UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended August 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 2-60372
FARMLAND INDUSTRIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
KANSAS 44-0209330
(State or Other Jurisdiction of Incorporation or Organization)(I.R.S. Employer
Identification No.)
3315 NORTH OAK TRAFFICWAY, KANSAS CITY, MISSOURI 64116-0005
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: 816-459-6000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ X ]
Farmland Industries, Inc. is a cooperative. Its voting stock can only
be held by its members. No public market for voting stock of Farmland
Industries, Inc. is established and it is unlikely, in the foreseeable future,
that a public market for such voting stock will develop.
Documents incorporated by reference: None
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PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
THE COMPANY
Farmland Industries, Inc., founded in 1929 and formally incorporated
in Kansas in 1931, is a farm supply and a processing and marketing cooperative.
Its principal executive offices are at 3315 North Oak Trafficway, Kansas City,
Missouri 64116 (telephone 816-459-6000). Farmland has grown from revenues of
$310,000 during its first year of operation to approximately $10.7 billion
during 1999. Unless the context requires otherwise, (i) "Farmland", "we", "us",
"our", or the "Company" refers to Farmland Industries, Inc. and its consolidated
subsidiaries, (ii) all references to "year" or "years" are to fiscal years ended
August 31, and (iii) the term "member" means (a) any voting member, (b) any
associate member, or (c) any other person with which Farmland is a party to a
currently effective patronage refund agreement (a "patron"). See "Business and
Properties - Business - Patronage Refunds and Distribution of Annual Earnings."
MEMBERSHIP
Farmland operates on a cooperative basis and is primarily owned by its
members. Requirements for membership in the cooperative are established by the
Articles of Incorporation of Farmland and by the Board of Directors.
As of August 31, 1999, Farmland's membership, associate membership and
patrons eligible for patronage refunds consisted of approximately 1,400
cooperative associations of farmers and ranchers and 5,700 pork or beef
producers or associations of such producers. See ''Business and Properties -
Business - Patronage Refunds and Distribution of Annual Earnings."
PROPOSED UNIFICATION
On May 6, 1999, Farmland and Cenex Harvest States Cooperatives announced that
they were considering a complete unification. During September, the Boards of
Directors of Farmland and Cenex Harvest States separately approved the terms of
the unification and entered into a formal Transaction Agreement. Both
cooperatives have scheduled a November 23, 1999, member vote regarding the
unification. If members approve, and if the companies receive the required
regulatory approval, the unification is scheduled to occur March 1, 2000. The
unified entity will be named United Country Brands.
BUSINESS
GENERAL
In terms of revenue, Farmland is one of the largest cooperatives in the
United States. In 1999, we had sales of $10.7 billion including export sales of
approximately $1.3 billion to customers worldwide. Substantially all of our
international sales are invoiced and collected in U.S. Dollars.
We conduct business primarily in two operating areas. First, on the
input side of the agricultural industry, we operate as a farm supply
cooperative. Second on the output side of the agricultural industry, we operate
as a processing and marketing cooperative.
Our farm supply operations consist of four principal product divisions:
petroleum, plant foods, crop protection and feed. Principal products of the
petroleum division are refined fuels, propane and by-products of petroleum
refining. Principal products of the plant foods division are nitrogen and
phosphate-
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based fertilizers ("plant foods"). Principal products of the crop protection
division include a complete line of insecticides, herbicides and mixed
chemicals. Crop protection operations are conducted primarily through our 50%
ownership in WILFARM, L.L.C. and Omnium, LLC. 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.
We manufactured approximately 59% of the dollar value of our sales of farm
supply products in 1999. Approximately 68% of the farm supply products we sold
in 1999 were at wholesale to farm cooperative associations which are members of
Farmland, and who, in turn, distribute these products primarily to farmers and
ranchers.
The output side of our business includes; processing and marketing of
pork, processing and marketing of beef, raising hogs for processing, domestic
storage and marketing of grain and international storage and marketing of grain.
In 1999, approximately 70% of the hogs processed, 38% of the beef cattle
processed and 60% of the domestic grain marketed by us were supplied to us by
our members. Substantially all the pork and beef products we sold in 1999 was
processed in plants we own.
No material part of the business of any segment of Farmland is dependent
on a single customer or a few customers. Financial information about our
industry segments is presented in Note 11 of the Notes to Consolidated Financial
Statements.
The principal businesses of Farmland have been highly seasonal.
Historically, the majority of sales of crop production products occur in the
spring. Sales in the beef business and in grain marketing historically have
been concentrated in the summer and summer is the lowest sales period for the
pork and feed businesses.
Farmland competes for market share with numerous participants of various
sizes and with various levels of vertical integration, product and geographical
diversification. In the petroleum industry, competitors include major oil
companies, independent refiners, other cooperatives and product brokers.
Competitors in the crop production industry include global producers (some of
which are cooperatives) of nitrogen- and phosphate-based fertilizers and product
importers and brokers. Competitors in the crop protection industry include
major chemical companies and product brokers. The feed, grain, pork and beef
industries are comprised of a large variety of competitive participants.
BUSINESS RISK FACTORS
INCOME TAX MATTERS
In July 1983, Farmland sold the stock of Terra Resources, Inc.
("Terra"), a wholly owned subsidiary engaged in oil and gas exploration and
production operations and exited its oil and gas exploration and production
activities. The gain from the sale of Terra amounted to $237.2 million for tax
reporting purposes.
On March 24, 1993, the Internal Revenue Service ("IRS") issued a
statutory notice to Farmland asserting deficiencies in federal income taxes
(exclusive of statutory interest thereon) in the aggregate amount of $70.8
million. The asserted deficiencies relate primarily to the Company's tax
treatment of the $237.2 million gain resulting from its sale of the stock of
Terra and the IRS's contention that Farmland incorrectly treated the Terra sale
gain as income against which certain patronage-sourced operating losses could be
offset. The statutory notice further asserts that Farmland incorrectly
characterized for tax purposes gains aggregating approximately $14.6 million and
a loss of approximately $2.3 million, from dispositions of certain other assets.
On June 11, 1993, Farmland filed a petition in the United States Tax
Court contesting the asserted deficiencies in their entirety. The case was
tried on June 13-15, 1995. The parties submitted post-trial briefs to the court
in September 1995 and reply briefs were submitted to the court in November 1995.
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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 $317.3 million
through August 31, 1999), or $403.1 million (before tax benefits of the interest
deduction) in the aggregate at August 31, 1999. 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 $15.3 million (including accumulated statutory
interest). The asserted federal and state income tax liabilities and
accumulated interest would become immediately due and payable unless Farmland
appealed the decision and posted the requisite bond to stay assessment and
collection.
In March 1998, Farmland received notice from the IRS assessing the $15.3
million tax and accumulated statutory interest related to our 1989 tax year (as
described above). In order to establish the trial court in which initial
litigation, if any, of the dispute would occur and to stop the accumulation of
interest, Farmland deposited funds with the IRS in the amount of the assessment.
After making this deposit, we filed for a refund of the entire amount deposited.
The liability resulting from an adverse decision by the United States
Tax Court would be charged to current earnings and would have a material adverse
effect on Farmland. In the event of such an adverse determination of the Terra
tax issue, certain financial covenants of the Company's Syndicated Credit
Facility (the "Credit Facility"), dated May 15, 1996, become less restrictive.
Had the United States Tax Court decided in favor of the IRS on all unresolved
issues and had all related additional federal and state income taxes and
accumulated interest been due and payable on August 31, 1999, our borrowing
capacity under the existing credit facilities was adequate to finance the
liability. However, Farmland's ability to finance such an adverse decision
depends substantially on the financial effects of future operating events on its
borrowing capacity. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Financial Condition, Liquidity and Capital
Resources."
ENVIRONMENTAL MATTERS
Farmland 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, which may impose liability for
cleanup of environmental contamination. Farmland uses hazardous materials and
generates hazardous wastes in the ordinary course of our manufacturing
processes. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Financial Conditions Liquidity and Capital Resources -
Matters Involving the Environment."
EXTERNAL RISK FACTORS THAT MAY AFFECT FARMLAND
Farmland's revenues, margins, net income and cash flow may be volatile due
to factors beyond our control. External factors that affect agricultural
conditions and Farmland's results of operations include:
1.REGULATORY: Farmland's ability to grow through acquisitions and investments
in ventures can be adversely affected by regulatory delays or other
unforeseen factors beyond our control. Various federal and state regulations
can affect the amount of fertilizer and other chemicals used.
2.COMPETITION: Competitors may have better access to equity capital markets and
may offer more varied products or possess greater resources than Farmland.
3.IMPORTS AND EXPORTS: Factors which affect the level of agricultural products
imported or exported including foreign trade and monetary policies, laws and
regulations, political and governmental changes, inflation and exchange
rates, taxes, operating conditions and world demand. Fluctuations in the
level of agricultural product imports and exports will likely impact our
operations.
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4.WEATHER: Weather conditions, both domestic and global, affect Farmland's
operations. Weather conditions may either increase or decrease demand.
Changes in demand affect selling prices and income of all our business
segments. Weather conditions also may increase or decrease the supply of
products. These changes in supply may affect costs related to Farmland's
pork and beef processing and marketing, livestock production and grain
storage and marketing business.
5.RAW MATERIALS COST: Historically, changes in the costs of raw materials have
not necessarily resulted in corresponding changes in the prices at which
finished products have been sold by Farmland.
6.YEAR 2000: Farmland does not know with certainty all of the consequences of
its most reasonably likely worst case Year 2000 scenario. We cannot with
certainty address the virtually unlimited number of differing circumstances
relating to what might be its most reasonably likely worst case. Farmland
has distributed a survey of its significant customers and vendors to
determine their state of Year 2000 readiness. However, responses to the
survey questionnaire have not provided a basis to conclude whether such
customers and vendors are Year 2000 compliant.
7.OTHER FACTORS: Domestic variables, such as crop failures, federal
agricultural programs and production efficiencies, and global variables, such
as general economic conditions, conditions in financial markets, embargoes,
political instabilities and local conflicts, affect the supply, demand and
price of crude oil, refined fuels, natural gas and other commodities and may
unfavorably impact Farmland's operations.
Management cannot determine the extent to which these factors may impact
our future operations. Farmland's revenues, margins, net income and cash
flow are likely to be volatile as conditions affecting agriculture and
markets for our products change. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Results of Operations for
Years Ended August 31, 1997, 1998 and 1999" and "Business and Properties -
Business - Raw Materials" and "Crop Production - Raw Materials."
LIMITED ACCESS TO EQUITY CAPITAL MARKETS
As a cooperative, Farmland cannot sell its voting common equity to
traditional public or private markets. Instead, equity is raised largely from
payment of the noncash portion of patronage refunds with common stock, associate
member common stock and capital credits, from offerings of preferred stocks and
from net income on transactions with nonmembers. See ''Business and Properties
- - Business - Patronage Refunds and Distribution of Annual Earnings'' and '' -
Equity Redemption Plans."
PLANT FOODS AND CROP PROTECTION
MARKETING
Farmland's plant foods business includes nitrogen, phosphate and potash
based plant nutrients. Sales of the crop production business segment as a
percent of consolidated sales for 1997, 1998 and 1999 were 14%, 13% and 9%,
respectively. The crop protection business is conducted primarily through our
50% ownership in WILFARM and Omnium ventures, and includes sales and
distribution of a complete line of crop protection products such as
insecticides, herbicides and mixed chemicals. Sales of the crop protection
business are not included in consolidated sales of Farmland.
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. Farmland maintains a significant capital
investment in distribution assets and a seasonal investment in inventory to
enhance its manufacturing and distribution operations. We own or lease plant
nutrient custom dry blending, liquid mixing, storage and distribution
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facilities at a large number of locations throughout our trade territory to
conform delivery capacity more closely to customer demands for delivery
services.
Domestic competition, mainly from other regional cooperatives and
integrated multinational crop production companies, is intense due to customers'
sophisticated buying tendencies and production strategies that focus on costs
and service. Also, foreign competition exists from producers of crop production
products manufactured in countries with lower cost natural gas supplies (the
principal raw material in nitrogen-based fertilizer products). In certain
cases, foreign producers of fertilizer for export to the United States may be
subsidized by their respective governments.
During October 1999, Farmland, Cenex Harvest States Cooperatives and Land
O'Lakes entered into a definitive agreement to form an agronomy marketing joint
venture for the purpose of distributing both plant foods and crop protection
products. The consummation of this agreement is subject to completion of the
Farmland and Cenex Harvest States unification into United Country Brands.
PRODUCTION
Farmland manufactures nitrogen-based crop production products. Natural
gas is the major raw material used in production of nitrogen-based fertilizer,
including synthetic anhydrous ammonia, urea, urea ammonium nitrate ("UAN") and
other forms of nitrogen-based fertilizers.
Farmland operates seven anhydrous ammonia production plants (three of which
are leased under long-term lease arrangements) at six locations in Kansas, Iowa,
Nebraska, Oklahoma and Louisiana. Farmland and Mississippi Chemical Company are
each 50% owners of a joint venture, Farmland MissChem, Limited ("Farmland
MissChem"), which owns an anhydrous ammonia production facility located in The
Republic of Trinidad and Tobago. All output from this facility is sold to and
distributed by the owners of the venture. Annual production for fiscal years
1997, 1998 and 1999, including Farmland's 50% share of the output of Farmland
MissChem, totaled approximately 2.8 million tons, 3.0 million tons and 3.1
million tons, respectively.
Five of these synthetic anhydrous ammonia plants have capacity to further
process anhydrous ammonia into urea, UAN solutions and other forms of nitrogen
fertilizer. Due to unfavorable market conditions, we have temporarily closed
production of UAN at our Lawrence, Kansas and Enid, Oklahoma facilities. In
1997, 1998 and 1999, production of these upgraded products approximated 1.6
million tons, 1.9 million tons and 2.1 million tons, respectively.
Farmland owns a phosphate chemical plant located in Joplin, Missouri, that
produces feed grade phosphate (dicalcium phosphate) and ammonium phosphate,
which is combined in varying ratios with muriate of potash to produce different
fertilizer grade products. Production of feed grade phosphate approximated
163,000 tons, 167,000 tons and 168,000 tons in 1997, 1998 and 1999, respectively
and production of ammonium phosphate approximated 44,000 tons, 56,000 tons and
29,000 tons in 1997, 1998 and 1999, respectively.
Farmland and Norsk Hydro a.s. are each 50% owners of, Farmland Hydro, L.P.
("Hydro"), a joint venture which owns a phosphate fertilizer manufacturing plant
at Green Bay, Florida. Hydro's plant produces products such as super phosphoric
acid, diammonium phosphate and monoammonium phosphate. Annual production in
tons of such products for 1997, 1998 and 1999 was 1,504,000, 1,428,000 and
1,457,000, respectively. Farmland provides management and administrative
services and Norsk Hydro a.s. provides marketing services to Hydro. Products of
this plant are distributed principally to international markets.
Farmland is a 50% owner of SF Phosphates Limited Liability Company ("SF
Phosphates"), a venture 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 phosphoric acid with annual production in tons for 1997,
1998 and 1999, of 529,000, 527,000 and 522,000, respectively. Under the venture
agreement, the owners purchase the production of the venture in proportion to
their ownership.
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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. In addition, Farmland has a hedging
program which utilizes natural gas futures and options to reduce risks of market
price volatility. See " Business and Properties - Business - Business Risk
Factors - External Factors That May Affect the Company."
Natural gas is delivered to Farmland's facilities under pipeline
transportation service agreements which have been negotiated with each plant's
delivering pipeline. Natural gas delivery to the plants could be curtailed
under regulations of the Federal Energy Regulatory Commission if a delivering
pipeline's capacity was required to serve priority users such as residences,
hospitals and schools. In such cases, production could be curtailed. No
significant production has been lost because of curtailments in pipeline
transportation and no such curtailment is anticipated.
Adequate supplies of the phosphate rock and sulfur required to operate
Hydro's plant are presently available from various suppliers. Hydro owns
phosphate rock reserves located in Hardee County, Florida which contain an
estimated 80 million tons of phosphate rock.
During 1998, Hydro began obtaining various permits and licenses necessary
for mining the above properties. This process will take several years to
complete and, therefore, Hydro does not anticipate mining any of the phosphate
rock reserves within the next year.
Based on current recovery methods and the levels of the SF Phosphate plant
production in recent years, we estimate that the phosphate rock reserves owned
by SF Phosphates are adequate to provide the phosphate rock requirements of the
plant for approximately 75 years.
PETROLEUM
MARKETING
The principal products of this business segment are refined fuels, propane
and by-products of the petroleum refinery. Other petroleum products include
lube oil, grease, and car, truck and tractor tires, batteries and accessories.
Sales of petroleum products as a percent of consolidated sales for 1997, 1998
and 1999 were 15%, 13% and 9%, respectively.
Competitive methods in the petroleum industry include service, product
quality and price. However, in refined fuel markets, price competition is
dominant. Many participants in the industry engage in one or more of the
industry's processes (oil production, transportation, refining, wholesale
distribution and retailing). Farmland participates in the industry primarily as
a mid-continent refiner and as a wholesale distributor of petroleum products.
Effective September 1, 1998, Country Energy LLC, a joint venture with Cenex
Harvest States, commenced operations. Country Energy LLC provides, on an agency
basis, refined fuel, propane and lubricants marketing and distribution
services for its owners.
PRODUCTION
Farmland owns a refinery, with an approximately 100,000 barrel per day
capacity, at Coffeyville, Kansas. Production at the Coffeyville refinery
amounted to approximately 71% of refined fuel sales in 1999. Effective
September 1, 1999, we formed an alliance, Cooperative Refining, LLC, with the
owners of National Cooperative Refinery Association ("NCRA"). Cooperative
Refining performs all activities related to operating NCRA's refinery at
McPherson, Kansas and Farmland's refinery at Coffeyville, Kansas.
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RAW MATERIALS
In 1999, Farmland's pipeline/trucking gathering system collected
approximately 15% of its crude oil supplies under lease from producers near its
refinery. Additional supplies are acquired from diversified sources, including
sour crude oil from foreign sources.
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 advance sales contracts of
refined products, are hedged utilizing various petroleum futures contracts. See
"Business and Properties - Business - Business Risk Factors - External Factors
That May Affect the Company".
During periods of volatile crude oil price changes, or in extremely short
crude oil supply conditions, our petroleum operations could be affected to a
greater extent than petroleum operations of more vertically integrated
competitors with crude oil supplies available from owned producing reserves. In
past periods of relatively severe crude oil shortages, various governmental
regulations such as price controls and mandatory crude oil allocating programs
have been implemented. There can be no assurance as to what, if any, government
action would be taken if a crude oil shortage were to develop.
FEED
Feed products include swine, beef, poultry, dairy, pet, mineral and
specialty feeds, feed ingredients and supplements, animal health products and
farm and ranch supplies. The primary components of feed products are grain and
grain by-products, which are generally available in the region in which we
operate.
This business segment's sales were approximately 7%, 6% and 5% of
consolidated sales for the years 1997, 1998 and 1999, respectively.
Approximately 47% of the feed segment's sales in 1999 was attributable to
products manufactured in our feed mills. Farmland operates feed mixing plants at
20 locations throughout its territory, an animal protein plant in Maquoketa,
Iowa, an animal protein plant and a premix plant located in Eagle Grove, Iowa, a
premix plant in Marion, Ohio and a pet food plant in Muncie, Kansas.
In June of 1998, we acquired six feed mills with an aggregate capacity of
747,000 tons through the acquisition of SF Services, Inc. In 1998 and 1999,
feed mills with an aggregate capacity of approximately 415,000 tons were either
sold or contributed to ventures. Our partners in these ventures are primarily
local cooperatives.
During November 1999, Farmland, Cenex Harvest States Cooperatives and
Land O'Lakes signed a letter of intent to form a feed venture that will combine
all aspects of their feed businesses. We anticipate the feed venture will begin
operations on March 1, 2000. The consummation of this agreement is subject to
completion of the Farmland and Cenex Harvest State unification with United
Country Brands.
PORK
PROCESSING
Farmland's pork processing and marketing operations are conducted through
Farmland Foods, Inc. ("Foods"), a 99%-owned subsidiary, which operates 11 food
processing facilities, including leased facilities in Albert Lea, Minnesota and
Omaha, Nebraska.
Facilities in Denison and Dubuque, Iowa, Monmouth, Illinois and Crete,
Nebraska function as pork abattoirs and have additional capabilities for
processing pork into bacon, ham and smoked meats. These facilities also process
fresh pork into primal cuts for additional processing into fabricated meats
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which are sold to commercial users and to retail grocery chains, as well as
case-ready and label-branded cuts for retail distribution. Meat processing
facilities at Springfield, Massachusetts and New Riegel, Ohio produce Italian-
style specialty meats and ham products. Plants in Wichita and Topeka, Kansas
and Albert Lea, Minnesota process fresh pork into a variety of products
including ham, bacon and sausage. Additionally, the Wichita, Kansas facility
processes pork, beef and chicken into hot dogs, dry sausage and other luncheon
meats. The plant located in Carroll, Iowa is primarily a packaging facility for
canned or cook-in-bag products. The facility located in Omaha, Nebraska,
prepares primal beef and pork products into case-ready cuts of meat which can be
shipped directly to retailers.
MARKETING
Farmland's pork 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 a variety of brand names
including: Farmland, Farmstead, OhSe, Maple River, Carando, Roegelein, Regal
and Marco Polo. Product distribution is through national and regional retail
food chains, food service accounts, distributors and through international
marketing brokers.
Pork marketing is a highly competitive industry with many suppliers of
fresh and processed pork products competing for shelf space in retail food
stores. Other meat products such as beef, poultry and fish also compete
directly with pork products. Competitive methods in this segment include price,
product quality, brand and product differentiation and customer service.
LIVESTOCK PRODUCTION
PRODUCTION AND MARKETING
Livestock Production's primary focus is to produce market hogs to be
processed by Farmland Foods Inc. We currently have approximately 300 contracts,
with producers in 8 states to finish hogs from our own production or from the
production of Alliance Farms, an affiliate. The risks associated with the
managing of hogs includes disease and genetic changes, as well as the general
market price risk for hogs. Livestock Production sells approximately 92% of its
inventory to Farmland Foods, which is a 99%-owned subsidiary of Farmland. In
1999, Livestock Production provided approximately 7.5% of Farmland Foods total
hog requirements.
BEEF
PROCESSING
Farmland's beef processing and marketing operations are conducted through
Farmland National Beef Packing Company, L.P., which at August 31, 1999, was
71.2%-owned by Farmland. The beef processing facilities are located in Liberal,
Kansas and Dodge City, Kansas. These facilities function as beef abattoirs and
process fresh beef into primal cuts for additional processing into fabricated or
boxed beef. During 1997, 1998 and 1999, the two plants slaughtered an aggregate
of 2.1 million, 2.4 million and 2.6 million cattle, respectively.
MARKETING
Products in our beef processing and marketing operations include fresh and
frozen beef, boxed beef and by-products. Product distribution is through
national and regional retail and food service customers as well as under the
Farmland Black Angus Beef label. In addition, certain beef products are
distributed in international markets.
Beef marketing is a highly competitive industry with many suppliers of
fresh and boxed beef. Other meat products such as pork, poultry and fish also
compete directly with beef products. Competitive methods in this industry
include price, product quality, brand and product differentiation and customer
service.
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GRAIN MARKETING
Farmland conducts domestic grain marketing operations through its North
American division and international marketing operations through its eight
international grain marketing subsidiaries conducted by a central management
group (referred to as "Tradigrain").
NORTH AMERICAN GRAIN
MARKETING
Farmland markets wheat, corn, soybeans, milo, barley and oats, with wheat
and corn constituting the majority of the marketing business. We purchase grain
from members and nonmembers located in the Midwestern part of the United States
and assume all risks related to selling such grain. Grain is priced in the
United States principally through bids based on organized commodity markets.
In 1998, Farmland and ConAgra Inc., formed Farmland-Atwood, LLC, a 50%-
owned venture. In May 1999, Farmland purchased ConAgra's, interest in the
venture. Farmland-Atwood provides risk management services, financial and grain
support services and grain brokerage to its customers.
Farmland is exposed to price risk as a result of holding grain inventory
and because, in the ordinary course of business, Farmland is a party to numerous
fixed price sales and fixed price purchase contracts. To reduce the price
change risk associated with holding positions in grain, Farmland takes opposite
and offsetting positions by entering into grain commodity futures contracts.
Generally, such contracts have terms of up to one year. Our strategy is to
maintain hedged positions on as close to 100% of our grain positions as is
possible. During 1997, 1998 and 1999, Farmland maintained hedges on
approximately 93%, 93% and 95%, respectively, of its grain positions. The
average market value of grain positions not hedged during the year amounted to
less than 1% of our 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. See "Management's Discussion and Analysis of Financial Conditions and
Results of Operations - Financial Condition, Liquidity and Capital Resources -
Results of Operations for Years Ended August 31, 1997, 1998 and 1999 - Grain
Marketing".
Approximately 41%, 43% and 37% of grain revenues were from export sales or
sales to domestic customers for export in 1997, 1998 and 1999, respectively.
Foreign sales of grain generally are paid in U.S. Dollars. Export-related sales
are affected by the level of grain production in foreign countries.
Furthermore, export-related sales are subject to international political events
and changes in other countries' trade policies which are not within the control
of the United States or Farmland.
PROPERTY
Farmland owns or leases, 26 inland elevators and one export elevator in the
United States with a total capacity of approximately 178.8 million bushels of
grain.
INTERNATIONAL GRAIN
Farmland's international grain trading subsidiaries (collectively referred
to as "Tradigrain") transact business in all major grains, soyoil, and sugar.
Final consumers are either governmental entities, private companies or other
major grain companies throughout the world.
Tradigrain's purchases of grain are made on a cash basis and its sales of
grain are mostly made against confirmed letters of credit. Furthermore,
Tradigrain may take long or short grain positions. These positions are
accounted for on a mark-to-market basis and the gain or loss is recognized as a
component of net income.
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RESEARCH
Farmland operates a research and development farm for the primary
purpose of developing improvements in nutrition, breeding and feeding practices
of livestock and pets. We also conduct research at our pork processing
facilities directed toward product development and process improvement.
Additionally, Farmland formed a five-year research alliance, beginning in 1997,
with Kansas State University.
Expenditures related to product research and process improvements sponsored
by Farmland amounted to $2.1 million, $2.4 million and $2.4 million for 1997,
1998 and 1999, respectively.
CAPITAL EXPENDITURES AND INVESTMENTS IN VENTURES
In 1999, Farmland made capital expenditures totaling $121.2 million
and investments in ventures totaling $23.3 million.
The Farmland Board has authorized expenditures (of which $32.8 million
was committed as of August 31, 1999) of up to $221.9 million for capital
additions and improvements during the years 2000 and 2001. The majority of
these expenditures are in the crop production, pork processing and marketing,
beef processing and marketing and petroleum businesses and are primarily for
plant improvements. From time to time, management may recommend additional
capital projects to Farmland's Board of Directors for approval.
We intend to fund our capital program with cash from operations,
through borrowings or through other capital market transactions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Financial Condition, Liquidity and Capital Resources."
YEAR 2000
Farmland formalized its Year 2000 program in the fall of 1997. Year 2000
readiness was defined by criteria which, if satisfied, would demonstrate that
systems and applications programs function correctly after the turn of the
century without abnormal results. Further, minimum acceptance testing procedures
for evaluating whether systems and applications met Year 2000 compliance
criteria were defined. In addition, systems and applications were categorized
as "high risk" or "low risk" according to the respective level of impact on the
continuation of business by Farmland at the turn of the century.
A comprehensive information technology ("IT") software inventory and
assessment was then completed. As a result of this readiness assessment, we
believe that all noncompliant systems have been identified.
To address the state of readiness condition, Farmland established an
Oversight Committee consisting of the Chief Information Officer, the Chief
Financial Officer and General Counsel of Farmland and a Year 2000 Program
Office.
The Oversight Committee has responsibility for both IT and non-IT systems
(embedded technologies such as microcontrollers built into machinery) and has a
direct reporting relationship to the Farmland Board of Directors. The Oversight
Committee has delegated Year 2000 compliance responsibility for non-IT systems
to management of the respective plants or facilities. Farmland contracted with
an outside vendor to inspect and remediate all processor related Year 2000
issues in its meat plants. This inspection and remediation has been completed.
We have not separately tracked the replacement cost and time related to non-IT
systems. However, we believe these costs have not had a material adverse effect
on our operating results.
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The Program Office, which is the working arm of the Oversight Committee,
organizes and administers Year 2000 projects related to IT systems. The Program
Office maintains a detailed project plan to complete and test projects within
specific time frames. The Program Office continuously monitors the status of the
SAP implementation and re-assesses the risk areas depending on movement of that
system's implementation schedule. The Program Office provides a monthly update
of Year 2000 progress to the Oversight Committee. The Program Office has revised
the estimated hours required for Year 2000 projects related to IT systems to
approximately 45,500 hours and the overall cost to approximately $6.5 million.
Through October 1999, approximately 44,000 hours of such work had been
performed. The remaining work primarily relates to final testing of the
effectiveness of the remediation work performed. The targeted completion of the
remaining work is December 1, 1999.
Farmland believes all significant modifications required to reach a state
of readiness for Year 2000 have been completed. However, despite all reasonable
efforts to resolve our Year 2000 issues, as described above, no assurances can
be given that the level of Year 2000 readiness actually attained will eliminate
all potential material effects that Year 2000 problems might have on our
business, results of operation, or financial condition. It is not, and will
not, be possible for us to represent that we have achieved complete Year 2000
compliance.
Farmland does not know all of the consequences of its most reasonably
likely worst case Year 2000 scenario. We cannot address the virtually unlimited
number of differing circumstances relating to what might be its most reasonably
likely worst case. Farmland is and intends to continue to address this
uncertainty through activities of its Oversight Committee and Program Office, as
described above.
Farmland has distributed a survey to its significant customers and vendors
to determine their state of Year 2000 readiness. However, responses to the
survey questionnaire have not provided a basis to conclude whether such
customers and vendors are Year 2000 compliant. Further, we have not conducted
and do not plan to conduct tests designed to confirm compatibility of our
information systems as modified for Year 2000 issues with those of significant
customers and vendors. Farmland will rely on the integrity of its vendors and
customers to resolve their Year 2000 issues.
GOVERNMENT REGULATION
Farmland'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.
Farmland believes that its operating procedures conform to the intent of these
laws and that we currently are in compliance with all such laws, the violation
of which could have a material adverse effect on us.
Certain policies may be implemented from time to time by the United
States Department of Agriculture, the Department of Energy or other governmental
agencies which may impact the demands of farmers and ranchers for our products
or which may impact the methods by which certain of our operations are
conducted. Such policies may have a significant impact on any or all of
Farmland's operating businesses.
The Federal Agriculture Improvement and Reform Act ("FAIR") represents the
most significant change in government farm programs in more than 60 years.
Under FAIR, the former system of variable price-linked deficiency payments to
farmers has been replaced by a program of fixed payments which decline over a
seven-year period from 1996 to 2002. To compensate for adverse market and
weather conditions, additional transfer payments were made by the Federal
government during 1998 and 1999. FAIR eliminates federal planting restrictions
and acreage controls. Farmland believes that FAIR was intended to accelerate the
trend toward greater market orientation and reduced Government influence on the
agricultural sector. As a result, we expect the number of acres under
cultivation to increase over a long period of time. This increase may favorably
impact demand of producers for our plant nutrients and crop protection products
and fuels. Whether demand for our products is favorably impacted depends in a
large part on whether U.S. agriculture becomes more competitive in world markets
as this industry
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<PAGE>
moves toward greater market orientation, the extent which governmental actions
expand international trade agreements and whether market access opportunities
for U.S. agriculture is increased.
The U.S. Congress has in the past considered, and may in the future
consider, trade measures which, if passed, could enhance agricultural export
potential. Farmland believes "fast-track" (legislation which would authorize
the President to submit a trade agreement to Congress with the assurance that it
will be voted on within 90 days and not be subject to amendments), China normal
trading relations, and removal of trade sanctions and language to prohibit
embargoes could benefit U.S. agricultural interests by opening markets,
increasing exports and expanding trade opportunities with countries which import
agricultural products. Absent such legislation, our access to international
markets may be adversely impacted.
Management is not aware of any newly implemented or pending policies,
other than as discussed above, having a significant impact or which may have a
significant impact on our operations.
EMPLOYEE RELATIONS
At August 31, 1999, Farmland had approximately 17,700 employees.
Approximately 44% of the our employees were represented by unions having
national affiliations. Farmland considers its relationship with employees to be
generally satisfactory. No labor strikes or work stoppages within the last three
fiscal years have had a materially adverse effect on our operating results.
Current labor contracts expire on various dates through April 2002.
PATRONAGE REFUNDS AND DISTRIBUTION OF ANNUAL EARNINGS
Farmland operates on a cooperative basis. In accordance with its bylaws,
Farmland determines its annual net earnings from transactions with members
("member-sourced earnings"). For this purpose, annual net earnings means income
before income tax determined in accordance with generally accepted accounting
principles. 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. The member-sourced earnings (after handling of member-
sourced losses) are returned to members as patronage refunds in the form of
qualified and/or nonqualified written notices of patronage refund allocation.
Each member's portion of the annual patronage refund is determined by the
earnings of Farmland attributed to the quantity or value of business transacted
by the member with Farmland during the year for which the patronage is paid.
A qualified patronage refund must be paid at least 20% in cash. The
portion of the qualified patronage refund not paid in cash (the allocated equity
portion) is currently paid by Farmland in common shares, associate member common
shares or capital credits (depending on the membership status of the recipient).
The Board of Directors may determine to pay the allocated equity portion in any
other form or forms of equities. The allocated equity portion of the qualified
patronage refund is determined annually by the Board of Directors. Farmland is
allowed an income tax deduction for the total amount (the cash portion and the
allocated equity portion) of its qualified patronage refunds.
Nonqualified patronage refunds may be paid entirely in allocated equity;
there is no minimum cash requirements. Nonqualified patronage refunds paid by
Farmland have been recorded as book credits in the form of common shares,
associate member common shares or capital credits (depending on the membership
status of the recipient). The Board of Directors may determine to record the
nonqualified patronage refund in any other form or forms of nonpreferred
equities. Farmland is not allowed an income tax deduction for a nonqualified
patronage refund in the year paid. The nonqualified patronage refund is
deductible for federal income tax purposes only when such nonqualified written
notices of allocation are redeemed for cash or tangible property.
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For the years ended 1997, 1998 and 1999, patronage refunds authorized by
the Board of Directors were:
<TABLE>
<CAPTION>
Cash or Cash
Equivalent Non-Cash Portion Total Patronage
Portion of of Patronage Refunds
Patronage Refunds Refunds
(Amounts in Thousands)
<S> <C> <C> <C>
1997............... $ 40,228 $ 68,079 $ 108,307
1998............... $ 23,593 $ 35,528 $ 59,121
1999............... $ 6,054 $ 24,215 $ 30,269
</TABLE>
Nonmember-sourced income (earnings attributed to transactions with
persons not eligible to receive patronage refunds, i.e. nonmembers) and
nonpatronage income or loss (income or loss from activities not directly related
to the cooperative marketing or purchasing activities of Farmland) is subject to
income taxes computed on the same basis as such taxes are computed on the income
or loss of other corporations.
EQUITY REDEMPTION PLANS
The Equity Redemption Plans described below, namely the base capital
plan, the estate settlement plan and the special equity redemption plans
(collectively, the "Plans") may be changed at any time or from time to time at
the sole and absolute discretion of the Board of Directors. The Plans are not
binding upon the Board of Directors or Farmland, and the Board of Directors
reserves the right to redeem, or not redeem, any of Farmland's equities without
regard to whether such action or inaction is in accordance with the Plans.
Factors which the Board of Directors may consider in determining when and under
what circumstances, Farmland may redeem equities include, but are not limited
to, the terms of our base capital plan and other equity redemption plans,
results of operations, financial position, cash flow, capital requirements,
long-term financial planning needs, income and other tax considerations and
other relevant considerations. By retaining discretion to determine the amount,
timing and ordering of any equity redemptions, the Board of Directors believes
that it can continue to assure that the best interests of Farmland and our
owners will be protected.
BASE CAPITAL PLAN
For the purposes of acquiring and maintaining adequate capital to
finance Farmland's business, the Board of Directors has established a base
capital plan.
The base capital plan provides a mechanism for determining Farmland's
total capital requirements and each voting member's and associate member's share
(referred to as 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 equity holdings of deceased
natural persons (except for equity purchased and held for less than five years)
be redeemed at par value. This provision is subject to a limitation of $1.0
million in any one fiscal year without further authorization by the Board of
Directors for such year.
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SPECIAL EQUITY REDEMPTION PLANS
From time to time, Farmland has redeemed portions of its outstanding
equity under various special equity redemption plans. The special equity
redemption plans have been and may be changed at any time or from time to time
at the sole and absolute discretion of the Board of Directors. The special
equity redemption plans are not binding upon the Board of Directors or Farmland,
and the Board of Directors reserves the right to redeem, or not redeem, any
equities without regard to whether such action or inaction is in accordance with
the special equity redemption plans.
The special equity redemption plans are designed to return cash to members
or former members of Farmland or Farmland Foods by providing a method for
redemption of outstanding equity which may not be subject to redemption through
other Plans, such as the base capital plan or the estate settlement plan. The
order in which each type of equity is redeemed is determined by the Board of
Directors.
Presented below are the amounts of equity approved for redemption by the
Board of Directors of Farmland and Farmland Foods under the base capital plan,
the estate settlement plan and special equity redemption plans for each of the
years in the three-year period ended 1999. During the third quarter of 1998,
Farmland approved and paid a special equity redemption of approximately $50.0
million. Substantially all other amounts approved for redemptions are paid in
cash in the year following approval.
<TABLE>
<CAPTION>
Estate
Base Capital Settlement and
Plan Redemptions Special Equity Total Plan
Redemptions(A) Redemptions
(Amounts in Thousands)
<S> <c <C> <C>
>
1997....... $ 17,228 $ 11,492 $ 28,720
1998....... $ 8,868 $ 50,103 $ 58,971
1999....... $ -0- $ 377 $ 377
</TABLE>
(a)Includes redemptions of preferred stock.
ITEM 3. LEGAL PROCEEDINGS
Management believes there is no litigation existing or pending against
Farmland or any of its subsidiaries that, based on the amounts involved or the
defenses available, would have a material adverse effect on our financial
position except for the pending tax litigation relating to Terra, as explained
in Note 6 of the Notes to Consolidated Financial Statements. See "Business and
Properties - Business - Business Risk Factors" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Financial Condition,
Liquidity and Capital Resources".
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF EQUITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of equity holders.
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<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
There is no established public market for the voting common stock,
associate member common stock and capital credits of Farmland. We believe that
it is highly unlikely that a public market for these equities will develop in
the foreseeable future for the following reasons:
1.The common stock, associate member common stock and capital credits are
nondividend bearing;
2.The common stock, associate member common stock and capital credits are
not transferable without consent of the Farmland Board of Directors.
3.The amount of patronage refunds a holder, who is eligible to receive
patronage refunds, may receive is dependent on the earnings of Farmland
attributable to the quantity or value of business such holder transacts
with Farmland and not on the amount of equity held. See "Business and
Properties - Business - Patronage Refunds and Distribution of Annual
Earnings" included herein; and
4.Farmland may redeem its equities from time to time at the sole and
absolute discretion of the Board of Directors. See "Business and
Properties - Business - Equity Redemption Plans" included herein.
At August 31, 1999 there are approximately 3,500 holders of common
shares, 550 holders of associate member shares and 6,600 holders of capital
credits based on holders of record.
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ITEM 6. 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, 1999 are
derived from the Consolidated Financial Statements of Farmland, which have been
audited by KPMG LLP, independent certified public accountants. The information
set forth below should be read in conjunction these Consolidated Financial
Statements. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and related
notes.
<TABLE>
<CAPTION>
Year Ended August 31
1995 1996 1997 1998 1999
(Amounts in Thousands)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:<F1>(1)
Net Sales..................... $ 7,256,869 $ 9,788,587 $ 9,147,507 $ 8,775,046 $ 10,709,073
Operating Income of Industry
Segments(2)<F2>............. 323,254 291,781 295,626 192,874 181,852
Interest Expense.............. 53,862 62,445 62,335 73,645 90,773
Net Income.................... 162,799 126,418 135,423 58,770 13,865
DISTRIBUTION OF NET INCOME:
Patronage Refunds:
Allocated Equity............ $ 61,356 $ 60,776 $ 68,079 $ 35,528 $ 24,215
Cash and Cash
Equivalents................. 33,061 32,719 40,228 23,593 6,054
Earned Surplus and Other
Equities.................... 68,382 32,923 27,116 (351) (16,404)
$ 162,799 $ 126,418 $ 135,423 $ 58,770 $ 13,865
BALANCE SHEETS:
Working Capital............... $ 319,513 $ 322,050 $ 242,211 $ 435,482 $ 450,439
Property, Plant and
Equipment, Net.............. 592,145 717,224 783,108 827,149 833,203
Total Assets.................. 2,185,943 2,568,446 2,645,312 2,874,618 3,257,649
Long-Term Borrowings
(excluding
current maturities)......... 469,718 616,258 580,665 728,103 808,413
Capital Shares and
Equities.................... 687,287 755,331 821,993 912,696 917,327
<FN>
<F1>
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 Farmland.
<F2>
2. Includes segment gross income, segment selling, general, and administrative expenses, and the segment's equity in income (loss)
of investees.
</FN>
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Farmland has historically maintained two primary sources for debt
capital: a substantially continuous public offering of its subordinated debt and
demand loan securities (the "continuous debt program") and bank lines of credit.
Farmland's debt securities issued under the continuous debt program
generally are offered on a best-efforts basis through our wholly owned broker-
dealer subsidiary, Farmland Securities Company and also may be offered by
selected unaffiliated broker-dealers. The types of debt securities offered in
the continuous debt program include certificates payable on demand and
subordinated debenture bonds. The total amount of debt securities outstanding
and the flow of funds to, or from, Farmland as a result of the continuous debt
program are influenced by the rate of interest which we establish for each type
or series of debt security offered and by options of Farmland to call for
redemption certain of its outstanding debt securities. During the year ended
August 31, 1999, the outstanding balance of demand certificates decreased by
$3.7 million and the outstanding balance of subordinated debenture bonds
increased by $101.1 million. The continuous debt security program has been
suspended temporarily until a prospectus containing information describing the
proposed unified company has been filed and approved.
In May 1996, Farmland entered into a five year Syndicated Credit
Facility (the "Credit Facility") with various participating banks. The Credit
Facility provides a $1.1 billion credit, subject to compliance with financial
covenants as set forth in the Credit Facility, consisting of an annually
renewable short-term credit of up to $650.0 million and a long-term credit of up
to $450.0 million.
If unification with Cenex Harvest States occurs, we believe it is likely
that the Credit Facility will be replaced with a new credit facility. However,
there is no assurance that United Country Brands will be successful in
negotiating an adequate credit facility.
Farmland pays commitment fees under the Credit Facility equal to 22.5
basis points annually on the unused portion of the short-term credit and 1/4 of
1% annually on the unused portion of the long-term credit. In addition,
Farmland must comply with the Credit Facility's financial covenants regarding
working capital, the ratio of certain debts to average cash flow and the ratio
of equity to total capitalization, all as defined in the agreement. We are in
compliance with all covenants of the Credit Facility. The short-term credit
provisions of the Credit Facility are reviewed and/or renewed annually. The
next scheduled review date is in May 2000. The revolving term provisions of the
Credit Facility expire in May 2001.
At August 31, 1999, Farmland had $368.5 million of short-term
borrowings under the Credit Facility and $180.0 million of revolving term
borrowings; additionally, $52.7 million of the Credit Facility was being
utilized to support letters of credit issued on our behalf. As of August 31,
1999, under the short-term credit provisions, we had capacity to finance
additional current assets of $231.1 million and, under the long-term credit
provisions, we had capacity to borrow up to an additional $267.6 million.
During April 1998, Farmland National Beef Packing Company, L.P.
replaced its existing borrowing arrangements with a new five year $130.0 million
credit facility. This facility, which expires March 31, 2003, is provided by
various participating banks and these borrowings are nonrecourse to Farmland or
Farmland's other affiliates. Farmland National Beef used a portion of this
facility to repay in full its borrowings from Farmland. At August 31, 1999,
Farmland National Beef had borrowings under this facility of $64.1 million and
$3.3 million of the facility was being utilized to support letters of credit.
Assets with a carrying value at August 31, 1999, of $241 million have been
pledged by Farmland National Beef to support its borrowings under the facility.
Leveraged leasing has been utilized to finance railcars and a significant
portion of our fertilizer production equipment. In December 1997, Farmland
entered into a series of agreements which provide for the construction and
operation under a long-term lease of facilities adjacent to our petroleum
refinery
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at Coffeyville, Kansas. These facilities are designed to convert petroleum coke
by-products into fertilizers. When the facilities are completed (presently
scheduled for the second quarter of fiscal year 2000), Farmland will be
obligated to make future minimum lease payments which, at that time, will have
an approximate present value of $223 million. Alternatively, Farmland has an
option to purchase the facilities.
Farmland maintains other borrowing arrangements with banks and
financial institutions. Under such agreements, at August 31, 1999, $62.2 million
was borrowed.
Tradigrain has borrowing agreements with various international banks
which provide financing and letters of credit primarily to support current
international grain trading transactions. Obligations of Tradigrain under these
loan agreements are nonrecourse to Farmland or Farmland's other affiliates. At
August 31, 1999, such borrowings totaled $108.3 million.
In December 1997, Farmland sold 2 million shares of 8% Series A
Cumulative Redeemable Preferred Shares (the "Preferred Shares") at $50 per
Preferred Share with an aggregate liquidation preference of $100 million ($50
liquidation preference per share). The Preferred Shares are not redeemable
prior to December 15, 2022. On and after December 15, 2022, the Preferred
Shares may be redeemed for cash at our option, in whole or in part, at specified
redemption prices declining to $50 per share on and after December 15, 2027,
plus accumulated and unpaid dividends. The Preferred Shares do not have any
stated maturity, are not subject to any sinking fund or mandatory redemption
provisions and are not convertible into any other security. Proceeds from the
issuance of the Preferred Shares were used to call for early redemption
approximately $47.6 million of principal and accumulated interest on certain
subordinated debt securities and to redeem approximately $50.0 million of
capital shares and equity.
In the opinion of management, these arrangements for debt capital are
adequate for our present operating and capital plans. However, alternative
financing arrangements are continuously evaluated.
In the normal course of business, Farmland utilizes derivative
commodity instruments, primarily related to grain, to limit its exposure to
price volatility. These instruments consist mainly of grain contracts traded on
organized exchanges and forward purchase and sales contracts in cash markets.
The activities which limit the risk of loss also limit the potential for gain
which otherwise could result from changes in market prices. Also, in the
ordinary course of its international grain trading business, Farmland may take
long or short grain positions. Such positions are accounted for on a mark-to-
market basis and the gain or loss is recognized currently as a component of net
earnings. See "Business and Properties - Business - Grain Marketing".
Farmland operates on a cooperative basis. In accordance with its bylaws,
Farmland determines its annual earnings before income tax in accordance with
generally accepted accounting principles. Such earnings are then identified to
the various patronage refund allocation units (groups of similar products or
services) which have been established by the Board of Directors The earnings of
each patronage refund allocation unit are then divided into 1) a patronage
sourced portion determined on the basis of the quantity or value of business
done by such allocation unit with or for its members who are eligible to receive
patronage refunds and 2) a non-patronage sourced portion for which amounts are
determined on the basis of the quantity or value of business done by such
allocation unit with or for persons who are not eligible to receive patronage
refunds, plus such net amount of earnings, expense or loss in an allocation unit
which are unrelated to the cooperative operations carried on by Farmland for its
members. The patronage sourced portion of each patronage refund allocation unit
is allocated among the members transacting business with such allocation unit in
the ratio that the quantity or value of the business done with or for each such
member bears to the quantity or value of the business done with or for all of
such members. The Board of Directors reasonably and equitability determines
whether allocations within any allocation unit will be on the basis of the
quantity or value. The non-patronage sourced portion of annual earnings and
earnings unrelated to the cooperative operations carried on by Farmland for its
members are transferred to earned surplus after appropriate reduction for income
tax.
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Under Farmland's bylaws, patronage refunds are distributed to members from
the member sourced earnings as determined above, unless the earned surplus
account after such distribution is lower than 30% of the sum of the prior year-
end balance of outstanding common shares, associate member shares, capital
credits and patronage refunds for reinvestment. In such cases, the patronage
refund 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 1997, 1998 and 1999, the earned surplus account exceeded the required
amount by $101.7 million, $80.1 million and $57.3 million, respectively.
The patronage refunds may be paid in the form of qualified or
nonqualified written notices of allocation or cash. The nonqualified patronage
refund and the allocated equity portion of the qualified patronage refund are
sources of funds from operations which are retained for use in the business and
which increase our equity base. Common shares and associate member common
shares may be redeemed by cash payments from Farmland to holders of these
equities who participate in Farmland's base capital plan. Common stock,
associate member common stock, capital credits and other equities of Farmland
and Farmland Foods may also be redeemed under other equity redemption plans.
The base capital plan and other equity redemption plans are described under
"Business and Properties - Business - Equity Redemption Plans".
The Board of Directors of this Association has complete discretion to
determine the handling and ultimate disposition of the Association's patronage-
sourced net losses (including allocation unit losses) and the form, priority and
manner in which such losses or portions thereof are taken into account,
retained, and ultimately disposed of or recovered. The Board may retain such
losses of the Association and subsequently (i) dispose of them by offset against
the net earnings of the Association of subsequent years, (ii) apply such losses
to prior years' patronage allocation at any time in order to dispose of them by
means of offset and cancellation against members' and patrons' equity account
balances, or (iii) select and use any other method of disposition of such losses
as the Board of Directors, in its sole discretion, from time to time determines.
Net cash from operating activities for 1999 decreased $200.1 million
compared to 1998, reflecting lower net income and an increase in accounts
receivable and inventories, partially offset by an increase in accounts payable.
Major uses of cash for 1999 include: $162.5 million used in operations, $121.2
million for capital expenditures, $38.2 million for acquisition of other long-
term assets, and $23.6 million for patronage refunds distributed from income of
the 1998 fiscal year.
Major sources of cash include: $114.9 million from net increase in bank
loans and other notes payable, $101.3 million from the net increase of
subordinated debt certificates outstanding, $54.1 million of distributions from
joint ventures, and $76.1 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 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
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<PAGE>
post-trial briefs to the court in September 1995 and reply briefs were submitted
to the court in November 1995.
If the United States Tax Court decides in favor of the IRS on all
unresolved issues raised in the statutory notice, Farmland would have additional
federal and state income tax liabilities aggregating approximately $85.8 million
plus accumulating statutory interest thereon (approximately $317.3 million
through August 31, 1999), or $403.1 million (before tax benefits of the interest
deduction) in the aggregate at August 31, 1999. 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 $15.3 million (including accumulated statutory
interest thereon). The asserted federal and state income tax liabilities and
accumulated interest would become immediately due and payable unless Farmland
appealed the decision and posted the requisite bond to stay assessment and
collection.
In March 1998, Farmland received notice from the IRS assessing the $15.3
million tax and accumulated statutory interest thereon related to the Company's
1989 tax year (as described above). In order to establish the trial court in
which initial litigation, if any, of the dispute would occur and to stop the
accumulation of interest, Farmland deposited funds with the IRS in the amount of
the assessment. After making the deposit, we filed for a refund of the entire
amount deposited.
The liability resulting from an adverse decision by the United States
Tax Court would be charged to current earnings and would have a material adverse
effect on Farmland. In the event of such an adverse determination of the Terra
tax issue, certain financial covenants of the Company's Syndicated Credit
Facility (the "Facility") become less restrictive. Had the United States Tax
Court decided in favor of the IRS on all unresolved issues and had all related
additional federal and state income taxes and accumulated interest thereon been
due and payable on August 31, 1999, Farmland's borrowing capacity under the
Credit Facility was adequate at that time to finance the liability. However,
Farmland's ability to finance such an adverse decision depends substantially on
the financial effects of future operating events on its borrowing capacity under
the Credit Facility.
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, the Company'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, 1997, 1998 AND 1999
Farmland's sales, gross margins and net income depend, to a large
extent, on conditions in agriculture and may be volatile due to factors beyond
our control, such as weather, crop failures, federal agricultural programs,
production efficiencies and U.S. imports and exports. In addition, various
federal and state regulations to protect the environment encourage farmers to
reduce the use of fertilizers and other chemicals. Global variables which
affect supply, demand and price of crude oil, refined fuels, natural gas and
other commodities may impact our operations. Historically, changes in the costs
of raw materials used in the manufacture of Farmland's finished products have
not necessarily resulted in corresponding changes in the prices at which such
products have been sold. Management cannot determine the extent to which these
factors may impact our future operations. Farmland's cash flow and net income
may continue to be volatile as conditions affecting agriculture and markets for
our products change.
The table below shows the increase (decrease) in sales and income by
business segment in each of the years in the three-year period ended 1999,
compared with the respective prior year.
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<PAGE>
<TABLE>
<CAPTION>
Change in Sales
1997 1998 1999
Compared Compared Compared
with 1996 with 1997 with 1998
(Amount in Millions)
<S> <c <C> <c
> >
INCREASE (DECREASE) OF BUSINESS SEGMENT SALES:
Plant Foods............................................. $ (73) $ (94) $ (155)
Crop Protection......................................... - (11) -
Petroleum............................................... 270 (195) (183)
Feed.................................................... 47 (68) 26
Other Operating Units................................... 8 7 117
Pork Processing and Marketing........................... 283 (145) (130)
Livestock Production.................................... - 3 7
Beef Processing and Marketing........................... 55 232 223
North American Grain.................................... (1,221) (133) 116
International Grain..................................... (10) 32 1,913
TOTAL INCREASE (DECREASE) IN BUSINESS SEGMENT SALES....... $ (641) $ (372) $ 1,934
Change in Business Segment Income
1997 1998 1999
Compared Compared Compared
with 1996 with 1997 with 1998
(Amount in Millions)
<S> <C> <C> <C>
INCREASE (DECREASE) OF BUSINESS SEGMENT INCOME OR LOSS:
Plant Foods...................................................... $ (19) $ (112) $ (60)
Crop Protection.................................................. (1) 2 1
Petroleum........................................................ 32 (35) 18
Feed............................................................. (7) 4 5
Other Operating Units............................................ (3) 6 3
Pork Processing and Marketing.................................... (30) 33 19
Livestock Production............................................. 4 (11) (17)
Beef Processing and Marketing.................................... 6 (17) 27
North American Grain............................................. 33 5 8
International Grain.............................................. (6) 21 (3)
TOTAL INCREASE (DECREASE) IN BUSINESS SEGMENT INCOME OR LOSS....... $ 9 $ (104) $ 1
<S> <C> <C> <C>
CORPORATE EXPENSES AND OTHER:
General corporate expenses (increase) decrease................... $ 6 $ (8) $ (26)
Interest expense (increase)...................................... - (11) (17)
Interest income increase......................................... - - 3
Other income and deductions - net increase (decrease)............ (8) 11 (10)
Corporate Equity in net income of investees increase............. 1 3 -
Income taxes decrease............................................ 1 32 $ 4
TOTAL INCREASE (DECREASE) IN NET INCOME............................ $ 9 $ (77) $ (45)
</TABLE>
In computing the change of business segment income or loss, income and
expenses not identified to an industry segment and income taxes have been
excluded. See Note 11 of the Consolidated Financial Statements.
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<PAGE>
Following is management's discussion of business segment sales, segment income
or loss and other factors affecting Farmland's net income during 1997, 1998 and
1999.
PLANT FOODS
SALES
Plant foods unit sales in 1999 were comparable to unit sales in 1998;
however, the average unit selling price for nitrogen-based plant foods decreased
16%. As a result, sales decreased $155.3 million, or 13%, in 1999 as compared
to 1998. The nitrogen plant foods industry has experienced market price
declines due to increased worldwide supplies of nitrogen and decreased demand
for plant foods in response to decreased unit prices that producers realize for
their grain. These adverse conditions were exacerbated by heavy spring rains
throughout Farmland's market area, which restricted the use of fertilizer
products. As a result of the above market conditions, Farmland temporarily
ceased production of urea ammonia nitrate ("UAN") at our Lawrence, Kansas and
Enid, Oklahoma facilities during the fourth quarter of 1999. We expect to
commence production at these facilities in the second quarter of 2000 in order
to meet expected demand during the 2000 year planting season.
In 1998, plant foods unit sales increased 2% compared to 1997. However,
unit prices for nitrogen-based plant foods decreased 15% and unit prices for
phosphate-based plant foods decreased 7%. As a result, crop production sales
decreased $94.4 million, or 7.5%, in 1998 compared with 1997. The decline in
nitrogen-based plant foods prices resulted from pressures of rising capacity and
inventories in the industry combined with decreased demand from East Asia and
China.
Plant foods sales decreased $73.5 million, or 5.5%, in 1997 compared with
1996. This decrease was primarily a result of lower unit sales of phosphate and
nitrogen plant foods and lower phosphate-based plant foods prices partially
offset by higher nitrogen prices.
INCOME
Income of the plant foods segment decreased from $93.0 million in 1998 to
$32.6 million in 1999. This decrease was primarily attributable to lower unit
margins on nitrogen plant foods products. Unit margins declined as additional
global plant foods production capacity combined with reduced domestic demand
continued to decrease selling prices of nitrogen products in 1999. Partially
offsetting the decline in gross margin, plant foods realized a $7.7 million gain
on the sale of phosphate rock reserves, a $4.1 million gain on futures positions
closed as a result of anticipated natural gas purchases which will not occur and
$4.3 million from settlement of litigation related to the acquisition of raw
materials.
Income of the plant foods segment decreased $112.2 million, or 55%, in
1998 compared with 1997. This decrease was primarily a result of lower nitrogen
plant foods unit margins partially offset by higher unit margins for phosphate
plant foods. Nitrogen margins decreased primarily due to lower selling prices
which declined as a result of additional global plant foods production capacity
combined with lower demand in the East Asian market, particularly China.
Income of the plant foods segment decreased $19.4 million, or 9%, in 1997
compared with 1996. This decrease was primarily a result of higher natural gas
costs which resulted in lower nitrogen plant foods unit margins and by a $2.3
million decrease in our share of net income from crop production ventures. The
effect of this decrease was partially offset by higher unit margins related to
the distribution of phosphate plant foods.
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<PAGE>
CROP PROTECTION
SALES
Sales of crop protection products are conducted primarily through two 50%-
owned ventures, WILFARM LLC ("WILFARM") and Omnium LLC ("Omnium"), and are not
included in consolidated sales.
INCOME
Income of the crop protection primarily consists of Farmland's share of
venture income, which increased $0.8 million in 1999 as compared to 1998. The
majority of this increase was attributable to a full year effect on WILFARM's
margins of its seed business. WILFARM added seed to its product line in 1998.
Income of the crop protection business increased $2.4 million in 1998 from
1997. Farmland's share of WILFARM's income increased $1.4 million, is due to
improved operational efficiencies coupled with the expansion of the geographic
market area into the mid-South (Arkansas, Alabama, Mississippi and Louisiana).
In addition, WILFARM's margins improved due to a favorable shift of its product
sales mix. The increase in Omnium, $0.8 million, is a result of improved
production volumes and efficiencies compared with 1997.
Income for the crop protection business decreased $1.2 million in 1997 as
compared to 1996. The decrease is primarily attributable to WILFARM, which had
lower margins combined with increased expenses.
PETROLEUM
SALES
Sales of the petroleum business decreased $182.8 million, or 16%, in 1999
compared to 1998. This decrease resulted in a 12% decrease in unit sales for
refined fuels (gasoline, distillates and diesel) and a decrease in the average
unit price for refined fuels and propane of 16% and 12%, respectively. The
price decline was primarily due to a temporary excess of product supplies in the
market relative to demand.
In 1998, unit sales of refined fuels increased by 7.5% compared to 1997.
However, dollar sales of this business segment decreased by $194.9 million, or
15%, primarily due to a 15% decrease in the average unit price of refined fuels
and a 29% decrease in the average unit price of propane.
Sales of the petroleum business increased $270.2 million, or 25%, in 1997
compared with 1996. This increase was principally attributable to expansion of
capacity at the Coffeyville, KS refinery, which enabled us to increase unit
sales of refined fuels. In addition, unit prices for these products were higher
than in 1996.
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<PAGE>
INCOME
The petroleum business segment had income of $20.5 million in 1999
compared to $2.6 million in 1998. The increase in income is primarily a result
of volatile market prices for energy products. In 1998, market prices fell
sharply and we reduced our income and the carrying value of inventories by
approximately $27.6 million to reflect this market value decline. In 1999, the
market value increased. We increased income and the carrying value of petroleum
inventories by $27.6 million to reflect this market value increase. In
addition, we placed the operations of the Coffeyville refining in a venture
which commenced operations on September 1, 1999. In anticipation of the
venture's operations, we were able to liquidate certain LIFO inventories and
realize a $14.5 million gain. These increases in income were partially offset
by strong industry-wide production of refined fuels combined with lower demand
for these products, which reduced the spread between crude oil costs and refined
product selling prices.
The petroleum business segment had income of $2.6 million in 1998 compared
with $37.3 million in 1997. This decrease resulted primarily from the $27.6
million adjustment of year-end LIFO inventories to market value as explained
above. Petroleum operating income also decreased as finished goods prices
declined more than crude oil prices declined, resulting in lower unit margins.
Segment income of the petroleum business increased $32.0 million in 1997
compared with 1996. This increase was primarily a result of higher margins
coupled with increased unit sales. The higher margins are primarily
attributable to an increase in the difference between crude oil prices and
finished product prices, the ability of the refinery to process crude oil
streams containing a higher proportion of sulfur and to production efficiencies
resulting from increased refinery capacity.
FEED
SALES
Sales of the feed business increased $25.8 million in 1999 compared with
1998. This increase resulted primarily from higher unit sales due to geographic
expansion partially offset by lower per ton selling prices for livestock feed
and feed ingredients.
Sales of the feed business decreased $68.3 million in 1998 compared with
1997. The decrease resulted primarily from lower prices. Unit sales were
approximately the same volume as in the prior year.
Sales of the feed business increased $47.2 million in 1997 compared with
1996. This increase resulted primarily from higher unit prices of feed
ingredients combined with a slight increase in volume.
INCOME
Income of the feed business increased $4.7 million in 1999 compared to
1998. The increase was primarily due to higher unit margins on
pet/specialty/equine feeds.
Income of the feed business increased $4.0 million in 1998 compared with
1997. The increase was primarily attributable to higher margins per ton in
livestock feed, feed ingredients and pet/specialty/equine feeds as well as lower
expenses.
Income of the feed business decreased $6.7 million in 1997 compared with
1996. This decrease was primarily attributable to declining sales through
traditional local cooperative channels and an increase in sales to lower margin
commercial accounts.
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<PAGE>
PORK PROCESSING AND MARKETING
SALES
Sales from the pork processing and marketing business decreased $130.4
million in 1999 compared with 1998. The decrease was attributable to decrease
in unit sales price of approximately 11% partly offset by a 3% increase in the
number of hogs processed.
The Company's pork processing and marketing business sales decreased $145.2
million in 1998 compared with 1997. The decrease was attributable to a decrease
in hog prices partly offset by a 9% increase in the number of hogs processed.
The Company's pork processing and marketing business sales increased $283.5
million in 1997 compared with 1996. The increase was largely attributable to
increased unit volume primarily resulting from the operations of pork processing
plants acquired during the third and fourth quarters of 1996.
INCOME
Income of the pork processing and marketing segment increased $19.0 million
in 1999 compared with 1998. The increase was primarily due to increased gross
margins as the decline in live hog prices was greater than the decline in the
selling price of fresh pork. This increase in gross margins was partially
offset by an increase in promotional, advertising and storage expenses.
Income of the Company's pork processing and marketing segment increased
$33.0 million in 1998 compared with 1997. The increase was primarily due to
increased gross margins in pork processing.
Income of the pork processing and marketing segment decreased $29.9 million
in 1997 compared with 1996. The decrease was primarily due to increased cost of
live hogs and to the increased selling and administrative expenses related to
the pork processing business.
LIVESTOCK PRODUCTION
INCOME
The livestock production segment had a loss of $24.8 million in 1999
compared to a loss of $8.2 million in 1998. The increased loss was primarily
due to lower live hog prices partially offset by lower selling and
administrative expenses.
The livestock production segment had a loss of $8.2 million in 1998
compared to income of $3.3 million in 1997. The decrease was primarily due to
lower live hog prices.
The livestock production segment had income of $3.3 million in 1997
compared with a loss of $0.7 million in 1996. This improvement was primarily
due to an increase in live hog prices.
BEEF PROCESSING AND MARKETING
SALES
Sales from beef processing and marketing business increased $223.0 million
in 1999 compared with 1998. The increase was attributable to higher unit sales
prices.
Beef processing and marketing business sales increased $232.1 million in
1998 compared with 1997. The increase was attributable to increases of
approximately 15% in the number of cattle processed partly offset by lower
wholesale prices for beef.
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<PAGE>
Beef processing and marketing business sales increased $54.9 million in
1997 compared with 1996. This increase was due to the increase of the number of
cattle processed and higher wholesale prices for beef.
INCOME
Income of the beef processing and marketing segment increased $27.5 million
in 1999 compared with 1998. The increase was primarily due to increased selling
prices, stable cost of raw product, and a decrease in selling and administrative
expenses.
Income of the beef processing and marketing segment decreased $17.5 million
in 1998 compared with 1997. The decrease was primarily due to lower unit margin
partially offset by an increase in the number of cattle processed.
Income of the beef processing and marketing segment increased $6.4 million
in 1997 compared with 1996. The increase was primarily due to increased beef
unit sales and increased margin per head of cattle.
NORTH AMERICAN GRAIN
SALES
North American grain sales increased $116.3 million, or 6% in 1999 compared
to 1998. This increase is primarily due to an increase in unit sales related to
feed grains.
In 1998, unit sales increased 4%. However, commodity prices decreased and
sales declined from $2.2 billion in 1997 to $2.1 billion in 1998.
North American grain sales decreased $1.2 billion in 1997 compared with
1996. This decrease resulted from decreases in both unit sales (primarily due
to a reduction in export sales) and unit prices.
INCOME
North American grain's segment income increased $7.7 million in 1999
compared to 1998. The increase is a result of increased margins and reduced
expenses.
North American grain income increased $4.9 million in 1998 compared with
1997. This increase resulted primarily from higher storage revenues.
The North American grain segment had income of $2.5 million in 1997
compared with a loss of $30.9 million in 1996. This increase in operating
income was primarily attributable to higher margins combined with increased
storage income.
INTERNATIONAL GRAIN
SALES
International Grain's sales increased $1.9 billion in 1999 compared to
1998. The primary cause of this increase in sales is the change in Tradigrain's
business from grain brokerage operations to buy/sell operations. Due to this
change, it is appropriate for Tradigrain to record the full value of the grain
sold as revenue ($2.0 billion in 1999) and the related cost of grain acquisition
as cost of goods sold ($1.9 billion in 1999), rather than recognizing as revenue
only the net margins on grain transactions. For 1997 and 1998, the net margin
recognized as revenue totaled $31.2 million and $63.5 million, respectively.
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<PAGE>
The gross value of these transactions for 1997 and 1998 totaled $2.3 billion and
$1.7 billion, respectively.
INCOME
Income of the international grain business decreased $2.7 million in 1999
compared to 1998 primarily as a result of increased administrative expenses.
Income of the international grain business increased $21.2 million in 1998
compared to 1997. This increase was primarily attributable to higher margins on
wheat, oil, and meal and lower selling, general and administrative expenses.
Income of the international grain business decreased $5.8 million in 1997
compared to 1996. In the ordinary course of its international grain trading
business, Tradigrain may take long or short positions in grain. In 1997, a late
spring freeze in certain wheat producing areas of the United States caused
short-term grain market price volatility. The grain market price movement
adversely impacted the market value of Tradigrain's grain positions and its
operating results for that year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SGA increased $48.8 million, or 11%, in 1999 compared with 1998. SGA
directly associated with business segments increased $22.7 million (primarily
related to the pork business and acquisition of SF Services, Inc.) and has been
included in the determination of the operating income of business segments.
General corporate expenses not identified to business segments increased $26.1
million primarily as a result of the increased cost of management information
systems and increased expenses related to geographic expansion.
Selling, general and administrative expenses ("SG&A") increased $22.6
million, or 5.5%, in 1998 compared with 1997. SG&A directly associated with
business segments increased $15.1 million (primarily related to the grain
marketing and meats businesses) and has been included in the determination of
the operating income of business segments. General corporate expenses not
identified to business segments increased $7.5 million primarily as a result of
the increased cost of management information systems and the acquisition of SF
Services, Inc.
SG&A increased $40.4 million, or 11%, in 1997 compared with 1996.
SG&A directly associated with business segments increased $45.8 million
(primarily associated with the food processing and marketing segment) and has
been included in the determination of the operating income of business segments.
General corporate expenses not identified to business segments decreased $5.4
million primarily as a result of lower employee-related costs.
OTHER INCOME (DEDUCTIONS)
INTEREST EXPENSE
Interest expense increased $17.1 million in 1999 compared with 1998,
primarily reflecting higher average borrowings.
Interest expense increased $11.3 million in 1998 compared with 1997,
primarily reflecting higher average borrowings.
Interest expense decreased $0.1 million in 1997 compared with 1996,
reflecting lower average borrowings offset by a slight increase in the average
interest rate.
OTHER, NET
Other income was $43.3 million in 1999, $30.3 million in 1998, and $22.5
million in 1997. Significant components of the increase in 1999 compared to
1998 include a $7.7 million gain on the sale of phosphate rock reserves, $4.3
million from litigation relating to the purchase of raw materials (natural
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<PAGE>
gas) consumed in producing nitrogen fertilizers and $4.1 million from closing
futures contracts used to hedge anticipated purchase of natural gas which
purchases are no longer anticipated due to temporary suspension of production of
the Enid, Oklahoma and Lawrence, Kansas UAN facilities, and have been included
in the income of the plant foods business segment..
The increase in 1998 compared to 1997 of $7.8 million is principally a
gain of $7.2 million on the sale of a 3.8% interest in National Beef Packing Co.
L.P. and a $2.2 million gain on the sale of Cooperative Service Company, a
wholly owned subsidiary engaged in insurance and auditing services.
CAPITAL EXPENDITURES
See "Business and Properties - Business - Capital Expenditures and
Investments in Ventures."
MATTERS INVOLVING THE ENVIRONMENT
Farmland 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 we use hazardous substances
and generate hazardous wastes in the ordinary course of our manufacturing
processes. Liabilities related to remediation of contaminated properties are
recognized 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 Farmland's share of
costs attributable to potentially responsible parties 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.
Farmland wholly or jointly owns or operates 27 grain elevators and 65
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. Farmland also has been identified as a
potentially responsible party ("PRP") under the federal Comprehensive
Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA") at
various National Priority List sites and has unresolved liability with respect
to the past disposal of hazardous substances at five such sites. CERCLA may
impose joint and several liability on certain statutory classes of persons for
the costs of investigation and remediation of contaminated properties,
regardless of fault or the legality of the original disposal. These persons
include the present and former owners or operators of a contaminated property
and companies that generated, disposed of, or arranged for the disposal of
hazardous substances found at the property. We are investigating or remediating
contamination at 31 properties under CERCLA and/or the state and federal
hazardous waste management laws. During 1997, 1998 and 1999, we paid
approximately $4.6 million, $3.1 million and $7.2 million, respectively, for
environmental investigation and remediation.
Farmland currently is aware of probable obligations for environmental
matters at 41 properties. As of August 31, 1999, we had an environmental
accrual in our Consolidated Balance Sheet for probable and reasonably estimated
cost for remediation of contaminated property of $13.3 million. We periodically
review and, as appropriate, revise our environmental accruals. Based on current
information and regulatory requirements, we believe that the accruals
established for environmental expenditures are adequate. Farmland has also
recorded, as a receivable, approximately $4.0 million of estimated, probable
insurance proceeds related to an environmental issue which has been remediated.
Some environmental matters are in preliminary stages and the timing, extent and
costs of actions which governmental authorities may require are currently
unknown. As a result, certain costs of addressing environmental matters are
either not probable or not reasonably estimable and, therefore, have not been
accrued. In management's opinion, it is reasonably possible that Farmland may
incur $9.7 million of costs in addition to the $13.3 million which has been
accrued.
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<PAGE>
Under the Resource Conservation Recovery Act of 1976 (' 'RCRA''),
Farmland has three closure and four post-closure plans in place for five
locations. Closure and post-closure plans also are in place for three landfills
and two injection wells as required by state regulations. Such closure and post-
closure costs are estimated to be $4.9 million at August 31, 1999 (and is in
addition to the $9.7 million discussed in the prior paragraph). These
liabilities are accrued when plans for termination of plant operations have been
made. Operations are being conducted at these locations and we do not plan to
terminate such operations in the foreseeable future. Therefore, these
environmental exit costs have not been accrued.
There can be no assurance that the environmental matters described
above, or environmental matters which may develop in the future, will not have a
material adverse effect on our business, financial condition or results of
operations.
Protection of the environment requires us to incur expenditures for
equipment or processes. These expenditures may impact our future net income.
However, we do not anticipate that our 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 1997, 1998 and 1999, Farmland had capital
expenditures of approximately $8.4 million, $8.7 million and $6.5 million,
respectively, to improve our environmental compliance and the efficiency of our
operations. Management believes we currently are in substantial compliance with
existing environmental rules and regulations.
RECENT ACCOUNTING PRONOUNCEMENTS
Statements of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities" was issued in June 1998 by
the FASB and is effective for fiscal periods beginning after June 15, 2000 as a
result of SFAS No. 137. Farmland is currently evaluating the impact, if any,
that adoption of the provisions of SFAS No. 133 will have on its financial
statements.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
Farmland is including the following cautionary statement in this Form to
make applicable and take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 for any forward-looking
statement made by, or on behalf of, Farmland. The factors identified in this
cautionary statement are important factors (but not necessarily all important
factors) that could cause actual results to differ materially from those
expressed in any forward-looking statement made by, or on behalf of, Farmland.
Where any such forward-looking statement includes a statement of the
assumptions or basis underlying such forward-looking statement, Farmland
cautions that, while it believes such assumptions or basis to be reasonable and
makes them in good faith, assumed facts or basis almost always vary from actual
results and the differences between assumed facts or basis and actual results
can be material, depending upon the circumstances. Where, in any forward-
looking statement, Farmland, or its management, expresses an expectation or
belief as to future results, such expectation or belief is expressed in good
faith and believed to have a reasonable basis, but there can be no assurance
that the statement of expectation or belief will result or be achieved or
accomplished. Such forward looking statements include, without limitation,
statements regarding the seasonal effects upon the business, the effects of
actual, pending and possible legislation and regulation (including, but not
limited to, the effects of FAIR, "fast-track" and certain environmental laws),
the anticipated expenditures for environmental remediation, the consequences of
an adverse judgment in certain litigations (including the Terra litigation), our
ability to fully and timely complete modifications and expansions with respect
to certain manufacturing facilities, the redemption of the our various equities,
the adequacy of certain raw material reserves and supplies, our ability to
complete our unification with Cenex Harvest States, and the Company's ability to
resolve Year 2000 issues with respect to its financial, informational and
operational systems. Discussion containing such forward-looking statements is
found in the material set forth under
Page 30
<PAGE>
"Business and Properties" (including, without limitation, "Business Risk
Factors"), "Market for the Registrant's Common Equity and Related Stockholder
Matters", "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Notes to Consolidated Financial Statements", as well
as within this Form 10-K generally.
Taking into account the foregoing, the following are identified as
important factors that could cause actual results to differ materially from
those expressed in any forward-looking statement made by, or on behalf of,
Farmland:
1.Weather patterns (flood, drought, frost, etc.) or crop failure.
2.Federal or state regulations regarding agricultural programs and production
efficiencies.
3.Federal or state regulations regarding the amounts of fertilizer and other
chemical applications used by farmers.
4.Factors affecting the export of U.S. agricultural produce (including foreign
trade and monetary policies, laws and regulations, political and governmental
changes, inflation and exchange rates, taxes, operating conditions and world
demand).
5.Factors affecting supply, demand and price of crude oil, refined fuels,
natural gas and other commodities.
6.Regulatory delays and other unforeseeable obstacles beyond our control that
may affect growth strategies through unification (including our proposed
unification with Cenex Harvest States), acquisitions and investments in
ventures.
7.Competitors in various segments which may be larger than Farmland, offer more
varied products or possess greater resources.
8.Technological changes (including "Year 2000" compliance issues) are more
difficult or expensive to implement than anticipated.
9.Unusual or unexpected events such as, among other things, litigation
settlements, adverse rulings or judgments and environmental remediation costs
in excess of amounts accrued.
10.The factors identified in "Business and Properties - Business - Business Risk
Factors".
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
SENSITIVITY ANALYSIS
Farmland is exposed to various market risks, including commodity price
risk, foreign currency risk and interest rate risk. To manage the volatility
related to these risks, we enter into various derivative transactions pursuant
to our policies in areas such as counterparty exposure and hedging practices.
Within limits approved by the Board of Directors, our international grain
trading subsidiary, Tradigrain, may take net long or short commodity positions.
Otherwise, Farmland does not hold or issue derivative instruments for trading
purposes. Commodities to which we have risk exposure include: feedgrains,
wheat, oilseeds, sugar, cattle, hogs, natural gas, crude oil and refined fuels.
Farmland maintains risk management control systems to monitor its commodity
risks and the offsetting hedge positions.
The following table presents one measure of market risk exposure using
sensitivity analysis. Market risk exposure is defined as the change in the fair
value of the derivative commodity instruments assuming a hypothetical change of
10% in market prices. Actual changes in commodity market prices
Page 31
<PAGE>
may differ from hypothetical changes. Fair value was determined for derivative
commodity contracts using the average quoted market prices for the three near-
term contract periods. For derivative commodity instruments, fair value was
based on the Company's net position by commodity at year-end. The market risk
exposure excludes the underlying positions that are being hedged. The
underlying commodities hedged have a high inverse correlation to price changes
of the derivative commodity instruments.
Effect of 10% Change in Fair Value
As of August 31
(Amounts in Millions)
DERIVATIVE COMMODITY CONTRACTS:
1998 1999
Grains:
Trading.................... $10.4 $18.9
Other than trading......... $ 6.5 $23.0
Energy, other than trading... $11.2 $11.3
Meats, other than trading.... $ 0.6 $ 3.2
Farmland uses interest rate swaps to hedge a portion of its variable
interest rate exposure and uses foreign currency forward contracts to hedge its
exposure related to certain foreign currency denominated transactions. Assuming
an adverse interest rate movement of 100 basis points, the impact on fair value
of interest positions held at August 31, 1998 and 1999 would be $3.1 million and
$1.6 million, respectively. Assuming an adverse movement in the foreign
currency spot price of 10%, the impact on fair value of currency positions held
at August 31, 1998 and 1999 would be $4.1 million and $2.6 million,
respectively. Market risk on other than trading transactions is not material to
our results of operations or financial position, as we have offsetting physical
positions. The market risk of trading positions is unlikely to have a material
impact on our financial position, but could have a material impact on our
results of operations.
Page 32
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FARMLAND CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report ...............................34
Consolidated Balance Sheets, August 31, 1998 and
1999 .......................................................35
Consolidated Statements of Operations for each of
the years in the three-year period ended August
31, 1999 ...................................................37
Consolidated Statements of Cash Flows for each of
the years in the three-year period ended August
31, 1999 ...................................................38
Consolidated Statements of Capital Shares and
Equities for each of the years in the three-year
period ended August 31, 1999 ...............................40
Notes to Consolidated Financial Statements .................41
Page 33
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Farmland Industries, Inc.:
We have audited the accompanying consolidated balance sheets of Farmland
Industries, Inc. and subsidiaries as of August 31, 1998 and 1999, and the
related consolidated statements of operations, cash flows and capital shares and
equities for each of the years in the three-year period ended August 31, 1999.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Farmland Industries,
Inc. and subsidiaries as of August 31, 1998 and 1999, and the results of their
operations and their cash flows for each of the years in the three-year period
ended August 31, 1999, in conformity with generally accepted accounting
principles.
KPMG LLP
Kansas City, Missouri
October 15, 1999
Page 34
<PAGE>
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
August 31
1998 1999
(Amounts in Thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents.................................$ 7,334 $ 0
Accounts receivable - trade............................... 596,415 794,237
Inventories (Note 2)...................................... 725,967 840,504
Deferred income taxes (Note 6)............................ 61,844 49,495
Other current assets...................................... 145,151 153,833
Total Current Assets.................................$ 1,536,711 $ 1,838,069
Investments and Long-Term Receivables (Note 3) $ 298,402 $ 329,729
Property, Plant and Equipment (Notes 4 and 5):
Property, plant and equipment, at cost....................$ 1,680,373 $ 1,744,252
Less accumulated depreciation and amortization............ 853,224 911,049
Net Property, Plant and Equipment.........................$ 827,149 $ 833,203
Other Assets................................................$ 212,356 $ 256,648
Total Assets................................................$ 2,874,618 $ 3,257,649
FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
</TABLE>
PAGE 35
<PAGE>
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND EQUITIES
<TABLE>
<CAPTION>
August 31
1998 1999
(Amounts in Thousands)
<S> <C> <C>
Current Liabilities:
Short-term notes payable (Note 5)...................................... $ 408,639 $ 546,180
Current maturities of long-term debt (Note 5).......................... 38,946 44,771
Accounts payable - trade............................................... 330,043 463,296
Other current liabilities.............................................. 323,601 333,383
Total Current Liabilities......................................... $ 1,101,229 $ 1,387,630
Long-term Liabilities:
Long-term borrowings (excluding current maturities) (Note 5)........... $ 728,103 $ 808,413
Other long-term liabilities............................................ 31,942 40,212
Total Long-Term Liabilities....................................... $ 760,045 $ 848,625
Deferred Income Taxes (Note 6)........................................... $ 65,177 $ 63,058
Minority Owners' Equity in Subsidiaries (Note 7) $ 35,471 $ 41,009
Capital Shares and Equities (Note 8):
Preferred shares, Authorized 8,000,000 shares, 8% Series A cumulative
redeemable preferred shares, stated at redemption value, $50 per share,
2,000,000 shares issued and outstanding ............................... $ 100,000 $ 100,000
Other preferred shares, $25 par value, 2,743 shares issued and
outstanding (2,838 shares in 1998) .... 71 69
Common shares, $25 par value -
Authorized 50,000,000 shares,
20,321,160 shares issued and outstanding
(18,072,136 shares in 1998) ........................................... 451,804 508,029
Associate member common shares
(nonvoting), $25 par value - Authorized 2,000,000 shares, 1,075,560
shares issued and outstanding
(1,140,304 shares in 1998) ............................................ 28,508 26,889
Earned surplus and other equities...................................... 332,313 282,340
Total Capital Shares and Equities................................. $ 912,696 $ 917,327
Contingent Liabilities and Commitments (Notes 5, 6 and 9)
Total Liabilities and Equities.............................................$ 2,874,618 $ 3,257,649
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
</TABLE>
Page 36
<PAGE>
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended August 31
1997 1998 1999
(Amounts in Thousands)
<S> <C> <C> <C>
Sales....................................................... $ 9,147,507 $ 8,775,046 $ 10,709,073
Cost of sales............................................... 8,580,826 8,299,505 10,231,081
Gross income................................................ $ 566,681 $ 475,541 $ 477,992
Selling, general and administrative expenses................ $ 409,378 $ 431,999 $ 480,839
Other income (expense):
Interest expense......................................... $ (62,335) $ (73,645) $ (90,773)
Interest income.......................................... 5,352 5,436 8,337
Other, net (Note 15)..................................... 22,486 30,265 43,322
Total other income (expense)................................ $ (34,497) $ (37,944) $ (39,114)
Income (loss) before equity in net income of investees,
minority owners interest in net income of subsidiaries
and income tax (expense) benefit......................... $ 122,806 $ 5,598 $ (41,961)
Equity in net income of investees (Note 3).................. 49,551 56,434 65,510
Minority owners' interest in net income
of subsidiaries.......................................... (8,684) (7,005) (17,727)
Net income before income taxes (Note 6) 163,673 55,027 5,822
Income tax (expense) benefit (Note 6)....................... (28,250) 3,743 8,043
Net income ................................................. $ 135,423 $ 58,770 $ 13,865
Distribution of net income (Note 8):
Patronage refunds:
Farm supply patrons.................................. $ 101,262 $ 51,513 $ 20,320
Pork marketing patrons............................... -0- 1,274 4,050
Beef marketing patrons............................... 6,458 3,817 5,420
Grain marketing patrons.............................. 585 2,517 479
Livestock production................................. 2 -0- 0
$ 108,307 $ 59,121 $ 30,269
Earned surplus and other equities........................ 27,116 (351) (16,404)
$ 135,423 $ 58,770 $ 13,865
<FN>
See accompanying Notes to Consolidated Financial statements.
</FN>
</TABLE>
Page 37
<PAGE>
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended August 31
1997 1998 1999
(Amounts in Thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................... $ 135,423 $ 58,770 $ 13,865
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization............................... 90,351 101,833 109,184
Equity in net income of investees........................... (49,551) (56,434) (65,510)
Minority owners' equity in net
income of subsidiaries.................................... 8,684 7,005 17,727
(Gain) loss on disposition of investments................... (552) (9,450) 189
Patronage refunds received in equities...................... (1,830) (1,099) (2,143)
Proceeds from redemption of patronage equities.............. 5,106 6,546 4,598
Deferred income taxes....................................... (1,469) (641) 10,230
Adjustment of LIFO inventories.............................. -0- 27,593 (27,593)
Other....................................................... 1,951 1,029 (4,028)
Changes in assets and liabilities (exclusive
of assets and liabilities of businesses acquired):
Accounts receivable....................................... 27,644 25,398 (181,454)
Inventories............................................... (9,343) 17,295 (76,190)
Other assets.............................................. 6,249 6,893 (30,592)
Accounts payable.......................................... (26,091) (67,286) 105,028
Other liabilities......................................... 35,736 (79,784) (35,791)
Net cash provided by (used in) operating activities........... $ 222,308 $ 37,668 $ (162,480)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.......................................... $ (158,655) $ (108,837) $ (121,184)
Distributions from joint ventures............................. 55,238 57,635 54,121
Acquisition of investments and notes receivable............... (46,243) (69,466) (69,811)
Acquisition of other long-term assets......................... (25,724) (27,267) (38,240)
Proceeds from sale of investments
and collection of notes receivable.......................... 24,758 40,884 61,993
Proceeds from sale of fixed assets............................ 6,895 20,632 22,023
Acquisition of businesses, net of cash acquired............... (3,515) (2,766) (5,829)
Other......................................................... -0- 2,642 (233)
Net cash used in investing activities......................... $ (147,246) $(86,543) $ (97,160)
<FN>
See accompanying Notes to Consolidated Financial Statements
</FN>
</TABLE>
Page 38
<PAGE>
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
Year Ended August 31
1997 1998 1999
(Amounts in Thousands)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of patronage refunds.............................. $ (32,511) $ (40,449) $ (23,593)
Payments for redemption of equities........................ (25,440) (80,243) (9,050)
Payments of dividends on preferred shares.................. (4) (4,937) (8,004)
Proceeds from bank loans and notes payable................. 337,407 612,634 2,739,865
Payments of bank loans and notes payable................... (416,715) (516,391) (2,624,938)
Proceeds from issuance of subordinated debt
certificates........................................... 86,132 99,309 121,630
Payments for redemption of subordinated
debt certificates...................................... (37,455) (66,000) (20,376)
Net increase (decrease) in checks
and drafts outstanding................................. 16,299 (47,243) 76,128
Proceeds from issuance of preferred shares................. -0- 100,000 -0-
Other increase (decrease).................................. (2,775) (471) 644
Net cash provided by (used in) financing activities........ $ (75,062) $ 56,209 $ 252,306
Net increase (decrease) in cash and cash equivalents....... $ -0- $ 7,334 $ (7,334)
Cash and cash equivalents at beginning of year............. -0- -0- 7,334
Cash and cash equivalents at end of year................... $ -0- $ 7,334 $ -0-
SUPPLEMENTAL SCHEDULE OF CASH PAID FOR INTEREST AND INCOME
TAXES:
Interest................................................... $ 57,650 $ 76,087 $ 77,143
Income tax expense (benefit), net of refunds............... $ 13,922 $ 13,446 $ (4,045)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Equities and minority owners' interest called
for redemption......................................... $ 28,579 $ 8,868 $ -0-
Transfer of assets in exchange for investment in
joint ventures......................................... $ 10,292 $ 4,601 $ 300
Appropriation of current year's net income as
patronage refunds...................................... $ 108,307 $ 59,121 $ 30,269
Acquisition of businesses:
Fair value of assets acquired.......................... $ -0- $ 168,409 $ 32,883
Goodwill............................................... 2,550 14,819 14,574
Minority owners' investment............................ 965 -0- -0-
Equity issuable........................................ -0- (26,323) -0-
Cash paid or payable................................... (3,515) (2,766) (7,750)
Liabilities assumed........................................$ -0- $ 154,139 $ 39,707
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
</TABLE>
Page 39
<PAGE>
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITAL SHARES AND EQUITIES
<TABLE>
<CAPTION>
Years Ended August 31, 1997, 1998 and 1999
Associate Earned Total
Member Surplus Capital
Preferred Common Common and Other Shares and
Shares Shares Shares Equities Equities
(Amounts in Thousands)
<S> <C> <C> <C> <C> <C>
BALANCE AT AUGUST 31, 1996......................... $ 1,264 $ 414,503 $ 15,576 $ 323,988 $ 755,331
Appropriation of current year's net income......... -0- -0- -0- 135,423 135,423
Patronage refund payable in cash transferred
to current liabilities........................... -0- -0- -0- (40,228) (40,228)
Base capital redemptions transferred
to current liabilities........................... -0- (16,783) (444) -0- (17,227)
Other equity redemptions transferred
to current liabilities........................... (1,189) (6,737) (302) (2,963) (11,191)
Prior year patronage refund allocation............. -0- 53,269 5,640 (59,103) (194)
Dividends on preferred shares...................... -0- -0- -0- (4) (4)
Exchange of common shares, associate
member common shares and other equities.......... -0- (2,566) 1,929 637 -0-
Issue, redemption and cancellation of equities..... (3) 326 (151) (89)
BALANCE AT AUGUST 31, 1997......................... $ 72 $ 442,012 $ 22,248 $ 357,661 $ 821,993
Appropriation of current year's net income......... -0- -0- -0- 58,770 58,770
Patronage refund payable in cash transferred
to current liabilities........................... -0- -0- -0- (23,593) (23,593)
Base capital redemptions transferred
to current liabilities........................... -0- (8,738) (130) -0- (8,868)
Prior year patronage refund allocation............. -0- 60,238 7,551 (67,789) -0-
Dividends on preferred shares...................... -0- -0- -0- (6,933) (6,933)
Exchange of common shares, associate
member common shares and other equities.......... -0- (2,058) 123 1,935 -0-
Equity issuable for purchase of
SF Services, Inc................................. -0- -0- -0- 26,323 26,323
Issue, redemption and cancellation of equities..... 99,999 (39,650) (1,284) (14,061) 45,004
BALANCE AT AUGUST 31, 1998......................... $ 100,071 $ 451,804 $ 28,508 $ 332,313 $ 912,696
Appropriation of current year's net income......... 0 0 0 13,865 13,865
Patronage refund payable in cash transferred
to current liabilities .... 0 0 0 (6,054) (6,054)
Prior year patronage refund allocation............. 0 32,481 3,046 (35,527) 0
Dividends on preferred stock....................... 0 0 0 (8,004) (8,004)
Exchange of common stock, associate member
common stock and other equities 0 (1,821) (1,393) 3,214 0
Issue, redemption and cancellation of equities.... (2) 25,565 (3,272) (17,467) 4,824
BALANCE AT AUGUST 31, 1999......................... $ 100,069 $ 508,029 $ 26,889 $ 282,340 $ 917,327
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
</TABLE>
Page 40
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Farmland Industries, Inc., a Kansas corporation, is organized and
operated as a cooperative and its mission is to be a global, consumer-driven,
producer-owned, farm-to-table cooperative system.
General -- The consolidated financial statements include the accounts
of Farmland Industries, Inc. and all of its majority-owned subsidiaries
("Farmland", "we", "us", "our", or the "Company", unless the context requires
otherwise). All significant intercompany accounts and transactions have been
eliminated. When necessary, the financial statements include amounts based on
informed estimates and judgments of management. Our fiscal year ends August 31.
Accordingly, all references to "year" or "years" are to fiscal years ended
August 31.
Cash and Cash Equivalents -- Investments with maturities of less than
three months are included as cash and cash equivalents.
Investments -- Investments in companies over which Farmland exercises
significant influence (20% to 50% voting control) are accounted for by the
equity method. Other investments are stated at cost, less any provision for
impairment which is other than temporary.
Accounts Receivable - Farmland uses the allowance method to account
for doubtful accounts and notes.
Inventories -- Grain inventories are valued at market adjusted for net
unrealized gains or losses on open commodity contracts. Crude oil and refined
petroleum products are valued at the lower of last-in, first-out ("LIFO") cost
or market. Other inventories are valued at the lower of first-in, first-out
("FIFO") cost or market. Supplies are valued at cost.
Property, Plant and Equipment -- Assets, including assets under
capital leases, are stated at cost. Depreciation and amortization are computed
principally using the straight-line method over the estimated useful lives of
the assets and the remaining terms of the capital leases, respectively.
Goodwill and Other Intangible Assets -- The excess of cost over the
fair market value of assets of businesses purchased is amortized on a
straight-line basis over a period of 15 to 25 years. Farmland assesses the
recoverability of goodwill and measures impairment, if any, by determining
whether the unamortized balance can be recovered over its remaining life through
undiscounted future operating cash flows. Goodwill is reflected in the
accompanying Consolidated Balance Sheets net of accumulated amortization of
$16.4 million and $18.4 million, respectively, at August 31, 1998 and 1999.
Other intangible assets, primarily software, are amortized over three to ten
years.
Sales - Farmland recognizes sales at the time product is shipped.
Farmland's international grain trading business ("Tradigrain") has changed from
a grain brokerage operation to a buy/sell operation. Accordingly, only the net
margins of the international grain business were included in sales during 1997
and 1998. Sales and cost of sales for 1999 include the gross value of the
international grain business transactions. Consistent with this change,
Tradigrain's 1999 bank borrowings and repayments have been included as cash
flows from financing activities.
Derivative Commodity Instruments -- Farmland uses derivative commodity
instruments, including forward contracts, futures and options contracts,
primarily to reduce its exposure to risk of loss from changes in commodity
prices. Derivative commodity instruments which are designated
Page 41
<PAGE>
as hedges and for which changes in value exhibit high correlation to changes in
value of the underlying position are accounted for as hedges.
Gains and losses on hedges of inventory are deferred as part of the carrying
amount of the related inventories and, upon sale of the inventory, recognized in
cost of sales. Gains and losses related to qualifying hedges of firm
commitments or anticipated transactions also are deferred and are recognized as
an adjustment to the carrying amounts of the commodities when the underlying
hedged transaction occurs. When a qualifying hedge is terminated or ceases to
meet the specified criteria for use of hedge accounting, any deferred gains or
losses through that date continue to be deferred. To the extent an anticipated
transaction is no longer likely to occur, related hedges are closed with gains
or losses charged to operations.
Tradigrain uses derivative commodity instruments to establish positions for
trading purposes. Instruments used for this purpose are marked-to-market and all
related gains and losses are included in operations. Cash flows from commodity
instruments are classified in the same category as cash flows from the hedged
commodities in the Consolidated Statements of Cash Flows.
Farmland enters into interest rate exchange agreements which involve the
exchange of fixed-rate and variable-rate interest payments over the life of the
agreements and effectively results in the conversion of specifically identified,
variable-rate debt into fixed-rate debt. Differences to be paid or received are
accrued as interest and are recognized as an adjustment to interest expense.
Gains and losses on termination of interest rate exchange agreements are
deferred and recognized over the term of the underlying debt instrument as an
adjustment to interest expense. In cases where there is no remaining underlying
debt instrument, gains and losses on termination are recognized currently in
other income (expense).
Environmental Expenditures -- Liabilities related to remediation of
contaminated properties are recognized when the related costs are considered
probable and can be reasonably estimated. Estimates of these costs are based
upon currently available facts, existing technology, undiscounted site specific
costs and currently enacted laws and regulations. In reporting environmental
liabilities, no offset is made for potential recoveries. All liabilities are
monitored and adjusted as new facts or changes in law or technology occur.
Environmental expenditures are capitalized when such costs provide future
economic benefits.
Federal Income Taxes -- Farmland is subject to income taxes on all
income not distributed to patrons as qualified patronage refunds. Farmland
files consolidated federal and state income tax returns.
Reclassifications -- Certain prior year amounts have been reclassified
to conform with the current year presentation.
(2) INVENTORIES
Major components of inventories are as follows:
Page 42
<TABLE>
<CAPTION>
<PAGE>
August 31
1998 1999
(Amounts in Thousands)
<S> <C> <C>
Finished and in-process products..... $ 605,876 $ 719,118
Materials............................ 62,578 54,387
Supplies............................. 57,513 66,999
$ 725,967 $ 840,504
</TABLE>
Income before income taxes for the year ended August 31, 1998 was reduced
by $27.6 million to recognize a non-cash charge for the adjustment of crude oil
and refined petroleum inventories to market value. In fiscal year 1999, the
inventories market value exceeded LIFO cost and the lower of LIFO cost or market
adjustment made in 1998 was reversed. The carrying values of crude oil and
refined petroleum inventories stated under the lower of LIFO cost or market at
August 31, 1998 and 1999, were $112.7 million and $113.2 million, respectively.
Replacement cost approximated the carrying values of petroleum inventories at
both August 31, 1998 and 1999. During 1999, LIFO inventory quantities were
reduced, resulting in a liquidation of LIFO inventory layers. The effect of
these layer liquidations was to decrease cost of goods sold and increase income
before income taxes by approximately $14.5 million.
(3) INVESTMENTS AND LONG-TERM RECEIVABLES
Investments and long-term receivables are as follows:
<TABLE>
<CAPTION>
August 31
1998 1999
(Amounts in Thousands)
<S> <C> <C>
Investments accounted for by the equity method................ $ 196,106 $ 205,047
Investments in and advances to other cooperatives............. 39,112 42,037
National Bank for Cooperatives................................ 16,554 22,362
Other investments and long-term receivables................... 46,630 60,283
$ 298,402 $ 329,729
</TABLE>
National Bank for Cooperatives ("CoBank") requires its borrowers to
maintain an investment in stock of the bank. The amount of investment required
is based on the average amount borrowed from CoBank during the previous five
years. At August 31, 1998 and 1999, Farmland's investment in CoBank
approximated its requirement. CoBank maintains a statutory lien on the
investment held by Farmland in CoBank.
Page 43
<PAGE>
Summarized financial information of investees accounted for by the
equity method is as follows:
<TABLE>
<CAPTION>
August 31
1998 1999
(Amounts in Thousands)
<S> <C> <C>
Current Assets................................................ $ 614,845 $ 488,447
Long-Term Assets.............................................. 596,869 707,548
Total Assets.............................................. $ 1,211,714 $ 1,195,995
Current Liabilities........................................... $ 513,293 $ 418,183
Long-Term Liabilities......................................... 308,382 370,882
Total Liabilities......................................... $ 821,675 $ 789,065
Net Assets.................................................... $ 390,039 $ 406,930
</TABLE>
<TABLE>
<CAPTION>
Year Ended August 31
1997 1998 1999
(Amounts in Thousands)
<S> <C> <C> <C>
Net sales.................................. $ 1,366,038 $ 1,859,159 $ 2,618,163
Net income................................. $ 99,264 $ 115,241 $ 125,826
Farmland's equity in net income............ $ 49,551 $ 56,434 $ 65,510
</TABLE>
Farmland's investments accounted for by the equity method consist
principally of 50% equity interests in three manufacturers of crop production
products, Farmland Hydro, L.P., SF Phosphates Limited Company and Farmland
MissChem, Limited and a 50% equity interest in a distributor of crop protection
products, WILFARM, LLC. During 1998, Farmland's North American Grain business
formed two 50%-owned alliances; Concourse Grain, LLC and Farmland-Atwood, LLC,
with ConAgra. Concourse Grain, a marketing alliance, provided both domestic and
international customers with multiple classes of wheat. Farmland-Atwood
provides risk management services, financial and grain support services and
grain brokerage to its customers. On May 24, 1999, the owners of Concourse
Grain voted to liquidate the venture. On May 28, 1999, we acquired the
remaining 50% interest in Farmland-Atwood. At August 31, 1999, our share of the
undistributed earnings of all ventures accounted for by the equity method
totaled $63.6 million.
Page 44
<PAGE>
(4) PROPERTY, PLANT AND EQUIPMENT
A summary of cost for property, plant and equipment is as follows:
<TABLE>
<CAPTION>
August 31
1998 1999
(Amounts in Thousands)
<S> <C> <C>
Land and improvements..................... $ 57,381 $ 59,072
Buildings................................. 296,163 291,131
Machinery and equipment................... 1,043,831 1,067,838
Automotive equipment...................... 70,676 71,948
Furniture and fixtures.................... 59,859 56,463
Capital leases............................ 54,467 54,461
Leasehold improvements.................... 30,750 38,231
Other..................................... 7,598 5,622
Construction in progress.................. 59,648 99,486
$ 1,680,373 $ 1,744,252
</TABLE>
(5) BANK LOANS, SUBORDINATED DEBT CERTIFICATES AND NOTES PAYABLE
Bank loans, subordinated debt certificates and notes payable are as
follows:
<TABLE>
<CAPTION>
August 31
1998 1999
(Amounts in Thousands)
<S> <C> <C>
Subordinated capital investment certificates
--6% to 9%, maturing 2000 through 2014......................... $ 318,733 $ 404,218
Subordinated monthly income certificates
--6.25% to 9.25%, maturing 2000 through 2009................... 87,675 103,314
Syndicated Credit Facility
--5.91% to 6.19%, maturing 2001................................ 170,000 180,000
Other bank notes-6.39% to 10.75%,
maturing 2000 through 2008..................................... 122,214 94,272
Industrial revenue bonds-3.05% to 6.75%,
maturing 2000 through 2021..................................... 25,475 25,500
Promissory notes-5% to 8.5%,
maturing 2000 through 2007..................................... 8,927 6,513
Other-3% to 14.92%................................................ 34,025 39,367
$ 767,049 $ 853,184
Less current maturities........................................... 38,946 44,771
$ 728,103 $ 808,413
</TABLE>
Farmland has a $1.1 billion Syndicated Credit Facility with a group of
domestic and international banks ("the Credit Facility"). The Credit Facility
provides revolving short-term credit of up to $650.0 million to finance seasonal
operations and inventory, and revolving term credit of up to $450.0 million. At
August 31, 1999, Farmland had outstanding $368.5 million of revolving short-term
borrowings under the Credit Facility and $180.0 million of revolving term
borrowings; additionally, $52.7 million of the Credit Facility was being
utilized to support letters of credit issued on our behalf.
Page 45
Farmland pays commitment fees under the Credit Facility of 22.5 basis
points annually on the unused portion of the revolving short-term commitment and
25 basis points annually on the unused portion of the revolving term commitment.
In addition, we must comply with the Credit Facility's financial covenants
regarding working capital, the ratio of certain debt to average cash flow and
the ratio of equity to total capitalization, all as defined therein. The short-
term provisions of the Credit Facility are reviewed and/or renewed annually.
The next review date is in May 2000. The revolving term provisions of the
Credit Facility expire in May 2001.
During April 1998, Farmland National Beef Packing Company, L.P., a
consolidated subsidiary, replaced its existing borrowing arrangements with a new
five-year $130.0 million credit facility. This facility, which expires March
31, 2003, is provided by various participating banks and all borrowings
thereunder are nonrecourse to Farmland. Farmland National Beef used a portion
of this facility to repay in full its borrowings from Farmland. At August 31,
1999, Farmland National Beef had borrowings under this facility of $64.2
million, and $3.3 million of the facility was being utilized to support letters
of credit. Farmland National Beef has pledged assets with a carrying value at
August 31, 1999, of $241.0 million to support its borrowings under the facility.
Farmland maintains other borrowing arrangements with banks and
financial institutions. At August 31, 1999, $62.2 million was borrowed under
these agreements.
Tradigrain has borrowing agreements with various international banks
which provide financing and letters of credit to support current international
grain trading transactions. At August 31, 1999, these short-term borrowings
totaled $108.3 million. Obligations of Tradigrain under these loan agreements
are nonrecourse to Farmland or Farmland's other affiliates.
Subordinated debt certificates have been issued under several
indentures. Certain subordinated capital investment certificates may be
redeemed prior to maturity at the option of the owner in accordance with the
indenture. Subject to limitations in the indenture, Farmland has options to
redeem certain subordinated capital investment certificates in advance of
scheduled maturities. Additionally, upon written request we will redeem
subordinated capital investment certificates and subordinated monthly income
certificates in the case of death of an owner.
Outstanding subordinated debt certificates are subordinated to senior
indebtedness ($682.2 million at August 31, 1999) and certain additional
financings (principally long-term operating leases). See Note 9.
At August 31, 1999, under industrial revenue bonds and other
agreements, assets with a carrying value of $17.6 million have been pledged.
Borrowings from CoBank, under both the Syndicated Credit Facility and
short-term notes payable, totaling $215.6 million at August 31, 1999, are
partially secured by liens on the equity investment held by Farmland in CoBank.
See Note 3.
Page 46
<PAGE>
Bank loans, subordinated debt certificates and notes payable mature
during future fiscal years ending August 31 in the following amounts:
(Amounts in
Thousands)
2001................. $ 231,864
2002................. 55,677
2003................. 64,544
2004................. 59,470
2005 and after....... 396,858
$ 808,413
At August 31, 1998 and 1999, we had demand loan certificates and short-
term bank debt outstanding of $408.6 million (weighted average interest rate of
6.06%) and $546.2 million (weighted average interest rate of 6.45%),
respectively.
During 1997, 1998 and 1999, Farmland capitalized interest of $4.0
million, $3.9 million and $0.3 million, respectively.
(6) INCOME TAXES
A. TERRA RESOURCES, INC.
In July 1983, Farmland sold the stock of Terra Resources, Inc.
("Terra"), a wholly owned subsidiary engaged in oil and gas exploration and
production operations and exited its oil and gas exploration and production
activities. The gain from the sale of Terra amounted to $237.2 million for tax
reporting purposes.
On March 24, 1993, the Internal Revenue Service ("IRS") issued a
statutory notice to Farmland asserting deficiencies in federal income taxes
(exclusive of statutory interest thereon) in the aggregate amount of $70.8
million. The asserted deficiencies relate primarily to the Company's tax
treatment of the $237.2 million gain resulting from its sale of the stock of
Terra and the IRS's contention that Farmland incorrectly treated the Terra sale
gain as patronage-sourced 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
in September 1995 and reply briefs were submitted to the court in November 1995.
If the United States Tax Court decides in favor of the IRS on all
unresolved issues raised in the statutory notice, Farmland would have additional
federal and state income tax liabilities aggregating approximately $85.8 million
plus accumulating statutory interest thereon (approximately $317.3 million
through August 31, 1999), or $403.1 million (before tax benefits of the interest
deduction) in the aggregate at August 31, 1999. 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 $15.3 million (including accumulating statutory
interest thereon). The asserted federal and state income tax
Page 47
<PAGE>
liabilities and accumulated interest thereon would become immediately due and
payable unless Farmland appealed the decision and posted the requisite bond to
stay assessment and collection.
In March 1998, Farmland received notice from the IRS assessing the $15.3
million tax and accumulated statutory interest thereon related to the Company's
1989 tax year (as described above). In order to establish the trial court in
which initial litigation, if any, of the dispute would occur and to stop the
accumulation of interest, Farmland deposited funds with the IRS in the amount of
the assessment. After making the deposit, we filed for a refund of the entire
amount deposited.
The liability resulting from an adverse decision by the United States
Tax Court would be charged to current earnings and would have a material adverse
effect on Farmland. In the event of such an adverse determination of the Terra
tax issue, certain financial covenants of the Company's Syndicated Credit
Facility (the "Credit Facility"), dated May 15, 1996, become less restrictive.
Had the United States Tax Court decided in favor of the IRS on all unresolved
issues and had all related additional federal and state income taxes and
accumulated interest thereon been due and payable on August 31, 1999, Farmland's
borrowing capacity under the Credit Facility was adequate at that time to
finance the liability. However, Farmland's ability to finance such an adverse
decision depends substantially on the financial effects of future operating
events on its borrowing capacity under the Credit Facility.
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 we have meritorious positions
with respect to all of these claims.
In the opinion of Bryan Cave LLP, the Company's special tax counsel,
it is more likely than not that the courts will ultimately conclude that the
Company's treatment of the Terra sale gain was substantially, if not entirely,
correct. Such counsel has further advised, however, that none of the issues
involved in this dispute is free from doubt and there can be no assurance that
the courts will ultimately rule in our favor on any of these issues.
b. OTHER INCOME TAX MATTERS
Income (loss) before income taxes include the following components:
<TABLE>
<CAPTION>
Year Ended August 31
1997 1998 1999
(Amounts in Thousands)
<S> <C> <C> <C>
Foreign..................... $ 9,709 $30,269 $ 27,381
Domestic.................... 153,964 24,758 (21,559)
Total....................... $ 63,673 $55,027 $ 5,822
</TABLE>
Page 48
<PAGE>
Income tax expense (benefit) is comprised of the following:
<TABLE>
<CAPTION>
Year Ended August 31
1997 1998 1999
(Amounts in Thousands)
<S> <C> <C> <C>
Federal:
Current.................................. $ 24,940 $ (5,610) $ (23,440)
Deferred................................. (1,129) (512) 12,119
$ 23,811 $ (6,122) $ (11,321)
State:
Current................................. $ 4,418 $ (981) $ (4,135)
Deferred................................ (199) (90) 2,138
$ 4,219 $ (1,071) $ (1,997)
Foreign:
Current................................. $ 361 $ 2,967 $ 1,362
Deferred................................ (141) 483 3,913
$ 220 $ 3,450 $ 5,275
Total income tax expense (benefit)......... $ 28,250 $ (3,743) $ (8,043)
</TABLE>
Income tax expense (benefit) differs from the "expected" income tax
expense (benefit) using a statutory rate of 35% as follows:
<TABLE>
<CAPTION>
Year Ended August 31
1997 1998 1999
<S> <C> <C> <C>
Computed "expected" income tax expense on
income
before income taxes ..................... 35.0 % 35.0 % 35.0 %
Increase (reduction) in income tax
expense attributable to:
Patronage refunds ....................... (22.9) (37.6) (181.7)
State income tax expense, net of
federal income tax effect.............. 1.2 3.3 2.4
Other, net .............................. 4.0 (7.5) 6.2
Income tax expense (benefit)............... 17.3 % (6.8) % (138.1) %
</TABLE>
Page 49
<PAGE>
The tax effect of temporary differences that give rise to significant
portions of deferred tax liabilities and deferred tax assets at August 31, 1998
and 1999 are as follows:
<TABLE>
<CAPTION>
August 31
1998 1999
(Amounts in Thousands)
<S> <C> <C>
Deferred tax liabilities:
Property, plant and equipment,
principally due to differences
in depreciation......................... $ 75,808 $ 90,321
Prepaid pension cost ....................... 16,388 16,114
Income from foreign subsidiaries ........... 11,187 16,776
Basis differences in pass-through
ventures................................ 4,677 6,446
Other ...................................... 6,169 7,701
Total deferred tax liabilities.......... $ 114,229 $ 137,358
Deferred tax assets:
Safe harbor leases ......................... $ 3,802 $ 3,435
Accrued expenses ........................... 61,700 55,241
Benefit of nonqualified
written notices......................... 33,761 39,542
Alternative minimum tax credit ............. 5,829 15,389
Accounts receivable, principally due to
allowance for doubtful accounts......... 3,024 6,359
Other ...................................... 2,780 3,829
Total deferred tax assets............... $ 110,896 $ 123,795
Net deferred tax liability ................. $ 3,333 $ 13,563
</TABLE>
At August 31, 1999, Farmland has nonmember-sourced loss carryforwards,
expiring in 2019, amounting to $36.6 million, available to offset future
nonmember-sourced income. Farmland also has alternative minimum tax credit
carryovers amounting to $15.4 million available to reduce future federal income
taxes payable.
At August 31, 1999, Farmland has member-sourced loss carryforwards,
expiring from 2010 through 2019, amounting to $24.1 million available to offset
future member-sourced income. No deferred tax asset has been established for
these carryforwards since member-sourced losses offset future patronage refunds.
(7) MINORITY OWNERS' EQUITY IN SUBSIDIARIES
A summary of the equity of subsidiaries owned by others is as follows:
<TABLE>
<CAPTION>.
August 31
1998 1999
(Amounts in Thousands)
<S> <C> <C>
Farmland National Beef Packing Company, L.P................$ 30,084 $ 36,414
Farmland Foods, Inc........................................ 4,061 3,723
Other subsidiaries......................................... 1,326 872
$ 35,471 $ 41,009
</TABLE>
Page 50
<PAGE>
(8) PREFERRED STOCK, EARNED SURPLUS AND OTHER EQUITIES
A summary of preferred stock is as follows:
<TABLE>
<CAPTION>
August 31
1998 1999
(Amounts in Thousands)
<S> <C> <C>
Preferred shares - Authorized 8,000,000 shares:
8%, Series A cumulative redeemable preferred shares,
stated at redemption value, $50 per share, 2,000,000 $100,000 $ 100,000
shares issued and outstanding ....
5-1/2% and 6%, $25 par value - 2,743 shares issued and
outstanding (2,838 shares in 1998)......................... 71 69
$100,071 $ 100,069
</TABLE>
Dividends on the Series A preferred shares accumulate whether or not:
Farmland has earnings; funds are legally available for the payment; or such
dividends are declared. These preferred shares are redeemable, beginning on
December 15, 2022, at our sole discretion. No redemption is allowed prior to
that time. Series A preferred shares each have a liquidation preference of $50
per share, plus an amount equal to accumulated and unpaid dividends, if any,
thereon. The preferred shares are not entitled to vote.
A summary of earned surplus and other equities is as follows:
<TABLE>
<CAPTION>
August 31
1998 1999
(Amounts in Thousands)
<S> <C> <C>
Earned surplus............................................ $ 249,108 $ 226,476
Patronage refund payable in equities...................... 35,528 24,215
Capital credits........................................... 19,694 26,453
Equity issuable for the purchase of SF Services, Inc...... 26,323 0
Additional paid-in surplus................................ 1,596 5,102
Other..................................................... 64 94
$ 332,313 $ 282,340
</TABLE>
Patronage refunds payable in equities represent the portion of
patronage refunds payable from current year earnings, in the form of common
shares, associate member common shares and capital credits.
In July 1998, Farmland acquired all of the common stock of SF Services,
Inc. in exchange for $26.3 million in Farmland equity, $2.8 million in cash and
warrants which, when exercisable, may be exchanged for $21.7 million in Farmland
equity. The right to exercise the warrants is contingent on achieving a
specified volume of purchases over seven years. As of August 31, 1999, no
warrants had been converted to Farmland equity. SF Services operated as a
regional farm supply cooperative, serving local cooperative members in Arkansas,
Mississippi, Louisiana and Alabama.
Capital credits are issued: 1) for payment of patronage refunds to
patrons who do not satisfy requirements for membership or associate membership
and 2) upon conversion of common
Page 51
<PAGE>
stock or associate member common stock held by persons who no longer meet
qualifications for membership or associate membership in Farmland.
(9)CONTINGENT LIABILITIES AND COMMITMENTS
Farmland leases various equipment and real properties under long-term
operating leases. For 1997, 1998 and 1999, rental expense totaled $53.9
million, $64.3 million, and $66.3 million, respectively. Rental expense is
reduced for sublease income, primarily rental income received on leased railroad
cars and ammonia trailers ($5.4 million in 1997, $1.1 million in 1998 and $1.0
million in 1999).
The lease agreements have various remaining terms ranging from one
year to fourteen years. Some agreements are renewable, at our option, for
additional periods. The minimum required payments for these agreements during
the fiscal years ending August 31 are as follows:
(Amounts in Thousands)
2000........................... $63,769
2001........................... 56,393
2002........................... 46,382
2003........................... 21,179
2004........................... 17,132
2005 and after................. 61,816
$266,671
Commitments for capital expenditures and investments in joint ventures
aggregated $32.8 million at August 31, 1999.
Farmland has been designated by the Environmental Protection Agency as
a potentially responsible party ("PRP") under the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA"), at various National
Priority List ("NPL") sites. In addition, we are aware of possible obligations
associated with environmental matters at other sites, including sites where no
claim or assessment has been made. Our accrued liability for probable and
reasonably estimable obligations for resolution of environmental matters at NPL
and other sites was $14.4 million and $13.3 million at August 31, 1998 and 1999,
respectively.
The ultimate costs of resolving certain environmental matters are not
quantifiable because many such matters are in preliminary stages and the timing
and extent of actions which governmental authorities may ultimately require are
unknown. It is possible that the costs of such resolution may be greater than
the liabilities which, in the opinion of management, are probable and reasonably
estimable at August 31, 1999. In the opinion of management, it is reasonably
possible for such costs to approximate an additional $9.7 million.
In the ordinary course of conducting international grain trading,
Tradigrain, as of August 31, 1999, was contingently liable in the amount of
$92.0 million of performance and bid bonds, guarantees and letters of credit.
In December 1997, Farmland entered into a series of agreements which
provide for the construction and operation under a long-term lease of facilities
adjacent to our petroleum refinery at Coffeyville, Kansas. These facilities are
designed to convert petroleum coke by-products into fertilizers. When the
facilities are completed (presently scheduled during the second quarter of
fiscal 2000), Farmland will be obligated to make future minimum lease payments
which, at that time, will have an approximate present value of $223 million.
Alternatively, Farmland has an option to purchase the facilities. Our
subordinated debt securities are subordinated in right of payment to payments
related to the Coffeyville facility and to $72.8 million of certain lease
obligations.
Page 52
<PAGE>
Farmland is involved in various lawsuits arising in the normal course
of business. In the opinion of management, except for the tax litigation
relating to Terra as explained in Note 6, the ultimate resolution of these
litigation issues is not expected to have a material adverse effect on our
Consolidated Financial Statements.
(10) EMPLOYEE BENEFIT PLANS
The Farmland Industries, Inc. Employee Retirement Plan (the "Plan") is
a defined benefit plan in which employees whose customary employment is at the
rate of at least 15 hours per week may participate. Participation in the Plan
is optional prior to age 34, but mandatory thereafter. Benefits payable under
the Plan are based on years of service and the employee's average compensation
during the highest four of the employee's last ten years of employment.
The assets of the Plan are maintained in a trust fund. The majority
of the Plan's assets are invested in common stocks, corporate bonds, United
States Government bonds, short-term investment funds, private REITS and venture
capital funds.
Our funding strategy is to make the maximum annual contribution to the
Plan's trust fund that can be deducted for federal income tax purposes.
Farmland charges pension costs as accrued based on the actuarial valuation of
the plan.
Farmland adopted SFAS No. 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits" for the year ended August 31, 1999. Prior year
disclosures have been conformed to this standard.
Components of the Company's pension cost are as follows:
<TABLE>
<CAPTION>
Year Ended August 31
1997 1998 1999
(Amounts in Thousands)
<S> <C> <C> <C>
Service cost....................................................... $ 11,333 $ 12,013 $ 15,126
Interest cost...................................................... 19,816 21,403 23,405
Expected return on Plan assets..................................... (25,771) (28,192) (34,621)
Curtailment gain................................................... (3,582) 0 0
Net amortization................................................... 207 207 207
Pension expense.................................................... $ 2,003 $ 5,431 $ 4,117
</TABLE>
The following table sets forth the Plan's funded status and amounts
recognized as assets in our Consolidated Balance Sheets at August 31, 1998 and
1999. Such prepaid pension cost is based on the Plan's funded status as of May
31, 1998 and 1999.
Page 53
<PAGE>
<TABLE>
<CAPTION>
AUGUST 31
1998 1999
(Amounts in Thousands)
<S> <C> <C>
CHANGE IN PROJECTED BENEFIT OBLIGATION:
Projected Benefit Obligation, beginning of year $ 264,523 $ 342,548
Service Cost 12,013 15,126
Employee Contributions 5,186 5,961
Interest Cost 21,403 23,405
Actuarial (Gain) Loss 48,647 (30,293)
Benefits Paid (9,224) (11,760)
Projected Benefit Obligation, end of year $ 342,548 $ 344,987
CHANGE IN FAIR VALUE OF PLAN ASSETS:
Plan Assets at Fair Value, beginning of year 331,822 385,112
Return on Plan Assets 56,047 13,052
Company Contributions 1,281 427
Employee Contributions 5,186 5,961
Benefits Paid (9,224) (11,760)
Plan Assets at Fair Value, end of year $ 385,112 $ 392,792
FUNDED STATUS AND PREPAID PENSION COST:
Funded Status of the Plan, end of year $ 42,564 $ 47,805
Unrecognized Prior Service cost 414 207
Unrecognized Net (Gain)/Loss 5,387 (3,337)
Prepaid Pension Cost, end of year $ 48,365 $ 44,675
</TABLE>
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<PAGE>
The following rates were used when calculating service cost, interest
cost, expected return on plan assets, the projected benefit obligation and the
Plan's funded status.
<TABLE>
<CAPTION>
Year Ended August 31 ......................
1997 1998 1999
<S> <C> <C> <C>
Discount rate......................... 8.0% 7.25% 7.5%
Rate of increase in future compensation
levels............................... 4.5% 4.5% 4.9%
Expected long-term rate of return on pla
assets............................... 8.5% 9.0% 9.0%
</TABLE>
(11) INDUSTRY SEGMENT INFORMATION
Farmland adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" for the year ended August 31, 1999. This
statement requires companies to report certain information about operating
segments in their financial statements and establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS 131 defines operating segments as components of an enterprise about which
separate financial information is available that is evaluated regularly by
management in deciding how to allocate resources and in assessing performance.
Comparative information for prior years presented has been restated to conform
to the requirements of SFAS 131.
Farmland conducts business primarily in two operating areas: agricultural
inputs and outputs. On the input side of the agricultural industry, we operate
as a farm supply cooperative. On the output side of the agricultural industry,
we operate as a processing and marketing cooperative.
Our farm supply operations consist of four segments: petroleum, plant
foods, crop protection and feed. Principal products of the petroleum division
are refined fuels, propane, jet fuels and by-products of petroleum refining.
Principal products of the plant foods division are nitrogen-based and phosphate-
based plant foods. Principal products of the crop protection business are,
through the Company's ownership in the WILFARM, LLC and Omnium L.L.C. joint
ventures, a complete line of insecticides, herbicides and mixed chemicals.
Principal products of the feed division include swine, dairy, pet, beef,
poultry, mineral and specialty feeds; feed ingredients and supplements, animal
health products and livestock services.
On the output side, Farmland's operations consist of five segments:
hog production, the processing and marketing of pork, the processing and
marketing of beef, the origination, storage and marketing of grain domestically,
and the origination, storage and marketing of grain internationally.
Other operations primarily includes: financial, management, printing
and transportation services.
The operating income (loss) of each industry segment includes the
revenue generated on transactions involving products within that industry
segment less identifiable expenses. Corporate assets include cash, investments
in other cooperatives, and certain other assets.
Following is a summary of industry segment information as of and for
the years ended August 31, 1997, 1998 and 1999:
Page 55
<PAGE>
<TABLE>
<CAPTION>
1997 (PAGE 1 OF 3)
(Amounts in Thousands)
CONSOLIDATED SEGMENTS
Combined
Segments Unallocated Consolidated
<S> <C> <C> <C>
Sales and transfers $ 9,425,548 $ - $ 9,425,548
Transfers between
segments (278,041) - (278,041)
Net sales $ 9,147,507 $ - $ 9,147,507
Cost of sales 8,580,826 - 8,580,826
Gross income $ 566,681 $ - $ 566,681
Selling, general and
administrative expenses $ 320,549 $ 88,829 $ 409,378
Other income (expense):
Interest expense $ - $ (62,335) $ (62,335)
Interest income - 5,352 5,352
Other, net 10,211 12,275 22,486
Total other income (expense) $ 10,211 $ (44,708) $ (34,497)
1997 (PAGE 1 OF 3)
Equity in net income
of investees 49,494 57 49,551
Minority owners' interest
in net (income)/loss
of subsidiaries (8,933) 249 (8,684)
Income tax (expense) - (28,250) (28,250)
Net income (loss) $ 296,904 $ (161,481) $ 135,423
Investment in and
advances to investees $ 168,977 $ 9,017 $ 177,994
Total assets $ 2,394,678 $ 250,634 $ 2,645,312
Depreciation and
amortization expense $ 80,969 $ 9,382 $ 90,351
Capital expenditures $ 145,229 $ 16,941 $ 162,170
</TABLE>
Page 56
<PAGE>
<TABLE>
<CAPTION>
1997 (PAGE 2 OF 3)
(Amounts in Thousands)
INPUT AND OTHER SEGMENTS
Other Total Input
Plant Crop Operating and Other
Foods Protection Petroleum Feed Units Segments
<S> <C> <C> <C> <C> <C> <C>
Sales & transfers $ 1,267,684 $ 11,634 $ 1,336,940 $ 636,134 $ 153,919 $ 3,406,311
Transfers between
segments (15,752) - (5,153) (18,134) (24,166) (63,205)
Net sales $ 1,251,932 $ 11,634 $ 1,331,787 $ 618,000 $ 129,753 $ 3,343,106
Cost of sales 1,064,147 10,635 1,272,617 579,006 104,911 3,031,316
Gross income $ 187,785 $ 999 $ 59,170 $ 38,994 $ 24,842 $ 311,790
Selling, general and
administrative expenses $ 27,612 $ 1,137 $ 22,904 $ 32,351 $ 36,405 $ 120,409
Other income (expense):
Interest expense $ - $ - $ - $ - $ - $ -
Interest income - - - - - -
Other, net 1,381 (65) 903 (416) 3,612 5,415
Total other income (expense) $ 1,381 $ (65) $ 903 $ (416) $ 3,612 $ 5,415
Equity in net income
of investees 43,269 4,986 163 399 237 49,054
Minority owners' interest
in net (income)/loss
of subsidiaries 382 - - 992 1,374
-
Income tax (expense) - - - -
- -
Net income (loss) $ 205,205 $ 4,783 $ 37,332 $ 6,626 $ (6,722) $ 247,224
Investment in and
advances to investees $ 148,634 $ 9,914 $ 706 $ 3,185 $ 3,281 $ 165,720
Total assets $ 591,638 $ 20,482 $ 449,754 $ 110,721 $ 67,942 $ 1,240,537
Depreciation and
amortization expense $ 15,898 $ 785 $ 13,901 $ 4,959 $ 7,695 $ 43,238
Capital expenditures $ 71,488 $ 102 $ 22,403 $ 3,035 $ 9,906 $ 106,934
</TABLE>
Page 57
<TABLE>
<CAPTION>
1997 (PAGE 3 OF 3)
(Amounts in Thousands)
OUTPUT SEGMENTS
Pork Beef Grain Total
Processing Livestock Processing North Output
& Marketing Production & Marketing American International Segments
<S> <C> <C> <C> <C> <C> <C>
Sales & transfers $ 1,655,893 $ 61,318 $ 1,903,413 $ 2,367,447 $ 31,166 $ 6,019,237
Transfers between
segments (54,523) - (160,313) - (214,836)
-
Net sales $ 1,655,893 $ 6,795 $1,903,413 $ 2,207,134 $ 31,166 $ 5,804,401
Cost of sales 1,516,055 3,050 1,840,497 2,189,908 - 5,549,510
Gross income $ 139,838 $ 3,745 $ 62,916 $ 17,226 $ 31,166 $ 254,891
Selling, general and
administrative expenses $ 144,625 $ 1,497 $ 13,474 $ 17,556 $ 22,988 $ 200,140
Other income (expense):
Interest expense $- $ - $ - $ - $ - $ -
Interest income - - - - - -
Other, net 676 747 2,281 2,718 (1,626) 4,796
Total other income (expense) $ 676 $ 747 $ 2,281 $ 2,718 $ (1,626) $ 4,796
1997 (PAGE 3 OF 3)
(Amounts in Thousands)
Equity in net income
of investees - 287 - - 440
153
Minority owners' interest
in net (income)/loss
of subsidiaries - - (10,307) - - (10,307)
Income tax (expense) - - - - -
-
Net income (loss) $ (4,111) $ 3,282 $ 41,416 $ 2,541 $ 6,552 $ 49,680
Investment in and
advances to investees $ 18 $ 2,618 $ - $ 621 $ - $ 3,257
Total assets $ 354,224 $ 29,818 $ 277,008 $ 263,403 $ 229,688 $ 1,154,141
Depreciation and
amortization expense $ 19,673 $ 1,772 $ 11,222 $ 3,039 $ 1,935 $ 37,641
1997 (PAGE 3 OF 3)
(Amounts in Thousands)
Capital expenditures $ 16,475 $ 3,439 $ 15,735 $ 1,696 $ 950 $ 38,295
</TABLE>
Page 58
<PAGE>
<TABLE>
<CAPTION>
1998 (PAGE 1 OF 3)
(Amounts in Thousands)
CONSOLIDATED SEGMENTS
Combined
Segments Unallocated Consolidated
<S> <C> <C> <C>
Sales & transfers $ 8,985,984 $ - $ 8,985,984
Transfers between
segments (210,938) - (210,938)
Net sales $ 8,775,046 $ - $ 8,775,046
Cost of sales 8,299,505 - 8,299,505
Gross income $ 475,541 $ - $ 475,541
Selling, general and
administrative expenses $ 335,677 $ 96,322 $ 431,999
Other income (expense):
Interest expense $ - $ (73,645) $ (73,645)
Interest income - 5,463 5,436
Other, net 6,806 23,459 30,265
Total other income (expense) $ 6,806 $ (44,750) $ (37,944)
Equity in income/(loss)
of investees 53,010 3,424 56,434
Minority owners' interest
in net (income)/loss
of subsidiaries (7,202) 197 (7,005)
Income tax benefit - 3,743 3,743
Net income (loss) $ 192,478 $ (133,708) $ 58,770
Investment in and
advances to investees $ 183,614 $ 12,492 $ 196,106
Total assets $ 2,579,039 $ 295,579 $ 2,874,618
Depreciation and
amortization expense $ 86,218 $ 15,615 $ 101,833
Capital expenditures $ 150,579 $ 3,650 $ 154,229
</TABLE>
Page 59
<TABLE>
<CAPTION>
1998 (PAGE 2 OF 3)
(Amounts in Thousands)
INPUT AND OTHER SEGMENTS
Other Total Input
Plant Crop Operating and Other
Foods Protection Petroleum Feed Units Segments
<S> <C> <C> <C> <C> <C> <C>
Sales & transfers $ 1,161,940 $ 299 $ 1,141,090 $ 570,622 $ 163,761 $ 3,037,712
Transfers between
segments (4,396) - (4,162) (20,890) (27,304) (56,752)
Net sales $ 1,157,544 $ 299 $ 1,136,928 $ 549,732 $ 136,457 $ 2,980,960
Cost of sales 1,081,397 243 1,114,081 509,418 103,869 2,809,008
Gross income $ 76,147 $ 56 $ 22,847 $ 40,314 $ 32,588 $ 171,952
Selling, general and
administrative expenses $ 28,188 $ 31 $ 22,485 $ 31,132 $ 37,449 $ 119,285
Other income (expense):
Interest expense $ - $ - $ - $ - $ - $ -
Interest income - - - - - -
Other, net 1,978 (9) 1,938 272 2,997 7,176
Total other income (expense) $ 1,978 $ (9) $ 1,938 $ 272 $ 2,997 $ 7,176
Equity in net income/(loss)
of investees 42,768 7,199 260 1,123 566 51,916
Minority owners' interest
in net (income)/loss
of subsidiaries 281 - - - 687 968
Income tax benefit - - - - - -
Net income (loss) $ 92,986 $ 7,215 $ 2,560 $ 10,577 $ (611) $ 112,727
Investment in and
advances to investees $ 140,212 $ 13,264 $ 1,087 $ 7,308 $ 4,862 $ 166,733
Total assets $ 631,887 $ 23,027 $ 433,117 $ 98,555 $ 222,099 $ 1,408,685
Depreciation and
amortization expense $ 22,215 $ 57 $ 14,609 $ 4,500 $ 6,529 $ 47,910
Capital expenditures $ 25,761 $ 311 $ 26,172 $ 5,627 $ 47,866 $ 105,737
</TABLE>
Page 60
<TABLE>
<CAPTION>
1998 (PAGE 3 OF 3)
(Amounts in Thousands)
OUTPUT SEGMENTS
Pork Beef Grain Total
Processing Livestock Processing North Output
& Marketing Production & Marketing American International Segments
<S> <C> <C> <C> <C> <C> <C>
Sales & transfers $ 1,510,677 $ 63,371 $ 2,135,476 $ 2,175,261 $ 63,487 $ 5,948,272
Transfers between
segments (53,184) - (101,002) - (154,186)
-
Net sales $ 1,510,677 $ 10,187 $ 2,135,476 $ 2,074,259 $ 63,487 $ 5,794,086
Cost of sales 1,339,263 17,323 2,081,585 2,052,326 - 5,490,497
Gross income $ 171,414 $ (,136) $ 53,891 $ 21,933 $ 63,487 $ 303,589
Selling, general and
administrative expenses $ 144,804 $ 2,172 $ 15,292 $ 19,375 $ 34,749 $ 216,392
Other income (expense):
Interest expense $ - $ - $ - $ - $ - $ -
Interest income - - - - - -
Other, net 2,230 660 (4,934) 2,655 (981) (370)
Total other income (expense) $ 2,230 $ 660 $ (4,934) $ 2,655 $ (981) $ (370)
1998 (PAGE 3 OF 3)
(Amounts in Thousands)
Equity in net income/(loss)
of investees - 477 (1,569) 2,186 - 1,094
Minority owners' interest
in net (income)/loss
of subsidiaries - - (8,170) - - (8,170)
Income tax benefit - - - - - -
Net income (loss) $ 28,840 $ (8,171) $ 23,926 $ 7,399 $ 27,757 $ 79,751
Investment in and
advances to investees $ - $ 3,496 $ - $ 13,385 $ - $ 16,881
Total assets $ 330,999 $ 33,343 $ 273,503 $ 297,050 $ 235,459 $ 1,170,354
Depreciation and
amortization expense $ 19,386 $ 1,231 $ 12,608 $ 3,065 $ 2,018 $ 38,308
Capital expenditures $ 19,166 $ 3,068 $ 18,680 $ 3,601 $ 327 $ 44,842
</TABLE>
Page 61
<PAGE>
<TABLE>
<CAPTION>
1999 (PAGE 1 OF 3)
(Amounts in Thousands)
CONSOLIDATED SEGMENTS
Combined
Segments Unallocated Consolidated
<S> <C> <C> <C>
Sales & transfers $ 11,038,775 $ - $ 11,038,775
Transfers between
segments (329,702) - (329,702)
Net sales $ 10,709,073 $ - $ 10,709,073
Cost of sales 10,231,081 - 10,231,081
Gross income $ 477,992 $ - $ 477,992
Selling, general and
administrative expenses 358,412 122,427 480,839
Other income (expense):
Interest expense - (90,773) (90,773)
Interest income - 8,337 8,337
Other, net 29,971 13,351 43,322
Total other income (expense) $ 29,971 $ (69,085) $ (39,114)
Equity in income/(loss)
of investees 62,272 3,238 65,510
Minority owners' interest
in net (income)/loss
of subsidiaries (18,010) 283 (17,727)
Income tax benefit - 8,043 8,043
Net income (loss) $ 193,813 $ (179,948) $ 13,865
Investment in and
advances to investees $ 193,143 $ 11,904 $ 205,047
Total assets $ 2,855,640 $ 402,009 $ 3,257,649
Depreciation and
amortization expense $ 93,284 $ 15,900 $ 109,184
Capital expenditures $ 114,986 $ 6,198 $ 121,184
</TABLE>
Page 62
<TABLE>
<CAPTION>
1999 (PAGE 2 OF 3)
(Amounts in Thousands)
INPUT AND OTHER SEGMENTS
Other Total Input
Plant Crop Operating and Other
Foods Protection Petroleum Feed Units Segments
<S> <C> <C> <C> <C> <C> <C>
Sales & transfers $ 1,009,019 $ 247 $ 954,220 $ 599,208 $ 284,756 $ 2,847,450
Transfers between
segments (6,735) - (48) (23,661) (30,837) (61,281)
Net sales $ 1,002,284 $ 247 $ 954,172 $ 575,547 $ 253,919 $ 2,786,169
Cost of sales 1,004,267 174 918,186 530,246 216,879 2,669,752
Gross income $ (1,983) $ 73 $ 35,986 $ 45,301 $ 37,040 $ 116,417
Selling, general and
administrative expenses $ 30,085 $ 4 $ 20,553 $ 30,774 $ 42,527 $ 123,943
Other income (expense):
Interest expense $ - $ - $ - $ - $ - $ -
Interest income - - - - - -
Other, net 18,166 242 2,726 355 7,465 28,954
Total other income (expense) $ 18,166 $ 242 $ 2,726 $ 355 $ 7,465 $ 28,954
Equity in net income/(loss)
of investees 46,374 7,682 2,366 906 229 57,557
Minority owners' interest
in net (income)/loss
of subsidiaries 167 - - (504) 498 161
Income tax benefit - - - - - -
Net income (loss) $ 32,639 $ 7,993 $ 20,525 $ 15,284 $ 2,705 $ 79,146
Investment in and
advances to investees $ 146,501 $ 16,310 $ 4,383 $ 7,771 $ 6,658 $ 181,623
Total assets $ 651,650 $ 26,287 $ 491,018 $ 121,380 $ 99,101 $ 1,389,436
Depreciation and
amortization expense $ 23,432 $ 66 $ 16,039 $ 4,844 $ 9,662 $ 54,043
Capital expenditures $ 6,683 $ 6 $ 26,841 $ 4,970 $ 11,758 $ 50,258
</TABLE>
Page 63
<TABLE>
<CAPTION>
1999 (PAGE 3 OF 3)
(Amounts in Thousands)
OUTPUT SEGMENTS
Pork Beef Grain Total
Processing Livestock Processing North Output
& Marketing Production & Marketing American International Segments
<S> <C> <C> <C> <C> <C> <C>
Sales & transfers $ 1,380,297 $ 64,156 $ 2,358,500 $ 2,411,788 $ 1,976,584 $ 8,191,325
Transfers between
segments - (47,237) - (221,184) - (268,421)
Net sales $ 1,380,297 $ 16,919 $ 2,358,500 $ 2,190,604 $ 1,976,584 $ 7,922,904
Cost of sales 1,175,938 38,332 2,273,251 2,159,466 1,914,342 7,561,329
Gross income $ 204,359 $ (21,413) $ 85,249 $ 31,138 $ 62,242 $ 361,575
Selling, general and
administrative expenses $ 157,419 $ 3,061 $ 17,750 $ 20,415 $ 35,824 $ 234,469
Other income (expense):
Interest expense $ - $ - $ - $ - $ - $ -
Interest income - - - - - -
Other, net 899 1 914 580 (1,377) 1,017
Total other income (expense) $ 899 $ 1 $ 914 $ 580 $ (1,377) $ 1,017
Equity in net income/(loss)
of investees 15 (336) 1,191 3,845 - 4,715
Minority owners' interest
in net (income)/loss
of subsidiaries - (4) (18,167) - - (18,171)
Income tax benefit - - - - - -
Net income (loss) $ 47,854 $ (24,813) $ 51,437 $ 15,148 $ 25,041 $ 114,667
Investment in and
advances to investees $ 266 $ 5,890 $ - $ 5,364 $ - $ 11,520
Total assets $ 344,979 $ 41,614 $ 296,039 $ 470,301 $ 313,271 $ 1,466,204
Depreciation and
amortization expense $ 19,576 $ 829 $ 13,497 $ 4,588 $ 751 $ 39,241
Capital expenditures $ 18,169 $ 4,929 $ 21,027 $ 11,891 $ 8,712 $ 64,728
</TABLE>
Page 64
Substantially all of Farmland's long-lived assets are located in the
United States. Sales by country, determined by customer location, were as
follows:
<TABLE>
<CAPTION>
Year Ended August 31
1997 1998 1999
(Amounts in Thousands)
<S> <C> <C> <C>
United States........................ $ 7,784,212 $ 7,474,758 $ 7,520,565
Mexico............................... 441,384 472,955 570,959
Japan................................ 158,694 157,022 220,763
Other................................ 763,217 670,311 2,396,786
Total................................ $ 9,147,507 $ 8,775,046 $ 10,709,073
</TABLE>
(12) SIGNIFICANT GROUP CONCENTRATION OF CREDIT RISK
Farmland extends credit to its customers on terms generally no more
favorable than standard terms of sale for the industries it serves. A
substantial portion of our receivables are concentrated in the agricultural
industry. Collection of these receivables may be dependent upon economic
returns from farm crop and livestock production. A significant amount of trade
receivables are with customers located in foreign countries. Although Farmland
does not currently foresee a credit risk associated with these receivables,
repayment is dependent upon the financial stability of those countries' national
economies. Farmland has counterparty performance risk on forward contracts we
have entered into with producers and local cooperatives. In the past, Farmland
has not had significant problems with non-performance on these contracts and we
do not anticipate having significant non-performance problems in the future.
However, the risk of non-performance always exists and such risk may change as
the agricultural economy changes. Our credit risks are continually reviewed and
management believes that adequate provisions have been made for doubtful
accounts.
Farmland enters into interest rate swap agreements, natural gas/financial
swap agreements, and foreign currency exchanges with financial institutions. We
continually monitor our positions with, and the credit quality of, the financial
institutions which are counterparties to our financial instruments and we do not
anticipate non-performance by counterparties.
Farmland maintains investments in and advances to cooperatives,
cooperative banks and joint ventures from which it purchases products or
services. A substantial portion of the business of these investees is dependent
upon the agribusiness economic sector. See Note 3.
(13)DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimates of fair values are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could affect the estimates.
Except for our investments in other cooperatives, the fair market value of all
financial instruments held by Farmland approximates the carrying value of these
instruments.
Investments in the equities of other cooperatives which have been
purchased are carried at cost and equities received as patronage refunds are
carried at par value, less provisions for other than temporary impairment.
Management believes it is not practicable to estimate the fair value of these
equities because there is no established market for these equities and estimated
future cash flows, which are largely dependent on the future equity redemption
policy of each cooperative, are not determinable. At August 31, 1998 and 1999,
the carrying value of our investments in other cooperatives' equities totaled
$43.7 million and $53.4 million, respectively.
Page 65
<PAGE>
For all other financial instrument assets, the fair value has been
estimated by discounting future cash flows using the current rates at which
similar loans would be made to borrowers with similar credit ratings. The
estimated fair value of the fixed rate financial instrument liabilities was
calculated using a discount rate equal to the interest rate on financial
instruments with similar maturities currently offered for sale by Farmland. The
estimated fair value of our variable rate financial instruments approximates the
carrying value.
(14) RELATED PARTY TRANSACTIONS
Farmland has a 50% interest in two manufacturers of phosphate products
and a manufacturer of nitrogen products, Farmland Hydro, L.P., SF Phosphates
Limited Company and Farmland MissChem Limited, a 50% interest in a distributor
of crop protection products, WILFARM, LLC, a 50% interest in a manufacturer and
distributor of crop protection products, Omnium, LLC and a 50% interest in
OneSystem Group, LLC, which is an information technology service.
During 1997, 1998 and 1999, Farmland purchased $131.9 million, $231.5
million and $224.1 million, respectively, of products and services from these
ventures. Farmland had accounts payable of $5.9 million and $14.6 million due to
these ventures at August 31, 1998 and 1999, respectively, and a note payable due
to a venture of $17.1 million and $12.6 million at August 31, 1998 and 1999,
respectively. Accounts receivable owed to us at August 31, 1998 and 1999
totaled $22.3 million and $6.2 million, respectively. Notes receivable due from
these ventures totaled $35.0 million and $35.4 million at August 31, 1998 and
1999, respectively.
(15) OTHER INCOME
During 1999, Farmland realized $10.3 million of gain resulting from the
favorable settlement of various lawsuits involving natural gas pricing, crude
oil supply, and environmental recoveries. Farmland also sold its investment in
its Florida phosphate reserves resulting in a gain of approximately $7.7 million
before income taxes. In connection with the temporary shutdown of the Lawrence
fertilizer production facility, Farmland realized a $4.1 million gain on futures
positions closed as a result of anticipated natural gas purchases which will not
occur.
During 1998, we sold: (1) an approximate 3.8% interest in Farmland
National Beef, resulting in a gain before income taxes of $7.2 million; and (2)
all of our interest in Cooperative Services Company, formerly a wholly-owned
subsidiary, resulting in a gain before income taxes of $2.2 million.
(16) SUBSEQUENT EVENTS
During September, the Boards of Directors of Farmland and Cenex Harvest
States separately approved the terms of a unification. Both cooperatives have
scheduled a November 23, 1999, member vote regarding the unification. If
members approve, the unification is scheduled to occur March 1, 2000. The
unified entity will be named United Country Brands.
During September, 1999, Land O'Lakes, Inc., Farmland and Cenex Harvest
States announced their intent to form a marketing venture which will distribute
crop production and crop protection products. The venture anticipates
beginning operations early in calendar year 2000.
Page 66
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Page 67
<PAGE>
<TABLE>
<CAPTION>
The directors of Farmland are as follows:
Expiration of Total Years
Age as of Positions Present Term of Service
August 31, Held With as as Board
1999 Farmland Director Member Business Experience During Last Five Years
Name
<S> <C> <C> <C> <C> <C>
Albert J. Shivley 56 Chairman of the 2001 15 General Manager--American Pride Co-op
Board Association, Brighton, Colorado, a local
cooperative association of farmers and
ranchers.
Jody Bezner 58 Vice Chairman 2000 8 Producer--Texline, Texas. Mr. Bezner
and Vice serves as President of Dalhart Consumers
President Fuel Association, Inc., Board of
Directors, Dalhart, Texas, a local
cooperative association of farmers and
ranchers.
Lyman Adams, Jr. 48 2001 7 General Manager--Cooperative Grain and
Supply, Hillsboro, Kansas, a local
cooperative association of farmers and
ranchers.
Ronald J. Amundson 55 2000 11 General Manager--Central Iowa Cooperative,
Jewell, Iowa, a local cooperative
association of farmers and ranchers.
Baxter Ankerstjerne 63 1999 9 Producer--Peterson, Iowa.
From 1988 to 1997, Mr. Ankerstjerne served
as Chairman of the Board of Directors of
Farmers Cooperative Association, Marathon,
Iowa.
Richard L. Detten 65 1999 12 Producer--Ponca City, Oklahoma
Active member and past President and Vice
President of Farmers Cooperative
Association Of Tonkawa, Oklahoma, a local
cooperative association of farmers and
ranchers.
Steven Erdman 49 2001 7 Producer--Bayard, Nebraska.
Mr. Erdman serves as Secretary, Panhandle
Co-op, Scottsbluff, Nebraska, a local
cooperative association of farmers and
ranchers.
Page 68
<PAGE>
Harry Fehrenbacher 51 1999 3 Producer--Newton, Illinois.
Mr. Fehrenbacher serves as President of
the Board of Directors of Effingham
Equity, Effingham, Illinois, a local
cooperative association of farmers and
ranchers.
Martie Floyd 51 2000 2 Producer--Johnson, Kansas. Mr. Floyd
serves as Secretary of the Board of
Directors of Johnson Cooperative Grain Co,
Inc., Johnson, Kansas, a local cooperative
association of farmers and ranchers.
Warren Gerdes 51 2001 6 General Manager--Farmers Cooperative
Elevator Company, Buffalo Lake, Minnesota,
a local cooperative association of farmers
and ranchers.
Thomas H. Gist 64 1999 1 Producer--Marianna, Ark. Mr. Gist serves
as Secretary of the Board of Directors of
Tri-County Farmers Association of
Brinkley, Ark. A local cooperative
association of farmers and ranchers.
Ben Griffith 50 2001 10 General Manager--Central Cooperatives,
Inc., Pleasant Hill, Missouri, a local
cooperative association of farmers and
ranchers.
Gail D. Hall 57 2000 11 General Manager--Lexington Cooperative Oil
Company, Lexington, Nebraska, a local
cooperative association of farmers and
ranchers. Mr. Hall retired from the
position of General Manager in February
1999.
Barry Jensen 54 1999 9 Producer--White River, South Dakota.
Mr. Jensen currently serves as a Director
of Dakota Pride Cooperative, Winner, South
Dakota, a local cooperative association of
farmers and ranchers.
Ron Jurgens 61 2001 4 General Manager-Agri Co-op in Holdrege,
Nebraska, a local cooperative association
of farmers and ranchers.
Page 69
<PAGE>
William F. Kuhlman 50 1999 3 Producer--Oakley, Kansas. Mr. Kuhlman
serves on the Boards of Directors of
Kansas Retail Venture Group. Formerly, he
was President and CEO of Cooperative
Agricultural Services, Inc., Oakley,
Kansas and General Manager of Menlo-
Rexford Cooperative, local cooperative
associations of farmers and ranchers.
Greg Pfenning 50 2000 7 Producer--Hobart, Oklahoma. Director of
The Farmers Cooperative Association,
Hobart Oklahoma, a local cooperative
association of farmers and ranchers.
Monte Romohr 46 1999 9 Producer--Gresham, Nebraska Mr. Romohr
serves as a Director of Farmers Co-op
Business Association, Shelby, Nebraska, a
local cooperative association of farmers
and ranchers.
Joe Royster 47 1999 6 General Manager--Dacoma Farmers
Cooperative, Inc., Dacoma, Oklahoma, a
local cooperative association of farmers
and ranchers.
E. Kent Stamper 53 1999 3 Producer--Plainville, Kansas. Mr. Stamper
serves as Director and Vice President of
the Board of Directors of Midland
Marketing Coop, Hays, Kansas, a local
cooperative association of farmers and
ranchers. He is a member of the Director
Development Committee of the Kansas
Cooperative Council.
Eli F. Vaughn 50 2000 2 General Manager--Farmers Cooperative
Company, Afton, Iowa, a local cooperative
association of farmers and ranchers.
Frank Wilson 51 2001 4 General Manager-Elkhart Farmers Co-op
Association, Elkhart, Texas, a local
cooperative association of farmers and
ranchers.
</TABLE>
Page 70
<PAGE>
Directors are elected for a term of three years by the shareholders of
Farmland at its annual meeting. The expiration dates for such three-year terms
are sequenced so that about one-third of the Board of Directors is elected each
year. The executive committee consists of Ronald Amundson, Lyman Adams, Jody
Bezner, Monte Romohr, Albert Shivley and H. D. Cleberg. With the exception of
H. D. Cleberg, President and Chief Executive Officer, members of the executive
committee serve as chairmen of standing committees of the Board of Directors as
follows: Ronald Amundson, corporate responsibility committee; Lyman Adams, audit
committee; Jody Bezner, compensation committee; Monte Romohr, finance committee;
and Albert Shivley, governance committee.
If the unification with Cenex Harvest States is approved, the Directors
whose term expires in 1999 will have their term extended to the unification date
which currently is anticipated to be March 1,2000. At the unification date, 17
members of Farmland's Board will be selected to serve on the Board of the united
company, United Country Brands.
The executive officers of Farmland are as follows:
<TABLE>
<CAPTION>
Age as of
August 31,
Name 1999 Principal Occupation and Other Positions
<S> <C> <C>
H. D. Cleberg 60 President and Chief Executive Officer - Mr. Cleberg has been with Farmland since
1968. He was appointed to his present position effective April 1991. Prior to
April 1991 Mr. Cleberg held senior leadership positions in Farmland's input and
output businesses and in corporate areas responsible for transportation and
logistics, sales, marketing and research.
R. W. Honse 56 Executive Vice President and Chief Operating Officer - Mr. Honse has been with
Farmland since 1973. He was appointed to his present position in February 1999.
From September 1995 to February 1999, he served as Executive Vice President and
Chief Operating Officer, Ag Input Businesses. From January 1992 to September
1995, he served as Executive Vice President, Agricultural Inputs Operations.
<J. F. Berardi 56 Executive Vice President and Chief Operating Officer, Grain and Grain Businesses
from July 1996 through September 1999 - Effective September 23, 1999, Mr. Berardi
was appointed Chief Financial Officer for United Country Brands, Inc. Mr. Berardi
joined Farmland in March 1992, serving as Executive Vice President and Chief
Financial Officer.
T. M. Campbell 49 Executive Vice President and Chief Financial Officer - Mr. Campbell joined Farmland
in August 1992, serving as Vice President and Treasurer. He was appointed to his
present position in August 1996.
G. E. Evans 55 Executive Vice President and Chief Operating Officer, Refrigerated Foods and
Livestock Production Group - Mr. Evans has been with Farmland since 1971. He was
appointed to his present position in July 1997. He held the same position in the
Meat and Livestock Businesses from September 1995 until July 1997. From January
1992 to September 1995 he served as Senior Vice President, Agricultural Production
Marketing/Processing.
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<PAGE>
B. L. Sanders 58 Senior Vice President and Corporate Secretary - Dr. Sanders had been with Farmland
since 1968. He was appointed to his present position in September 1991. From
April 1990 to September 1991 he served as Vice President, Strategic Planning and
Development.
Stan Riemann 48 Executive Vice President and President, Crop Production Group - Mr. Riemann joined
Farmland in March 1974. He was appointed to his present position as Executive
Vice President and President, Crop Production in May 1999.
Kent Nunn 42 Vice President and Chief Information Officer Farmland Industries; President and
Chief Executive Officer OneSystem Group, LLC - Mr. Nunn joined Farmland in 1990.
He was appointed to his present position of Vice President and Chief Information
Officer in 1995, and has served as President and CEO of OneSystem Group, LLC since
its formation in 1997.
Bob Terry 43 Vice President and General Counsel - Mr. Terry has been with Farmland since
September 1989. He was appointed to his present position in 1993.
</TABLE>
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<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the annual compensation awarded to,
earned by, or paid to the Chief Executive Officer and the Company's next four
most highly compensated executive officers for services rendered to Farmland in
all capacities during 1997, 1998 and 1999.
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
Employee
Variable
Year Ending Compensation LTIP
Name and Principal Position August 31 Salary Plan Payouts
<S> <C> <C> <C> <C>
H. D. Cleberg, 1997 $ 540,292 $ 469,954 $ 514,999
President and 1998 $ 578,878 $ 213,564 $ 400,436
Chief Executive Officer 1999 $ 623,814 $ -0- $ -0-
R. W. Honse, 1997 $ 322,125 $ 245,352 $ 257,499
Executive Vice President and 1998 $ 347,328 $ 110,144 $ 200,218
Chief Operating Officer 1999 $ 426,224 $ -0- $ -0-
G. E. Evans, 1997 $ 317,568 $ 245,352 $ 257,499
Executive Vice President and 1998 $ 333,456 $ 110,144 $ 200,218
Chief Operating Officer 1999 $ 348,456 $ -0- $ -0-
Refrigerated Foods and
Livestock Production Group
J. F. Berardi, 1997 $ 286,814 $ 245,352 $ 243,194
Executive Vice President and 1998 $ 326,016 $ 110,144 $ 200,218
Chief Operating Officer, 1999 $ 340,680 $ -0- $ -0-
Grain and Grain Group
S. A. Riemann 1997 $ 231,240 $ 165,044 $ 171,666
Executive Vice President and 1998 $ 246,264 $ 61,781 $ 133,479
President, Crop Production Group 1999 $ 261,314 $ -0- $ -0-
<FN>
An Annual Employee Variable Compensation Plan, a Management Long-Term Incentive Plan ("LTIP") and an Executive Deferred
Compensation Plan have been established by Farmland to meet the competitive salary programs of other companies and to provide a
method of compensation which is based on the Company's performance.
</TABLE>
Under the Annual Employee Variable Compensation Plan, all regular
salaried employees' total compensation is based on a combination of base and
variable pay. The variable compensation award is dependent upon the employee's
position, the performance of Farmland for the fiscal year and/or the selected
performance criteria of the operating unit where the individual is employed.
Variable compensation is awarded only in years that Farmland achieves a
threshold performance level as approved each year by the Board of Directors. We
intend for our total cash compensation (base plus variable) to be competitive,
recognizing that in the event Farmland fails to achieve a predetermined
threshold level of performance, the base pay alone will place the employees well
under market rates. This system of variable compensation allows us to keep our
fixed costs (base salaries) lower and only increase payroll costs consistent
with our ability to pay. Distributions under this plan are made annually after
the close of each fiscal year.
Under the Management Long-Term Incentive Plan, selected management
employees are paid cash incentive amounts determined by a formula which takes
into account the position held and Farmland's
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aggregate income over periods specified in the plan. Periods covered by the
Management Long-Term Incentive Plan are: 1998 through 2000 ("2000 Plan"), 1999
through 2001 ("2001 Plan") and 2000 through 2002 ("2002 Plan"). For each plan,
if the aggregate income is less than the Threshold or if the sum of the cash
returned to members as patronage refunds, redemptions under the base capital
plan, estate settlement plans and special allocated equity redemptions is less
than the amount specified in the respective Plan, subject to the following
paragraph, no payment will occur with respect to such Plan.
The Board of Directors may, in its sole discretion, amend or
discontinue, adjust or cancel any award otherwise payable under the Management
Long-Term Incentive Plan, should Farmland incur a loss in the final year of any
plan. In addition, the Board of Directors may impact the payout amount of a
plan by approving for inclusion or exclusion in the calculation of performance
the effects of extraordinary events occurring during a plan period.
Subject to the preceding paragraph, if aggregate income equals or
exceeds the Threshold and the cash returned to members equals or exceeds the
specified amounts, then .83% of aggregate income of the three year plan period
is made available to pay incentive awards. In general, a participant must be an
active employee of Farmland at the end of a Plan in order to receive payment of
the award. Absent a significant change in their status, in which event such
percentages may be adjusted, of the amount made available to pay incentives,
Messrs. Cleberg, Honse, Evans, Berardi and Riemann will receive at least 11.2%,
7.2%, 5.6%, 5.6% and 3.7%, respectively, for the 2000 Plan, 11.2%, 7.9%, 5.6%,
5.6% and 3.7% respectively, for the 2001 Plan and 11.2%, 8.4%, 5.6%, 5.6% and
3.7% respectively, for the 2002 Plan.
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<PAGE>
Under the 2000 Plan, the 2001 Plan and the 2002 Plan, certain management
employees, including those executives set forth below, may be eligible for
future awards, contingent on satisfying the terms and conditions of the Plan
as set forth above.
<TABLE>
<CAPTION>
Estimated Future Payouts Under Non-Stock
(A) (B) (C) Price Based Plans
Number of Shares, Performance or Other
Units or Other Period Until Maturation (D) (E) (F)
Name Rights (1) or Payout Threshold Target (2) Maximum (2)
(Amounts in Thousands)
<S> <C> <C> <C> <C> <C>
H. D. Cleberg 1998 - 2000 $ 463
1999 - 2001 460
2000 - 2002 376
R. W. Honse 1998 - 2000 $ 296
1999 - 2001 326
2000 - 2002 282
G. E. Evans 1998 - 2000 $ 232
1999 - 2001 230
2000 - 2002 188
J. F. Berardi 1998 - 2000 $ 232
1999 - 2001 230
2000 - 2002 188
S. A. Riemann 1998 - 2000 $ 153
1999 - 2001 152
2000 - 2002 124
<FN>
(1) Rights in the incentive pool are expressed as a minimum percentage
of the total pool.
(2) The Plan does not specify a target or maximum payment. Payouts are
only made when income over the three year plan period reaches the
threshold amount, and then the amount available for payment is a
fixed percentage of total income.
</FN>
</TABLE>
Our Executive Deferred Compensation Plan permits executive employees to
defer part of their salary and/or part or all of
their variable and incentive compensation. The amount to be deferred and
the period for deferral is specified by an election made
semi-annually. Payments of deferred amounts shall begin at the earlier of
the end of the specified deferral period, retirement,
disability or death. The employee's deferred account balance is credited
annually with interest at the highest rate of interest
paid by Farmland on any subordinated debt certificate sold during the year.
Payment of an employee's account balance shall, at the
employee's election, be a lump sum or in ten annual installments. Amounts
deferred pursuant to the plan for the accounts of the
named individuals during the years 1997, 1998 and 1999 are included in the
cash compensation table.
Farmland established the Farmland Industries, Inc. Employee
Retirement Plan (the "Retirement Plan") in 1986. Generally,
employees whose customary employment is at the rate of at least 15 hours per
week may participate in the Retirement Plan.
Participation in the Retirement Plan is optional prior to age 34, but
mandatory thereafter. Approximately 7,945 active and 9,300
inactive employees were participants in the Retirement Plan on August 31,
1999. The Retirement Plan is funded by employer and
employee contributions to provide lifetime retirement income at normal
retirement age 62, or a reduced income beginning as early as
age 55. The Retirement Plan also contains provisions for death and
disability benefits. The Retirement Plan has been determined
qualified under the Internal Revenue Code. The Retirement Plan is
administered by a committee appointed by the Board of Directors
and all funds are held
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by a bank trustee in accordance with the terms of the trust agreement.
Farmland's funding strategy is to make the maximum annual
contributions to the Retirement Plan's trust fund that can be deducted for
federal income tax purposes. Farmland's contributions
made to the Retirement Plan for the years ended August 31, 1997, 1998 and
1999 were $12.2 million, $-0- million and $ 1.7 million,
respectively.
If the proposed unification of Farmland and Cenex Harvest States is
consummated, the Retirement Plans of either or both
companies may be modified, or a Retirement Plan currently in effect for one
of the companies may be adopted.
Payments to participants in the Retirement Plan are based upon
length of participation and compensation reported for the
four highest of the last ten years of employment. Compensation for this
purpose includes base salary and compensation earned under
the Annual Employee Variable Compensation Plan discussed above. However, at
the present time, the maximum compensation per
participant which may be covered by a qualified pension plan is limited to
$160,000 annually and the maximum retirement benefit
which may be paid by such plan is limited to $130,000 annually by the
Internal Revenue Code ("IRC").
We established a Supplemental Executive Retirement Plan ("SERP")
effective January 1, 1994. The SERP is intended to
supplement the retirement income of executive participants in the Retirement
Plan whose retirement benefit is reduced because of the
limitation of the IRC on the amount of annual salary which can be included
in the computation of retirement income or the amount of
annual retirement benefit which may be paid by a qualified retirement plan.
Prior to September 1, 1999, Farmland's obligation to pay supplemental
retirement benefits under the SERP was limited to the
aggregate cash value of the life insurance policies designated by the Board's
Administrative Committee as policies of the SERP. The
SERP was amended so that effective September 1, 1999, our obligation is to
make up 100% of the employer provided retirement benefit
that would otherwise be lost under the Retirement Plan due to the IRC limits
discussed above for qualified plans.
The following table sets forth, for compensation levels up to
$160,000, the estimated annual benefits payable at age 62
for members of the Retirement Plan. These benefits are not reduced to take
into account Social Security payments. The following
table also sets forth, for compensation levels exceeding $160,000, the
combined estimated annual benefits payable under the
Retirement Plan and SERP assuming: (1) Retirement occurs on or after age 62;
(2) The portion of the employee's benefit lost (due to
the IRC limitations) which would have been provided by the employer's
contribution to the Retirement Plan is 85% of the total
benefit lost; (3) Benefits have been computed using an IRC 401(a)(17) Final
Average Wage of $155,000, which represents the average
of the compensation limits for the last four years; and (4) Grandfathered
benefits, if any, have been ignored. Grandfather benefits
(prior to 1995) would alter the amounts paid from either the Retirement Plan
or the SERP, but would not materially alter the total
benefit amount shown in this chart.
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<PAGE>
<TABLE>
<CAPTION>
Final Averag Years of Service
Wage 15 20 25 30 35
<s <C> <C> <C> <C> <C>
100,000 $ 26,250 $ 35,000 $ 43,750 $ 52,500 $ 61,250
125,000 32,813 43,750 54,688 65,625 76,563
150,000 39,375 52,500 65,625 78,750 91,875
200,000 50,728 67,638 84,547 101,456 118,366
250,000 61,884 82,513 103,141 123,769 144,397
300,000 73,041 97,388 121,734 146,081 170,428
350,000 84,197 112,263 140,328 168,394 196,459
400,000 95,353 127,138 158,922 190,706 222,491
450,000 106,509 142,013 177,516 213,019 248,522
500,000 117,666 156,888 196,109 235,331 274,553
600,000 139,978 186,638 233,297 279,956 326,616
700,000 162,291 216,388 270,484 324,581 378,678
800,000 184,603 246,138 307,672 369,206 430,741
900,000 206,916 275,888 344,859 413,831 482,803
1,000,000 229,228 305,638 382,047 458,456 534,866
1,100,000 251,541 335,388 419,234 503,081 586,928
1,200,000 273,853 365,138 456,422 547,706 638,991
1,300,000 296,166 394,888 493,609 592,331 691,053
1,400,000 318,478 424,638 530,797 636,956 691,053
1,500,000 340,791 454,388 567,984 681,581 795,178
</TABLE>
The following table sets forth the credited years of service for
certain of Farmland's executive officers at August 31, 1999.
Name Years of Creditable Service
H. D. Cleberg 34
R. W. Honse 25
G. E. Evans 25
J. F. Berardi 7
S. A. Riemann 23
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The following persons, none of whom, except as indicated below, is
either currently or formerly an officer or employee of Farmland or any of its
subsidiaries, served as members of the compensation committee during 1999:
Messrs. Jody Bezner, Tom Gist, Harry Fehrenbacher, Barry Jensen and Joe Royster.
Mr. Bezner has served as Vice Chairman and Vice President of the Board of
Farmland from December 1997 to the current date. No executive officer of
Farmland (i) served as a member of a compensation committee (or other board
committee performing equivalent functions or, in the absence of such committee,
the entire board of directors) of another entity, one of whose executive
officers served on the compensation committee of Farmland, (ii) served as a
director of another entity, one of whose executive officers served on the
compensation committee of Farmland, or (iii) served as a member of a
compensation committee (or other board committee performing equivalent functions
or, in the absence of such committee, the entire board of directors) of another
entity, one of whose executive officers served as a director of Farmland.
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<PAGE>
COMPENSATION OF DIRECTORS
Directors' compensation consists of payment of three hundred dollars
($300.00) per day of Farmland business (including, for example, board and
committee meetings and other similar activities), plus reimbursement of
necessary expenses incurred in connection with their official duties. In
addition, we pay annual retainers of $30,000 to the Chairman; $25,000 to each
member of the Executive Committee, other than the Chairman and President; and
$20,000 to all other directors.
ITEM 12. EQUITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Farmland's equity consists of preferred shares, common shares,
associate member common shares and capital credits. Only the common shares have
voting rights.
At August 31, 1999, no person was known by Farmland to be the
beneficial owner of more than five percent of Farmland's common shares.
At August 31, 1999, the directors and executive officers of Farmland,
neither individually nor as a group, beneficially owned in excess of one percent
of any class of Farmland's equity.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Farmland transacts business in the ordinary course with its directors
and with its local cooperative members with which the directors are associated
on terms no more favorable than those available to its other members.
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<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) Listing of Financial Statements, Financial Statement Schedules and Exhibits
(1) FINANCIAL STATEMENTS
Consolidated Balance Sheets, August 31, 1998 and 1999
Consolidated Statements of Operations for each of the years
in the three-year period ended August 31, 1999
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended August 31, 1999
Consolidated Statements of Capital Shares and Equities for
each of the years in the three-year period ended August 31,
1999
Notes to Consolidated Financial Statements
(2) FINANCIAL STATEMENTS
All schedules are omitted as the required information is inapplicable
or the information is presented in the Consolidated Financial Statements
or related notes.
(3) EXHIBITS
Exhibit No. Description of Exhibits
PLAN OF COMBINATION
2. A Transaction Agreement between Cenex Harvest States Cooperatives, a
Minnesota cooperative association and Farmland Industries, Inc., a
Kansas cooperative corporation, dated as of September 23, 1999.*
ARTICLES OF INCORPORATION AND BYLAWS:
3.(i)A Articles of Incorporation and Bylaws of Farmland Industries, Inc.
effective December 10, 1998. (Incorporated by Reference - Form S-1/A,
filed December 16, 1998)
INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING
INDENTURES**:
4.(i)A Form of Trust Indenture with UMB Bank, National Association, providing
for issuance of unsubordinated debt securities, including form of
Demand Loan Certificates. (Incorporated by Reference - Form S-1, No.
33-40759, effective December 31, 1997)
4.(i)B Form of Trust Indenture with Commerce Bank, National Association,
providing for issuance of subordinated debt securities, including forms
of Ten-Year Bond, Series A, Ten-Year Bond, Series B, Five-Year Bond,
Series C, Five-Year Bond, Series D, Ten-Year Monthly Income Bond,
Series E, Ten-Year Monthly Income Bond, Series F, Five-Year Monthly
Income Bond, Series G and Five-Year Monthly Income Bond, Series H.
(Incorporated by Reference - Form S-1, No. 33-40759, effective
December 31, 1997)
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4.(i)C Certificate of Designation for a Series of Preferred Shares Designated
as 8% Series A Cumulative Redeemable Preferred Shares, dated December
19, 1997. (Incorporated by Reference - Form S-2, filed April 3, 1998)
4(.ii)A Syndicated Credit Facility between Farmland Industries, Inc. and
various banks dated May 15, 1996, (Incorporated by Reference - Form 10-
Q filed July 15, 1996)
MATERIAL CONTRACTS:
MANAGEMENT REMUNERATIVE PLANS:
10.(iii)A Employee Variable Compensation Plan (September 1, 1999 - August 31,
2000)
10.(iii)B Farmland Industries, Inc. Management Long-Term Incentive Plan
(Incorporated by Reference - Form 10-K, filed November 7, 1997)
10.(iii)B(1) Exhibit F (Fiscal years 1998 through 2000) (Incorporated
by Reference - Form 10-K, filed November 7, 1997)
10.(iii)B(2) Exhibit G (Fiscal years 1999 through 2001) (Incorporated
by Reference - Form 10-K, filed November 20, 1998)
10.(iii)B(3) Exhibit H (Fiscal years 2000 through 2002)
10.(iii)C Farmland Industries, Inc. Supplemental Executive Retirement Plan
(As Amended and Restated Effective September 1, 1999)
10.(iii)C(1) Resolution Approving the Revision of Appendix A and
Appendix A (Incorporated by Reference - Form 10-K, filed November 27,
1996)
10.(iii)D Farmland Industries, Inc. Executive Deferred Compensation Plan (As
Amended and Restated Effective November 1, 1996) (Incorporated by
Reference - Form 10-K, filed November 27, 1996)
10.(iii)E Employment agreement between Farmland and Mr. H. D. Cleberg, dated
May 1, 1999 (Incorporated by Reference - Form 10-Q, filed July 14,
1999).
10.(iii)F Employment Agreement between Farmland and Mr. Robert Honse, dated
June 7, 1999 (Incorporated by Reference - Form 10-Q, filed July 14,
1999).
10.(iii)G Summary of severance and retention bonus plan for certain
management employees of Farmland, dated June 7, 1999 (Incorporated by
Reference - Form 10-Q filed July 14, 1999).
21 Subsidiaries of the Registrant
24 Power of Attorney
27 Financial Data Schedule
* Exhibits to the Transaction Agreement do not contain information material to
an investment decision and have not been filed. At the Commission's request, we
agree to furnish a copy of such exhibits.
** Long-term debt instruments pursuant to which the debt issuable thereunder
does not exceed 10% of Farmland's total assets have not been filed. At the
Commission's request, we agree to furnish a copy of such instruments or
agreements.
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<PAGE>
(B) Reports on Form 8-K
No reports on Form 8-K have been filed during the last quarter of the
period covered by the report.
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT
As of the filing of this Form 10-K, no annual report covering the
Registrant's last fiscal year and no proxy statement, form of proxy or other
proxy soliciting material, has been sent to holders of the Registrant's
securities. At such time as any such annual report or proxy soliciting material
is sent to holders of the Registrant's securities subsequent to the filing of
this Form 10-K, four copies of the same will be furnished to the Commission as
and to the extent required by the Instructions to Form 10-K.
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<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES ACT
OF 1934, FARMLAND INDUSTRIES, INC. HAS DULY CAUSED THIS REPORT ON FORM 10-K TO
BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF KANSAS CITY, STATE OF MISSOURI ON NOVEMBER 19, 1999.
FARMLAND INDUSTRIES, INC.
BY /s/ TERRY M. CAMPBELL
Terry M. Campbell
Executive Vice President and
Chief Financial Officer
BY /s/ ROBERT B. TERRY
Robert B. Terry
Vice President and General Counsel
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1934, THIS FORM 10-K
HAS BEEN SIGNED FOR THE FOLLOWING PERSONS ON BEHALF OF FARMLAND INDUSTRIES, INC.
AND IN THE CAPACITIES AND ON THE DATE INDICATED PURSUANT TO VALID POWER OF
ATTORNEY EXECUTED ON OCTOBER 20, 1999.
Signature Title Date
* Chairman of Board, November 19, 1999
Albert J. Shivley Director
* Vice Chairman of Board November 19, 1999
Jody Bezner Vice President and Director
* Director November 19, 1999
Lyman L. Adams, Jr.
* Director November 19, 1999
* Director November 19, 1999
Richard L. Detten
* Director November 19, 1999
Steven Erdman
* Director November 19, 1999
Harry Fehrenbacher
* Director November 19, 1999
Martie Floyd
* Director November 19, 1999
Warren Gerdes
* Director November 19, 1999
Thomas H. Gist
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<PAGE>
* Director November 19, 1999
Ben Griffith
* Director November 19, 1999
Gail D. Hall
* Director November 19, 1999
Barry Jensen
* Director November 19, 1999
Ron Jurgens
* Director November 19, 1999
William F. Kuhlman
* Director November 19, 1999
Greg Pfenning
* Director November 19, 1999
Monte Romohr
* Director November 19, 1999
Joe Royster
* Director November 19, 1999
E. Kent Stamper
* Director November 19, 1999
Eli F. Vaughn
* Director November 19, 1999
Frank Wilson
/s/ H.D. CLEBERG President, November 19, 1999
H. D. Cleberg Chief Executive
Officer
/s/ TERRY M. CAMPBELL Executive Vice President November 19, 1999
Terry M. Campbell and Chief Financial Officer
(Principal Financial Officer)
/s/ MERL DANIEL Vice President and November 19, 1999
Merl Daniel Controller
(Principal Accounting Officer)
*BY/s/ TERRY M. CAMPBELL
Terry M. Campbell
Attorney-In-Fact
Page 82
EXHIBIT 99
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
EXHIBITS
To
Form 10-K
August 31, 1999
Under
The Securities Exchange Act of 1934
Farmland Industries, Inc.
EXHIBIT INDEX
The following exhibits are filed as a part of this Form 10-K Registration
Statement. Certain of these exhibits are incorporated by reference as
indicated. Items marked with an asterisk (*) are filed herein.
Exhibit No. Description of Exhibits
PLAN OF COMBINATION
2. A Transaction Agreement between Cenex Harvest States Cooperatives, a
Minnesota cooperative association and Farmland Industries, Inc., a
Kansas cooperative corporation, dated as of September 23, 1999.*
ARTICLES OF INCORPORATION AND BYLAWS:
3.(i)A Articles of Incorporation and Bylaws of Farmland Industries, Inc.
effective December 10, 1998. (Incorporated by Reference - Form S-
1/A, filed December 16, 1998)
INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING
INDENTURES**:
4.(i)A Form of Trust Indenture with UMB Bank, National Association,
providing for issuance of unsubordinated debt securities,
including form of Demand Loan Certificates. (Incorporated by
Reference - Form S-1, No. 33-40759, effective December 31, 1997)
4.(i)B Form of Trust Indenture with Commerce Bank, National Association,
providing for issuance of subordinated debt securities, including
forms of Ten-Year Bond, Series A, Ten-Year Bond, Series B, Five-
Year Bond, Series C, Five-Year Bond, Series D, Ten-Year Monthly
Income Bond, Series E, Ten-Year Monthly Income Bond, Series F,
Five-Year Monthly Income Bond, Series G and Five-Year Monthly
Income Bond, Series H. (Incorporated by Reference - Form S-1, No.
33-40759, effective December 31, 1997)
4.(i)C Certificate of Designation for a Series of Preferred Shares
Designated as 8% Series A Cumulative Redeemable Preferred Shares,
dated December 19, 1997. (Incorporated by Reference - Form S-2,
filed April 3, 1998)
4(.ii)A Syndicated Credit Facility between Farmland Industries, Inc. and
various banks dated May 15, 1996, (Incorporated by Reference - Form
10-Q filed July 15, 1996)
MATERIAL CONTRACTS:
MANAGEMENT REMUNERATIVE PLANS:
10.(iii)A Employee Variable Compensation Plan (September 1, 1999 - August 31,
2000)
10.(iii)B Farmland Industries, Inc. Management Long-Term Incentive Plan
(Incorporated by Reference - Form 10-K, filed November 7, 1997)
10.(iii)B(1) Exhibit F (Fiscal years 1998 through 2000) (Incorporated
by Reference - Form 10-K, filed November 7, 1997)
10.(iii)B(2) Exhibit G (Fiscal years 1999 through 2001) (Incorporated
by Reference - Form 10-K, filed November 20, 1998)
10.(iii)B(3) Exhibit H (Fiscal years 2000 through 2002)
10.(iii)C Farmland Industries, Inc. Supplemental Executive Retirement Plan
(As Amended and Restated Effective September 1, 1999)
10.(iii)C(1) Resolution Approving the Revision of Appendix A and
Appendix A (Incorporated by Reference - Form 10-K, filed
November 27, 1996)
10.(iii)D Farmland Industries, Inc. Executive Deferred Compensation Plan (As
Amended and Restated Effective November 1, 1996) (Incorporated by
Reference - Form 10-K, filed November 27, 1996)
10.(iii)E Employment agreement between Farmland and Mr. H. D. Cleberg, dated
May 1, 1999 (Incorporated by Reference - Form 10-Q, filed July 14,
1999).
10.(iii)F Employment Agreement between Farmland and Mr. Robert Honse, dated
June 7, 1999 (Incorporated by Reference - Form 10-Q, filed July 14,
1999).
10.(iii)G Summary of severance and retention bonus plan for certain
management employees of Farmland, dated June 7, 1999 (Incorporated
by Reference - Form 10-Q filed July 14, 1999).
21 Subsidiaries of the Registrant
24 Power of Attorney
27 Financial Data Schedule
EXHIBIT 10.(iii)A
FY 2000 STANDARD VARIABLE COMPENSATION PLAN
(SEPTEMBER 1, 1999 - AUGUST 31, 2000)
OBJECTIVE
To pay additional cash beyond base salary to eligible employees
of Farmland Industries, Inc. or one of its units, contingent
upon the company's financial performance. Farmland Industries,
Inc. ("Corporate") must achieve a threshold or minimum return on
equity before extraordinary items, or no payout occurs,
regardless of individual business/service unit results.
This plan includes four important exhibits which are an integral
part of the plan structure. Please be aware of and consult
them. They include the following:
Exhibit A - Corporate financial performance criteria
and levels
Exhibit B - A summary schedule of payout opportunities by
earnings level
Exhibit C - Additional detail on determination of payout
Exhibit D - Descriptions and definitions of accounting terms
and methodologies relevant to this plan
PLAN STRUCTURE
The plan provides a one-time cash payment following the
conclusion of FY 2000 to eligible employees for the attainment
of corporate objectives. The corporate standard measure is
Return On Equity (ROE). With Senior Management approval,
including the Chief Executive Officer, a business unit may be
based completely on corporate ROE. Alternatively, a business
unit may be based partially or completely on unit measures, with
full Senior Management approval, and would thus not participate
in this standard plan. Farmland would have to achieve at least
the threshold ROE level before any payout would occur under a
customized unit plan.
For appointed corporate officers, 50% of payout is based on ROE
performance; 50% is based on cost savings realized from major
corporate initiatives, including strategic sourcing, Reliant
Energy, SAP and corporate administrative expense control.
A further requirement for payout to Farmland Industries, Inc.
appointed corporate officers is that cash patronage payments to
members must occur; if not, this group will receive no payout
under the terms of this plan.
ELIGIBILITY
The following types of employees are ineligible for payout
under the Standard Variable Compensation Plan:
o Employees whose terms and conditions of employment are
subject to collective bargaining
o Employees hired after 6/1/2000 (Waived if the employee is a
former regular full time employee during FY 2000. Payout is
prorated)
o Regular part time employees with less than 500 hours of
service during FY 2000
o Temporary employees with less than 1000 hours of service
during FY 99
o Employees terminated for cause prior to 8/31/2000
o Employees who terminate voluntarily prior to 8/31/2000
(Employees who terminate to accept a position with a member
cooperative may be eligible for a prorated payout.)
o Employees included in variable compensation plans other than
the standard variable compensation plan. Exceptions must be
approved by Senior Management of the affected area and by the
VP, Human Resources.
Certain classes of employees who terminate prior to the end of
the fiscal year will receive payout based on their eligible
earnings during the year:
Death/Disability
Retirement
Reduction in Force
Focus Team member obtaining outside employment
Layoff
Leave of Absence
Hired after 9/1/99 but on or before 6/1/2000
Involuntary separations, other than for reasons included in the
list above, which are not for performance or for cause, may
result in prorated payout.
Employees who voluntarily terminate prior to 08/31/2000 for the
purpose of assuming a position with a system member cooperative
may be eligible to receive a payout. To secure eligibility, the
employee must notify Corporate Human Resources, in writing, at
the time of separation and ensure that the system member
cooperative notifies Farmland's Corporate Human Resources
Department, in writing, to verify employment from the point of
separation through the conclusion of the plan year.
Employees on formal disciplinary or performance probation are
ineligible for that portion of the fiscal year.
DETERMINATION
OF PAYOUT
Payout is determined as a percentage of eligible gross wages or
salary paid during the fiscal year, as shown in Exhibits B and
C. Corporate performance measurements are labeled "threshold",
"target", and "maximum".
Threshold - The minimal performance level required for the plan
to pay out. No payout occurs for achievement below threshold.
Target - Identifies the actual performance objective.
Maximum - A performance level exceeding target at which the
payout as a percentage of eligible gross wages or salary is
frozen. No payout occurs beyond these percentages regardless of
performance.
Payout for performance between threshold and target or target
and maximum is prorated.
In the event of a merger, change of control, or other major
organizational structure change during the course of the plan
year, the rate of earnings for the year, up to the effective
date of the change, would be projected to the end of the year in
order to derive an ROE performance estimate. If, at the date of
the consummation of the merger, change of control, or other
major organizational structure change, the projected
performance were at the threshold level or above compared to the
most recent 6-year history for the first six months of a fiscal
year, then a payout pro-rated for the portion of the year
completed prior to the major organizational change would occur.
A similar projection to year end would occur in order to
determine performance level and a pro-rated payout for the major
savings initiative portion applicable to appointed corporate
officers. In no event, however, will payout occur if Farmland
experiences negative year-to-date earnings up to the point of
merger, change of control, or other major organizational
structure change.
APPROVED:
________________________________________
H.D. Cleberg
President and CEO
EXHIBIT A
FY 2000 PERFORMANCE CRITERIA AND GOALS
Corporate Return on Equity:
Threshold 8%
Target 11%
Maximum 16%
Savings From Major Initiatives *(Appointed Corporate Officers):
Threshold $30,000,000
Target $42,000,000
Maximum $55,000,000
*Includes strategic sourcing project, Reliant Energy, SAP and corporate
expenses.
<TABLE>
<CAPTION>
EXHIBIT B
FY 2000 STANDARD VARIABLE COMPENSATION PLAN
Threshold - Target - Maximum Earnings V Comp Calculation Point*
<S> <C> <C>
3 - 5 - 8 All Non - Exempt** Any Earnings
3 - 5 - 8 Below $36,050 Exempt Actual Earnings
3 - 6 - 10 $36,050 - $39,654 $37,855
4 - 7 - 12 $39,655 - $43,619 $41,640
5 - 8 - 15 $43,620 - $50,164 $46,895
5 - 10 - 18*** $50,165 - $57,689 $53,930
6 - 12 - 22 $57,690 - $66,344 $62,020
7 - 15 - 27 $66,345 - $76,299 $71,325
8 - 18 - 33 $76,300 - $87,744 $82,025
10 - 22 - 40 $87,745 - $100,909 $94,330
12 - 25 - 46 $100,910 - $116,049 $108,480
12 - 25 - 46 $116,050 - $133,459 $124,755
12 - 25 - 46 $133,460 - $153,479 $143,470
14 - 28 - 52 $153,480 + Actual Earnings
(Non - FII Executives)
</TABLE>
* I.E., for any exempt employee whose earnings fall within a particular
range, the payout is calculated on this middle value.
** Includes Truck Drivers
*** Employees legitimately considered Production Supervisors will receive AT
LEAST this percentage payout opportunity level, regardless of actual
pay. Calculation point against which percentage is applied is based on
actual pay.
<TABLE>
<CAPTION>
EXECUTIVES
Threshold - Target - Maximum Earnings V Comp Calculation Point
<S> <C> <C>
18 - 36 - 67 Designated FII Executives
22 - 45 - 83 Designated FII Executives
Determined by Board President and CEO
$92,700 - $111,239 $101,970
$111,240 - $133,489 $122,365
$133,490 - $160,189 $146,840
$160,190 - $192,229 $176,210
$192,230 - $230,674 $211,455
$230,675 - $276,809 $253,745
$276,810 - $332,169 $304,490
$332,170 - $398,604 $365,390
$398,605 - $478,324 $438,465
$478,325 - $573,989 $526,160
$573,990 - $688,789 $631,390
$688,790 - $826,549 $757,170
$826,550 + Actual Earnings
</TABLE>
Note: These scales are different from those used in Fiscal Year 1999.
EXHIBIT C
DETAIL ON DETERMINATION OF PAYOUT
NON-EXEMPT EMPLOYEES:
Payout is determined as a percentage of eligible gross earnings paid
from 9/1/99 to 8/31/2000.
Note: Eligible gross wages may exclude some lump sums.
EXEMPT/MANAGEMENT EMPLOYEES:
Payout is determined as a percentage of the Variable Comp Calculation
Point based on eligible gross wages from 9/1/99 to 8/31/2000.
Exhibit B grid lists the percentage opportunities assigned to each
Variable Comp Calculation Point.**
NOTE: Lump Sum amounts given during the fiscal year will not be
included in Eligible gross wages unless they were given in
lieu of merit increase.
**Variable Comp Calculation Point and designated percentage will be
used unless comparison to FY 96 salary range midpoint and grade
determined percentage results in a higher payout amount; but once a
person has transitioned to the current variable pay computation
method, that person cannot return to receiving a payout based on the
FY 96 salary range midpoint. Individuals hired, promoted or demoted
after 9/1/96 are ineligible for this comparison.
ELIGIBLE EARNINGS:
Base earnings, merit increase pay, lump sum in lieu of a merit
increase, shift differential, bridge differential, and geographic
differential. Production supervisors flat rate overtime payments.
Non-exempts overtime payments.
NON-ELIGIBLE EARNINGS:
The following is list of the most common items not included as
earnings:
Vacation and personal holiday balance lump sum payments
Previous FY variable compensation payment
Sales Commission, SPIFFs payment, bonus, etc.
Severance pay
Relocation reimbursements
Exceptions to normal eligibility or ineligibility of earnings must be
approved in advance by the appropriate FII Vice President and the
Director, Human Resource Information Team.
EXHIBIT D
ACCOUNTING TERMS AND METHODOLOGY
DEFINITIONS
INCOME is defined as income before taxes and extraordinary items as reported
for Key Results purposes.
EQUITY is the prior year's ending equity. Equity includes all capital shares
and equities (preferred, common and associate member shares, patronage refunds
for reinvestment, and earned surplus). It does not include minority owners
equity in subsidiaries.
RETURN ON EQUITY (ROE) is the ratio determined by dividing Income by Equity.
TREATMENT OF THE VARIABLE COMPENSATION EXPENSE
The ROE targets have been expressed after the recognition of the variable
compensation expense. In calculating the level at which variable compensation
will be paid, the variable compensation expense is added back to Income. For
example, assume Equity is $923,000,000 and the ROE for threshold is expressed
as 8%. This would correspond to Income of $73,840,000 (.08 times
$923,000,000). However, the $73,840,000 includes variable compensation expense
(variable compensation expense is budgeted at target and an accrual is made
each month).
EXAMPLE OF REQUIRED INCOME*
(ASSUMING PRIOR YEAR ENDING EQUITY OF $923,000,000 MILLION)
ROE Required Income
Threshold 8.0% $ 73,840,000
Target 11.0% $ 101,530,000
Maximum 16.0% $ 147,680,000
*Actual FY 99 ending ROE has yet to be determined. When it is, the income
figures will be modified accordingly.
DETERMINATION OF EXTRAORDINARY ITEM
If Farmland achieves its performance goals, but experiences a loss year due to
extraordinary items, the Board of Directors of Farmland Industries, Inc.
maintains the discretion to authorize, adjust, or deny payout of the management
portion of the Variable Compensation Plan (See the definition of management
employees in the main plan document and in Exhibit "A"). This also applies to
management level employees who participate in customized plans. Employees on
sales incentive plans, with base pay administered at a lower level, are NOT
affected by this provision unless specific portions of their plans are tied to
corporate performance.
GUIDELINES FOR "EXTRAORDINARY" DESIGNATION
The Chief Financial Officer and the Chief Executive Officer must approve the
classification of any item as "extraordinary." Transactions deemed as
"extraordinary" and therefore excluded in the determination of Income for
variable compensation include:
o The punitive portion of litigation results in favor of or against Farmland,
excluding redemptive payments on normal business matter where the intent is
to substantially restore net income to where it would have been had the
incident not occurred.
o Non-recurring (one-time) adjustments to income or expense such as the gain
from settlement of the retirement plan. Any such items would generally be
reported as extraordinary items on Farmland financial statements under
generally accepted accounting principles.
o The gain or loss on the disposal of a major asset, group of assets, or
investments.
o The gain or loss from any new business activity or business unit added
subsequent to the approval of the Business Plan, provided that the
acquisition was such that it required specific Board of Director approval
outside of the business plan.
o The impact of adjustments resulting from LIFO inventory computations or
reserves.
o Other items as approved.
Specific requests by an operating unit for treatment of an item as
"extraordinary" must be approved by the Senior Management representative
before review by the Chief Financial Officer and the Chief Executive
Officer.
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
FISCAL YEAR 1999
AGGROW FINANCE, INC., a wholly-owned subsidiary, was formed under the laws of
the State of Arkansas. Aggrow Finance, Inc. has been included in the
Consolidated Financial Statements filed in this registration.
AGRONOMY SERVICE BUREAU, L.L.C., a 56%-owned subsidiary, was formed under the
laws of the State of Mississippi. Agronomy Service Bureau has been included in
the Consolidated Financial Statements filed in this registration.
CERES REALTY CORPORATION, a wholly-owned subsidiary, was formed under the laws
of the State of Missouri. Ceres Realty Corporation has been included in the
Consolidated Financial Statements filed in this registration.
COLORADO BOAR STUD REAL ESTATE LLC, a wholly-owned subsidiary, was formed under
the laws of the State of Minnesota. Colorado Boar Stud Real Estate LLC been
included in the Consolidated Financial Statements filed in this registration.
DOUBLE CIRCLE FARM SUPPLY COMPANY, a wholly-owned subsidiary, was formed under
the laws of the State of Nevada. Double Circle Farm Supply Company has been
included in the Consolidated Financial Statements filed in this registration.
EQUITY COUNTRY, INC., a wholly-owned subsidiary, was formed under the laws of
the State of Delaware. Equity Country, Inc. has been included in the
Consolidated Financial Statements filed in this registration.
FARMERS CHEMICAL COMPANY, a wholly-owned subsidiary, was formed under the laws
of the State of Kansas. Farmers Chemical Company has been included in the
Consolidated Financial Statements filed in this registration.
FARMERS PETROLEUM, INC., a wholly-owned subsidiary, was formed under the laws of
the State of Michigan. Farmers Petroleum Inc. has been included in the
Consolidated Financial Statements filed in this registration.
FARMLAND-ATWOOD COMPANY, LLC, a wholly-owned subsidiary, was formed under the
laws of the State of Delaware. Farmland-Atwood Company, LLC has been included
in the Consolidated Financial Statements filed in this registration.
FARMLAND FOODS, INC., a 99%-owned subsidiary, was formed under the laws of the
State of Kansas. Farmland Foods, Inc. has been included in the Consolidated
Financial Statements filed in this registration.
FARMLAND-HARVEST STATES, L.L.C., an 80%-owned subsidiary, was formed under the
laws of the State of Delaware. Farmland-Harvest States, L.L.C. has been
included in the Consolidated Financial Statements filed in this registration.
FARMLAND INDUSTRIAS S.A. DE C.V., a wholly-owned subsidiary, was formed under
the laws of Mexico. Farmland Industrias S.A. de C.V. has been included in the
Consolidated Financial Statements filed in this registration.
FARMLAND INDUSTRIES, LTD., a wholly-owned subsidiary, was formed under the laws
of the United States Virgin Islands. Farmland Industries, Ltd. has been
included in the Consolidated Financial Statements filed in this registration.
FARMLAND INSURANCE AGENCY, a wholly-owned subsidiary, was formed under the laws
of the State of Missouri. Farmland Insurance Agency has been included in the
Consolidated Financial Statements filed in this registration.
FARMLAND INTERNATIONAL BUSINESS, LTD., a wholly-owned subsidiary, was formed
under the laws of the State of Missouri. Farmland International Business, Ltd.
Has been included in the Consolidated Financial Statements filed in this
registration.
FARMLAND NATIONAL BEEF FOREIGN SALES CORPORATION, a 69%-owned subsidiary, was
formed under the laws under the United State Virgin Islands. Farmland National
Beef Foreign Sales Corporation has been included in the Consolidated Financial
Statements filed in this registration.
FARMLAND NATIONAL BEEF PACKING COMPANY, L.P., a 69%-owned subsidiary, was formed
under the laws of the State of Delaware. National Beef Packing Company, L.P.
has been included in the Consolidated Financial Statements filed in this
registration.
FARMLAND PIPELINE COMPANY, a wholly-owned subsidiary, was formed under the laws
of the State of Kansas. Farmland Pipeline Company has been included in the
Consolidated Financial Statements filed in this registration.
FARMLAND SECURITIES COMPANY, a wholly-owned subsidiary, was formed under the
laws of the State of Delaware. Farmland Securities Company has been included in
the Consolidated Financial Statements filed in this registration.
FARMLAND TRANSPORTATION, INC., a wholly-owned subsidiary, was formed under the
laws of the State of Missouri. Farmland Transportation, Inc. has been included
in the Consolidated Financial Statements filed in this registration.
FDL FOODS, INC., a wholly-owned subsidiary, was formed under the laws of the
State of Iowa. FDL Foods, Inc. has been included in the Consolidated Financial
Statements filed in this registration.
FII COMMUNICATIONS, L.L.C., a wholly-owned subsidiary, was formed under the laws
of the State of Missouri. FII Communications, L.L.C. has been included in the
Consolidated Financial Statements filed in this registration.
HEARTLAND WHEAT GROWERS, INC., a 79%-owned subsidiary, was formed under the laws
of the State of Kansas. Heartland Wheat Growers, Inc. has been included in the
Consolidated Financial Statements filed in this registration.
HEARTLAND WHEAT GROWERS, L.P., a 78%-owned subsidiary, was formed under the laws
of the State of Kansas. Heartland Wheat Growers, L.P. has been included in the
Consolidated Financial Statements filed in this registration.
INVEST GRAIN, LTD., a wholly-owned subsidiary, was formed under the laws of the
British Virgin Islands. Invest Grain, Ltd. has been included in the
Consolidated Financial Statements filed in this registration.
KANSAS CITY STEAK COMPANY, L.L.C., a 69%-owned subsidiary, was formed under the
laws of the State of Missouri. Kansas City Steak Company, L.L.C. has been
included in the Consolidated Financial Statements filed in this registration.
NATIONAL CARRIERS, INC., a 99%-owned subsidiary, was formed under the laws of
the State of Kansas. National Carriers, Inc. has been included in the
Consolidated Financial Statements filed in this registration.
NBPCO, L.L.C., a wholly-owned subsidiary, was formed under the laws of the State
of Kansas. NBPCo, L.L.C. has been included in the Consolidated Financial
Statements filed in this registration.
NORTHEAST ARKANSAS OIL COMPANY, L.L.C., a wholly-owned subsidiary, was formed
under the laws of the State of Arkansas. Northeast Arkansas Oil Company, L.L.C.
has been included in the Consolidated Financial Statements in this registration.
SF SERVICES, INC., a wholly-owned subsidiary, was formed under the laws of the
State of Kansas. SF Services, Inc. has been included in the Consolidated
Financial Statements in this registration.
SOUTHERN FARMERS ASSOCIATION, INC., a wholly-owned subsidiary, was formed under
the laws of the State of Arkansas. Southern Farmers Association, Inc. has been
included in the Consolidated Financial Statements in this registration.
SOUTHERN FARM FISH PROCESSORS, INC., a wholly-owned subsidiary, was formed under
the laws of the State of Arkansas. Southern Farm Fish Processors, Inc. has been
included in the Consolidated Financial Statements in this registration.
TRADIGRAIN DEL PERU, S.A., a wholly-owned subsidiary, was formed under the laws
of Peru. Tradigrain del Peru S.A. has been included in the Consolidated
Financial Statements filed in this registration.
TRADIGRAIN DO BRASIL LTDA, a wholly-owned subsidiary, was formed under the laws
of Brazil. Tradigrain DO Brasil LTDA has been included in the Consolidated
Financial Statements filed in this registration.
TRADIGRAIN GMBH, a wholly-owned subsidiary, was formed under the laws of
Germany. Tradigrain GmbH has been included in the Consolidated Financial
Statements filed in this registration.
TRADIGRAIN LTD., a wholly-owned subsidiary, was formed under the laws of Great
Britain. Tradigrain LTD. has been included in the Consolidated Financial
Statements filed in this registration.
TRADIGRAIN S.A., a wholly-owned subsidiary, was formed under the laws of
Switzerland. Tradigrain S.A. of Switzerland has been included in the
Consolidated Financial Statements filed in this registration.
TRADIGRAIN S.A., a wholly-owned subsidiary, was formed under the laws of
Argentina. Tradigrain S.A. of Argentina has been included in the Consolidated
Financial Statements filed in this registration.
TRADIGRAIN S.A., a wholly-owned subsidiary, was formed under the laws of France.
Tradigrain S.A. of France has been included in the Consolidated Financial
Statements filed in this registration.
TRADIGRAIN SHIPPING S.A., a wholly-owned subsidiary, was formed under the laws
of Switzerland. Tradigrain Shipping S.A. has been included in the Consolidated
Financial Statements filed in this registration.
TRADIGRAIN, INC., a wholly-owned subsidiary, was formed under the laws of the
State of Tennessee. Tradigrain, Inc. has been included in the Consolidated
Financial Statements filed in this registration.
TRADIGRAIN KFT BUDAPEST, a wholly-owned subsidiary, was formed under the laws of
Hungary. Tradigrain Kft Budapest has been included in the Consolidated
Financial Statements filed in the registration.
TRADIGRAIN LTD. MOSCOW, a wholly-owned subsidiary, was formed under the laws of
Russia. Tradigrain Ltd. Moscow has been included in the Consolidated Financial
Statements filed in the registration.
TRADIGRAIN UKRAINE, LTD., a wholly-owned subsidiary, was formed under the laws
of Ukraine. Tradigrain Ukraine, Ltd. has been included in the Consolidated
Financial Statements filed in the registration.
TRADIGRAIN URUGUAY S.A., a wholly-owned subsidiary, was formed under the laws of
Uruguay. Tradigrain Uruguay S.A. has been included in the Consolidated
Financial Statements filed in the registration.
TRIUMPH PORK GROUP LLC, a 56%-owned subsidiary, was formed under the laws of the
State of Missouri. Triumph Pork Group LLC has been included in the Consolidated
Financial Statements filed in the registration.
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose name appears below
constitutes and appoints Robert B. Terry and Terry M. Campbell, and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all Farmland Industries, Inc.' s 1998
annual reports prepared, pursuant to Sections 13 or 15d of the Securities Act
of 1934, (including any amendments thereto), and file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
This Power of Attorney may be executed in multiple counterparts, each of
which shall be deemed an original, but which taken together shall constitute one
instrument.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
s/s ALBERT J. SHIVLEY Chairman of Board October 20, 1999
---------------------------
Albert J. Shivley and Director
s/s JODY BEZNER Vice Chairman of Board October 20, 1999
---------------------------
Jody Bezner and Director
s/s LYMAN L. ADAMS, JR. Director October 20, 1999
---------------------------
Lyman L. Adams, Jr.
s/s RONALD J. AMUNDSON Director October 20, 1999
---------------------------
Ronald J. Amundson
s/s BAXTER ANKERSTJERNE Director October 20, 1999
---------------------------
Baxter Ankerstjerne
s/s RICHARD L. DETTEN Director October 20, 1999
---------------------------
Richard L. Detten
s/s STEVEN ERDMAN Director October 20, 1999
---------------------------
Steven Erdman
s/s HARRY FEHRENBACHER Director October 20, 1999
---------------------------
Harry Fehrenbacher
s/s MARTIE FLOYD Director October 20, 1999
---------------------------
Martie Floyd
s/s WARREN GERDES Director October 20, 1999
---------------------------
Warren Gerdes
s/s THOMAS H. GIST Director October 20, 1999
---------------------------
Thomas H. Gist
s/s BEN GRIFFITH Director October 20, 1999
---------------------------
Ben Griffith
s/s GAIL D. HALL Director October 20, 1999
---------------------------
Gail D. Hall
s/s BARRY JENSEN Director October 20, 1999
---------------------------
Barry Jensen
s/s RON JURGENS Director October 20, 1999
---------------------------
Ron Jurgens
s/s WILLIAM F. KUHLMAN Director October 20, 1999
---------------------------
William F. Kuhlman
s/s GREG PFENNING Director October 20, 1999
---------------------------
Greg Pfenning
s/s MONTE ROMOHR Director October 20, 1999
---------------------------
Monte Romohr
s/s JOE ROYSTER Director October 20, 1999
---------------------------
Joe Royster
s/s E. KENT STAMPER Director October 20, 1999
---------------------------
E. Kent Stamper
s/s ELI F. VAUGHN Director October 20, 1999
---------------------------
Eli F. Vaughn
s/s FRANK WILSON Director October 20, 1999
---------------------------
Frank Wilson
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the August 31,
1999 Form 10-K and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-START> SEP-01-1998
<PERIOD-END> AUG-31-1999
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 794,237
<ALLOWANCES> 0
<INVENTORY> 840,504
<CURRENT-ASSETS> 1,838,069
<PP&E> 1,744,252
<DEPRECIATION> 911,049
<TOTAL-ASSETS> 3,257,649
<CURRENT-LIABILITIES> 1,387,630
<BONDS> 808,413
0
100,069
<COMMON> 508,029
<OTHER-SE> 309,229
<TOTAL-LIABILITY-AND-EQUITY> 3,257,649
<SALES> 10,508,096
<TOTAL-REVENUES> 10,709,073
<CGS> 10,081,617
<TOTAL-COSTS> 10,231,081
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 90,773
<INCOME-PRETAX> (41,961)
<INCOME-TAX> (8,043)
<INCOME-CONTINUING> 13,865
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,865
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
EXHIBIT 10.(III)B(3)
EXHIBIT H
Performance criteria for FY 2000 - FY 2002 cycle include the following:
Aggregate Income, defined as the targeted income, before taxes and extraordinary
items1, for the entire three-year period, as shown in the table below.
Performance goals and amounts funding the payout pool include the following:
Performance Level Aggregate Income % of Net Earnings to Pool
Below Target Below $405,302,000 0%
Target $405,302,000 .83% of earnings
Above Target Above$405,302,000 .83% of earnings
During the FY 2000 - FY 2002 cycle, Farmland Industries, Inc. must return to its
members at least $119,000,000 in cash2, or no payout will occur under this plan.
1The Chief Financial Officer and the Chief Executive Officer must approve
the classification of any item as "extraordinary". Transactions deemed as
"extraordinary" and therefore excluded in the determination of income for
variable compensation include:
. The punitive portion of litigation results in favor of or against
Farmland, excluding redemptive payments on normal business matter where
the intent is to substantially restore net income to where it would have
been had the incident not occurred.
. Non-recurring (one-time) adjustment to income or expense such as the
gain from settlement of the retirement plan or a write-down of a major
fixed asset.
. The gain or loss on the disposal of a major asset or a group of assets.
. The impact of adjustments resulting from LIFO inventory computations or
reserves.
. Other items as approved.
Specific requests by an operating unit for treatment of an item as
"extraordinary" must be approved by the Senior Management representative
before review by the Chief Financial Officer and the Chief Executive
Officer.
2Cash Returned to Members includes cash patronage, equity redemptions,
additional equity redemptions due to tax savings on net operating losses
(NOL), ownership retirements, capital credits, preferred stock dividends
and preferred stock redemption and Cooperative Finance Company cash
patronage refund.
Exhibit 10.(iii)C
FARMLAND INDUSTRIES, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
AS AMENDED AND RESTATED EFFECTIVE SEPTEMBER 1, 1999
Secretary Document Number: 420
TABLE OF CONTENTS
1.NAME OF PLAN ........................................................1
2.EFFECTIVE DATE ......................................................1
3.DEFINITIONS .........................................................1
a) DEFERRED COMPENSATION PLAN .......................................1
b) RETIREMENT PLAN ..................................................1
c) RETIREMENT PLAN BENEFIT ..........................................1
d) NORMAL RETIREMENT DATE ...........................................1
e) COMPENSATION .....................................................1
f) AVERAGE COMPENSATION .............................................1
g) BOARD ............................................................2
h) PLAN YEAR ........................................................2
i) TERMS ............................................................2
4. PARTICIPANTS........................................................2
5. SUPPLEMENTAL RETIREMENT BENEFIT.....................................2
a) COMMENCEMENT AND FORM OF BENEFIT .................................2
b) AMOUNT OF SUPPLEMENTAL RETIREMENT BENEFIT ........................2
6. DISABILITY BENEFITS.................................................4
a) AMOUNT OF BENEFIT ................................................4
b) TOTAL AND PERMANENT DISABILITY ...................................4
7. DEATH BENEFITS......................................................4
a) DEATH BEFORE RETIREMENT ..........................................4
b) DEATH AFTER RETIREMENT ...........................................4
8. FORFEITURE FOR VIOLATING STANDARDS OF CONDUCT.......................4
9. PARTICIPANTS' RIGHTS UNSECURED......................................5
10. PAYMENTS TO INCOMPETENT PERSONS....................................5
11. PAYMENTS TO PARTICIPANTS WHO HAVE RETIRED..........................5
12. AMENDMENTS TO THE PLAN.............................................5
13. TERMINATION OF THE PLAN............................................5
14. EXPENSES...........................................................5
15. NOTICES............................................................5
16. PLAN ADMINISTRATOR.................................................6
17. INTERPRETATION AND GOVERNING LAW...................................6
18. ADMINISTRATIVE COMMITTEE...........................................6
19. CLAIMS PROCEDURE...................................................6
20. RESTRICTIONS UPON FUNDING..........................................6
FARMLAND INDUSTRIES, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
Farmland Industries, Inc. (the "Corporation") hereby amends and restates
the Farmland Industries, Inc. Supplemental Executive Retirement Plan, a plan
which is unfunded and is maintained by the Corporation for the purpose of
providing benefits for certain of its employees who participate in the Farmland
Industries, Inc. Employee Retirement Plan in excess of the limitations imposed
by Sections 401(a)(17) and 415 of the Internal Revenue Code, under the terms set
forth below, effective September 1, 1999:
1. NAME OF PLAN. This Plan shall be known as the "Farmland Industries, Inc.
Supplemental Executive Retirement Plan." It may be referred to in this document
simply as the "Plan."
2. EFFECTIVE DATE. The effective date of the plan is January 1, 1994. The
effective date of this restatement is September 1, 1999.
3. DEFINITIONS. The following terms shall have the meaning given them below:
a) Deferred Compensation Plan means the Corporation's Executive Deferred
Compensation Plan, as it may be amended from time to time.
b) Retirement Plan means the Farmland Industries, Inc. Employee
Retirement Plan, as it may be amended from time to time.
c) Retirement Plan Benefit means the amount of benefit payable from the
Retirement Plan to a Participant in the form of a single life annuity.
d) Normal Retirement Date means the later of attainment of age 62 and
completion of 5 years of Vesting Service.
e) Compensation means a participant's compensation paid by the
Corporation that is reportable as compensation on his or her Form W-2,
plus amounts deducted from the Participant's compensation pursuant to
Sections 125 or 401(k) of the Internal Revenue Code and amounts
deferred under the Deferred Compensation Plan (excluding deferrals of
long-term management incentive compensation), less:
i) moving expenses paid to the Participant by the Corporation,
ii) non-cash payments,
iii) in the case of a Participant who is a United States citizen, pay
received from any foreign subsidiary of the Corporation or any
affiliate of the Corporation, and
iv) any amounts received from this Plan, the Deferred Compensation Plan
or any long-term executive incentive program sponsored by the
Corporation.
f) Average Compensation means the average of the four highest calendar
years of Compensation out of the last ten calendar years prior to the
earliest to occur of a Participant's death, total and permanent
disability or retirement from employment with the Corporation.
g) Board means the Board of Directors of the Corporation.
h) Plan Year means the calendar year.
i) The following terms shall have the meaning set forth in the
Retirement Plan:
i. Actuarial Equivalent;
ii. Beneficiary;
iii. Deferred Retirement Date;
iv. Disability Retirement Annuity;
v. Early Retirement Annuity;
vi. Early Retirement Date;
vii. 50% Joint Annuity ;
viii. Final Average Wage Base;
ix. Normal Retirement Date:
x. Qualified Domestic Relations Order; and
xi. Vesting Service;
4. PARTICIPANTS. Participants shall include those individuals who are
members of a select group of the Corporation's management or whose
Compensation exceeds or has exceeded at any time the compensation limit
described in section 401(a)(17) of the Internal Revenue Code and who are
selected by the Board to participate in the Plan. Such participants are
listed in Appendix A to this Plan.
5. SUPPLEMENTAL RETIREMENT BENEFIT. Each Participant (a) whose employment
with the Corporation terminates on or after his or her 55th birthday and (b) who
has earned a fully vested employer-provided benefit under the Retirement Plan
shall be eligible to receive a Supplemental Retirement Benefit under this Plan.
a) Commencement and Form of Benefit. A Participant's annual
Supplemental Retirement Benefit determined under this Plan shall
be paid in monthly installments on the first day of each month
beginning with the first of the month coincident with the payment
of the Participant's Retirement Plan Benefit. Payments made to a
Participant who is not married at the time benefits under this Plan
commence shall be in the form of a monthly benefit payable for the
Participant's lifetime.
Payments made to a Participant who is married at the time benefits
under this Plan commence shall be in the form of a 50% Joint Annuity.
Alternatively, the Participant may elect an optional form of benefit.
Optional forms available include all optional forms permitted under
the Retirement Plan.
b) Amount of Supplemental Retirement Benefit. The annual Supplemental
Retirement Benefit, if any, payable to a Participant shall be equal
to:
i. the employer-provided portion of the Retirement Plan Benefit
payable to the Participant in a single life annuity under the
Retirement Plan (expressed as an annual amount), as modified under
rules set forth below, less
ii. the employer-provided portion of the actual Retirement Plan
Benefit payable to the Participant and/or his or her alternate
payee(s) under a Qualified Domestic Relations Order in a single
life annuity under the Retirement Plan (expressed as an annual
amount), and less
iii. the retirement adjustment payment under Section 6.4 of the
Deferred Compensation Plan (expressed as an annual amount).
Rules for Calculating i. Above. In calculating the amount in i.
above, the Participant's Retirement Plan Benefit payable to the
Participant in a single life annuity under the Retirement Plan
shall be modified. It shall be modified by including as wages (for
purposes of calculating the Participant's Final Average Wage Base)
all deferrals made by the Participant under the Deferred
Compensation Plan. It shall also be modified by disregarding the
limitations imposed by Sections 401(a)(17) and 415 of the Internal
Revenue Code of 1986, as they may be amended. These adjustments
shall have no impact on the benefit actually paid to the
Participant under the Retirement Plan. This shall instead affect
only the calculation of the Participant's Supplemental Retirement
Benefit under this Plan.
Determining Employer-Provided Portion of Benefits. In calculating
the amount in ii. above, the employer-provided portion of a
Participant's Retirement Plan Benefit shall be the portion
considered to be derived from employer contributions under Section
411(c)(1) of the Internal Revenue Code of 1986, as that Section may
be amended. In calculating the amount in i. above, the employer-
provided portion of a Participant's Retirement Plan Benefit shall
be the Participant's Retirement Plan Benefit multiplied by a
fraction. The fraction shall have as its numerator the employer-
provided portion of the Participant's Retirement Plan Benefit on
the Participant's Early Retirement Date, Normal Retirement Date or
Deferred Retirement Date (whichever is applicable). The
denominator shall be the Participant's full Retirement Plan Benefit
determined on the Participant's Early Retirement Date, Normal
Retirement Date or Deferred Retirement Date (whichever is
applicable).
Early Retirement "Window" Enhancements Disregarded. In
calculating a Participant's Retirement Plan Benefit under the
Retirement Plan,
any enhancement of benefits for early retirement available only to
those retiring during a "window" of time which is no longer than
two years in length, shall not be taken into account.
6. DISABILITY BENEFITS
a)Amount of Benefit. If a Participant becomes totally and permanently
disabled (i) before his employment with the Corporation terminates, (ii)
after attaining age 55, and (iii) after having earned a fully vested
employer-provided benefit under the Retirement Plan, he or she shall be
entitled to a disability benefit under the Plan. The disability benefit
will be equal to:
i) the Supplemental Retirement Benefit described in Section 5,
provided that in the case of a disability prior to the
Participant's Normal Retirement Date, there will be no
application of Early Retirement Annuity Factors as described in
Section 5(c), less
ii) the Disability Retirement Annuity payable to the Participant
under the Retirement Plan.
This benefit is payable beginning on the first of the month coincident
with or next following his or her date of total and permanent
disability.
b)Total and Permanent Disability. A Participant shall be considered
totally and permanently disabled if he or she becomes eligible to
receive disability benefits from the Social Security Administration.
7. DEATH BENEFITS
a)eath Before Retirement. If a Participant dies (i) before his
employment with the Corporation terminates, (ii) after attaining age 55,
and (iii) after having earned a fully vested employer-provided benefit
under the Retirement Plan, a death benefit shall be paid to the
Participant's Beneficiary. That Beneficiary shall be entitled to a
monthly amount payable for life. The monthly amount shall be equal to
the difference between; (i) the monthly benefit the Participant would
have received under Section 5 if he or she had retired on the date of
the Participant's death, and had elected to be paid in a Joint and 100%
Survivor Annuity form as that form is described in the Retirement Plan,
with his or her Beneficiary as joint annuitant, and (ii) the 100% Joint
Annuity, if any, payable to the Beneficiary under the Retirement Plan.
This benefit is payable beginning on the first of the month coincident
with or next following his or her date of death.
b)Death After Retirement. If a Participant entitled to a benefit under
this Plan dies after his employment terminates, the Participant's
Beneficiary shall receive benefits, if any, to which they may be
entitled based on the form of benefit elected by the Participant.
8. FORFEITURE FOR VIOLATING STANDARDS OF CONDUCT. Unless the Board of
Directors of the Corporation, in its sole discretion, chooses otherwise, no
benefit shall be payable to a Participant if one of the reasons for the
Participant's termination of employment is the Corporation's reasonable belief
that the participant has committed a criminal act or has violated the
Corporation's standards of conduct set forth in the Corporation's employee
handbook.
9. PARTICIPANTS' RIGHTS UNSECURED. The right of a Participant, or any
beneficiary, to receive a distribution under this Plan shall be an unsecured
claim against the general assets of the Corporation. Neither the Participant
nor his or her beneficiaries shall have any right to enter against any specific
assets of the Corporation. The Participants shall have the status of general
unsecured creditors to the Corporation. This Plan constitutes a mere promise by
the Corporation to make benefit payments in the future. Benefits under this
Plan may not in any way be encumbered or assigned by a Participant or any
beneficiary nor shall any benefits under this Plan be subject to seizure for the
payment of any debts, judgments, alimony or separate maintenance owed by the
Participant or his or her Beneficiary nor shall they be transferable by
operation of law in the event of bankruptcy, insolvency or otherwise.
10. PAYMENTS TO INCOMPETENT PERSONS. Every person receiving or claiming a
benefit under the Plan shall be presumed to be mentally competent and of age
until the Administrative Committee receives reliable, written notice that such
person is incompetent or a minor. Payments otherwise due a minor shall be paid
to any custodial parent of such minor. Payments otherwise due any other
incompetent person shall be paid to the guardian, conservator, or other legal
representative of such person. In the even that the Administrative Committee is
unable to locate a parent, guardian, conservator, or other legal representative
of an incompetent person who is otherwise entitled to payment under the Plan,
such payment shall be made to the individual determined by the Administrative
Committee to have assumed financial responsibility for the care of such person.
Before the initial payment is made to an individual designated in this section,
the minor or other legally incompetent person shall be notified of the
Administrative Committee's intent to make such payment to that other individual.
Any payment of a benefit in accordance with the provisions of this Section shall
be a complete discharge of any liability to make such payment.
11. PAYMENTS TO PARTICIPANTS WHO HAVE RETIRED. Participants who retired on or
before August 31, 1999 will continue to receive benefits, if any, pursuant to
the Plan provisions in effect at the time of their retirement, but without
regard to Section 6 of the prior plan.
12. AMENDMENTS TO THE PLAN. The Board may amend the Plan at any time,
without the consent of the Participants or their Beneficiaries, provided,
however no amendment shall reduce the benefit payable, if any, to a
Participant or Beneficiary, if such Participant or Beneficiary would have
been eligible to receive a benefit under this Plan if the Participant would
have terminated employment on the effective date of such amendment.
13. TERMINATION OF THE PLAN. The Board may terminate the Plan at any time.
No additional benefits shall be credited following termination of the Plan.
Upon termination of the Plan, distribution of Participants' benefits shall be
made in
the manner and at the time described under the Plan's normal provisions.
14. EXPENSES. Costs of administration of the Plan shall be paid by the
Corporation.
15. NOTICES. Any Notice or election required or permitted to be given
hereunder shall be in writing, in the form prescribed by the Administrative
Committee, and shall be deemed to be filed:
a)On the date it is personally delivered to the Administrative Committee
(or its designee), or
b)Three business days after it is sent by the registered or certified
mail, addressed to the Administrative Committee (or its designee) at the
Corporation's address.
16. PLAN ADMINISTRATOR. The Administrative Committee shall be the Plan
Administrator for the Plan.
17. INTERPRETATION AND GOVERNING LAW. This Plan is established in the state of
Missouri. To the extent federal law does not apply, any questions arising
under the Plan will be determined under the laws of the state of Missouri.
18. ADMINISTRATIVE COMMITTEE. The Board shall appoint an administrative
committee of no more than ten members (the "Administrative Committee") to
administer this Plan. The Administrative Committee shall have the power to
interpret the Plan and to determine all questions that arise under it. Such
power includes, for example, the administrative discretion necessary to
determine whether an individual meets the Plan's written eligibility
requirements, and to interpret any other term contained in this document. All
payments of benefits under the Plan shall be made by the Corporation in
accordance with the written direction of the Administrative Committee. The
decision of the Administrative Committee upon all matters within the scope of
its authority shall be final and binding on all parties.
19. CLAIMS PROCEDURE. In the event that a dispute arises over benefits under
this Plan and benefits are not paid to the Participant (or to his or her
Beneficiary in the case of the Participant's death) and such claimant feels he
or she is entitled to receive such benefits, then a written claim must be made
to the Plan Administrator within sixty (60) days from the date payments are
refused. The Plan Administrator shall review the written claim and, if the
claim is denied in whole or in part, the Plan Administrator shall provide, in
writing and within ninety (90) days of receipt of such claim, the Plan
Administrator's specific reasons for such denial and reference to the provisions
of the Plan upon which the denial is based and any additional material or
information necessary to perfect the claim. Such written notice shall further
indicate the steps to be taken by claimant if a further review of the claim
denial is desired. A claim shall be deemed denied if the Plan Administrator
fails to take any action within the aforesaid ninety-day period.
If claimant desires a second review, he or she shall notify the Plan
Administrator in writing within sixty (60) days of the first claim denial.
Claimant may review the Plan or any documents relating thereto and submit any
written issues and comments he or she may feel appropriate. In its sole
discretion, the Plan Administrator shall then review the second claim and
provide a written decision within sixty (60) days of receipt of such claim.
This decision shall likewise state the specific reasons for the decision and
shall include reference to specific provisions of the Plan upon which the
decision is based.
20. RESTRICTIONS UPON FUNDING. The Corporation shall have no obligation to set
aside, earmark or entrust any fund or money with which to pay its obligations
under the Plan.
The Corporation reserves the absolute right at its sole discretion to either
fund the obligations undertaken by this Plan or to refrain from funding the same
and to determine the extent, nature and method of such funding. Should the
Corporation elect to fund this Plan, in whole or in part, through the purchase
of life insurance, mutual funds, disability policies or annuities, the
Corporation reserves the absolute right, in its sole discretion, to terminate
such funding at any time, in whole or in part. At no time shall the Participant
or his or her Beneficiary be deemed to have any lien nor right, title or
interest in or to any such life insurance policy, mutual fund or annuity
contract, or to any other assets of the Corporation, nor shall nay such funding
investments or other assets be collateral security for the performance of the
Corporation's obligations under this Plan. Rather, any such life insurance
policy, mutual fund, annuity contract or other asset shall remain a general,
unpledged and unrestricted asset of the Corporation.
If the corporation elects to invest in a life insurance or annuity policy upon
the life of the Participant, then the Participant shall assist the Corporation
by freely submitting to a physical exam and supplying such additional
information necessary to obtain such insurance or annuity.
IN WITNESS WHEREOF, the Corporation hereby adopts this amended and restated
Supplemental Executive Retirement Plan this day of ________,
1999.
FARMLAND INDUSTRIES, INC.
By:_________________________________
Title:_______________________________
ATTEST:
________________________________
Exhibit 2.A
===============================
TRANSACTION AGREEMENT
between
CENEX HARVEST STATES COOPERATIVES,
a Minnesota cooperative association
and
FARMLAND INDUSTRIES, INC.,
a Kansas cooperative corporation
Dated as of September 23, 1999
===============================
TABLE OF CONTENTS
ARTICLE ITHE TRANSACTION........................................1
Section 1.01.........................Overview of Transaction 1
Section 1.02.....................................The Closing 2
Section 1.03..........................Actions at the Closing 2
Section 1.04...........................Effect of Transaction 3
ARTICLE IIREPRESENTATIONS AND WARRANTIES OF CHSC................5
Section 2.01..................Organization and Good Standing 6
Section 2.02............................Financial Statements 6
Section 2.03..........................Absence of Liabilities 6
Section 2.04...............................Title to Property 6
Section 2.05...........................Intellectual Property 7
Section 2.06......................Compliance with Laws, etc. 7
Section 2.07Pending Litigation, Claims, Actions, Proceedings or
Investigations........................................7
Section 2.08.............................Absence of Defaults 7
Section 2.09...................................Authorization 8
Section 2.10.......................................Insurance 8
Section 2.11......................Governmental Authorization 8
Section 2.12....................................Subsidiaries 8
Section 2.13.....................................SEC Filings 9
Section 2.14......................Absence of Certain Changes 9
Section 2.15...........................................Taxes 9
Section 2.16..........................Employee Benefit Plans 10
Section 2.17...........................Environmental Matters 11
Section 2.18..........................Pooling; Tax Treatment 12
Section 2.19...........................No Dissenters' Rights 12
Section 2.20.................................Acquisition Co. 12
Section 2.21.................................Full Disclosure 13
ARTICLE IIIREPRESENTATIONS AND WARRANTIES OF FARMLAND..........13
Section 3.01..................Organization and Good Standing 13
Section 3.02............................Financial Statements 14
Section 3.03..........................Absence of Liabilities 14
Section 3.04...............................Title to Property 14
Section 3.05...........................Intellectual Property 14
Section 3.06......................Compliance with Laws, etc. 15
Section 3.07Pending Litigation, Claims, Actions, Proceedings or
Investigations.......................................15
Section 3.08.............................Absence of Defaults 15
Section 3.09...................................Authorization 15
Section 3.10.......................................Insurance 16
Section 3.11......................Governmental Authorization 16
Section 3.12....................................Subsidiaries 16
Section 3.13.....................................SEC Filings 16
Section 3.14......................Absence of Certain Changes 17
Section 3.15...........................................Taxes 17
Section 3.16..........................Employee Benefit Plans 18
Section 3.17...........................Environmental Matters 19
Section 3.18..........................Pooling; Tax Treatment 19
Section 3.19...........................No Dissenters' Rights 19
Section 3.20.................................Full Disclosure 20
ARTICLE IVPRE-CLOSING COVENANTS................................20
Section 4.01..........................Selection of Structure 20
Section 4.02..............................Good Faith Efforts 20
Section 4.03........................Preservation of Business 21
Section 4.04............................Conduct of Business. 21
Section 4.05.............................Meetings of Members 22
Section 4.06.....................................Full Access 22
Section 4.07..........................Notice of Developments 23
Section 4.08.......................................Exclusive 23
Section 4.09.......................Hart-Scott-Rodino Filings 23
Section 4.10....................Tax and Accounting Treatment 23
ARTICLE VCLOSING CONDITIONS....................................23
Section 5.01.........Conditions to Obligations of Each Party 24
Section 5.02.....Additional Conditions to Obligation of CHSC 24
Section 5.03.Additional Conditions to Obligation of Farmland 25
ARTICLE VIPOST-CLOSING AGREEMENTS..............................26
Section 6.01..................Consolidation of Benefit Plans 26
Section 6.02.........................Patronage Distributions 26
Section 6.03...Indemnification of Former Officers; Insurance 26
ARTICLE VIITERMINATION.........................................27
Section 7.01........................Termination of Agreement 27
Section 7.02...........................Effect of Termination 27
ARTICLE VIIIMISCELLANEOUS......................................28
Section 8.01............................Waiver of Conditions 28
Section 8.02.......................................Amendment 28
Section 8.03..................................Binding Nature 28
Section 8.04....................................Counterparts 28
Section 8.05................................Entire Agreement 28
Section 8.06.........................................Notices 28
Section 8.07..Non-Survival of Representations and Warranties 29
Section 8.08........................................Captions 29
Exhibits
Exhibit A-1 - Structure A Plan of Merger
Exhibit A-2 - Structure A Surviving Entity Bylaws
Exhibit B-1 - Structure B Plans of Merger
Exhibit B-2 - Structure B Surviving Entity Bylaws
Exhibit C - Senior Management Reporting Relationships
Exhibit D - Capital Plan
CHSC Disclosure Schedule
Farmland Disclosure Schedule
TRANSACTION AGREEMENT
THIS TRANSACTION AGREEMENT (this "Agreement") is made and entered into as
of September 23, 1999, by and between CENEX HARVEST STATES COOPERATIVES, a
Minnesota cooperative association ("CHSC"), and FARMLAND INDUSTRIES, INC., a
Kansas cooperative corporation ("Farmland").
WHEREAS, each of CHSC and Farmland is an agricultural cooperative organized
for the purposes of benefitting and serving its members and patrons; and
WHEREAS, the parties believe that the unification of their respective
business operations and assets will be in the best interest of their respective
members; and
WHEREAS, on May 6, 1999, the parties entered into a Memorandum of Intent
pursuant to which both parties agreed to negotiate in good faith to reach
agreement on the principal terms of a transaction pursuant to which they would
combine their respective assets and business operations into a single entity,
through a form of business combination to be determined by the parties, and
WHEREAS, the parties have now reached agreement as to the final terms and
conditions of such business combination, and wish to reduce such agreement to
writing as more particularly described herein.
NOW THEREFORE, in consideration of the foregoing and the mutual
representations, warranties and covenants herein contained, the parties hereto
agree as follows:
ARTICLE I
THE TRANSACTIONARTICLE ITHE TRANSACTION{tc \l 1 "ARTICLE ITHE TRANSACTION"}
Section 1.01 Overview of TransactionSection 1.01
Overview of Transaction{tc \l 2 "Section 1.01 Overview of
Transaction"}.
At the Effective Time (as such term is defined in section 1.04 hereof),
CHSC and Farmland will combine into a single entity named "United Country
Brands, Inc." (the "Surviving Entity"). The combination will be in the form of
either (a) Structure A, which will be a merger of Farmland with and into CHSC,
with CHSC as the Surviving Entity, such merger to become effective at the
Effective Time ("Structure A"), or (b) a merger, prior to the Effective Time, of
CHSC into UCB Acquisition Co., an Ohio cooperative corporation and wholly-owned
subsidiary of CHSC ("Acquisition Co."), with Acquisition Co. as the survivor in
such merger (the "CHSC/Acquisition Co. Merger"), and immediately thereafter, the
merger of Farmland into Acquisition Co., with Acquisition Co. as the Surviving
Entity ("Structure B"). The parties anticipate and agree that Structure A
constitutes the structure that is preferred by the parties and the default
structure to accomplish the combination, and agree that Structure A shall be
used (and that the parties will use their best efforts to resolve any issues
relating to the use of Structure A) unless, prior to the Closing (as defined
herein), either party obtains an opinion of counsel to the effect that use of
such Structure A would have a Material Adverse Effect (as defined herein) on the
Surviving Entity. If Structure A is used to accomplish the combination, then
(i) the parties shall execute, deliver and file the Agreement and Plan of Merger
attached hereto as Exhibit A-1 to effectuate the merger therein contemplated;
and (ii) effective as of the Effective Time, the Surviving Entity will be
governed by Articles of Incorporation in the form attached hereto as Schedule I
to such Plan of Merger and Bylaws in the form attached hereto as Exhibit A-2
and will otherwise continue to operate and exist as a cooperative association
organized under the laws of the State of Minnesota. If Structure B is used to
accomplish the combination, then (i) CHSC shall take appropriate action to
effectuate the CHSC/Acquisition Co. Merger, and in connection therewith, shall
execute, deliver and file the appropriate Agreement and Plan of Merger attached
hereto as Exhibit B-1 and shall redeem all of its outstanding Equity
Participation Units in the Defined Business Units; (ii) thereafter the parties
shall execute, deliver and file the appropriate Agreement and Plan of Merger
attached hereto as Exhibit B-1 as required by law to effectuate the merger of
Farmland into Acquisition Co.; and (iii) effective as of the Effective Time, the
Surviving Entity will be governed by Articles of Incorporation in the form
attached hereto as Schedule I to such Plan of Merger and Bylaws in the form
attached hereto as Exhibit B-2 and will (subject to Section 4.01 hereof)
continue to operate and exist as a cooperative association organized under the
laws of the State of Ohio. The Agreement and Plan of Merger so used and
executed, delivered and filed as hereinabove provided is referred to herein as
the "Plan of Merger", the Articles of Incorporation which serve as the Articles
of Incorporation of the Surviving Entity are referred to herein as the
"Surviving Entity Articles", the Bylaws which serve as the Bylaws of the
Surviving Entity are referred to herein as the "Surviving Entity Bylaws", and
the merger transaction therein contemplated, together with all actions,
consents, agreements and transactions described herein or otherwise necessary or
desirable in connection therewith, are referred to collectively herein as the
"Transaction."
Section 1.02 The Closing
Unless this Agreement is terminated and the Transaction is abandoned as
provided in Article VII hereof, the closing for the Transaction (the "Closing")
shall take place on or before February 29, 2000, or such other date as the
parties may mutually determine (the "Closing Date"), subject to the satisfaction
or waiver of all conditions to the obligations of each of the parties to
consummate the Transaction (other than conditions with respect to actions which
the respective parties will take at the Closing itself).
Section 1.03 Actions at the Closing
At the Closing, the parties shall (a) execute and deliver the Agreement and
Plan of Merger pursuant to Section 1.01 above, (b) deliver the various
certificates, instruments and documents referred to in the Plan of Merger or in
Article V of this Agreement, and (c) cause to be filed with the Secretary of
State of the appropriate states the Plan of Merger, certificate of merger or
such other documents as may be required by the applicable laws to effectuate the
Transaction pursuant to the terms of the Plan of Merger and this Agreement.
Section 1.04 Effect of Transaction
The Transaction shall become fully effective at 12:02 a.m. Central Time on
March 1, 2000 (the "Effective Time"). The Transaction shall have the effect set
forth in the Plan of Merger, this Agreement and applicable state law. At any
time after the Effective Time, the Surviving Entity may take any action
(including executing and delivering any document) in the name and on behalf of
either party to this Agreement in order to carry out and effectuate the
Transaction contemplated by this Agreement. At the Effective Time, without any
further action on the part of the members or the boards of directors of either
CHSC or Farmland:
(a) Articles and Bylaws. The Surviving Entity Articles and the
Surviving Entity Bylaws shall become the articles of incorporation and
bylaws of the Surviving Entity, as provided in the Plan of Merger.
(b) Board of Directors.
(i) Transition Board Each of the then current directors of
Farmland and the then current directors of CHSC will become directors
of the Surviving Entity, to serve according to the Surviving Entity
Bylaws, so that the board of directors of the Surviving Entity as of
the Effective Time will consist of all of the then current directors
of both Farmland and CHSC. Each party agrees to take all actions
necessary to reduce, as of the Effective Time, the number of directors
on the Board of Directors of such party to seventeen (17).
(ii) Producer Directors After December 2001. Effective for and
after the annual meeting of the members of the Surviving Entity to be
held in December 2001, for purposes of Section 4.4(b) of the Surviving
Entity Bylaws and subject to review and reapportionment by the Board
of Directors of the Surviving Entity pursuant to Section 4.4(c) of the
Surviving Entity Bylaws from time to time, the numbers of producer
directors in each director district shall be as follows: District 1 --
one (1) producer director; District 2 -- two (2) producer directors;
District 3 -- four (4) producer directors; District 4 -- five (5)
producer directors; District 5 -- two (2) producer directors; District
6 -- one (1) producer director; and District 7 -- three (3) producer
directors.
(c) Board Officers. For the period from the Effective Time to the
annual meeting of the members of the Surviving Entity to be held in
December 2000 (the "Transition Period"), Elroy Webster will serve as
Chairman of the Board and Albert Shivley will serve as the Vice Chairman of
the Board. In addition, effective as of the Effective Time, there shall be
established an Executive Committee of the Board, and the following Standing
Committees of the Board: Capital, Finance/Audit, Governance and Corporate
Responsibility (including compensation). For the Transition Period the
Capital Committee will be chaired by Merlin Van Walleghen, the
Finance/Audit Committee of the Board will be chaired by Monte Romohr, the
Governance Committee will be chaired by Gerald Kuster and the Corporate
Responsibility Committee will be chaired by Jody Bezner. For the
Transition Period, the Chairman and Vice Chairman of the Board, together
with the Chairs of the Standing Committees, shall make up the Executive
Committee.
(d) Office of Leadership. The "Office of Leadership" will consist of
the Chief Executive Officer and the President of the Surviving Entity.
Robert Honse ("Honse") will serve as Chief Executive Officer of the
Surviving Entity, reporting to the board of directors of the Surviving
Entity. It is anticipated that Honse shall serve in that capacity through
no later than December 31, 2003; and John D. Johnson ("Johnson") will serve
as the President of the Surviving Entity, reporting to the Chief Executive
Officer of the Surviving Entity. Upon expiration of Honse's service as
Chief Executive Officer, it is anticipated that Johnson shall assume the
role of President and Chief Executive Officer of the Surviving Entity.
Both the Chief Executive Officer and the President will serve at the
pleasure of the Board of Directors of the Surviving Entity at all times,
subject, however, to the monetary provisions of any applicable employment
contract. Such employment contracts will provide that Honse, as Chief
Executive Officer, may not demote, discharge, change the senior management
reporting relationships (described in paragraph (e) below) of, or otherwise
materially adversely change the status of, Johnson, as President, without
the agreement of the Executive Committee of the Board of Directors.
(e) Senior Management. Senior management will be as designated by
the Office of Leadership from time to time in accordance with the Surviving
Entity Bylaws. The reporting relationships between senior management and
the Office of Leadership are identified in Exhibit C attached hereto and
will be incorporated into employment contracts with the Chief Executive
Officer and the President.
(f) Exchange and Conversion of Stock, Non-Stock Equity and Patronage
Equities. At and as of the Effective Time, without any further action by
the parties or any of their respective members, and as further described in
the Plan of Merger, (i) each member of CHSC and each member of Farmland
shall become a member of the Surviving Entity, to the extent they are
eligible for membership under the Surviving Entity Articles and the
Surviving Entity Bylaws, and (ii) except for any stock and equity interests
of Farmland in CHSC or any stock interest of CHSC in Farmland (which shall,
in each case, be extinguished), the stock, non-stock equity and patronage
equity interests of each member, patron and former patron of Farmland shall
be exchanged for non-stock equity and patronage equity interests in the
Surviving Entity at their stated value amount on a dollar-for-dollar basis,
as further described in the Plan of Merger.
(g) Capital Plan. From and after the Effective Time, the Surviving
Entity will operate pursuant to a capital plan that adheres to the
principles set forth on Exhibit D attached hereto and the Surviving Entity
shall use its best efforts to adopt and implement a capital plan that
incorporates such principles (the "Capital Plan"). The Capital Plan may be
adopted and amended from time to time, by the board of directors of the
Surviving Entity, provided that amendment of any provisions of the Capital
Plan relating to disposition of the Terra tax case shall require a vote
of
three-fourths (3/4) of the full board of directors of the Surviving Entity,
and provided further that any such amendment shall, as far as feasible,
adhere to the "Key Terra Principles" described on Exhibit D attached
hereto.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF CHSC
CHSC represents and warrants to Farmland and the Surviving Entity that the
statements contained in this Article II are correct and complete in all material
respects as of the date of this Agreement, except as set forth in the CHSC
Disclosure Schedule delivered by CHSC to Farmland attached hereto (the "CHSC
Disclosure Schedule"). Nothing in the CHSC Disclosure Schedule shall be deemed
adequate to disclose an exception to a representation or warranty made herein
unless the CHSC Disclosure Schedule identifies the exception with particularity
and describes the relevant facts in detail. Without limiting the generality of
the foregoing, the mere listing (or inclusion of a copy) of a document or other
item shall not be deemed adequate to disclose an exception to a representation
or warranty made herein (unless the representation or warranty has to do with
the existence of the document or other item itself). For purposes of this
Agreement (a) the word "Subsidiary" when used with respect to any Person (as
herein defined) means any other Person, whether incorporated or unincorporated
(i) of which fifty percent or more of the securities or other ownership
interests is directly owned or controlled by such Person or by any one or more
of its Subsidiaries, or (ii) of which securities or other interests having by
their terms ordinary voting power to elect fifty percent or more of the board of
directors or others performing similar functions with respect to such
corporation or other organization is directly owned or controlled by such Person
or by any one or more of its Subsidiaries, or (iii) when such Person is CHSC,
the entities listed on the CHSC Disclosure Schedule, or (iv) when such Person is
Farmland, the entities listed on the Farmland Disclosure Schedule (as herein
defined), (b) "Person" means an individual, a corporation, a limited liability
company, a partnership, an association, a trust or any other entity or
organization, including a government or political subdivision or any agency or
instrumentality thereof, and (c) a "Material Adverse Effect" with respect to any
Person means a material adverse effect on the financial condition, business,
liabilities, properties, assets or results of operations, taken as a whole, of
such Person and its Subsidiaries, taken as a whole, except to the extent
resulting from (w) any changes in general United States or global economic
conditions, (x) any changes affecting the agricultural industry in general, (y)
matters whose significance or impact would reasonably be expected to be
primarily short term (i.e., under one year) or (z) matters disclosed on the
Person's Disclosure Schedule.
Section 2.01 Organization and Good Standing
CHSC is a cooperative association duly organized and existing under Chapter
308A of the Minnesota Statutes, is in good standing under the laws of the State
of Minnesota, and has all requisite corporate power and authority to own its
properties and conduct its business as it is presently being conducted. CHSC is
duly qualified to do business and is in good standing in each jurisdiction in
which it conducts business or owns or leases properties of a nature which would
require such qualification, except for those jurisdictions where the failure to
be so qualified would not, individually or in the aggregate, have a Material
Adverse Effect on CHSC. CHSC has heretofore delivered to Farmland true and
complete copies of the CHSC articles of incorporation and bylaws as currently in
effect.
Section 2.02 Financial StatementsSection 2.02
CHSC has delivered to Farmland (a) its audited financial statements as of
August 31, 1998, accompanied by the opinion of PricewaterhouseCoopers, (b) the
audited financial statements of CENEX, Inc. for the year ended September 30,
1997 and the eight months ended May 31, 1998, (c) the audited financial
statements of Harvest States Cooperatives for the year ended May 31, 1998, and
(d) the unaudited financial statements of CHSC for the nine months ended May 31,
1999. Such financial statements fairly present the financial position of CHSC
at the dates indicated therein and the results of its operation for the periods
indicated therein, in conformity with generally accepted accounting principles
consistently applied ("GAAP"). There has been no material adverse change in the
financial condition or results of operations of CHSC since May 31, 1999.
Section 2.03 Absence of Liabilities
Neither CHSC nor any Subsidiary of CHSC has any liabilities or obligations,
absolute or contingent, except for liabilities and obligations which are (i)
reflected in the financial statements referred to in Section 2.02, (ii) fully
covered by insurance, except for reasonable deductibles or self-insured
retention levels, (iii) incurred in the ordinary course of business since May
31, 1999 and not materially different in type or amount from those reflected in
the financial statements referred to in Section 2.02, or (iv) would not in the
aggregate reasonably be expected to have a Material Adverse Effect on CHSC.
Section 2.04 Title to Property
Except as reflected in the notes accompanying the audited financial
statements of CHSC, CHSC has good and marketable title to all real and personal
property reflected as owned on the books and records of CHSC as of the date of
this Agreement and owns outright all other assets, properties or property
interests acquired since that date, in each case free of all mortgages, liens,
charges and encumbrances, other than (i) easements, rights-of-way and other
encumbrances which do not materially impair the use of such real or personal
property for the same or similar purposes as such real or personal property has
been used by CHSC prior to the Effective Time, (ii) liens for current taxes that
are not yet due and payable, (iii) liens related to the acquisition of inventory
or otherwise arising in the normal course of business, and (iv) other liens,
encumbrances and title defects which would not reasonably be expected to have a
Material Adverse Effect on CHSC.
Section 2.05 Intellectual Property
CHSC owns or possesses, is licensed under or otherwise has lawful access
to, all patents, trade secrets, know-how, other confidential information,
trademarks, service marks, copyrights, trade names, logos and other intellectual
property, whether registered or unregistered, necessary for the lawful conduct
of its business as currently conducted, without any infringement of or conflict
with the industrial or intellectual property rights of any third party, except
as would not reasonably be expected to have a Material Adverse Effect on CHSC.
CHSC does not know or have reason to know of any unauthorized use or disclosure
or misappropriation of any of its intellectual property, which disclosure, use,
or misappropriation would reasonably be expected to have a Material Adverse
Effect on CHSC.
Section 2.06 Compliance with Laws, etc.
CHSC is in compliance with all applicable laws and regulations the
violation of which would reasonably be expected to have a Material Adverse
Effect on CHSC. CHSC has all governmental authorizations, consents, licenses
and permits required by law or otherwise necessary for the proper operation of
its business as currently conducted, all of such licenses and permits are in
full force and effect and no action to terminate, withdraw, not renew or
materially limit or otherwise change any such license or permit is pending or
has been threatened by any governmental agency or other party, except as would
not reasonably be expected to have a Material Adverse Effect on CHSC.
Section 2.07 Pending Litigation, Claims, Actions, Proceedings or
Investigations
There is no action, proceeding or investigation pending against, or to the
best of the knowledge of CHSC after reasonable inquiry, is threatened against
CHSC or any Subsidiary of CHSC or any of the assets which are owned by CHSC or
any Subsidiary of CHSC which would reasonably be expected to have a Material
Adverse Effect on CHSC.
Section 2.08 Absence of Defaults
CHSC is not in default under any provision of its Articles of Incorporation
or Bylaws or any indenture, mortgage, loan agreement or other material agreement
to which it is a party or by which it is bound, and CHSC is not in violation of
any statute, order, rule or regulation of any court or governmental agency
having jurisdiction over it or its properties, which, in each case, could have a
Material Adverse Effect on CHSC, and, except for any consent or approval
identified on the CHSC Disclosure Schedule, neither the execution and delivery
of this Agreement nor the consummation of the Transaction in accordance with
this Agreement will in any respect conflict with or result in a breach of any of
the foregoing, which could have a Material Adverse Effect on CHSC.
Section 2.09 Authorization
CHSC has the corporate power and authority to enter into and to perform its
obligations under this Agreement (subject to the approval of its members as
required by Section 5.01(a)). This Agreement and the Transaction have been duly
and validly authorized by the Board of Directors of CHSC, and (except for the
approvals of its members, as required by Section 5.01(a)) no other corporate
action is required by CHSC in connection with this Agreement or the Transaction.
This Agreement constitutes the valid and binding agreement of CHSC, enforceable
against CHSC in accordance with its terms, except to the extent such enforcement
may be limited by the application of equitable principles where equitable relief
is sought or bankruptcy and other laws relating to the enforcement of creditors'
rights generally.
Section 2.10 Insurance
CHSC has secured appropriate insurance policies which (i) are issued by
sound and reputable insurance companies duly authorized to write said insurance,
(ii) are in full force and effect, (iii) are sufficient for compliance with all
requirements of law and all agreements to which CHSC is a party, and (iv)
provide reasonable insurance coverage for the assets and operations of CHSC and
all liabilities related thereto.
Section 2.11 Governmental Authorization
The execution, delivery and performance by CHSC of this Agreement and the
consummation of the Transaction by CHSC require no action by or in respect of,
or filing with, any governmental body, agency, official or authority other than
(a) the filing of appropriate documents to effect the Plan of Merger under
applicable law, (b) compliance with any applicable requirements of the Hart-
Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"), (c) compliance
with applicable requirements of U.S. state and federal securities laws and (d)
other actions or filings which if not taken or made would not, individually or
in the aggregate, have a Material Adverse Effect on CHSC or the Surviving Entity
following the Effective Time.
Section 2.12 Subsidiaries
Each Subsidiary of CHSC is duly organized, validly existing and in good
standing under the laws of its jurisdiction of organization, has all powers and
all governmental licenses, authorizations, consents and approvals required to
carry on its business as now conducted, except for those the absence of which
would not, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect on CHSC. Each Subsidiary of CHSC is duly qualified to
do business and is in good standing in each jurisdiction where the character of
the property owned or leased by it or the nature of its activities makes such
qualification necessary, except for those jurisdictions where failure to be so
qualified would not, individually or in the aggregate, have a Material Adverse
Effect on CHSC.
Section 2.13 SEC Filings
(a) CHSC has delivered to Farmland (i) its annual report on Form 10-K for
its fiscal year ended August 31, 1998, (ii) its quarterly reports on Form 10-Q
for its fiscal quarters ended after August 31, 1998, (iii) all of its other
reports, statements, schedules and registration statements filed with the SEC
since August 31, 1998 (the documents referred to in this Section 2.13(a) being
referred to collectively as the "CHSC SEC Documents").
(b) As of its filing date, each CHSC SEC Document complied as to form in
all material respects with the applicable requirements of the Securities
Exchange Act of 1934 (the "Exchange Act").
(c) As of its filing date, each CHSC SEC Document filed pursuant to the
Exchange Act did not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements made therein,
in the light of the circumstances under which they were made, not misleading.
Section 2.14 Absence of Certain Changes
Except as set forth in the CHSC Disclosure Schedule, since May 31, 1999,
CHSC and its Subsidiaries have conducted their business in the ordinary course
consistent with past practice and there has not been: (a) any event, occurrence
or development of a state of circumstances or facts which has had or reasonably
would be expected to have, individually or in the aggregate, a Material Adverse
Effect on CHSC; (b) any transaction or commitment made, or any contract,
agreement or settlement entered into, by (or judgment, order or decree
affecting) CHSC or any of its Subsidiaries relating to its assets or business
(including the acquisition or disposition of any assets) or any relinquishment
by CHSC or any of its Subsidiaries of any contract or other right, in either
case, material to CHSC and its Subsidiaries taken as a whole, other than
transactions, commitments, contracts, agreements or settlements (including
without limitation settlements of litigation and tax proceedings) in the
ordinary course of business consistent with past practice, those contemplated by
this Agreement, or as agreed to in writing by Farmland; (c) any change in any
method of accounting or accounting practice (other than any change for tax
purposes) by CHSC or any of its Subsidiaries, except for any such change which
is not significant or which is required by reason of a concurrent change in
GAAP; or (d) any increase in (or amendments to the terms of) compensation, bonus
or other benefits payable to directors, officers or employees of CHSC or any of
its Subsidiaries, other than in the ordinary course of business consistent with
past practice, as permitted by this Agreement, or as agreed to in writing by
Farmland.
Section 2.15 Taxes
Except as set forth in the CHSC Balance Sheet dated May 31, 1999 (including
the notes thereto) and except as would not, individually or in the aggregate,
have a Material Adverse Effect on CHSC, (i) all CHSC Tax Returns required to be
filed with any taxing authority by, or with respect to, CHSC and its
Subsidiaries have been filed in accordance with all applicable laws; (ii) CHSC
and its Subsidiaries have timely paid all Taxes shown as due and payable on the
CHSC Tax Returns that have been so filed, and, as of the time of filing, the
CHSC Tax Returns correctly reflected the facts regarding the income, business,
assets, operations, activities and the status of CHSC and its Subsidiaries
(other than Taxes which are being contested in good faith and for which adequate
reserves are reflected on the CHSC Balance Sheet); (iii) CHSC and its
Subsidiaries have made provision for all Taxes payable by CHSC and its
Subsidiaries for which no CHSC Tax Return has yet been filed; (iv) the charges,
accruals and reserves for Taxes with respect to CHSC and its Subsidiaries
reflected on the CHSC Balance Sheet are adequate under GAAP to cover the Tax
liabilities accruing through the date thereof; (v) there is no action, suit,
proceeding, audit or claim now proposed or pending against or with respect to
CHSC or any of its Subsidiaries in respect of any Tax where there is a
reasonable possibility of an adverse determination; and (vi) to the best of
CHSC's knowledge and belief, neither CHSC nor any of its Subsidiaries is liable
for any Tax imposed on any entity other than such Person, except as the result
of the application of Treas. Reg. Section 1.1502-6 (and any comparable provision
of the tax laws of any state, local or foreign jurisdiction) to the affiliated
group of which CHSC is the common parent. For purposes of this Agreement,
"Taxes" shall mean any and all taxes, charges, fees, levies or other
assessments, including, without limitation, all net income, gross income, gross
receipts, excise, stamp, real or personal property, ad valorem, withholding,
social security (or similar), unemployment, occupation, use, service, service
use, license, net worth, payroll, franchise, severance, transfer, recording,
employment, premium, windfall profits, environmental (including taxes under
Section 59A of the Internal Revenue Code of 1986, as amended (the "Code")),
customs duties, capital stock, profits, disability, sales, registration, value
added, alternative or add-on minimum, estimated or other taxes, assessments or
charges imposed by any federal, state, local or foreign governmental entity and
any interest, penalties, or additions to tax attributable thereto. For purposes
of this Agreement, "Tax Returns" shall mean any return, report, form or similar
statement required to be filed with respect to any Tax (including any attached
schedules), including, without limitation, any information return, claim for
refund, amended return or declaration of estimated Tax.
Section 2.16 Employee Benefit Plans
(a) Prior to the date hereof, CHSC has provided Farmland with a list
identifying each material "employee benefit plan," as defined in Section 3(3) of
the Employee Retirement Income Security Act of 1974 ("ERISA"), each material
employment, severance or similar contract, plan, arrangement or policy
applicable to any director, former director, employee or former employee of CHSC
and each material plan or arrangement (written or oral), providing for
compensation, bonuses, profit-sharing, stock option or other stock related
rights or other forms of incentive or deferred compensation, vacation benefits,
insurance coverage (including any self-insured arrangements), health or medical
benefits, disability benefits, workers' compensation, supplemental unemployment
benefits, severance benefits and post-employment or retirement benefits
(including compensation, pension, health, medical or life insurance benefits)
which is maintained, administered or contributed to by CHSC and covers any
employee or director or former employee or director of CHSC, or under which CHSC
has any liability. Such material plans (excluding any such plan that is a
"multiemployer plan", as defined in Section 3(37) of ERISA) are referred to
collectively herein as the "CHSC Employee Plans".
(b) Each CHSC Employee Plan has been maintained in compliance with its
terms and with the requirements prescribed by any and all statutes, orders,
rules and regulations (including but not limited to ERISA and the Code) which
are applicable to such Plan, except where failure to so comply would not,
individually or in the aggregate, have a Material Adverse Effect on CHSC.
(c) Neither CHSC nor any affiliate of CHSC has incurred a liability under
Title IV of ERISA that has not been satisfied in full, and no condition exists
that presents a material risk to CHSC or any affiliate of CHSC of incurring any
such liability other than liability for premiums due the Pension Benefit
Guaranty Corporation (which premiums have been paid when due).
(d) Each CHSC Employee Plan which is intended to be qualified under
Section 401(a) of the Code is so qualified and has been so qualified during the
period from its adoption to date, and each trust forming a part thereof is
exempt from federal income tax pursuant to Section 501(a) of the Code.
(e) No director or officer or other employee of CHSC or any of its
Subsidiaries will become entitled to any retirement, severance or similar
benefit or enhanced or accelerated benefit solely as a result of the
transactions contemplated hereby.
(f) Each CHSC Employee Plan that provides for post-retirement health and
medical, life or other insurance benefits for retired employees of CHSC or any
of its Subsidiaries has been adequately reserved for in CHSC's financial
statements.
(g) There has been no amendment to, written interpretation or announcement
(whether or not written) by CHSC or any of its affiliates relating to, or change
in employee participation or coverage under, any CHSC Employee Plan which would
increase materially the expense of maintaining such CHSC Employee Plan above the
level of the expense incurred in respect thereof for the 12 months ended May 31,
1999.
Section 2.17 Environmental Matters
(a) Except as set forth in the CHSC SEC Documents filed prior to the date
hereof and with such exceptions as, individually or in the aggregate, have not
had, and would not reasonably be expected to have, a Material Adverse Effect on
CHSC (i) no notice, notification, demand, request for information, citation,
summons, complaint or order has been received by, and no investigation, action,
claim, suit, proceeding or review is pending or, to the knowledge of CHSC or any
of its Subsidiaries, threatened by any Person against, CHSC or any of its
Subsidiaries, and no penalty has been assessed against CHSC or any of its
Subsidiaries, in each case, with respect to any matters relating to or arising
out of any Environmental Law; (ii) CHSC and its Subsidiaries are and have been
in compliance with all Environmental Laws; (iii) there are no liabilities of
CHSC or any of its Subsidiaries relating to or arising out of any Environmental
Law of any kind whatsoever, whether accrued, contingent, absolute, determined,
determinable or otherwise, and there is no existing condition, situation or set
of circumstances which could reasonably be expected to result in such a
liability; and (iv) there has been no environmental investigation, study, audit,
test, review or other analysis conducted of which CHSC has knowledge in relation
to the current or prior business of CHSC or any of its Subsidiaries or any
property or facility now or previously owned, leased or operated by CHSC or any
of its Subsidiaries which has not been delivered to Farmland at least five days
prior to the date hereof. All liabilities of CHSC or any of its Subsidiaries
relating to or arising out of any Environmental Law of any kind whatsoever have
been adequately reserved for on the financial statements of CHSC, or for
unconsolidated Subsidiaries, on the financial statements of such Subsidiaries.
(b) For purposes of this Agreement, the term "Environmental Laws" means
any federal, state, local and foreign statutes, laws (including, without
limitation, common law), judicial decisions, regulations, ordinances, rules,
judgments, orders, codes, injunctions, permits, governmental agreements or
governmental restrictions relating to human health and safety, the environment
or to pollutants, contaminants, wastes, or chemicals.
Section 2.18 Pooling; Tax Treatment
The parties intend that the Transaction be accounted for under the "pooling
of interests" method under the requirements of Opinion No. 16 (Business
Combinations) of the Accounting Principles Board of the American Institute of
Certified Public Accountants, the Financial Accounting Standards Board, and the
rules and regulations of the Securities and Exchange Commission. Neither CHSC
nor any of its affiliates has taken or agreed to take any action or is aware of
any fact or circumstance that would prevent the Transaction from qualifying (i)
for "pooling of interests" accounting treatment as described above or (ii) as a
reorganization within the meaning of Section 368 of the Code (a "368
Reorganization").
Section 2.19 No Dissenters Rights
No member of CHSC or any other holder of equity of CHSC, other than the
holders of Equity Participation Units as defined in CHSC's Bylaws and as further
defined in resolutions of the CHSC board of directors establishing the defined
business units to which such Equity Participation Units relate, have the right
to dissent from the Transaction and receive payment for their interest in cash
or otherwise receive any property or other interest in the Transaction, other
than as provided in the Plan of Merger.
Section 2.20 Acquisition Co.
Acquisition Co. has been formed by CHSC solely for the purpose of carrying
out the Transaction if Structure B is selected. Acquisition Co. is a
"Subsidiary" of CHSC for purposes hereof. Acquisition Co. has no assets or
liabilities, other than nominal assets to comply with any organizational
requirements of Ohio law.
Section 2.21 Full Disclosure
CHSC has disclosed to Farmland all facts material to the transactions
contemplated in this Agreement, including disclosure of all material contracts
(as such term is described in Item 601 of Regulation S-K under the Securities
Act of 1933, as amended ("Regulation S-K")). No representation, warranty, or
covenant by CHSC contained in this Agreement or the Plan of Merger, and no
statement contained in any certificate, schedule, or other documents or
instrument furnished to Farmland pursuant hereto or in connection with the
transactions contemplated hereby, including responses to Farmland inquiries put
to CHSC in the course of its investigation to confirm the warranties and
representations of CHSC in this Agreement, when taken as a whole, contains or
will contain any untrue statement of a material fact or omits or will omit a
material fact which would make it misleading as to CHSC.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF FARMLAND
Farmland represents and warrants to CHSC and the Surviving Entity that the
statements contained in this Article III are correct and complete in all
material respects as of the date of this Agreement, except as set forth in the
Farmland Disclosure Schedule attached hereto (the "Farmland Disclosure
Schedule"). Nothing in the Farmland Disclosure Schedule shall be deemed
adequate to disclose an exception to a representation or warranty made herein
unless the Farmland Disclosure Schedule identifies the exception with
particularity and describes the relevant facts in detail. Without limiting the
generality of the foregoing, the mere listing (or inclusion of a copy) of a
document or other item shall not be deemed adequate to disclose an exception to
a representation or warranty made herein (unless the representation or warranty
has to do with the existence of the document or other item itself).
Section 3.01 Organization and Good Standing
Farmland is a cooperative corporation duly organized and existing under
Chapter 17, Article 16 of the Kansas Statutes, is in good standing under the
laws of the State of Kansas, and has all requisite corporate power and authority
to own its properties and conduct its business as it is presently being
conducted. Farmland is duly qualified to do business and is in good standing in
each jurisdiction in which it conducts business or owns or leases properties of
a nature which would require such qualification, except for those jurisdictions
where the failure to be so qualified would not, individually or in the
aggregate, have a Material Adverse Effect on Farmland. Farmland has heretofore
delivered to Farmland true and complete copies of the Farmland articles of
incorporation and bylaws as currently in effect.
.
Section 3.02 Financial Statements
Farmland has delivered to CHSC (a) its audited financial statements as of
August 31, 1998, accompanied by the opinion of KPMG-Peat Marwick, and (b) its
unaudited financial statements for the nine months ended May 31, 1999. Such
financial statements fairly present the financial position
of Farmland at the dates indicated therein and the results of its operation for
the periods indicated therein, in conformity with GAAP. There has been no
material adverse change in the financial condition or results of operations of
Farmland since May 31, 1999.
Section 3.03 Absence of Liabilities
Neither Farmland nor any Subsidiary of Farmland has any liabilities or
obligations, absolute or contingent, except for liabilities and obligations
which are (i) reflected in the financial statements referred to in Section 3.02,
(ii) fully covered by insurance, except for reasonable deductibles or self-
insured retention levels, (iii) incurred in the ordinary course of business
since May 31, 1999 and not materially different in type or amount from those
reflected in the financial statements referred to in Section 3.02, or (iv) would
not in the aggregate reasonably be expected to have a Material Adverse Effect on
Farmland.
Section 3.04 Title to PropertyS
Except as reflected in the notes accompanying the audited financial
statements of Farmland, Farmland has good and marketable title to all real and
personal property reflected as owned on the books and records of Farmland as of
the date of this Agreement and owns outright all other assets, properties or
property interests acquired since that date, in each case free of all mortgages,
liens, charges and encumbrances, other than (i) easements, rights-of-way and
similar encumbrances which do not materially impair the use of such real or
personal property for the same or similar purposes as such real or personal
property has been used by Farmland prior to the Effective Time, (ii) liens for
current taxes that are not yet due and payable, (iii) liens related to the
acquisition of inventory or otherwise arising in the normal course of business,
and (iv) other liens, encumbrances and title defects which would not reasonably
be expected to have a Material Adverse Effect on Farmland.
Section 3.05 Intellectual Property
Farmland owns or possesses, is licensed under or otherwise has lawful
access to, all patents, trade secrets, know-how, other confidential information,
trademarks, service marks, copyrights, trade names, logos and other intellectual
property, whether registered or unregistered, necessary for the lawful conduct
of its business as currently conducted, without any infringement of or conflict
with the industrial or intellectual property rights of any third party, except
as would not reasonably be expected to have a Material Adverse Effect on
Farmland. Farmland does not know or have reason to know of any unauthorized use
or disclosure or misappropriation of any of its intellectual property. which
disclosure, use, or misappropriation would reasonably be expected to have a
Material Adverse Effect on Farmland.
Section 3.06 Compliance with Laws, etc.
Farmland is in compliance with all applicable laws and regulations the
violation of which would reasonably be expected to have a Material Adverse
Effect on Farmland. Farmland has all governmental authorizations, consents,
licenses and permits required by law or otherwise necessary for the proper
operation of its business as currently conducted, all of such licenses and
permits are in full force and effect, and no action to terminate, withdraw, not
renew or materially limit or otherwise change any such license or permit is
pending or has been threatened by any governmental agency or other party, except
as would not reasonably be expected to have a Material Adverse Effect on
Farmland.
Section 3.07 Pending Litigation, Claims, Actions, Proceedings
or
Investigations
There is no action, proceeding or investigation pending against, or to the
best of the knowledge of Farmland after reasonable inquiry, is threatened
against Farmland or any Subsidiary of Farmland or any of the assets which are
owned by Farmland or any Subsidiary of Farmland which would reasonably be
expected to have a Material Adverse Effect on Farmland.
Section 3.08 Absence of Defaults
Farmland is not in default under any provision of its Articles of
Incorporation or Bylaws or any indenture, mortgage, loan agreement or other
material agreement to which it is a party or by which it is bound, and Farmland
is not in violation of any statute, order, rule or regulation of any court or
governmental agency having jurisdiction over it or its properties, which, in
each case, could have a Material Adverse Effect on Farmland, and, except for any
consent or approval identified on the Farmland Disclosure Schedule, neither the
execution and delivery of this Agreement nor the consummation of the Transaction
in accordance with this Agreement will in any respect conflict with or result in
a breach of any of the foregoing, which could have a Material Adverse Effect on
Farmland.
Section 3.09 Authorization
Farmland has the corporate power and authority to enter into and to perform
its obligations under this Agreement (subject to the approvals of its members as
required by Section 5.01(b)). This Agreement and the Transaction have been duly
and validly authorized by the Board of Directors of Farmland, and (except for
the approvals of its members as required by Section 5.01(b)) no other corporate
action is required by Farmland in connection with this Agreement or the
Transaction. This Agreement constitutes the valid and binding agreement of
Farmland, enforceable against Farmland in accordance with its terms, except to
the extent such enforcement may be limited by the application of equitable
principles where equitable relief is sought or bankruptcy and other laws
relating to the enforcement of creditors' rights generally.
Section 3.10 Insurance
Farmland has secured appropriate insurance policies which (i) are issued by
sound and reputable insurance companies duly authorized to write said insurance,
(ii) are in full force and effect, (iii) are sufficient for compliance with all
requirements of law and all agreements to which Farmland is a party, and (iv)
provide reasonable insurance coverage for the assets and operations of Farmland
and all liabilities related thereto.
Section 3.11 Governmental Authorization
The execution, delivery and performance by Farmland of this Agreement and
the consummation of the Transaction by Farmland require no action by or in
respect of, or filing with, any governmental body, agency, official or authority
other than (a) the filing of appropriate documents to effect the Plan of Merger
under applicable law, (b) compliance with any applicable requirements of the HSR
Act, and (c) other actions or filings which if not taken or made would not,
individually or in the aggregate, have a Material Adverse Effect on Farmland or
the Surviving Entity following the Effective Time.
Section 3.12 Subsidiaries
Each Subsidiary of Farmland is duly organized, validly existing and in good
standing under the laws of its jurisdiction of organization, has all powers and
all governmental licenses, authorizations, consents and approvals required to
carry on its business as now conducted, except for those the absence of which
would not, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect on Farmland. Each Subsidiary of Farmland is duly
qualified to do business and is in good standing in each jurisdiction where the
character of the property owned or leased by it or the nature of its activities
makes such qualification necessary, except for those jurisdictions where failure
to be so qualified would not, individually or in the aggregate, have a Material
Adverse Effect on Farmland.
Section 3.13 SEC Filings
(a) Farmland has delivered to CHSC (i) its annual report on Form 10-K for
its fiscal year ended August 31, 1998, (ii) its quarterly reports on Form 10-Q
for its fiscal quarters ended after August 31, 1998, (iii) all of its other
reports, statements, schedules and registration statements filed with the SEC
since August 31, 1998 (the documents referred to in this Section 3.13(a) being
referred to collectively as the "Farmland SEC Documents").
(b) As of its filing date, each Farmland SEC Document complied as to form
in all material respects with the applicable requirements of the Exchange Act.
(c) As of its filing date, each Farmland SEC Document filed pursuant to
the Exchange Act did not contain any untrue statement of a material fact or omit
to state any material fact necessary in order to make the statements made
therein, in the light of the circumstances under which they were made, not
misleading.
Section 3.14 Absence of Certain Changes
Except as set forth in the Farmland Disclosure Schedule, since May 31,
1999, Farmland and its Subsidiaries have conducted their business in the
ordinary course consistent with past practice and there has not been: (a) any
event, occurrence or development of a state of circumstances or facts which has
had or reasonably would be expected to have, individually or in the aggregate, a
Material Adverse Effect on Farmland; (b) any transaction or commitment made, or
any contract, agreement or settlement entered into, by (or judgment, order or
decree affecting) Farmland or any of its Subsidiaries relating to its assets or
business (including the acquisition or disposition of any assets) or any
relinquishment by Farmland or any of its Subsidiaries of any contract or other
right, in either case, material to Farmland and its Subsidiaries taken as a
whole, other than transactions, commitments, contracts, agreements or
settlements (including without limitation settlements of litigation and tax
proceedings) in the ordinary course of business consistent with past practice,
those contemplated by this Agreement, or as agreed to in writing by CHSC; (c)
any change in any method of accounting or accounting practice (other than any
change for tax purposes) by Farmland or any of its Subsidiaries, except for any
such change which is not significant or which is required by reason of a
concurrent change in GAAP; or (d) any increase in (or amendments to the terms
of) compensation, bonus or other benefits payable to directors, officers or
employees of Farmland or any of its Subsidiaries, other than in the ordinary
course of business consistent with past practice, as permitted by this
Agreement, or as agreed to in writing by CHSC.
Section 3.15 Taxes
Except as set forth in the Farmland Balance Sheet dated May 31, 1999
(including the notes thereto) and except as would not, individually or in the
aggregate, have a Material Adverse Effect on Farmland, (i) all Farmland Tax
Returns required to be filed with any taxing authority by, or with respect to,
Farmland and its Subsidiaries have been filed in accordance with all applicable
laws; (ii) Farmland and its Subsidiaries have timely paid all Taxes shown as due
and payable on the Farmland Tax Returns that have been so filed, and, as of the
time of filing, the Farmland Tax Returns correctly reflected the facts regarding
the income, business, assets, operations, activities and the status of Farmland
and its Subsidiaries (other than Taxes which are being contested in good faith
and for which adequate reserves are reflected on the Farmland Balance Sheet);
(iii) Farmland and its Subsidiaries have made provision for all Taxes payable by
Farmland and its Subsidiaries for which no Farmland Tax Return has yet been
filed; (iv) the charges, accruals and reserves for Taxes with respect to
Farmland and its Subsidiaries reflected on the Farmland Balance Sheet are
adequate under GAAP to cover the Tax liabilities accruing through the date
thereof; (v) there is no action, suit, proceeding, audit or claim now proposed
or pending against or with respect to Farmland or any of its Subsidiaries in
respect of any Tax where there is a reasonable possibility of an adverse
determination; and (vi) to the best of Farmland's knowledge and belief, neither
Farmland nor any of its Subsidiaries is liable for any Tax imposed on any entity
other than such Person, except as the result of the application of Treas. Reg.
Section 1.1502-6 (and any comparable provision of the tax laws of any state,
local or foreign jurisdiction) to the affiliated group of which Farmland is the
common parent.
Section 3.16 Employee Benefit Plans
(a) Prior to the date hereof, Farmland has provided CHSC with a list
identifying each material "employee benefit plan," as defined in Section 3(3) of
ERISA, each material employment, severance or similar contract, plan,
arrangement or policy applicable to any director, former director, employee or
former employee of Farmland and each material plan or arrangement (written or
oral), providing for compensation, bonuses, profit-sharing, stock option or
other stock related rights or other forms of incentive or deferred compensation,
vacation benefits, insurance coverage (including any self-insured arrangements),
health or medical benefits, disability benefits, workers' compensation,
supplemental unemployment benefits, severance benefits and post-employment or
retirement benefits (including compensation, pension, health, medical or life
insurance benefits) which is maintained, administered or contributed to by
Farmland and covers any employee or director or former employee or director of
Farmland, or under which Farmland has any liability. Such material plans
(excluding any such plan that is a "multiemployer plan", as defined in Section
3(37) of ERISA) are referred to collectively herein as the "Farmland Employee
Plans".
(b) Each Farmland Employee Plan has been maintained in compliance with its
terms and with the requirements prescribed by any and all statutes, orders,
rules and regulations (including but not limited to ERISA and the Code) which
are applicable to such Plan, except where failure to so comply would not,
individually or in the aggregate, have a Material Adverse Effect on Farmland.
(c) Neither Farmland nor any affiliate of Farmland has incurred a
liability under Title IV of ERISA that has not been satisfied in full, and no
condition exists that presents a material risk to Farmland or any affiliate of
Farmland of incurring any such liability other than liability for premiums due
the Pension Benefit Guaranty Corporation (which premiums have been paid when
due).
(d) Each Farmland Employee Plan which is intended to be qualified under
Section 401(a) of the Code is so qualified and has been so qualified during the
period from its adoption to date, and each trust forming a part thereof is
exempt from federal income tax pursuant to Section 501(a) of the Code.
(e) No director or officer or other employee of Farmland or any of its
Subsidiaries will become entitled to any retirement, severance or similar
benefit or enhanced or accelerated benefit solely as a result of the
transactions contemplated hereby.
(f) Each Farmland Employee Plan that provides for post-retirement health
and medical, life or other insurance benefits for retired employees of Farmland
or any of its Subsidiaries has been adequately reserved for in Farmland's
financial statements.
(g) There has been no amendment to, written interpretation or announcement
(whether or not written) by Farmland or any of its affiliates relating to, or
change in employee participation or coverage under, any Farmland Employee Plan
which would increase materially the expense of maintaining such Farmland
Employee Plan above the level of the expense incurred in respect thereof for the
12 months ended May 31, 1999.
Section 3.17 Environmental Matters Except as set
forth in the Farmland SEC Documents filed prior to the date hereof and with such
exceptions as, individually or in the aggregate, have not had, and would not
reasonably be expected to have, a Material Adverse Effect on Farmland (i) no
notice, notification, demand, request for information, citation, summons,
complaint or order has been received by, and no investigation, action, claim,
suit, proceeding or review is pending or, to the knowledge of Farmland or any of
its Subsidiaries, threatened by any Person against, Farmland or any of its
Subsidiaries, and no penalty has been assessed against Farmland or any of its
Subsidiaries, in each case, with respect to any matters relating to or arising
out of any Environmental Law; (ii) Farmland and its Subsidiaries are and have
been in compliance with all Environmental Laws; (iii) there are no liabilities
of Farmland or any of its Subsidiaries relating to or arising out of any
Environmental Law of any kind whatsoever, whether accrued, contingent, absolute,
determined, determinable or otherwise, and there is no existing condition,
situation or set of circumstances which could reasonably be expected to result
in such a liability; and (iv) there has been no environmental investigation,
study, audit, test, review or other analysis conducted of which Farmland has
knowledge in relation to the current or prior business of Farmland or any of its
Subsidiaries or any property or facility now or previously owned, leased or
operated by Farmland or any of its Subsidiaries which has not been delivered to
CHSC at least five days prior to the date hereof. All liabilities of Farmland
or any of its Subsidiaries relating to or arising out of any Environmental Law
of any kind whatsoever have been adequately reserved for on the financial
statements of Farmland, or for unconsolidated Subsidiaries, on the financial
statements of such Subsidiaries.
Section 3.18 Pooling; Tax Treatment
The parties intend that the Transaction be accounted for under the "pooling
of interests" method under the requirements of Opinion No. 16 (Business
Combinations) of the Accounting Principles Board of the American Institute of
Certified Public Accountants, the Financial Accounting Standards Board, and the
rules and regulations of the Securities and Exchange Commission. Neither
Farmland nor any of its affiliates has taken or agreed to take any action or is
aware of any fact or circumstance that would prevent the Transaction from
qualifying (i) for "pooling of interests" accounting treatment as described
above or (ii) as a 368 Reorganization.
Section 3.19 No Dissenters' Rights
No member of Farmland or any other holder of equity of Farmland have the
right to dissent from the Transaction and receive payment for their interest in
cash or otherwise receive any property or other interest in the Transaction,
other than as provided in the Plan of Merger.
Section 3.20 Full Disclosure
Farmland has disclosed to CHSC all facts material to the transactions
contemplated in this Agreement, including disclosure of all material contracts
(as such term is described in Item 601 of Regulation S-K). No representation,
warranty, or covenant by Farmland contained in this Agreement or the Plan of
Merger, and no statement contained in any certificate, schedule, or other
documents or instrument furnished to CHSC pursuant hereto or in connection with
the transactions contemplated hereby, including responses to CHSC inquiries put
to Farmland in the course of its investigation to confirm the warranties and
representations of Farmland in this Agreement, when taken as a whole, contains
or will contain any untrue statement of a material fact or omits or will omit a
material fact which would make it misleading as to Farmland.
ARTICLE IV
PRE-CLOSING COVENANTS
The parties agree as follows with respect to the period between the
execution of this Agreement and the Closing Date:
Section 4.01 Selection of Structure
The board of directors of each of CHSC and Farmland shall work together to
determine whether Structure A or Structure B shall be selected as the most
appropriate structure for the Transaction. If Structure B is selected, CHSC
agrees to take such action as the sole member of Acquisition Co., or otherwise,
to permit Acquisition Co. to take such actions as may be necessary to effect the
CHSC/Acquisition Co. Merger pursuant to applicable law, it being understood that
following such Merger the Surviving Entity shall be reincorporated as a
cooperative association under Chapter 308A of the Minnesota Statutes as soon as
practicable after the issue or issues that precluded use of Structure A have
been resolved, unless the board of directors of the Surviving Entity, by a
three-fourths (3/4) vote, determines otherwise.
Section 4.02 Good Faith Efforts
Each party will use its good faith efforts (i) to take all action necessary
to render accurate, as of the Closing Date, its representations and warranties
contained herein, and to refrain from taking any action which would render any
such representation or warranty inaccurate as of the Closing Date, (ii) to
perform or cause to be satisfied each covenant or condition to be performed or
satisfied by it pursuant to this Agreement or the Plan of Merger, and to cause
the Transaction to be consummated, and (iii) to obtain all licenses or other
approvals required to be obtained by it from any appropriate governmental or
regulatory body or other person in connection with the carrying out of the
Transaction and the continued operation of business by the Surviving Entity
after the Closing Date, including without limitation the consents and approvals
identified in each party's Disclosure Schedule.
Section 4.03 Preservation of Business
Each party shall, and shall cause each of its Subsidiaries to, conduct its
business in the ordinary course and in a manner consistent with its past
practices (except as expressly contemplated hereby), and shall use good faith
efforts to preserve intact its business organization, properties (except as they
may be sold, used or otherwise disposed of in the ordinary course) and the good
will of its members, suppliers, customers and others having business
relationships with it.
Section 4.04 Conduct of Business
Each Party agrees to not engage in , and agrees to cause each of its
Subsidiaries not to engage in, any practice, take any action, or enter into any
transaction outside of the ordinary course of business without the prior consent
of the other party to this Agreement. Without limiting the generality of the
foregoing, each party shall not and each party agrees to cause each of its
Subsidiaries to not:
(a) grant to any person any option to purchase, or other right to
acquire, capital stock or other equity interests, except for allocation of
patronage equities in a manner consistent with past practice;
(b) issue any capital stock or other equity interests, except in the
ordinary course of business;
(c) make any material amendment to enter into or terminate any
material contract, lease or understanding;
(d) amend its Articles of Incorporation, Bylaws, or any board
policies;
(e) incur any indebtedness for borrowed money or make any commitment
to borrow money, except indebtedness incurred in the ordinary course of
business pursuant to credit arrangements existing as of the date of this
Agreement (including any renewals thereof);
(f) make any material capital expenditures other than in the ordinary
course of business;
(g) mortgage any of its assets, or except in the ordinary course of
business, sell any of its assets having an aggregate value which would be
material to its business;
(h) pay any dividends or make any distributions with respect to its
capital stock or equity interests, except in the ordinary course of
business;
(i) reclassify, combine, subdivide, split-up, or amend its capital
stock or equity interests;
(j) purchase, acquire or redeem any shares of capital stock or other
equity interests (other than in satisfaction of allocated losses), except
pursuant to the existing equity redemption/base capital plans of the party;
or
(k) agree or commit to do any of the foregoing.
Section 4.05 Meetings of Members
The parties will take all steps necessary to call special meetings of,
and/or mail votes by, the members of Farmland and CHSC, to be held on or around
November 23, 1999 for purposes of considering and voting on the Transaction and
other matters covered by this Agreement in accordance with their respective
Articles of Incorporation, Bylaws and applicable law. The parties will
cooperate with each other in connection with the special member meetings and/or
mail votes and will develop a mutually agreed upon plan for disseminating
information concerning the Transaction to their members (including holding
member information meetings and preparation of a joint statement of terms and
conditions to be mailed to members).
Section 4.06 Full Access
Each party will permit the authorized representatives of the other party to
have full access at all reasonable times, and in a manner so as not to interfere
with the normal business operations of such party, to all premises, properties,
personnel, books, records (including tax records), contracts, and documents of
or pertaining to such party. The obligations of each party with respect to any
"Confidential Information" (as such term is defined in that certain
Confidentiality Agreement between the parties dated April 8, 1999 (the
"Confidentiality Agreement")) furnished by the other party shall be governed in
all respects by the Confidentiality Agreement, the terms of which are
incorporated herein by this reference. If for any reason the Transaction is not
consummated, each party will promptly return all documents, papers, books,
records and other materials (and all copies thereof) embodying any Confidential
Information obtained in the course of its investigation and evaluation.
Section 4.07 Notice of Developments
Each party will give prompt written notice to the other of any development
which could reasonably be expected to result in a Material Adverse Effect on
such party or which would cause a breach of any of its representations and
warranties contained herein. Except as specified in such written notice, no
disclosure by a party pursuant to this Section 4.07 shall be deemed to amend or
supplement such party's Disclosure Schedule or to prevent or cure any
misrepresentation, breach of warranty, or breach of covenant.
Section 4.08 Exclusive
Neither party will (i) solicit, initiate, or encourage the submission of
any proposal or offer from any person relating to the acquisition of any capital
stock or other voting securities, or any substantial portion of the assets of,
such party (including any acquisition structured as a merger, consolidation, or
share exchange) or (ii) participate in any discussions or negotiations
regarding, furnish any information with respect to, assist or participate in, or
facilitate in any other manner any effort or attempt by any person to do or seek
any of the foregoing. Each party will notify the other party immediately if any
person makes any proposal, offer, inquiry, or contact with respect to any of the
foregoing.
Section 4.09 Hart-Scott-Rodino Filings
CHSC and Farmland shall prepare and file with the Antitrust Division of the
U.S. Justice Department (the "Antitrust Division") and the Federal Trade
Commission (the "FTC"), all reports required to be filed in connection with the
Transaction pursuant to the HSR Act. Each of CHSC and Farmland shall cooperate
fully with each other in preparation of such reports. If either the Antitrust
Division or the FTC requests that additional information be filed pursuant to
the HSR Act, CHSC and HSR shall prepare and file such additional information as
soon as practicable after the request, and shall cooperate fully with each other
in preparation of such additional information. With respect to preparation or
filing of any of the reports or additional information described in this Section
4.09, each party shall bear its own costs.
Section 4.10 Tax and Accounting Treatment
Each of the parties shall not take any action and shall not fail to take
any action, which action or failure to act would prevent, or would be reasonably
likely to prevent, the Transaction from qualifying (a) for "pooling of
interests" accounting treatment as described in Sections 2.19 and 3.19, or (b)
as a 368 Reorganization.
ARTICLE V
CLOSING CONDITIONS
Section 5.01 Conditions to Obligations of Each Party
The respective obligations of CHSC and Farmland to consummate the
Transaction and other matters described in this Agreement are, at their
respective options, subject to the satisfaction or waiver of each of the
following conditions on or before the Closing Date:
(a) The members of CHSC shall have approved this Agreement, the Plan
of Merger, and the Transaction, all in accordance with the requirements of
applicable law and the Articles of Incorporation and Bylaws of CHSC;
(b) The members of Farmland shall have approved this Agreement, the
Plan of Merger, and the Transaction, all in accordance with the
requirements of applicable law and the Articles of Incorporation and Bylaws
of Farmland;
(c) If Structure B is to be used to effect the combination, all steps
then legally feasible to reincorporate the Surviving Entity as a Minnesota
cooperative association (as described in Section 4.01 hereof) shall have
been taken;
(d) The parties shall have made the filings required by Section 4.09
above under the HSR Act, and all applicable time periods under the HSR Act
shall have expired;
(e) No injunction, restraining order or order of any nature issued by
any court of competent jurisdiction, government or governmental agency
enjoining the Transaction shall have been issued and remain in effect;
(f) All consents, approvals and waivers which are necessary in
connection with the Transaction, or any part thereof, shall have been
obtained, including the consents and approvals referred to in Section 4.02
above, other than any such consents, approvals or waiver as do not,
individually or in the aggregate, have a Material Adverse Effect on the
Surviving Entity; and
(g) No action shall have been threatened or instituted by any
governmental agency or any other person challenging the legality of the
Transaction, seeking to prevent or delay consummation of the Transaction or
seeking to obtain divestiture or other relief in the event of consummation
of the Transaction. It is understood in the event that such an action is
threatened or instituted, the parties will first attempt for a period of 90
days to obtain dismissal or other favorable resolution of such threatened
or actual action prior to exercise of their right to terminate hereunder.
Section 5.02 Additional Conditions to Obligation of CHSC
The obligation of CHSC to consummate the Transaction is, at its option,
subject to the satisfaction or waiver of each of the following additional
conditions at the Closing Date.
(a) All the representations and warranties of Farmland contained in
this Agreement shall be true and correct in all material respects on the
Closing Date as though such representations and warranties were made on and
as of the Closing Date, and Farmland shall have performed all of its
obligations and complied with all of its covenants contained in this
Agreement and in the Plan of Merger to be performed or complied with prior
to the Closing Date;
(b) There shall have occurred no change since the date hereof in the
assets, liabilities, financial condition or operations of Farmland which,
in the reasonable judgment of CHSC, has or is likely to have a Material
Adverse Effect on the Surviving Entity; provided, however, that an adverse
ruling in the Terra tax case referred to on Exhibit D hereto shall not
be considered as such a change;
(c) CHSC shall have received a certificate, dated as of the Closing
Date, and executed by the President of Farmland, certifying in such detail
as CHSC may reasonably request as to the accuracy of such representations
and warranties, the fulfillment of such obligations, compliance with such
covenants and satisfaction of the conditions to CHSC's obligation as of the
Closing Date; and
(d) All actions, proceedings and documents necessary to carry out the
Transaction shall be reasonably satisfactory to CHSC
Section 5.03 Additional Conditions to Obligation of Farmland
The obligation of Farmland to consummate the Transaction is, at its option,
subject to the satisfaction or waiver of each of the following additional
conditions on or before the Closing Date:
(a) All the representations and warranties of CHSC contained in this
Agreement shall be true and correct in all material respects on the Closing
Date as though such representations and warranties were made on and as of
the Closing Date, and CHSC shall have performed all of its obligations and
complied with all of its covenants contained in this Agreement and in the
Plan of Merger to be performed or complied with prior to the Closing Date;
(b) There shall have occurred no change since the date hereof in the
assets, liabilities, financial condition or operations of CHSC which, in
the reasonable judgment of Farmland, has or is likely to have a Material
Adverse Effect on the Surviving Entity;
(c) Farmland shall have received a certificate, dated as of the
Closing Date, executed by the President of CHSC, certifying in such detail
as Farmland may reasonably request as to the accuracy of such
representations and warranties, the fulfillment of such obligations,
compliance with such covenants and satisfaction of the conditions to
Farmland's obligations as of the Closing Date; and
(d) All actions, proceedings and documents necessary to carry out the
Transaction shall be reasonably satisfactory to Farmland, including the
effectiveness of the CHSC/Acquisition Co. Merger, if Structure B is
selected.
ARTICLE VI
POST-CLOSING AGREEMENTS
With respect to issues relating to the Surviving Entity subsequent to the
Effective Time, CHSC and Farmland agree as follows:
Section 6.01 Consolidation of Benefit Plans
Within a reasonable period of time after the Effective Time, the Surviving
Entity shall take steps to consolidate the various benefit plans provided to the
employees of the respective parties in accordance with the applicable provisions
of the Code and ERISA. This consolidation of plans shall be accomplished in a
manner to be determined by the Surviving Entity.
Section 6.02 Patronage Distributions
Following the Effective Time and within the time period required by
Subchapter T of the Code, the Surviving Entity will make patronage allocations
to the former members of each party (a) based on patronage transactions with the
respective parties during each party's respective fiscal year or portion thereof
immediately preceding the Effective Time and (b) in accordance with the terms of
the bylaws of the party that are in effect during the period such patronage
transaction occurred. The distributions of such allocation shall be in the form
of cash and equity credits in a manner consistent with the previous patronage
distributions of each party.
Section 6.03 Indemnification of Former Officers; Insurance
The surviving Entity shall indemnify each director, officer, manager,
employee or agent of CHSC or Farmland, and each person serving at the request of
CHSC or Farmland as a director, officer, manager, employee or agent of any other
entity, partnership, joint venture, trust or enterprise, against any losses,
claims or expenses incurred by such person prior to the Effective Time that
would be indemnifiable under Bylaws of the Surviving Entity as in force on the
Effective Time and otherwise to the fullest extent provided or permitted by any
statute which applies to any type of corporation of the state of incorporation
of the Surviving Entity as in effect at such time. The Surviving Entity shall
maintain insurance coverage against any such loss, claim or expense in an amount
of at least $20,000,000, subject to standard exclusions and exceptions to
coverage, for a period of not less than six (6) years after the Effective Time,
subject to the right of the Board of Directors to discontinue such coverage on
grounds of unreasonable cost.
ARTICLE VII
TERMINATION
Section 7.01 Termination of Agreement
This Agreement shall be terminated and the Transaction abandoned if at any
time prior to the Closing:
(a) The members of CHSC at the CHSC member meeting called for the
purpose of voting on the Transaction, fail to approve the Transaction as
required by Section 5.01(a), or the members of Farmland at the Farmland
member meeting called for the purpose of voting on the Transaction, fail to
approve the Transaction as required by Section 5.01(b); or
(b) The parties mutually agree in writing to terminate this
Agreement; or
(c) Either party delivers a written notice to the other to the effect
that (i) one or more of the conditions to its obligations as set forth
herein cannot be met, (ii) the other party has defaulted in a material
respect under one or more of its covenants or agreements contained herein,
or (iii) any of the representations or warranties of the other party are or
have become materially untrue or incorrect as of the date of such notice,
and in any case such condition or conditions have not been satisfied, such
default or defaults have not been remedied or such representation or
warranty has not been rendered true and correct within thirty (30) days
after such notice is mailed; or
(d) The Closing has not occurred on or before December 31, 2000, or
such later date as the parties may mutually agree upon.
Section 7.02 Effect of Termination
If this Agreement is terminated pursuant to Section 7.01 above, all rights
and obligations of the parties hereunder shall terminate without any liability
of either party to the other (except for any liability of a party for breach of
this Agreement); provided, however, that the confidentiality and return of
documents provisions contained in or referred to Section 4.06 above shall
survive any such termination.
ARTICLE VIII
MISCELLANEOUS
Section 8.01 Waiver of Conditions
Any party may, at its option, waive in writing any and all of the
conditions herein contained to which its obligations hereunder are subject. A
party, by consummating the transactions contemplated herein, shall be deemed to
have waived any breach of a warranty, representation, covenant or condition of
which such party received written notice prior to the Closing Date if the notice
specifically referred to this Section 8.01 and described the breach in
reasonable detail.
Section 8.02 Amendment
The parties by mutual consent may, before or after approval of this
Agreement by the members, amend, modify or supplement this Agreement in such
manner as may be agreed upon in writing.
Section 8.03 Binding Nature
This Agreement shall be binding upon and inure only to the benefit of the
parties hereto and their respective successors and assigns, provided that
neither this Agreement nor any of the rights, interests or obligations hereunder
shall be assigned or delegated by any of the parties hereto without the prior
written consent of the other parties hereto.
Section 8.04 Counterparts
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
Section 8.05 Entire Agreement
Except for the Confidentiality Agreement (the terms of which are
incorporated herein by reference pursuant to Section 4.06 hereof), this
Agreement, the Plan of Merger and the other documents referred to herein and
therein set forth the entire understanding of the parties hereto with respect to
the matters provided for herein and therein and supersede all prior agreements,
covenants, arrangements, communications, representations or warranties, whether
oral or written, by any officer, employee or representative of either party.
Section 8.06 Notices
All notices, requests, demands and other communications hereunder shall be
deemed to have been duly given if delivered or mailed, certified or registered
mail, with postage prepaid:
If to CHSC:
Cenex Harvest States Cooperatives
5500 CENEX Drive
Inver Grove Heights, MN 55077-1733
Attn: Vice President and General Counsel
If to Farmland:
Farmland Industries, Inc.
Department 62
3315 North Oak Trafficway
Kansas City, Missouri 64116
Attn: General Counsel
Section 8.07 Non-Survival of Representations and Warranties
The representations and warranties of the parties contained in Articles II
and III of this Agreement shall form the basis for closing conditions only,
shall not survive the Closing Date and, except to the extent of the principles
for the Capital Plan in Exhibit D hereto, shall not form the basis for any
action by or on behalf of either party or any third party for breach,
misrepresentation or indemnity at any time after the Closing Date.
Section 8.08 Captions
The article and section headings of this Agreement are for convenience only
and shall not affect the meaning or construction of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first set forth above.
CENEX HARVEST STATES FARMLAND INDUSTRIES, INC.
COOPERATIVES
By________________________________ By________________________________
Its________________________________ Its________________________________
The undersigned, UCB Acquisition Co., an Ohio cooperative corporation, the
only member of which is Cenex Harvest States Cooperatives, hereby joins in the
foregoing Transaction Agreement and agrees to take all actions required to
effect Structure B, as therein defined, if said structure is selected pursuant
to Section 1.01 of said Transaction Agreement.
UCB ACQUISITION CO.
By Date: ___________________________
President
EXHIBIT D
CAPITAL PLAN
I. Key Principles Underlying the Capital Plan.
1) The total capital required by the Company will be dependent upon the
assets required to be owned to accomplish its mission as well as the
cost and availability of debt.
2) Each base capital pool will have a target level of base capital.
3) Members of the Company will be required to provide capital based upon
relative use of the capitalization unit and the respective target
levels of base capital.
4) Retention of earnings will be a source of capital. The percentage of
earnings to be paid in cash patronage from a patronage pool will
increase as a member's capital increases relative to the base capital
requirement.
5) If a member has capital levels in excess of base capital requirements,
the excess amount will be subject to retirement on a basis to be
determined by the Board of Directors.
6) Patronage-sourced earnings will be allocated on a patronage basis
provided that the Board will have the authority to designate a portion
of patronage-sourced earnings as unallocated surplus to build a
reserve to absorb losses.
7) Earnings from non-patronage sourced business will generally be used to
build unallocated surplus.
8) The concept of Equity Participation Units developed by Harvest States
will be retained.
9) Minimum capital requirements will be $1,000 for individual members and
$10,000 for member cooperatives, with all existing members to be
grandfathered under existing minimum capital requirements. New
members meet minimum capital requirements through patronage earnings.
II. Terra Tax Case.
A. Key Terra Principles
1) No owner equities will be adversely impacted in a consolidated
setting as compared to stand alone. In the event, however, that
there is an adverse impact, it is understood that it should be
borne by the former Farmland stockholders (equity holders).
2) The Company must maintain a base of permanent equity to support
its operations (i.e. equity which is not subject to retirement
and is not credited to base capital plan requirements).
3) The outcome of the Terra case will not impact voting power.
B. Key Terra Agreements
1) Each party will be responsible for $100,000,000 of permanent
equity.
a. As set forth in the Plan of Merger, at the Effective Time, the
Surviving Entity will allocate and distribute to CHSC
members non-patronage equity interests in the Surviving
Entity in an amount equal to CHSC's surplus minus CHSC's
deferred patronage as of the Effective Time and minus
$100,000,000. Such non-patronage equity interests shall not
be included for purposes of voting determinations but shall
be "retirement/base capital eligible equity" (i.e., included
in determining satisfaction of requirements for base capital
and shall be eligible for redemption under the Capital
Plan).
b. At the Effective Time, the Surviving Entity will allocate to
Farmland members non-patronage equity interests in the
Surviving Entity in an amount equal to the excess of the
Farmland surplus over $100,000,000 as of the Effective Time.
The non-patronage equity interests allocated to Farmland's
members shall be distributed to such members by transfer of
such non-patronage equity interests to the Surviving Entity
to be held in escrow on behalf of the Farmland members until
the Terra tax case is resolved and is then to be distributed
to Farmland members in accordance with the provisions set
forth below or canceled. So long as such non-patronage
equity is held in escrow, it shall not be included for
purposes of voting determinations, shall not be included in
determining satisfaction of requirements for base capital
and shall not be eligible for redemption under the Capital
Plan; however, once distributed from escrow to Farmland
members, such non-patronage equity shall be included in
determining satisfaction of requirements for base capital
and shall be eligible for redemption under the Capital Plan.
2) If Terra is lost:
a. The amount of the Terra loss (which amount shall be net of the
deferred tax asset created) shall be determined.
b. The amount in 2)a. shall be reduced by an amount equal to
64.5% of the net non-patronage income of the Surviving
Entity from the Effective Time.
c. The net amount determined in 2)b. above shall first be
allocated to Farmland members by cancellation of the non-
patronage equity issued under 1)b. above up to such net
amount and if, thereafter, there remains any non-patronage
equity held in escrow under 1)b. above, it shall be
distributed from escrow to the appropriate members and shall
be converted to retirement/base capital eligible equity.
d. If there is any net loss remaining after application of 2)c.
above (the "Remaining Adjustment"), then equity in an amount
equal to the Remaining Adjustment received by Farmland
members in the Merger for their Farmland Equity Interests
shall be converted to permanent equity so that such
converted equity will not be included in determining
satisfaction of requirements for base capital and will not
be eligible for redemption under the Capital Plan. However,
such equity will continue to be counted for voting purposes.
e. Permanent equity in 2)d. will be converted to retirement/base
capital eligible equity at a rate of 64.5% of the total non-
patronage earnings (after application of all expenses other
than interest on borrowings used to pay the Terra
obligation), less an appropriate interest charge to reflect
the borrowings used to pay the Terra obligation, less the
reduction of the deferred tax asset associated with the
Terra loss.
f. Debt and other funding actions required to pay a Terra
judgment will be serviced from non-patronage income deemed
attributable to Farmland assets.
g. Equity balances held by estates will be retired in full
regardless of classification.
h. An example of the foregoing is appended hereto as Appendix I.
3) If Terra is won, Farmland members' non-patronage equity allocated
under 1)b. above will be converted into retirement/base capital
eligible equity and distributed from the escrow.
III. Other Contingent Liabilities.
A. Key Principles The parties recognize that there will be liabilities
that arise in the future out of facts that existed at the Effective
Time, which liabilities would be required to be paid by the Surviving
Entity. Some of such liabilities and/or the facts related thereto may
not be disclosed pursuant to the Transaction Agreement, or if
disclosed, nevertheless may not be adequately reserved for in the
party's financial statements.
B. Reclassification. Accordingly, in addition to the Terra Tax case
matter, the Surviving Entity shall make reclassifications of equity as
follows: (a) with respect to Farmland Contingent Losses, the
Surviving Entity shall reclassify the equity that was received in the
Transaction in exchange for Farmland common stock or other Farmland
equity, and (b) with respect to CHSC Contingent Losses, the Surviving
Entity shall reclassify the equity that was retained with respect to
CHSC equity or was received in exchange for CHSC equity in the
Transaction.
C. Procedures and Definitions.
1) As used herein, "Farmland Contingent Loss" is a loss that exceeds
$1,000,000.00 incurred by the Surviving Entity arising out of a
matter or group of related matters relating to liabilities
(fixed, contingent or otherwise, but not including losses
relating to the Terra Tax case) of Farmland, the material facts
of which existed at the Effective Time but were not included in
Farmland's Disclosure Schedule and were not adequately reserved
for in the financial statements of Farmland as of the Effective
Time, or even if included in such disclosure schedule, were not
adequately reserved for in the financial statements of Farmland
as of the Effective Time, and a "CHSC Contingent Loss" is a loss
that exceeds $1,000,000.00 incurred by the Surviving Entity
arising out of a matter or group of related matters relating to
liabilities (fixed, contingent or otherwise) of CHSC, the
material facts of which existed at the Effective Time but were
not included in CHSC's Disclosure Schedule and were not
adequately reserved for in the financial statements of CHSC as of
the Effective Time, or even if included in such disclosure
schedule, were not adequately reserved for in the financial
statements of CHSC as of the Effective Time; and which in either
case come to light before October 1, 2000 or such earlier time as
the parties agree. For purposes of these definitions: (i) a loss
shall be deemed to have been incurred at the earlier of the time
that (a) it was actually incurred, or (b) at the time that the
party incurring the loss is required by GAAP to account for the
loss on its books; (ii) whether a liability was "adequately"
reserved for shall be assessed with reference to the finally-
determined amount of the liability in question; and (iii) the
amount of a Contingent Loss shall be determined net of any actual
reserves.
2) In determining the amount of any loss, there shall be taken into
account the reserves for such loss that were provided for in the
financial statements of (i) Farmland or of any unconsolidated
Subsidiary of Farmland, in the instance of determining the amount
of any Farmland Contingent Loss, and (ii) CHSC or of any
unconsolidated Subsidiary of CHSC, in the instance of determining
the amount of any CHSC Contingent Loss. Determinations of the
amount of any loss shall be made by the board of directors of the
Surviving Entity.
3) Such reclassification of equity shall be done by the Surviving
Entity as follows:
a. Each party's Contingent Losses shall be calculated.
b. $20 million shall be deducted from each such Contingent Loss
figure, to arrive at a "Net Contingent Loss" figure for each
party.
c. Reclassification of equity shall be made with respect to a
party only if, and to the extent that, the aggregate of such
party's Net Contingent Losses exceeds the aggregate of the
other party's Net Contingent Losses.
4) Any such reclassification shall be made in a manner substantially
similar to the procedures for the reclassification to be made if
there is a loss relating to the Terra Tax case (as set forth in
II above).
5) The provisions of this Part III may be modified upon the
affirmative vote of three-fourths of the full board of directors
of the Surviving Entity.
Appendix I
1. Assume a Terra loss with a required payment of $400 million. The
approximate after-tax charge to equity would be $280 million. A deferred
tax asset of $120 million would be created.
2. If Farmland allocated equity is $550 million and unallocated surplus is
$250 million, the $280 million charge would offset the entire unallocated
account; $30 million would be carried in a deficit account.
3. Of the $550 million in allocated equities, $130 million would be converted
to permanent equity. The remaining $420 million would remain as
retirement/base capital eligible equity.
4. Assume, after the Effective Time, the Surviving Entity has total non-
patronage income (after application of all expenses other than interest on
borrowings used to pay the Terra obligation) of $93 million.
5. Of the $93 million in total non-patronage earnings, approximately $60
million would go into the Farmland pool.
6. Assume the interest expense on the Terra note is $25 million. The net non-
patronage sourced income in the Farmland pool would be $35 million.
7. The $35 million net non-patronage sourced income in the pool will be
sheltered with the NOL. As the NOL is used, the deferred tax asset will be
reduced.
8. The net build-up in the unallocated surplus attributable to the Farmland
pool will be $35 million less the reduction in the deferred tax asset.
This net number will be the amount of permanent equity converted to
retirement/base capital eligible equity.
