INDEPENDENT AUDITORS’ REPORT
The Board of DirectorsFarmland
Industries, Inc.:
We have audited the accompanying consolidated balance sheets of Farmland Industries, Inc. and subsidiaries as of August 31, 1999 and 2000, and the related consolidated statements of operations, cash flows and capital shares and equities for each of the years in the three-year period ended August 31, 2000. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Farmland Industries, Inc. and subsidiaries as of August 31, 1999 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended August 31, 2000, in conformity with accounting principles generally accepted in the United States of America.
KPMG LLP
Kansas City, MissouriOctober
26, 2000
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
August 31
-------------------------------------
1999 2000
------------------ -----------------
(Amounts in Thousands)
Current Assets:
Accounts receivable - trade......................................... $ 794,237 $ 740,026
Inventories (Note 2)................................................ 840,504 832,687
Deferred income taxes (Note 6)...................................... 49,495 45,589
Other current assets................................................ 153,833 207,127
Total Current Assets.......................................... $ 1,838,069 $ 1,825,429
Investments and Long-Term Receivables (Note 3) $ 329,729 $ 399,889
Property, Plant and Equipment (Notes 4 and 5):
Property, plant and equipment, at cost.............................. $ 1,744,252 $ 1,787,614
Less accumulated depreciation and amortization...................... 911,049 960,652
Net Property, Plant and Equipment................................... $ 833,203 $ 826,962
Other Assets $ 256,648 $ 229,907
Total Assets $ 3,257,649 $ 3,282,187
See accompanying Notes to Consolidated Financial Statements.
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND EQUITIES
August 31
------------------------------------
1999 2000
------------------- ----------------
(Amounts in Thousands)
Current Liabilities:
Checks and drafts outstanding.......................................... $ 76,128 $ 135,799
Short-term notes payable (Note 5)...................................... 546,180 689,477
Current maturities of long-term debt (Note 5).......................... 44,771 32,222
Accounts payable - trade............................................... 463,296 345,286
Customer advances on product purchases................................. 13,715 120,731
Other current liabilities.............................................. 243,540 287,012
Total Current Liabilities........................................ $ 1,387,630 $ 1,610,527
Long-term Liabilities:
Long-term borrowings (excluding current maturities) (Note 5)........... $ 808,413 $ 646,160
Other long-term liabilities............................................ 40,212 40,134
Total Long-Term Liabilities...................................... $ 848,625 $ 686,294
Deferred Income Taxes (Note 6)........................................... $ 63,058 $ 54,676
Minority Owners' Equity in Subsidiaries (Note 7) $ 41,009 $ 49,459
Capital Shares and Equities (Note 8):
Preferred shares, Authorized 8,000,000 shares, 8% Series A cumulative
redeemable preferred shares, stated at redemption value, $50 per share,
2,000,000 shares issued and outstanding............................. $ 100,000 $ 100,000
Other preferred shares, $25 par value, -0- shares issued and
outstanding (2,743 shares in 1999).................................. 69 -0-
Common shares, $25 par value --
Authorized 50,000,000 shares,
20,915,040 shares issued and outstanding (20,321,160 shares in 1999) 508,029 522,876
Associate member common shares
(nonvoting), $25 par value -- Authorized 2,000,000 shares, 1,212,840
shares issued and outstanding (1,075,560 shares in 1999) 26,889 30,321
Earned surplus and other equities...................................... 282,340 228,034
Total Capital Shares and Equities................................ $ 917,327 $ 881,231
Contingent Liabilities and Commitments (Notes 5 and 9)
Total Liabilities and Equities.............................................. $ 3,257,649 $ 3,282,187
See accompanying Notes to Consolidated Financial Statements.
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended August 31
--------------------------------------------------------
1998 1999 2000
---------------- ---------------- ------------------
(Amounts in Thousands)
Sales........................................................ $ 8,775,046 $ 10,709,073 $ 12,238,963
Cost of sales................................................ 8,299,505 10,231,081 11,767,482
Gross income................................................. $ 475,541 $ 477,992 $ 471,481
Selling, general and administrative expenses................. $ 431,999 $ 480,839 $ 476,808
Other income (expense):
Interest expense......................................... $ (73,645) $ (90,773) $ (114,239)
Interest income.......................................... 5,436 8,337 14,248
Other, net (Note 15)..................................... 30,265 43,322 22,691
Total other income (expense)................................. $ (37,944) $ (39,114) $ (77,300)
----------------- ----------------- ----------------
Income (loss) before equity in net income of investees,
minority owners interest in net income of subsidiaries
and income tax benefit................................... $ 5,598 $ (41,961) $ (82,627)
Equity in net income of investees (Note 3)................... 56,434 65,510 56,891
Minority owners' interest in net income
of subsidiaries.......................................... (7,005) (17,727) (24,996)
----------------- ----------------- ----------------
Income (loss) before income taxes (Note 6).................. 55,027 5,822 (50,732)
Income tax benefit (Note 6).................................. 3,743 8,043 21,482
----------------
Net income (loss)............................................ $ 58,770 $ 13,865 $ (29,250)
Distribution of net income (loss) (Note 8):
Patronage refunds:
Farm supply patrons................................... $ 51,513 $ 20,320 $ -0-
Pork marketing patrons................................ 1,274 4,050 -0-
Beef marketing patrons................................ 3,817 5,420 8,002
Grain marketing patrons............................... 2,517 479 -0-
$ 59,121 $ 30,269 $ 8,002
Earned surplus and other equities........................ (351) (16,404) (37,252)
----------------- ----------------- ----------------
$ 58,770 $ 13,865 $ (29,250)
See accompanying Notes to Consolidated Financial Statements.
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended August 31
----------------------------------------------------
1998 1999 2000
--------------- --------------- ----------------
(Amounts in Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................................. $ 58,770 $ 13,865 $ (29,250)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization................................ 101,833 109,184 108,126
Equity in net income of investees............................ (56,434) (65,510) (56,891)
Minority owners' equity in net
income of subsidiaries..................................... 7,005 17,727 24,996
(Gain) loss on disposition of investments.................... (9,450) 189 (50,234)
Patronage refunds received in equities....................... (1,099) (2,143) (1,284)
Proceeds from redemption of patronage equities............... 6,546 4,598 3,123
Deferred income taxes........................................ (641) 10,230 (4,476)
Adjustment of LIFO inventories............................... 27,593 (27,593) -0-
Other........................................................ 2,501 7,929 (5,450)
Changes in assets and liabilities (exclusive
of assets and liabilities of businesses acquired):
Accounts receivable........................................ 25,398 (181,454) 54,211
Inventories................................................ 17,295 (76,190) (45,737)
Other assets............................................... 6,893 (30,592) (11,214)
Accounts payable........................................... (67,286) 105,028 (118,010)
Other liabilities.......................................... (79,784) (35,791) 155,960
Net cash provided by (used in) operating activities............ $ 39,140 $ (150,523) $ 23,870
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................... $ (108,837) $ (121,184) $ (100,865)
Distributions from joint ventures.............................. 57,635 54,121 58,962
Acquisition of investments and notes receivable................ (69,466) (69,811) (36,568)
Acquisition of other long-term assets.......................... (27,267) (38,240) (35,081)
Proceeds from sale of investments
and collection of notes receivable........................... 40,884 61,993 93,530
Proceeds from sale of fixed assets............................. 20,632 22,023 16,825
Acquisition of businesses, net of cash acquired................ (2,766) (5,829) -0-
Other 2,642 (233) -0-
Net cash used in investing activities.......................... $ (86,543) $ (97,160) $ (3,197)
See accompanying Notes to Consolidated Financial Statements.
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Year Ended August 31
------------------------------------------------------
1998 1999 2000
------------------ ---------------- ----------------
(Amounts in Thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of patronage refunds.................................$ (40,449) $ (23,593) $ (6,054)
Payments for redemption of equities............................ (80,243) (9,050) (480)
Payments of dividends on preferred shares...................... (4,937) (8,004) (8,000)
Proceeds from bank loans and notes payable..................... 612,634 2,739,865 3,335,921
Payments of bank loans and notes payable....................... (516,391) (2,624,938) (3,447,962)
Proceeds from issuance of subordinated debt
Certificates............................................... 99,309 121,630 101,786
Payments for redemption of subordinated
debt certificates.......................................... (66,000) (20,376) (40,538)
Net increase (decrease) in checks
and drafts outstanding..................................... (47,243) 76,128 59,671
Proceeds from issuance of preferred shares..................... 100,000 -0- -0-
Partner Distributions.......................................... (1,472) (11,957) (16,204)
Other increase (decrease)...................................... (471) 644 1,187
Net cash provided by financing activities.....................$ 54,737 $ 240,349 $ (20,673)
Net increase (decrease) in cash and cash equivalents..........$ 7,334 $ (7,334) $ -0-
Cash and cash equivalents at beginning of year................. -0- 7,334 -0-
Cash and cash equivalents at end of year......................$ 7,334 $ -0- $ -0-
SUPPLEMENTAL SCHEDULE OF CASH PAID FOR INTEREST AND INCOME
TAXES:
Interest......................................................$ 76,087 $ 77,143 $ 107,991
Income taxes paid (refunded), net.............................$ 13,446 $ (4,045) $ (17,622)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Equities and minority owners' interest called
for redemption............................................$ 8,868 $ -0- $ -0-
Transfer of assets in exchange for investment in
joint ventures............................................$ 4,601 $ 300 $ 69,150
Appropriation of current year's net income as
patronage refunds.........................................$ 59,121 $ 30,269 $ 8,002
Acquisition of businesses:
Fair value of assets acquired.............................$ 168,409 $ 32,883 $ -0-
Goodwill................................................... 14,819 14,574 -0-
Equity issuable............................................ (26,323) -0- -0-
Cash paid or payable....................................... (2,766) (7,750) -0-
Liabilities assumed...........................................$ 154,139 $ 39,707 $ -0-
See accompanying Notes to Consolidated Financial Statements.
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITAL SHARES AND EQUITIES
Years Ended August 31, 1998, 1999 and 2000
-----------------------------------------------------------------------
Associate Earned
Member Surplus and Total
Preferred Common Shares Common Other Capital
Shares Shares Equities Shares and
Equities
-----------------------------------------------------------------------
(Amounts in Thousands)
Balance at August 31, 1997.........................$ 72 $ 442,012 $ 22,248 $ 357,661 $ 821,993
Appropriation of current year's net income.......... -0- -0- -0- 58,770 58,770
Patronage refund payable in cash transferred
To current liabilities........................... -0- -0- -0- (23,593) (23,593)
Base capital redemptions transferred
To current liabilities........................... -0- (8,738) (130) -0- (8,868)
Prior year patronage refund allocation.............. -0- 60,238 7,551 (67,789) -0-
Dividends on preferred shares....................... -0- -0- -0- (6,933) (6,933)
Exchange of common stock, associate member
common shares and other equities................. -0- (2,058) 123 1,935 -0-
Equity issuable for purchase of
SF Services, Inc................................. -0- -0- -0- 26,323 26,323
Issue, redemption and cancellation of equities...... 99,999 (39,650) (1,284) (14,061) 45,004
Balance at August 31, 1998.........................$ 100,071 $ 451,804 $ 28,508 $ 332,313 $ 912,696
Appropriation of current year's net income.......... -0- -0- -0- 13,865 13,865
Patronage refund payable in cash transferred
to current liabilities...................... -0- -0- -0- (6,054) (6,054)
Prior year patronage refund allocation.............. -0- 32,481 3,046 (35,527) -0-
Dividends on preferred stock........................ -0- -0- -0- (8,004) (8,004)
Exchange of common stock, associate member
common stock and other equities............. -0- (1,821) (1,393) 3,214 -0-
Issue, redemption and cancellation of equities..... (2) 25,565 (3,272) (17,467) 4,824
----------------------------- ----------------------------------------
Balance at August 31, 1999.........................$ 100,069 $ 508,029 $ 26,889 $ 282,340 $917,327
Appropriation of current year's net loss............ -0- -0- -0- (29,250) (29,250)
Prior year patronage refund allocation.............. -0- 18,241 3,757 (21,998) -0-
Dividends on preferred stock........................ -0- -0- -0- (8,000) (8,000)
Exchange of common stock, associate member
common stock and other equities............. -0- (2,209) (345) 2,554 -0-
Issue, redemption and cancellation of equities..... (69) (1,185) 20 2,388 1,154
----------------------------- ----------------------------------------
Balance at August 31, 2000.........................$ 100,000 $ 522,876 $ 30,321 $ 228,034 $ 881,231
============================= ========================================
See accompanying Notes to Consolidated Financial Statements.
FARMLAND INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
Farmland Industries, Inc., a Kansas corporation, is organized and operated as a cooperative and its mission is to be a global, consumer-driven, producer-owned, farm-to-table cooperative system. General -- The consolidated financial statements include the accounts of Farmland Industries, Inc. and all of its majority-owned subsidiaries (“Farmland”, “we”, “us”, “our”, or the “Company”, unless the context requires otherwise). All significant intercompany accounts and transactions have been eliminated. When necessary, the financial statements include amounts based on informed estimates and judgments of management. Our fiscal year ends August 31. Accordingly, all references to “year” or “years” are to fiscal years ended August 31.
Cash and Cash Equivalents -- Investments with maturities of less than three months are included as cash and cash equivalents.
Investments -- Investments in companies over which Farmland exercises significant influence (20% to 50% voting control) are accounted for by the equity method. Other investments are stated at cost, less any provision for impairment which is other than temporary.
Accounts Receivable -- Farmland uses the allowance method to account for doubtful accounts and notes.
Inventories -- Grain inventories are valued at market adjusted for net unrealized gains or losses on open commodity contracts. Crude oil and refined petroleum products are valued at the lower of last-in, first-out (“LIFO”) cost or market. Other inventories are valued at the lower of first-in, first-out (“FIFO”) cost or market. Supplies are valued at cost.
Property, Plant and Equipment -- Assets, including assets under capital leases, are stated at cost. Depreciation and amortization are computed principally using the straight-line method over the estimated useful lives of the assets and the remaining terms of the capital leases, respectively.
Goodwill and Other Intangible Assets -- The excess of cost over the fair market value of assets of businesses purchased is amortized on a straight-line basis over a period of 15 to 25 years. Farmland assesses the recoverability of goodwill and measures impairment, if any, by determining whether the unamortized balance can be recovered over its remaining life through undiscounted future operating cash flows. Goodwill is reflected in the accompanying Consolidated Balance Sheets net of accumulated amortization of $18.4 million and $23.1 million, respectively, at August 31, 1999 and 2000. Other intangible assets, primarily software, are amortized over three to ten years.
Sales -- Farmland recognizes sales at the time product is shipped. Farmland’s international grain trading business (“Tradigrain”) has changed from a grain brokerage operation to a buy/sell operation. Accordingly, only the net margins of the international grain business were included in sales during 1998. Sales and cost of sales for 1999 and 2000 include the gross value of the international grain business transactions. Consistent with this change, Tradigrain’s 1999 and 2000 bank borrowings and repayments have been included as cash flows from financing activities.
Derivative Commodity Instruments - -- Farmland uses derivative commodity instruments, including forward contracts, futures and options contracts, primarily to reduce its exposure to risk of loss from changes in commodity prices. Derivative commodity instruments which are designated as hedges and for which changes in value exhibit high correlation to changes in value of the underlying position are accounted for as hedges.
Gains and losses on hedges of inventory are deferred as part of the carrying amount of the related inventories and, upon sale of the inventory, recognized in cost of sales. Gains and losses related to qualifying hedges of firm commitments or anticipated transactions also are deferred and are recognized as an adjustment to the carrying amounts of the commodities when the underlying hedged transaction occurs. When a qualifying hedge is terminated or ceases to meet the specified criteria for use of hedge accounting, any deferred gains or losses through that date continue to be deferred. To the extent an anticipated transaction is no longer likely to occur, related hedges are closed with gains or losses charged to operations.
Our world grain business may use derivative commodity instruments to establish positions for trading purposes. Instruments used for this purpose are marked-to-market and all related gains and losses are included in operations. Cash flows from commodity instruments are classified in the same category as cash flows from the hedged commodities in the Consolidated Statements of Cash Flows.
Farmland enters into interest rate exchange agreements which involve the exchange of fixed-rate and variable-rate interest payments over the life of the agreements and effectively results in the conversion of specifically identified, variable-rate debt into fixed-rate debt. Differences to be paid or received are accrued as interest and are recognized as an adjustment to interest expense.
Gains and losses on termination of interest rate exchange agreements are deferred and recognized over the term of the underlying debt instrument as an adjustment to interest expense. In cases where there is no remaining underlying debt instrument, gains and losses on termination are recognized currently in other income (expense).
Environmental Expenditures -- Liabilities related to remediation of contaminated properties are recognized when the related costs are considered probable and can be reasonably estimated. Estimates of these costs are based upon currently available facts, existing technology, undiscounted site specific costs and currently enacted laws and regulations. In reporting environmental liabilities, no offset is made for potential recoveries. All liabilities are monitored and adjusted as new facts or changes in law or technology occur. Environmental expenditures are capitalized when such costs provide future economic benefits.
Federal Income Taxes -- Farmland is subject to income taxes on all income not distributed to patrons as qualified patronage refunds. Farmland files consolidated federal and state income tax returns.
Reclassifications -- Certain prior year amounts have been reclassified to conform with the current year presentation.
(2) Inventories
Major components of inventories are as follows:
------------------------------------
1999 2000
---------------- -----------------
(Amounts in Thousands)
Finished and in-process products..... $ 719,118 $ 750,057
Materials............................ 54,387 16,939
Supplies............................. 66,999 65,691
$ 840,504 $ 832,687
Income before income taxes for the year ended August 31, 1998 was reduced by $27.6 million to recognize a non-cash charge for the adjustment of crude oil and refined petroleum inventories to market value. In fiscal year 1999, the inventories market value exceeded LIFO cost and the lower of LIFO cost or market adjustment made in 1998 was reversed.
The carrying values of crude oil and refined petroleum inventories stated under the lower of LIFO cost or market at August 31, 1999 and 2000, were $113.2 million and $39.1 million, respectively. Replacement cost approximated the carrying values of petroleum inventories at August 31, 1999. Replacement cost is higher than the carrying values of petroleum inventories at August 31, 2000 by $24.7 million.
During 1999 and 2000, LIFO inventory quantities were reduced, resulting in a liquidations of LIFO inventory layers. The effect of these layer liquidations was to decrease cost of goods sold and increase income before income taxes by approximately $14.5 million and $3.2 million, respectively.
(3) Investments and Long-Term Receivables
Investments and long-term receivables are as follows:
-------------------------------------
1999 2000
----------------- ------------------
(Amounts in Thousands)
Investments accounted for by the equity method................. $ 205,047 $ 277,633
Investments in and advances to other cooperatives.............. 42,037 39,540
National Bank for Cooperatives................................. 22,362 20,201
Other investments and long-term receivables.................... 60,283 62,515
$ 329,729 $ 399,889
National Bank for Cooperatives (“CoBank”) requires its borrowers to maintain an investment in stock of the bank. The amount of investment required is based on the average amount borrowed from CoBank during the previous five years. At August 31, 1999 and 2000, Farmland’s investment in CoBank approximated its requirement. CoBank maintains a statutory lien on the investment held by Farmland in CoBank.
Summarized financial information of investees accounted for by the equity method is as follows:
-------------------------------------
1999 2000
----------------- -----------------
(Amounts in Thousands)
Current Assets................................................. $ 488,447 $ 2,615,992
Long-Term Assets............................................... 707,548 920,548
Total Assets............................................... $ 1,195,995 $ 3,536,540
Current Liabilities............................................ $ 418,183 $ 2,279,139
Long-Term Liabilities.......................................... 370,882 643,942
Total Liabilities.......................................... $ 789,065 $ 2,923,081
Net Assets..................................................... $ 406,930 $ 613,459
Year Ended August 31
--------------------------------------------------------
1998 1999 2000
----------------- ----------------- -----------------
(Amounts in Thousands)
Net sales................................... $ 1,859,159 $ 2,618,163 $ 6,770,839
Net income.................................. $ 115,241 $ 125,826 $ 173,081
Farmland's equity in net income............. $ 56,434 $ 65,510 $ 56,891
Our investments accounted for by the equity method consist principally of :- 50% equity interests in three manufacturers of plant foods products, Farmland Hydro, L.P., SF Phosphates Limited Company and Farmland MissChem, Limited;
- beginning January 1, 2000, an approximate 50% equity interest in UCB LLC, which in turn holds a 50% equity interest in Agriliance LLC, an agronomy distribution and marketing venture;
- during the year ended August 31, 1999, a 50% equity interest in a grain marketer, Concourse Grain, LLC;
- during the year ended August 31, 2000, an approximate 42% equity interest in Cooperative Refining, LLC, which operates two refineries; and
- at August 31, 2000, our share of the undistributed earnings of all ventures accounted for by the equity method totaled $61.0.
(4) Property, Plant and Equipment
A summary of cost for property, plant and equipment is as follows:
-----------------------------------------
1999 2000
------------------ ------------------
(Amounts in Thousands)
Land and improvements...................... $ 59,072 $ 70,085
Buildings.................................. 291,131 304,855
Machinery and equipment.................... 1,067,838 1,103,155
Automotive equipment....................... 71,948 75,417
Furniture and fixtures..................... 56,463 57,446
Capital leases............................. 54,461 50,351
Leasehold improvements..................... 38,231 40,793
Other...................................... 5,622 5,217
Construction in progress................... 99,486 80,295
$ 1,744,252 $ 1,787,614
(5) Bank Loans, Subordinated Debt Certificates and Notes Payable
Bank loans, subordinated debt certificates and notes payable are as follows:
August 31
--------------------------------
1999 2000
--------------- --------------
(Amounts in Thousands)
Subordinated capital investment certificates
--6.25% to 10.00%, maturing 2001 through 2014.................... $ 404,218 $ 446,968
Subordinated monthly income certificates
--7.0% to 10.00%, maturing 2001 through 2010..................... 103,314 121,947
Syndicated Credit Facility 180,000 -0-
Other bank notes--7.12% to 10.75%,
maturing 2001 through 2004...................................... 94,272 31,153
Industrial revenue bonds--3.25% to 6.75%,
maturing 2002 through 2021...................................... 25,500 38,423
Promissory notes--7% to 9%,
maturing 2001 through 2003...................................... 6,513 8,224
Other--1.64% to 12.77%............................................. 39,367 31,667
$ 853,184 $ 678,382
Less current maturities............................................ 44,771 32,222
$ 808,413 $ 646,160
Farmland has a $750 million revolving credit facility, expiring May 9, 2001, with a group of domestic and international banks (“the Credit Facility”). At August 31, 2000, Farmland had outstanding $427.1 million of short-term borrowings under the Credit Facility; additionally $36.1 million of the Credit Facility was being utilized to support letters of credit issued on our behalf.
Farmland pays commitment fees under the Credit Facility, currently equal to 50 basis points annually, on the unused portion of the credit. Borrowings under the Credit Facility are secured by a substantial portion of our accounts receivable, inventories and fixed assets. Interest rates under the credit facility are based on a spread over the base rate (as defined in the agreement) or a spread over LIBOR. The Credit Facility contains covenants related to Farmland’s ratio of earnings before interest, taxes, depreciation and amortization to net interest expense, our ratio of total debt to total capitalization, and our ratio of senior debt to total capitalization, all as defined in the agreement. In addition to these financial covenants, our ability to borrow under the Credit Facility may be restricted based on our level of receivables and inventories. As of August 31, 2000, we were in compliance with all covenants under the Credit Facility.
Farmland National Beef Packing Company, L.P., a consolidated subsidiary, has a five-year, $130.0 million, credit facility. This facility, which expires March 31, 2003, is provided by various participating banks and all borrowings thereunder are nonrecourse to Farmland. At August 31, 2000, Farmland National Beef had borrowings under this facility of $14.0 million, and $17.9 million of the facility was being utilized to support letters of credit. Farmland National Beef has pledged assets with a carrying value at August 31, 2000, of $253.9 million to support its borrowings under the facility.
Farmland maintains other borrowing arrangements with banks and financial institutions. At August 31, 2000, $17.2 million was borrowed under these agreements.
Tradigrain, a consolidated subsidiary, has borrowing agreements with various banks which provide financing and letters of credit to support current grain trading transactions. At August 31, 2000, these short-term borrowings totaled $224.0 million. Obligations of Tradigrain under these loan agreements are nonrecourse to Farmland or Farmland’s other affiliates.
Subordinated debt certificates have been issued under several indentures. Certain subordinated capital investment certificates may be redeemed prior to maturity at the option of the owner in accordance with the indenture. Subject to limitations in the indenture, Farmland has options to redeem certain subordinated capital investment certificates in advance of scheduled maturities. Additionally, upon written request we will redeem subordinated capital investment certificates and subordinated monthly income certificates in the case of death of an owner.
Outstanding subordinated debt certificates are subordinated to senior indebtedness ($543.2 million at August 31, 2000) and certain additional financings (principally long-term operating leases). See Note 9.
At August 31, 2000, under industrial revenue bonds and other agreements, assets with a carrying value of $16.4 million have been pledged.
Borrowings from CoBank, under both the Syndicated Credit Facility and short-term notes payable, totaling $71.0 million at August 31, 2000, are partially secured by liens on the equity investment held by Farmland in CoBank. See Note 3.
Bank loans, subordinated debt certificates and notes payable mature during future fiscal years ending August 31 in the following amounts:
2001........................... $ 32,222
2002........................... 77,569
2003........................... 64,492
2004........................... 36,741
2005........................... 45,535
2006 and after................. 421,823
$ 678,382
At August 31, 1999 and 2000, we had demand loan certificates and short-term bank debt outstanding of $546.2 million (weighted average interest rate of 6.45%) and $689.5 million (weighted average interest rate of 8.55%), respectively.
During 1998, 1999 and 2000, Farmland capitalized interest of $3.9 million, $0.3 million and $1.7 million, respectively.
(6) Income Taxes
a. Tax Litigation
On November 29, 1999, the United States Tax Court issued an opinion holding that the gains and losses we realized in 1983 and 1984 on the sale of the stock of Terra Resources, Inc. and certain other assets were patronage-sourced and that we had reported these gains and losses correctly. By ruling in our favor, the Tax Court rejected claims of the Internal Revenue Service that would have resulted in material additional federal income taxes plus accumulated interest. This ruling also means that we do not owe additional state income tax and accumulated interest related to these transactions. The statutory time period for the Internal Revenue Service to appeal the Tax Court’s decision expired on September 6, 2000.
b. Other Income Tax Matters
The Internal Revenue Service (“IRS”) has examined the Federal income tax returns of Farmland and its subsidiaries through the year ended August 31, 1992. The results of the examinations for fiscal years ended August 31, 1988 through August 31, 1992 have been protested with the Appeals Office of the IRS. Management believes that any liability remaining upon a final determination of the issues will not be material. The IRS has informed Farmland that they will not be conducting audits for the fiscal years ended August 31, 1993 through August 31, 1995. Our returns for fiscal years ended August 31, 1996 through August 31, 1999 have been filed but have not been reviewed by the IRS.
Income (loss) before income taxes include the following components:
-----------------------------------------------------
1998 1999 2000
------------- --------------- --------------
Foreign................................... $ 30,269 $ 27,381 $ (12,873)
Domestic.................................. 24,758 (21,559) (37,859)
Total..................................... $ 55,027 $ 5,822 $ (50,732)
Income tax expense (benefit) is comprised of the following:
Year Ended August 31
--------------------------------------------------------
1998 1999 2000
----------------- ----------------- -----------------
(Amounts in Thousands)
Federal:
Current................................... $ (5,610) $ (23,440) $ (14,147)
Deferred.................................. (512) 12,119 (5,286)
$ (6,122) $ (11,321) $ (19,433)
State:
Current.................................. $ (981) $ (4,135) $ (2,497)
Deferred................................. (90) 2,138 (932)
$ (1,071) $ (1,997) $ (3,429)
Foreign:
Current.................................. $ 2,967 $ 1,362 $ 1,140
Deferred................................. 483 3,913 240
$ 3,450 $ 5,275 $ 1,380
Total income tax (benefit).................. $ (3,743) $ (8,043) $ (21,482)
Income tax expense (benefit) differs from the "expected" income tax expense (benefit) using a statutory rate of 35% as
follows:
Year Ended August 31
--------------------------------------------------------
1998 1999 2000
----------------- ----------------- -----------------
Computed "expected" income tax expense
(benefit) on income
before income taxes..................... 35.0 % 35.0 % (35.0)%
Increase (reduction) in income tax
expense (benefit) attributable to:
Patronage refunds....................... (37.6) (181.7) (5.5)
Patronage-sourced items for which no
benefit is available................... -0- -0- 8.9
State income tax expense (benefit), net
of federal income tax effect........... 3.3 2.4 (3.6)
Other, net.............................. (7.5) 6.2 (7.1)
Income tax (benefit)........................ (6.8)% (138.1)% (42.3)%
The tax effect of temporary differences that give rise to significant portions of deferred tax liabilities and deferred tax
assets at August 31, 1999 and 2000 are as follows:
August 31
------------------------------------
1999 2000
---------------- -----------------
(Amounts in Thousands)
Deferred tax liabilities:
Property, plant and equipment,
............principally due to differences
in depreciation.......................... $ 90,321 $ 94,945
Prepaid pension cost....................... 16,114 13,237
Income from foreign subsidiaries........... 16,776 12,141
Basis differences in pass-through
ventures................................. 6,446 6,461
Other...................................... 7,701 10,883
Total deferred tax liabilities........... $ 137,358 $ 137,667
Deferred tax assets:
Safe harbor leases......................... $ 3,435 $ 3,034
Accrued expenses........................... 55,241 58,111
Benefit of nonqualified
written notices.......................... 39,542 42,317
Alternative minimum tax credit............. 15,389 17,689
Accounts receivable, principally due to
allowance for doubtful accounts.......... 6,359 4,496
Other...................................... 3,829 2,933
Total deferred tax assets................ $ 123,795 $ 128,580
Net deferred tax liability.................. $ 13,563 $ 9,087
At August 31, 2000, Farmland has nonmember-sourced loss carryforwards, expiring from 2019 to 2020, amounting to $86.9 million, available to offset future nonmember-sourced income. Farmland also has alternative minimum tax credit carryovers amounting to $17.7 million available to reduce future federal income taxes payable.
At August 31, 2000, Farmland has member-sourced loss carryforwards, expiring from 2010 through 2020, amounting to $36.5 million available to offset future member-sourced income. No deferred tax asset has been established for these carryforwards as member-sourced losses will be available to offset future patronage refunds.
(7) Minority Owners’ Equity in Subsidiaries
A summary of the equity of subsidiaries owned by others is as follows:
----------------------------------
1999 2000
(Amounts in Thousands)
Farmland National Beef Packing Company, L.P................ $ 36,414 $ 45,737
Farmland Foods, Inc........................................ 3,723 3,341
Other subsidiaries......................................... 872 381
---------------- ---------------
$ 41,009 $ 49,459
================ ===============
(8) Preferred Stock, Earned Surplus and Other Equities
A summary of preferred stock is as follows:
August 31
----------------------------
1999 2000
------------- -------------
(Amounts in Thousands)
Preferred shares - Authorized 8,000,000 shares:
8%, Series A cumulative redeemable preferred shares,
.......stated at redemption value, $50 per share, 2,000,000
...shares issued and outstanding............................... $ 100,000 $100,000
5-1/2% and 6%, $25 par value - 0 shares issued and
outstanding (2,743 shares in 1999).......................... 69 -0-
------------- -------------
$ 100,069 $ 100,000
============= =============
Dividends on the Series A preferred shares accumulate whether or not: Farmland has earnings; funds are legally available for the payment; or such dividends are declared. These preferred shares are redeemable, beginning on December 15, 2022, at our sole discretion. No redemption is allowed prior to that time. Series A preferred shares each have a liquidation preference of $50 per share, plus an amount equal to accumulated and unpaid dividends, if any, thereon. The preferred shares are not entitled to vote.
A summary of earned surplus and other equities is as follows:
August 31
---------------------------------
1999 2000
---------------- ----------------
(Amounts in Thousands)
Earned surplus............................................ $ 226,476 $ 180,508
Patronage refund payable in equities...................... 24,215 8,002
Capital credits........................................... 26,453 32,167
Additional paid-in surplus................................ 5,102 7,248
Other 94 109
----------------
----------------
$ 282,340 $ 228,034
================ ================
Patronage refunds payable in equities represent the portion of patronage refunds, payable from current year earnings, in the form of common shares, associate member common shares and capital credits.
In July 1998, Farmland acquired all of the common stock of SF Services, Inc. in exchange for $26.3 million in Farmland equity, $2.8 million in cash and warrants which, when exercisable, may be exchanged for $21.7 million in Farmland equity. The right to exercise the warrants is contingent on achieving a specified volume of purchases over seven years. As of August 31, 2000, $0.9 million in warrants had been converted to Farmland equity. SF Services operated as a regional farm supply cooperative, serving local cooperative members in Arkansas, Mississippi, Louisiana and Alabama.
Capital credits are issued: 1) for payment of patronage refunds to patrons who do not satisfy requirements for membership or associate membership and 2) upon conversion of common stock or associate member common stock held by persons who no longer meet qualifications for membership or associate membership in Farmland.
(9) Contingent Liabilities and Commitments
Farmland leases various equipment and real properties under long-term operating leases. For 1998, 1999 and 2000, rental expense totaled $64.3 million, $66.3 million, and $71.1 million, respectively. Rental expense is reduced for sublease income, primarily rental income received on leased railroad cars and ammonia trailers ($1.1 million in 1998, $1.0 million in 1999, and $1.1 million in 2000).
The lease agreements have various remaining terms ranging from one to sixteen years. Some agreements are renewable, at our option, for additional periods. The minimum required payments for these agreements during the fiscal years ending August 31 are as follows:
2001.......................................... $ 88,092
2002.......................................... 74,923
2003.......................................... 59,826
2004.......................................... 50,046
2005.......................................... 248,832
2006 and after................................ 35,231
$556,950
Commitments for capital expenditures and investments in joint ventures aggregated $93.5 million at August 31, 2000.
Farmland has been designated by the Environmental Protection Agency as a potentially responsible party (“PRP”) under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), at various National Priority List (“NPL”) sites. In addition, we are aware of possible obligations associated with environmental matters at other sites, including sites where no claim or assessment has been made. Our accrued liability for probable and reasonably estimable obligations for resolution of environmental matters at NPL and other sites was $13.3 million and $12.9 million at August 31, 1999 and 2000, respectively.
The ultimate costs of resolving certain environmental matters are not quantifiable because many such matters are in preliminary stages and the timing and extent of actions which governmental authorities may ultimately require are unknown. It is possible that the costs of such resolution may be greater than the liabilities which, in the opinion of management, are probable and reasonably estimable at August 31, 2000. In the opinion of management, it is reasonably possible for such costs to approximate an additional $10.5 million.
In the ordinary course of conducting grain trading activities, as of August 31, 2000, we were contingently liable in the amount of $78.5 million of performance and bid bonds, guarantees and letters of credit.
Farmland is involved in various lawsuits arising in the normal course of business. In the opinion of management, the ultimate resolution of these litigation issues is not expected to have a material adverse effect on our Consolidated Financial Statements.
(10) Employee Benefit Plans
The Farmland Industries, Inc. Employee Retirement Plan (the “Plan”) is a defined benefit plan in which substantially all employees may participate. Participation in the Plan is optional prior to age 34, but mandatory thereafter. Benefits payable under the Plan are based on years of service and the employee’s average compensation during the highest four of the employee’s last ten years of employment.
The assets of the Plan are maintained in a trust fund. The majority of the Plan’s assets are invested in common stocks, corporate bonds, United States Government bonds, short-term investment funds, private REITS and venture capital funds.
The funding policy for the Plan is at the sole discretion of the Farmland Employee Retirement Plan Committee. The Committee’s current strategy is to limit contributions to an amount not to exceed the amount deductible for federal income tax purposes. Farmland charges pension costs as accrued based on the actuarial valuation of the plan.
Components of Farmland’s pension cost are as follows:
---------------------------------------------
1998 1999 2000
------------- ------------- --------------
(Amounts in Thousands)
Service cost....................................................... $ 12,013 $ 15,126 $ 16,175
Interest cost...................................................... 21,403 23,405 25,168
Expected return on Plan assets (28,192) (34,621) (35,207)
Net amortization................................................... 207 207 207
Pension expense.................................................... $ 5,431 $ 4,117 $ 6,343
The following table sets forth the Plan’s funded status and amounts recognized as assets in our Consolidated Balance Sheets at August 31, 1999 and 2000. Such prepaid pension cost is based on the Plan’s funded status as of May 31, 1999 and 2000.
August 31
----------------------------------------------
1999 2000
--------------------- -------------------
(Amounts in Thousands)
Change in Projected Benefit Obligation:
Projected Benefit Obligation, beginning of year $ 342,548 $ 344,987
Service Cost 15,126 16,175
Expected Employee Contributions 5,961 6,800
Interest Cost 23,405 25,168
Actuarial (Gain) Loss (30,293) (46,092)
Benefits Paid (11,760) (13,096)
Projected Benefit Obligation, end of year $ 344,987 $ 333,942
Change in Fair Value of Plan Assets:
Plan Assets at fair value, beginning of year $ 385,112 $ 392,792
Return on Plan Assets 13,052 44,298
Company Contributions 427 -0-
Actual Employee Contributions 5,961 6,120
Benefits Paid (11,760) (13,096)
Plan Assets at fair value, end of year $ 392,792 430,114
Funded Status and Prepaid Pension Cost:
Funded Status of the Plan, end of year $ 47,805 $ 96,172
Unrecognized Prior Service Cost 207 -0-
Unrecognized Net (Gain) Loss (3,337) (57,840)
Prepaid Pension Cost, end of year $ 44,675 $ 38,332
The following rates were used when calculating service cost, interest cost, expected return on plan assets, the projected benefit obligation and the Plan’s funded status.
Year Ended August 31
1998 1999 2000
Discount rate.......................... 7.25% 7.5% 8.25%
Rate of increase in future compensation
levels................................ 4.5% 4.9% 4.92%
Expected long-term rate of return on
plan assets........................... 9.0% 9.0% 9.0%
(11) Industry Segment Information
Farmland adopted SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” for the year ended August 31, 1999. This statement requires companies to report certain information about operating segments in their financial statements and establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS 131 defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by management in deciding how to allocate resources and in assessing performance. Comparative information for prior years presented has been restated to conform to our current organizational structure.
Farmland conducts business primarily in two operating areas: agricultural inputs and outputs. On the input side of the agricultural industry, we operate as a farm supply cooperative. On the output side of the agricultural industry, we operate as a processing and marketing cooperative.
Our farm supply operations consist of three segments: crop production, petroleum, and feed. Principal products of the crop production segment are nitrogen-based and phosphate-based plant foods and a complete line of insecticides, herbicides and mixed chemicals. Principal products of the petroleum division are refined fuels, propane, jet fuels and by-products of petroleum refining. Principal products of the feed division include swine, dairy, pet, beef, poultry, mineral and specialty feeds; feed ingredients and supplements, animal health products and livestock services.
On the output side, Farmland’s operations consist of two segments: the processing and marketing of meat products (“Refrigerated Foods”) and the origination, storage and marketing of grain (“World Grain”).
Other operations primarily include financial, management, printing and transportation services.
The operating income (loss) of each industry segment includes the revenue generated on transactions involving products within that industry segment less identifiable expenses. Corporate assets include cash, investments in other cooperatives, and certain other assets.
Unallocated includes income and expense items which are not directly attributed to or allocated to any operating segment. Examples of such items include interest expense and certain legal, human resources, and finance expenses.
Following is a summary of industry segment information as of and for the years ended August 31, 1998, 1999 and 2000.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1998 (Page 1 of 3)
(Amounts in Thousands)
CONSOLIDATED SEGMENTS
--------------------------------------------------------------
Combined
Segments Unallocated Consolidated
------------------ ---------------- -----------------
Sales & transfers $ 8,985,984 $ - $ 8,985,984
Transfers between
segments (210,938) - (210,938)
------------------ ---------------- -----------------
Net sales $ 8,775,046 $ - $ 8,775,046
Cost of sales 8,299,505 - 8,299,505
------------------ ---------------- -----------------
Gross income $ 475,541 $ - $ 475,541
Selling, general and
administrative expenses $ 335,789 $ 96,210 $ 431,999
Other income (expense):
Interest expense $ - $ (73,645) $ (73,645)
Interest income - 5,436 5,436
Other, net 6,587 23,678 30,265
------------------ ---------------- -----------------
Total other income (expense) $ 6,587 $ (44,531) $ (37,944)
Equity in income/(loss)
of investees 53,010 3,424 56,434
Minority owners' interest
in net (income)/loss
of subsidiaries (7,005) - (7,005)
Income tax benefit - 3,743 3,743
------------------ ---------------- -----------------
Net income (loss) $ 192,344 $ (133,574) $ 58,770
================== ================ =================
Investment in and
advances to investees $ 188,104 $ 8,002 $ 196,106
================ =================
==================
Total assets $ 2,603,827 $ 270,791 $ 2,874,618
================== ================ =================
Depreciation and
amortization expense $ 87,168 $ 14,665 $ 101,833
================== ================ =================
Capital expenditures $ 150,878 $ 3,351 $ 154,229
================== ================ =================
1998 (Page 2 of 3)
(Amounts in Thousands)
INPUT AND OTHER SEGMENTS
--------------------------------------------------------------------
Other Total Input
Crop Operating and Other
Production Petroleum Feed Units Segments
------------- -------------- ----------- ---------- --------------
Sales & transfers $ 1,162,239 $ 1,141,090 $ 570,622 $ 163,761 $ 3,037,712
Transfers between
segments (4,396) (4,162) (20,890) (27,304) (56,752)
------------- -------------- ----------- ---------- --------------
Net sales $ 1,157,843 $ 1,136,928 $ 549,732 $ 136,457 $ 2,980,960
Cost of sales 1,081,640 1,114,081 509,418 103,869 2,809,008
------------- -------------- ----------- ---------- --------------
Gross income $ 76,203 $ 22,847 $ 40,314 $ 32,588 $ 171,952
Selling, general and
administrative expenses $ 28,219 $ 22,485 $ 31,132 $ 37,561 $ 119,397
Other income (expense):
Interest expense $ - $ - $ - $ - $ -
Interest income - - - - -
Other, net 1,969 1,938 272 2,778 6,957
------------- -------------- ----------- ---------- --------------
Total other income (expense) $ 1,969 $ 1,938 $ 272 $ 2,778 $ 6,957
Equity in net income/(loss)
of investees 49,967 260 1,123 566 51,916
Minority owners' interest
in net (income)/loss
of subsidiaries 281 - - 884 1,165
Income tax benefit - - - - -
------------- -------------- ----------- ---------- --------------
Net income (loss) $ 100,201 $ 2,560 $ 10,577 $ (745) $ 112,593
============= ============== =========== ========== ==============
Investment in and
advances to investees $ 153,476 $ 1,087 $ 7,308 $ 4,862 $ 166,733
============= ============== =========== ========== ==============
Total assets $ 654,915 $ 433,117 $ 98,555 $ 231,440 $ 1,418,027
============= ============== =========== ========== ==============
Depreciation and
amortization expense $ 22,271 $ 14,609 $ 4,500 $ 7,480 $ 48,860
============= ============== =========== ========== ==============
Capital expenditures $ 26,072 $ 26,172 $ 5,627 $ 47,950 $ 105,821
============= ============== =========== ========== ==============
1998 (Page 3 of 3)
(Amounts in Thousands)
OUTPUT SEGMENTS
--------------------------------------------------
Total
Refrigerated World Output
Foods Grain Segments
---------------- -------------- ----------------
Sales & transfers $ 3,709,524 $ 2,238,748 $ 5,948,272
Transfers between
segments (53,184) (101,002) (154,186)
---------------- -------------- ----------------
Net sales $ 3,656,340 $ 2,137,746 $ 5,794,086
Cost of sales 3,438,171 2,052,326 5,490,497
---------------- -------------- ----------------
Gross income $ 218,169 $ 85,420 $ 303,589
Selling, general and
administrative expenses $ 162,267 $ 54,125 $ 216,392
Other income (expense):
Interest expense $ - $ - $ -
Interest income - - -
Other, net (2,044) 1,674 (370)
---------------- -------------- ----------------
Total other income (expense) $ (2,044) $ 1,674 $ (370)
Equity in net income/(loss)
of investees (1,092) 2,186 1,094
Minority owners' interest
in net (income)/loss
of subsidiaries (8,170) - (8,170)
Income tax benefit - - -
---------------- -------------- ----------------
Net income (loss) $ 44,596 $ 35,155 $ 79,751
================ ============== ================
Investment in and
advances to investees $ 7,986 $ 13,385 $ 21,371
============== ================
================
Total assets $ 642,336 $ 543,464 $ 1,185,800
================ ============== ================
Depreciation and
amortization expense $ 33,225 $ 5,083 $ 38,308
================ ============== ================
Capital expenditures $ 40,914 $ 4,143 $ 45,057
================ ============== ================
1999 (Page 1 of 3)
(Amounts in Thousands)
CONSOLIDATED SEGMENTS
--------------------------------------------------------------
Combined
Segments Unallocated Consolidated
------------------ ---------------- -----------------
Sales &transfers $ 11,038,775 $ - $ 11,038,775
Transfers between
segments (329,702) - (329,702)
------------------ ---------------- -----------------
Net sales $ 10,709,073 $ - $ 10,709,073
Cost of sales 10,231,081 - 10,231,081
------------------ ---------------- -----------------
Gross income $ 477,992 $ - $ 477,992
Selling, general and
administrative expenses 357,440 123,399 480,839
Other income (expense):
Interest expense - (90,773) (90,773)
Interest income - 8,337 8,337
Other, net 28,634 14,688 43,322
------------------ ---------------- -----------------
Total other income (expense) $ 28,634 $ (67,748) $ (39,114)
Equity in income/(loss)
of investees 62,272 3,238 65,510
Minority owners' interest
in net (income)/loss
of subsidiaries (17,727) - (17,727)
Income tax benefit - 8,043 8,043
------------------ ---------------- -----------------
Net income (loss) $ 193,731 $ (179,866) $ 13,865
================== ================ =================
Investment in and
advances to investees $ 198,824 $ 6,223 $ 205,047
================ =================
==================
Total assets $ 2,912,526 $ 345,123 $ 3,257,649
================== ================ =================
Depreciation and
amortization expense $ 94,219 $ 14,965 $ 109,184
================== ================ =================
Capital expenditures $ 114,986 $ 6,198 $ 121,184
================== ================ =================
1999 (Page 2 of 3)
(Amounts in Thousands)
INPUT AND OTHER SEGMENTS
---------------------------------------------------------------------------------
Other Total Input
Crop Operating and Other
Production Petroleum Feed Units Segments
------------------- -------------- ------------ ------------ -------------
Sales & transfers $ 1,009,266 $ 954,220 $ 599,208 $ 284,756 $ 2,847,450
Transfers between
segments (6,735) (48) (23,661) (30,837) (61,281)
------------------- -------------- ------------ ------------ -------------
Net sales $ 1,002,531 $ 954,172 $ 575,547 $ 253,919 $ 2,786,169
Cost of sales 1,004,441 918,186 530,246 216,879 2,669,752
------------------- -------------- ------------ ------------ -------------
Gross income $ (1,910) $ 35,986 $ 45,301 $ 37,040 $ 116,417
Selling, general and
administrative expenses $ 30,089 $ 20,553 $ 30,774 $ 41,555 $ 122,971
Other income (expense):
Interest expense $ - $ - $ - $ - $ -
Interest income - - - - -
Other, net 18,408 2,726 355 6,128 27,617
------------------- -------------- ------------ ------------ -------------
Total other income (expense) $ 18,408 $ 2,726 $ 355 $ 6128 $ 27,617
Equity in net income/(loss)
of investees 54,056 2,366 906 229 57,557
Minority owners' interest
in net (income)/loss 167 - (504) 781 444
Income tax benefit - - - - -
------------------- -------------- ------------ ------------ -------------
Net income (loss) $ 40,632 $ 20,525 $ 15,284 $ 2,623 $ 79,064
=================== ============== ============ ============ =============
Investment in and
advances to investees $ 162,811 $ 4,383 $ 7,771 $ 6,658 $ 181,623
=================== ============== ============ ============ =============
Total assets $ 678,109 $ 491,137 $122,765 $ 107,714 $ 1,399,725
=================== ============== ============ ============ =============
Depreciation and
amortization expense $ 23,498 $ 16,039 $ 4,844 $ 10,597 $ 54,978
=================== ============== ============ ============ =============
Capital expenditures $ 6,689 $ 26,841 $ 4,970 $ 11,758 $ 50,258
=================== ============== ============ ============ =============
1999 (Page 3 of 3)
(Amounts in Thousands)
OUTPUT SEGMENTS
---------------------------------------------------
Total
Refrigerated World Output
Foods Grain Segments
---------------- --------------- --------------
Sales& transfers $3,802,953 $ 4,388,372 $ 8,191,325
Transfers between
segments (47,237) (221,184) (268,421)
---------------- --------------- --------------
Net sales $3,755,716 $ 4,167,188 $ 7,922,904
Cost of sales 3,487,521 4,073,808 7,561,329
---------------- --------------- --------------
Gross income $ 268,195 $ 93,380 $ 361,575
Selling, general and
administrative expenses $ 178,230 $ 56,239 $ 234,469
Other income (expense):
Interest expense $ - $ - $ -
Interest income - - -
Other, net 1,814 (797) 1,017
---------------- --------------- --------------
Total other income (expense) $ 1,814 $ (797) $ 1,017
Equity in net income/(loss)
of investees 870 3,845 4,715
Minority owners' interest
in net (income)/loss
of subsidiaries (18,171) - (18,171)
Income tax benefit - - -
---------------- --------------- --------------
Net income (loss) $ 74,478 $ 40,189 $ 114,667
================ =============== ==============
Investment in and
advances to investees $ 11,837 $ 5,364 $ 17,201
================ ================ ==============
Total assets $ 683,961 $ 828,840 $ 1,512,801
================ =============== ==============
Depreciation and
amortization expense $ 33,902 $ 5,339 $ 39,241
================ =============== ==============
Capital expenditures $ 44,125 $ 20,603 $ 64,728
================ =============== ==============
2000 (Page 1 of 3)
(Amounts in Thousands)
CONSOLIDATED SEGMENTS
-------------------------------------------------------------
Combined
Segments Unallocated Consolidated
----------------- ---------------- -----------------
Sales & transfers $ 14,065,907 $ - $ 14,065,907
Transfers between
segments (1,826,944) - (1,826,944)
----------------- ---------------- -----------------
Net sales $ 12,238,963 $ - $ 12,238,963
Cost of sales 11,767,482 - 11,767,482
----------------- ---------------- -----------------
Gross income (loss) $ 471,481 $ - $ 471,481
Selling, general and
administrative expenses 348,084 128,724 476,808
Other income (expense):
Interest expense - (114,239) (114,239)
Interest income - 14,248 14,248
Other, net 15,447 7,244 22,691
----------------- ---------------- -----------------
Total other income (expense) $ 15,447 $ (92,747) $ (77,300)
Equity in income/(loss)
of investees 58,700 (1,809) 56,891
Minority owners' interest
in net (income)/loss
of subsidiaries (24,996) - (24,996)
Income tax benefit - 21,482 21,482
----------------- ---------------- -----------------
Net income (loss) $ 172,548 $ (201,798) $ (29,250)
================= ================ =================
Investment in and
advances to investees $ 279,330 $ (1,697) $ 277,633
================ =================
=================
Total assets $ 2,966,046 $ 316,141 $ 3,282,187
================= ================ =================
Depreciation and
amortization expense $ 95,507 $ 12,619 $ 108,126
================= ================ =================
Capital expenditures $ 96,027 $ 4,838 $ 100,865
================= ================ =================
2000 (Page 2 of 3)
(Amounts in Thousands)
INPUT AND OTHER SEGMENTS
----------------------------------------------------------------------------------
Other Total Input
Crop Operating and Other
Production Petroleum Feed Units Segments
------------------- -------------- ------------ ------------ --------------
Sales & transfers $ 984,782 $ 1,419,423 $ 672,697 $ 847,116 $ 3,924,018
Transfers between
segments (5,601) - (60,125) (500,849) (566,575)
------------------- -------------- ------------ ------------ --------------
Net sales $ 979,181 $ 1,419,423 $ 612,572 $ 346,267 $ 3,357,443
Cost of sales 983,056 1,395,507 565,075 306,709 3,250,347
------------------- -------------- ------------ ------------ --------------
Gross income (loss) $ (3,875) $ 23,916 $ 47,497 $ 39,558 $ 107,096
Selling, general and
administrative expenses $ 13,674 $ 13,654 $ 31,742 $ 43,174 $ 102,244
Other income (expense):
Interest expense $ - $ - $ - $ - $ -
Interest income - - - - -
Other, net 18,777 (142) 511 5,173 24,319
------------------- -------------- ------------ ------------ --------------
Total other income (expense) $ 18,777 $ (142) $ 511 $ 5,173 $ 24,319
Equity in net income/(loss)
of investees 37,445 20,299 293 (2,094) 55,943
Minority owners' interest
in net (income)/loss
- - 504 6 510
Income tax benefit - - - - -
------------------- -------------- ------------ ------------ --------------
Net income (loss) $ 38,673 $ 30,419 $ 17,063 $ (531) $ 85,624
=================== ============== ============ ============ ==============
Investment in and
advances to investees $ 182,296 $ 62,107 $ 7,126 $ 5,584 $ 257,113
=================== ============== ============ ============ ==============
Total assets $ 596,354 $ 411,860 $124,999 $124,068 $ 1,257,281
=================== ============== ============ ============ ==============
Depreciation and
amortization expense $ 23,968 $ 15,966 $ 5,774 $ 13,700 $ 59,408
=================== ============== ============ ============ ==============
Capital expenditures $ 6,563 $ 6,986 $ 5,390 $ 4,572 $ 23,511
=================== ============== ============ ============ ==============
2000 (Page 3 of 3)
(Amounts in Thousands)
OUTPUT SEGMENTS
---------------------------------------------------
Total
Refrigerated World Output
Foods Grain Segments
---------------- --------------- --------------
Sales &transfers $5,277,033 $ 4,864,856 $ 10,141,889
Transfers between
segments (924,629) (335,740) (1,260,369)
---------------- --------------- --------------
Net sales $4,352,404 $ 4,529,116 $ 8,881,520
Cost of sales 4,054,673 4,462,462 8,517,135
---------------- --------------- --------------
Gross income (loss) $ 297,731 $ 66,654 $ 364,385
Selling, general and
administrative expenses $ 185,801 $ 60,039 $ 245,840
Other income (expense):
Interest expense $ - $ - $ -
Interest income - - -
Other, net (6,600) (2,272) (8,872)
---------------- --------------- --------------
Total other income (expense) $ (6,600) $ (2,272) $ (8,872)
Equity in net income/(loss)
of investees 2,397 360 2,757
Minority owners' interest
in net (income)/loss
of subsidiaries (25,506) - (25,506)
Income tax benefit - - -
---------------- --------------- --------------
Net income (loss) $ 82,221 $ 4,703 $ 86,924
================ =============== ==============
Investment in and
advances to investees $ 14,452 $ 7,765 $ 22,217
================ =============== =============
Total assets $ 714,309 $ 994,456 $ 1,708,765
================ =============== ==============
Depreciation and
amortization expense $ 33,975 $ 2,124 $ 36,099
================ =============== ==============
Capital expenditures $ 55,191 $ 17,325 $ 72,516
================ =============== ==============
Substantially all of Farmland's long-lived assets are located in the United States. Sales by country, determined by
customer location, were as follows:
Year Ended August 31
-------------------------------------------------------
1998 1999 2000
---------------- ----------------- -----------------
(Amounts in Thousands)
United States......................... $ 7,474,758 $ 7,520,565 $ 8,706,211
Mexico................................ 472,955 570,959 533,524
Egypt................................. 94,232 133,012 303,884
Japan................................. 157,022 220,763 283,833
Other................................. 576,079 2,263,774 2,411,511
Total................................. $ 8,775,046 $ 10,709,073 $ 12,238,963
(12) Significant Group Concentration of Credit Risk
Farmland extends credit to its customers on terms generally no more favorable than standard terms of sale for the industries it serves. A substantial portion of our receivables are concentrated in the agricultural industry. Collection of these receivables may be dependent upon economic returns from farm crop and livestock production. A significant amount of trade receivables are with customers located in foreign countries. Although Farmland does not currently foresee a credit risk associated with these receivables, repayment is dependent upon the financial stability of those countries’ national economies. Farmland has counterparty performance risk on forward contracts we have entered into with producers and local cooperatives. In the past, Farmland has not had significant problems with non-performance on these contracts and we do not anticipate having significant non-performance problems in the future. However, the risk of non-performance always exists and such risk may change as the agricultural economy changes. Our credit risks are continually reviewed and management believes that adequate provisions have been made for doubtful accounts.
Farmland enters into interest rate swap agreements and natural gas/financial swap agreements with financial institutions. We continually monitor our positions with, and the credit quality of, the financial institutions which are counterparties to our financial instruments and we do not anticipate non-performance by counterparties.
Farmland maintains investments in and advances to cooperatives, cooperative banks and joint ventures from which it purchases products or services. A substantial portion of the business of these investees is dependent upon the agribusiness economic sector. See Note 3.
(13) Disclosures About Fair Value of Financial Instruments
Estimates of fair values are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could affect the estimates.
Investments in the equities of other cooperatives which have been purchased are carried at cost and equities received as patronage refunds are carried at par value, less provisions for other than temporary impairment. Management believes it is not practicable to estimate the fair value of these equities because there is no established market for these equities and estimated future cash flows, which are largely dependent on the future equity redemption policy of each cooperative, are not determinable. At August 31, 1999 and 2000, the carrying value of our investments in other cooperatives’ equities totaled $53.4 million and $50.8 million, respectively.
For all other financial instrument assets, the fair value has been estimated by discounting future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings. The estimated fair value of the fixed rate financial instrument liabilities was calculated using a discount rate equal to the interest rate on financial instruments with similar maturities currently offered for sale by Farmland. The carrying value and the estimated fair value of our subordinated debenture bonds at August 31, 2000 is $569 million and $530 million, respectively. The estimated fair value of our remaining variable rate financial instruments approximates the carrying value.
(14) Related Party Transactions
Farmland has a 50% interest in three manufacturers of crop nutrient products, Farmland Hydro, L.P., SF Phosphates Limited Company and Farmland MissChem Limited. Beginning January 1, 2000, we acquired an approximate 50% equity interest in UCB LLC, which in turn holds a 50% equity interest in Agriliance LLC, an agronomy distribution and marketing venture. During the year ended August 31, 2000, we acquired an approximate 42% equity interest in Cooperative Refining, LLC, which operates two refineries, and a 50% interest in OneSystem Group, LLC, which is an information technology service.
During 1998, 1999 and 2000, Farmland purchased $231.5 million, $224.1 million and $1,082.4 million, respectively, of products and services from ventures and had sales to a venture of $0, $0 and $55.4 million, respectively. Farmland had accounts payable of $14.6 million and $27.9 million due to ventures at August 31, 1999 and 2000, respectively, and a note payable due to a venture of $12.6 million and $12.5 million at August 31, 1999 and 2000, respectively. Accounts receivable owed to us at August 31, 1999 and 2000 totaled $6.2 million and $36.0 million, respectively. Notes receivable due from ventures totaled $35.4 million and $20.3 million at August 31, 1999 and 2000, respectively.
(15) Other Income
During 2000, we realized a cash gain of $49.6 million on the sale of our direct interest in Agriliance, LLC to Land O’Lakes. In connection with the temporary shutdown of the Pollock, Louisiana fertilizer production facility, we realized an $8.9 million gain on futures positions closed as a result of anticipated natural gas purchases which will not occur. The above gains were partially offset by $35.3 million in startup costs related to the coke gasification facilities in Coffeyville, Kansas and a $11.5 million of loss related to the sale of the Dubuque, Iowa pork processing facility.
During 1999, Farmland realized a $10.3 million gain from the favorable settlement of various lawsuits involving natural gas pricing, crude oil supply, and environmental recoveries. Farmland also sold its investment in its Florida phosphate reserves with a resulting gain of approximately $7.7 million before income taxes. In connection with the temporary shutdown of the Lawrence fertilizer production facility, Farmland realized a $4.1 million gain on futures positions closed as a result of anticipated natural gas purchases which will not occur.
During 1998, we sold: (1) an approximate 3.8% interest in Farmland National Beef, resulting in a gain before income taxes of $7.2 million; and (2) all of our interest in Cooperative Services Company, formerly a wholly-owned subsidiary, resulting in a gain before income taxes of $2.2 million.
(16) Subsequent Events
In July 2000, Farmland entered into a joint venture agreement with Land O’Lakes that will combine all aspects of their feed businesses. This new venture, Land O’Lakes Farmland Feed, began operations October 1, 2000. Farmland owns approximately 31% of this venture.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors of Farmland are as follows:
Expiration Years of
Age as of Positions of Present Service
August 31, Held With Term as as Board
Name Farmland Director Member Business Experience During Last Five Years
2000
Albert J. Shivley 57 2001 16 General Manager--American Pride Co-op
Chairman of Association, Brighton, Colorado, a local
the Board cooperative association of farmers and
ranchers.
Jody Bezner 59 Vice Chairman 2000 9 Producer--Texline, Texas. Mr. Bezner
and Vice serves as President of Dalhart Consumers
President Fuel Association, Inc., Board of
Directors, Dalhart, Texas, a local
cooperative association of farmers and
ranchers.
Lyman Adams, Jr. 49 2001 8 General Manager--Cooperative Grain and
Supply, Hillsboro, Kansas, a local
cooperative association of farmers and
ranchers.
Ronald J. Amundson 56 2000 12 General Manager--Central Iowa
Cooperative, Jewell, Iowa, a local
cooperative association of farmers and
ranchers.
Baxter Ankerstjerne 64 2002 10 Producer--Peterson, Iowa.
From 1988 to 1997, Mr. Ankerstjerne
served as Chairman of the Board of
Directors of Farmers Cooperative
Association, Marathon, Iowa.
Steven Erdman 50 2001 8 Producer--Bayard, Nebraska.
Mr. Erdman serves as Secretary,
Panhandle Co-op, Scottsbluff, Nebraska,
a local cooperative association of
farmers and ranchers.
Harry Fehrenbacher 52 2002 4 Producer--Newton, Illinois.
Mr. Fehrenbacher serves as President of
the Board of Directors of Effingham
Equity, Effingham, Illinois, a local
cooperative association of farmers and
ranchers.
Martie Floyd 52 2000 3 Producer--Johnson, Kansas. Mr. Floyd
serves as Secretary/Treasurer of the
Board of Directors of Johnson
Cooperative Grain Co, Inc., Johnson,
Kansas, a local cooperative association
of farmers and ranchers.
Donald Gales 38 2002 1 General Manager--South Dakota Wheat
Growers, Aberdeen, SD a local
cooperative association of farmers and
ranchers.
Warren Gerdes 52 2001 6 General Manager--Farmers Cooperative
Elevator Company, Buffalo Lake,
Minnesota, a local cooperative
association of farmers and ranchers.
Thomas H. Gist 65 2002 2 Producer--Marianna, Ark. Mr. Gist serves
as Secretary of the Board of Directors
of Tri-County Farmers Association of
Brinkley, Ark. A local cooperative
association of farmers and ranchers.
Ben Griffith 51 2001 11 General Manager--Central Cooperatives,
Inc., Pleasant Hill, Missouri, a local
cooperative association of farmers and
ranchers.
Gail D. Hall 58 2000 12 General Manager--Lexington Cooperative
Oil Company, Lexington, Nebraska, a
local cooperative association of farmers
and ranchers. Mr. Hall retired from the
position of General Manager in February
1999.
Barry Jensen 55 2002 10 Producer--White River, South Dakota.
Mr. Jensen currently serves as a
Director of Dakota Pride Cooperative,
Winner, South Dakota, a local
cooperative association of farmers and
ranchers.
Ron Jurgens 62 2001 5 General Manager--Agri Co-op in Holdrege,
Nebraska, a local cooperative
association of farmers and ranchers.
William F. Kuhlman 51 2002 4 Producer--Oakley, Kansas. Mr. Kuhlman
serves on the Boards of Directors of
Kansas Retail Venture Group. Formerly,
he was President and CEO of Cooperative
Agricultural Services, Inc., Oakley,
Kansas and General Manager of
Menlo-Rexford Cooperative, local
cooperative associations of farmers and
ranchers.
Greg Pfenning 51 2000 8 Producer--Hobart, Oklahoma. Past
Director and President of The Farmers
Cooperative Association, Hobart,
Oklahoma, a local cooperative
association of farmers and ranchers.
Monte Romohr 47 2002 10 Producer--Gresham, Nebraska Mr. Romohr
serves as a Director of Farmers Co-op
Business Association, Shelby, Nebraska,
a local cooperative association of
farmers and ranchers.
Joe Royster 48 2002 7 General Manager--Dacoma Farmers
Cooperative, Inc., Dacoma, Oklahoma, a
local cooperative association of farmers
and ranchers.
E. Kent Stamper 54 2002 4 Producer--Plainville, Kansas. Mr.
Stamper serves as Director and Vice
President of the Board of Directors of
Midland Marketing Coop, Hays, Kansas, a
local cooperative association of farmers
and ranchers. He is a member of the
Director Development Committee of the
Kansas Cooperative Council.
Eli F. Vaughn 51 2000 3 General Manager--Farmers Cooperative
Company, Afton, Iowa, a local
cooperative association of farmers and
ranchers.
Frank Wilson 52 2001 5 General Manager--Elkhart Farmers Co-op
Association, Elkhart, Texas, a local
cooperative association of farmers and
ranchers.
Directors are elected for a term of three years by the shareholders of Farmland at its annual meeting. The expiration dates for such three-year terms are sequenced so that about one-third of the Board of Directors is elected each year. The executive committee consists of Jody Bezner, Ben Griffith, Ron Jurgens, Monte Romohr, Albert Shivley and Robert Honse. With the exception of Robert Honse, President and Chief Executive Officer, members of the executive committee serve as chairmen of standing committees of the Board of Directors as follows: Ron Jurgens, corporate responsibility committee; Ben Griffith, audit committee; Jody Bezner, compensation committee; Monte Romohr, finance committee; and Albert Shivley, executive committee and governance committee.
Age as of
August 31,
Name 2000 Principal Occupation and Other Positions
H. D. "Harry" Cleberg 61 President and Chief Executive Officer - Mr. Cleberg has been with Farmland since
1968. He was appointed to his present position effective April 1991. Prior
to April 1991 Mr. Cleberg held senior leadership positions in Farmland's input
and output businesses and in corporate areas responsible for transportation
and logistics, sales, marketing and research. Effective September 1, 2000,
Mr. Cleberg retired.
Robert Honse 57 Executive Vice President and Chief Operating Officer - Effective September 1, 2000
Mr. Honse was appointed President and Chief Executive Officer. Mr. Honse has
been with Farmland since 1973. He was appointed to Executive Vice President
and Chief Operating Officer in February 1999. From September 1995 to February
1999, he served as Executive Vice President and Chief Operating Officer, Ag
Input Businesses. From January 1992 to September 1995, he served as Executive
Vice President, Agricultural Inputs Operations.
John Berardi 57 Executive Vice President and Chief Financial Officer - Effective August 31, 2000,
Mr. Berardi was appointed Chief Financial Officer. Mr. Berardi joined
Farmland in March 1992, serving as Executive Vice President and Chief
Financial Officer. From July 1996 through August 2000, he served as Executive
Vice President and President, Grain and Grain Businesses.
Bernie Sanders 59 Senior Vice President and Corporate Secretary - Dr. Sanders had been with Farmland
since 1968. He was appointed to his present position in September 1991. From
April 1990 to September 1991 he served as Vice President, Strategic Planning
and Development.
Stan Riemann 49 Executive Vice President and President, Crop Production - Mr. Riemann joined
Farmland in March 1974. He has held various positions in the Crop Nutrients
and Crop Protection areas. He was appointed to his present position as
Executive Vice President and President, Crop Production in May 1999, and also
serves as Co-President of Agriliance, LLC since its formation in 2000.
Kent Nunn 44 Vice President and Chief Information Officer Farmland Industries; President and
Chief Executive Officer OneSystem Group, LLC - Mr. Nunn joined Farmland in
1990. He was appointed to his present position of Vice President and Chief
Information Officer in 1995, and has served as President and CEO of OneSystem
Group, LLC since its formation in 1997.
Bob Terry 44 Executive Vice President, Administrative Group and General Counsel - Effective
September 2000, Mr. Terry was appointed to his present position. Mr. Terry
joined Farmland in 1989 as a corporate counsel. From 1993 through August
2000, Mr. Terry served as Vice President and General Counsel.
William Fielding 53 Executive Vice President and President, Refrigerated Foods - Mr. Fielding joined
Farmland in January 2000. Prior to his current position Mr. Fielding served
as President, Dickey Environmental from 1998 to 1999, as President, Conagra
Refrigerated Meats from 1996 to 1998, and as President, Cargill Meat Sector
from 1995 to 1996.
Tim Daughterty 47 Executive Vice President and President, World Grain - Mr. Daugherty joined
Farmland in 1985. He was appointed to his current position in September of
1996. Prior to his current position, he served as Vice President of Marketing
for a geographic territory that included Kansas, Colorado and Utah.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the annual compensation awarded to, earned by, or paid to the Chief Executive Officer and the Company’s next four most highly compensated executive officers for services rendered to Farmland in all capacities during 1998, 1999 and 2000.
Annual Compensation Long-Term
Compensation
----------------------------------------------------------------------------
Employee
Year Variable
Ending Compensation LTIP
Name and Principal Position August 31 Salary Bonus Plan Payouts
- --------------------------------------- ------------ -------------- -------------- -------------- ---------------
H. D. "Harry" Cleberg, 1998 $ 578,878 $ -0- $ 213,564 $ 400,436
President and 1999 $ 623,814 $ -0- $ -0- $ -0-
Chief Executive Officer 2000 $ 633,584 $ 700,000 $ -0- $ -0-
Robert Honse, 1998 $ 347,328 $ -0- $ 110,144 $ 200,218
Executive Vice President and 1999 $ 426,224 $ -0- $ -0- $ -0-
Chief Operating Officer 2000 $ 552,057 $ -0- $ -0- $ -0-
John Berardi, 1998 $ 326,016 $ -0- $ 110,144 $ 200,218
Executive Vice President and 1999 $ 340,680 $ -0- $ -0- $ -0-
Chief Financial Officer 2000 $ 361,110 $ -0- $ -0- $ -0-
Stan Riemann 1998 $ 246,264 $ -0- $ 61,781 $ 133,479
Executive Vice President and 1999 $ 261,314 $ -0- $ -0- $ -0-
President, Crop Production Group 2000 $ 292,197 $ -0- $ 68,956(1) $ -0-
William Fielding 1998 $ -0- $ -0- $ -0- $ -0-
Executive Vice President and 1999 $ -0- $ -0- $ -0- $ -0-
President, Refrigerated Foods 2000 $ 204,166 $ 375,000 $ -0- $ -0-
(1) Compensation earned under the Agriliance variable compensation program for 2000. An Annual Employee Variable Compensation Plan, a Management Long-Term Incentive Plan (“LTIP”) and an Executive Deferred Compensation Plan have been established by our Board of Directors to meet the competitive salary programs of other companies and to provide a method of compensation which is based on Farmland’s performance.
Under the Annual Employee Variable Compensation Plan, all regular salaried employees’ total compensation is based on a combination of base and variable pay. The variable compensation award is dependent upon the employee’s position and the year-to-date performance of Farmland and/or the selected performance criteria of the operating or service unit where the individual is employed. Variable compensation is awarded only in each quarter that Farmland and/or the operating or service unit achieves a threshold performance level as approved each year by the Board of Directors. We intend for our total cash compensation (base plus variable) to be competitive, recognizing that in the event Farmland and/or the operating or service unit fails to achieve a predetermined threshold level of performance, the base pay alone will place the employees well under market rates. This system of variable compensation allows us to keep our fixed costs (base salaries) lower and only increase payroll costs consistent with our ability to pay. Distributions under this plan are made quarterly after the close of each fiscal quarter.
Mr. Riemann is also eligible for an award under Agriliance's Variable Pay Program. This program was established January 1, 2000. Payout is based on operating results and the achievement of specific synergy objectives. In view of our recent results, we have terminated, except as discussed below, all previously awarded Management Long-Term Incentive Plans. We did not make any payouts under any of these plans. The Board of Directors, in its sole discretion, may establish a new Management Long-Term Incentive Plan or Plans.
Under an employment contract commencing February 1, 2000, Mr. Fielding’s total compensation is based on a combination of base, variable and long-term incentive pay that is separate from the arrangements for other employees. The variable compensation award is dependent on Farmland Foods achieving earnings in excess of a base amount plus a return on incremental capital expenditures. The base amount is the average of 1998, 1999 and 2000 Farmland Food’s pre-tax earnings plus $15 million for 2001, $30 million for 2002, $40 million for 2003 and $50 million for 2004. Distributions under this plan are made annually after the close of each fiscal year.
Mr. Fielding’s long-term incentive is defined in his employment agreement commencing February 1, 2000. Under the agreement, payout is only made when income over the four year plan period exceeds a calculated amount. The amount, which cannot be calculated until the close of the 2004 year, equals the average of Farmland Food’s pre-tax earnings for the three year period 1998 through 2000 plus a return on incremental capital expenditures plus $50 million. The amount paid is 10% of the first $50 million over the base pre-tax earnings and 5% of any additional excess pre-tax earnings.
Mr. Fielding's long term incentive award payout, contingent on satisfying the terms and conditions of his plan as set forth above, is set forth below.
(A) (B) (C) Non-Stock Price Based Plans
- ----------------------------------- ----------------------------------------------------------
Number of Performance or
Shares, Units Other Period Until (D) (E) (F)
Name or Other Rights Maturation or Threshold Target Maximum
(1) Payout
- ----------------------------------- ---------------------------------------------------------- --------- ------------
(Amounts
in
Thousands)
William Fielding 2001 - 2004 Note 1 Note 1 Note 1
(1) Mr. Fielding’s long-term incentive plan does not specify a target or maximum. Threshold level is the average of Farmland Food’s pre-tax earnings for the three year period 1998 through 2000 plus a return on incremental capital expenditures plus $50 million. Payout, if any, will occur after the close of the 2004 year.
Our Executive Deferred Compensation Plan permits executive employees to defer part of their salary and/or part or all of their variable and incentive compensation. The amount to be deferred and the period for deferral is specified by an election made semi-annually. Payments of deferred amounts shall begin at the earlier of the end of the specified deferral period, retirement, disability or death. The employee’s deferred account balance is credited annually with interest at the highest rate of interest paid by Farmland on any subordinated debt certificate sold during the year. Payment of an employee’s account balance shall, at the employee’s election, be a lump sum or in ten annual installments. Amounts deferred pursuant to the plan for the accounts of the named individuals during the years 1998, 1999 and 2000 are included in the cash compensation table.
Farmland established the Farmland Industries, Inc. Employee Retirement Plan (the “Retirement Plan”) in 1986. Generally, employees whose customary employment is at the rate of at least 15 hours per week may participate in the Retirement Plan. Participation in the Retirement Plan is optional prior to age 34, but mandatory thereafter. Approximately 6,900 active and 8,500 inactive employees were participants in the Retirement Plan on August 31, 2000. The Retirement Plan is funded by employer and employee contributions to provide lifetime retirement income at normal retirement age 62, or a reduced income beginning as early as age 55. The Retirement Plan also contains provisions for death and disability benefits. The Retirement Plan has been determined qualified under the Internal Revenue Code. The Retirement Plan is administered by a committee appointed by the Board of Directors and all funds are held by a bank trustee in accordance with the terms of the trust agreement. The funding policy for the Plan is at the sole discretion of the Farmland Employee Retirement Plan Committee. The Committee’s current strategy is to limit contributions to an amount not to exceed the amount deductible for federal income tax purposes. Farmland’s contributions made to the Retirement Plan for the years ended August 31, 1998, 1999 and 2000 were $-0- million, $ 1.7 million and $-0- million, respectively.
Payments to participants in the Retirement Plan are based upon length of participation and compensation reported for the four highest of the last ten years of employment. Compensation for this purpose includes base salary and compensation earned under the Annual Employee Variable Compensation Plan discussed above. However, at the present time, the maximum compensation per participant which may be covered by a qualified pension plan is limited to $170,000 annually and the maximum retirement benefit which may be paid by such plan is limited to $135,000 annually by the Internal Revenue Code (“IRC”).
We established a Supplemental Executive Retirement Plan (“SERP”) effective January 1, 1994. The SERP is intended to supplement the retirement income of executive participants in the Retirement Plan whose retirement benefit is reduced because of the limitation of the IRC on the amount of annual salary which can be included in the computation of retirement income or the amount of annual retirement benefit which may be paid by a qualified retirement plan. Under terms of the SERP, Farmland’s obligation is to make up 100% of the employer provided retirement benefit that would otherwise be lost under the Retirement Plan due to the IRC limits discussed above for qualified plans.
The following table sets forth, for compensation levels up to $170,000, the estimated annual benefits payable at age 62 for members of the Retirement Plan. These benefits are not reduced to take into account Social Security payments. The following table also sets forth, for compensation levels exceeding $170,000, the combined estimated annual benefits payable under the Retirement Plan and SERP assuming: (1) Retirement occurs on or after age 62; (2) The portion of the employee’s benefit lost (due to the IRC limitations) which would have been provided by the employer’s contribution to the Retirement Plan is 85% of the total benefit lost; (3) Benefits have been computed using an IRC 401(a)(17) Final Average Wage of $157,500, which represents the average of the compensation limits for the last four years; and (4) Grandfathered benefits, if any, have been ignored. Grandfather benefits (prior to 1995) would alter the amounts paid from either the Retirement Plan or the SERP, but would not materially alter the total benefit amount shown in this chart.
-----------------------------------------------------------------------------------------------------
Wage 15 20 25 30 35
- -------------------- ------------------ ------------------- ------------------- ------------------- ------------------
$ 100,000 $ 26,250 $ 35,000 $ 43,750 $ 52,500 $ 61,250
125,000 32,813 43,750 54,688 65,625 76,563
150,000 39,375 52,500 65,625 78,750 91,875
200,000 50,728 67,769 84,711 101,653 118,595
250,000 61,983 82,644 103,305 123,966 144,627
300,000 73,139 97,519 121,898 146,278 170,658
350,000 84,295 112,394 140,492 168,591 196,689
400,000 95,452 127,269 159,086 190,903 222,720
450,000 106,608 142,144 177,680 213,216 248,752
500,000 117,764 157,019 196,273 235,528 274,783
600,000 140,077 186,769 233,461 280,153 326,845
700,000 162,389 216,519 270,648 324,778 378,908
800,000 184,702 246,269 307,836 369,403 430,970
900,000 207,014 276,019 345,023 414,028 483,033
1,000,000 229,327 305,769 382,211 458,653 535,095
1,100,000 251,639 335,519 419,398 503,278 587,158
1,200,000 273,952 365,269 456,586 547,903 639,220
1,300,000 296,264 395,019 493,773 592,528 691,283
1,400,000 318,577 424,769 530,961 637,153 743,345
1,500,000 340,889 454,519 568,148 681,778 795,408
The following table sets forth the credited years of service for certain of Farmland's executive officers at August 31, 2000.
Name Years of Creditable Service
H. D. "Harry" Cleberg 35
Robert Honse 26
John Berardi 8
Stan Riemann 24
William Fielding -0-
Compensation Committee Interlocks and Insider Participation
The following persons, none of whom, except as indicated below, is either currently or formerly an officer or employee of Farmland or any of its subsidiaries, served as members of the compensation committee during 2000: Messrs. Jody Bezner, Tom Gist, Ron Amundson, Barry Jensen and Bill Kuhlman. Mr. Bezner has served as Vice Chairman and Vice President of the Board of Farmland from December 1997 to the current date. No executive officer of Farmland (i) served as a member of a compensation committee (or other board committee performing equivalent functions or, in the absence of such committee, the entire board of directors) of another entity, one of whose executive officers served on the compensation committee of Farmland, (ii) served as a director of another entity, one of whose executive officers served on the compensation committee of Farmland, or (iii) served as a member of a compensation committee (or other board committee performing equivalent functions or, in the absence of such committee, the entire board of directors) of another entity, one of whose executive officers served as a director of Farmland.
Compensation of Directors
Directors’ compensation consists of payment of three hundred dollars ($300.00) per day of Farmland business (including, for example, board and committee meetings and other similar activities), plus reimbursement of necessary expenses incurred in connection with their official duties. In addition, we pay annual retainers of $30,000 to the Chairman; $25,000 to each member of the Executive Committee, other than the Chairman and President; and $20,000 to all other directors.
Farmland provides each director a $100,000 life insurance benefit. Farmland also has established a $100,000 supplemental life insurance benefit for directors. A director is eligible for this benefit on commencement of a second elected term of office.
ITEM 12. EQUITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Farmland’s equity consists of preferred shares, common shares, associate member common shares and capital credits. Only the common shares have voting rights.
At August 31, 2000, no person was known by Farmland to be the beneficial owner of more than five percent of Farmland’s common shares.
At August 31, 2000, the directors and executive officers of Farmland, neither individually nor as a group, beneficially owned in excess of one percent of any class of Farmland’s equity.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Farmland transacts business in the ordinary course with its directors and with its local cooperative members with which the directors are associated on terms no more favorable than those available to its other members.
Exhibit No. Description of Exhibits
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(1) Listing of Financial Statements, Financial Statement Schedules and Exhibits(1) Financial Statements
Consolidated Balance Sheets, August 31, 1999 and 2000 Consolidated Statements of Operations for each of the years in the three-year period ended August 31, 2000 Consolidated Statements of Cash Flows for each of the years in the three-year period ended August 31, 2000 Consolidated Statements of Capital Shares and Equities for each of the years in the three-year period ended August 31, 2000
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
(d) The separate financial statements of a significant fifty percent or less owned subsidiary - Cooperative Refining, LLC.
(3) Exhibits
Articles of Incorporation and Bylaws:
3.(i)A Articles of Incorporation and Bylaws of Farmland Industries, Inc. effective December 10, 1998. (Incorporated by
Reference - Form S-1/A, filed December 16, 1998)
Instruments Defining the Rights of Security Holders, including Indentures*:
4.(i)A Form of Trust Indenture with UMB Bank, National Association, providing for issuance of unsubordinated debt securities,
including form of Demand Loan Certificates. (Incorporated by Reference - Form S-1, No. 33-40759, effective December 31,
1997)
4.(i)B Form of Trust Indenture
with Commerce Bank, National Association, providing for issuance of subordinated
debt securities, including forms of Ten-Year Bond, Series A, Ten-Year Bond,
Series B, Five-Year Bond, Series C, Five-Year Bond, Series D, Ten-Year Monthly
Income Bond, Series E, Ten-Year Monthly Income Bond, Series F, Five-Year Monthly
Income Bond, Series G and Five-Year Monthly Income Bond, Series H. (Incorporated
by Reference - Form S-1, No.
33-40759, effective December 31, 1997)
4.(i)C Certificate of Designation for a Series of Preferred Shares Designated as 8% Series A Cumulative Redeemable Preferred
Shares, dated December 19, 1997. (Incorporated by Reference - Form S-2, filed April 3, 1998)
4(.ii)A Syndicated Credit Facility between Farmland Industries, Inc. and various banks dated May 10, 2000 (Incorporated by
Reference - Form 10-Q filed July 17, 2000)
Material Contracts:
Management Remunerative Plans:
10.(iii)A Employee Variable Compensation Plan (September 1, 2000 - August 31, 2001)
10.(iii)B Board of Directors Insurance
10.(iii)C Farmland Industries, Inc. Supplemental Executive Retirement Plan (As Amended and Restated Effective September 1, 1999)
(Incorporated by Reference - Form 10-K filed November 19, 1999).
10.(iii)C(1)Resolution Approving
the Revision of Appendix A and Appendix A (Incorporated by Reference - Form
10-K, filed November 27, 1996)
10.(iii)D Farmland Industries, Inc. Executive Deferred Compensation Plan (As Amended and Restated Effective November 1, 1996)
(Incorporated by Reference - Form 10-K, filed November 27, 1996).
10.(iii)E Employment agreement between Farmland and Mr. H. D. Cleberg, dated March 1, 2000 (Incorporated by Reference - Form
10-Q, filed July 17, 2000).
10.(iii)F Employment agreement between Farmland and Mr. Robert W. Honse, dated August 1, 2000
10.(iii)G Employment agreement
between Farmland and Mr. William Fielding, dated January 31, 2000 (Incorporated
by Reference Form 10-Q filed April 14, 2000).
10.(iii)H Agriliance Staff Variable Pay Program FY2000.
21 Subsidiaries of the Registrant
24 Power of Attorney
27 Financial Data Schedule
* Long-term debt instruments pursuant to which the debt issuable thereunder does not exceed 10% of Farmland’s total assets have not been filed. At the Commission’s request, we agree to furnish a copy of such instruments or agreements.
(B) Reports on Form 8-K Farmland filed a report on Form 8-K, Item 5 “Other Events” on July 24, 2000. The report announced an agreement to establish Land O’Lakes Farmland Feed LLC, a joint venture that consolidates all aspects of the feed businesses of Land O’Lakes and Farmland.
Farmland filed a report on Form 8-K, Item 5 “Other Events” on August 29, 2000. This report describes Farmland’s financial performance.
Farmland filed a report on Form 8-K on October 13, 2000, Item 2, “Acquisition or Disposition of Assets”, describes the formation of Land O’Lakes Farmland Feed LLC, a joint venture, Item 7, “Financial Statements and Exhibits”, illustrates the effects of the contribution of certain feed assets and certain feed liabilities by the venture.
Supplemental Information to be Furnished With Reports Filed Pursuant to Section 15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to Section 12 of the Act As of the filing of this Form 10-K, no annual report covering the Registrant’s last fiscal year and no proxy statement, form of proxy or other proxy soliciting material, has been sent to holders of the Registrant’s securities. At such time as any such annual report or proxy soliciting material is sent to holders of the Registrant’s securities subsequent to the filing of this Form 10-K, four copies of the same will be furnished to the Commission as and to the extent required by the Instructions to Form 10-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, Farmland Industries, Inc. has duly caused
this report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Kansas City, State
of Missouri on November 22, 2000.
FARMLAND INDUSTRIES, INC.
By /s/ JOHN F. BERARDI
John F. Berardi
Executive Vice President and
Chief Financial Officer
By /s/ ROBERT B. TERRY
Robert B. Terry
Executive Vice President and General Counsel
Pursuant to the requirements of the Securities Act of 1934, this Form 10-K has been signed for the following persons on behalf
of Farmland Industries, Inc. and in the capacities and on the date indicated pursuant to valid Power of Attorney executed on October
25, 2000.
Signature Title Date
* Chairman of the Board, November 22, 2000
--------------------------------------------------
Albert J. Shivley Director
* Vice Chairman of Board, November 22, 2000
--------------------------------------------------
Jody Benzer Vice President and Director
* Director November 22, 2000
--------------------------------------------------
Lyman L. Adams, Jr.
* Director November 22, 2000
--------------------------------------------------
Ronald J. Amundson
* Director November 22, 2000
--------------------------------------------------
Baxter Ankerstjerne
* Director November 22, 2000
--------------------------------------------------
Steven Erdman
* Director November 22, 2000
--------------------------------------------------
Harry Fehrenbacher
* Director November 22, 2000
--------------------------------------------------
Martie Floyd
* Director November 22, 2000
--------------------------------------------------
Donald Gales
* Director November 22, 2000
--------------------------------------------------
Warren Gerdes
* Director November 22, 2000
--------------------------------------------------
Thomas H. Gist
* Director November 22, 2000
--------------------------------------------------
Ben Griffith
* Director November 22, 2000
--------------------------------------------------
Gail D. Hall
Director November 22, 2000
--------------------------------------------------
Barry Jensen
* Director November 22, 2000
--------------------------------------------------
Ron Jurgens
* Director November 22, 2000
--------------------------------------------------
William F. Kuhlman
* Director November 22, 2000
--------------------------------------------------
Greg Pfenning
* Director November 22, 2000
--------------------------------------------------
Monte Romohr
* Director November 22, 2000
--------------------------------------------------
Joe Royster
* Director November 22, 2000
--------------------------------------------------
E. Kent Stamper
* Director November 22, 2000
--------------------------------------------------
Eli F. Vaughn
* Director November 22, 2000
--------------------------------------------------
Frank Wilson
/s/ ROBERT W. HONSE President, November 22, 2000
--------------------------------------------------
Robert W. Honse Chief Executive
Officer
/s/ JOHN F. BERARDI Executive Vice President November 22, 2000
--------------------------------------------------
John F. Berardi And Chief Financial Officer
(Principal Financial Officer)
/s/ MERL DANIEL Vice President and November 22, 2000
--------------------------------------------------
Merl Daniel Controller
(Principal Accounting Officer)
*BY /s/ JOHN F. BERARDI
John F. Berardi
Attorney-In-Fact
Cooperative Refining, LLC
BALANCE SHEET
August 31, 2000
(Dollars in Thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 3,000
Accounts receivable, primarily from
Members (see Note 2) 314,865
Inventories 184,884
Other current assets 1,647
Total assets (all current) $ 504,396
LIABILITIES AND EQUITIES
Current liabilities:
Accounts payable $ 362,471
Accrued expenses 8,898
Members' distributions payable 1,725
Total liabilities (all current) 373,094
Equities 131,302
Total liabilities and equities $ 504,396
The accompanying notes are an integral part of the financial
statements
STATEMENT OF OPERATIONS AND
MEMBERS' EQUITY
For the period from September 1, 1999 (date of inception) to
August 31, 2000
(Dollars in Thousands)
Net sales, primarily to members (see Note 2) $ 2,074,018
Cost of sales 2,024,112
Gross margin 49,906
Distribution, marketing and administrative expenses 8,690
Interest, net (2,243)
Net income 43,459
Contributed capital 128,195
Distributions to members (40,352)
Members' equity, August 31, 2000 $ 131,302
The accompanying notes are an integral part of the financial
statements
STATEMENT OF CASH FLOWS
For the period from September 1, 1999 (date of inception) to
August 31, 2000
(Dollars in Thousands)
Cash flows from operating activities:
Net income $ 43,459
Adjustments to reconcile net income to
net cash provided by operating activities:
Changes in assets and liabilities:
Accounts receivable (314,865)
Inventories (56,689)
Other current assets (1,647)
Accounts payable and
accrued expenses 370,720
Net cash provided by operating activities 40,978
Cash flows from financing activities:
Distributions to members (38,627)
Change in book cash overdraft 649
Net cash used in financing activities (37,978)
Net increase in cash and cash equivalents 3,000
Cash and cash equivalents at beginning of period -0-
Cash and cash equivalents at end of period $ 3,000
Supplemental cash flow information:
Cash paid during the period for interest $ 342
Significant non-cash financing activities:
Contributions of inventories from members $ 128,195
Declaration of distribution payable
to members 1,725
The accompanying notes are an integral part of the financial
statements
Report of Independent Accountants
To the Board of Managers and Members of Cooperative Refining, LLC:In our opinion, the accompanying balance sheet and the related statements of operations and members’ equity and cash flows present fairly, in all material respects, the financial position of Cooperative Refining, LLC (CRLLC) at August 31, 2000, and the results of its operations and its cash flows for the period from September 1, 1999 (date of inception) to August 31, 2000 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of CRLLC’s management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
PricewaterhouseCoopers LLPMinneapolis,
Minnesota
October 6, 2000Notes to Financial Statements
1. Summary of Significant Accounting Policies: Organization:On September 1, 1999, National Cooperative Refinery Association (NCRA) and Farmland Industries, Inc. (Farmland) formed Cooperative Refining, LLC (CRLLC), a joint venture established to operate and manage the refineries and related pipelines and terminals of NCRA and Farmland. In conjunction with the formation of CRLLC, NCRA contributed inventories with a fair market value of $73.8 million in exchange for a 57.6 percent ownership in CRLLC, and Farmland contributed inventories with a fair market value of $54.4 million in exchange for a 42.4 percent ownership in CRLLC. The profits and losses of CRLLC are to be allocated to NCRA and Farmland in proportion to their respective ownership percentages, subject to certain adjustments outlined in the joint venture agreements, and cash distributions are to be made monthly based on certain criteria described in the joint venture agreements.
Also in conjunction with the formation of CRLLC, NCRA and Farmland entered into a Personnel Lease Agreement and a Refinery Operating and Product Output Purchase Agreement, which establish the terms and conditions by which NCRA and Farmland will lease their respective employees to CRLLC and operate CRLLC’s activities. In these agreements, NCRA and Farmland give CRLLC the right to occupy, use and operate specified assets, primarily property, plant and equipment, which are to remain the sole property of the respective owners. NCRA and Farmland shall each have a right of first refusal for the purchase of all refined petroleum products produced by CRLLC to the extent of their respective ownership interest in CRLLC. All other products, including specified by-products, shall be marketed by CRLLC. During the year ended August 31, 2000, CRLLC made payments of $90.6 million and $90.3 million to NCRA and Farmland, respectively, for reimbursement of their refinery operating expenses. In addition, payables to NCRA and Farmland of $8.2 million and $9.3 million, respectively, for refinery operating expenses not yet reimbursed are reflected in Accounts payable in the balance sheet at August 31, 2000. Effective August 30, 2000, NCRA gave notice of its intent to terminate the aforementioned agreements and dissolve CRLLC, in accordance with the provisions of the agreements, effective no later than September 1, 2001.
Cash Equivalents and Short-Term Investments:
Cash equivalents include short-term highly liquid investments with original maturities of three months or less at the date of acquisition. Investments with original maturities in excess of three months are classified as short-term or long-term investments based on the remaining maturities. A book cash overdraft of $0.6 million is included in Accounts payable in the balance sheet at August 31, 2000.
Inventories and Hedging:
Inventories are valued at the lower of cost or market, with cost deter-mined on the last-in, first-out (LIFO) method.
Gains and losses on futures and options transactions related to inventories are credited or charged to cost of sales as such inventories are sold or reduced to the lower of cost or market. Gains and losses on hedge contracts not yet closed are accounted for as unrealized gains and losses and, accordingly, are deferred in the balance sheet.
Commodity trading in petroleum futures and option contracts is a natural extension of cash market trading. The commodity futures and option markets have underlying principles of increased liquidity and longer trading periods than the cash market. Hedging is one method of reducing exposure to the price risk inherent in the petroleum business. Typically, trading is conducted to manage price risk for near-term supply requirements. CRLLC’s use of futures and option contracts reduces the effects of price volatility, thereby protecting against adverse short-term price movements, while somewhat limiting the benefits of short-term price movements.
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (FAS 133). In June 1999, the FASB issued Statement of Financial Accounting Standards No. 137, Deferral of the Effective Date of FASB Statement No. 133. FAS 133, as amended, is effective for CRLLC’s fiscal year beginning September 1, 2000. FAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. For fair-value hedge transactions, in which a company is hedging changes in an asset’s, liability’s, or firm commitment’s fair value, changes in the fair value of the derivative instrument will generally be offset in the statements of operations by changes in the hedged item’s fair value. For cash-flow hedge transactions, in which a company is hedging the variability of cash flows related to a variable-rate asset, liability, or forecasted transaction, changes in the fair value of the derivative instrument will be reported in other comprehensive income. The gains and losses on the derivative instrument that are reported in other comprehensive income will be reclassified as earnings in the periods in which earnings are impacted by the variability of the cash flows of the hedged item. The ineffective portion of all hedges will be recognized in current-period earnings. CRLLC has not yet determined the impact that the adoption of FAS 133 will have on its operations or statement of financial position.
Fair Value of Financial Instruments:
Statement of Financial Accounting Standards No. 107, Disclosures about Fair Value of Financial Instruments, requires disclosure of the fair value of all financial instruments to which CRLLC is a party. All financial instruments are carried at amounts that approximate estimated fair value.
Revenue Recognition:
Revenues are recognized as products are shipped, primarily with FOB shipping point terms.
Income Taxes:
CRLLC is organized as a limited liability corporation and is not subject to federal income tax. All earnings of CRLLC are passed through to its members.
Use of Estimates:
The preparation of CRLLC’s financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.
2. Accounts Receivable:CRLLC’s net sales are primarily to its members. Accordingly, accounts receivable is comprised primarily of amounts due from these members. There was no allowance for doubtful accounts at August 31, 2000. At certain times during fiscal 2000, the members paid their respective amounts owed to CRLLC prior to the required payment date as specified by the payment terms. In return, CRLLC paid interest to its members based on the federal short-term rate and the number of days between actual payment date and required payment date. The federal short-term rate was 6.27 percent at August 31, 2000.
3. Inventories:
($ in thousands)
Refined products $ 68,432
Crude oil 116,452
$ 184,884
If the first-in, first-out (FIFO) method of accounting for inventories had been used by CRLLC, inventories would have been higher than the reported amount by $56.8 million at August 31, 2000.
4. Contingencies:CRLLC is required to comply with various environmental laws and regulations incident to its normal business operations. In order to meet its compliance requirements, CRLLC will establish reserves for future costs of remediation as issues are identified. CRLLC is involved in certain legal claims and disputes which are in the normal course of CRLLC’s business. While the resolution of any of the above matters may have an impact on CRLLC’s financial results for a particular reporting period, management believes any such matters will not have a material adverse effect on the financial position of CRLLC.
