific portion of the
patronage dividend (presently 20%) be paid in money or by a qualified check);
(B) the Company may pay or make Distributions in connection with estate
settlements; and (C) the Company may pay or make Distributions that arise by
operation of law (including, without limitation, pursuant to a court order,
judgment or decree). (Section 9.13).
CORPORATE EXISTENCE
Subject to "--Mergers, Consolidations and Transfers of Assets" below, the
Company will at all times do or cause to be done all things necessary to
preserve and keep in full force and effect its corporate existence and rights
and franchises; provided, however, that the Company may abandon or terminate
any right or franchise if, in the determination of the Company, such
abandonment or termination is in the best interests of the Company and does
not materially adversely affect the ability of the Company to operate its
business or to fulfill its obligations under the Indenture. (Section 9.4).
WAIVERS OF CERTAIN COVENANTS
The Company may fail or omit in any particular instance to comply with any
of the covenants set forth above in this "--Certain Covenants" subsection
(other than the covenant relating to its corporate existence) with respect to
any series of Debt Securities if the Company shall have obtained and filed
with the Trustee prior to the time for such compliance the consent in writing
of the Holders of at least a majority in aggregate principal amount of all of
the Debt Securities of such series at the time Outstanding either waiving such
compliance in such instance or generally waiving compliance with such covenant
or covenants, but no such waiver shall extend to or affect any obligation not
expressly waived or impair any right consequent thereon. (Section 9.14).
MERGERS, CONSOLIDATIONS AND TRANSFERS OF ASSETS
The Company may merge or consolidate with or into any other corporation or
sell, convey, transfer or otherwise dispose of all or substantially all of its
assets to any Person, if: (a) (i) in the case of a merger or consolidation,
the Company is the surviving corporation, or (ii) in the case of a merger or
consolidation where the Company is not the surviving corporation and in the
case of any such sale, conveyance, transfer or other disposition, the
successor or acquiring corporation is a corporation organized and existing
under the laws of the United States or a State thereof and such corporation
expressly assumes by supplemental indenture all the obligations of the Company
under the Debt Securities and under the Indenture; (b) immediately thereafter,
giving effect to such merger or consolidation, or such sale, conveyance,
transfer or other disposition, no Default or Event of Default shall have
occurred and be continuing; and (c) the Company has delivered to the Trustee
an Officers' Certificate and an Opinion of Counsel each stating that such
merger or consolidation, or such sale, conveyance, transfer or other
disposition complies with the Indenture and that all conditions precedent
therein provided for relating to such transaction have been complied with. In
the event of the assumption by a successor corporation of the obligations of
the Company as provided in clause (a)(ii) of the immediately preceding
sentence, such successor corporation shall succeed to and be substituted for
the Company under the Indenture and under the Debt Securities and all
obligations of the Company thereunder shall terminate. (Section 7.1).
EVENTS OF DEFAULT, NOTICE AND WAIVER
Except as may otherwise be set forth in the applicable Prospectus
Supplement, the Indenture provides that the following events are "Events of
Default" with respect to any series of Debt Securities:
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(a) default for 30 days in the payment of any installment of interest on any
Debt Security of such series; (b) default in the payment of any principal of,
or premium, if any, on, any such Debt Security of such series at its Maturity,
upon redemption (if applicable) or otherwise; (c) default for 60 days after
written notice to the Company by the Trustee, or to the Company and the
Trustee by the Holders of at least 25% in principal amount of the Outstanding
Debt Securities of such series, in the performance of, or breach of, any other
covenant or warranty in respect of the Debt Securities of such series
contained in the Indenture; (d) a default under any agreement or instrument
under which there may be issued or by which there may be secured or evidenced
any indebtedness for money borrowed, whether such indebtedness now exists or
shall hereafter be created, having an outstanding principal amount of $15
million or more in the aggregate, which default shall have resulted in such
indebtedness being declared due and payable prior to the date on which it
would otherwise have become due and payable, without such declaration of
acceleration having been rescinded or annulled within a period of ten days
after there shall have been given, by registered or certified mail, to the
Company by the Trustee, or to the Company and the Trustee by the Holders of at
least 25% in aggregate principal amount of the Outstanding Debt Securities of
such series, a written notice specifying such Event of Default, and stating
that such notice is a "Notice of Default" under the Indenture; provided,
however, that if such default under such agreement or instrument is remedied
or cured by the Company or waived by the holders of such indebtedness, then
such Event of Default by reason thereof shall be deemed likewise to have been
thereupon remedied, cured or waived without further action upon the part of
either the Trustee or any of the Holders of the Debt Securities of that
series; (e) certain events of bankruptcy, insolvency or reorganization, or
court appointment of a receiver, liquidator or trustee of the Company or its
property; and (f) any other Event of Default provided in or pursuant to the
applicable resolution of the Board of Directors, or established in the
supplemental indenture under which such series of Debt Securities is issued.
(Section 5.1). No Event of Default with respect to a particular series of Debt
Securities necessarily constitutes an Event of Default with respect to any
other series of Debt Securities issued under the Indenture.
Within 90 days after the occurrence of any Default with respect to any
series of Debt Securities, the Trustee for such series must give the Holders
of Debt Securities of such series notice of all Defaults of which it has
knowledge and that have not been cured or waived. Nevertheless, except in the
case of a Default in payment on the Debt Securities of any series, the Trustee
may withhold notice to the Holders of Debt Securities of any series of any
Default with respect to such series if and so long as it determines that the
withholding of such notice is in the interest of such Holders; provided,
however, that, in the case of any default or breach of the character specified
in clause (c) of the preceding paragraph with respect to the Debt Securities
of such series, no such notice to Holders shall be given until at least 60
days after the occurrence thereof. (Section 6.6).
If an Event of Default with respect to any series of Debt Securities at the
time Outstanding shall have occurred and be continuing, the Trustee or the
Holders of at least 25% in aggregate principal amount of the Outstanding Debt
Securities of such series may, by written notice, declare the principal
thereof (or, if the Debt Securities of such series are Original Issue Discount
Securities, such portion of the principal amount as may be specified in the
terms of such series) to be due and payable immediately. (Section 5.2).
The Indenture contains a provision entitling the Trustee to be indemnified
by the Holders of Debt Securities issued thereunder before proceeding to
exercise any right or power under the Indenture at the request of any Holders.
(Section 6.2). The Indenture provides that the Holders of a majority in
principal amount of the Outstanding Debt Securities of any series issued
thereunder may, with certain exceptions, direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee, or
exercising any trust or power conferred upon the Trustee, with respect to the
Debt Securities of such series. (Section 5.8). The right of a Holder to
institute a proceeding with respect to the Indenture is subject to certain
conditions precedent, including notice and indemnity to the Trustee,
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but each Holder has a right to the receipt of principal, premium, if any, and
interest, if any, at the respective Stated Maturities of the Debt Securities
(or, in the case of a redemption, on the Redemption Date) or to institute suit
for the enforcement thereof. (Sections 5.9 and 5.10).
The Holders of a majority in principal amount of the Outstanding Debt
Securities of any series may, on behalf of the Holders of all such Debt
Securities, waive any past default, except a default (a) in the payment of
principal of, premium, if any, or interest, if any, on any Debt Securities of
such series at maturity, upon redemption or otherwise, and (b) in respect of
any covenant or provision of the Indenture that cannot be modified or amended
without the consent of the Holder of each Outstanding Debt Security affected.
(Sections 5.7 and 8.2).
The Indenture requires the Company to furnish to the Trustee annual
statements as to the fulfillment by the Company of its obligations under the
Indenture. (Section 9.7).
MODIFICATION OF THE INDENTURE
The Company and the Trustee may, at any time and from time to time, without
the consent of any Holders of Debt Securities, modify and amend the Indenture,
for any of the following purposes: (a) to evidence the succession of another
corporation to the Company and the assumption by any such successor of the
covenants of the Company under the Indenture and in the Debt Securities; (b)
to add to the covenants of the Company for the benefit of the Holders of all
or any series of Debt Securities (and if such covenants are to be for the
benefit of less than all series of Debt Securities, stating that such
covenants are expressly being included solely for the benefit of such series)
or to surrender any right or power conferred by the Indenture upon the
Company; (c) to add any additional Events of Default with respect to all or
any series of Debt Securities; (d) to add to or change any of the provisions
of the Indenture to facilitate the issuance of Debt Securities in global form;
(e) to add to, change or eliminate any of the provisions of the Indenture;
provided, however, that any such addition, change or elimination shall become
effective only when there is no Debt Security Outstanding of any series
created prior to the execution of the supplemental indenture which is entitled
to the benefit of such provision; (f) to secure the Debt Securities; (g) to
establish the form or terms of Debt Securities of any series as permitted by
Sections 2.1 and 3.1 of the Indenture; (h) to evidence and provide for the
acceptance of appointment under the Indenture by a successor Trustee with
respect to the Debt Securities of one or more series and to add to or change
any of the provisions of the Indenture as shall be necessary to provide for or
facilitate the administration of the trusts under the Indenture by more than
one Trustee, pursuant to the requirements of Section 6.11 of the Indenture;
(i) to correct or supplement any provision under the Indenture which may be
inconsistent with any other provision under the Indenture or to make any other
provisions with respect to matters or questions arising under the Indenture,
provided, however, such action shall not adversely affect the interests of the
Holders of Debt Securities of any series issued under the Indenture in any
material respect; or to cure any ambiguity or correct any mistake; or (j) to
modify, eliminate or add to the provisions of the Indenture under the TIA or
under any similar federal statute subsequently enacted and to add to the
Indenture such other provisions as may be expressly required under the TIA.
(Section 8.1).
Modifications and amendments to the Indenture may be made by the Company and
the Trustee with the written consent of the Holders of a majority in principal
amount of each series of Debt Securities at the time Outstanding that is
affected thereby; provided, however, that no such modification or amendment
may, without the consent of the Holder of each Outstanding Debt Security of
such series affected thereby: (i) change the Stated Maturity of the principal
of, or any installment of principal of or interest on, any Debt Security of
such series, or reduce the principal amount thereof or the rate of interest
thereon or any premium payable upon the redemption thereof, or reduce the
amount of the principal of an Original Issue Discount Security of such series
that would be due and payable upon a declaration of acceleration of the
Maturity thereof pursuant to Section 5.2 of the Indenture, or impair the right
to institute suit for the enforcement of any such payment on or after the
Stated Maturity thereof
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(or, in the case of redemption, on or after the Redemption Date); (ii) reduce
the percentage in aggregate principal amount of the Outstanding Debt
Securities of such series, the consent of whose Holders is required for any
such supplemental indenture, or the consent of whose Holders is required for
any waiver (of compliance with certain provisions of the Indenture or certain
defaults thereunder and their consequences) provided for in the Indenture;
(iii) change any obligation of the Company to maintain an office or agency in
the Place of Payment for the Debt Securities of such series where such Debt
Securities may be presented or surrendered for payment, where such Debt
Securities may be surrendered for registration of transfer or exchange or
where notices and demands to or upon the Company may be served; or (iv) make
any change in Section 5.7 or Section 8.2 of the Indenture except to increase
any percentage or to provide that certain other provisions of the Indenture
cannot be modified or waived without the consent of the Holders of each
Outstanding Debt Security of such series affected thereby. (Section 8.2).
SATISFACTION AND DISCHARGE; DEFEASANCE
The Indenture, with respect to any series of Debt Securities (except for
certain specified surviving obligations referred to below), will be discharged
and canceled upon the satisfaction of certain conditions, including the
following: (a) all Debt Securities of such series not theretofore delivered to
the Trustee for cancellation have become due or payable, will become and due
and payable at their Stated Maturity within one year, or are to be called for
redemption within one year; and (b) the deposit with the Trustee of an amount
sufficient to pay the principal, premium, if any, and interest to the Maturity
of all Debt Securities of such series. Upon any such discharge of the
Company's obligations, the Holders of the Debt Securities of such series shall
no longer be entitled to the benefits of the Indenture, except for the
purposes of registration of transfer and exchange of the Debt Securities or
replacement of lost, stolen or mutilated Debt Securities and shall look only
to such deposited funds or obligations for payment. (Sections 4.1 and 4.2).
The Indenture also provides that the Company may elect:
(a) to be discharged from its obligations with respect to the Debt
Securities of or within a series on and after the date the conditions set
forth below in the next paragraph are satisfied (hereinafter "defeasance").
For this purpose, such defeasance means that the Company shall be deemed to
have paid and discharged the entire indebtedness represented by such Debt
Securities which shall thereafter be deemed to be "Outstanding" only for
the purposes of Article 4 of the Indenture, and to have satisfied all its
other obligations under such Debt Securities and the Indenture insofar as
such Debt Securities are concerned (and the Trustee, at the expense of the
Company, shall on a Company Order execute proper instruments acknowledging
the same), except the following which shall survive until otherwise
terminated or discharged hereunder: (i) the rights of Holders of such Debt
Securities to receive, solely from the trust funds described below in the
next paragraph, payments in respect of the principal of, premium, if any,
and interest, if any, on such Debt Securities when such payments are due;
(ii) the rights, powers, trusts, duties and immunities of the Trustee under
the Indenture; and (iii) Article 4 of the Indenture. Subject to compliance
with Article 4 of the Indenture, the Company may exercise this option
notwithstanding the prior exercise of its option to effect covenant
defeasance (as defined below) with respect to such Debt Securities.
(Section 4.4).
(b) to be released from its obligations with respect to the Debt
Securities of or within a series under "--Mergers, Consolidations and
Transfers of Assets" and "--Certain Covenants" above and certain other
obligations, and, if specified pursuant to provisions of the Indenture
establishing the terms of such Debt Securities, its obligations under any
other covenants with respect to such Debt Securities on and after the date
the conditions set forth below in the next paragraph are satisfied
(hereinafter "covenant defeasance"), and such Debt Securities shall
thereafter be deemed to be not "Outstanding" for the purpose of any
request, demand, authorization, direction, notice, consent, waiver or other
Act of Holders (and the consequences of any thereof) in
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connection with such obligations or such other covenants, but shall
continue to be deemed "Outstanding" for all other purposes of the
Indenture. For this purpose, such covenant defeasance means that, with
respect to such Debt Securities, the Company may omit to comply with and
shall have no liability in respect of such obligations or such other
covenants, whether directly or indirectly, by reason of any reference
elsewhere in the Indenture to any such obligation or such other covenants
or by reason of any reference to any such obligation or such other
covenants to any other provision in the Indenture or in any other document
or otherwise and such omission to comply shall not constitute a Default or
an Event of Default under the Indenture or otherwise, as the case may be,
but, except as specified above, the remainder of the Indenture and such
Debt Securities shall be unaffected thereby. (Section 4.5).
Such defeasance or covenant defeasance will take effect with respect to any
Debt Securities of or within a series at any time prior to the Stated Maturity
or redemption thereof only when:
(a) The Company shall have deposited or caused to be deposited
irrevocably with the Trustee (or another trustee satisfying the
requirements of the Indenture who shall agree to comply with, and shall be
entitled to the benefits of, certain specified provisions of the Indenture
relating to defeasance or covenant defeasance, for purposes of such
provisions also a "Trustee") as trust funds in trust for the purpose of
making the payments referred to in clauses (x) and (y) below, specifically
pledged as security for, and dedicated solely to, the benefit of the
Holders of such Debt Securities, with instructions to the Trustee as to the
application thereof, (i) money in an amount, or (ii) Government Obligations
which through the payment of interest and principal in respect thereof in
accordance with their terms will provide, not later than one day before the
due date of any payment referred to in clause (x) or (y) below, money in an
amount or (iii) a combination thereof in an amount, sufficient, in the
opinion of a nationally recognized firm of independent certified public
accountants expressed in a written certification thereof delivered to the
Trustee, to pay and discharge, and which shall be applied by the Trustee to
pay and discharge, (x) the principal of, premium, if any, and interest, if
any, on such Debt Securities on the Maturity of such principal or
installment of principal or interest and (y) any mandatory sinking fund
payments applicable to such Debt Securities on the day on which such
payments are due and payable in accordance with the terms of the Indenture
and such Debt Securities. Before such a deposit the Company may make
arrangements satisfactory to the Trustee for the redemption of Debt
Securities at a future date or dates in accordance with the Indenture which
shall be given effect in applying the foregoing.
(b) Such defeasance or covenant defeasance shall not result in a breach
or violation of, or constitute a Default or Event of Default under the
Indenture or result in a breach or violation of, or constitute a default
under, any other material agreement or instrument to which the Company is a
party or by which it is bound.
(c) No Event of Default of the type described in clause (e) of "--Events
of Default, Notice and Waiver" above with respect to such Debt Securities
shall have occurred and be continuing during the period commencing on the
date of such deposit and ending on the 91st day after such date (it being
understood that this condition shall not be deemed satisfied until the
expiration of such period).
(d) In the case of an exercise by the Company of its option to effect
such defeasance as described above, the Company shall have delivered to the
Trustee an Officers' Certificate and an Opinion of Counsel to the effect
that (i) the Company has received from, or there has been published by, the
Internal Revenue Service a ruling, or (ii) since the date of execution of
the Indenture, there has been a change in the applicable Federal income tax
law, in either case to the effect that, and based thereon such opinion
shall confirm that, the Holders of such Debt Securities will not recognize
income, gain or loss for Federal income tax purposes as a result of such
defeasance and will be subject to Federal income tax on the same amount and
in the same manner and at the same times, as would have been the case if
such deposit, defeasance and discharge had not occurred.
28
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(e) In the case of an exercise by the Company of its option to effect
such covenant defeasance as described above, the Company shall have
delivered to the Trustee an Opinion of Counsel to the effect that the
Holders of such Debt Securities will not recognize income, gain or loss for
Federal income tax purposes as a result of such covenant defeasance and
will be subject to Federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such covenant
defeasance had not occurred.
(f) The Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent to such defeasance as described above or such covenant defeasance
as described above (as the case may be) have been complied with and an
Opinion of Counsel to the effect that either (i) as a result of a deposit
pursuant to subparagraph (a) above and the related exercise of the
Company's option to effect such defeasance as described above or to effect
such covenant defeasance as described above (as the case may be),
registration is not required under the Investment Company Act of 1940, as
amended, by the Company, with respect to the trust funds representing such
deposit or by the Trustee for such trust funds or (ii) all necessary
registrations under said Act have been effected.
(g) Such defeasance or covenant defeasance shall be effected in
compliance with any additional or substitute terms, conditions or
limitations which may be imposed on the Company in connection therewith as
contemplated by the provisions of the Indenture establishing the terms of
such Debt Securities. (Section 4.6).
PAYMENT AND TRANSFER
Principal of, premium, if any, and interest, if any, on the Debt Securities
of any series are to be payable at the Place of Payment for such series, which
may be the Corporate Trust Office of the Trustee or any other office or agency
maintained by the Company for such purposes, provided that payment of
interest, if any, on Debt Securities may be made at the option of the Company
by check mailed to the persons in whose names such Debt Securities are
registered at the close of business on the day or days specified in the
applicable Prospectus Supplement. (Sections 3.7 and 9.2).
Debt Securities may be transferred or exchanged at the Place of Payment for
such series, which may be the Corporate Trust Office of the Trustee or at any
other office or agency maintained by the Company for such purposes, subject to
the limitations in the Indenture, without the payment of any service charge
except for any tax or governmental charge incidental thereto. (Section 3.5).
SAME-DAY SETTLEMENT
If the accompanying Prospectus Supplement so indicates, settlement for the
Debt Securities will be made by the underwriters, dealers or agents in
immediately available funds and all applicable payments of principal, premium
and interest on the Debt Securities will be made by the Company in immediately
available funds.
NO PERSONAL LIABILITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS OR DIRECTORS
The Indenture provides that no recourse under or upon any obligation,
covenant or agreement of or contained in the Indenture or of or contained in
any Senior Note, or because of the creation of any indebtedness represented
thereby, shall be had against any incorporator, stockholder, officer or
director, as such, of the Company or of any successor Person. Each Holder, by
accepting the Senior Notes, waives and releases all such liability. (Section
1.13).
CONCERNING THE TRUSTEE
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set
forth in the Indenture. If an Event of Default has
29
<PAGE>
occurred and is continuing, the Trustee will use the same degree of care and
skill in its exercise of the rights and powers vested in it by the Indenture
as a prudent person would exercise under the circumstances in the conduct of
such person's own affairs. (Section 6.1).
The Indenture and provisions of the TIA incorporated by reference therein
contain limitations on the rights of the Trustee, should it become a creditor
of the Company, to obtain payment of claims in certain cases or to realize on
certain property received by it in respect of any such claims, as security or
otherwise. The Trustee is permitted to engage in other transactions; provided,
however, that if it acquires any conflicting interest, it must eliminate such
conflict or resign. (Section 6.3).
The Chase Manhattan Bank (National Association) is the Trustee under the
Indenture. The Company maintains banking relationships in the ordinary course
of business with the Trustee. Among other things, the Trustee is a lending
bank under a $650.0 million credit facility provided to the Company by ten
domestic and international banking institutions. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Financial
Condition, Liquidity and Capital Resources" in the accompanying Prospectus
Supplement.
PLAN OF DISTRIBUTION
The Company may sell Debt Securities to or through underwriters and also may
sell Debt Securities directly to other purchasers or through agents. Such
underwriters may include Goldman, Sachs & Co. or a group of underwriters
represented by firms including Goldman, Sachs & Co. Goldman, Sachs & Co. also
may act as agents.
The distribution of the Debt Securities may be effected from time to time in
one or more transactions at a fixed price or prices, which may be changed, or
at market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices.
In connection with the sale of Debt Securities, underwriters may receive
compensation from the Company or from purchasers of Debt Securities for whom
they may act as agents in the form of discounts, concessions or commissions.
Underwriters may sell Debt Securities to or through dealers, and such dealers
may receive compensation in the form of discounts, concessions or commissions
from the underwriters and/or commissions from the purchasers for whom they may
act as agents. Underwriters, dealers and agents that participate in the
distribution of Debt Securities may be deemed to be underwriters, and any
discounts or commissions received by them from the Company and any profit on
the resale of Debt Securities by them may be deemed to be underwriting
discounts and commissions, under the Securities Act. Any such underwriter or
agent will be identified, and any such compensation received from the Company
will be described, in the Prospectus Supplement.
Under agreements which may be entered into by the Company, underwriters and
agents who participate in the distribution of Debt Securities may be entitled
to indemnification by the Company against certain liabilities, including
liabilities under the Securities Act.
If so indicated in the Prospectus Supplement, the Company will authorize
underwriters or other persons acting as the Company's agents to solicit offers
by certain institutions to purchase Debt Securities from the Company pursuant
to contracts providing for payment and delivery on a future date. Institutions
with which such contracts may be made include commercial and savings banks,
insurance companies, pension funds, investment companies, educational and
charitable institutions and others, but in all cases such institutions must be
approved by the Company. The obligations of any purchaser under any such
contract will be subject to the condition that the purchase of the offered
Debt Securities shall not at the time of delivery be prohibited under the laws
of the jurisdiction to which such purchaser is subject. The underwriters and
such other agents will not have any responsibility in respect of the validity
or performance of such contracts.
30
<PAGE>
LEGAL MATTERS
The validity of the Debt Securities will be passed upon for the Company by
Fried, Frank, Harris, Shriver & Jacobson (a partnership including professional
corporations), New York, New York. McDermott, Will & Emery, Chicago, Illinois,
will serve as counsel for any underwriters or agents. McDermott, Will & Emery
in the past has represented and in the future may represent the Company on
other matters. McDermott, Will & Emery currently is acting as special counsel
to assist the Company and its trial counsel in connection with the pending
income tax litigation relating to Terra (see "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Financial
Condition, Liquidity and Capital Resources" in the accompanying Prospectus
Supplement). Fried, Frank, Harris, Shriver & Jacobson and McDermott, Will &
Emery each will rely upon the opinion of Robert B. Terry, Esq., Vice President
and General Counsel of the Company, with respect to all matters of Kansas law.
EXPERTS
The Consolidated Financial Statements of Farmland as of August 31, 1994 and
1995, and for each of the years in the three-year period ended August 31,
1995, have been incorporated by reference in this Prospectus and the
Registration Statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, incorporated by reference in this
Prospectus and the Registration Statement, upon the authority of such firm as
experts in accounting and auditing. The report of KPMG Peat Marwick LLP
covering the Consolidated Financial Statements contains an explanatory
paragraph concerning income tax adjustments proposed by the Internal Revenue
Service relating to Terra.
31
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS SUPPLEMENT AND
THE PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES DESCRIBED IN THIS PRO-
SPECTUS SUPPLEMENT AND THE PROSPECTUS OR AN OFFER TO SELL OR THE SOLICITATION
OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT
OR THE PROSPECTUS NOR ANY SALE MADE HEREUNDER OR THEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AF-
FAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF SUCH IN-
FORMATION.
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TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ S-3
Risk Factors.............................................................. S-6
Use of Proceeds........................................................... S-8
Capitalization............................................................ S-9
Selected Consolidated Financial Data...................................... S-10
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... S-12
Description of the Senior Notes........................................... S-25
Underwriting.............................................................. S-28
Legal Matters............................................................. S-29
PROSPECTUS
Available Information..................................................... 2
Documents Incorporated by Reference....................................... 2
The Company............................................................... 3
Business.................................................................. 4
Use of Proceeds........................................................... 18
Description of Debt Securities............................................ 18
Plan of Distribution...................................................... 30
Legal Matters............................................................. 31
Experts................................................................... 31
</TABLE>
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$100,000,000
FARMLAND INDUSTRIES, INC.
% SENIOR NOTES DUE 2003
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PROSPECTUS SUPPLEMENT
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GOLDMAN, SACHS & CO.
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