UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 1999
or
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________.
Commission File Number: 2-67985
FARMLAND INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Kansas 44-0209330
(State of incorporation) (I.R.S. Employer
Identification No.)
3315 North Oak Trafficway
Kansas City, Missouri 64116-0005
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: 816-459-6000
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 [ ]
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
August 31 May 31
1998 1999
(Amounts in Thousands)
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................. $ 7,334 $ -0-
Accounts receivable - trade............................... 596,415 612,376
Inventories (Note 2)...................................... 725,967 823,166
Other current assets...................................... 145,151 192,307
Total Current Assets................................. $ 1,474,867 $ 1,627,849
Investments and Long-Term Receivables (Note 4).............. $ 298,402 $ 302,335
Property, Plant and Equipment:
Property, plant and equipment, at cost.................... $ 1,680,373 $ 1,747,495
Less accumulated depreciation and
amortization........................................... 853,224 905,885
Net Property, Plant and Equipment......................... $ 827,149 $ 841,610
Other Assets................................................ $ 212,356 $ 217,375
Total Assets................................................ $ 2,812,774 $ 2,989,169
<FN>
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND EQUITIES
<TABLE>
<CAPTION>
August 31 May 31
1998 1999
(Amounts in Thousands)
<S> <C> <C>
Current Liabilities:
Checks and drafts outstanding................................... $ -0- $ 58,327
Demand loan certificates........................................ 28,407 26,932
Short-term notes payable ....................................... 380,232 501,446
Current maturities of long-term debt ........................... 38,946 44,944
Accounts payable - trade........................................ 330,043 317,340
Other current liabilities....................................... 323,601 269,370
Total Current Liabilities................................... $ 1,101,229 $ 1,218,359
Long-Term Liabilities:
Long-term borrowings (excluding current maturities)............. $ 728,103 $ 792,258
Other long-term liabilities..................................... 31,942 31,301
Total Long-Term Liabilities................................. $ 760,045 $ 823,559
Deferred Income Taxes............................................... $ 3,333 $ 9,806
Minority Owners' Equity in Subsidiaries............................. $ 35,471 $ 38,195
Net Loss (Note 1)................................................... $ -0- $ (11,658)
Capital Shares and Equities:
Preferred Shares, Authorized 8,000,000 Shares, 8% Series A
cumulative redeemable preferred shares, stated at
redemption value, $50 per share ................................ $ 100,000 $ 100,000
Other Preferred Shares, $25 Par Value ........................... 71 69
Common shares, $25 par value--Authorized
50,000,000 shares.............................................. 451,804 506,111
Earned surplus and other equities............................... 360,821 304,728
Total Capital Shares and Equities........................... $ 912,696 $ 910,908
Contingent Liabilities and Commitments (Note 3)
Total Liabilities and Equities...................................... $ 2,812,774 $ 2,989,169
<FN>
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
May 31 May 31
1998 1999
(Amounts in Thousands)
<S> <C> <C>
Sales......................................................... $ 6,650,223 $ 7,823,790
Cost of sales................................................. 6,292,566 7,487,634
Gross income.................................................. $ 357,657 $ 336,156
Selling, general and administrative expenses.................. $ 310,390 $ 359,002
Other income (deductions):
Interest expense........................................... $ (53,506) $ (60,238)
Other, net................................................. 29,770 21,906
Total other income (deductions)............................... $ (23,736) $ (38,332)
Income (loss) before equity in net income of investees,
minority owners' interest in net income of subsidiaries
and income taxes.......................................... $ 23,531 $ (61,178)
Equity in net income of investees (note 4) ................... 40,323 41,413
Minority owners' interest in net income
of subsidiaries............................................ (1,312) (8,121)
Income (loss) before income taxes.............................. $ 62,542 $ (27,886)
Income tax (expense) benefit.................................. (7,239) 16,228
Net income (loss)............................................. $ 55,303 $ (11,658)
<FN>
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
May 31 May 31
1998 1999
(Amounts in Thousands)
<S> <C> <C>
Sales......................................................... $ 2,236,882 $ 2,749,892
Cost of sales................................................. 2,096,023 2,635,599
Gross income.................................................. $ 140,859 $ 114,293
Selling, general and administrative expenses.................. $ 109,435 $ 123,178
Other income (deductions):
Interest expense........................................... $ (18,177) $ (20,566)
Other, net................................................. 10,497 5,004
Total other income (deductions)............................... $ (7,680) $ (15,562)
Income (loss) before equity in net income of investees,
minority owners' interest in net income of subsidiaries
and income taxes.......................................... $ 23,744 $ (24,447)
Equity in net income of investees (note 4) ................... 17,518 16,934
Minority owners' interest in net income
of subsidiaries............................................ (1,863) (3,975)
Income (loss) before income taxes............................. $ 39,399 $ (11,488)
Income tax (expense) benefit.................................. (4,524) 4,124
Net income (loss)............................................. $ 34,875 $ (7,364)
<FN>
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
May 31 May 31
1998 1999
(Amounts in Thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................................... $ 55,303 $ (11,658)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization.......................................... 76,735 82,859
Equity in net (income) of investees.................................... (40,323) (41,413)
Other.................................................................. 11,139 7,590
Changes in assets and liabilities:
Accounts receivable.................................................. (25,394) (19,594)
Inventories.......................................................... 77,196 (88,581)
Other assets......................................................... (88,953) (33,175)
Accounts payable..................................................... 9,030 (12,703)
Other liabilities.................................................... (49,265) (20,302)
Net cash provided by (used in) operating activities......................... $ 25,468 $ (136,977)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................................ $ (79,107) $ (82,036)
Distributions from joint ventures........................................... 34,473 40,557
Additions to investments and notes receivable............................... (31,107) (40,052)
Acquisition of other long-term assets....................................... (20,955) (23,138)
Proceeds from disposal of investments and notes receivable.................. 43,746 22,707
Proceeds from sale of fixed assets.......................................... 2,904 2,419
Other....................................................................... (123) 66
Net cash used in investing activities....................................... $ (50,169) $ (79,477)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of patronage refunds............................................... $ (40,337) $ (23,714)
Payments for redemption of equities......................................... (81,623) (9,439)
Payments of dividends....................................................... (2,937) (6,004)
Proceeds from bank loans and notes payable.................................. 467,251 1,023,077
Payments on bank loans and notes payable.................................... (431,876) (899,927)
Proceeds from issuance of subordinated debt certificates.................... 84,941 81,348
Payments for redemption of subordinated debt certificates................... (58,770) (13,240)
Increase of checks and drafts outstanding................................... 5,521 58,327
Net decrease in demand loan certificates.................................... (17,620) (1,475)
Proceeds from issuance of preferred shares.................................. 100,000 -0-
Other ...................................................................... 151 167
Net cash provided by financing activities................................... $ 24,701 $ 209,120
Net decrease in cash and cash equivalents................................... $ -0- $ (7,334)
Cash and cash equivalents at beginning of period............................ -0- 7,334
Cash and cash equivalents at end of period.................................. $ -0- $ -0-
</TABLE>
[FN]
See accompanying Notes to Consolidated Financial Statements.
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) INTERIM FINANCIAL STATEMENTS
Unless the context requires otherwise, (i) "Farmland", "we", "us" and
"our" refer to Farmland Industries, Inc. and its consolidated subsidiaries, (ii)
all references to "year" or "years" are to fiscal years ended August 31 and
(iii) all references to "members" are to persons eligible to receive patronage
refunds from Farmland including voting members, associate members and other
patrons with which Farmland has a currently effective patronage refund
agreement.
In view of the seasonality of Farmland's businesses, it must be emphasized
that the results of operations for the periods presented are not necessarily
indicative of the results for a full fiscal year.
The information included in these unaudited Condensed Consolidated
Financial Statements of Farmland reflects all adjustments (consisting only of
normal recurring accruals) which, in the opinion of management, are necessary
for a fair statement of the results for the interim periods presented.
Our revenues, 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 intended 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,
livestock, grain and other commodities may impact Farmland's operations.
Historically, changes in the costs of raw materials used in the manufacture of
our finished products have not necessarily resulted in corresponding changes in
the prices at which we have sold such products. We cannot determine the extent
to which these factors may impact our future operations. Our cash flow and net
income may be volatile as conditions affecting agriculture and markets for our
products change.
In accordance with the bylaws of Farmland and its cooperative subsidiaries,
we determine annually the members' portion of income or loss before income
taxes. From this amount, patronage refunds are distributed or losses are
allocated to our members.
We make the determination of members' income (and members' loss) only after
the end of the fiscal year. Our Board of Directors, in their sole discretion,
then determine the amount of patronage refunds to be paid or losses to be
allocated from such member income or loss. Since we determine the amount of
members' income and the amount of members' loss only after the end of the fiscal
year, and since only after that determination can our Board of Directors
determine the handling of members' loss, the resulting amount of patronage
refunds to be paid, the portion of such refund to be paid either in cash or
Farmland equity (common stock, associate member common stock and capital
credits) and the resulting appropriation of income to earned surplus, Farmland
makes no provision for patronage refunds in its interim financial statements.
Therefore, the amount of net income (loss) has been reflected as a separate item
in the accompanying Condensed Consolidated Balance Sheet as of May 31, 1999.
(2) INVENTORIES
Major components of inventories are as follows:
<TABLE>
<CAPTION>
August 31 May 31
1998 1999
(Amounts in Thousands)
<S> <C> <C>
Finished and in-process products.............. $ 605,876 $ 679,288
Materials..................................... 62,578 86,020
Supplies...................................... 57,513 57,858
$ 725,967 $ 823,166
</TABLE>
Income before income taxes for the three months and the nine months ended
May 31, 1999 has been increased by approximately $8.6 million to recognize a
partial recovery of last year's adjustment of crude oil and refined petroleum
inventories to the lower of LIFO cost or market value. The carrying value of
crude oil and refined petroleum inventories stated under the lower of LIFO cost
or market at May 31, 1999 was $129.1 million.
(3) CONTINGENCIES
(A) TAX LITIGATION
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 Farmland'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
$306.6 million through May 31, 1999), or $392.4 million (before tax benefits of
the interest deduction) in the aggregate at May 31, 1999. In addition, such a
decision would affect the computation of Farmland's taxable income for its 1989
tax year and 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 Farmland'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, we 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 operations in the period during which such decision is
received 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 our 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
May 31, 1999, our 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, Farmland's special tax counsel, it is
more likely than not that the courts will ultimately conclude that our 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 Farmland's favor on any of these issues.
(B) ENVIRONMENTAL MATTERS
We are aware of probable obligations under state and federal environmental
laws at 40 properties. At May 31, 1999, we have an environmental accrual in our
Condensed Consolidated Balance Sheet for probable and reasonably estimated costs
for remediation of contaminated properties of $20.5 million. We periodically
review and, as appropriate, revise our environmental accruals. Based on current
information and regulatory requirements, Farmland believes that the accruals
established for environmental expenditures are adequate.
Farmland's actual final costs of addressing certain environmental matters
are not quantifiable, and therefore have not been accrued, because such matters
are in preliminary stages and the timing, extent and costs of various actions
which governmental authorities may require are currently unknown. Management is
aware of other environmental matters for which there is a reasonable possibility
that Farmland will incur costs to resolve. It is possible that the costs of
resolution of the matters described in this paragraph may exceed the liabilities
which, in the opinion of management, are probable and reasonably estimable at
May 31, 1999. In the opinion of management, it is reasonably possible for such
additional costs to be approximately $10.3 million.
The environmental accrual discussed above covers certain matters in
connection with which the Environmental Protection Agency has designated us as a
potentially responsible party ("PRP") or a responsible party ("RP") under the
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"),
at various National Priority List ("NPL") sites.
Under the Resource Conservation Recovery Act of 1976 (''RCRA''), Farmland
has three closure and four post-closure plans in place for multiple locations.
Closure and post-closure plans also are in place for three landfills and two
injection wells as required by state regulations. These closure and post-closure
costs are estimated to be $4.9 million at May 31, 1999 (and are in addition to
the $20.5 million accrual and the $10.3 million discussed in the prior
paragraphs). We accrue these liabilities when plans for termination of plant
operations have been made. Operations are ongoing at these locations and we do
not plan to terminate such operations in the foreseeable future. Therefore,
Farmland has not accrued these environmental exit costs.
(4) SUMMARIZED FINANCIAL INFORMATION OF INVESTEES ACCOUNTED FOR BY THE EQUITY
METHOD
Summarized financial information of investees accounted for by the equity
method for the nine months ended May 31, 1998 and May 31, 1999 is as follows:
<TABLE>
<CAPTION>
May 31, May 31,
1998 1999
(Amounts in Thousands)
<S> <C> <C>
Net sales..................................... $ 1,137,986 $ 2,050,391
Net income.................................... $ 81,118 $ 73,559
Farmland's equity in net income............... $ 40,323 $ 41,413
</TABLE>
Our 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; a 50% equity interest in a distributor of crop protection products,
WILFARM, LLC; and, during the nine months ended May 31, 1999, a 50% equity
interest in a grain marketing entity, Concourse Grain, LLC., and a 50% equity
interest in a grain procurement, marketing and services entity, Farmland-Atwood,
LLC, both of which were organized in July 1998. On May 24, 1999, the owners of
Concourse Grain LLC, voted to liquidate the venture. We anticipate that the
liquidation will occur during the fourth quarter of fiscal 1999. This
liquidation will not have a significant impact on our grain business or on our
consolidated financial statements. On May 28, 1999, we acquired the remaining
50% interest in Farmland-Atwood, LLC for approximately $7.8 million.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information contained herein and the Condensed Consolidated Financial
Statements and Accompanying Notes presented in this Form 10-Q should be read in
conjunction with information set forth in Part II, Items 7 and 8, in the
Company's Annual Report on Form 10-K for the year ended August 31, 1998.
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.
Debt securities issued under the continuous public debt offering are
offered on a best-efforts basis through our wholly owned broker-dealer
subsidiary, Farmland Securities Company. The types of securities included in the
continuous debt offering include certificates payable on demand and subordinated
debt securities. The total amount of such debt outstanding and the flow of
funds to or from Farmland as a result of the continuous debt offering are
influenced by the rate of interest which we establish for each type or series of
debt security offered and by our option to call for redemption certain of the
outstanding debt securities. During the nine months ended May 31, 1999, the
outstanding balance of demand certificates decreased by $1.5 million and the
outstanding balance of subordinated debt securities increased by $68.1 million.
In May 1996, Farmland entered into the Credit Facility with various
participating banks. The Credit Facility provides a $1.1 billion credit
(subject to compliance with certain financial covenants) consisting of an
annually renewable short-term credit of up to $650.0 million and revolving
long-term credit of up to $450.0 million.
Farmland pays commitment fees under the Credit Facility equal to 1/5 of 1%
annually on the unused portion of the short-term credit and 1/4 of 1% annually
on the unused portion of the long-term credit. In addition, Farmland must comply
with 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 Credit Facility. The short-term credit provided under the Credit
Facility is reviewed and/or renewed annually. The next scheduled review date is
in May 2000. The revolving long-term credit provided under the Credit Facility
expires in May 2001.
At May 31, 1999, we had incurred $368.6 million of short-term borrowings
under the Credit Facility and $180 million of revolving term borrowings.
Additionally, $41.6 million of the Credit Facility was utilized to support
letters of credit. At May 31, 1999, we had capacity to borrow $242.2 million
under the short-term credit. Requirements under the Credit Facility limit
current availability under the long-term credit to $148.6 million.
Farmland maintains other borrowing arrangements with banks and financial
institutions. Under such agreements at May 31, 1999, $47.0 million was borrowed.
Farmland National Beef Packing Company, L.P. ("FNBPC") has a five year
$130.0 million credit facility which expires March 31, 2003. This facility is
provided by various participating banks and all borrowings thereunder are
nonrecourse to Farmland or Farmland's other affiliates. At May 31, 1999, FNBPC
had borrowings under this facility of $84.0 million, and $3.3 million of the
facility was being utilized to support letters of credit. FNBPC has pledged
certain assets to support its borrowings under the facility.
Our international grain trading subsidiaries (collectively referred to as
"Tradigrain") have borrowing agreements with various international banks which
provide financing and letters of credit to support current international grain
trading transactions. Obligations of Tradigrain under these loan agreements are
nonrecourse to Farmland or Farmland's other affiliates. At May 31, 1999, these
borrowings totaled $77.3 million.
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 at Coffeyville, Kansas. These facilities are designed to convert
petroleum coke by-products into fertilizers. When the facilities are completed
in the fall of 1999, Farmland will be obligated to make future minimum lease
payments with an approximate present value of $223 million. Alternatively, we
have an option to purchase the facilities for a purchase price equal to the
facilities' construction costs less any portion of the original construction
cost previously paid. In the event Farmland should default on the obligations
described above, future lease obligations may be accelerated. If accelerated,
obligations due and payable would total approximately $263 million, all of
which would be senior to the subordinated debt securities. Upon payment of such
amount, we would receive title to the assets.
In the opinion of management, these arrangements for capital are adequate
for the Company's present operating and capital plans. Additionally, growth and
investment opportunities and alternative financing arrangements are continuously
evaluated.
Net cash from operating activities for the nine months ended May 31, 1999
decreased $162.4 million from the same period of the prior year reflecting
primarily the net loss for the nine months ended May 31, 1999 discussed below
and an increase in grain and fertilizer inventories. Major uses of cash during
the nine months ended May 31, 1999 include: $137.0 million used in operations,
$23.7 million for patronage refunds distributed from income of the 1998 fiscal
year, $17.3 million for net additions to investments and notes receivable
(excluding joint ventures) $23.1 million for acquisition of other long term
assets and $82.0 million for capital expenditures. Major sources of cash
include: $123.2 million from a net increase of bank loans and other notes
payable, $68.1 million from the net increase of subordinated debt certificates
outstanding, $40.6 million of distributions from joint ventures, $58.3 million
from an increase in the balance of checks and drafts outstanding and $7.3
million from a decrease in cash and cash equivalents.
In 1993, the IRS issued a statutory notice to Farmland asserting
significant deficiencies in federal income taxes and statutory interest thereon.
Farmland filed a petition in the United States Tax Court contesting the asserted
deficiencies in their entirety. See Note 3 of the Notes to the Condensed
Consolidated Financial Statements.
RESULTS OF OPERATIONS
GENERAL
In view of the seasonality of Farmland's businesses, it must be emphasized
that the results of operations for the periods presented are not necessarily
indicative of the results for a full fiscal year. Historically, the majority of
farm supply products are sold in the spring. Sales in the beef and grain
marketing businesses historically have been concentrated in the summer. Summer
is the lowest sales period for pork products.
Farmland's revenues, margins and net income depend, to a large extent, on
conditions affecting 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,
livestock, grain and other commodities may impact our operations. Historically,
changes in the costs of raw materials used in the manufacture of our finished
products have not necessarily resulted in corresponding changes in the prices at
which we have sold such products. We cannot determine the extent to which these
factors may impact our future operations. Our cash flow and net income may be
volatile as conditions affecting agriculture and markets for our products
change.
RESULTS OF OPERATIONS FOR NINE MONTHS ENDED MAY 31, 1999 COMPARED TO NINE MONTHS
ENDED MAY 31, 1998.
For the nine months ended May 31, 1999, our sales were $7.8 billion
compared with sales of $6.7 billion for the same period last year. For the nine
months ended May 31, 1999, we had a net loss of $11.7 million compared with net
income of $55.3 million for the same period last year.
SALES
On the input side of our business, compared with the same period last
year, sales of the petroleum segment decreased $176.8 million and sales of the
crop production segment decreased $101.1 million in the nine months ended May
31, 1999, while sales of the feed segment increased $13.6 million. Lower global
demand for petroleum products combined with an industry wide building of
inventory and strong supply streams of petroleum products created an environment
in which unit sales decreased 10% and the average unit price of refined fuels
(gasoline, diesel and distillates) and propane decreased 17%. Nitrogen unit
sales for the nine months ended May 31, 1999 were comparable to unit sales for
the same period last year while the average unit selling prices of nitrogen
fertilizers decreased 11%. The nitrogen fertilizer industry has experienced
market price declines due to increased worldwide supplies of nitrogen and the
decreased demand for fertilizer in response to decreased unit prices that
producers realize for their grain. These adverse conditions were exacerbated by
the heavy spring rains throughout Farmland's market area, which also lessened
demand. As a result of the above market conditions, subsequent to quarter-end,
Farmland ceased production of urea ammonia nitrate ("UAN") at one of our
facilities and we anticipate we will cease production at a second nitrogen
fertilizer facility (see "Recent Developments" on page 15). Sales of the feed
business increased primarily due to geographic expansion.
On the output side of our business, sales in the food processing and
marketing business (the "meats group") increased $23.2 million, or 1% in the
nine months ended May 31, 1999, as compared to the same period last year. This
increase is primarily attributable to higher unit sales of both beef and pork
products of approximately 9% and 5%, respectively, and 4% higher unit prices for
beef, partially offset by lower unit prices for pork. Sales of the grain
business increased by $1.3 billion. 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, Tradigrain records the full value of
each sale as revenue and the cost of acquisition as cost of goods sold rather
than recognizing as revenue only the net margins on transactions. This resulted
in additional sales of $1.3 billion for the nine months ended May 31, 1999
compared with the nine months ended May 31, 1998.
NET INCOME (LOSS)
The net loss for the nine months ended May 31, 1999 was $11.7 million
compared with net income of $55.3 million for the same period in the prior year.
This decrease was principally the result of an $82.1 million decrease in the
operating income in Farmland's agricultural input businesses and higher general
and administrative expenses not identified to any business segment of $23.0
million, partly offset by a $31.9 million increase in the operating income of
the food processing and marketing business. In addition, an income tax benefit
of $16.2 million was recognized on Farmland's nonmember loss (the taxable
portion of our cooperative business) incurred during the nine months ended May
31, 1999.
Crop Production's income, including our share of venture income, for the
nine months ended May 31, 1999 was $19.5 million compared with income, including
our share of venture income, of $79.7 million for the same period last year.
This change was primarily attributable to lower nitrogen fertilizer margins.
Nitrogen margins decreased primarily due to lower average selling prices which
declined as a result of additional global fertilizer production capacity
combined with reduced domestic demand and lower demand in the East Asian market,
particularly China.
The petroleum business had a $4.2 million operating loss (after the $8.6
million partial recovery of last year's adjustment of crude oil and refined
petroleum inventories to the lower of LIFO cost or market value) for the nine
months ended May 31, 1999 compared with operating income of $18.5 million the
same period last year. Strong industry-wide production of gasoline and
distillates combined with lower demand for these products reduced the spread
between crude oil costs and refined products selling prices and prohibited full
recovery of selling and administrative costs in this business.
Operating income in the meats group for the nine months ended May 31, 1999
increased $31.9 million compared to the prior period. This increase is
primarily attributable to increased pork and beef unit margins due to lower live
hog and cattle prices. These improved margins were partially offset by losses
in livestock production that were also the result of low live hog prices.
Operating income in the grain business segment for the nine months ended
May 31, 1999 decreased $0.5 million compared to the same period last year. This
decrease is primarily attributable to a decrease in gross margins, partly offset
by higher storage revenues.
Selling, general and administrative ("SG&A") expenses increased $48.6
million, or 16%, from the same period last year. SG&A expenses directly
attributable to business segments increased approximately $25.6 million and
these expenses have been included in the determination of operating income of
such segments. SG&A expenses not identified to business segments increased
$23.0 million, primarily as a result of the acquisition of SF Services, Inc.
("SFS") in July of last year, the related expansion of our operations in the
states previously serviced by SFS and from increased costs of information
services, partly offset by a decrease in variable compensation expense.
Other income decreased $7.9 million for the nine months ended May 31, 1999
as compared to the same period last year. This decrease is primarily
attributable to the inclusion in other income for the nine months ended May 31,
1998 of a gain of $7.2 million on the sale of approximately 3.8% of Farmland's
ownership interest in FNBPC.
Income from transactions with members distributed by Farmland as qualified
patronage refunds is taxable income of our members and not taxable income of
Farmland. Farmland's taxable income or loss is from non-member business. The
effective tax rate on non-member income (loss) is approximately 38.5%. During
the nine months ended May 31, 1999, transactions with nonmembers generated a
loss while transactions with members generated income. When the effective rate
(38.5%) is applied to the estimated nonmember loss, the resulting income tax
benefit is approximately 58% of the loss before income taxes (estimated member
income net of estimated nonmember loss).
Operating income in the crop production, petroleum and food processing and
marketing businesses, to a significant degree, is attributable to the spread
between selling prices and raw material costs (the natural gas in nitrogen-based
plant nutrients, the crude oil in petroleum products and live hogs and cattle in
the food processing and marketing business). We cannot determine the direction
or magnitude to which these factors will affect our cash flow and net income.
RESULTS OF OPERATIONS FOR THREE MONTHS ENDED MAY 31, 1999 COMPARED TO THREE
MONTHS ENDED MAY 31, 1998.
For the three months ended May 31, 1999, Farmland had sales of $2.7
billion compared with sales of $2.2 billion for the same period last year. The
net loss for the three months ended May 31, 1999 was $7.4 million compared with
net income of $34.9 million for the same period last year. The changes in sales
and operating income are attributable principally to the factors discussed above
under the caption "Results of Operations for Nine Months Ended May 31, 1999
Compared to Nine Months Ended May 31, 1998."
YEAR 2000
As the end of this century nears, there are concerns about potential
problems which may arise at the turn of the millennium because many current
computer systems and software products are coded to accept only two digit
entries in date code fields. Before the year 2000, these systems and software
products will need an upgrade in order to recognize differences between dates
in the 21st century and dates in the 20th century. If not adequately addressed,
these technology problems have a potential to cause widespread business
interruptions, litigation and liability. Significant uncertainty exists, as to
whether adequate resources are available to minimize these potentially serious
problems by the year 2000.
Since the mid-1980's, we have striven to maintain Year 2000 compliance for
all applications developed in-house. The challenge is that a substantial
percentage of the applications used for normal business processing have been
purchased from outside vendors. Historically, vendors were not required to
commit to Year 2000 compliance. However, all new software contracts include
Year 2000 compliance warranties.
In April 1997, Farmland and Ernst & Young, LLP formed One System Group,
LLC ("OSG"), a joint venture. OSG has approximately 400 employees and is the
sole supplier of information technology ("IT") services to Farmland. The
initial focus of OSG involves the implementation of Systems, Applications,
Products in Data Processing ("SAP") software as an enterprise wide solution for
processing Farmland's business transactions and for management reporting. One
of the many important benefits of the implementation of SAP is that it is Year
2000 compliant. Its installation will eliminate a large amount of the Year
2000 risk inherent in our systems and software. Therefore, mission critical
(critical to the basic operation of Farmland's businesses) IT projects have not
been deferred because of Year 2000 readiness efforts.
Farmland formalized its Year 2000 program with OSG in the fall of 1997.
Through this program, 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. 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. Further, the program established minimum acceptance
testing procedures for evaluating whether systems and applications met Year 2000
compliant criteria.
A comprehensive IT software inventory and assessment was then completed by
OSG. As a result of this readiness assessment, Farmland believes that it has
identified all noncompliant systems.
To address the state of readiness condition, Farmland established an
Oversight Committee consisting of the Chief Information Officer of OSG, the
Chief Financial Officer and the General Counsel of Farmland and created 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. The Year 2000 issues of
all process control systems and other non-IT systems have been identified.
Certain of the non-IT Year 2000 issues have been fixed. The other non-IT
systems or application programs are scheduled to be replaced and tested.
Farmland has 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.
Farmland has contracted with an outside vendor (Electronic Data Care
("EDC")) to inspect and remediate all processor related Year 2000 issues in its
meat plants. This inspection and remediation is currently underway. To date,
EDC has uncovered few defects. Defects that have been identified are being
remediated or the equipment is being replaced.
The Program Office 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 44,000 hours and the
overall cost to approximately $6.2 million. Through May 1999, approximately
29,000 hours of such work had been performed. The targeted completion of the
remaining test and remediation work is September 1, 1999. During September
1999, OSG and Farmland will complete the development of a standard contingency
plan that includes a policy and procedure that will be used in the event that
any process fails to work as a result of a year 2000 problem.
Farmland believes that the quantity and quality of resources it has
committed to address its Year 2000 project are adequate to obtain a Year 2000
state of readiness and it believes all significant modifications required to
reach a state of readiness for Year 2000 will be completed by the year 2000.
However, despite all of our 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 Farmland's business, results of operations, 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, Farmland has not
conducted and does not plan to conduct tests designed to confirm compatibility
of its information systems as modified for Year 2000 issues with those of its
significant customers and vendors. We will rely on the integrity of its vendors
and customers to resolve their Year 2000 issues.
RECENT DEVELOPMENTS
Farmland and Cenex Harvest States Cooperatives announced on May 6, 1999
that they are considering a complete unification. Negotiations are ongoing with
a tentative goal of completing the unification by June 1, 2000.
Farmland and National Cooperative Refinery Association ("NCRA") are
exploring the potential economic benefits that might be realized from forming an
operating alliance. The alliance would involve the Farmland refinery located in
Coffeyville, Kansas and the NCRA refinery located in McPherson, Kansas, as well
as other petroleum assets. We anticipate that this alliance will be consummated
early in fiscal year 2000.
In response to the continued reduced nitrogen fertilizer demand,
subsequent to May 31, 1999, Farmland stopped production of UAN at our Enid,
Oklahoma facility. We are unable at this time to determine when the Enid
facility will resume production. We also anticipate a cessation of ammonia and
UAN production at our Lawrence, Kansas facility by fiscal year-end.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards 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, 1999. An
exposure has been issued which proposes the effective date be delayed for one
year. We are currently evaluating the impact, if any, that adoption of the
provisions of SFAS No. 133 will have on its financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Farmland's market exposure to derivative transactions, entered into for
the purpose of managing commodity price risk, foreign currency risk and interest
rate risk, has not materially changed since August 31, 1998. Quantitative and
qualitative disclosures about market risk are contained in Item 7A of our Annual
Report on Form 10-K for the year ended August 31, 1998.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
We are including the following cautionary statement in this Form 10-Q 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 include 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, we caution that,
while we believe such assumptions or basis to be reasonable and makes them in
good faith, the assumed facts or basis almost always vary from actual results,
and the differences between the 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 our business, the anticipated expenditures
for environmental remediation, Farmland's assessment of its Year 2000 readiness,
the total cost and the estimated completion date to remediate Year 2000 issues,
the continuation of current operating trends through the end of this fiscal
year, the ultimate consummation of proposed ventures or alliances, the
consummation of our proposed unification with Cenex Harvest States, the impact
of seasonal demand on the profitability of the crop production business, the
consequences of an adverse judgment in certain litigations (including the Terra
litigation), and our ability to fully and timely complete modifications and
expansions with respect to certain manufacturing facilities. Discussion
containing such forward-looking statements is found in the material set forth
herein under "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Notes to Condensed Consolidated Financial
Statements".
Taking into account the foregoing, the following are identified as
important factors that could cause actual results to differ materially from
those expressed in any forward-looking statement made by, or on behalf of,
Farmland:
1.Weather patterns 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.actors 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
production and demand).
5.Factors affecting supply, demand and price of crude oil, refined fuels,
natural gas, livestock, grain and other commodities.
6.Regulatory delays and other unforeseeable obstacles beyond our control that
may affect growth strategies through unification, acquisitions, investments
in joint ventures and operational alliances.
7.Competitors in various segments may be larger, may offer more varied products
or may possess greater financial and other resources than Farmland.
8.Unusual or unexpected events such as, among other things, litigation
settlements, adverse rulings or judgments, and environmental remediation
costs in excess of amounts accrued.
9.The factors identified in "Business and Properties - Business - Business Risk
Factors" included in our Annual Report on Form 10-K for the year ended August
31, 1998.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS
The exhibits listed below are filed as part of Form 10-Q for quarter ended
May 31, 1999.
Exhibit No. Description of Exhibits
10.(iii)A Employment Agreement between Farmland and Mr. H. D.
Cleberg, dated May 1, 1999
10.(iii)B Employment Agreement between Farmland and Mr. Robert
Honse, dated June 7, 1999
10.(iii)C Summary of severance and retention bonus plan for
certain management employees of Farmland, dated June
7, 1999.
27 Financial Data Schedule
(B) FARMLAND FILED A REPORT ON FORM 8-K, ITEM 5. "OTHER EVENTS" ON MAY 6,
1999 AND AN AMENDMENT TO THAT REPORT MAY 7, 1999. THE REPORT ON FORM 8-K
DESCRIBED FARMLAND'S POSSIBLE COMBINATION WITH CENEX HARVEST STATES
COOPERATIVES.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FARMLAND INDUSTRIES, INC.
(Registrant)
By: /s/ TERRY M. CAMPBELL
Terry M. Campbell
Executive Vice President
and Chief Financial Officer
Date: July 14, 1999
EXHIBIT 99
EXHIBIT INDEX
The exhibits listed below are filed as part of Form 10-Q for quarter ended
May 31, 1999.
Exhibit No. Description of Exhibits
10.(iii)A Employment Agreement between Farmland and Mr. H. D.
Cleberg, dated May 1, 1999
10.(iii)B Employment Agreement between Farmland and Mr. Robert
Honse, dated June 7, 1999
10.(iii)C Summary of severance and retention bonus plan for
certain management employees of Farmland, dated June
7, 1999.
27 Financial Data Schedule
EMPLOYMENT AGREEMENT
This Employment Agreement is made effective as of May 1, 1999 between
Farmland Industries, Inc., a Kansas cooperative corporation (the "Company") and
H. D. Cleberg, who is presently the President and Chief Executive Officer of the
Company, ("Executive").
WHEREAS;
A.Executive is the principal officer of the Company and an integral
part of its management.
B.The Company is contemplating the possible full consolidation of its
business with the business of Cenex Harvest States Cooperatives
("CHS") through a merger or other similar transaction (the
"Consolidation") and desires to assure both itself and Executive of
continuity in the event of the Consolidation.
C.This Employment Agreement is intended to provide to Executive,
either a severance benefit in the event that his employment
terminates under certain circumstances, as described herein, prior
to December 31, 2000 or a transaction incentive payment if the
Company successfully completes the Consolidation on or before
December 31, 2000.
NOW THEREFORE, it is hereby agreed by and between the parties as follows:
1.Employment. The Company hereby employs Executive and Executive
hereby accepts employment with the Company, subject to the terms
and conditions hereinafter provided.
2.Term. The employment of Executive hereunder will be for the period
commencing on the effective date of this Agreement and ending on
December 31, 2000, provided, however, that either party may
terminate the employment relationship prior to the expiration date
as hereinafter provided. In the event of the Consolidation,
Executive hereby agrees to tender his written resignation effective
December 31, 2000.
3.Position, Duties, Responsibilities. Executive shall be employed as
the Chief Executive Officer or, in the event of the Consolidation,
may be employed as a co-Chief Executive Officer of the Consolidated
Company. Executive shall exercise such authority and perform such
duties and services, consistent with such position, as may be
assigned to him from time to time by the Board of Directors (the
"Board").
4.Devotion of Time and Best Efforts. Except for vacations and
absences due to temporary illness, Executive shall devote his full
time, best efforts and undivided attention and energies during his
employment to the performance of his duties and to advance the
Company's interests, as determined by the Board. During his
employment, Executive shall not, without the prior approval of the
Board be engaged in any other business activity which conflicts
with the duties of Executive hereunder, whether or not such
business activity is pursued for gain, profit or other pecuniary
advantage. Executive may continue his current civic and charitable
activities and his current service on various boards.
5.Early Termination.
a.Death. Executive's employment shall terminate upon Executive's
death.
b.Termination by the Company.
(1)Without Cause. The Company, by action of the Board, may
terminate Executive's employment, at any time and for any
reason whatsoever, without cause, effective upon delivery
of written notice of termination to Executive.
(2)For Cause. The Company, by action of the Board, may
terminate the Executive's employment at any time for
Cause, effective upon delivery of written notice of
termination to Executive. If such termination by the
Company is asserted to be for Cause, such termination
notice shall state the grounds that the Board claims
constitute Cause.
As used herein, "Cause" shall mean (a) willful misconduct
by Executive which is damaging or detrimental to the
business and affairs of the Company, monetarily or
otherwise, as determined by the Board in the exercise of
its good faith business judgment; (b) a material breach
of this Agreement by Executive, (c) chronic alcoholism or
any other form of substance addiction on the part of
Executive, (d) the commission by Executive of any act
involving fraud or dishonesty or moral turpitude, (e) the
indictment for, being bound over for trial following a
preliminary hearing, or the conviction of Executive of
any felony in either a state or federal court proceeding,
or (f) willful refusal to implement policies promulgated
by the Board.
(3)Disability. The Company, by action of the Board, may
terminate the Executive's employment if Executive
sustains a disability which is serious enough that
Executive is not able to perform the essential functions
of Executive's job, with or without reasonable
accommodations, as defined and if required by applicable
state and federal disability laws. Executive shall be
presumed to have such a disability for purpose of this
Agreement if Executive qualifies, because of illness or
incapacity, to begin receiving disability income
insurance payments under the long-term disability income
insurance policy that Company maintains for the benefit
of Executive. If there is no such policy in effect at
the date of Executive's potential disability, or if
Executive does not qualify for such payments, Executive
shall nevertheless be presumed to have such a disability
if Executive is substantially incapable of performing
Executive's duties for a period of more than twelve (12)
weeks.
c.Termination by Executive.
(1)Voluntary Resignation. Executive may terminate the
Employment Period and Executive's employment at any time
and for any reason whatsoever, effective upon delivery of
written notice of termination to the Company.
(2)Good Reason Resignation. Executive may terminate the
Employment Period and Executive's employment at any time
for Good Reason, effective upon delivery of written
notice of termination to the Company. If such
termination by Executive is asserted to be for "Good
Reason", such termination notice shall state the grounds
that Executive claims constitute Good Reason. As used
herein, "Good Reason" shall mean a material breach of
this Agreement by the Company. A demotion such that
Executive does not serve as the Chief Executive Officer,
or Co-Chief Executive Officer of the Company shall
constitute "Good Reason".
6.Compensation.
a.Base Salary. During his employment, the Company shall pay
Executive an initial "Base Salary" at the rate of Six Hundred,
Thirty-Five Thousand, Six Hundred Dollars ($635,600) per year,
commencing on the effective date of this Agreement, payable in
accordance with the Company's regular payroll practices and
policies which are in effect from time to time. The Board
shall annually review the amount of Base Salary. Such review
and any increase shall occur on the current customary
schedule. Any such upward adjustment shall not require a
written amendment to this Agreement and shall not affect any
other provisions of this Agreement, which shall remain in
effect unless changed by a written amendment to this Agreement
or terminated by either party as provided herein.
b.Annual Variable and Long-Term Incentive Compensation. During
his employment, Executive shall be entitled to receive
compensation under the annual Variable Compensation Plan and
the Management Long-Term Incentive Plan payable within the
current customary time frame on terms that are no less
favorable to Executive than the terms currently in existence.
In the event that either of these plans is discontinued or
amended effective during his employment, and the amount of
variable compensation due Executive under the replacement or
amended plans is less than Executive would have received under
the current plans, the Executive shall be entitled to receive
the amount of variable compensation that would have been
payable under the current plans.
7.Benefit Plans.
a.General. During the Employment Period, Executive shall be
eligible to participate in all executive compensation and
employee benefit plans or programs generally applicable to
senior management employees of the Company pursuant to the
terms and conditions of such plans and programs. Nothing
contained in this Agreement shall preclude the Company from
terminating or amending any such plan or program.
b.Qualified Plans. Executive shall be entitled to Company
contributions and benefits with respect to Base Salary under
the Company's qualified pension plans determined in the same
manner as for other participants in those plans, subject to
any contribution or benefit limitations. However, if such
plans as in effect on the date of execution of this Agreement
are modified in a manner, which will reduce future benefits
under those plans for Executive, then, as a means to make up
for those reductions, the Company shall establish a new
nonqualified plan or amend an existing nonqualified plan which
shall provide for any lost benefits under the Company's
pension plan.
c.Nonqualified Plans.
(1)Deferred Compensation Plan. Executive shall continue to
be eligible to participate in the Deferred Compensation
Plan. If this plan should be amended or terminated prior
to the end of the Employment Period, the terms of the
plan will be maintained with respect to Executive, unless
Executive agrees to accept the modified provisions of a
revised plan or a new plan intended to replace the plan.
(2)Supplemental Executive Retirement Plan. Executive will
be entitled to benefits under this plan on terms no less
favorable than those set forth in the restatement of the
plan effective January 1, 1997; however, if this plan
should be amended or terminated prior to the completion
of payments under it to Executive, the terms of the plan
will be maintained with respect to Executive, unless
Executive agrees to accept the modified provisions of a
revised plan or a new plan intended to replace that
restatement.
8.Post-Termination Payments by the Company.
a.Terminations Without Cause or Resignation for Good Reason. In
the event that Executive's employment is terminated prior to
December 31, 2000 by the Company without Cause or by Executive
for Good Reason, and the Executive signs (and does not
rescind, as allowed by law) a Release of Claims in a form
satisfactory to the Company which assures, among other things,
that Executive will not commence any type of litigation or
other claims as a result of the termination, and honors all of
Executive's other obligations as required by this Agreement,
the Company will continue to pay Executive all of the
compensation provided for in Paragraph 6 of this Agreement as
if he had remained employed through December 31, 2000. In
addition, Executive will be entitled to a Severance Payment
("Severance Pay") in an amount equal to 2.99 x Executive's
average annual income from the Company included in Executive's
gross income for the five calendar years ending December 31,
1999. The Severance Pay shall be paid on or before January
31, 2001. Severance Pay shall not be considered as income or
compensation in determining Executive's benefits under any
non-qualified benefit plan, including the Supplemental
Executive Retirement Plan. In no event will Executive be
entitled to both Severance Pay and a Transaction Incentive.
b.Termination For Cause, or Voluntary Resignation. If
Executive's employment is terminated prior to December 31,
2000 by the Company for Cause or by Executive as a Voluntary
Resignation, Executive shall be entitled only to his rights
(a) to receive the unpaid portion of his Base Salary, prorated
to the date of termination, (b) to receive reimbursement for
any ordinary and reasonable business expenses for which he had
not yet been reimbursed, (c) to receive payment for accrued
and unused vacation days, (d) to receive his incentive
compensation for each full or partial (on a pro rata basis)
year during which he was employed, to the extent earned and
accrued, pursuant to the terms and conditions of the
applicable incentive compensation plan(s), (e) to receive
payments under the Company's pension, profit sharing, deferred
compensation or other benefit plans in which the Executive has
participated, all to the extent and in accordance with the
terms of such plans, and (f) to continue certain health
insurance at his expense pursuant to COBRA.
c.Transaction Incentive. If the Company and CHS complete the
Consolidation prior to December 31, 2000 and Executive remains
actively employed through December 31, 2000, Executive shall
become entitled to an incentive payment of 2.99 x his average
annual income from the Company includable in Executive's gross
income for the five calendar years ending December 31, 1999
(the "Transaction Incentive"). In the event that Executive's
employment is terminated by death or disability after the
Consolidation, Executive or Executive's estate shall be paid
the full Transaction Incentive. In the event that Executive's
employment is terminated by death or disability prior to the
Consolidation, Executive, Executive's estate or any
beneficiary designated by Executive shall be entitled to a
partial Transaction Incentive, prorated for the period of his
employment between May 1, 1999 and the closing of the
Consolidation. (For example, if Executive is terminated for
one of these reasons on November 30, 1999 and the
Consolidation occurs on June 1, 2000, Executive or Executive's
estate would be entitled to 7/13 of the Transaction
Incentive.) The Transaction Incentive shall be paid on or
before January 31, 2001. The Transaction Incentive shall not
be considered as income or compensation in determining
Executive's benefits under any non-qualified benefit plan,
including the Supplemental Executive Retirement Plan.
d.Severance Pay or Transaction Incentive Limitation. The amount
of Severance Pay or Transaction Incentive provided for herein
shall be reduced to the extent necessary to avoid any portion
thereof becoming non-deductible under Section 280 G of the
Internal Revenue Code of 1986, as amended from time to time,
or giving rise to excise tax under Section 4999 of the
Internal Revenue Code of 1986, as amended from time to time.
9.Other Executive Obligations. Executive agrees that the following
provisions will apply throughout Executive's period of active or
inactive employment, and will continue to apply even if Executive's
employment and the Employment Period are terminated under Paragraph
5, regardless of the reason for termination:
a.Nondisclosure of Confidential Information. Except to the
extent required in furtherance of the Company's business in
connection with matters as to which Executive is involved as
an employee, Executive will not, during the term of his
employment and for an unlimited period thereafter, directly or
indirectly: (1) disclose or furnish to, or discuss with, any
other person or entity any confidential information concerning
the Company or its business or employees, acquired during the
period of his employment by the Company; (2) individually or
in conjunction with any other person or entity, employ or
cause to be employed, any such confidential information in any
way whatsoever or (3) without the written consent of the
Company, publish or deliver any copies, abstracts or summaries
of any papers, documents, lists, plans, specifications or
drawings containing any such confidential information.
b.Non-Interference. Executive will not, during the term of his
employment and for an unlimited period thereafter, directly or
indirectly attempt to encourage, induce or otherwise solicit
any employee or other person or entity to breach any agreement
with the Company or otherwise interfere with the advantageous
business relationship of the Company with any person or
entity. Executive specifically agrees not to solicit, on
Executive's own behalf or on behalf of another, any of the
Company's employees to resign from their employment with the
Company in order to go to work elsewhere. Executive further
specifically agrees not to make any disparaging remarks of any
sort or otherwise communicate any disparaging remarks about
the Company or any of its members, equity holders, directors,
officers or employees, directly or indirectly, to any of the
Company's employees, members, equity holders, directors,
customers, vendors, competitors, or other people or entities
with whom the Company has a business or employment
relationship.
c.Non-Competition. Executive agrees that during the term of his
employment and thereafter for a period of two (2) years,
Executive will not directly or indirectly engage in or carry
on a business that is in direct competition with any
significant business unit of the Company as conclusively
determined by the Board of Directors. Further, Executive
agrees that during this same period of time he will not act as
an agent, representative, consultant, officer, director,
independent contractor or employee of any entity or enterprise
that is in direct competition with any significant business
unit of the Company as conclusively determined by the Board of
Directors.
d.Cooperation in Claims. During the term of his employment and
for an unlimited period thereafter, at the request of the
Company, Executive will cooperate with the Company with
respect to any claims or lawsuits by or against the Company
where Executive has knowledge of the facts involved in such
claims or lawsuits. Executive shall be entitled to reasonable
compensation for Executive's time and expense in rendering
such cooperation. Further, Executive will decline to
voluntarily aid, assist or cooperate with any party who has
claims or lawsuits against the Company, or with their
attorneys or agents. The Company and Executive both
acknowledge, however, that nothing in this paragraph shall
prevent Executive from honestly testifying at an
administrative hearing, arbitration, deposition or in court,
in response to a lawful and properly served subpoena in a
proceeding involving the Company.
e.Remedies. The parties recognize and agree that, because any
would result in damages difficult to ascertain, the Company
shall be entitled to injunctive and other equitable relief to
prevent a breach or threatened breach of the provisions of
this Paragraph 9. Accordingly, the parties specifically agree
that the Company shall be entitled to temporary and permanent
injunctive relief to enforce the provisions of this Paragraph
9, that such relief may be granted without the necessity of
proving actual damages. The parties further agree that the
right to such relief shall be in lieu of any right to recover
money damages for any such breach.
f.Enforceability. Executive agrees that considering Executive's
relationship with the Company, and given the terms of this
Agreement, the restrictions and remedies set forth in
Paragraph 9 are reasonable. Notwithstanding the foregoing, if
any of the covenants set forth above shall be held to be
invalid or unenforceable, the remaining parts thereof shall
nevertheless continue to be valid and enforceable as though
the invalid or unenforceable parts have not been included
therein. In the event the provisions relating to time periods
and/or areas of restriction shall be declared by a court of
competent jurisdiction to exceed the maximum time periods or
areas of restriction permitted by law, then such time periods
and areas of restriction shall be amended to become and shall
thereafter be the maximum periods and/or areas of restriction
which said court deems reasonable and enforceable. Executive
also agrees that the Company's action in not enforcing a
particular breach of any part of Paragraph 9 will not prevent
the Company from enforcing any other breaches that the Company
discovers, and shall not operate as a waiver by the Company
against any future enforcement of a breach.
10.Notices. Notices hereunder shall be in writing and shall be
prepaid, addressed as follows:
If to Executive:
H. D. Cleberg
c/o Farmland Industries, Inc.
3315 North Oak Trafficway
Kansas City, MO 64116
If to the Company:
Chairman of the Board
c/o Corporate Secretary
Farmland Industries, Inc.
3315 North Oak Trafficway
Kansas City, MO 64116
with a copy to:
Vice President and General Counsel
Farmland Industries, Inc.
3315 North Oak Trafficway
Kansas City, MO 64116
11.Assignment. This Agreement is personal in its nature and the
parties hereto shall not, without the consent of the other, assign
or transfer this Agreement or any rights or obligations hereunder;
provided, however, that the provisions hereof shall inure to the
benefit of, and be binding upon each successor in a change of
control of the Company, whether by merger, consolidation, transfer
of all or substantially all assets, sale or otherwise (and such
successor shall thereafter be deemed the "Company" for purposes of
this Agreement).
12.Binding Agreement. The provisions of this Agreement shall be
binding upon, and shall inure to the benefit of, the respective
heirs, legal representatives and successors of the parties hereto.
13.Missouri Law. This Agreement shall be governed by and construed in
pre-empted by federal law.
14.Captions and Section Headings. Captions and paragraph headings
Agreement and shall not be used in construing it.
15.Invalid Provisions. If any provision of this Agreement shall be
unlawful, void, or for any reason unenforceable, it shall be deemed
severable from, and shall in no way affect the validity or
enforceability of, the remaining provisions of this Agreement.
16.Waiver of Breach. The failure to enforce at any time any of the
provisions of this Agreement, or to require at any time performance
by the other party of any of the provisions hereof, shall in no way
be construed to be a waiver of such provisions or to affect either
the validity of this Agreement or any part hereof or the right of
either party thereafter to enforce each and every provision in
accordance with the terms of this Agreement.
17.Entire Agreement. This Agreement contains the entire agreement
between the parties with respect to the subject matter hereof and
supersedes all prior and contemporaneous agreements,
representations and understandings of the parties with respect
thereto. No modification or amendment of any of the provisions of
this Agreement shall be effective unless in writing specifically
referring hereto and signed by Executive and a member of the Board
upon authorization of the Board to do so.
IN WITNESS WHEREOF, the parties have executed this Agreement
effective as of the date set forth above.
EXECUTIVE FARMLAND INDUSTRIES, INC.
/s/ H. D. CLEBERG By: /s/ ALBERT SHIVLEY
_____________________ _______________________________
H. D. Cleberg Albert Shivley, Chairman of the
Board of Directors
By: /s/ JODY BEZNER
_______________________________
Jody Bezner, Vice-Chairman of the
Board of Directors
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made effective as of June 7, 1999 by and between Robert
Honse (hereafter "Honse") and Farmland Industries, Inc., a Kansas cooperative
corporation (together with all affiliates, the "Company").
WHEREAS, Honse is an integral part of the Company's management; and
WHEREAS, the Company is contemplating the possible full consolidation of
its business with the business of Cenex Harvest States Cooperatives through a
merger or other similar transaction (the "Consolidation") and desires to assure
both itself and Honse of continuity in the event of the Consolidation;
NOW, THEREFORE, it is hereby agreed to by and between the parties as
follows:
1. Employment
The Company hereby agrees to, and does hereby, employ Honse as Executive Vice
President and Chief Operating Officer, and Honse hereby agrees to accept
employment with the Company in such position upon the other terms and conditions
set forth in this Agreement. It is understood that the Company or its successor
may appoint Honse to a different position, and that Honse may accept such a
position, subject to the other terms and conditions set forth in this Agreement.
2. Period of Employment; Termination of Agreement
The period of employment shall commence on the date of this Agreement and
continue through December 31, 2000. In the event of the Consolidation, the
period of employment shall continue for a rolling three (3) year period,
provided that Honse's employment may be earlier terminated by either party
subject to the rights and obligations of the parties set forth herein.
3. Performance
Throughout the period of employment, Honse agrees to devote his full time and
attention during normal business hours to the business of the Company, except
for earned vacations and except for illness or incapacity.
4. Compensation
(a) For all services to be rendered by Honse in any capacity during the
period of employment, Honse shall be paid as annual compensation a base salary
of at least $481,224.00. The Company will annually review Honse's annual
compensation and determine what is appropriate for a cost of living increase,
merit increase, and/or increase related to a change in Honse's responsibilities
or duties.
(b) During the term of his employment hereunder, Honse shall be eligible
to participate in all of the Company's variable pay programs. Honse shall
further be entitled to any additional employee benefits separately made
available to him from time to time by the Company in its discretion.
(c) The Company shall bear such ordinary and necessary business expenses
incurred by Honse in performing his duties hereunder as the Company determines
from time to time, provided that Honse accounts promptly for such expenses to
the Company in the manner prescribed from time to time by the Company.
5. Termination with Severance Allowance
(a) Termination by the Company Not for Cause. In the event of termination
of the employment of Honse by the Company, prior to the applicable expiration
date, for any reason other than for cause, as defined in paragraph 6(a), death
or disability, the Company shall:
(i) pay Honse a severance allowance in the amount of 2.99 times the
"Annual Amount" as defined herein;
(ii) continue his family health insurance for one (1) year; and
(iii) continue his family health insurance thereafter up to age 65 (or
any revised age for Medicare eligibility), upon Honse's payment of
the retiree premium rate; provided that such coverage shall
terminate if and when Honse becomes eligible for coverage, without
any exclusions for preexisting conditions, through another group
plan.
Said severance allowance shall be in lieu of all other severance
payable to Honse under Company severance policies.
(b) Termination by Honse if the Consolidation is closed on or before
December 31, 2000. If the Consolidation is closed on or before December 31,
2000; and if (i) Honse is not offered the position of Chief Executive Officer of
the Company or its successor on or before June 1, 2001, or (ii) the Company or
its successor names someone other than Honse as its new Chief Executive Officer;
and if Honse thereafter resigns his employment on or before June 1, 2002, the
Company shall:
(i) pay Honse a severance allowance in the amount of 1.99 times the
"Annual Amount" as defined herein;
(ii) continue his family health insurance for one (1) year; and
(iii) continue his family health insurance thereafter up to age 65 (or
any revised age for Medicare eligibility), upon Honse's payment of
the retiree premium rate; provided that such coverage shall
terminate if and when Honse becomes eligible for coverage, without
any exclusions for preexisting conditions, through another group
plan.
Said severance allowance shall be in lieu of all other severance
payable to Honse under Company severance policies.
(c) Additional Payments. In the event that Honse becomes entitled to
payments under paragraphs 5(a), 5(b), or 7 of this Agreement, the Company shall
cause its independent auditors promptly to review, at the Company's sole
expense, the applicability of Section 4999 of the Code to such payments. If
such auditors shall determine that any payment or distribution of any type by
the Company to Honse or for his benefit, whether paid or payable or distributed
or distributable pursuant to the terms of this Agreement or otherwise (the
"Total Payments"), would be subject to the excise tax imposed by Section 4999 of
the Code, or any interest or penalties with respect to such excise tax (such
excise tax, together with any such interest and penalties, are collectively
referred to as the "Excise Tax"), then Honse shall be entitled to receive an
additional cash payment (a "Gross-Up Payment") within 30 days of such
determination equal to an amount such that after payment by Honse of all taxes
(including any interest or penalties imposed with respect to such taxes),
including any Excise Tax, imposed upon the Gross-Up Payment, Honse would retain
an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Total
Payments. For purposes of the foregoing determination, Honse's tax rate shall
be deemed to be the highest statutory marginal state and Federal tax rate (on a
combined basis) (including Honse's share of F.I.C.A. and Medicare taxes) then in
effect. If no determination by the Company's auditors is made prior to the time
a tax return reflecting the Total Payments is required to be filed by Honse, he
will be entitled to receive a Gross-Up Payment calculated on the basis of the
Total Payments reported by Honse in such tax return, within 30 days of the
filing of such tax return. In all events, if any tax authority determines that
a greater Excise Tax should be imposed upon the Total Payments than is
determined by the Company's independent auditors or reflected in Honse's tax
return pursuant to this Section 6, Honse shall be entitled to receive the full
Gross-Up Payment calculated on the basis of the amount of Excise Tax determined
to be payable by such tax authority from the Company within 30 days of such
determination.
(d) Request and Release. In order to obtain any severance allowance
provided for in this Agreement, Honse must submit a request for severance and
must sign a complete release of all claims. The Company shall have no
obligation to pay any severance allowance unless and until Honse shall have
submitted the request for severance and signed a full and complete release of
all claims, to be drafted by Legal Counsel for the Company.
6. Termination without Severance Allowance
(a) Termination by the Company for Cause. The Company may terminate
Honse's employment for cause without incurring further obligation. For the
purpose of this Agreement, termination of Honse's employment shall be deemed to
have been for cause only:
(i) if termination of Honse's employment shall have been the result
of an act or acts of fraud, theft or embezzlement on the part of
Honse which, upon conviction, would constitute a felony and which
results or which is intended to result directly or indirectly in
gain or personal enrichment of Honse at the expense of the Company;
or
(ii) if termination of Honse's employment results from Honse's willful
and material misconduct, including willful and material failure to
perform his duties, and Honse has been given written notice by the
Company with respect to such and Honse does not cure within a
reasonable time; or
(iii) if there has been a breach by Honse during the period of
employment of the provisions of Paragraph 3 above, relating to the
time to be devoted to the affairs of the Company, and with respect
to any alleged breach of Paragraph 3 hereof, Honse shall have
substantially failed to remedy such alleged breach within thirty
days from Honse's receipt of notice from the Company.
(b) Nonrenewal of Agreement. In the event of the Consolidation, except as
otherwise provided in paragraph 5(b) above, the Company may elect not to renew
this Agreement, and thereby to terminate Honse's employment hereunder without
any severance obligations, upon at least three (3) year's prior written notice
to Honse.
(c) Termination by Honse. Honse shall have the right to terminate his
employment in his sole discretion, with or without cause, by providing thirty
(30) days notice of his intent to resign. Except as otherwise provided in
paragraph 5(b) above, Honse shall in that event receive no further compensation
or severance allowance.
(d) Death. In the event of Honse's death during the period of employment,
the legal representative of Honse shall be entitled to the base or fixed salary
provided for in Paragraph 4(a) above for the month in which death shall have
occurred, at the rate being paid at the time of death, and the period of
employment shall be deemed to have ended as of the close of business on the last
day of the month in which death shall have occurred but without prejudice to any
benefits, such as life insurance, otherwise due in respect of Honse's death.
(e) Disability
(i) In the event of Honse's disability during the period of
employment, Honse shall be entitled to an amount equal to the base
or fixed salary provided for in Paragraph 4(a) above, at the rate
being paid at the time of the commencement of disability, for the
period of such disability but not in excess of twelve (12) months
from the beginning of the period that establishes such disability,
as described in Paragraph 6(e)(iii) below.
(ii) The amount of any payments due under Paragraph 6(e)(i) shall be
reduced by any payments to which Honse may be entitled for the same
period because of disability under any disability or pension plan
of the Company or of any division, subsidiary, or affiliate
thereof, or as the result of workers' compensation or
nonoccupational disability payments received from any government
entity.
(iii) The term "Disability" as used in this Agreement, shall mean an
illness or accident occurring during the period of employment which
prevents Honse from performing the essential functions of his job
under this Agreement, with reasonable accommodations (as defined by
federal and Missouri disability laws), for a period of six
consecutive months. The period of employment shall be deemed to
have ended as of the close of business on the last day of such six-
month period but without prejudice to any payments due Honse from
any disability policy or disability insurance.
7. Transaction Incentive
If the Company and Cenex Harvest States Cooperatives complete the Consolidation
prior to December 31, 2000, and Honse has not by December 31, 2000 resigned or
been terminated for cause, Honse shall become entitled to a Transaction
Incentive payment in the amount of 1.0 x the Annual Amount as defined herein.
In the event that Honse's employment is terminated by death or disability after
the Consolidation, Honse, his estate, or his designated beneficiary shall be
paid the full Transaction Incentive. In the event that Honse's employment is
terminated by death or disability prior to the Consolidation, Honse, his estate
or any beneficiary designated by Honse shall be entitled to a partial
Transaction Incentive, prorated for the period of his employment between May 1,
1999 and the closing of the Consolidation. (For example, if Honse is terminated
for one of these reasons on November 30, 1999 and the Consolidation occurs on
June 1, 2000, Honse or his estate would be entitled to 7/13 of Transaction
Incentive.) The Transaction Incentive shall be paid on or before January 31,
2001. The Transaction Incentive, including any payments under paragraph 5(c)
herein, shall not be considered as income or compensation in determining Honse's
benefits under any non-qualified benefit plan, including the Supplemental
Executive Retirement Plan except that Honse may elect to defer all or part of
the Transaction Incentive under the Executive Deferred Compensation Plan or
comparable plan.
8.Annual Amount
As used herein, the Annual Amount shall be determined as follows:
(a) For calculating the severance allowance in the event that the
Consolidation has not occurred at the time of the termination of employment, the
Annual Amount shall equal Honse's average annual "W-2 income" for the last five
complete calendar years.
(b) For calculating the severance allowance in the event the Consolidation
has occurred at the time of the termination of employment, or for calculating
the Transaction Incentive, the Annual Amount shall equal the greater of:
(i) Honse's average annual "W-2 income" for the last five complete
calendar years;
(ii) An amount equal to John D. Johnson's then current base salary
plus short-term and long-term target bonus (the "Target Bonus"); or
(iii) An amount equal to John D. Johnson's base salary plus Target
Bonus for calendar year 1999.
9.Noncompetition
Executive agrees that during the term of his employment and thereafter for a
period of two (2) years, Executive will not directly or indirectly engage in or
carry on a business that is in direct competition with any significant business
unit of the Company as conclusively determined by the Company. Further,
Executive agrees that during this same period of time he will not act as an
agent, representative, consultant, officer, director, independent contractor or
employee of any entity or enterprise that is in direct competition with any
significant business unit of the Company as conclusively determined by the Board
of Directors. If Honse's employment terminates pursuant to paragraph 5(b), the
foregoing restrictions shall extend only for a period of one (1) year
thereafter.
10. Successor in Interest
This Agreement and the rights and obligations hereunder shall be binding upon
and inure to the benefit of the parties hereto and their respective legal
representatives, and shall also bind and inure to the benefit of any successor
of the Company by merger or consolidation or any purchaser or assignee of all or
substantially all of its assets, but, except to any such successor, purchaser,
or assignee of the Company, neither this Agreement nor any rights or benefits
hereunder may be assigned by either party hereto.
11. Construction
Whenever possible, each provision of this Agreement shall be interpreted in such
a manner as to be effective and valid under applicable law, but if any provision
of this Agreement shall be prohibited by or invalid under applicable law, such
provision shall be ineffective only to the extent of such prohibition or
invalidity without invalidating the remainder of such provision or the remaining
provisions of this Agreement.
12. Governing Laws
This Agreement shall be governed by and construed and enforced in accordance
with the laws of the State of Missouri.
13. Notices
Any notice required or permitted to be given under this Agreement shall be
sufficient if in writing, sent by Certified Mail, Return Receipt Requested:
If to Honse: Robert Honse
2015 Hogan Drive
Lawrence, KS 66047
If to the Company: Chief Executive Officer
Farmland Industries, Inc.
3315 North Oak Trafficway
Kansas City, MO 64116
With a copy to: Vice President and General Counsel
Farmland Industries, Inc.
3315 North Oak Trafficway
Kansas City, MO 64116
14. Entire Agreement
This Agreement shall constitute the entire agreement between the parties,
superseding all prior agreements, and may not be modified or amended and no
waiver shall be effective unless by written document signed by the Chief
Executive Officer, or the Chairman of the Board and Honse.
IN WITNESS WHEREOF, the parties have executed this Agreement effective as
of the date set forth above.
ROBERT HONSE FARMLAND INDUSTRIES, INC.
/s/ ROBERT HONSE /s/ H.D. CLEBERG
___________________ ____________________________________________
By: H.D. Cleberg
Its: President and Chief Executive Officer
EXHIBIT 10.(III) C
SEVERANCE AND RETENTION BONUS PLAN - Certain management employees are eligible
to participate in a plan providing an opportunity to receive a bonus based on
their average annual compensation if the unification of Cenex Harvest States and
Farmland takes place prior to 12/31/00. The plan requires continued employment
through the date of unification. The plan also provides a severance arrangement
based on their average annual compensation if employment is terminated under
certain circumstances, within two years after the unification.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extrated from the May 31,
1999 Form 10-Q and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-START> SEP-01-1998
<PERIOD-END> MAY-31-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 612,376
<ALLOWANCES> 0
<INVENTORY> 823,166
<CURRENT-ASSETS> 1,627,849
<PP&E> 1,747,495
<DEPRECIATION> 905,885
<TOTAL-ASSETS> 2,989,169
<CURRENT-LIABILITIES> 1,218,359
<BONDS> 792,258
0
100,069
<COMMON> 506,111
<OTHER-SE> 293,070
<TOTAL-LIABILITY-AND-EQUITY> 2,989,169
<SALES> 6,431,157
<TOTAL-REVENUES> 7,823,790
<CGS> 6,149,833
<TOTAL-COSTS> 7,487,634
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 60,238
<INCOME-PRETAX> (61,178)
<INCOME-TAX> 16,228
<INCOME-CONTINUING> (11,658)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,658)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
